This Is When You Can FINALLY Stop Saving for Retirement

[00:00:00] Hey, welcome to another episode of Retirement Made Simple. I'm your host, Kevin Lum. I'm a certified financial planner based in Los Angeles, and this podcast is dedicated to helping a million people retire without worry. As a quick reminder, every episode here comes straight from our YouTube channel. So this is just the audio, so you can listen while you're walking, driving, or living your life. Let's dive in.

[00:00:26] Elon Musk recently said something along the lines of, we won't need to save for retirement anymore because robots and artificial intelligence will end up doing so much more for us. Saving for retirement will be irrelevant. Now, most of you watching, even if you read this quote, didn't stop contributing to your 401k after hearing this, which is probably a good call.

[00:00:46] But here's something I think about a lot when I'm sitting across from people who are in their late 50s or early 60s who have done everything right. You know, you've saved well, you've lived within your means, you've lived below your means, and you've avoided lifestyle creep.

[00:01:00] And yet, you're still doing the exact same thing. You're saving in the same way you were when you were in your early 40s, contributing and saving on autopilot and never stopping to ask yourself if that behavior, if that savings behavior, if that spending behavior makes sense for where you are today. And so in this video, I want to give you a tool to help you decide if maybe you can stop saving or at least cut back on your savings.

[00:01:27] So what I want to do today is help you answer the question with actual math about whether you should continue saving. And I want to walk through a real world situation for someone that we'll call Jim and Pam to show you what changes when the numbers say you're done. Before you change anything, you need a way to answer one basic question. Is saving more money actually moving the needle for you? And the simplest way to do this is with something called the funded ratio.

[00:01:57] The idea is pretty straightforward, right? Compare what you've already accumulated to what you actually need to support the lifestyle that you want in retirement. So here's how you do it. This is a very bare bones analysis, and I'll give you a quick calculator you can use. It's just kind of back in the napkin math to help you understand, does it make sense to keep saving? And if the answer is no, then you probably want to dial your numbers in a bit more. But first of all, take your annual projected retirement spending, right? So figure out what you think that retirement spending is going to be.

[00:02:27] Let's say it's $100,000 a year, and then subtract your guaranteed income, Social Security, pensions, any other guaranteed income that you can count on. Every dollar of that income reduces how much you need to save in your portfolio. So let's say you need $100,000 a year and you have $40,000 in Social Security. So now we're left with a $60,000 shortfall that you need to come up with from your portfolio.

[00:02:55] Now take that $60,000 and divide it by your rate of withdrawal. For easy math, you can use 4% here as a conservative baseline. And the point really isn't to argue about the perfect number. It's to give you a directional read of where you stand. So take $60,000 divided by 4% and that gives you about $1.5 million. That's essentially the portfolio you'd need to make up the gap in your plan.

[00:03:24] So if you save $2 million, you probably over-save. So I created a little calculator you can use to help you with this. So let's look at this. I'll put a link in the description. So you have $100,000 a year that you spend or want to spend. You have inflation, adjusted guaranteed income. So Social Security, $30,000 a year. Maybe you have a pension that doesn't have an inflation right or $10,000 a year. And you have a portfolio that's about $1.5 million, right? So what's the withdrawal rate?

[00:03:53] What's the expected inflation? And then what's your retirement time horizon? And then it's going to give you your funded ratio. So essentially about 94% of your retirement is covered. So you want to spend $100,000 a year. Right now you have in real value about $36,000 a year in guaranteed income. We had to discount it a bit because there's not an inflation rider.

[00:04:16] So your portfolio needs to cover about $63,000, which means your portfolio target needs to be about $1.6 million. Now we directionally know if we're close and maybe if we can pull our foot off the gas. Maybe we don't stop saving completely. But most of us were taught two modes in life, right? Save aggressively while working. Deny ourself. Live below our means. Put every penny we have away. Then we can retire and we can finally start living.

[00:04:44] Of course, you realize it's very hard to switch from one to the other. If you've been saving your whole life, it turns out it's not easy to start spending. And what gets missed is that there's often can be a transition phase. And I think this is one of the more underutilized windows in financial planning. It's especially helpful if you're someone who struggles to move from saving to spending. When you're still earning a paycheck, you have something you're not going to have in retirement. You have income structure and options.

[00:05:12] And who's to say that you have to wait to do the things you've been planning to do in retirement until someday when you finally quit? Maybe you can take some sort of hybrid role. Maybe you take off a little bit more time. You take off two to three weeks in the summer and you do some of those things that you were thinking about doing in retirement. You do them while you're still working. Or maybe you've been putting off that kitchen remodel. Maybe go ahead and do that now.

[00:05:36] There are so many goals that people end up putting off because they think they need to wait for some sort of magic retirement date. In reality, some of these large financial purchases are easier to absorb when your income is still coming in. Now, you don't want to inflate your lifestyle and lock yourself into higher expenses forever.

[00:05:56] But I found for a lot of people that they find it a little easier to ease themselves into spending and doing some of these things they've dreamed of doing while they still have a paycheck coming in. Right? They can be intentional about that. So let's look at this scenario. Jim and Pam Halpert. Jim and Pam are 58 and 57, respectively. And they plan to retire at 61 and 62.

[00:06:20] They have about 3 million invested spread across taxable accounts and tax deferred accounts and just a little bit of money in a Roth. And they also have a home in Scranton with a low rate mortgage that's going to be paid off about three years into retirement. And together, they earn about $250,000 a year. And they're still maxing out their 401k. They know that they feel pretty good about being financially ready for retirement. But they just have no idea how the numbers work out.

[00:06:48] Now, we're not going to run all the math today. You can either use the calculator or at the end of this video, I'm going to give you access to the same software that I use with my clients. You're like, look, I don't want that funded ratio. I want some real financial planning software. But with this client, again, names have been changed. We had a conversation about graduating their behavior. We had adjusted their plan to continue contributions through this year, then stopping new contributions going into the next year.

[00:07:16] And what happened is that decision freed up, I don't know, $30,000, $40,000, $50,000 a year. And then that money could be redirected to doing some things that they'd wanted to do for a while, taking a big trip, renovating the kitchen in their house. But before we made that call, we made sure that the math said that they were actually ready and it was okay to take the foot off the pedal.

[00:07:38] And their spending plan in retirement came about $10,000 a month when you added up all their different expenses, about $12,000 when you added in travel and charitable giving and private health insurance that they're going to have to purchase until Medicare kicked in. Because Jim's plan was to take Social Security at $70,000. Pam's plan was to take hers a few years earlier.

[00:07:58] And then what we helped Jim and Pam see, again, the names have been changed, is we helped them see that retirement, even once they retire, that retirement is not one flat line. It can be a series of phases. Early on, the portfolio is going to do more of the heavy lifting. Then Social Security kicks on and that portfolio withdrawal is going to drop fairly significantly. Then the mortgage is paid off a few more years into retirement. And it kind of acts like a new income source because that money is no longer going out the door, right?

[00:08:28] And so to keep them disciplined through these phases, we put into place spending guardrails. And the idea is this. If their portfolio grows well beyond what the plan requires, they get a green light to spend more. And if the market pulls back, maybe they take a few less trips. They tighten their belt temporarily, right? We build a system around the life that they want to live. So it helps to remove the emotion and the uncertainty from the plan. But one of the important things that we did, we helped them ultimately see that actually their retirement phases begin before they even retire.

[00:08:58] Because they can begin to pull their foot off the gas just a bit. Begin to do some of those things they thought they were going to do in retirement before, which actually helps make the transition into retirement easier. Then we started getting into real nuts and bolts, right? When Jim and Pam retire, they're going to start taking money first from their taxable account. The advantage here is that not every dollar gets taxed as ordinary income. It gives us more room, maybe even helps them qualify for ACA subsidies.

[00:09:26] They're taxed on the gains at a lower term capital gains rate. But it also creates a series of tax valleys. But it also creates this window, the golden window, a window of relatively low taxable income before Social Security, before RMDs, and before that bigger tax bill might hit later in life. And while they have this income valley, they could maybe use it for ACA subsidies or what typically, if you have a lot of money in a tax deferred account.

[00:09:54] But more often than not, what we see is that window allows them to begin doing Roth conversions at a much more efficient tax rate. Jim and Pam can execute Roth conversions during that income valley. And the idea is to pay a lower tax rate now by moving money from that large tax deferred account into a Roth instead of paying higher rates later on when they're forced to take money out via RMDs or required minimum distributions.

[00:10:21] There are so many different variables, and this provides them with significantly more flexibility in retirement. And one of the things that we did in this plan by helping them run load some of those expenses while they're still working because they stopped saving as much, we're able to set aside more cash to pay for Roth conversions on a pocket. But we also help them keep their spending lower during that income valley by doing things like taking a couple of the big trips and by renovating their kitchen. Jim and Pam had always wanted to renovate their kitchen.

[00:10:50] Well, we went ahead and had them do that while they were still working. So that way they weren't withdrawing the money for that kitchen remodel at the same time that they were trying to do Roth conversions. Now, the important thing here is you want to create a sequence plan for your retirement, view it as various phases, and then you need to evaluate it year by year to make sure you're still being strategic. You're dialing in those numbers for that particular year.

[00:11:15] How much income is our taxable brokerage going to generate when we raise expenses to live? Is there another way to do that without generating additional income? Dialing in all those pieces. So you kind of create this high-level plan. Okay, we're actually going to stop saving earlier. We're going to start spending earlier. And then we're going to do, you know, then we're going to have an income valley and, you know, sequence all this out. Ultimately, preparation beats reaction. And that's kind of the whole point of this video, helping you reframe and rethink things.

[00:11:45] And then we keep saving, saving, saving. And then we retire. We have all this money in this tax-deferred account. But we don't have as many options. So you just want to make sure you're preparing properly for these various phases in your retirement so that once again, right, I'm going to say that again, because preparation beats reaction. And I think so often that people in retirement are just reacting to what is happening to them, reacting to the phase that they're in, rather than preparing and approaching each phase through a strategic lens. Hey, thanks for listening.

[00:12:14] If you enjoyed this content, if you'd do me a favor and just leave a review on whatever podcast app you're using, Apple or Google or Spotify. And also you can find us on YouTube. Just search Foundry Financial or Retirement Made Simple. You should be able to find us by searching both. And then you can find our website at foundryfinancial.org. Thanks for listening.