5 Common Misconceptions About Retirement
Key Points – 5 Common Misconceptions About Retirement
- Paying $0 in Taxes Is Always the Best Case
- Claiming Social Security as Early as Possible Makes the Most Sense
- Retiring Early Is Easy if You Have Enough Money
- Retiring Is All Fun and Relaxation
- “We Don’t Have Enough Money to [INSERT DREAM]”
- 23 minute read | 38 minutes to listen
There can be a lot to look forward about to retirement, but people often have a lot of misconceptions on their way to and through retirement. Join Dean Barber and Bud Kasper, as they break down some common misconceptions about retirement to provide you with the clarity to retire with confidence.
5 Common Misconceptions About Retirement
Dean Barber: Thanks so much for joining us here on America’s Wealth Management Show. I’m your host Dean Barber, along with Bud Casper.
Bud Kasper: Another week, more information to share.
Dean Barber: Today, we’re going to share what we think are five common misconceptions about retirement. I’m going to run through those misconceptions so people will know what to expect, and then we’ll dive into the subject matter.
The first misconception is that paying zero in taxes is always the best case. We’re going to throw some cold water on that idea.
We’re going to talk about claiming Social Security. One common misconception about retirement is claiming Social Security as early as possible. It’s assumed that makes the most sense with getting money back out of the system.
Number three, retiring early is easy if you have enough money.
Number four, retirement is all fun and relaxation.
And number five, we don’t have enough money to … blank.
Each person is going to be different.
Paying $0 in Taxes Is Always the Best Case
Dean Barber: We’ve got some great stories to go around that, but let’s start with this idea that paying zero in taxes is always the best case. If you live in the United States and you have money or make money, taxes will be a fact of your life. It’s not about paying zero taxes each year; it’s about figuring out how to pay as little tax as possible over your lifetime.
Bud Kasper: It’s because there’s a compounded benefit, isn’t there? Once you get the direction of the taxation of your income in your control, you can measure how much tax you will have to pay as you move forward in retirement income.
A Long-Term, Forward-Looking Tax Strategy
Dean Barber: When we say paying as little tax as possible over time, we talk about a long-term, forward-looking tax strategy. We started doing this tax work years ago. We did a show on this back in probably back in early 2006-07 timeframe, so it’s been a while. The show focused on looking at your situation and seeing if we can help you figure out how to pay fewer taxes over your lifetime.
We offered a complimentary consultation, which we always do. I had a guy come in and he sat down and pushed his last two years of tax returns in front of me. He paid zero in taxes both those years. He says, “I want to know how you could do better than this.” I said, “Well, you didn’t pay any taxes in the last two years, but you’re not dead. How old are you?” He said he was 62, so I wanted to ask him a few questions.
- Do you have money in IRAs?
- How are you living?
- What’s supporting your lifestyle?
He had a couple million dollars in IRAs and a bunch of money saved in the bank, so he’d been living off that. He figured he had enough for three or four years and then was going to start taking money out of his IRAs.
Taking Advantage of Standard Deductions and Personal Exemptions
Dean Barber: Tax codes were different back then, so I asked him another question. I asked him, “When you sat down and did your taxes, and your CPA told you that you could have taken about $35,000 out of your IRAs and paid zero taxes on that, why you didn’t do it?” He looked at me and asked me what I was talking about.
I told him he had no income and that he didn’t get to take advantage of his standard deductions and personal exemptions. He could have taken out everything up to that and paid no taxes on that distribution from the IRA. Or he could have converted that over to a Roth IRA so it would grow tax-free forevermore. Why didn’t he do it?
Bud Kasper: Right. It should’ve been the advice.
Dean Barber: He said his CPA didn’t tell him to. I said to him, “Your CPA pointed out that you could have converted over $90,000 to a Roth IRA and paid only $11,000 on that. You never would have to pay another dime of taxes on that $90,000 or any future growth from it, even when your kids inherit it. Why didn’t you do that?”
He didn’t know he could do that. I told him he’d already missed two years and he said he’d been doing it for five years. He missed out on getting almost $500,000 from his traditional IRA to a Roth IRA and all the growth on that tax-free forever. It was all because he was so focused on zero taxes each year.
Asking the Important Questions
Bud Kasper: The CPA was probably happy because he told him he didn’t have any taxes to pay this year.
Dean Barber: The problem was the CPA didn’t ask the questions. The CPA was there to do tax compliance, file the tax return, and move on.
Bud Kasper: Those are lost opportunities you can’t get back because you’re running out of time. You can’t flex at the right time.
Dean Barber: You and I have a good longtime friend, Ed Slott. I call him a mentor. He’s known as America’s IRA expert and has written several books. Ed has been a guest on my podcast, The Guided Retirement Show™, a couple of times. Most recently, he was on Episode 45, “Creating a Tax-Free Retirement with Ed Slott.”
Ed refers to himself as a recovering CPA. He’s quite funny. He is one of the most brilliant guys to do understand that you can create a tax-free environment but can’t live tax-free forever. First, you must pay some taxes at some point to get to that tax-free situation. Let’s look at what you’ve got going on and find out if there are opportunities where you could be paying fewer taxes over a lifetime.
Bud Kasper: Ed is so energizing. I encourage people to listen to that podcast because he is exciting to listen to. He is so passionate about saving money through tax strategies.
Dean Barber: He’s so passionate that he started his Elite IRA Advisor Group. It’s been 17 years now that we’ve been studying with Ed.
Bud Kasper: We’re charter members.
Dean Barber: His whole deal is to let me educate advisors. Yet, the number of advisors that choose to pay for the education that Ed provides is so small. That’s why we see so many mistakes made.
Claiming Social Security as Early as Possible Makes the Most Sense
Dean Barber: The second common misconception about retirement is that Social Security claiming age is synonymous with the day that you retire. People think they’ve got all this money that’s gone into the Social Security System over the years. Then, they think they should start claiming it as soon as possible to get as much money out as possible.
Last week, there was another article projecting that the Social Security Trust Fund will be underfunded even sooner than what they thought. That brings panic to people, but that’s simply not the case. Social Security, especially if you’re married, should not be looked at as a singular benefit. It needs to be viewed at as a couple’s benefit.
People need to understand that when you’re married, a couple at age 62 will have over 600 different iterations on how they can claim Social Security. The difference between the best and the worst decision oftentimes leads to an additional $100,000 of income from the same earnings history for the same life expectancy.
Bud Kasper: We dug into that about 10 years ago.
Dean Barber: Actually, it was 2008.
Bud Kasper: Was it?
Dean Barber: Yes.
Short-Sited Thinking with Social Security Strategies
Bud Kasper: The nuance is associated with Social Security strategies. I hear it too often from people who want to get their money out as fast as they can because they’re not sure it’s going to be there. That short-sighted thinking is not a good planning process. You will not be rewarded for that decision very often from that perspective.
Dean Barber: That’s not to say that sometimes it doesn’t make sense. I’ll give you a perfect example. A client that I’ve worked with for several years is finally retiring in February 2022. His wife retired this year and is 63. As soon as he retires, I’ve instructed her to claim her Social Security benefits. Then, we’re going to delay his until age 70. Why would we do that? Her Social Security amount is going to be a smaller amount, and she is ill.
Bud Kasper: Sorry to hear that.
Dean Barber: She’s got a blood disease, so her life expectancy is not going to be into the late 80s or early 90s. If she makes 80, it’s going to be a blessing. We want her to go ahead and claim. Now, why would we want him to wait? When she’s gone, her Social Security checks are going to go away and no longer be a part of the income for the household.
We need his to get it as large as it can possibly get. When she passes and her Social Security check goes away, we can make up as much of that as possible through getting his check larger. Each check is going to be about $2,500 a month.
Where’s the Best Net Benefit?
Bud Kasper: Exactly right. Then, you put in the nuance of maybe that Social Security is going to be taxed. We need to go through the planning process. We have to vet through this to see where’s the best net benefit.
For those who are saying, “I want to get this out as fast as I can,” remember this. Your wife, supposing that the man dies before his wife, is going to get the greater of the two. If you compound your Social Security benefit to the maximum level, or any time between when you can claim Social Security, you’re assuring that your wife will have additional guaranteed income for the rest of her life.
Dean Barber: I want to talk about how we came up with the decision I just laid out. We didn’t just sit back and have a conversation. We built their entire strategy for retirement into our Guided Retirement System.
We’ve been working that plan over the last several years toward the date of his ultimate retirement at 65. We looked at all the capable claiming strategies, built the plan built, and asked ourselves, “What if she only makes it to 75?” There’s a real possibility that that’s all the longer she’ll make it, 10 to 12 years.
Then, we ran all the different iterations of how claiming Social Security was going to give us the best probability of a successful retirement, assuming he lived to 92. That’s what he wanted to put his life expectancy at. The best strategy of all the 600-plus iterations we ran was for her to claim now and him to wait until 70. The difference was $250,000 of additional ending value in the net worth of the plan.
Bud Kasper: That’s beautiful.
Dean Barber: It was huge.
Making the Most of Your Opportunities
Bud Kasper: You can calculate that out and present it to a retiree so that they know you’ve got options. If you don’t understand the strategies necessary that are specific to you, the retiree, then you’re missing out on tons of opportunity to better secure your retirement.
Dean Barber: I encourage you to listen to Episode 49 of our The Guided Retirement Show™. It’s titled, “Claim the Most from Your Social Security with Marc Kiner & Jim Blair.” We take a deep dive into the Social Security claiming strategies, and it’s a great lesson. Our Retirement Plan Checklist is probably the one thing that people request more than anything else because it takes you from about age 50 through retirement. It discusses all the things you need to be thinking about and doing. It’s very detailed.
Bud Kasper: There’s so much education available from the incredible data you’ve put together. Everyone can better learn how to maximize the success of retirement.
A Paradigm Shift That’s Paramount
Dean Barber: The rules when it comes to retirement planning and how you treat and think about your money are different than when you’re in that accumulation phase. There is a paradigm shift that must take place. Most people that have accumulated a good amount of money have accumulated that money because they’ve been frugal. Since they’ve lived below their means, they’ve saved well, focused, and haven’t splurged. Most of our clients were never huge income earners, great big business owners where they get multi-millions of dollars.
I’m not saying that we don’t work with people like that because we do every day, but most people that worked and saved hard just need that education. That education is what we’re trying to do here on America’s Wealth Management Show, The Guided Retirement Show™, and with all the literature we write.
Bud Kasper: I might even suggest reading the article called, Five Potential Problems on Retiring Early. It goes into some of the things that Dean and I are discussing and gives clarity with things that you need to be aware of when preparing for retirement.
Retiring Early Is Easy If You Have Enough Money
Dean Barber: When you talk about retiring early, that was number three in our common misconceptions about retirement. That misconception is that retiring early is easy if you have enough money. Some people can do it, some can’t. One of the problems with retiring too early is that the longevity is there. You must be cautious on how much income you’re taking. Another problem is healthcare. Unless you’ve got a company that provides you healthcare for the rest of your life, you need to get healthcare. That can be super expensive.
There’s a lot of planning that goes into retiring early. I love it when people can do it. You and I were just reminiscing before we started the program that your 38-year anniversary as a financial planner is here. My 34-year anniversary as a financial planner is here. We see so many scenarios unfold where people waited too long to get help or ask questions.
Bud Kasper: The thing that always relates to me is the evolution that we’ve gone through during that timeframe. Many things are always changing, and we need to master whatever’s necessary to help our clients have successful retirement.
Clarity Spurs Confidence; Confusion Spurs Chaos
Dean Barber: The whole idea is that we want to provide clarity. Clarity spurs confidence. But what we have most of the time with what we do is confusion. Confusion spurs chaos. Let us give you the clarity that you need so that you can have confidence in your financial future.
I want to take a trip down memory lane back into the mid-’90s. We had a lot of early retirement packages for a lot of the big bells. You and I worked with a lot of those people. They had a lot of issues because there were men and women coming out of there at 55, some as young as 50, and had very lucrative retirement packages.
One big problem many people had was most of their money being in their 401(k) plan or a lump sum of a pension they received as part of a buyout. It’s still a problem for many people today. Everything had to go into an IRA. If they’re not 59 and a half, they could be subject to a 10% penalty if they didn’t do it correctly.
Bud Kasper: That’s on top of the taxation. Hence, Reg 72(t).
Reviewing Regulation 72(t)
Dean Barber: Exactly. You and I did a load of work with Regulation 72(t). It’s part of the IRS code that tells you that you can apply the Fed fund’s mid-term rate in an annuitization formula to determine how much money can come out of that IRA annually without the 10% penalty.
There are some caveats. If you change it by a dollar, everything that you had taken out up to that point was subject to a 10% penalty, and it still is. One big problem with retiring early is you must have adequate funds or assets outside of qualified retirement accounts.
Bud Kasper: A lot of those people did not. I remember that vividly. I felt like I was on a road show because I was going around to the unions trying to explain. This was all new to these people. In the process, they needed to know what their options were. This was irreversible, so you needed to understand it.
The big issue is that we had a lot of young retirees. We have evolved as CERTIFIED FINANCIAL PLANNER™ Professionals. When I think about what about how we do things today, would we have done it the same way back then? I’d say yes, for the most part, but there were things we could have added to the experience that might’ve made more money for our clients.
The More Things Change, the More Things Stay the Same
Dean Barber: What was true then with Regulation 72(t) is true today as well, which is one of the problems with retiring early. It can be done, and you can work through the nuances, but the penalties are stiff if you mess it up.
Bud Kasper: The amount that you were required to take out every year once you establish that, what was it for? A five-year period? I can’t quite remember. And it was at 59 and a half.
Dean Barber: Whichever is longer.
Bud Kasper: There was an issue with that because what if your value is suddenly going down and you’re taking out distributions? Now you’re saying, “I can’t take this out. We’re losing money on the other side because the market’s down.”
Figuring Out the Fed Fund’s Mid-Term Rate
Dean Barber: Here’s the scenario. A lot of those people got that package in ’97, ’98, ’99.
Bud Kasper: ’99.
Dean Barber: You figure out the formula by using the Fed fund’s mid-term rate and start taking that income stream. At that time where the Fed fund’s mid-term rate was, the amortization schedule called for a distribution in the 6 to 6.5% range for most people, depending upon their age.
If someone retired and had $1 million, they got to take $60,000 to $65,000 out of that IRA. That’s what they’ve allowed to take without the penalty, but the problem is they can’t alter that amount. Let’s say they took that out for two years and retired in ’98. Suddenly, 2000, 2001, and 2002 come around, and your account value is now half what it was when you retired.
Now you’re taking out a distribution closer to 12% to 15% per year. What you’re doing is creating a self-fulfilling prophecy of running out of money. Some people would say, “Oh my gosh. I can’t do this anymore. I need to go back to work.” Guess what? If you go back to work and stop taking it, that’s an alteration to that income stream. Everything you’d taken out up to that point is now subject to the 10% penalty.
Mitigating Penalties and Taxes
Bud Kasper: The strategy we used back then, which I believe was the correct strategy, would open multiple IRAs—at least three of them. If they had to break the rule, let’s do it on a small amount of money, not the big enchilada associated with that. We had to do that from time to time. But by using that strategy, we mitigated a lot of penalties and taxes that would have been there otherwise.
Dean Barber: The point that we’re trying to make here is that retiring early can be done and be very rewarding. It can spawn a new career or passion. You can reinvent yourself into something that you have dreamed about over the years. However, you must make sure that everything is set financially. This is not your simple, “I’m 65. I’m going to get Medicare” because you have healthcare costs. All these things can be out there.
Bud Kasper: We always look forward to is when someone turns 59 and a half because then they had the freedom to make alterations if they weren’t within that five-year period of distribution.
Utilizing Your 401(k)
Dean Barber: If somebody does it at 57, they must go to 62. 59 and a half is irrelevant. We also have something called the 401(k) Survival Guide. We talk about a lot of the rules in that guide.
One thing you do is if you separate service from a company after 55, and you leave money in the 401(k), you can gradually take the money out of the 401(k) if the company allows it. Some companies force you to do a rollover once you retire. If they allow it, you can access those funds without restriction and the 10% penalty.
In cases like that, we might’ve left a couple of years’ worth of income in the 401(k), check the rest of it, and roll it over to an IRA where you got more investment choices. Then, take that income for the first couple of years, and you’re not encumbered by that 72(t) rule.
We’re Talking About Options
Bud Kasper: I’m sure people are saying, “What in the world are these guys talking about?” We’re talking about options. You have optionality associated with retirement. What are you trying to do? Get the best net result with the least amount of tax possible.
Dean Barber: And with the least amount of restrictions possible. There’s an awful lot of gotchas out there. A lot of gotchas in what I’ll call the financial salesperson’s world that you won’t know about until it gets you. Then there’s gotchas on the tax side of things, too, which is why we have our CERTIFIED FINANCIAL PLANNER™ Professionals working alongside our CPAs, risk management experts, and estate planning attorney.
Retiring Early Is All Fun and Relaxation
Dean Barber: Number four in our list of common misconceptions about retirement is retirement is all fun and relaxation. Bud, is that a true statement?
Bud Kasper: No, it’s not. Everybody has some anxieties associated with it. What am I going to do with my time? What do I want to focus on at this point in my life? You’ve been so focused before on planning for retirement, savings, and all the necessary things.
Suddenly, you don’t have to go into work, you’re sleeping in. You go, “This is great. This is wonderful.” Then you start to say, “What’s my purpose now?” People think about that.
The Impact on Sense of Self
Dean Barber: That’s true. It can impact your sense of self. I had a great conversation with Dr. David Lereah on The Guided Retirement Show™, which is our long-form podcast. He was chief economist for one of the very large banks. He appeared on CNBC and Bloomberg and was mentioned in the Wall Street Journal. He’s a fascinating person to interview. He wrote a book called, The Power of Positive Aging.
I encourage everybody to listen to Episode 44 of The Guided Retirement Show™, which is titled, “The Power of Positive Aging with Dr. David Lereah.” He left a major career and was in the spotlight, and asked himself, “Who am I now?”
Dr. Lereah fought cancer, and at this point is beating cancer, but it was a long struggle for him. He said if he had to go back and do it all over again, he would have done things a lot differently. I think there’s a lot of people like that. We’re not talking just about financial decisions that you would make differently. We’re also talking about personal decisions, things that you did, and people that you spent time with. Would you do that differently?
Reflecting on Your Personality
Bud Kasper: No doubt about it. I have a fraternity brother that was highly successful. He has a place down at the Lake of the Ozarks that he and his family enjoy immensely. But now, they’re torn between the two. I think they say, “We own this thing. We need to go down and enjoy it more than we have in the past.” That’s what they’re trying to do with that.
You must look at your personality. You talked to a client of mine who struggled with retirement because he was such an active person. Do you remember that?
Dean Barber: Yeah. He’s going to appear on the podcast next season.
Bud Kasper: That’s excellent. He’s highly intelligent, very successful. Now he’s struggling with what to do. He wants to contribute to something other than himself.
The Component of Complexity
Dean Barber: There’s another aspect besides sense of self, that is the complexity that comes along with all the rules that come into play during retirement. Those rules include how things are taxed in retirement, what’s required, minimum distributions, and QCDs. They didn’t exist during your working years and accumulation phase.
If you really want retirement to be that time of fun and relaxation, I encourage to think of yourself as the CEO of your own retirement. You don’t want to have the worries of making sure that these rules are met. You’re the one in control and has the vision. You know what you want to happen.
The Importance of Comprehensive Financial Planning
Dean Barber: What you need is a team of professionals to do the work for you. They’ll report to you on where you are and show you that you’re accomplishing that vision. That’s why we created The Guided Retirement System. All those things that are confusing and can turn into chaos. They can give people a lot of anxiety. We can take that away and give you that clarity, which provides confidence.
Bud Kasper: That’s right. You’re asking, “Have I thought of everything that I need to think of?” There’s a big difference between investing and comprehensive financial planning, which considers the taxation, the inheritance that will be coming back. Where’s my responsibility to my family and the money that I’ve created? Am I doing the right things? Where am I screwing up? We can share that by the way we approach retirement planning.
Dean Barber: It’s more than investing, which shouldn’t be discussed until the comprehensive financial plan is completed. Please remember to listen to The Power of Positive Aging with Dr. David Lereah podcast.
“We Don’t Have Enough Money to [INSERT DREAM]”
Dean Barber: Number five on our list of common misconceptions about retirement is people think, “We don’t have enough money to do certain things.” We recently recorded a free new educational series. The one that we’re getting ready to put out is about making big purchases in retirement.
We sent out the announcement that it was going to be the next one, and a client told me, “This is perfect timing because we’re getting ready to make a big purchase.” They’re moving into a continuing care community, which is a big decision for a lot of people.
Clarity and Confidence
Dean Barber: It’s important to have clarity and confidence that it’s going to be OK and won’t wipe out inheritance that you want to leave down to the kids and the grandkids. That’s the best thing you can do for yourself is start getting the clarity that you need by starting a conversation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals.
Bud Kasper: My mom will be 94 next March, so my family needed to find her a place she’d be comfortable and have security. Looking at these contracts that are oftentimes affiliated with these places, you better know what the bottom line is in all the little red tape that’s inside of this.
I’ve seen it where people are putting large amounts of money in to secure the position for their mother. If something were to happen, you may not get all your money back or get any back at all. Once you understand what the rules are—and you need to understand it—it could be costly.
Communication with Family Is Key
Dean Barber: This goes back to engaging your children and letting them know what your wishes are. Another thing that’s difficult there is the cognitive impairment that comes along with aging. It’s natural and going to happen to all of us.
It can be super confusing when you’re supposed to make decisions on things as complex as what you’re talking about if you don’t have somebody that’s there to help you. And it’s not just that. There’s a lot of other things that come along. Thinking about fun and relaxation, that other stuff isn’t fun to deal with and isn’t relaxing.
Bud Kasper: That goes right to the point. That’s comprehensive. If there are issues or could be issues with those things, find out about it.
Dean Barber: That’s what we do in our Guided Retirement System. It’s not just designed to get you to retirement; it’s designed to get you through retirement.
Bud Kasper: I like that.
Dean Barber: We appreciate you spending time with us here on America’s Wealth Management Show. We hope that you’ve learned something. Next week, we’ll be back with you at the same time, same place. We hope everybody stays healthy out there. Stay safe and enjoy the rest of your day.
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