How To Avoid The Risk Of Working Too Long

most people are keenly aware of the risk that comes from retiring too soon they understand the risk of running out of money and not being able to do what they want to do however there's also a risk from continuing to work too long because when you do that you end up missing out on many of the experiences that you could have when you have your health your freedom your independence and if you work too long you end up missing out on those things in today's video i'm going to help you understand how to avoid the risk of working too long hey everybody i'm james canoll founder of root financial partners and i'm here to teach you what you need to know to create a secure retirement today's video actually comes from a question that i received from the podcast that i have and it came from a listener a few months ago know when i released the podcast i got a lot of interesting responses so i wanted to be able to do a video that fully flushed this concept out so to start i'm going to read through the question that i received and then we're going to go through a series of considerations that anyone should consider as they're planning through these types of things that this listener asks so to start the listener says this she says hello james i'm lucky to have found your podcast and i've been listening since july this year i found your podcast to be the most informative and enjoyable i'm 56 and a half and i plan to retire from my current employer in three years at the age of 59 and a half my current salary is 180 000 per year i currently have a balance of 1.3 million in my 403 b i made the switch from defined contribution to defined benefit plan just last year and will have about 450 000 lump sum plus a pension of about 900 per month i also have a small pension of about 350 per month from a previous employer i have no other retirement accounts like any iras i do have a hundred and eighty thousand in cash which will likely be about two hundred and fifty thousand in cash in three years i will also be able to cash in my unused sick time which will be around thirty six thousand dollars after tax my social security payment at full retirement age is three thousand one hundred and forty dollars per month and that's at age sixty seven i can live off of cash for about two and a half years once i retire after taking this much-needed sabbatical from employment to do what i want to do while i'm still able to enjoy life and good health i might end up taking part-time job although i'm not counting on it since the pandemic began in march of 2020 i've lost friends and colleagues who were in their 40s and 50s who suddenly got their lives cut too short i could drag it out working at my current job until age 62 65 or 67 to double my monthly pension amount but if i felt more confident secure about my finances i would leave sooner maybe in the next six months what do you think james is there anything i can tweak now i love this question because what this listener and what this individual is trying to balance is she wants to ensure she doesn't not have enough save she wants to make sure she's on track for retirement and doesn't ever run out of money that's her first consideration but what i love is she's also hitting on a secondary point which is if she continues to work too long she's recognizing the preciousness of life she's lost some people that were close to her in the last couple years and she doesn't want to work so long that she misses out on some of the best opportunities the best chances that she has to do what she actually wants to do so in today's video what we're going to do is flesh this out how do you ensure you've not saved or that you're not under saved and can fully fund everything you want to do but also how to make sure you're not working longer than you need to so you're not missing out on any of the opportunities along the way and living with the regret of not having left work earlier there's a quote that says we have two lives and the second begins the moment we realize we have just one and to me this is the crux of the issue here of this individual is realizing we only have one life and is recognizing the goal of financial planning the goal of investing isn't to grow and grow and grow and grow our money the goal of financial planning and investing is to get to that point where we have enough to fully support the things that we want to do so we want to look at how can we ensure we don't outlive our money and we also want to look at how do we ensure we can fully live and do the things that we want to do so to summarize i know that was a long question here's the facts that we have today this individual has a total balance of about 1.75 million dollars in retirement accounts part of this is her 403b part of this is a lump sum rollover that she will receive when she's no longer working she also has a pension amount of one thousand two hundred and fifty dollars which is really the combination of two smaller pensions one for nine hundred one for three hundred and fifty dollars we know that she has social security at age sixty seven of three thousand one hundred and forty dollars and we know that she'll have cash at retirement of around 250 000 plus 36 000 of payout the goal is to be okay long term but also not to work longer than she needs to because she's recognizing that these are the years that she wants to be able to do the things she wants to do now what we don't have is we don't have her expenses we know that her salary today is 180 000 but we don't actually know how much she wants to live on in retirement but the biggest factor the biggest goal here is to say how can i focus on not running out of money while still balancing not working any longer than i have to here's an important distinction i want to make is you can still be okay or you can be okay with your financial planning but completely missed the point of all of it what's the best way to ensure you never run out of money well it's to work as long as you possibly can keep working keep saving keep investing keep deferring the things you want to do you will probably be just fine over time but it misses the point the point is how do we get to that point where we can do everything we want to do today now plus do everything we want to do in the future so here's how i would look at this is i would look at this individual and i don't know her expenses but i do know that she has a hundred and eighty thousand dollars is her salary today the first thing we want to understand is you don't need to fully replace that full hundred and eighty thousand dollars in her salary of the 180 000 we know that she's putting some in her 403b we know that she's saving a couple thousand dollars per month or so it seems to cash and we know that taxes are going to be taking a chunk of that out as well so really it's not 180 000 that she needs to be able to replace to be able to give herself permission to retire it's a much smaller amount because if income starts here after taxes after savings after investments it's going to be a much lower amount that she actually needs to maintain to be able to support her lifestyle the first thing we want to do now is understand how much income can she create from a portfolio value of about two million dollars per year so again we're going to be conservative with this we don't know exactly how much her portfolio is going to grow to in the next three years could be much higher could be much lower but i don't believe it's unreasonable to expect that portfolio could grow from 1.75 million today to 2 million with the contributions she's making along the way along with some little rate of return in the market so if we assume a 2 million portfolio value the first thing we want to understand is how much income can that create for her there's a couple approaches we can take to this the first is let's just use the simple rule of four percent if you have a two million dollar portfolio and you take out two per four percent per year that's going to give you 80 000 per year of income that you can live on of course that's before taxes you have to tap factor taxes in that's also assuming you're invested in the right way that allows that portfolio to last for 30 plus years not just give you a couple years of that income but if you use the four percent rule right about we can say there's at least 80 000 of pre-tax income that she could generate if you've watched in my other videos you've seen me talk about other approaches but the four percent rule is a good starting point but are there other more dynamic approaches that you can take there's something called guidance guard rails and guidance guardrails helps you understand how much more can you take from your portfolio if you diversify your portfolio a little bit differently and if you follow some dynamic guardrails along the way now in that example she might be able to take about five and a half percent from her portfolio each year so if we go back to her having two million dollars in her portfolio five and a half percent per year taken out of that each year that comes out to about a hundred and ten thousand meaning right right off the bat before factoring in pension before factoring in social security she could generate 80 to 110 000 per year pre-tax from her portfolio let's just use a round number of 100 000 in this case let's say that hundred thousand dollars of income could come from her portfolio now that's before pension and that's before social security so let's now add those in we know that she's gonna have a pension and the combined annual amount between the two pensions is fifteen thousand dollars per year so now what we know is it's not just the hundred thousand dollars that she could live on for income and retirement it's a hundred thousand plus fifteen thousand from her pension so now we're at a hundred and fifteen thousand dollars per year before taxes that she could live on that's also before social security so a few years down the road social security kicks in and that benefit is going to be about 37 000 per year pre-tax so when we look at that you'll have the pension of 15 thousand social security of thirty seven thousand investment income of a hundred thousand that gives her about a hundred and fifty two thousand dollars of income before taxes that she could generate throughout retirement the reality is this she's not gonna start with just a hundred thousand dollars from her income for the first few years of retirement before pension and social security kicks in if that were to be the case she would live on a hundred thousand just from her portfolio then pensions kick in and that hundred thousand goes to 115 she lives on that for a little bit then social security kicks in and that 115 goes up to the full 152. it's not how most people do it in reality she'd probably take more from her portfolio up front less from her portfolio on the back end to normalize the income amount to say how can i have a consistent amount of income understanding that more will need to come from my portfolio up front less on the back end as social security and pension kick in but that's a basic way of understanding the different components of where income will come from investments pension social security now there's certainly some considerations to make with this one is do those pensions have a cost of living adjustment so when we're looking at the four percent rule or guys guard rails it's designed to show you how much income you can you create but that's going to be adjusted for inflation over time social security will be adjusted for inflation over time these pensions may or may not be so that's something to keep in mind as well these pensions help you to preserve your purchasing power or are they going to be fixed which means the dollar amount remains the same but the purchasing power is diminished a little bit each year with inflation tax brackets so all these numbers are pre-tax i'm not sure exactly what state this individual is in but what you can do is depending on whether these investment withdrawals are coming from iras or brokerage accounts or roth iras you can start to understand how will they be taxed social security part of that is going to be taxed pensions those will likely be taxed so understanding okay if you're generating 100 000 or 115 000 or 150 000 that's pre-tax really what you want to know to see can i retire is what's the after tax amount of each of those then also the investment strategy we can't just assume some income amount that those portfolios create and and be guaranteed that that's going to happen those income amounts are based upon research and based on years and years and years of data of based upon how you're invested what's the most amount of income that a portfolio like that has been able to generate historically so that's just a very simple way of starting just understand there are some considerations to look at to ensure this is actually being dealt with more appropriately so here are the key points from some of this how can you ensure you don't outlive your money well you take a basic starting approach like this and then ideally make it more detailed you start by understanding what are your expenses going to be what do you want that retirement to look like so as this listener she's asking this question she probably has some idea of what she wants to be able to do she talked about a sabbatical she talked about being able to do the things that she wants to do today the real question is what's it going to cost to do what you want to do today if that cost is 60 70 grand per year probably in a wonderful place to make this happen if that cost is 150 grand per year after taxes not so much obviously those might be two of the two of the extremes it may be somewhere in the middle but understanding what that amount is going to be is crucial here because what we're looking at is how much income can be generated what you now need to do is line that up with how much expenses do you need to cover and is that fully met is that expense liability met just to take a basic crack at it going back to my point earlier of her salary is 180 000 today does not mean that she needs 180 000 today and i ran just quick basic numbers i said let's assume well let's not assume her income is 180 000 today let's assume that when she's retired she's no longer saving 25 grand per year to savings which is about how much she's put into her savings account today what that does is it takes 180 000 and drops it down to 155 that now needs to be replaced well let's also assume that she's paying 30 thousand dollars per year more in taxes today than she will be in retirement maybe that number is close maybe it's off but just for assumption what that does is start at 180 we remove 25 000 she's no longer saving now we're down to 155 if you remove 30 000 of taxes now we're down to 125 000. now we also know that she's maxing out her 403 b at 26 000 per year so what that means is now that 125 comes down to about 99 000 per year so as we're looking at this i'm just making some very back of the napkin calculations here but if she needs about 99 000 per year of income and she can generate about 152 000 per year of pre-tax income that's what we're looking at here is there's there enough pre-tax income so that after you pay taxes there's enough to be able to do what you want to do if the answer is yes then you're in a good position and if the answer is yes that's where the second part of her question comes in of am i at the risk of working too long well once you have enough once you're in a position where you can fully support your retirement lifestyle every additional year every additional month every additional week you continue to work is one fewer week one fewer months one fewer year that you have to do the things you want to do with now if you love work great it's not a huge risk but it sounds like that's not the position she's in she's in the position where she wants to be able to do other things and by understanding how much she needs to retire once she is there what that's telling me is that every day week month year she continues to work past that point there's really a risk to that as well there's the lost opportunity there's the opportunity cost of not being able to do those things she wants to do when she has her health when she has her energy when she has the freedom and the ability to fully pursue some of that so i really like this question because i want to go back to the quote that i started with of we have two lives and the second begins the moment we realize we have just one and for this particular individual she realized she has just one unfortunately it took passing of friends or colleagues or people close to her and for some of us that's what's needed to realize that we don't exist just to work and we don't exist just to save to our 401ks and iras and all that so how can we look at all this as a tool to help us pursue what we want to do and how do we balance the risk of retiring too early and not having enough money to last for the rest of our lives but also contrast that against the risk of working too long and having more than enough money to last us the rest of our lives but missing out on what matters along the way thanks again for watching this is james canal with root financial partners if you enjoyed this video please be sure to share it with someone else who you think can find value from it and also be sure to like this video and subscribe for more content like this and if you want more resources about how you can create a secure retirement be sure to check out our podcast called ready for retirement and finally if you're interested in seeing how our services can help you create a secure retirement check us out at root financialpartners.com [Music] you

Channel: James Conole, CFP®

Views: 28,828

Keywords: investing, retirement planning, tax planning, financial planning, retirement, personalfinance, taxes, dividend investing, financial planning at 50, how do I retire?, long-term investing, financial planning at 60, roth conversions, roth ira, IRA, individual retirement account, benefits of investing, pros and cons of investing, donor advised fund, financial education

Id: jE6IsZXE5Jk

Length: 16min 13sec (973 seconds)

Published: Fri Feb 25 2022