so you're ready to retire but you plan on holding off on claiming Social Security so that you can get a higher payout and you're trying to figure out you know can you afford to retire uh before claiming Social Security and how should you manage your money and your Investments and where should you draw from to fund your retirement until Social Security kicks in well that's the question we're going to top tackle in today's video and we're going to look at three high level questions the first of course is can you afford to retire and how should we even think about that issue when you're going to wait a few years uh before claiming Social Security that's question one question two then is where should the money come from that you're going to live on until Social Security uh kicks in are there tax considerations that we should factor in how should we even think about that and then the third question is for the money you are going to spend uh before Social Security how should you invest it should you make any changes to the way you invest that money so that's what we're going to look at let's Dive Right In I'm going to show you two different tools the first is imp power uh and we're we're going to look at new retirement in just a minute Uh there's Big differences between these two tools new retirement I think is a great free tool to manage your Investments track your budget and and the retirement planner that we're going to look at as Retirement planners go it's it's a I'll call it a highlevel tool as you'll see new retirement allows us uh to dig into far greater detail uh and just one example of that is taxes and we'll look at that in a minute but in Empower uh it's very easy and very quick to get a rough idea of of what your spending would look like if you retired before taking social security so this is a demo account I've just thrown some manual accounts in here equals about $1.3 million if we go over to planning go to retirement planner it runs a Monte Carlo analysis simulations it runs 5,000 simulations and the first thing we need to look at is our our assumptions before we even look at the results so it pulls in your whatever accounts you were to link over here you link all your investment accounts and 401ks and IAS it pulls all of those in automatically you can exclude an account if you want to which might make sense if you've got one account that's designated for some particular uh spending uh need but it pulls them all in with Social Security you would want to get your actual numbers from the Social Security Administration but they also offer this tool that does an estimate and I've just set it to 70 and then uh retirement spending I for the moment I've put it at $6,000 a month and uh this hypothetical person uh is retiring they're 65 today and they're going to we've got we're planning for 30-year retirement and then uh they they certainly don't offer the level of of detail you can go into with new retirement but they do offer three these three assumptions an effective tax rate inflation rate life expectancy uh I've left those alone and it runs the simulations and as we can see the results at least with what we we've put in there not very good 58% it actually runs two different numbers here the first one is sort of uh at the 50th percentile you can see you actually we we actually do survive 30 years without running out of money but a 50% confidence level is probably not certainly wouldn't be comfortable for me I doubt it'd be comfortable for you if you want a a 90% confidence level it's this this lower uh line but unfortunately we run out of money around age 86 87 again understand this is a simulation based on historical data uh uh we don't know what the future is going to hold but uh this gives us sort of a a bird's eye view of what could happen uh based on historical data and what we can then do is start to make changes to see if we can maybe improve the the likelihood this plan will succeed we could for example say well you know I'm going to retire at 65 I don't know maybe I'll take my Social Security at 67 how's that what's that look like and it runs simulations actually makes things worse so maybe that's not the way to go we can put that back uh so then we could say all right well uh what if uh we spend 6,000 a month but we can actually they've got this nice tool where they can say you know as we get older we spend less maybe we'll reduce our spending by 1% a year but never go they have a minimum uh never go below some minimum what does that do to our plan well that gets us to 90% so that that be comfortable for you that might be a good plan of course you could also change the amount you're spending each month uh the other thing you can do is rather than going in and changing these numbers as I've shown you you could leave them all as we originally had them set and then create new scenarios create a new scenario where you spend less money or you reduce your spending uh as we did or claim Social Security at a different age or maybe you say you know what happens if I add an an income and I'll do a part-time job so you can just do it is you know work during retirement you know I'll work during retirement and uh if there's something you enjoy doing you make some some money so you could play with those different options and then the last thing I'll show you before we move to New retirement is um uh well this uh how is a projection calculated actually brings you to a white paper that goes into detail about how they run these simulations you might want to read that but also you can look at a detailed cash flow and it shows you um year by year this is when over here is when Social Security kicks in and uh and and shows you um yearby year uh what your spending might look like so overall I think Empower is a great a great tool again it's a high level you can't do a lot of tax planning Roth conversions it doesn't look at uh you can't control like Irma which is that extra premium you may have to pay for Medicare uh you don't get into things like long-term care insurance all of those things we can look at in new retirement so let's go to that now here we are now I've put in in um very similar numbers if we go to my plan accounts you can see we've got a total of um uh 1.3 million and for expenses I've got 6,000 a month same thing you'll notice we go to the overview remember Empower showed us with a initially with a 58% chance of success but here at new retirement it's 93% what's going on well there at least two things uh going on the first is with with new retirement you can control the expected Returns on each account so for the investment accounts I have an optimistic rate of return of 10% pessimistic of four and then you come over to these assumptions over here and you can either use the pessimistic the optimistic or I'm using an average uh and so that's the average of 10 and four is 7% and new retirement actually uses that in its simulations and then it it attaches U uh a variance based on on that uh return rate so you have at least some control over the inputs to the simulation which you don't have with Empower but probably the more important difference is that in Empower all of these accounts are traditional IRAs or 401ks which means uh every withdrawal is is treated as ordinary uh income and subject to tax here I decided to mix things up a bit and we can see it easier here I put 400 in a Roth 400 in a traditional 100 in effectively a checking account and 400 in a taxable investment account and so the tax treatment is different and uh just to show you the taxable uh investment account quickly when you do a taxable investment account in new retirement you can choose either capital gains or ordinary income tax treatment so for the for the um we'll come back here for just a second for the checking account I call it a bucket one cash actually I'm just going to rename it check checking account you'll see it's ordinary income and I show it earning 1% interest um but for the investment account I I give it capital gains treatment and you set the cost basis so I just put in half of the the value you can also put in a turnover rate if you're buying and selling within the account or for dividends but for our purposes I'm going to leave it at 0% for right now and uh uh but because of that different tax treatment you may say wait a minute I get that fine Roth is tax free uh uh the taxable Investments that you get favorable cap long-term capital gains treatment and not all of it's taxable but are you telling me that takes us those differences can take us from 58% to 93% yeah actually I am telling you that now again the Monte Carlo analysis that they run is a bit different so that's going to account for some of it but yes taxes really really matter in assessing how likelihood the likelihood of success of a retirement plan and in fact that's why I want to spend a little time looking at that that for those of you that are going to retire first claim Social Security later uh it's important for any of us in retirement but it's particularly important if you're going to claim Social Security some years after you retire and let me show you why in new retirement you've get this section down here called insights it's a really important part of the um program and let's jump down to taxes we can see let me I always want to refresh it to make sure it's got the correct data if you change things in the plan sometimes you have to refresh a page to to see the changes you'll notice the estimated taxes and we're at the federal level boy they're not very much these first few years they're pretty low and we can see that we can see why remember we don't have a job right in this scenario we've retired we're not getting social security for the first five years rmds haven't kicked in yet and so the only taxable income in these first few years are coming from when we have to sell are taxable Investments and even then it triggers a only partial part of that sale is taxable right because we had $200,000 in cost basis and it's long-term capital gains and if we actually come down to the federal income tax uh brackets you know this is income nothing and um we can see here our capital gains you can see the amount over here but remember a lot of that if not all of that is in a 0% tax bracket in fact I pulled up the capital gains uh tax rates you can see for a single person and that's what I've modeled in new retirement at least at the moment up to 41,600 per tax rate and so we can really see going back here the benefits um uh uh of the tax benefits we're getting because of the way I've structured this now we might be able to do even uh better and to understand that we need to go back to to our accounts for a second and I want to look at them here one thing to understand about new retirement and this by the way is important for any retirement planning tool whatever you may use is that we need to understand what order will the tool take from our different accounts so for example for next year we need to spend $72,000 right $6,000 a month so what we programmed where's that money coming from well uh the way new retirement works uh is they first it first takes from taxable accounts in our case the checking account and the taxable Investments and it depletes all of those accounts then it moves up to traditional depletes all of those accounts and then goes to Roth and then beyond that HSA which we're not modeling in this plan now when you have more than one account at each of those levels so for example we have two taxable accounts how does it know which one to take from well it will take from the it will first take from the one with the lowest rate rate of return so in our case it's the checking account if you may you may recall I set that up with a return of just 1% the tax bill Investments have a return of 7% so it will deplete this $100,000 first then it will deplete this 400 then it'll jump up to the traditional and deplete this account and then it will jump jump up and uh Delete the Roth IAS that's important to know because you may have multiple traditional IRAs and multiple wths and multiple tax taxable accounts and you can affect the order within each of those categories by the rate of return you put in so even if you think well I think it's 7% for everything you might have one at 7.1 and another at seven or 6.9 if you want to affect the order but there's another way we can affect uh the order and that's what I want to show you uh and and we're going to see how it might affect the plan so to show you that I want to jump back to taxes for a minute again we want to look at these tax brackets where you know we're not you know eventually when when rmds kick in uh and Social Security kicks in we're going to start to see higher tax brackets uh up to the 22% bracket but maybe we could fill in some taxable income here and reduce our overall taxes throughout our lifetime we could do that possibly with Roth conversions and uh but I'm going to do it a different way both both of what I'm going to show you would be in money flow so here are the Roth conversions but what I want to do is actually do a transfer and here's how it works we could come in here and say look for 20 we we'll just look at one year 2024 uh we know that we're not going to have any taxable income because we're pulling that 72,000 from a checking account right so what if we actually took a distribution from our traditional IRA and uh we're going to move it into that uh checking account because we're going to spend it right and we'll put it in at uh I'll just put in we could all do all 72,000 uh but let's let's start with 50,000 and it's going to be a one time for now and when are we going to do it uh well let's do it this year 20 December 23 cuz we don't have any taxable income and we'll save it whenever you make a change like that you get this popup which is really useful so it says we have a whopping $63 more at at the end of our our lifetime but look at this we're paying $21,000 Less in taxes I like it so we can come down to the taxes and we can see what's going on we can see oh yeah we're paying more in taxes uh here it is and it's purple and we come over here it says it's cuz you transfer money rob that's why you've got these taxes good it's what we expected and we can come down here and this shows us our tax bracket so we're still within the 12% tax bracket so we could start to refine that we could come back up here and say well you know let's uh let's edit this let's do the full boat we'll do 72,000 I don't know really why I called it the full boat but there you go all right and we can come down to taxes of course they're going to go up and we can look at our oh I don't think I like that 14 we got 14,420 in that 22% tax bracket on 72,000 so maybe we come down to like 58,000 come here we can edit it let's just try 58 and see what we get save it come back to tax by the way we can see the differences uh come back to taxes yeah that keeps us in gu there's a there's $42 in the 22% tax bracket so I suppose we could we could um uh shave that down a little bit and then we could we could keep going right we could say all right well let's uh we'll come back to transfers we will we'll we'll just make it we'll make it 57 whoops 575 but here's what we're going to do we're going to do it annually but we're going to stop it we don't want to go to end of our Lives we're just going to do till we get to Social Security so we'll come down here and we'll pick um let's see we're going to start receiving Social Security at the at age 70 uh November 29 so we we'll just we'll just stop it here um save it we can see the difference we're going to have 50 Grand more uh at the end of our Lives we're going to pay 14,000 Less in taxes that's all good we can come down to taxes come down to our brackets pretty good uh nothing goes into the 22% we can see all that orange we had before is gone uh and we could even do some more uh now one thing I'll say I won't I won't do more transfers I think you get the idea but one thing I would suggest you could edit the transfer we just did to try to incorporate these years uh but another thing you could do that might be easier is rather than editing this just add another one and you can start it you know where the other one left off and and play with that until you get the result you want um the other thing that I would always keep an eye on is Irma because you know we're pulling money from a um uh the the IRA that's taxable and that's creating some taxable income for us we we might be happy with that because of the lower tax brackets but we also want to know does it trigger any Irma and right now it's saying no Let me refresh that just to make sure but you always want to keep an eye on Irma uh and what impact your your transfers Roth conversions are having having on Irma always very very important and if we go back to overview I don't know if you remember it was 93% now we're at 95 frankly I I I wouldn't I wouldn't put a lot of weight on the difference between 93 and 95 but I'd prefer to go up not down but so I've really only scratched the surface of the things you can do with new retirement but I wanted to show you and this would apply you know even if maybe you are claiming Social Security when you retire uh you still could have a lower taxable income in those early years before rmds kick in and so this sort of tax analysis can be very helpful if you have someone who prepares your taxes as we do I think I'd probably run this by them before you made any final decisions uh but you can get an idea from what I showed you how a lot of this works now if you've stuck with me in the vide this far thank you I do want to just cover one last topic and that is should we think any differently about how we invest our money you may have you know your sort of straightforward simple portfolio you've got you know x amount in in in stocks maybe US stocks and international stocks you've got another the rest of it in in in bonds maybe a total bond market fund maybe you're 7030 or or 6040 and should you do anything differently should you just pull from that uh those buckets uh buckets those those Investments each year depending on which account you're pulling from you may do those transfers like I showed you from a traditional IRA that's fine you still have to decide which Investments to pull it from should you just you know pull pull those out and rebalance each year and keep your your 6040 or 7030 portfolio or should you you invest the money in a very specific way to cover those in our case 5 years before Social Security begins well for me I think it's perfectly fine just to keep investing the way you plan to invest for retirement and withdrawing money I don't think I would invest in in any particular particularly special way however I think some folks get a little nervous about that they say Rob listen if I take Social Security now don't wait it's guaranteed and I feel comfortable if I'm going to wait 5 years that makes me a little nervous can I take some money out and invest it in in a specific way to cover those five years it gets me to Social Security I'm just going to sleep better at night absolutely if I wanted to do that what I would probably do is just build a five-year tips ladder uh you could take the money you're going to need I would take it out of the bond allocation that's how I would do it so if you had a 604 portfolio I would still have a 60/40 portfolio it's just that that 40% in fixed income would include uh tips that cover the first five years and one one easy investment you could use I've shown you this before that you might and you could you could invest in this inside of a traditional IRA and then each year uh pull that money out and put it in your checking account for example if that was if that made sense from a tax perspective but uh it's called ibonds now this is not the US government ibond this is a a a part of ey shares let me show it to you they've recently released um uh tips and let me see if I can show them here here we go us tips and you can easily build a five-year I uh uh uh tips ladder uh the 2024 you can see it's ticker IB a so this is going to it's a it's a fun but it kind of acts like individual uh uh tips bonds it's going to it's going to mature at the end of 2020 4 and give you your money back and you could then take that money uh and use it for 2025 and you could buy the 2025 fund for the next year and the 2026 fund for the year after that so if you needed say a three or four or fivey year uh period of time before Social Security kicked in and you wanted that added security you could build a tip slatter for those number of years picking uh each successive uh fund as I've shown you with these I share I bonds again it's not the only reasonable way to invest in my view but it certainly would be one and remember uh tips are adjusted for inflation you're holding these ETFs until maturity so you're getting a guaranteed they call it real yield meaning you're getting uh a yield it's probably around 2% in fact we can actually quickly look at one let's go to ibia this is the one that that that uh matures at the end of next year and uh the real yield is look at that the the real yield is higher than I thought wow 4.56% which means you're going to get that plus inflation and um and this is going to mature at the end of 2024 but now yeah October right here now keep in mind you can always sell these funds early there's you could sell them anytime that you want to uh but you may end up selling at more or less than you paid depending on what interest rates are doing but if you hold it to maturity in this case October uh of the end of next year you know you're going to get that real yield plus and so if you wanted that extra security until Social Security uh kicked in yeah you could build a tips ladder with those uh I share I I uh tips ETFs I hate that they call them ibonds too confusing but any event I know sort of a detailed uh video and there's particularly when it gets into taxes there's a lot of nuances you really need to spend some time understanding a tool like new retirement and frankly as well as I know it I still learn new things about it every single day but I do think it's a really good tool can help you work your way through this or you can just hire a financial planner and help them have them help you work out a plan if you'd like so there you go uh how to bridge the Social Security Gap if you want to retire before claiming Social Security hope hopefully this video is giving you some ideas to think about if you have any questions leave them in the comments below be happy to help you out any way I can and until next time remember the best thing money can buy is Financial Freedom
