Retiring After 65? The Rules Change (Hint: You Can Spend More)

Episode Transcript
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SPEAKER_00 (00:00):
Most people don't realize this, but retiring later
in life changes the rules.
You have fewer go-go years, lessrunway for recovery in RMDs
right around the corner.
But you also have more clarity.
So today I'm walking through thekey decisions people retiring
after the age of 65 need to getright because these things are
different than people who retireearly.
So jumping right in.
Retiring later typically meanshigher social security benefits.

(00:21):
It typically means fewer yearsthat your portfolio needs to
support you.
But it also means things likecompressed tax planning windows
and fewer high energy years thatyou have left remaining.
So this isn't about plaindefense.
It's about designing a strategythat aligns with your health,
your energy, your purpose, anddoes so with a math to support
it.
So the first thing that changesif you're retiring after the age
of 65 is standard withdrawalrate logic.

(00:42):
Typically, when you're lookingat a portfolio and you want to
say how long can this last soyou can determine a safe
withdrawal rate, you're assumingthat portfolio needs to last for
30 to 40 years.
Everything from the 4% rule tothe guidance guard rules
approach, this is assuming a 30to 40 year time horizon.
That is completely out thewindow if you are retiring much
later in life.
You probably don't have 30 or 40years in your retirement time

(01:04):
horizon.
So what changes?
What changes is your withdrawalrate.
If you only have, for example,20 years that you're planning
for in your retirement, using anumber like 4% to plan for the
rest of your life, you'reprobably leaving a whole lot of
money on the table.
Depending on the approach you'retaking, depending upon the rules
that you're following, you maybe able to spend closer to 6 or
7% if you only have 20 yearsthat you're planning for.

(01:26):
Now, of course, none of this isintended to be specific advice.
Make sure that you're aligningthe strategy to your unique
situation, understanding yourposition, working with your
financial advisor.
But generally speaking, 6-7%might not be too high of a
withdrawal rate if you're onlytrying to support 20 years as
opposed to the traditional 30 oreven 40 year time horizon.
Now, what if you only have 10years left?

(01:46):
What if you've worked until 75and you think that you might
only live until age 85?
Well, if you're only spending 4%of your portfolio, that's less
than half of what you probablycould be spending.
You might be able to spend 10%or even more from your initial
portfolio balance if you onlyhave 10 years of life that
you're trying to support withthat portfolio.
Now compare these numbers, 10%per year versus a traditional 4%

(02:08):
per year.
How much more could yourportfolio do for you?
How much further could that goif you're using the right
withdrawal numbers?
So as you're retiring later, thefirst thing to keep in mind is
the traditional withdrawalrates, those sustainable
withdrawal rates.
The math and the logic is soundthere, but it's assuming a 30 to
40 year retirement.
The older you are when youretire, the fewer years you have

(02:30):
that your portfolio needs tosustain you.
So factor that in so you're notunderspending in these years of
your retirement.
And when you look at theimplications of this, a lot of
later retirees, they end upunderspending because they're
applying traditional withdrawalframeworks to a much shorter
retirement.
So you may have far morepermission to spend, especially
in those go-go years, than youinitially thought you might.

(02:51):
Now, this ties in perfectly tothe second thing that you need
to be thinking about if you'reretiring later, and that is
this.
You really need to optimize thego-go years.
Traditionally, you have thego-go years, the slow go years,
and the no-go years.
And the go-go years is when youhave the most time and energy
and enthusiasm to do the thingsthat are in front of you.
That's typically ages 60 to 75.
The slow go years, you'reslowing down, that's maybe age

(03:12):
75 to 85.
And the no-go years, you reallydon't have the health or the
vitality to do much of anythingat that point.
And that's 85 and beyond.
Now, these numbers, of course,are unique to you and your
health and your energy levels.
But if you're retiring, say at70, well, on average, you might
only have five years left of thego-go years.
Compare that to someone whoretires at the age of 62.

(03:33):
They might have 13 years inthose go-go years.
So more than double what you'dhave if you retire at 70.
What's the takeaway here?
Make sure that you start living,especially when you tie this
into our previous point of awithdrawal rate that can support
higher numbers the longer youwait to retire, simply because
there's fewer years left thatyou have to use your portfolio
to support.
But make sure you're not lettingthose go-go years pass you by.

(03:56):
Make sure that you areintentionally front-loading some
of these experiences, thattravel, that time and family,
the giving that you want to do,do that because those years are
not going to last forever.
Now, with everything I'm talkingabout here, and of course, over
all videos, make sure that youhave the numbers to back this
up.
Make sure you've gone throughthe planning projections, make
sure you've worked with youradvisor to make sure that you're
in a good spot to make thishappen.

(04:16):
But if you are, those go-goyears, that window, it does not
last forever.
And sometimes it comes to anabrupt end if there's a health
event that prevents you fromdoing the things that you
initially plan on doing.
You won't get those years back.
So make sure that you're takingfull advantage of them.
The third thing that you need toconsider has to do with market
downturns.
Now, typically when peopleretire later, let's assume age
70, for example, one of theircommon concerns when it comes to

(04:37):
investments is I don't have timeto wait out a recovery.
Now, a couple points that I wantto make here.
Number one, you're right, youdon't have as long of a time
horizon, but you still mighthave 20 plus years left of
living.
Over 20 plus years, you still doneed to make sure that you have
the investment portfolio thatcan offset inflation and can be
growing for you for futureyears, especially if you're

(04:58):
factoring in later healthcareexpenses, long-term care
expenses, you need to bepositioned well to support that.
But you do need to have enoughmoney that's also set aside in
something that's not going to beas subject to the ups and downs
of the market.
Here is the other point, though.
When you look at your portfolioand you look at sequence of
return risk, which is that riskthat what if the market falls in
your first few years ofretirement and you start

(05:20):
spinning down your portfolio toosoon, and on top of that, the
market's falling, that's arecipe for disaster long term.
Here's the thing though.
Typically, if you are retiringlater, let's say age 70, you are
going to have a higher socialsecurity benefit.
You're collecting at 70 asopposed to say collecting at 62
or 65.
If you're married, your spouseis also going to have a social
security benefit.
The all else being equal isprobably going to be higher.

(05:42):
Here's why that matters when itcomes to your investments.
The more money you have fromoutside income sources, pension,
social security, rental income,whatever the case might be, the
less pressure there is on yourportfolio to generate every last
dollar of income that you needto live on.
So the higher your outsideincome sources, the less at risk
you are of sequence of returnrisk.
And the reason for that is ifthere's a major market downturn,

(06:03):
you're not so heavily dependentupon only your portfolio to meet
your income needs.
You have these other incomesources that you can use to
support your core expenses, tosupport what you need to spend
while given time for yourportfolio to recover.
So, yes, you have less time torecover from a downturn, but
that does not need, you don'tstill need to be very
intentional about designing theright mix of long-term growth

(06:24):
investments, because you stillmight have a couple of decades
or more in your retirement withthe appropriate mix of
shorter-term conservativeinvestments at root financial,
we call these root reserves,where we actually go through and
say, what is five years worth ofcash flow that you need from
your portfolio?
Depending on what you need fromyour portfolio, we need to
protect at least five years ofthat so that if there's a market

(06:44):
downturn, we don't have to pullfrom our stock investments, from
our growth investments.
We can instead pull from ourconservative investments, our
conservative bucket, and thatgives time for these stock
investments to recover.
So those numbers look differentif you're retiring at 70 versus
retiring at 60, but that sameframework still applies to make
sure that you have a portfoliothat fully supports your needs
going into retirement.

(07:06):
The bottom line is retiring at alater age does not automatically
mean you need to be superconservative with your
investments.
Instead, your portfolio shouldbe a reflection of your cash
flow needs, your other incomesources, and how long you need
your portfolio to last.
The next point that you need toconsider if you're retiring
after the age of 65 is RMDsmight be right around the
corner.

(07:26):
This might be age 73 or thismight be age 75, depending upon
the year in which you were born.
And just to illustrate howdifferent this is than for
someone who's maybe retiringearly, is someone who's retiring
at 62 and has an RMD age of 75,they have 13 years of a tax
planning window to implementRoth conversions, to implement
some of the most impactful taxstrategy.
If you're retiring at 70 andyour RMD age is 73, you only

(07:49):
have three years to do so.
So it's really compressing thewindow that you have.
Here's the thing the strategy isstill the same, but the
implementation is going to bedifferent.
You don't have this giant windowwithin which you can spread out
any potential Roth conversions.
You may need to do moresignificant Roth conversions in
those first few years, but youstill need to look at the

(08:09):
overall picture.
The framework is still the same.
If you need to understand at 70,how much are you paying in
taxes?
What tax bracket are you in atthis point?
Versus once requireddistributions kick in, what tax
bracket will you be in at thatpoint?
What about five years in, 10years into required minimum
distributions?
What tax bracket are youprojected to be in?
And when you get a 30,000 footview of where you are today,

(08:31):
where you're expected to be inthe future, what you're doing is
simply implementing taxarbitrage.
How can you pay taxes in yearsin which you're in a lower tax
bracket to avoid paying evenmore in taxes in years in which
you're in a higher tax bracket?
The same framework applieswhether you retire at 50, 60, or
70, but the window that you haveto do this becomes far more
compressed, which means theimportance of doing this and

(08:53):
having the right strategy is allthe more important.
Now, part of this ties intopoint number four.
If you do any charitable giving,then as soon as you turn 70 and
a half, you are eligible forwhat's called a qualified
charitable distribution.
A qualified charitabledistribution says that you can
actually gift money directlyfrom your IRA to the charity of
your choice.
Practically speaking, what thisallows you to do is it allows

(09:16):
you to avoid having your IRA,pulling money out, paying taxes
on that, and then gifting what'sleft to the charity.
If instead you can gift rightfrom the IRA to the charity, it
saves you money on taxes.
The charity doesn't pay anytaxes on the gift that they
receive.
So if you are doing charitablegiving, understand that this
becomes one of the primary toolsthat you should think about
using.
The benefits are twofold.

(09:37):
Number one, I just mentioned itsaves you money on taxes.
But number two, any qualifiedcharitable distribution that you
do counts towards the requiredminimum distribution you must
take from your account.
So if your required distributionis 40,000 and you want to gift
10,000, well, if you do thatdirectly from your IRA, the
remaining amount that youpersonally have to take is only

(09:58):
30,000.
So this can be an excellent taxplanning tool as well as a great
way to help you gift more tocharity without paying taxes on
that money yourself.
The fifth thing that you need toconsider is IRMA surcharges.
IRMA surcharges are the extraamounts that you pay on your
Medicare premiums.
And this kicks in after the ageof 65.
A couple of things to note withthis.
When you're looking at IRMAsurcharges, you need to do two

(10:20):
things.
Number one, you need to realizethis is based upon a two-year
look back.
So if you are 70 and you'resaying, okay, now my income
going forward is gonna be$70,000per year, but you are a very
high income earner.
Let's say you're earning$300,000,$400,000,$500,000 per
year leading up to that,Medicare is gonna calculate your
surcharge as being much higherthan it will actually be.

(10:42):
It's looking two years behindand saying, wow, you earned
$500,000.
Therefore, your surcharge isthis.
But practically speaking, you'reseeing my income is much lower
now.
I just retired.
My income on a go-forward basisis only gonna be$70,000 per year
because that's what I need,hypothetically in this example,
to maintain my lifestyle.
Well, what you can actually dois you can actually submit a
form to the Medicare officeessentially saying my income

(11:05):
going forward is going to bethis, and you're not actually
subject to that two-year lookback.
The default time period is atwo-year look back.
They have your tax returns, theyhave your records, they can very
easily apply that.
But understand that you canactually challenge that by
submitting the form and saying,here's what my income will
actually be.
Now, if your income ends upbeing higher, you'll owe
retroactive surcharges on that.
But there's a way to tellMedicare, here's what your

(11:27):
income will actually be.
That's very important and cansave you a few hundred dollars
in that first year or two ofretirement.
Number two, the second thing toconsider with this is you just
need to treat Irma as likeanother tax.
If you want to pull more moneyout of your portfolio, but
you're saying, you know what,there's gonna be a tax bill on
this, but it's a vacation youreally want to take, don't let
the tax strategy drive the lifedecisions.

(11:48):
Take the vacation, take thetrip.
That's what you've saved themoney for.
And yes, you want to minimizetaxes to the extent possible,
but not to the extent that'sholding you back from doing what
you actually want to do.
Treat Irma the same way with onecaveat.
Taxes, ordinary income taxes,they're progressive, which means
if you earn one more dollar,that extra dollar is taxed at
your marginal tax bracket.

(12:09):
It's not impacting the tax rateof other dollars that you
previously earned.
So, for example, if you're inthe 22% tax bracket, that means
some of your dollars were taxedat 10%, some were taxed at 12%,
and then finally some were taxedat 22%.
Each additional dollar that youearn, it's taxed at 22%.
With Irma, it's different.
Once you do cross a newthreshold, your surcharge just

(12:30):
jumps to that next level, thatnext threshold.
It's not a progressive thingwhere some dollars are taxed
differently.
So you should treat it as a tax,but understand that if you are
right up against one Irmasurcharge, right up against one
Irma threshold, it might makesense to try to be a little bit
strategic about where do youpull that next dollar so that
you don't spend one more dollarand end up having that one

(12:51):
dollar cost you a few hundreddollars the next year in extra
surcharges.
The next thing that you need toconsider if you're retiring
later is planning for thesurvivor.
If we just look at averages, thelighter you wait to retire, the
earlier, assuming you'remarried, one of you is going to
pass away.
So when you're looking at yourretirement plan, it's always
important to have a plan for thesurviving spouse, not just the
time that both of you aretogether, but it's all the more

(13:13):
important when you are retiringlater.
The reason is one of you islikely to pass earlier than you
would, of course, had youretired much earlier.
What does this mean?
It means understanding what'sgoing to happen to Social
Security when one of you passesaway first.
There will be a survivorbenefit, but it still means that
your overall social securityincome is cut.
When you are married, you get totake advantage of tax brackets

(13:34):
that are designed for people whoare married finally jointly.
When one of you passes away,those tax brackets, in most
cases, get cut in half dependingon your income.
What doesn't typically get cutin half is your income,
especially because a lot of yourincome in many cases is driven
by required distributions.
And if one spouse passes away,depending on the age gap, their

(13:55):
IRA typically just folds intothe surviving spouse's IRA and
you continue taking requireddistributions.
So the actual requireddistribution does not go down,
but the tax brackets that youget to take advantage of do get
cut in half.
So the surviving spouse could beon the hook for a lot more in
taxes if you're not carefulabout planning for this ahead of
time.
And then also just plan for theemotional side of this.

(14:16):
One spouse typically tends to bethe money person, the other
spouse typically is not themoney person.
That's perfectly fine, but youstill do need to be on the same
page.
The spouse that's not the moneyperson needs to understand where
is everything held?
How much can we spend?
What would happen if my spousepassed away?
Who could I reach out to if myspouse passed away?
In fact, that's a big reason alot of people start working with

(14:38):
financial advisors later on.
They enjoyed doing things theirwhole life, they were quite good
at it, but they know that ifthey were to pass away, their
spouse would not have the sameinterest, nor would they have
the same capabilities when itcomes to making sure everything
is optimized.
We see that all the time at RootFinancial.
When people come to us, they aredoing a good job, but they're
preparing not just for theirretirements and optimizing
everything, they're alsopreparing for what happens when

(15:00):
they pass first.
How do they make sure that theirspouse is taken care of?
So making sure there's a plan inplace, not for if one of you
predeceases the other, but when.
Both the financial side of thisas well as the emotional side of
making sure the surviving spouseis in a good position to carry
on.
The last thing that you reallyneed to prioritize if you're
retiring later is your health.

(15:21):
Now, when you are retiringlater, your go-go years are
compressed, as I talk about.
Because of this, investing inyour health is not an expense.
This truly is an investment.
Without your health, you're notgoing to be able to enjoy your
retirement as much.
Without your health, you're notgoing to be able to take the
trips you want to take.
Without your health, you're notgoing to be able to play with
your grandchildren with the sameenergy and vitality you
otherwise would have wanted.

(15:42):
So, really, really, reallyprioritize your health in those
initial years.
Once it goes, it's verydifficult to get it back.
So, what can you do to make sureyou're spending time in the gym,
you're spending time stayingactive, you're spending time
eating right so that all thoseretirement goals you have don't
fade away because your health islost, but those actually become
a reality that you can liveinto.
So to wrap up, retiring later isnot a disadvantage.

(16:05):
It's simply different.
And if you design this firstfive to 10 years very
intentionally, everything fromyour tax strategy to how do you
invest to how do you plan forcontingencies is making sure
your spouse is cared for if youare married, you can create an
incredibly rich and meaningfulretirement.
But it doesn't happen bydefault.
So make sure that you are eitherputting the work in to create
this plan yourself or work witha financial advisor if you need

(16:27):
help doing so.
That's exactly what we do atRoot Financial.
If you're interested in Root,you can either click on the link
in the show notes below, or youcan scan this QR code right here
to schedule time with our team.
But when it comes to retirement,retirement's not just a math
problem.
You need to get the math rightso that retirement can be all
that you want it to be.
You can pursue the purpose, thefun, the impact that you can

(16:48):
have when you have a welldesigned strategy.

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