3 Things to Do Before You Retire | The Limitless Retirement Podcast

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"I encourage all of my clients to view retirement not as what they're retiring from, but what they're retiring to. Thinking about retirement this way creates a mental shift and gives you a sense of hope and joy as you enter this new phase of life."

Have you ever looked into your financial future and wondered how you can retire not just comfortably but with a genuine zest for life? That's the journey our host Danny Gudorf takes us on in the latest episode of The Limitless Retirement Podcast. Danny tackles the critical need for a healthy cash reserve as you step into retirement, ensuring you have the freedom to draw on your funds without the worry of heavy taxation. He unpacks the secrets of navigating tax-deferred accounts and the strategic finesse of Roth conversions, aiming to protect your Social Security benefits from becoming a casualty of tax implications.

But it's not all about the numbers; your retirement dreams are just as pivotal. Danny guides us through crafting a retirement plan that resonates with our deepest aspirations, looking at how to accurately calculate your monthly expenses to secure your financial future, and more importantly, how to intertwine those dreams into your fiscal strategy. The goal is to transform this concept of retirement from just a financial milestone into an inspired, purpose-driven chapter of your life.

Key Topics:

  • Three Things To Do Before You Retire (00:40)
  • 1: Building Up Your Cash Position in Retirement (01:31)
  • 2: Figuring Out How Much You’re Spending Monthly (09:46)
  • 3: Creating a List of Important Things to Accomplish or Do During Retirement (16:34)
  • Wrap-Up and Review (20:07)

As you approach retirement, a myriad of questions, concerns, and even fears may arise. After all, this is a significant life transition, and you want to get it right the first time. In this blog post, we'll explore the three critical steps you should take before retiring to ensure a successful and fulfilling retirement.

Key Takeaways

  1. Build up your cash reserves to provide flexibility in retirement distributions and tax planning.
  2. Calculate your monthly expenses accurately to determine your retirement income needs.
  3. Create a list of your retirement dreams and goals to give purpose to your financial planning.

Step 1: Build Your Cash Position

One of the most crucial aspects of a successful retirement plan is having an adequate cash reserve. Many people focus on saving in tax-deferred accounts like 401(k)s, which is excellent for accumulating wealth. However, the source of your retirement income is just as important as the amount you've saved.

Why Cash Reserves Matter

When you withdraw money from a tax-deferred account, such as a 401(k), you'll owe ordinary income taxes on every dollar distributed. If most of your retirement savings are in these accounts, you may end up paying more in taxes than you anticipated.

Furthermore, distributions from tax-deferred accounts count as income, which can increase the taxable portion of your Social Security benefits. This leaves you with less money to spend each month.

The Benefits of a Cash Position

Having a cash reserve or taxable investment account provides flexibility in your retirement distributions. Cash is a tax-free asset, meaning you can withdraw it without owing taxes or affecting your adjusted gross income.

By strategically splitting your retirement income sources between tax-deferred accounts, cash reserves, and Social Security, you can minimize your tax liability and maximize your spendable income.

Preparing for Required Minimum Distributions (RMDs)

If you have a significant amount saved in tax-deferred accounts, you'll eventually face Required Minimum Distributions (RMDs). These mandatory withdrawals begin at age 73 or 75, depending on your birth year, and can push you into a higher tax bracket.

By building up your cash reserves, you can better manage your tax liability during retirement and avoid being forced to take larger distributions than necessary.

Maximizing Roth Conversions

Cash reserves also play a crucial role in making Roth conversions more beneficial. When you convert funds from a tax-deferred account to a Roth IRA, you'll owe taxes on the converted amount. If you don't have cash available to pay these taxes, you'll need to withhold them from the conversion, reducing the amount that goes into your Roth IRA.

By having cash on hand to pay the taxes, you can ensure that the entire converted amount goes into your Roth IRA, allowing for more tax-free growth and ultimately providing more tax-free income in retirement.

Step 2: Calculate Your Monthly Expenses

Knowing your monthly expenses is crucial for determining your retirement income needs. Without an accurate understanding of your spending, you can't effectively plan for retirement or know if you're truly ready to take the leap.

Tracking Your Spending

To get a clear picture of your monthly expenses, review your bank statements, credit card statements, and any other financial records for the past 6-12 months. Don't forget to include one-off purchases or annual expenses, as these can add up over time.

Accounting for Fixed and Variable Expenses

Be sure to account for both fixed expenses (e.g., mortgage payments, car payments) and variable expenses (e.g., groceries, entertainment) when calculating your monthly spending. While some expenses may change in retirement, it's essential to have a realistic baseline.

Anticipating Retirement Lifestyle Changes

Contrary to popular belief, many retirees find that their expenses remain the same or even increase in retirement. This can be due to factors such as traveling more, pursuing new hobbies, or relocating to a new area.

By accurately tracking your current spending and anticipating any lifestyle changes, you can create a reliable estimate of your retirement income needs.

Using Technology to Simplify Tracking

There are numerous apps and software programs available that can help you track your spending automatically. Consider using these tools 1-2 years before retirement to get a head start on understanding your expenses.

Step 3: Create a List of Retirement Dreams and Goals

While much of retirement planning focuses on the financial aspects, it's equally important to consider what you want to do with your time and money in retirement. Creating a list of your retirement dreams and goals can provide purpose and direction for your financial planning.

Money as a Means, Not an End

Remember, money is a tool to help you achieve your dreams, not the end goal itself. By identifying what's most important to you in retirement, you can work with a financial planner to create a strategy that supports those goals.

Defining Your "Why"

Your retirement dreams and goals are your "why" – the reason behind all the financial planning and optimization. Whether you want to travel the world, move closer to family, or volunteer for a cause you're passionate about, having a clear sense of purpose can make retirement more fulfilling.

Viewing Retirement as a New Beginning

Rather than thinking of retirement as an ending, try to view it as a new beginning – a chance to pursue the things you've always wanted to do. This mental shift can bring a sense of excitement and anticipation to the retirement planning process.

Conclusion

By taking these three critical steps before retiring – building cash reserves, calculating monthly expenses, and creating a list of retirement dreams – you can set yourself up for a successful and enjoyable retirement.

Remember, retirement planning isn't just about the numbers; it's about creating a life that aligns with your values and aspirations. With careful planning and a clear sense of purpose, you can embrace this new chapter with confidence and enthusiasm.


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Transcript: Prefer to Read — Click to Open

Danny (00:00.556)

This is episode three of the Limitless Retirement Podcast.

Danny (00:15.596)

Hello and welcome back to another episode of the Limitless Retirement Podcast. In today’s episode, we’ll be discussing the three critical things that you should do before you retire. I understand that if you’re approaching retirement, you’re likely beginning to think about all the different obstacles, questions, concerns, and fears that come with this significant life transition.

The reality is, is that you want to retire and you want to do it correctly the first time because you don’t have the opportunity to mess it up and try it again another day or another year. You have many questions that come with this decision, but in this particular episode, I want to share the three things that I believe are essential to any successful retirement plan.

So let’s start with the first and most critical point, building up your cash position in retirement. Far too many people I encounter and talk to come to me a month before they’re about to retire and say, Hey, I’ve got a million bucks or I’ve got $2 million saved in my 401k and it’s all tax deferred, but I only have about $25 ,000.

and my checking and my savings at the bank. Well, it’s great they’ve saved and invested so well for retirement.

Danny (01:56.268)

how and where your savings come from in retirement are almost as important as how well you’ve saved for your retirement. Here’s why this matters. In the situation I just presented, if a person has a tax deferred 401k that holds all or the majority of their money, whether it be a million or $2 million, when they go to ret…

and start taking distributions out of those accounts, every dollar they take out of their account will be taxed at ordinary income tax rates whenever they distribute that money. Now, that’s just their investment accounts. What if we have Social Security or we add a pension on top of that? Now, you’re looking at paying nearly the same amount of tax that you would while you’re potentially working.

even, you know, in a lot of cases.

people in retirement are paying the same.

because of

Danny (03:11.436)

Additionally, having those distributions count as income, it will increase how much of your Social Security is taxable, leaving you with less of your Social Security benefit each month that you can take out and spend. This is where having a cash position or reserve account in the bank can provide you with flexibility for your retirement distributions. Cash

is a tax -free asset, meaning that whenever you take it from your bank account or your taxable investment account, you can take that money tax -free without owing any taxes on it. It doesn’t go as a line item on your tax form, and it doesn’t count towards your adjusted gross income. Simply because of how cash is taxed, or in this case, not taxed,

you’re able to split where you pull your money from and live on in retirement. Now let’s look at an example to help illustrate this. If you had a million dollars saved in a 401k account and a cash account at the bank or a taxable account, you can pull money from your 401k account a little bit out of there. You can pull money out of your cash account and then you’d also have

your social security income coming in as well. We can structure it in such a way that only a portion of that IRA or 401k distribution is actually going to end up being taxable. In fact, depending upon how much cash you have saved, we can probably do it in such a manner that you don’t pay tax on any of that income or distribution at all.

This gives you a lot of flexibility and options when it comes to your retirement income distribution planning. Moreover, if you have over a million dollars saved in a tax -deferred IRA or 401k, one day you’re going to have to start taking large required minimum distributions or RMDs. Whether you’re already taking them at 72 or for everyone else moving forward,

Danny (05:35.116)

It’s going to be either 73 or 75. But once you reach that age, you’re going to start taking those required minimum distributions. And if you have over a million dollars saved in this tax deferred account, those RMDs are going to be anywhere from $50 ,000 and higher. And those distributions or those RMDs are going to go on top of all your other income.

This is what we call forced distribution, meaning you don’t have the option to not take this money out of your 401k account. Therefore, you’re just going to pay tax on it and then perhaps reinvest it if you don’t need those distributions to spend. Either way, it’s going as a line item on your tax form and you’re going to have to pay ordinary income taxes on it.

Here’s one more final point that I like to talk to clients about as to why cash is important to any retirement plan. You’ve probably heard me talk about or heard others talk about, or maybe you’ve investigated yourself, but what are the benefits of doing Roth conversions? And are you able to do Roth conversions and get the highest benefit out of those Roth conversions?

That’s something a lot of people are concerned about and look at because they don’t want that large RMD issue to happen to them when they do turn 73 or 75. They don’t want to have to be forced to take that money out of their accounts and they want to lower their total lifetime tax liability. Roth conversions can be a great tool.

to do that, but having no cash limits how much you can do in Roth conversions or said differently, it limits how valuable that Roth conversion will be to you. If you have to withhold taxes from your IRA to do the conversion, it might still be beneficial to do the conversion, but you’re eating into the benefit a little bit as far as how beneficial it would be.

Danny (08:03.244)

Let’s say you want to do a $100 ,000 conversion. If you have to withhold $20 ,000 or $30 ,000, technically, you’re only giving $70 ,000 or $80 ,000 into that Roth IRA account, which means you’re starting from behind. You have to dig out of that $20 or $30 ,000 hole before you even get back to a break -even point.

Obviously that takes years to do. That’s the benefit of having that cash set aside. If you can pay the taxes on your Roth conversions from that cash, you immediately get more money working for you inside of your Roth IRA, which is going to provide more tax -free growth, which is the benefit of having that account. So that’s another thing to consider.

when it comes to why having cash is such an important thing is because it allows you to do more in Roth conversions and make them more beneficial for you. To summarize, number one is to build up that cash as you begin to think about retirement. A lot of our clients, we tell them three, four years out, only contribute up into the match on your 401k plan.

After you’ve hit that match, then begin deferring those contributions to help build up your cash position, to help build up your reserve account, and to maybe invest in a taxable brokerage account.

Now let’s move on to the second point. Figuring out how much you’re spending on a monthly basis. I can’t stress how important this is. Knowing how much you spend each month is key to determining what your monthly income needs will be in retirement. If you have no idea about how much you spend or how you can get an accurate estimate of how much you’ll need to distribute,

Danny (10:16.172)

from your portfolio in retirement, then that can cause a lot of confusion and friction when it comes to planning for retirement. If you don’t know how much your actual spending is, then you can’t really tell if you can truly retire or not. If you’re spending more than you think, then you have to distribute much more than you think you’re gonna need to, which is gonna be a higher percentage of assets

that are going to have to be sent out of your accounts each year to meet your spending needs. And this might actually cause you to not be able to retire at all. For example, if you think only spending, you know, let’s say you only spend $6 ,000 a month, but you’re actually spending $8 ,000 a month, this will drastically change your plan for retirement or even your potential.

to be able to retire at this moment.

that mismatching in what you think you need to spend and what you’re actually spending can wreak havoc on your overall income and retirement plan. So here’s what I would do or what we recommend sometimes to our clients. I would go through your last six to 12 months of bank accounts, credit card account statements, and count through how much you’ve spent each month. And then average this out.

in such a way that you can figure out what your average monthly spending needs are. I know this is not fun. I know no one likes to count where they’re spending their money, but pull all those statements together and everything like that so you have a clear picture as far as what you’re actually spending. But as someone who’s getting close to retirement, it’s crucial to know what the spending number is.

Danny (12:15.148)

If you’ve got a mortgage, a car payment or other fixed expenses like that, those things are going to matter when you get your retirement. We have to account for all your fixed monthly expenses, but there’s also your variable expenses. One thing I’ll say here is to not scratch that.

One thing I’ll say here is to be sure not to leave out all of those random or one -off purchases that happen. Obviously, monthly we think about these things, hey, you know, I had this big thing, my water heater went out, it’s a one -off thing, it’s not going to happen again. But these things that we think are random,

that come into us when we’re going through our daily lives.

And we think to ourselves, this thing that is random is not so random when we’re just spending the money. Okay. It’s just what we’re spending it on. So I say, leave all of those things in because there’s always something that comes up. A good example of this is when I’m talking to somebody and I ask how much you spend on a monthly basis. And let’s say it’s around the holidays and they’ll say, well, December was an expensive month. We had.

Christmas gifts and we had outings and we went out to dinner a lot. And I’m like, well, perfect. Everybody has to do that. And we have to do that every year. Right. So, you know, we can’t just tune that high month out or that one off expense out. That’s a portion of your spending. And we should anticipate that each year. We have to calculate that and we have to leave that in to help get an average of what our true monthly spending is.

Danny (14:11.02)

Once you have an average of what you’ll spend over the last six or 12 months, this is about what you could probably expect to need each month in retirement. Now there’s going to be some things once you get in retirement that aren’t there, and there’s going to be other things that are going to be added in to the budget as well. So you have to think about everything and you know, what’s going to be staying, what’s going to be going and what’s going to be coming in. A common,

misunderstanding I see often is that people think they’re going to actually spend less in retirement because they’re

I don’t fully understand that because you’re expe…

Danny (15:09.324)

Typically, your variable expenses remain the same in terms of how much you need to spend on food, groceries and gas and everything else. I would even maybe suggest that perhaps your expenses are going to increase maybe in retirement because now maybe you’re trying to move to a different state or you want to move to a different city or buy a different house in retirement. Or what about all those trips and traveling you want to do?

All of these things factor in to how much you’re spending. And I’m not sure how we came to the conclusion that people spend less in retirement. I would just say whatever your monthly spending is right now, that would maybe be the most accurate number as you transition into retirement.

then we can know how much we would need to generate, whether it be from your IRAs, your Roth IRAs, your cash investments, or your other taxable investment accounts. And then whether or not we need to start taking Social Security now because we need the income, or if we’re able to delay it farther in the future to help us do some other strategies and strategic planning, as well as getting that increased

Social Security benefit by not taking it early. So that’s number two. Figure out how much you are spending on a monthly basis and really dial that in and make sure your estimate is accurate. There’s a lot of software out there, apps that can help aggregate and automate all of this for you. And we definitely recommend using those or downloading those and tracking it one to two years prior to retirement. All right.

Let’s finally discuss the third point. The third point is going about creating a list of things that will be important for you to accomplish or do during retirement. Here’s the deal. A lot of what I talk about is on the financial side of retirement. There’s Roth conversions and tax planning and investments. And we all love getting all into the numbers and figuring out the best.

Danny (17:25.516)

course of action to go. But at the end of the day, none of that matters if you aren’t enjoying your life and doing the things you want to do in retirement. I’m not really a fan of calling these goals, but I think that’s maybe the most accurate representation of what they are from a simplicity standpoint. However, I think that they’re more than goals. These are your dreams. These are your hopes and your wishes.

And these are things that will be fulfilling for you as someone living the rest of your life in retirement.

Here’s something I like to talk about or work with my clients on. Money isn’t the end. It’s just the means by which we get there. So my job as a retirement planner who works with clients who are already retired or about to retire is to help you organize and optimize your money in such a way that you can go out and enjoy your life without having to think about the markets or having to think about taxes or having to think about

Am I going to get enough income this month? I want you to be thinking about things like traveling and making sure, you know, we can do all the things we want to do and that we have enough assets to be able to do that. So understanding your why, the purpose of creating this list. You know, why do we want to save money on taxes? Why do we want to make sure we optimize our Social Security income?

Why do we make sure we’re not spending too much of our portfolio too quickly? The reason that we should care about all of these things is because whether you want to move closer to kids or grandkids, be more involved in your church or local charity, or buy a new house and move to a different area, those types of things are the kind of the why and your purpose in retirement. The money helps support those things.

Danny (19:34.668)

It fulfills those things. And that’s why we want to make sure that we do this accurately. And we do this in the most optimized, efficient way for you. The reason I encourage you to create this list is so that you’ll have your own why established. You can create your own purpose, and then we can strategize and create different plans from a money standpoint to accomplish all of those things.

that you want to do. I encourage all of my clients to view retirement not as what they’re retiring from, but what they’re retiring to. Thinking about retirement this way creates a mental shift and gives you a sense of hope and joy as you enter this new phase of life. Like a lot of phases in life, it’s always a transition and it’s always going to be different, but we just want to make sure.

that we’re as prepared as possible. So to wrap this episode up, let’s review the three things that we want to do before we retire. Number one is to build up that cash position or that cash reserve account. I think it’s super important to give yourself the ultimate flexibility throughout your retirement. To be able to

Danny (20:59.468)

you want to pay your taxes. Number two is to calculate how much you spend on a monthly basis. Key point in figuring out how to retire. That way you’ll know how much you have to start distributing throughout your retirement years. And number three is writing down all the things that you want to do and require. Scratch that.

And number three is writing down all of the things that you want to do in retirement and creating that list. So we have a purpose, we have hopes, we have dreams, and we have goals that we can look forward to accomplishing, but also to give us purpose and why we’re doing all the money things correctly and why we saved all of this money for the last 20 or 30, 40 years.

Those are the three things that I would say are important to do and know before you take the leap in retirement. I hope this has been helpful and you’ve enjoyed this episode. My name is Danny Goodorf of Goodorf Financial Group, and I look forward to talking with you again next week. Thank you for tuning in. And remember, it’s not just about the money. It’s about living the life you’ve always dreamed of.

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