Retirement Regrets

Welcome to another edition of Mr. Stilman's Opus.

It's very dramatic with John Stilman. Well, hey John. Always good to see you. It's good to be heard. Steve Gramsey, your first time on this podcast. I welcome myself. That was quite the opening you had there.

You can tell it's a 40-year radio veteran. You know, it's just a matter of the tools of the trade. For instance, you've probably seen a carpenter do his job and he takes a nail and a hammer and one pound and the nail's in all the way. Well, when you do what we do, you try to perfect the tools of your trade. So, over the years of reading medical books to learn how the esophagus and the diaphragm and taking vocal lessons to know how to hit the notes by pushing the air in your nose. You've learned how to do things like Mr. Stilman's Opus, things like that. I had a voice and diction class in college that I probably didn't pay quite enough attention in, but it was interesting. We talked about a lot of that biology stuff too, or anatomy, whatever it is.

There was an instructor in broadcasting school, which I once took while I was going to college for auto body design, but I always wanted to be a broadcaster, so I went that direction. And he used to roll up a billboard magazine and he used to hit me upside the head if I couldn't say W, if I said W. So, there are just some things in life you practice long enough and you may not be great at it, but they become natural anyway. Well, I'll try not to hit you with a rolled up newspaper today, like a dog who pees on the floor. That's good. Well, I'm going to let you do all the hard work. I'm going to let you do most of the... I'm going to steer a little bit and we're going to get some good nuggets from you in this podcast today, and you can pass it along to all of our great clients that we have. All right.

So, let's do that. Retirement. Once we've made some decisions, you've gone in a direction or down a fork in a row and you look back a couple of years later and you go, man, I wish I would have gone this way. It's probably hard to avoid having no regrets about your retirement plan.

What's your advice? How can we avoid maybe those pitfalls? Well, there's an old quote from somebody, and I can't remember who it is, but the quote is basically paraphrasing here, but smart people learn from their own mistakes and geniuses learn from other people's mistakes. It might have been Einstein. I don't know.

Most quotes get credited to Einstein whether they were him or not. But the idea here is we have the opportunity to help clients who are retiring or getting close to retiring, we have the opportunity to help them learn from other people's mistakes because we've seen other people make mistakes in years past, and so the collective wisdom that we're able to take from folks. A lot of people come in our office with sort of a mess that they've made and they're coming to us to help them fix it, so we get the perspective of the mistakes they've made, which we can then pass on to other people. Hey, look out for this. Now, I wanted to ask you about taking funds from some places to finance other things. For instance, I want to buy a beach house. So I'm going to need some funding, and I figure I could tap into possibly my IRA to do that, or maybe even my life insurance that has cash value to it.

Is that a good idea or no? Well, that's a great example of something that could be a regret down the road if you didn't do it with a plan in place that shows you all right, if you're going to take this money out, here's why it's not going to hurt you when you're 85 because you ran out of money. So there was actually a poll that USA Today published not too long ago that listed retirement regrets, and one of them was premature IRA withdrawals. Now, for you, we don't think of it as being premature because you've passed that magical age of 59.5, and just last week you passed that age, right?

Don't feel a day over 40, though. So you've passed that age, and you can take money out of your IRA with no penalty. It's still taxed as income, but you don't have that 10% penalty. Well, premature IRA withdrawals for a lot of people would be them taking it out at 53 to pay for something they're paying tax and the additional 10% penalty.

So anytime you do that, you'll almost always look back and regret it. But it could be a premature IRA withdrawal from the standpoint of maybe you've reached 59.5, but you're taking the money out before you should relative to your income plan. So, like I said, we don't want to be taking out money to buy a boat or, in your case, a beach house, paying the taxes on all that money and maybe cutting our IRA by 10% or 15%, and that's money that we're going to need growing 15, 20 years down the road so that our income in our later years of life are covered.

So if you're going to be taking a big chunk out of a tax-deferred account like that, we want to be sure we understand the implications of that withdrawal 20 years into the future. In our peak earning years, we tend, I think, to spend what we make. And when you're saying, I'm making as much money as I ever did now, so I'm going to enjoy my vacations.

I'm going to buy a new car every three years. And I think we often think that we're going to keep making that kind of salary or income forever. But at some point, we're going downhill with the income.

It's a little phenomenon called lifestyle creep, right? So as your income increases, your lifestyle creeps up to match that income. And the people that I've seen be most successful are the people who keep their lifestyle at a certain point, no matter how much their income increases. The great example is doctors who go to med school, and they're living like paupers when they're in med school. And then when they get out of med school, they say, oh, I'm a doctor, I'm going to get this new car and this big house, and yeah, I've got $365,000 of med school debt, but I'm going to live the doctor life.

Whereas, the people who get out of med school and continue living from a lifestyle perspective as if they're in med school and they put all that extra income toward their student loans and the student loans are gone in less than five years, those are the people who really help themselves out down the road, as opposed to people who keep those student loans around for 20 years, right? And so, same thing when you're in your prime earning years. It's very tempting to, like you said, go spend that money on cars and vacations and things like that. But the reality is, that's a very important time in your life where if you can keep your lifestyle the same, you really have the opportunity to sort of pour gas on the fire from a savings standpoint, right?

So, kids are probably gone, hopefully you're done paying for college. Now you have the chance to make a lot of money, keep your lifestyle where it is, and maybe max out your 401K for the first time ever, or an IRA, or contribute some money to an after-tax account that you haven't before, really build up your emergency fund, your money market, maybe pay off the house. If the house is paid off, that's yet another reason that you can save even more. So, I've seen a lot of people who have saved as much money in the last five or six years of their working life as they did the 20 years before that. And so, in a lot of cases, you get to your mid-50s, late 50s, and you sort of feel behind from a savings standpoint, which is logical. You've been raising kids, things like that, a lot of expenses that have come along the way. But now that you're past that stage of life, it's a great opportunity to really save a lot.

So, don't get caught up in the lifestyle creep of spending too much money. Well, there's a lot of folks who have extemporaneous income, you know, more than they have to use to pay bills. And so, they're out buying a car, and then you get a boat, and you got a snowmobile, and most people don't pay cash for those things.

Most of those, they put it on some kind of loan. And then, the next thing you know, you've got a $300 car payment and a $150 snowmobile payment, and you've got a payment for this and a payment for that. And one day, you wake up and you go, I guess I am in debt. And that's not the best way to be able to put money away to save for retirement when you're putting it to pay off your snowmobile.

And this is kind of the lifestyle creep on steroids. Not only are you spending all your money, you're spending money that you don't even have and creating debt. And yeah, the problem there is, as you make more, you have the ability to borrow more money. And so, if you've spent your entire life in this debt mindset to pay for everything, it can get really bad in these years where you don't have as many obligations. And you could just pay for stuff, but instead of paying for stuff, you acquire debt.

And then, we're either in this push where we're trying to get ourselves debt-free before we waltz off into retirement, or it could be that you're looking at maybe working a year or two longer because you don't want to enter retirement with all this consumer debt. Interesting thought about credit scores. Your credit scores that are very high, the people that have those usually have little or no debt. And so, you will be inundated with solicitors who will tell you, you can buy two cars, three cars, or two houses, three houses, whatever it is, because your credit score is that high. But those people who have credit scores like that know that the reason it is high and the reason they can buy whatever they want, whatever they want, is because they haven't been neglectful and gotten into debt, or at least make sure that their debt is minimal, like maybe just a house payment, no cars.

There's an old saying that banks are institutions that are willing to loan money to people who don't need loans and won't lend money to people who need it. And that's kind of what you're talking about. So when you get around my age, you're trying to decide, should I hang it up? Should I retire now? I mean, if you have the option. Should I keep on working?

Should I make some combination? For what reasons would I want to retire early? Well, retiring early means different things to different people. So for some people, retiring early simply means retiring before full retirement age, of 66 or 67, as it relates to Social Security. To some people, retiring early means retiring before 59 and a half, before they can get their IRA money penalty-free. So first of all, we have to look at, what's your definition of retiring early? Now, the reason this is a regret for a lot of people is because they feel entitled to retire, so they go ahead and they quit the job, have the big party, they waltz off into retirement, and then they get a couple of years in and they realize, whoops, I should have waited a little longer because now I have to go back to work or cut my lifestyle.

In fact, I had a blog post about this recently comparing it to the mishap, if you will, at the Oscars a few weeks ago, where the guys from La La Land, they get their name announced and they come up to get their Oscar, and then they find out, whoops, nope, this belongs to the folks from Moonlight. Well, same thing in retirement. If you at least know before you retire, yeah, you're going to need to work a couple of years longer, it might be disappointing, but it's not the same level of disappointment as if you'd retired and then found out you had to go back.

It's like getting called up onto the stage and saying you won the award and then saying, nope, you have to give it to somebody else. So be sure you have that plan in place, don't head off into retirement until you know that it's time. Because I promise you, it's much more palatable to find out before the fact that you need to work longer instead of learning that you have to go back to work. John Mueller Some people choose to retire early. Other people had no choice. In this economy, in this America, in this last 10 years, there were a number of healthy working individuals who through no fault of their own were taken out of the job market, could have been age, could be downsizing, whatever it is. I can honestly say that I was laid off at, well, I won't say what age, but I haven't had and haven't been able to have a full time job for the last six years. Now, fortunately, I'm okay with that. I didn't want to retire, but I would have loved to at a certain point have somebody say, Hey, Steve, come and join us full time.

But it didn't happen. So what about people who've been taken out of the workforce and had no choice and have been forced to retire early? What's your advice to them? Chris Potter Well, I actually have a friend who wrote a book called Forced to Retire, which is about that very thing. You get the early retirement buyout, or you just get laid off and you're sort of in no man's land because you're old enough that you're not really ready to launch a new career. And nobody really wants to hire you for a 15 year position when you're in your late 50s. John Mueller Or you could have the entrepreneurial spirit, but you don't want to start a company.

Chris Potter Right, exactly. And so you're old enough that it's hard to launch a new career, but at the same time, young enough that you can't legitimately retire and be done working all together. So in a lot of cases, we're trying to piece things together between maybe a little bit of part time work and supplementing from your investments a little bit.

In many cases, it's actually all right. Like once you get to a certain point, if you can just make it a few more years without drawing down on your savings, if you can make just enough to live on, it's all right that you're not contributing to your savings anymore in a lot of cases. So again, it all just goes back to having the plan, being sure that you have it all mapped out and you understand where your paychecks are going to come from, what it costs you to have the lifestyle that you want.

And from there, you can make the right decisions. John Mueller I'm thinking about tax season and I'm thinking about every year when I'm doing my taxes. And I'm thinking that I'm looking like I'm going to have to pay something because I'm making my own income on the side. And when I get to that point, I'm looking at, okay, I have got to take and put money away in my IRA in order to drop my tax liability down to zero where I like it. But after I do that, I'm putting it in the IRA with after-tax money in the first place. And so when I take it out, I'm going to get taxed on it again. But in the meantime, I've shifted the tax burden from this year to several years down the road, when I take it to 70 and a half at least.

Is that a bad strategy? John Mueller Well, that's very much a case-by-case situation. And if you ask a CPA, CPAs are very biased toward the deduction in the present year, it seems like. And so most CPAs, from my experience, seem to like to push you toward the go ahead and contribute and get the deduction this year. The whole premise of that argument is that you'll be in a lower tax bracket in retirement. And so you'll be taking that money out and paying a lower tax rate on it.

Well, two problems with that. First of all, most people, once they get into retirement, they want to keep the same income they have while they're working. So that's how their plan is set up. They're not in a lower bracket. Two, if tax rates go up down the road, you could actually be in a lower bracket and have a higher rate. Like we've got the 15% bracket and the 25% bracket and the 28% bracket. Well, you could be in the 25% bracket now. And income-wise, be in what's currently the 15% bracket. But who knows, maybe that's being taxed at 28% 20 years from now.

Who knows? So ignoring Roth IRAs is another regret that I see a lot of. In fact, this is probably the number one regret that I see people have when they come in, is they wish that they'd saved more in their Roth over the years instead of their 401K and their IRA. It's very rare that I see anybody with more than, say, 10% or 12% of their total savings in a Roth. And so for me, at age 33, I'm all in on the Roth, right? Because I've got 40 years of tax-free growth on that. But that's probably the biggest regret I see, is people saying, man, I wish I'd sucked it up, paid the taxes in those years, and now had more tax-free moving forward. O'Reilly Is there ever a time when you would recommend taking an IRA and converting it to a Roth?

Brokamp Certainly there are times. The younger you are, the more sense it makes. Because the more years of tax-free growth that you're going to create by doing that, the better. If you're 59 and you need the money when you're 65, it probably doesn't make a lot of sense, because you don't have that many years of growth. But if it's money that you don't need for 20 years, it could very well make a lot of sense.

O'Reilly This is Mr. Stillman's opus. There's another thing that also comes to mind when you talk about being in a lower tax bracket when you're getting ready to take out of your IRA. You're most likely not in a vacuum.

You probably got a spouse who also was working and could be making much more than you were making, so you're already in a high bracket. So anytime you take it out, you may have the same consequence. Brokamp And you've just put your finger on the pulse of why we have to evaluate everything case by case, right?

Because we just can't give blanket answers to anything because we really have to look at your situation and what makes sense for you right now. O'Reilly John Stillman, this podcast is for you, and we hope that you've been able to take a couple of nuggets and rattle it around there and think about your plan you've got with John and make sure that you're in touch. I'm sure you will be, right? You got it.

You're following up with those clients and letting them know and doing this service so that they've got some new information to at least think about and their plans, which are all case by case basis, as you mentioned. Mr. Stillman's Opus. O'Reilly Look at that. Look at that esophagus. O'Reilly On the road again. O'Reilly Was that diaphragm or esophagus you were using right there? O'Reilly On the road again. O'Reilly Well, would you use the esophagus in talking?

Not really, I guess. O'Reilly Trachea. O'Reilly No. Isn't that a vegetable? O'Reilly Yeah.

Please so. O'Reilly It is. O'Reilly It's an esophagus casserole. O'Reilly I like to broil it with a little garlic salt and some butter on it. O'Reilly Yeah, it's pretty good. O'Reilly I'll sprinkle it on it and have it with my mashed potatoes and roast beef. O'Reilly The delicacy. O'Reilly Okay. Well, we're hungry, so it's time to go. But thanks for having me join you, John. O'Reilly Pleasure to see you, my friend. O'Reilly There'll be another podcast of Mr. Stillman's Opus sometime in the near future, and I invite you to make sure that you're here to listen to it.