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Be Ready For Retirement (Podcast)

Something Personal Episode 12: Be Ready For Retirement

Something Personal logo. We all want to have a comfortable and secure retirement, but getting there can sometimes seem daunting. How much should you be saving? Do you need an IRA? Is your 401(k) enough? How can you balance saving for retirement with other goals like paying for your kids’ college education? Retirement planning can be complicated, but the best way forward is make sure you understand the basics and get started as soon as possible. Managing vice president Paul Jacobs is ready to help with the first part. In this episode, Paul explains the main types of employer retirement plans most workers will encounter, discusses the difference between traditional and Roth IRAs, provides an overview of some rules of thumb that can help you know if you’re saving enough and more. Paul and host Amy Laburda talk about how to keep in mind what you can control and what you can’t control when it comes to your retirement, as well as the ways a good financial adviser can keep you from making potentially disastrous decisions under stress.


About the Guest

thumbnail of Paul Jacobs headshot. Paul Jacobs, CFP®, EA, assumed the role of managing vice president in 2023 after joining our executive team as a vice president in 2017. As managing vice president, Paul oversees the entirety of the firm’s client service operations. He also continues to work with clients across the country from his base in Atlanta, where he established Palisades Hudson's presence in 2008. Paul is among the authors of Looking Ahead: Life, Family, Wealth and Business After 55; his chapter on retirement serves as the basis for this episode. For Paul's full biography, click here.

Episode Transcript (click arrow to expand)

Amy Laburda 00:07
Welcome to “Something Personal,” the podcast where a team of financial planners offers you their knowledge and expertise … and then ultimately tells you that you'll probably need to hire a financial planner of your own anyway. I'm Amy Laburda, the editorial manager at Palisades Hudson Financial Group. And I'm talking once again to Paul Jacobs, our firm's managing vice president. Today we're discussing retirement plans. That means everyone who isn't retired or about to retire should turn this episode off immediately. Right, Paul?

Paul Jacobs 00:36
I'd say that is incorrect, Amy.

Amy Laburda
OK, I did know that. But why not, though?

Paul Jacobs
For a few reasons, really. You know, first off, I'd like to break the fourth wall here right at the beginning. You know, we spend time preparing for these podcasts. We don't just go in cold. And going into my preparation for this one, on retirement, I was dreading this a little bit, because I thought it might just be focused on

the many, many types of retirement plans that are out there: the money purchase plans, the SEP plans, the profit-sharing plans, the ESOPs. I could go on. But the good news is, I quickly discovered as I was reviewing the material for this podcast, there's a lot of interesting information here that's not super technical when it comes to the various types of saving vehicles and things like that. There are things that really apply to everyone, whether you're close to retired or not.

And I'd also say that for younger people who are not retired or not close to retirement, the more options for retirement planning you have. A lot of people really start thinking about retirement planning when they get a job with an employer who offers retirement benefits.

Amy Laburda
All right. So not to get too deep into the weeds that you were dreading a little bit, but from a big-picture perspective, what [do] the kind of

plans people might encounter tend to look like?

Paul Jacobs
Right, so let's talk a bit about the different types of plans. Like I said, there are a lot, but the good news is that they fall into — there's really just a few main categories that apply when it comes to retirement plans. First of all, two main categories are: You've got your qualified and nonqualified plans. Qualified, what that means is generally that there are a set of rules, laws that need to be followed, and in exchange for following those laws,

the plan can qualify for special tax benefits. So for example, your 401(k)s, things like that are considered qualified retirement plans where income tax can be deferred on that money until later on, when the money eventually comes out. Nonqualified plans are something that you don't see as often. When I think “nonqualified plans,” really the main one that comes to mind is deferred compensation plans.

This is something that you tend to see with corporate executives, where there can be special opportunities to defer compensation, large amounts for people that are in top tax brackets. But this is something that you don't see often, just day-to-day in general life. Nonqualified plans, obviously, there are less rules and regulations, more that can go wrong if not done carefully, so it's really not something that you see, tend to see, made available to

large numbers of employees at once. So typically when we're talking about retirement plans with employees, we're talking about the qualified plans. Going a step further, another way to think of retirement plans is — another two categories that you can view retirement accounts as — is defined benefit and defined contribution. I'll spend a bit explaining what each of these mean. Defined benefit

plans. So, when you talk about defined benefit, you're talking about a defined benefit: a defined amount that is due, typically in the form of a pension, after retirement. So, this is something that you don't see much at all anymore either. This used to be very common; you know, people would retire and they would get a pension just for a fixed amount. It might be based on a formula of their earnings.

And you know, I always say, “Hey, look, it's great if you can get it,” but you really saw most employers shifting away from this for various reasons. There's a lot of complexity of administrative costs involved. And also, there's investment risk for the employer. If their investments don't perform well, then the money's got to come from somewhere to pay these pensions. So it's very rare in most professions now to see a defined benefit plan be available. There are some benefits, which we can talk about, with a defined benefit

plan, but really not common. Defined contribution plans are the other category, and this is what you tend to see much more of. And with defined contribution, what that means is there is a defined contribution: a defined amount that goes into your retirement account each year, and it is up to the employee to invest that contribution. And so the investment risk is really taken on by the employee. It's up to them to invest as aggressively or conservatively

as they like. And when they retire, you know, however much they've built up in that account, that's what they have to live on in retirement. So again, defined benefit: Great if you can get it. But in most cases, when starting a job, if there is going to be, if there is a employer plan available, it is likely going to be a defined contribution plan, and it's up to that employee to not only sign up to participate in it, but also to invest it and, you know, decide for themselves how they'd like to invest those funds.

Amy Laburda
So defined

benefit plans, as you said, are rarer, but they sound pretty good. Are there any drawbacks that people should be aware of if they have access to a defined benefit plan?

Paul Jacobs
So the main drawbacks really apply more to the employer than the employee. Again, I'd say if you're an employee and this is something that is available to you, it's great if you can get it.

There might be concerns, I suppose, on the employee side, if you were concerned that the money is being invested too conservatively, and you'd rather just get that money and be able to invest it yourself, then that's something to consider. But really, the risks and the problems tend to be more on the employer side, and I think that's why you've seen so many of these plans disappear over the last several years. One note, though. One reason why you do

tend to see defined benefit plans come up in certain, very specific situations. And this is really, we're dealing with high net worth individuals here, but: dollar amounts. For example, the maximum that someone can put in a 401(k): $22,500. The maximum that can be put in some other defined contribution plans is higher: $66,000. So that's a lot. But the maximum that can be put into a defined benefit plan: $265,000.

So, there are certain situations where, say you're a doctor or a lawyer and you're in the top tax bracket, you're making more money than you could spend. You want to defer as much income as possible to future years when you think your tax rate will be lower. Then you tend to see sometimes people ask questions about defined benefit plans and if it could make sense to really just sock away as much as possible in a way that is compliant with the qualified plan rules.

And it can really lead to significant tax savings. Now, on the other hand, just remember there are administrative costs involved, there are actuarial costs involved. This is not something to do for small amounts, I'd say. It's just the costs outweigh the benefits. But for certain individuals who are making very large amounts, a defined benefit plan can make a lot of sense.

Amy Laburda
Sure. So the drawbacks to a defined contribution plan

such as a 401(k), you touched on a little bit already: market risk, and you're sort of taking on more of those variables as the employee. Are there ways that you would advise your clients to mitigate those risks, especially as you approach retirement, or is it sort of just part of the nature of the plans?

Paul Jacobs
And so that's a good question. And let's, I think it kind of, it takes us away from all the different types of retirement accounts and just into general,

the general topic of saving for retirement. So obviously, if your employer has a 401(k), with a matching contribution especially, it can make a lot of sense to use it and save for retirement. But I'd say in general, employer-provider retirement accounts do not tend to be enough to — in most cases, you're not going to set aside enough that that is all you'll be able to — that you will set aside enough to live on in retirement. It's important to save in other ways as well.

There are different types of accounts, for example, IRAs can be saved in. But in a lot of cases, it's important to just save in your taxable accounts, whether it's your bank account or a brokerage investment account. It's important to be looking at the big picture and be thinking about how much you need to save so that you can have the type of retirement you want. So an employee or retirement plan can be a very useful piece of the puzzle.

Social Security, something we may talk about as well, can also be a piece of that puzzle. But there needs to be more money set aside, I'd say, in order to make sure you have the type of retirement you want. So let's talk a bit about: What are some good goals in terms of saving, and how to think about a goal or a target for the future in retirement. First off, in terms of saving.

There is no hard and fast rule, right? There is no one-size-fits-all approach to saving for retirement. It'd be great if there was, but there isn't. Different people have different situations, different needs. And because of that, I'd say that any retirement plan really needs to be customized. However, let's talk a little bit about rules of thumb and just things to think about as you're setting a plan for the future. In terms of saving, I'd say it's important to be saving at least 10% of your income

annually for the future. And that's, you know, pretax income. I always say, you know, 10%, but the more you can save, the better. So if you can be saving 20%, 30%, whatever it is, it will only help. So it's — even if you're saving 10%, it doesn't necessarily mean that you're going to be set for life. But if you're saving, you know, 0% or 5%, that is … I'd say that's a sign that, you know, there's a potential problem in the future. So

10% may mean maxing out your 401(k). It may mean maxing out your IRA. And then setting aside additional funds in a taxable account or some other … well, in a taxable account for the future and investing it. And even if there are tax consequences involved year to year, that's OK, you can still invest in tax-efficient vehicles. So year after year, you want to be saving money for the future for retirement.

But then how do you know when you've saved enough? Again, no hard and fast, one-size-fits-all rule there. Different people need different amounts. Some people may need a lot more saved for retirement to have the type of retirement they've always envisioned, and the type of retirement where they will be comfortable. Another rule of thumb, something I like to throw out to clients just to give them an idea of a way to think about this — and again, it's not,

it doesn't work for everybody. It can take you in a wrong direction if you're not careful. But a rule of thumb I like to think abou,t just when I'm thinking about the big picture, is called the 4% rule. And what the 4% rule says is basically that if you, in retirement, are withdrawing 4% or less of your money, of your assets, per year to support yourself, then you're in good shape. You are relatively unlikely to outlive

your assets. And that's really the nightmare scenario that you want to avoid, is outliving your assets. You know, 4% rule, right? So again, some numbers, you know, for example: Say you retire with a million dollars, 4% of that would be $40,000. If you can live on $40,000 or less, then that is a good sign. If you can't, and you need to be withdrawing, you know, $200,000 a year from your $1 million portfolio, I mean, you do the math. You're in trouble. You’re

going to run out of money pretty quickly. You're at significant risk of outliving your assets. If you have $2 million, then 4% would be $80,000. $10 million, you do the math. It can be intimidating. It can be overwhelming at first. But that's why I'd say, the earlier you start, the better, obviously. The benefits of compounding and growing your assets over time

are very significant. It can make it a lot easier to achieve those goals as time passes. But it is important, I'd say, even though life can be hectic and there can be a lot of going on, a lot of money coming in and going out at once, it's important to think about how much you're saving and how much you need to save in order to feel comfortable that you have enough assets to support yourself in retirement.

Amy Laburda
And I imagine listeners will be unsurprised to hear me

banging the drum of communication. But for listeners who are married or who otherwise have family members that will be very integral to those future plans, you'll also need to have conversations about making sure you're on the same page for your intended lifestyle, and your savings amounts, and that sort of thing too, right?

Paul Jacobs
Sure. You know, again, different people have different approaches to this. That actually raises another interesting point I wanted to make, which is, you know, when…

Of course, we don't all just live in a vacuum. We have families. We have people — you may have people that rely on you, or people that you rely on. And it's important. I always say, you don't want to pretend that that stuff's not there. It's OK to… If you stand to inherit money or if you want to leave an inheritance, it's important to think about that, and not just ignore it or pretend it's not there. Something else that comes to mind when thinking about family

and people relying on you is there's a very important interplay, I'd say, between saving for retirement and saving for education. We see it a lot with our clients with children, you know, people that have kids, they want to pay. A lot of people may set a goal that they don't want their kids to have student loans. They want to be able to pay for all of the tuition or as much tuition as possible. And that's a great goal. It's an admirable goal.

But something I always say is: You can borrow for college, you can't borrow for retirement, right? So it can be a painful decision for some, saying, “Hey, I'm sorry. I can't set aside funds for… I can't send my kids to college and pay their whole way. They're going to have to do loans. They're going to have to pay their own way.” But they can pay those loans off in the future. If you're sacrificing your own retirement to

pay for your kids' education costs — I mean, if you're just viewing this as a math problem or something to be solved, I'd say that's the wrong approach. If you can do it all, great. But if it's a decision that needs to be made, and something has to be sacrificed, I'd say that it's more important to save for retirement than to save for education. Because again, there's loans for education, but I don't think … good luck finding a loan for someone to lend you money to just

live in retirement, never pay them back.

Amy Laburda
Right. And we also talked about, in our episode on long-term care, that many people end up having to take care of their parents, if expenses wildly outpace what they were expecting. I imagine even if you're not having a health issue causing long-term care concerns, if you run through your retirement savings, then those same kids you want to help may end up sort of on the hook for making sure that you're taken care of and protected. So you’re sort of trading a

present gift for a future obligation, in that case, if it goes wrong.

Paul Jacobs
Yeah, I mean that's a good point. And medical expenses and care expenses can be significant, and it's important to be thinking about that too when you're planning your retirement. Some people think that in retirement that their spending will be much lower. “Oh, I'll be able to just take it easy and relax, and my expenses will go down.” And typically that… typically you do see expenses drop

in retirement, because there's a need to live within your means and live on a fixed amount. So typically you do see expenses go down compared to when you're working and money is coming in. However, sometimes it's the opposite. Again, everyone's different. And sometimes expenses — it costs more to live in retirement. Medical expenses can be very significant in the retirement years, either all at once or just continuously

And as we know, medical expenses tend to — the inflation rate for medical expenses tends to be much higher than your typical inflation rate. So that's something to… as uncomfortable as it may be to think about it and to try to plan for it, I'd say you got to think about it. You know, just in year one of retirement, you know, if it costs you $100,000 to live, OK, great. But that doesn't mean it's going to cost that much in year 20 or year 30 if you start to have significant medical expenses. There is Medicare,

you know, similar to Social Security, you know, it's something that is out there. And I don't think you have to ignore it. But also there is a risk that maybe things don't, you know, that the benefits are not as planned, that there could be changes in the future that might lead to just a negative outcome when it comes to that. So medical expenses: something important to be thinking about and not be blindsided or caught off guard if they end up being, you know, much higher in later years in life than they are when you're younger.

Amy Laburda 18:06
So let's say you've convinced anyone who didn't already come into this episode convinced that they need to get started saving sooner rather than later, and their employer-provided plan and Social Security may not be enough by themselves. So why don't we circle back to IRAs? People may have a grip on what they are, what the difference between Roth and traditional are, or not. So could you just give us kind of a big-picture overview of IRAs?

Paul Jacobs
Sure. So IRAs are something that are available

to anyone with earned income, with W-2 income, or other just earned income that you earn from a job. And regardless of whether you participate in an employer-provided plan, you can also create and open an IRA. And IRAs are great. It's a great way to set aside money each year for retirement with tax benefits. Again, numbers, if you're under 50, $6,500 a year that you can put in per year,

assuming you have earned income of at least that much. If you're over 50, there's additional funds that you can contribute. So you've got your Roth and traditional IRAs. And Roth, now, you may have heard of the Roth and traditional — Roth now applies to almost everything. There've been rule changes. So now you've got Roth 401(k)s, you've got Roth SEP IRAs, a lot of Roth. So what is the difference? Let's talk through traditional first and then Roth.

Traditional essentially means, when you're talking about traditional IRAs, that money contributed to the IRA is deductible and it grows tax-free. And then eventually, when the money is withdrawn, then it is subject to income tax. So pretax dollars invested for the future and are only taxed when they are withdrawn.

The acronym of RMDs, required minimum distributions, may be something that you're familiar with, and those apply to traditional IRAs. So you may be thinking, “Oh, I'll just put the money in and never take it off. Never take it out. I'll put the money in and never take it out. I've outsmarted the system.” The problem is that with traditional IRAs, you have to begin taking money out at the RMD age, which they keep changing. But now it is 73, and it is scheduled to increase to 75 in the future.

And at that point, there's a formula. Money has to come out each year, and it can lead to a pretty significant tax hit if you've accumulated a lot of money and then it has to all start coming out. There's a lot of nuances with traditional and Roth IRAs, but I'd say that those are the main things to understand when it comes to traditional IRAs: is you're dealing with pre-tax dollars that are taxed when it comes out, and that the money does have to come out. With Roth IRAs, it's kind of the opposite of traditional, and what I mean by that is

money that you put in is after tax. So there is no deduction when you contribute to a Roth IRA. You're putting in after-tax dollars, the money grows, and eventually when you withdraw it, it is tax-free. And so the way I'm describing it, you may be hearing this and say, “Well, that doesn't sound as good. I want the traditional. I want to get the tax deduction.” But Roth IRAs in most cases, I'd say, are the better way to go.

The reason why is that, as long as you expect your tax rate to be the same or higher in the future, which is what happens to a lot of people as they earn income over the years, the Roth is better. It's better to pay tax now, and being able to grow that money potentially forever, for the rest of your life, without taxes, when you do the math, it leads to a better outcome than the traditional IRA.

Another important benefit with Roths is no RMDs. So, you can put the money in, leave it, never touch it, and just never pay tax on it. And that can lead to huge growth. Again, as an example, say that every year you put in the maximum IRA contribution. You grow your traditional IRA to a million dollars. That's a million dollars of pretax assets.

It's all going to be taxed. So that [$1 million] after tax is maybe something closer to $500,000, $600,000. The Roth IRA, say you contribute each year and you grow to a million dollars. That's a million dollars. You know, there is no tax hit. As long as the money's in there, there is no tax hit. No RMDs. And actually, one other great benefit with Roth IRAs is you can take your money out anytime. So if you contribute

$5,000 to your Roth IRA, a month later you say, “Oh, shucks, I need that money.” Take it out. No problem. With a traditional IRA, one thing I didn't mention before, is once you put the money in, in most cases, you cannot take it out without a penalty, without a 10% penalty. So, in our world, penalties are always something you want to really do everything possible to avoid, because you want to try to use any other option available to you to avoid these penalties that

are otherwise unnecessary. So Roth IRA, I'm a big fan, as it may be coming across. With traditional IRAs, say that you're in a very high tax bracket now, but you expect to be in a very low tax bracket in the future, then yeah, deferring income could be very attractive, because why pay tax at high rates now when you could pay at low rates in the future? But in most cases, that's not really people's situation as they're saving for retirement and saving for the future.

And so the Roth, with its flexibility and its tax benefits, can really be — is, in most cases I'd say — the better option.

Amy Laburda
So given the advantages of a Roth, if you already have a traditional IRA, is it possible to roll it over? And if so, how would you go about approaching that?

Paul Jacobs
So with Roths, that actually leads to one other point. You know, Roths are so great that if your income is over a certain amount, you're not allowed

contribute to them. The government has decided that they don't want everyone to just be able to contribute to a Roth IRA every year. If your income is over a certain amount, you are not eligible to contribute to a Roth. However, anyone with earned income can contribute to a traditional IRA. And you may say, well, what if I don't want the traditional IRA? I really want the Roth. Well, what you can do is what's called a Roth IRA conversion. And this is something that used to have an income limitation on it

as well, but the government removed that income limit about 10 years ago. And since then, there have been huge amounts contributed from traditional IRAs to Roth IRAs. You have a lot of people who had set aside a lot of money in retirement accounts, pretax retirement accounts who were concerned that tax rates are going to go up in the future and liked the flexibility that comes with Roth IRAs. So they converted

traditional IRA assets to Roth IRAs. And the way that works is, it's kind of what it sounds like. You know, there's some paperwork involved. So you would submit a form to your brokerage firm that holds your traditional IRA, saying, “Please convert either some or all of my IRA to a new Roth IRA.” So that's important. It's not all or nothing. You don't have to do the whole thing. You can do it in pieces. You could do a piece each year if you'd like, to try to manage your tax bracket. And so by doing that,

that triggers taxable income, right? So if you convert a $100,000 traditional IRA to a Roth IRA, then that's it. The money is no longer pretax. You have to pay tax at that time, preferably with outside money. If you pay the tax with your IRA money, that is not a good outcome. That is not the way to go. But by paying the tax now, getting in the Roth IRA, then you start to get all the benefits that come with Roth IRAs that I mentioned earlier

at that time. So it kind of starts that clock and shifts from pretax assets to after-tax. One other note on Roth IRAs, again, this is another area where the rules have changed over the years. There used to be an option to reverse IRA conversions. You can't do it anymore. It was really good while you could do that. You could convert the IRA and then you could,

later on, you could, if you changed your mind or whatever, you could reverse it. A lot of people were doing that. They were gaming the system, you know, within the rules, but it reached a point where I think the government realized, “Hey, wait a minute, you know, this is a little too good a deal for everybody.” So now you cannot reverse IRA conversions. Once you do it, it is done. It is irreversible. So you really want to make sure, before you do anything irreversible, same as anything else, that you understand the consequences and that

you're comfortable that it is the right move. So it can still make perfect sense to do IRA conversions, and large IRA conversions. But you just want to make sure that you understand the tax consequences, and you're not caught off-guard or caught by surprise when you file your tax returns.

Amy Laburda
OK. So zooming out a little bit, say you have a working-age client who has a 401(k), a Roth IRA and [is] saving for retirement in a taxable brokerage account, as you mentioned earlier was possibly a good idea to do.

If they're juggling between these different accounts, how would you advise them to decide what dollars or assets go where? Is there any rule of thumb? Or is it kind of just fill up one bucket, then go to the next bucket, you know, more sequentially? Does it matter?

Paul Jacobs
So Amy, your question leads to an important concept called tax diversification. So the same way it's good to diversify with your investments, there can also be benefits to having different types of

accounts: taxable, pretax, after-tax like a Roth IRA. And that way in the future, when you're retired, it may make sense in different years to kind of pull from different accounts in order to get the best outcome on your tax return. And in addition, having different types of accounts, it can also lead to different investment decisions. Or, said another way, different investments

can be a better fit in different types of accounts. For example, bonds pay interest. That interest is taxed at ordinary rates. Most stocks pay dividends that are taxed at qualified dividend rates, which are lower. And we've done an analysis on this. And when you crunch the numbers,

for example, it often makes sense to put the bonds in a pretax retirement account. If you've got a mix of stocks and bonds, you typically want the bonds in the pretax account. That way, the interest escapes income tax. And in addition, the bonds are not expected to grow as quickly as stocks, so you're not going to have as much growth in that pretax account, where, again, remember, as it grows, so does the embedded tax liability.

With stocks that are paying qualified dividends, which are taxed at, say, 15% compared to up to 37% on bond interest income, the stocks can make a lot more sense to put in either a Roth IRA, where they can just grow forever, or in a taxable brokerage account, where if you have to pay tax on something, you'd rather it be dividends that are taxed at lower rates than interest income. Another example is mutual funds.

Some mutual funds are considered very tax efficient. Some are considered very tax inefficient. And what I mean by that is some funds make large distributions. They have to distribute their capital gains each year. And so some funds trade a lot, and that leads to large distributions each year. That's something you would want in a retirement account versus having that — So obviously you wouldn't want a tax inefficient investment in a taxable account. You want your tax efficient investments, for example,

you know, index funds that don't trade a lot, that don't make large capital gain distributions. You'd want that in your taxable account and your tax inefficient investments in your tax-deferred or tax-free accounts. So, you know, I always say, this is something that is not going to… this is not going to lead to millions of dollars of difference in most cases for anybody when it comes to retirement. But if you have investments, if you have investments that you need to allocate across different accounts,

this is something that can increase your after-tax returns and just lead to more money in retirement. So it is worth thinking about and being careful about, although it's not something that I say is going to have a drastic outcome. It's not going to be the difference between outliving your assets or not outliving your assets. But it is just another way to boost your portfolio's return.

Amy Laburda
So when you talk to clients about retirement goals,

as we actually talked about the last time you were on the show, some people go on to start a second business, start a second career. Some people continue to work part time. When you think about people working past traditional retirement age, or retirement from their first career, is that something that is mainly just a preference, something because they want to keep busy and that's how they go? Or is that something that is sometimes part of the financial plan, where you're trying to make things sort of stretch longer for the early years where your

energy and health might be better compared to later in your career?

Paul Jacobs
It's a really important question. And I think it's something that people didn't put as much thought into years ago, it’s, you know, what does retirement actually look like? What am I actually going to do when I'm retired? You know, am I going to… am I going to just sit around and relax? Am I going to travel and see the world? Am I going to start a business? Am I going to work even harder than I did before? What does it actually look like? And I think you, years ago, you had a lot of people

never think about it, then one day they retire, and it could be a pretty bad experience. It can lead to depression. It can lead to a really… it can be just a really sad situation if someone is not ready for retirement, never thought about it, never planned for it. And then they're just kind of sitting around with nothing with nothing to do. And, you know, money is not a problem, but it's just not… It can lead to unhappiness. So I always try to talk to clients

leading up to retirement and the years leading up to it, just to make sure that they have thought about this, that they have a plan or an idea of what it looks like. And it could be anything. It could, like I said, it could be traveling and seeing the world. It could be starting a business. It could be anything. There's no wrong answer. It could be just catching up on all the Netflix stuff you never got to watch. I don't care. So there's no wrong answer. But it's important, I'd say, to have an answer,

because that way when the time comes, you've thought about it, you can try to make that smooth transition, you can try to make that transition as smooth as possible. And the good news is, I feel like I'm seeing just a lot better results in this area, you know, with maybe it's the baby boomers as they approach retirement and seeing how their parents dealt with retirement before them. I feel like it is something that people are much more conscious about and thoughtful about, just what does retirement look like? And just

thinking about what would make you the happiest, so that when the time comes, you can do what you want to do. So that's very important, I'd say, is thinking about just day to day, no numbers, but just what does retirement look like? Then there's the numbers, right? So I think it can be hard to think of what your budget will look like in retirement. It can be hard to think about, will I spend more in retirement? Will I spend less? But

it is, I'd say, important to try. You're not going to nail it. You're not going to hit the nail on the head and get everything perfect, of course. But it can be helpful to sit down, look at your expenses while working, and think about how things will change in retirement. Think about how much money you'll have to live on and what you can accomplish with that in retirement. So maybe

you'll spend a lot of money on travel. You'll spend a lot of money on entertainment, on gifts, on experiences. Again, no wrong answers, but it really helps to avoid being caught off guard or blindsided by saying, “Oh, wait a minute, you know, this is not going the way I'm … I'm shocked at, you know, how much my expenses have gone up in retirement,” or or something like that, so.

I'd say it's not something to go overboard on and think about how much coffee you'll be drinking in retirement or anything like that, you know, the little things. But the big things, it is valuable to, it is a useful experience, I'd say, to block out time and really think about that. You know, I've had people tell me that, you know, they spend more time planning their vacations than planning for retirement. And I get it. I like to travel. Traveling is great. But

it is good to spend time. If you're not spending any time thinking about this, or thinking about how you're going to spend your days in retirement as you approach it, or what your spending will look like in retirement as you approach it, I'd say it's a good time to start.

Amy Laburda
And I imagine it's not a one-time thing. If nothing else, we've all recently seen that inflation can come up and surprise you. But I imagine there's a lot of other things in your life that can change: number of children, where you live, that sort of thing.

So is this a thing that people should be revisiting regularly, or when there's a big life change, both of those?

Paul Jacobs
Yeah, I think that life is going to throw you curveballs, right? Things don't usually go exactly according to plan, and that's OK. So it is OK to change the plan if life changes and your circumstances change. I think it's important to think about what you can control and what you can't, right?

There are a lot of people out there you see in the news who maybe got buyout packages from their employer and all of a sudden they're retired, years earlier than expected, but maybe the offer was too good to refuse. And so they took the money, and you're retired years earlier than before. And that can be OK. That can be a good thing. So it is important to be flexible, I'd say, and just think about what you can control and what you can't. Another thing that you can control that

we haven't discussed, and it may kind of feed more into a different episode of this podcast, is how you invest, right? So you can invest as aggressively or conservatively as you see fit. But unfortunately, you hear these nightmare stories of people who were planning to retire, and they were aggressively invested. And if you were aggressively invested in February of 2020, and the market dropped quickly in March 2020 and you panicked, that may have —

of course, the markets bounced back very quickly after they dropped in March 2020 — but still, people who invest aggressively and time things wrong, or make emotional decisions with their investments, sometimes that can mean really having to make serious changes with your retirement plan. During the financial crisis of 2008 and 2009, you heard about these kind of stories, too, of people who had saved for retirement. But then right as the time came that they were planning to retire,

their aggressive investments, their stock investments, had dropped significantly. And what looked doable all of a sudden did not look so doable. So what do you do? You know, it's not like then all is lost and your life is ruined. Obviously, you have some choices. You could work more years. You could just try to stay the course or cut your expenses, you know, try to catch up from that side. So, again, there's always things you can control. It's not like all of this is out of your control.

But I'd say stock market performance, investment performance… What you can control there is just how aggressive or conservative you are, what your asset allocation is. But you don't want to do something that you would regret and say, “Oh, nuts, you know, now I have to work for a few more years and I was all set to retire because, you know, I was invested more aggressively than I really should have been.”

Amy Laburda
Yeah we talked in the investment episode a bit about the importance of

sticking to a plan and not making emotional decisions. I imagine for everyone that's easier said than done, especially if you're coming up on retirement. The stakes seem very high. But it sounds like with retirement, as with other goals, it's important to sort of take a step back and, you know, not to toot our own horn too much. But I think that seems like a place where someone like you or our colleagues can step in. If you have a trusted adviser to be like, “Hey,

this is a really scary situation, should I stick to my plan?” And then you can say, “Yes, you should stick to your plan.” But we talked in our episode about investing, about the dangers of emotionally reacting to market moves, especially in high-tension situations like the 2008-2009 crisis or, on a smaller scale, the dip in March 2020. It sounds like,

in general, sticking to your plan is one of the best ways to avoid that. But I think also in general, we all have emotions, we're all human, and if you're close to retirement, it can feel like the stakes are especially high. Is that a situation in which you would encourage your clients to just call and talk to you? Is there generally something that you say to clients who are a little bit panicked to help them stay the course?

Paul Jacobs
Yeah I think this is one of the main ways that a financial adviser can help

someone. I think a lot of people think when they hire an adviser that the way they're going to add value and help them is just, I don't know, beating the market every year by 1%, or something like that. But in a lot of cases, the real value, I think looking back, is talking people out of making emotional decisions at market bottoms and things like that. We're also talking them into making changes at market tops.

Just not getting too high, not getting too low. And, you know, you again, you hear these nightmare stories of people who sell at the bottom. They just think the world is ending, and they sell at the bottom. And that's something that you never can really, you can never get that money back if you sell and then the market recovers. That is not a paper loss. That is a permanent loss. And having someone talk you off the ledge in those situations can be extremely valuable. And that is something that I'd say can make the difference between

outliving your assets or not outliving your assets. So I don't know. I guess it's kind of a sales pitch, but I do believe it. And I've been there. Unfortunately, there have been a few too many crises over the last 10, 20 years. And these kinds of conversations do happen. And I think that's really when we do some of our best work, is talking people… is just explaining to people why we think they should hang on and expect things to normalize in the future.

Amy Laburda
Alright, Paul.

So we've covered a lot of ground. Is there anything else about retirement planning you wanted to talk about today that we haven't touched on yet?

Paul Jacobs
We have certainly covered a lot. Let's see. One other note I wanted to make is that there have been a lot of rule changes in the last few years. While our government has been gridlocked in a lot of things and not able to agree on much, it's been surprising the bipartisan support for certain retirement changes with the rules.

I think that our government, while they don't agree on much, it seems, they do agree that this is something that is important, to motivate and incentivize people to save for retirement so that they can support themselves when the time comes. So there have been, even recently, there was new legislation passed with a lot… nothing huge, nothing really that changes everything, but a lot of little things. The rule — All of this was wrapped up in a package called the

Secure 2.0 Act. If you Google Secure 2.0 Act, you'll see that. Again, lots of little things, not much big things, but little things that can be useful and we can all take advantage of. One thing was changing the RMD age, like I mentioned, so now it's going to go up to 75 in the future. I think everyone realized that people are working longer, they don't necessarily need RMDs at 59 1⁄2 or anything like that. It can make sense to wait until later.

One thing that caught my eye with the new rule changes that I'll just flag here is: New rule. It's almost comical, but $1,000 can be withdrawn each year for an emergency with no penalty. So in the past, if you had an emergency and you withdrew money before your RMD age, you would owe income tax and you would also owe a 10% penalty. There are certain exceptions to that.

But now the government has kind of given us this little, this little carrot of, you know, $1,000 each. So, you know, if your life has a lot of drama, yeah, just every year, $1,000 can come out. This rule doesn't go live until next year [epsiode recorded in 2023], so it's possible there may be more guidance or information. I assume that, you know, if the IRS or state were to come asking questions, you would want to be able to provide support and demonstrate that there was an emergency.

But there's not going to be any form, or … your brokerage firm is certainly not going to ask you to demonstrate that there's an emergency. So at $1,000, I guess everyone was comfortable just saying, “You know what, let's give some flexibility here for the people that need it for small amounts.” And this is new. This is not something you could do before, but now it's really just almost this no-questions-asked rule, $1,000 per year. So the answer is not, for those of you listening, to just take out $1,000 every year

because Paul Jacobs said so, but there is just that flexibility. So if someone finds themselves in a pinch, and they really would benefit from being able to make a small withdrawal, this is a way to avoid that penalty. You still would owe income tax on it, but avoid that 10% penalty, which as I said before, we hate penalties at Palisades Hudson and we really try to avoid those whenever possible.

So that's an example of, again, a small rule change, not something that's going to make a monster difference in anyone's financial affairs. But I think that there's going to be more things like this in the future. So it can be helpful to just keep an eye out when you're planning for the future, when you're looking at, when you hear in the news that new legislation was passed, new tax legislation, give it a look and try to understand if there's anything in there that could affect you or impact you, because like I said this is one of

the things that there is bipartisan support for, to make it easier, to make retirement more accessible for everyone so they can achieve their goals.

Amy Laburda
Thanks so much, Paul. Well, it was a pleasure talking to you today. Thanks so much for coming back on the show.

Paul Jacobs
Thank you, Amy. My pleasure.

Amy Laburda
“Something Personal” is a production of Palisades Hudson Financial Group, a financial planning and investment firm headquartered in South Florida. Our other offices are in Atlanta; Austin; the Portland, Oregon metropolitan area;

and the New York City metro area. “Something Personal” is hosted by me, Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor, and mixer. Our firm has written two books, Looking Ahead: Life, Family, Wealth and Business After 55, and The High Achiever’s Guide to Wealth, which offers advice for younger professionals, entrepreneurs, athletes and performers.

Both books are available on Amazon, in paperback and as e-books.