The number 1 mistake retirees make with money

Yahoo

17-06-2025

Planning for what happens to your finances when you're gone can be a tough but necessary conversation. On this episode of Decoding Retirement, Robert "Bob" Powell speaks with Jeffrey Levine, chief planning officer of Focus Partners Wealth, about balancing a happy retirement with a sizable nest egg for your family to inherit. Jeffrey discusses how to maximize tax efficiency, how aggressive your portfolio should be, and how to ensure your expenses don't exceed your income.
Yahoo Finance's Decoding Retirement is hosted by Robert Powell.
Find more episodes of Decoding Retirement at https://finance.yahoo.com/videos/series/decoding-retirement.
Some people think that estate planning is only for the wealthy, but it's not. And here to talk with me about that is Jeffrey Levine. He's the chief planning officer at Focus Financial and also, I think the chief planning nerd at Kits.com. Jeffrey, welcome.
Yeah, lotsof different titles, really just a big, you know, big nerd is really what I am for sure.Yeah. All
right, so two nerds talking to each other for, uh, 22 minutes or so.
All right.
So I, I, I, I, a lot of times people think.Estate planning, that's not for me, you know, spousal limited access trusts, charitable remainder trust, charitable giving, that's for the wealthy, uh, but it's not. Tell us about that.
Yeah,
well,
I think thefirst thing we need to do is make the distinction between estate planning and estate tax planning, right? Estate tax planning is one component of estate planning.And if you're not super wealthy, maybe you don't have to worry about estate tax planning, but there are still a lot of other elements of estate planning. For instance, there's a lot of income tax planning that can go around estate planning that could be how you leave your retirement accounts, for instance, to various beneficiaries. Do you name them on the beneficiary form versus leaving it to them through a will? Uh, who is your beneficiary? You know, with retirement accounts there are.Actually different rules for let's say a spouse versus a uh a child that's healthy versus leaving it to a charity. They all have different post death distribution rules. Uh, if you leave a taxable account, like let's say money you just invested in your own name that you had bought, you know, something years ago for $1000 and now it's worth $10,000 there's a what's called a step up in basis there.So there's some tax advantages there, but if we go all away from taxes, just thinking about, you know, if we ignore taxes, there's still, who do you want to get your money and how do you get there as efficiently as possible, and then what happens about all the other non-financial issues? What about who is going to make decisions on your behalf if you are incapacitated or otherwise not able to make those decisions that might be.Financial decisions, but it might also be medical decisions. Uh, beyond that, thinking about if you have children or other individuals that you take care of maybe even adult individuals with special needs, maybe even a an elderly parent if something happens to you who becomes the guardian who will take over care for these individuals, these are all things that should be addressed within an estate plan and have absolutely nothing to do with having a lot of wealth.
All right, that's fair. So one of the things that I wanted to do in today's podcast, uh, Jeffrey, is to talk a lot about some of the mistakes that people make either pre-retirement or in retirement and what they can do to avoid them. Uh, one thing that, uh, I just wrote about and I'm curious to hear what you have to say is this notion of relocating based on your sources of income so that maybe you can create the most tax efficient, uh, place to live based on maybe whether you have earned income or investment income or.Or partnership income or uh or Social Security or pension income or IRA withdrawals. Uh, do you have thoughts about that?
Absolutely. I,I guess the first thing I would say is, you know, taxes should be a part of the consideration because they're cost, right? And when we're looking at retirement, it's a matter of balancing how much you have versus what your expenses are, and expenses can be the things you want to spend money on like gifts for your grandchildren and vacations and uh, you know, a nice residence to live in, etc. but they're also the cost that maybe we don't love, but we have to pay anyway, right? Things like income taxes, maybe property taxes.Uh, and so forth. Well, obviously that becomes a factor, but where I have seen in my experience, people really, uh, go make unfortunate decisions is to base their decision solely or too heavily on where they're going to have the lowest income tax bill. At the end of the day, when you get to retirement, you've done all the hard work to get there, right? You've worked for the last 2030, 40 years in many cases even longer than that, and you've putIn your, you know, your blood, sweat, and tears, in some cases, quite literally, to be able to build up your savings. The last thing you want is to go somewhere, purely because it's gonna save you a little bit in the way of taxes, but you're just not happy there. It's not, you're not close to your friends, you're not close to your family. And if we look at, you know, satisfaction of individuals in retirement, and not only just satisfaction, but individuals' health during retirement, both mental and physical, a greatdeal of that has to deal with community, who you have around you, and that could be, you know, family, friends, etc. So you want to try to balance these things moving close to individuals, or even if it's a new place, a place where you could develop a community around you so that you can enjoy your retirement, and not just from a, hey, what do I enjoy doing, but also to be healthy mentally and physically in retirement to be able for it to be as long as possible,right?
So, so one thing that happens in retirement, uh, in terms of enjoyment is, uh, people sometimes don't spend what they could spend, especially early in the go go years, for instance, and, uh, you have some thoughts about that too, I'm sure.
Yeah, I do. I, it's actually one of the biggest mistakes I think a lot of, um, fortunate retirees make, right? There are certainly some individuals who have not been fortunate enough to save enough during their careers. They're gonna be tight during retirement and they have to be very careful about that. But there are an awful lot of people who've worked really hard and also benefited from some good fortune where they have enough. In fact, they probably.Have more than enough. And when we think about classic rules of thumb for taking money out of retirement accounts or just distributing dollars in general during retirement, they tend to be pretty conservative and for obvious reasons, right? Like you don't want to have to be 80 and go back to work if you haven't worked already in the last 20 years. But let's there's a really popular one like Bob, you are very familiar, I know with the rule of like the quote unquote.4% rule, right? The, the 4% rule effectively says you're based on some research that was done a number of years ago, if you take 4% out of your portfolio when you start your retirement, you can go 30 years and you won't run out of money. Again, that's based on historical returns and so forth, doesn't mean it's always going to be that case going forward. Um, but here's the end result of that.The 4% quote unquote rule was based on the research and saying what is the uh the most amount of money that could be taken out of portfolio in order for during the 30 year period that they looked at for it never to run out of money. So that was like the worst case scenario and the worst scenario they looked at 4% still meant that you could make it through 30 years. But that means in every other scena.Scenario, but the worst case, you could have taken more. So someone who just says, Well, I'm gonna take 4%. Well, you might end up with a lot more money than you actually thought. And in some cases, that's fine. But in other cases, it's not. And here's the way I make the determination, Bob. On one hand, you have some individuals who say, I've worked really hard and I want to, uh, make sure that not only do I have a wonderful retirement, but I want to provide a legacy for my.and leave them, you know, maybe as much as possible after I spend what I want. That's one set of individuals. There's another set that says either, whatever's left over for my kids or grandkids, they'll get and they'll be happy with it because it's left over, you know, it's bonus for them. Or maybe even, uh, a little bit of a variation of that where someone says, Hey, um, I want to leave behind a million dollars for them. And you already have it. But then there's all this other money that you were lucky.Enough to have accumulated. If you don't spend through it and you die with like $10 million you, you, you've not followed your plan, right? Like, it's, it's a failure of your plan. It's now, it's a failure to the upside, which is certainly a lot better than running out of money. But if your goal is, I want to leave my kids a million dollars, and then everything else I want for my spouse and my enjoyment during retirement, then you've got to periodically re-evaluate how things have gone.Versus what your initial set of expectations are, and in many cases you can spend more than you originally planned, because when you start retirement, you're often conservative in case you happen to retire in a bad market scenario.
Yeah. So you mentioned the word conservative. A lot of times people at the end of their working life, they really only have maybe their uh retirement account to to to depend on for income, maybe they have a social security, maybe they have a pension.Uh, but in many ways, uh, people have to think hard around how conservative or aggressive that portfolio needs to be, and sometimes they lean too heavily toward conservative when they might need to think about how do I manage and mitigate the risk of inflation for a 30 year time horizon.
Yeah, I think you just hit on a really important point, right? You, you mentioned inflation and then also the value of the portfolio and you know, when, when people say risk, for whatever reason we have become conditioned to risk is when I look at my account statement, is it, you know, has it gone up or down? And that is how we assess risk, right? Like the account balance, the risk that when you put money into something, when you look next month or next year or 2 years or 5 years or whatever it is down the road, that the amount of money you put.Into the account has gone down. And that's what a lot of people call the risk in my portfolio. But the reality is, market risk, which is that is my investment up or down, is just one type of risk that people should be aware of. Uh, we already talked a little bit about tax risk in retirement, but there's tax risk, there's, uh, uh, a inflation risk which you just mentioned, which over a long period of time, I mean, even if inflation is just 2 or 2.5%, when you compound.that over a 2030, or potentially even 40 year retirement in some cases, that really eats away at the value that you have, your ability to spend and, you know, I, I used to use eggs as the example before eggs became such a, you know, a, a, uh, hot button issue here. But, you know, you want to be able to go to the grocery store and buy a dozen eggs this year and go next year and buy another 1 dozen eggs. You don't want to be stuck saying, well, I have the same $10 but it only buys 11 eggs next year and the year.After that it only buys $10. Like yes you still have your $10 but if it buys less, who cares? So there's inflation risk. there's interest rate risk as interest rates change, the ability for you to take money that is perhaps matured in a previous investment and reinvest it might be lower or higher than it was before and obviously as interest rates rise and fall, so too does the value of certain investments like bonds or your ability to refinance a mortgage.Or take a home equity loan in retirement if you need. So there are any number of risks. Market risk is certainly one of them and probably the one we focus on the most, but in order to build a sustainable retirement portfolio that's really built to withstand threats in a multitude of areas, you have to have the right mix and again that's different for every individual based on a, you know, a multitude of factors, but going to conservative quote unquote.And protecting against market risk probably leaves you more exposed to inflation risk. Worrying about solely inflation risk probably leaves you more exposed to market risk. So it's having investments oftentimes in different areas that can each help deal or mitigate certain risks, but leave youexposed to others.
Yeah, I, I'm often fond of telling people to go to the Society of Actuaries website where on their uh page about retirement and retirement risks.There's a booklet that outlines the 15+ risks that you'll face in retirement and then also outlines the ways to manage and mitigate these risks. And if you read this chart, you'll think, I won't have any money left over for essential expense of this, so I have to manage and mitigate all these risks that I'm going to face in retirement. Jeffrey, we have to take a short break and when we come back, we're going to talk about, I think one of your favorite topics, which is, uh, tax bracket management. So don't go away.Welcome back to Decoding Retirement. I'm talking to Jeffrey Levine. He's the chief planning officer at Focus Financial. And, uh, before the break, I mentioned that we're going to talk about one of Jeffrey's favorite topics. He's a CPA by background and also an IRA expert, right, Jeffrey? And then there's a host of other designations after your name that I can't recall all of them.
Yeah, abunch of letters, but I, like I said, to start, Bob, I'm just a big nerd. That's really, it's the those are the four letters that you need to know. N E R D, big nerd.
Uh, I have a lot of favorite four letter words too. One of them is food.Um, all right, so let's talk about tax, managing your tax brackets effectively either pre or during retirement, as well as the opportunities that maybe it creates for Roth conversions, especially now that maybe we're going to have a tax bill that extends, uh, the tax bracket, uh, the tax cuts of the uh of the tax cuts and Jobs Act.
Yeah, it certainly seems like it at this point. And, you know, I guess if we really continue with sort of the theme of what we've been discussing, we've been talking a lot about mistakes that people make in retirement. And, and we can sort of put this bracket management in, in context of one of those mistakes. Another common mistake I see individuals make is focusing too much on their annual taxes and their annual tax bill and not enough.On what I call their lifetime tax bill, you know, when it comes to good tax planning, it's not about giving anybody the lowest tax bill in any one year. It's looking at their lifetime and trying to figure out how to pay taxes over that extended period of time, such that the total of those taxes over your life is as low as possible. And where does that come in with brackett management? Well, there are a lot of times when, when you've retired.You might be, let's say in what are known as the so-called gap years, the uh the years between when you were working and had income coming in from work and the years when you start getting income from Social Security and maybe when you start taking required minimum distributions from your IRA's 401ks, etc. and during those years, oftentimes individuals have very low in some cases no taxable income whatsoever.And, you know, on, on the surface, that might feel great, like, hey, I paid no taxes this year. That was awesome. But if you look, if you have very modest income and modest savings, that's just gonna be what it is. But for those who have been fortunate enough to accumulate significant savings, having a low or no income tax year.It is actually a really bad thing. A low income year is a terrible thing to waste as a tax planner because you could be pulling money down at 2 days or at that time, you know, the low income tax rate you have in that year. And it's better to pay taxes oftentimes a little bit sooner, but at a much lower rate.Then to wait until the future when you already have all of this income, or to do it earlier while you're working and have all of that income and be paying taxes at those higher rates. So you want to look for those gaps in income years, or even years where you make abnormally large uh contributions to charity or other things that would result in a deduction, and look to pull down more income in those years. Now, the challenge with that, Bob, isIf you could have more income simply by saying more income please, like, wouldn't you have it, right? Like that would be great.Uh, but we, we can't generally do that, but there is sort of a magic wand of creating income for those who have saved money in an IRA or a 401k or a similar type of plan, and that is the Roth conversion. It is the tax equivalent of waiving your wand and creating income in exactly the year when you want to pay that income. So it is a veryVery powerful approach to look and to say, when will my rate on this income be the lowest? And one other thought here Bob before I kind of take a breath and come up for air and that's when we're thinking about rate, people oftentimes focus only on their tax bracket, but there are a lot of other costs potentially associated with income as well. Things.That may be on your tax return like surtaxes, etc. like the 3.8% surtax, but even things that may not be on your tax return. For instance, if you do a Roth conversion before 63, you don't have to worry about impacting the cost of your Medicare Part B or Part D premiums. But if you do a Roth conversion at 63 or older, that can potentially bump you up into.Paying higher Medicare Part B and or Part D premiums and now even though it's not a quote unquote tax, it's a cost that needs to be factored in to when you should take your income and when you should avoid taking income.
Yeah. So oftentimes, Jeffrey, the traditional advice is for people to delay Social Security to age 70, let's say, so they get the maximum benefit.And that to bridge the gap that they might take money from their IRA, uh, that would have been coming from Social Security, and that does two things. One is, right, it brings money forward that's maybe at a lower tax bracket, and it allows you to sort of maybe avoid higher taxes when you reach RMD age, and then it allows you to create the highest possible benefit with your Social Security benefit, uh, at age 70. Any thoughts about that as a strategy?Yeah, I,
I thinkthat's oftentimes the advice that is kind of put out there as a, a general statement of more people should do this, right? Like everyone's situation is different. What I could say with certainty is far too far too few people wait until 70 or closer to 70 to take their income, right? Like if you look at the statistics that Social Security puts out, it's pretty clear that a lot of people make.Decisions that are not in their best interest. It's impossible to look at any one individual and say you shouldn't have claimed that 62, for instance, unless you know everything about them, uh, but it is on, on based on the large numbers, it's clear that there are so many people who claim either as early as possible or not waiting until their full retirement age or even if they're their own full retirement age, not.Waiting until perhaps as late as 70 as you mentioned, to take advantage of those quote unquote delayed credits where your unreduced retirement benefit at your full retirement age for Social Security can then be increased by as much as 8% per calendar year for the amount you wait which can have a really material impact. Uh, one thing I would share is, you know, a lot of times people are looking at this and they're planning as a couple.And there, you can often separate the Social Security decision for the higher earner and the lower earner. The higher earner should really be focused not on their own death, but when the second death occurs.So, you know, sometimes people say, well, I've, I'm in poor health, I'm gonna die at 72. Well, sometimes I look at somebody like that and I say, do you love your spouse? They say, yes, I say, well then don't worry about dying at 72. It's still the right decision to delay because your higher check will live on with your spouse who might live another 20 or 30 years. And if that's the case, even though you didn't.Necessarily see the benefit during your lifetime before you die, it was a meaningful impact for your surviving spouse. Now, on the other hand, a lower earning spouse doesn't need to worry about when the second death occurs, they should think about when the first death will occur because that lower check will go away regardless of who dies first, and the higher check lives on with the surviving.So oftentimes when I'm asked that question by couples and they say, what should we do, you know, again, it's got to be looked at on an individualized basis. But many times, the higher earner will end up claiming at 70 or closer to 70, and the lower earner might start claiming a little bit younger so that they get at least some income in the interim, right? Uh, hey, we want to take more vacation.now or things like that. OK, great. So here's a little bit, a little taste of Social Security income for you now, but then later on it'll be much higher because the higher earner has madethe decision to wait.
So Jeffrey, uh, 23 minutes goes by in the blink of an eye. I'm afraid we've run out of time, but I, as always, I want to thank you for sharing your knowledge and wisdom with our listeners and our viewers. It's so greatly appreciated and hopefully you come back on, uh, future episodes to talk more nerdy. I'd
love
to.
Yeah, thank you and thank Yahoo for the opportunity to be with you guystoday.
Great, so that wraps up this episode of Decoding Retirement. We hope we provided you with some actionable advice to plan for or live in retirement. If you've got questions about retirement, you can email me at YF podcast@yahoo Inc.com, and we'll do our best to answer your questions in a future episode. And don't forget you can listen to Decoding Retirement on all your favorite podcast platforms.
This content was not intended to be financial advice and should not be used as a substitute for professional financial services.