Business
There’s More to Saving for Retirement Than Knowing How Much Money You’ll Need
In this episode of Real Personal Finance, Scott Frank explores the complexities of retirement savings beyond just knowing your target number. He emphasizes the importance of understanding spending hab...
There’s More to Saving for Retirement Than Knowing How Much Money You’ll Need
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Interactive Transcript
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If you've been deferring all that income now to this point and you show up with say like two million dollars in an IRA
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thinking like, I'm golden, you may or may not be depending on how much you need from that portfolio.
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Welcome to Real Personal Finance.
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I'm your host Scott Frank, founder of Stone Steps Financial.
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The premise of our show is simple.
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Money can be confusing, but it doesn't have to be.
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Our goal is to answer real personal financial questions that we hear from our clients and our listeners.
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Each episode we answer one personal financial question in a clear and understandable way.
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Because money is a tool and when you understand the language of money you can make better decisions to improve your daily financial life.
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Good buddy.
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Scott, good to see you.
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Yeah, we're not in office today.
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We are not.
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We're in the mobile office.
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That's right.
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Yeah, at the beach.
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At the beach, summertime's year, a little different background.
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I think I like it a little better.
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Me too, man.
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Well, today we are going to talk to you guys about something that happens for us all the time when people come in.
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Kind of what they're thinking about under the under the surface.
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This thing that they want to know, fidelity did a really good job of making people think or a couple of companies have done people think.
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I've done a good job and we could think it's the thing you need to focus on.
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Right.
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What's my number?
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Well, everyone's obsessed with a number.
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But oftentimes, the deeper than that, there's a thing beneath the thing.
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And that's what we're going to dive into today.
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Totally.
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So, you know, the what's my number makes sense for a lot of people.
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You know, it's a simple idea.
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I can I can think how much money do I need to retire?
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Give me that number, Nick.
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And I can go focus on achieving that.
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But there's certainly some things that lie beneath that number.
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So, you know, outside of do I need two million or three million to retire?
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There's so much underneath that.
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So how about we just chat that through what people show up kind of thinking about and then what we think they also need to think about?
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Yeah, I'd like to get into that.
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I think, you know, to your point, too, it's easy.
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It's measurable.
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We could see the light at the end of the tunnel.
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You give us this number.
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We're going to go run towards the goal.
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But oftentimes as we find this planters, depending on how, right?
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How being the big variable there of how and where we solve for saving for that number.
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There's things that maybe that study from different bigger institutions hasn't covered or hasn't gone into depth for and that's what we're going to dive into.
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Yeah, I mean, that's the point.
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It's a simple thing to look at, but there's obviously complexity under that simple number.
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So, you know, the things that there's the things that most people come in thinking about, or at least they have some semblance of an idea of something to think about, like they want to have their number.
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They can retire.
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We usually start with what do you spend today?
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Pretty easy to back into, right?
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Yeah, we need to have a sense of what your spend is.
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And then they often will bring up things like, well, you know, I might need to buy a car every so many years or.
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This is where I want to travel to or so and so son, daughter is getting married.
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We want to make sure to contribute to that.
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Whatever the personal goal is, there's things that are like they call lumpy or one off expenses that are just different than month to month.
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Right.
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And so we think about those all the time as well.
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And we definitely build those into plans.
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But that oftentimes that's where I've seen for a lot of clients.
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It's not to say all people because some people are really into geeking out on this stuff.
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That's normally where their knowledge kind of ends and our are the things that we're trying to add on are helpful.
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We've seen all the spreadsheets.
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So I hate.
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Did we remember to factor this in?
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And so I think, you know, diving into it today is like, where are the things that we're not thinking about?
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But what I'd like to also talk about too is if we're listening to this and when our.
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Honestly, I don't think it's ever too early to start, but yeah, generally speaking, where we start to really kind of hone in on this is when we're in our.
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Mid 40's late 40's early 50's thinking, okay, how can I optimize this?
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Because chances are you're probably already doing the great job saving.
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And now we're just trying to figure out let's look at a broader lens or filter here.
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Yeah, let's start looking beyond that.
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Yeah, so if we we can go there to begin with.
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One of the things that we'll look at right away is we'll look at.
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We'll great that you've saved and we'll look at the question of where have you saved.
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What do you mean by that?
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Like where are like, of course, like I'm a four one.
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Okay.
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Yep. So sometimes I think of that as like.
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Like your asset mix or maybe asset location could be a word for that.
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But like where what types of accounts are your assets in that you're going to use to live in retirement?
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Some people just think like they don't even know potentially like retirement.
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Maybe it's an IRA 401k.
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They don't know anything beyond that.
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Right. Totally. Yeah.
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Yeah. So like we've talked about on the show before, you know, IRAs and 401k is a great place to save for retirement.
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And they do allow us to potentially defer taxes now or we could choose to turn them into a Roth now.
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But if you've been deferring all that income now to this point and you show up with say like $2 million in an IRA thinking like I'm golden.
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You may or may not be depending on how much you need from that portfolio because essentially what you've done is you built an asset that is now worth $2 million.
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But some portion of that actually belongs to the federal government and the state government wherever you hang out.
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Because when you take the money out, it's going to be taxed.
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So nothing because I'm looking at where we're filming this today.
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Right. And that's going to be a bigger tax bite from our account since you million dollars because of state taxes.
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Right. So like the common tax in the state of California is 9.3% goes up to 13.3%.
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So you could have a really large amount coming out in taxes. So you won another way you could think of it is of that $2 million.
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10% of that belongs to the state of California.
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What are we going to say 15 to 20, 25 at least belongs to Uncle Sam in the federal government.
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Right. So something like that. But then so one thing we might look at if you have a long time until retirement is you might look to save to other accounts.
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That you can then be more nimble with your withdrawals when they occur.
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So one one thing we'll look at is what percentage of your assets are sitting all in tax deferred accounts, what percentage are sitting in accounts like Roths and what percentage are sitting in just traditional taxable brokerage accounts.
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Because if we have ideally you have something like a third a third and a third when you don't know what the future tax law is because then you have the ability to be really dynamic with your planning.
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What I like to look at too is like it's not to discourage anyone from saving into the pre-tax and saying how can we start to look beyond retirement age 60, 65, 70, right?
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These 401k IRAs pre-tax assets. There's going to be a time whether or not we need the money where we're going to be required to take that money out.
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So if the Scott's point of third to third third helps us figure out well at 50 where do we want to take our first distribution or dollar from but that may look different in our 60s or 70s.
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Yeah, right. And I think you know what so many people often overlook is yeah, we got that $2 million.
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But if we're looking at what we give Uncle Stan and whatever state we're in, yeah, maybe it's now closer to 1.5, 1.6 million dollars.
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So what's the factor in taxes? And so having we'll call it the three legs of the stool, right, very common example, having some money spread out elsewhere can really help smooth out the ride when it comes to paying less in taxes and getting strategic about it.
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Yeah, which is the next thing we'll pay attention to is going to be like your taxes not only in the year that you're in now, maybe while you're still working and getting ready to retire, but also looking and planning for the years in which you're not going to have as much income because you're going to stop working or maybe just do some consulting
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and bring down your tax bracket. And then eventually you're going to have that $2 million. If you're, let's say you have $2 million saved in your early 50s now, maybe you're 53 and you have 20 more years for it to grow.
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Well, if you just double it every 10 years, which is a 7% rate of return on that money, the two turns to four, the four turns to eight. And now you have really big, really big.
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So it'd be like 75 grand times four. So I think I think that's the quick math. I don't have a calcon front of me, but it'd be something like that would be somewhere around 300 grand of RMDs.
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Now you're going to really high tax bracket. So we basically want to look at how do we optimize all of those years from a tax perspective, not for each year that you're in to be the lowest of that year, but to make it so the lifetime of taxes is as low as it can be or lower than it otherwise would be if you just paid attention to each year.
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Yeah, and we're throwing all this at you right now saying if we're again in our 40s, 50s, these are great conversations and things to think about to ponder before we retire because so many times we've seen great savers coming to both of our offices.
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And it's too late. They're already in their 60s. They're actively in distribution mode. And now we got a tax bill to kind of wrestle through and figure out how we're going to maneuver around that.
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And so having that conversation of, hey, here's our savings rate. Now let's figure out where we're going to save because that gets into the next point, which is well, you have some health insurance coverage and retirement.
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Yeah, before before the age of 65, well, you know, they open care marketplace.
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Yeah.
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Yeah. And a lot of I've actually had a lot of folks come in who will be worried about going from being paint, you know, their employers largely paying for health insurance.
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And they they'll in their mind think I can't retire before because I'll have to pay for all this health care and it's going to be so it's just I don't know they've number random numbers.
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They do that here. Right.
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Well, but even they'll just hear it. They'll go here that like for a family a couple in their late late 50s early 60s to be on a traditional plan is going to be something like two grand three grand a month.
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Right. That might be the answer, but that's not always the answer. And we actually find that that that more often than not is not the answer, but there needs to be planning involved with that.
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Well, absolutely, and especially even in light of current legislation through the one big beautiful bill, there are some changes that are still working through the pipeline right now of the premium tax credits and how that changes, but what we're getting at is to Scott's point and may not always be as expensive as once you were either quoted or thought when we could then figure out well, where is the money coming from?
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How are we going to pay it from it? Do we need to take it from our 401k IRA pre tax assets, which is all taxable as ordinary income or could we take it from a brokerage account, which is capital gains, depending on where you take it within your brokerage counter.
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Do we have cash saved up set aside already or have you been saving to a health savings account, which you could find premiums.
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Yes, you can do a health savings account. So there's like there's all kinds of answers, but it's just looking at that next layer to figure that out.
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And all of those answers basically tie back to taxes and tie back to withdrawal strategies, which help us understand what your number actually needs to be.
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Absolutely.
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Because if you go to the simplest version, again, if we just make it a really simple, you have two million bucks and we go, okay, you can withdraw. I'm going to make up a number 4%.
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So you take 80 grand out of an IRA. That's before taxes. So I go figure out what you can have after taxes on that, right?
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But if instead we build it so that you have it in Roth and in IRA and in taxable, now we can probably be much more nimble with the tax code and help you get to keep more of that money for yourself.
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Yeah, because so many people will talk about the power of a Roth IRA and we're never going to touch it.
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We're going to let that thing grow tax troops for as long as possible. But to your point being nimble, what if we need to use some of it at 5960 just to get us underneath our tax brackets more specifically for premium health care tax credits or when we're on Medicare,
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we're going to have to pay more of our health care premiums because our income is higher.
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This idea to say, well, okay, if we could flirt with this line and say under, let's pull a little bit of our assets from our broker, Jar Ross, just to stay under that threshold.
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And now we're getting more affordable health care coverage or we're in a lower tax bracket.
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I'm going to apologize for Nick. You got super geeky. The Irma. I explained what it is. But all that it means in playing English is that you have to pay in to the Medicare system.
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It's not free. And you pay in based on what your tax return was two years ago.
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So one of the things we have to look at is as the work that we're doing this year going to cause you to pay more in premiums two years from now.
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And we that has to be built into the calculus of does this move make sense?
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Sure. And sometimes people don't know as well because when they're getting your social security checks, it's taken from that automatically.
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You have the choice. Right. And so oftentimes we'll get clients that have had a life event whether they sell a house, sell a business, view a rough conversion, whatever it is, it spikes up their income.
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And they ask, hey, why is my social security lower?
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Yeah. You know, another thing that I think and we probably end on this one for today because I don't have too much all the time in the world.
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Another thing we'll think about often. I know you and I both will think about for your number one of the biggest expenses that you're going to have in your retirement years is going to happen in the last year or two of your retirement.
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And it's some form of long term care. And that has to be baked into your plan. So we definitely want to build that in.
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Yeah. And I like looking at, you know, whether it's long term care, just having that conversation somewhere in our 50s or 60s. So again, just like knowing our number, just like understanding what to say, where money's coming from with anticipating some of these costs, having that conversation in advance to figure out, should we get long from here?
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How would we fund it? What would it cover just to be able to factor that in well in advance?
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Absolutely. And another thing you can do there is that's where like the there's so many different ways to solve it.
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If you've been saving to a health savings account for years, you might choose to let some of that keep ballooning while you're using a lot of it to pay for current expenses as well.
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But so that some of it could be available for big expenses that are medically related because it's tax-free when you get to take it withdrawal.
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But again, it comes down to like, where are your assets? What's the location and what makes the most sense for you specific food?
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And I think the thing I would end on is a lot of us when we do this initial planning, even as advisors, a couple comes in, you run the analysis for them as Mary filing jointly.
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Right? And you just think like, they're going to be fun. But it's like, man, if one of them passes all of a sudden, their tax rate just skyrocketed on them.
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Their income could be missing now because the sole security one's gone.
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Even if you can't still be missing, but if there are indeed are large router, they're paying a lot more in taxes, nothing ever stays the same.
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There's just so much to work through.
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So, yeah, yes, know your number.
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But know that there's things to look at underneath it.
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And actually, if you're interested in what's your number, you can click below for how much do I need to retire, quiz, you can answer a few questions and we'll get back to you with what we've seen based on what you submitted.
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But if you have any questions, let us know. And we would love to answer your questions if you have them.
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So, send them on in, we'll answer them for you. Anything else for today?
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That's what we're here for. Hope you enjoyed this episode. We can nerd out. I've had two coffees, the beaches here, they're loving new backgrounds.
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So, send us your questions. We'd love to be a resource.
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Bye, guys.
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Thank you for listening to another episode of the Real Personal Finance Podcast. And we'll see you next time.
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This podcast is for informational and entertainment purposes only and should not be relied upon for a basis for investment decisions.
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This podcast is not engaged in rendering financial, legal or other professional services.