Ep. 206 – Dear Patti: The Four Seasons of Retirement

Ep. 206 | Dear Patti: The Four Seasons of Retirement

 

 

This transcript has been edited for clarity and readability.

 

Hi everybody, welcome to the Patti Brennan Show. Whether you have $20, $20 million, or $200 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

In this series, we are going to be talking about the complete retirement checklist that you will find on our website. When we think about preparing for retirement, I want you to think about it in terms of seasons.

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Season One: Winter Break Before Freshman Year (Pre-Retirement)

The most important season, in my opinion, is the winter before freshman year. When you go to college, think of retirement the same way. It is like freshman year. Mom and Dad are not giving you curfews. You can go nuts and do all the things you have wanted to do. The same is true with retirement. You have been working your whole life. You want to travel, get through that honey-do list you have been putting off for years. But before you get to that stage, you want to be prepared.

So during your winter break, what is really important is getting a clear sense of what your cash flow needs are going to be. Notice I did not say budget. I am not a believer in budgets. Let’s simply define what you think you will need coming in, and then figure out what your sources of income are going to be. Run some stress tests before you let the stress run you. Ask yourself: what if this happened? What if that happened? That kind of preparation is what prevents the period of ambiguity that many people experience when they first retire. You just do not know how it is all going to work.

Another critical part of this checklist that I want to emphasize: do not ignore the emotional transition. You have been working your entire life. You may have been managing people, been the person everyone looked up to. And then suddenly, that is gone. Who are you now? What are you going to do? How are you going to add structure to your day? These are the things to think through during your winter break.

There are other practical considerations as well. How will you get your medical insurance? Are you on a high-deductible plan? Are you contributing to an HSA? If you are and you are about to go on Medicare, remember: you must stop HSA contributions six months before you retire. That is exactly why this pre-retirement window is so important.

This is also the time to think about your portfolio in terms of when you will need the money. Remember the pools of money concept. Pool number one covers your zero-to-three-year cash flow needs. How much do you need to pull from your portfolio in the first three years? Nobody knows what the future holds, so you do not want to take a lot of risk with that money. The pools of money strategy is one of the most effective ways to avoid financial stress in early retirement.

I will never forget one client, a grown man, a high-level executive, who sat in our conference room in tears. He was bored to death. He had no structure. He had not thought through what life would look like without work, without people reporting to him. That emotional piece is just as important as the financial piece.

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Season Two: Spring, The Honeymoon Phase (First 5-10 Years)

The next season is the one we all look forward to. It is spring. It is the honeymoon. The first five to ten years of retirement.

In the beginning, there is still a period of ambiguity. How is the cash flow really going to work? What will I do each day? But if you did your homework in the winter, the transition is much easier.

We had a client who retired in early 2020, just before the pandemic. Because we had already positioned her using the three pools of money strategy, she was able to continue traveling once restrictions lifted and did everything she had planned. Her friends who had also retired were panic-stricken because they had not been prepared. The pools of money strategy made all the difference.

During this season, you want to think carefully about your portfolio withdrawal strategy, Medicare, and your Social Security timing. Should you take it early? Wait until full retirement age? Or wait until age 70 and receive that 8% annual increase? The biggest risk during this spring season is a bear market and the sequence-of-returns risk, especially while you are drawing money out of the portfolio. Bear markets hurt. That is exactly why the pools of money strategy is so effective: it keeps you from having to sell low.

Tax optimization is also critically important during this season, before most retirees are hit with required minimum distributions. It is remarkable how much money you can save if someone is paying close attention to this window.

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Season Three: Summer, The Transition Phase (Years 10-20)

The next season is summertime. This is a transition phase that typically spans years ten through twenty of retirement. Things have settled down. You have traveled where you wanted to go. Spending often decreases. This is what I call the Goldilocks tax zone.

This is the ideal time to look at Roth conversions and strategic capital gains harvesting. If we can get you into a 12% tax bracket, you may be able to take capital gains and pay zero federal taxes. If you still like the investment, you can sell it and rebuy it the same day or the next. There is no penalty for doing so because you have already recognized the gain.

We have clients who are systematically converting portions of their 401(k)s and IRAs into Roth accounts each year during this season. They do not need the money, so we move it directly into the Roth, where it grows tax-free for the rest of their lives and for their children. I have long said that a Roth is one of the best legacies you can leave the next generation.

One important caution: when doing Roth conversions or harvesting capital gains, always be mindful of IRMAA, the Medicare Part B premium surcharge. You want to avoid unintended consequences. This is a complicated calculation. Once you make the move, there are no mulligans.

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Season Four: Fall, The Support Season (Later Years)

The next season is fall, and just like the weather, it is unpredictable. It could be a beautiful extension of summer, or it could bring cold and rain. The same is true for this season of life. There are a lot of unknowns: healthcare changes, adult children returning home, grandchildren, and more.

During this season, we also want to pay close attention to cognitive health and threats to financial security such as cybersecurity. This is the period when people become most vulnerable to hacks, phishing attempts, and financial exploitation.

This is also a good time to run the numbers on long-term care, whether that is for yourself, your spouse, or both. Housing decisions become very important here as well. Many people choose to move during this season to be closer to family, and there are meaningful tax implications to think through.

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The Final Season: Winter, Living Solo

The last season is one I address directly with every couple I work with. There will come a day when I am sitting at this table with just one of you. We want to make sure that when that day comes, the transition is seamless and free of anxiety.

Cash flow needs will change. You will automatically lose one Social Security income. Pension elections made years earlier will matter enormously now. When your spouse elected their pension, did they choose a joint and survivor option? Was it 100% to the survivor or 50%? That one decision can make an enormous difference.

I often share my own family’s story. When my father retired from IBM, he came to me and asked what he should do with his pension election. I told him that because he and my mother had put seven children through school and had not been able to save much beyond that, I strongly recommended the 100% joint and survivor option. My mother was already going to lose one Social Security payment. That one decision changed the trajectory of her financial life.

Pension elections matter. If you have access to a pension, even a frozen one, you need to make an election. And the right choice is not your colleague’s choice or your neighbor’s. It is yours, and if you are married, it is your spouse’s too.

When living solo, you also need to revisit your legal documents. Most people have what I call “I love you” wills: everything goes to the spouse. But what happens when the spouse is gone? Who are the alternate beneficiaries? Who holds your financial and healthcare power of attorney if your primary designee is no longer alive? These documents need to be reviewed every three to five years. You do not want to address this in a crisis.

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Closing Thoughts

Those are the seasons. That is the framework behind the complete retirement checklist available on our website. Please visit us at keyfinancialinc.com to download it. It is all there for your use.

Thank you so much for tuning in today. Take care.