Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

3 Common Mistakes People Forget When Retiring Early

• Ari Taublieb, CFP®, MBA • Season 1 • Episode 203

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How can you ensure a secure and organized retirement plan without falling into common financial traps? In this episode, we promise to equip you with essential strategies that will help you avoid costly mistakes and make the most of your retirement savings. We'll discuss the importance of personalized financial planning and share the risks of mindlessly following others' investment moves, even if you're simply relying on your 401k. Listener Steve McCord offers a heartwarming reminder of the value in scrutinizing your financial plans, regardless of your net worth. 

We'll tackle the intricacies of Roth conversions and the pivotal role of tailored advice in your retirement strategy. Hear a real client story about why blindly filling up tax brackets through Roth conversions might not always be the best move, especially if you have significant assets from a business sale. We also examine the potential downsides of long-term care insurance and propose an alternative: self-funding your future care to ease financial anxiety. Whether you're amassing substantial assets or just beginning to think about retirement, our actionable advice will help you steer clear of common pitfalls and ensure a stress-free retirement.

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

There are lots of people that make lots of mistakes when it comes to investing and tax strategy and withdrawal and healthcare and all the different topics that I like discussing, and nobody's perfect, and I recognize that. So what I want to do today is tell you about a bunch of things you're probably doing right, that you should continue doing, and common mistakes that most people go yep, I was about to do that and now I'm not going to do that. Or you know I've already done that and it's good to hear that I don't need to buy even more X amount of insurance or whatever it is. So these are big mistakes that I see all the time. But part of my job is telling clients do this. And part of my job is saying look, your neighbor or your friend is going to bring up diversification or long-term care or health care, and your job is to say I'm not sure if that applies to me, but it sounds interesting. You don't need to beat them down. But what you can do is ask yourself okay, just because my neighbor has this, does that mean I need this? And my coworker? And how do I look at my finances and ensure I'm okay? I want to give you the pro tips and the pro mistakes that I see all the time.

Speaker 1:

Now, before I get into this, this comment was just left on my YouTube channel. So if you're listening to this podcast on the podcast app, great, I'm, of course, going to always post here. If you are watching on YouTube beautiful, you can see me right now and the comment on the screen. You're going to continue getting this information the way you like receiving it. So this comes from Steve McCord 6927, who says Ari, you and James James is my partner have provided such a gift of thoughtful content.

Speaker 1:

I've been on autopilot with just stashing away money in my 401k for so long, but last spring my boss, who is 20 years younger, asked what my plans were for retirement. I came back with at least eight to 10 years, since the government would probably push the goalpost to 70 by the time I got there. The simple interaction flipped a switch to cause me to start being more intentional with scrutinizing where I was and what I need to do to be where I want to. I'm not at your 2 million threshold, but the concepts you present are priceless. Keep up the good work and I pray you are rewarded with both tangible success and the joy from knowing you blessed others' lives. What a beautiful comment, steve. Cannot thank you enough.

Speaker 1:

And this is a lot of you who are, I know, adding money to your 401k. You've done it for 20 years. You're going to continue doing it for 5, 10, 15 years, depending on where you're at, and I will be the first advisor to tell you not to hire an advisor I believe most of you. If you don't have $2 million where an advisor can manage it, I don't believe they can justify the value, unless you're already retired and it's fully available for management or you're just going. Hey, I just need you know. If you want someone who's going to tell you to rebalance, I don't really think you need to pay an advisor for that. If you're going, no, I need tax and withdrawal and health care and, more than anything, I don't want to have to do this. Well, that's why people hire an advisor. You are literally paying for your time.

Speaker 1:

So the reason I'm making this comment to the highlight of the week, a few reasons. The first is this person's been adding money to a 401k for 20 plus years. They are in such autopilot mode they're not wondering should I have a different account? What if I retire earlier? What about social security? How does healthcare come into all of this? Because they're on autopilot and if they were worrying about all the things I just said, that would be weird, because they are busy working and they have a family and there's stuff that they want to do which probably doesn't involve listening about tax strategy. So the point here is I'm going to tell you a few things today that are going to be really simple and easy, so that you do not screw up your retirement, and a few things that you're probably doing a good job of that I don't want you to change.

Speaker 1:

So here are the big mistakes. The first one is one I just saw an hour ago, and this is how I like to make my content. I don't wanna batch. I used to batch content where I'd make four episodes in a day and that's for the month. Now I just get so emotional and heated that when I have that feeling and I want to discuss it, I just pull this microphone up and I start talking.

Speaker 1:

So I just spoke to someone who is so excited about doing Roth conversions and they came in and said Ari, do I fill up the 24% bracket or the 32% bracket? I don't even know which one I should do, but I'm so excited, tell me which one. And I said you should do none of them. And they're like what do you mean? I said, well, you're going to get crushed in taxes. And they're like I know, that's why I'm coming to you to help me out. And I said but it's actually going to be better if you don't do anything. You just said they go. Why? I said most of your money is in a brokerage account because you sold a business and because of that, the majority of retirement issues you see about Roth conversions and all these fancy things they're just not going to apply to you because most of your money is after taxes, it's already been taxed and as it grows you'll have to pay taxes on dividends and interest and different things. But the 401k the required distribution issue that most people are going to run into that does not apply to you. Now, as a reminder, that's going to apply to most of you.

Speaker 1:

At 73 or 75, you are going to be forced to take out more money than you need. So most people start going oh yeah, I need to worry about this because I'm probably going to be spending less when I'm in my 70s and my investments if I've got $2 million in my 401k and I'm 60, when I'm 70, it could be $3.5 or $4 million and then maybe even $5 million. And so at that point you might be forced to take out so much money that you're going to be like, hey, I don't think I need $400,000. And the government's like, too bad, you have to take it out. And the reason that you're not going to want to do this is because you might have social security and a pension and rental income and have to take out more money than you need when you're probably spending less than your earlier years of retirement. Why, well, you had your energy, you had your health, you were spending and enjoying it. Now it's a different stage of life.

Speaker 1:

So the point as to why I'm bringing this up Roth conversions can be amazing, but they can also be horrible. And in this case, for this client, it would have resulted in 2 million fewer dollars to do Roth conversions. And the wife is joking going. You see that I would have been a better advisor than you. And the wife was saying that to her husband because the husband's so into the finances and loves it so much. And I know most of you listening right now and watching are like yep, I'm the one that operates the finances for the household. My wife's not into it. My husband, my partner they're not into finances.

Speaker 1:

And the reality is you're probably in a good spot because you have actually taken the time to educate yourself and if it was just your spouse or partner running it, you wouldn't be in the position you're in. But sometimes I see people over optimize and it's not from a place of being malicious. They're just trying to help their family and you've worked really hard to get what you have. I don't want to see you throw it away. So number one is don't just start doing Roth conversions. Don't start doing tax strategy unless you're really confident you're doing it properly, because I saw someone who was about to throw away $2 million in taxes.

Speaker 1:

Number two is don't just go buy long-term care insurance because your mom did, or your dad or your neighbor. The majority of you you're not going to need long-term care insurance. I see way too many people buy long-term care. Don't end up even using the policy because it turns out it's not going to put them in the community they want or the coverage is so minimal. They thought they were covered because they had long-term care insurance, but it's just so minimal and they would have been better to instead and this is what I often recommend for my clients is understand your state legislation, because every single state is different when it comes to long-term care care.

Speaker 1:

Go get a quote from a long-term care insurance company, let it freak you out and go oh my gosh, really $20,000 a year, and now I want you to pay the $20,000 a year to your own long-term care policy. So you're just opening a new account. You are literally paying future you, saying hey, yep, instead of giving it to this insurance company that might pay me, you know, a hundred thousand bucks, even though I paid in 500,000 bucks over the course of my lifetime. I'm going to pay me, I'm going to pay future me. And the reason I like clients who do this is because if you keep all of your money together and you don't have a separate account for long-term care, it adds anxiety because you're like, yeah, I have all my money, but isn't that for my travel, and isn't that for my kids' wedding? And what about the home remodel? And if you separate out long-term care and pay yourself on a schedule just as if you were going to pay it to an insurance company. It's really good for the brain going yep, I know I'm adding new money, that's going to be there and I'm actually accounting for it. Now, don't go do that.

Speaker 1:

If you have a 401k and you're 50 years old and you're going to have to pay taxes to fund a long-term care policy, you probably can just let your money keep growing. It's just a tactic that I call barrier financing, where you're creating a barrier in your brain, mental accounting to go yep, I'm going to have travel over here, I'm going to have long-term care over here and I'm going to have health care before retirement, before Medicare over here, and it just helps clients go yeah, when I do retire, I've got my specific goals. I've got a few different buckets. I know what I'm going to do. Versus just looking online at Fidelity going yeah, there's $2.5 million in my 401K. It just looking online at fidelity going yeah, there's two and a half million in my 401k it doesn't really add as much confidence.

Speaker 1:

So this is a very simple thing. It's not rocket science, but just organizing your brain is number two, because the third mistake and this is the one I really need you to avoid is the following so people come and they go all right, or, james, you know, I just cannot wait. I'm going to retire early and I'm going to live off the 4% rule and I'll go. That's really dangerous and they'll go why? You know the studies show if I take 4% out of my portfolio, I won't run the risk of running out of money lot of money on the table and it could create a big risk for your retirement. And they're like why?

Speaker 1:

And I say well, I need you to think about being a retirement boxer who owns a business. They're like what did you just say? And I said think about it like this. Let's assume you're a business owner and your business is doing really well. You might go buy more equipment, you might hire more employees, you might try to innovate the business and invest more capital to grow it long-term. But let's assume your business is not doing well. Are you going to go hire 20 employees? Probably not. It doesn't make a lot of sense. Are you going to go buy equipment? No, most people do it anyways.

Speaker 1:

They just don't know they're actually doing it and what they're doing is they're retiring at 60. They've got healthcare before Medicare, they've got travel, they've got a home remodel, they have a kid's wedding, they have college expenses, they have vacations and they're trying to enjoy their early years when they have their health and energy, and so they spend too much all at once. Wall markets are going down and now the rest of their retirement is not so rosy. And I know this because a lot of the work I do it's called revisional planning. For people that retire early unsuccessfully and are coming to me to fix their retirement so they don't have to go back to work and, trust me, you do not want to be in that boat. It's like getting an unnecessary surgery. It turns out that was just completely you know. Now you have all this scar tissue and it was just completely unnecessary and it wants just.

Speaker 1:

There's lots of issues. Okay, so I'll do a whole episode on that in the future, but these are the mistakes I see. The big ones are people doing tax strategy because they watch a YouTube video and it sounds cool. The second one is people who are like, oh, yeah, I'm just going to keep adding money my 401k. Who cares? And yeah, I'm just going to keep, kind of just like Steve here I'm doing the right thing, I'm adding my 401k, but if Steve doesn't stop and go wait, what if I want to retire earlier. What if it turns out I should have a brokerage account? How am I going to pay for all the Roth conversion taxes? How do I think about social security? And what about this whole pre-healthcare, before Medicare? Like, how do I even think through that?

Speaker 1:

Really, getting clear on long term care and ignoring buying that, like I'll tell my clients here's something you've probably thought of before Like, yeah, I've thought about it for so long I go, I never want you to buy it. And they're like thank God, because, like I don't want to buy it, I go great, there's certain things you shouldn't do. Don't go buy more life insurance. A quick example of that and I'll use this to end the episode is I often hear people go do I need more long-term care? And I'll say no, you know you can self-insure and they'll go.

Speaker 1:

What about life insurance? And I'll say life insurance is a tricky one, because if you have three million dollars or let's just use one million dollars, um, and you're 50 years old and if something happens to you, you should have to ask yourself would my spouse or my child be okay? If they would be okay, you don't need life insurance. But let's assume you go. You know, yeah, they'd be okay, but I'd be putting them in a pretty rough spot. So you go buy 500,000 more life insurance of short-term coverage Awesome. But now you're 60 and you're like, do I really need this life insurance? Like there's enough money that if something happened, they'd be okay. So you're thinking about dumping the policy. It's only costing you a thousand bucks a year.

Speaker 1:

But you're wondering what do I do? Well, let's assume you pay a thousand dollars a year and if something happened to you, your family would get $500,000. Where could you go to beat that return? So you put a thousand dollars down every year and if something happens to you, you get 500,000. Well, you're not going to beat that in the stock market. You're not going to beat that in real estate.

Speaker 1:

So I have clients that go I don't need life insurance, but I sleep better at night knowing that I'm paying $1,000 a year and if something happens to me, I'm paying $1,000 the next 10 years. So I pay $10,000 to maybe get $500,000. Yeah, that's a trade-off I really like and that's an investment. Other people go look, I'm just probably not going to pass away. So that 10,000 bucks, yeah, maybe it grows to 20 or 25,000 if I invest well, but that's something that I would rather do and I've seen clients do both sides. So there's not a perfect financial answer or real-life answer. That just is always going to be. Hey, it's highlighted, do this.

Speaker 1:

But I want you to not worry about a lot of things and long-term care and withdrawal strategy and 401ks and Roth IRAs there's so much that, when it comes to this, it just becomes overwhelming. And so you're just trying to do your best for your family. If you don't have $2 million and you're wondering how do I optimize? Well, that's why I created the Academy, so you can go in and see yep. Conversions make a ton of sense for me. Or you know what Yep? Look at that I should absolutely not buy long-term care. And wow me, collecting Social Security at full retirement age versus 62 yields a $300,000 difference. Well, I'm going to do that Like start getting some answers and then either work with an advisor or you can do an optimization session.

Speaker 1:

Now, this is something I'm only doing through the end of the year, but this is where you pay me for two hours and I get to just go through and tell you do all these things, don't do these things, and it's just a kind of optimization session. I only let people do that if after they go through the academy, because the academy is for a few hundred bucks. Some of you you go, it's perfect, it's all I needed and I'm good. Others of you go no, I need to work with you and your team on an ongoing basis because I don't want to do this and there's too much to mess up. Others go look, maybe this middle ground option could work for me. I pay you a fee. Once you tell me what I need to do, I'm in a good spot. I pay you a fee once you tell me what I need to do, I'm in a good spot. That generally is for people that don't have $2 million, most of their money's in a 401k. They're like I don't know when I can retire, I just need guidance. Or if you're like, look, I've got 30 million bucks, I just don't like this is what I do for a living, like I want to manage.

Speaker 1:

Please like this, please review it. If you're listening on the app, please subscribe If you're on YouTube and share it with people that you want to retire early with. See you guys next time. Thank you for listening to another episode of the early retirement show. If you have a question that you want answered in a future episode, you can always go to my website. In a future episode, you can always go to my website, earlyretirementpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week.