Don’t Make These Income Planning Mistakes

Are you planning for your retirement with the confidence that you're making all the right moves? With so many moving pieces in retirement, it takes detailed planning to cover all your bases, but it begins with building an income plan.

In today's episode, we'll unveil the crucial income planning mistakes that could jeopardize your retirement and show you how to craft a financial plan that's built to last decades, not just years. Tune in to ensure your retirement strategy is foolproof against common pitfalls and ready to secure your financial future.

Here’s what we discuss in this episode:

• Don’t plan to be retired for years. Instead, plan to be retired for decades.
• Why starting Social Security too early before you understand your options could cost you.
• As you build your income plan, one expense that is easy to overlook is healthcare costs.
• Why you need to factor inflation into your plan because your budget won’t be the same in 20 years.
• Creating lifetime income streams other than Social Security.
• Is now a time to consider moving money into an annuity?

Full Transcript:

Ben (00:00):

Are you planning for retirement with the confidence that you're making all the right moves? In today's episode, we'll unveil the crucial income planning mistakes that could jeopardize your retirement and show you how to craft a financial plan that's built to last for decades, not just years that's coming up.

Announcer (00:18):

When it comes to financial planning. You need to cut through the jargon so that you can understand how to achieve your own retirement success. This is Candid Conversations: Retirement Talk with Ryan Cravitz of Cravitz Financial & Insurance Solutions.

Ben (00:33):

Welcome in. Glad to have you on Candid Conversations Retirement Talk with Ryan Cravitz of Cravitz Financial in Orange, California. Ryan, what's happening today?

Ryan (00:42):

It is springtime over here. It is nice and warm. It is I think high seventies, so it's beautiful and it's spring break. My son's going to be at Disneyland later, so it's a good day.

Ben (00:55):

Are you going out there with him as well?

Ryan (00:57):

I'm not going to make this trip here, but I am sure going to get plenty of pictures and I'm sure he's going to have a great time. We've got that annual pass used certain days and so my wife was able to take him today with some friends and so should be fun.

Ben (01:15):

That's a lot of fun. Is that a place you guys get to often Disneyland?

Ryan (01:19):

In the last year we've had that season pass. There's different ones. My wife knows more about all the different types, but we have a one where you can use on certain days and so she's able to pick and choose and take 'em there for a few hours and which is the perfect amount of time because he's five going on six. He's not ready for a full day. I don't think so.

Ben (01:39):

Yeah, I'm sure you're okay not having a full day out there as well. Sometimes it can be pretty exhausting.

Ryan (01:45):

Absolutely. You're not kidding. Especially if it is hot, but it'll only be too hot. It'll just be nice. Yeah,

Ben (01:53):

Well cool to have that in your backyard to be able to enjoy. So hope that's a lot of fun. But I want to hop into our topic today. I think it's going to be a good one about income planning mistakes that people make and I encourage anyone to jot down this number so you can follow up with or Ryan, if you have income planning questions for yourself or want to begin crafting your income plan as part of your bigger retirement strategy, that number 714-462-9155. But also you could find him online at Cravitzfinancial.com. So again, our goal today is to really help you ensure your retirement strategy is foolproof against some of these common pitfalls and really to make sure that you're ready to secure your financial future. So we've got five or six retirement income planning mistakes that we want to run through. And Ryan, I'm going to throw the mistake your way, let you kind of explain it for us. I want to start with this one. You don't want to be planned to be retired for years, right? It's important that you're looking at a longer timeframe than that planning to be retired for decades even.

Ryan (02:48):

Yeah, it's so true now today. I mean people are living so much longer. It's not unlikely that people are going to live for 15 years or 20 years or even 30 years or more now in retirement. So often I'll hear things like, well, my parents died young so I probably will too. Yet they're in their sixties already and they're feeling healthy. So you really want to give some... kind of rethink that. What is your longevity? What is your health like today? I know of many people that had no idea they would be as healthy and as active as they are and they're now in their seventies and it's just a new normal now that people are living longer but also healthier and more active and having more energy at older ages, well into their seventies, sometimes well into their eighties, still out there traveling and doing stuff. So you definitely want to make sure that you're planning for a long time there in retirement so that you have the resources that you need to make that happen, make that work well for you.

Ben (03:54):

Yeah, absolutely. It's so important to be looking long term. I know a lot of people look at retirement as maybe the destination, but there's so much more life ahead of you once you get there and you want to be able to fully enjoy that by having a proper income plan in place.

Ryan (04:08):

Yeah, I always say back a couple generations ago, it was like a lot of times when people did retire and they got that company pension and they set back on the rocking chair many folks and people just didn't have as much energy by the time they retired and it just wasn't, people didn't live as active retirements and such as they do now today. So life has just completely changed as people are living longer, we're healthier and so we have to plan for that and know that that's our new reality.

Ben (04:43):

And it's so important to have some help with that. In most cases, you want someone on your side that can help you plan for these things and help you adjust to retirement planning as it has evolved over the past few decades. What about Social Security? I know we've touched on this one a little bit on the show in the past, but you don't want to start it too early necessarily. Not to say that that's the wrong strategy for you specifically, but don't just assume that starting it super early is the best path.

Ryan (05:08):

Yeah, I mean that's absolutely true. I mean many people, you could take Social Security at 62 and so many people think, well, I might as well go ahead and get what's mine and I'm just going to go ahead and start collecting. But there's so many factors that need to be considered, including whether you're still planning to work, then you could be subject to the earnings test and then maybe you'd have to end up paying back those benefits or losing that and then not completely losing it. You would get that back at your full retirement age in the form of a positive adjustment. But you have to think about are you still continuing to work? What are your other sources of income? Are you married. Who has the higher benefit? And if that's you and you take your benefit early and you pass away before your spouse, your spouse is now going to have a much reduced survivor benefit now for the rest of their life.

(06:00):

And so definitely need to think through that. One of the big mistakes that I see is oftentimes it's the husband, not always, but oftentimes the husband was the higher breadwinner and he says that. He says, I'm 62, I'm going to go ahead and take it. I'm just an average health, might as well go ahead and get what's mine. And then when he ends up passing away his wife who's maybe a couple years younger than him, she will now have that much reduced survivor benefit now for the rest of her life. And I read a statistic the other day, I believe it was that women are outliving men by 14 years are being widows now for 14 years. I think that was the number. And I also read 98% of women are the widow recipients there of Social Security. So that's so important if you're married, making that decision not just what's best for you but what's best for you and your spouse and really how to coordinate that. So definitely want to think through what you're going to do that. The other thing too with Social Security is it's tax advantaged, right? So it's taxed differently so there can be some other advantages to delaying that benefit as well.

Ben (07:15):

Awesome, great stuff. So again, that's one mistake that people make is starting it too early without thinking through their options. Alright, as you build your income plan, one of the expenses that is easy to overlook is healthcare costs. Again, a mistake that a lot of people make.

Ryan (07:30):

Yeah, unfortunately with a lot of expenses I find people tend to spend less overtime just in general. In general, what I find is usually in your sixties, if that's when you retire, that's when you're going to spend the most money. And then sometime in your maybe mid seventies or so, you start to slow down a little bit, you start to spend a little bit less and then maybe in your mid eighties or so you start to spend even less just because you're not out there traveling, going on different vacations or going out and just doing things, going out to eat, going out to shows or whatever it is that's fun for you. But the one expense that just continues to escalate year by year are healthcare costs. And historically the healthcare costs have been going up at roughly twice the rate is overall inflation. So definitely need to account for that.

(08:23):

Even though a lot of expenses do decline over time in retirement, the healthcare cost is the one that tends to really creep up and the older that you get, the higher those costs become. So understanding how you're going to pay for that, what your options are for Medicare, what that covers, what it doesn't cover and what's considered long-term care and what that's all about and how much it would cost if you needed to get care at home or in an assisted living facility or even in a nursing home, costs vary tremendously depending upon where you're getting care, the type of care, and even depending on the part of the country that you're in or even the part of the county such as here in Southern California. I mean there's certainly cities where you could get care a lot for a lot less costs than in other cities. So it's important to be aware of what these costs are and likely how you would receive care if you needed and have a plan for how you're going to pay for it.

Ben (09:24):

Yeah, so true. So true healthcare costs and you make some good points about how they can differ depending on where you are. So a lot of different factors that go into it, but ultimately it's going to probably end up being more expensive than you anticipated going into it. So you definitely want to work that into the plan. Again, as we go through this, if you have questions for Ryan, number 714-462-9155 or log on CravitzFinancial.com. Alright, so when you come up with an income plan and you go ahead and target that number you're going to need per month to live on, do not ignore inflation because that number that you're planning on using today probably not going to hold up in a few years.

Ryan (10:00):

So here's the thing is that the cost of living is going to go up over time. And as I mentioned earlier, what happens though with a lot of people is they don't tend to spend as much over time just because as people get older you tend to have less energy and less desire to go out and do all those fun things. Now that said though, inflation is still there. So if let's say we're assuming that inflation is going to be 3%, so in our plan, instead of assuming that hey, we need to adjust or have the necessary income that we're going to need to keep up with that 3% inflation rate, maybe we just assume that we're going to increase the amount that we're able to spend by 2% per year as an example, or maybe one and half percent instead of 3% to account for the fact that we don't spend as much over time. So there's different ways to look at that, but it's something that can't be overlooked. But certainly inflation will take its toll over time and the longer that you live the more of an impact it's going to have.

Ben (11:09):

Yeah, very well said. And inflation, while we're definitely aware of it in the past few years, even when it creeps back down, it's still always in the background and you need to account for that in your income plan. Alright, our next one here, Ryan, the mistake people make is they forget to create those other lifetime income streams beyond Social Security. And that's a big one everybody's going to rely on, but you need to have more than that, correct?

Ryan (11:33):

Yeah. The biggest fear for most retirees is the prospect of running out of money. And even amongst people that have done a really good job of saving and maybe don't have that fear that they're going to run out of money, what I find is there's still that fear that they're going to make a wrong turn, they're going to make a bad decision, and now they're going to be put in a position where they now have to live a lifestyle that's not quite as good as they had anticipated they would be able to live. So be sure that you have a plan in place that will give you and your spouse if you're married, several income streams for the rest of either of your lives so that you don't have the remaining spouse in a difficult financial position after the death of the first spouse.

Ben (12:21):

Alright, very good. Let's go to a couple extra ones here. Ryan, I want to throw out for you, these mistakes get made to tax implications on your retirement income. You're building that income plan, but you need to understand what taxes you might owe on that money as you're pulling it out.

Ryan (12:37):

This is so big too because what I find happens a lot, Ben, is people throughout their working years, if you're working for an employer, you're an employee, you're getting that paycheck maybe every two weeks. And for a lot of folks, that's your sole source of income and so you get what you get, right? You can make some decisions around that as to how much you're going to contribute maybe to a 401(k) and then that's going to change the amount that you're getting after taxes and such like that. But in your working years, you have one source of income, at least that's the case for most folks. But in retirement for most people, it's very, very different. You're going to have Social Security, at least most people are. Some folks are going to have a pension, some are going to have money in an IRA or a 401(k) or some other type of retirement account that they contributed to.

(13:35):

You might have money in non-qualified funds that are in a taxable brokerage account such as where you're paying taxes on dividends and capital gains each year. And the key thing to understand here is that all this money is taxed differently. You've got IRAs and 401(k)'s, we have ordinary income, you've got dividends and capital gains. Those are taxed differently. Even the formula to determine whether Social Security is going to be taxed, that's different. That's a whole other thing that's called combined income. You have all these different income sources. You could even have tax-free income from a Roth IRA. And one of the big mistakes that I see that folks make in retirement is they're planning their retirement, how they're going to get their income in retirement is not accounting for the taxes they're going to have to pay on those different accounts and how much they should withdraw from which accounts.

(14:31):

And when I just saw the other day, I was talking to a gentleman that I think he was 66, 67, something like that, and in his mind he didn't need the money that was in his IRA, so he was just going to keep deferring it until he had to start taking out his RMDs. Well, in his situation, it actually would've been a better move for him to consider start withdrawing some of that money sooner because he would be able to do that at a presumably lower tax bracket now. If he was able to withdraw some of that money, he could get some out at even a 10 and some a 12% tax bracket versus having to wait and keep deferring that money until he has to... He's required to take up those RMDs and now perhaps having to pay taxes at an even higher rate. And don't forget too, that the Tax Cuts And Jobs Act sunsets in a couple years here. So we already know tax rates are going up. So a lot of things to plan for, Ben.

Ben (15:31):

Alright, some important income planning mistakes that you want to avoid. Again, you want to have someone on your side to help you build that plan, stick to that plan, ensure that you're taking out enough, you're accounting for all these different factors that go into your income in retirement. You want to make sure you get it right so you can truly enjoy everything you work so hard for. So get in touch with Ryan at CravitzFinancial.com or over the phone, (714) 462-9155 to help you get your income plan in place. Alright, Ryan, let's turn into the mailbag and take a look at a question I have for you today. Again, if you have anything on your mind, we'd love to hear from you, you can send it in to us via Cravitz financial.com. But our question today is from Jacob, since about a year ago, I looked at moving some money into an annuity that would have protected my funds from loss, but I'd never actually did that. Now that the market has been up since then, this move seems to be even more appealing to me. Am I approaching this decision the right way?

Ryan (16:31):

So this is a good question and there's a lot of unknowns here, but the first thing that I would say is I would not say that you're approaching this the right way. In other words, just because the market has gone up over the course of the last year, that isn't the reason why I would consider moving some money over into an annuity. I'm not saying that you shouldn't move some money perhaps into an annuity, but really the key question here is what is the purpose of this money now? What do we want these funds to do for us? Because just because the market's been up over the last year doesn't mean that the market won't be up again over the next year. It could be down, right? No one has that crystal ball to know for sure what's going to happen. The key thing really is again, what's the purpose of this money?

(17:21):

Do we want to get some guaranteed income from the annuity backed by the insurance company that we can have to help supplement our other income, maybe our Social Security that's coming in. Is that the purpose or are we trying to, are we looking at a fixed index annuity product where you're able to participate in the upside of the market with no downside risk and want to have those gains locked in? And that's going to be kind of a supplement to your overall portfolio, right? You're going to have this, it can be seen as kind of a bond substitute. It's more of a conservative growth vehicle and then maybe it's going to afford you the ability to invest more aggressively in the markets, maybe tilt more of your portfolio towards stocks and less towards bonds. Just as an example there just to oversimplify it. But the key thing is what's the purpose of the money?

(18:22):

What do we want to do? What do we want this money to do for us? When do we want to spend this money or do we not need to spend this money? And is this money that is going to be passed on to the next generation? So those are really some of the bigger questions here. And the other thing too is I'm thinking about this is a lot of it depends upon what your age is. If you're 15 years away from retirement, then it's probably not going to be the most appropriate thing for you. But if you're retired or if you're looking to retire soon, then it could certainly have a place perhaps within your portfolio, depending again, what your goals are and what you want that money to do for you.

Ben (19:07):

Alright, very good. Great question Jacob. And one you'll want to follow up with. You can always get in touch with Ryan at Cravitz Financial.com, learn more about what Cravitz Financial could do for you, how they help their clients with retirement planning. If you want to call, you can always do that as well. It's 714-462-9155. Again, 714-462-9155. Alright, Ryan, great stuff as always. This income planning is so important as part of your overall retirement plan and we want to get it right without making these mistakes. So thanks for talking us through this.

Ryan (19:38):

Absolutely. Good talking to you Ben.