Are you confident that your financial plan is complete? Many people believe they have a solid plan in place, only to realize later that they've missed important areas. From not accounting for long-term care expenses to overlooking the impact of taxes on retirement income, there are many ways a financial plan can be incomplete.
On this episode, we'll be pointing out the most common areas people overlook when planning and provide actionable tips to ensure that your plan is as comprehensive as possible.
Here are some of the topics we’ll discuss in this show:
- The danger of a downturn in the market in the early years of your retirement. (1:31)
- Have you overlooked the effects of inflation over time? (3:25)
- Are you prepared for the possibility of tax increases in the future? (5:56)
- Preparing for the challenge sometimes presented by your RMDs. (7:50)
- Planning for the likelihood you’ll have a long-term care need. (9:34)
Ryan: A lot of people are going to delay and keep deferring that money and then they're going to take money out of their IRA accounts and such. And when they do, they may be pushed into a much higher tax bracket.
Announcer: 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 and Insurance Solutions.
Ben: Welcome in to Candid Conversations Retirement Talk with Ryan Cravitz, out of Cravitz Financial in Irvine, California. I'm Ben George. And we're talking about the incomplete financial plan. Are you confident that your financial plan is complete? Many people believe they have a solid plan in place, only to realize later that they missed some important areas, from non-accounting to long-term care expenses, to overlooking the impact of taxes on retirement, there are so many ways the financial plan can be incomplete. So on this episode, we'll be pointing out the most common areas people overlook when planning and provide some actionable tips to ensure that your plan is as comprehensive as possible. Ryan, should be a good show. How you doing today?
Ryan: I'm doing pretty good. How about you, Ben?
Ben: I am doing well also and looking forward to kind of going through this because there are so many pieces of a financial plan when you take that comprehensive approach like you do. So it's all very easy, if you're doing it on your own, to overlook a lot of these things. So hopefully today's episode will help point out some of those and more importantly, provide some actionable tips to make sure you are on top of these items. So I think I'll start with this one, Ryan, as we're pointing out some of the incomplete areas or where people overlook, and that's a danger of a downturn in the market in the early years of your retirement, and I think anybody that's in retirement now or has been the last couple of years, might be realizing this.
Ryan: You're definitely right. That time period, right about when you retire, typically the time period about five to 10 years before you retire, up until about five to 10 years right afterwards, often it's called the retirement red zone or financial red zone. That's a critical time period because if you suffer a large stock market loss, because if your portfolio loses a substantial amount of money right around that time, right around when you need to start withdrawing money from it for income, it could put you at a very real risk of running out of money. So you really need to be careful and make sure that you're positioned properly.
Ben: Yeah, because I guess when you retire, that's about your peak amount that you've accumulated. So 10% off of your highest amount is much more than say it would be later in retirement.
Ryan: Absolutely. It's a huge difference. I mean, if you just take a round number, a million dollars, and if they lose, let's say 30%, they're down to 700,000 and now they needed to withdraw, let's say 40,000, maybe they were just following the old 4% rule. Now that's another 40,000 on top of that. And now there's a lot of nervousness. I mean, the next year we got to continue to withdraw more money and will that portfolio recover and it may not. And so you have to be real careful about how you're allocated, where you're withdrawing money from, how that's positioned, how that's invested. So there's a lot that goes into it.
Ben: Yeah. So that's the first spot that people often overlook. What about the effects of inflation over time? Again, another one that if you hadn't been thinking about and you had not planned for it, well, it became pretty clear early in retirement that you had a problem.
Ryan: Yeah, you're not kidding because last year in 2022, I mean inflation spiked quite a bit, but before that for several years, inflation was pretty low overall, and it just wasn't on as many people's minds as it has been in the last year or so. But you have to plan for inflation. You have to know that if you're 65 and you're retiring now, that in 20, maybe 30 years, depending on what the overall inflation rate is, you may very well need twice as much to live on just to maintain the same standard of living. So you got to be careful and really think through how that works.
Ben: Yes, you have to be prepared for inflation. Hopefully we're inching down in that respect, we shall see, but either way, it has to be baked into your plan. All right. Third thing here on our list, the fact that medical costs are increasing at an even faster rate than inflation.
Ryan: Yeah, I mean in the inflation rate for medical costs has gone up and about double what the overall inflation rate has. I mean it's huge. So if you think about inflation in general, let's just say the long term rate is 3%. So if in fact it's 3%, following the rule of 72, takes 72 divided by three, and that equals 24. So that would mean if we had inflation at 3%, that in 24 years you'd need twice as much to live on. Well, when you look at healthcare costs, and if they're going up at roughly twice the rate of inflation, that means in about 12 years, healthcare costs are going to be twice as much as they are today.
And the other thing y you have to consider is that if you're retiring, let's say in your 60s, you know may not need long-term care and you likely won't in your 60s, but there's a much higher likelihood that you will when you get into your 80s and 90s. And you got to think through what are those costs going to be, and you got to have a plan to pay for them if and when they arise.
Ben: Yes, always important to get ahead of those things and that's a big one indeed. All right, taxes is the next spot I want to talk to you a little bit about Ryan, because I think most people that you listen to think that taxes will go up, and I think even if nothing really happens over the next couple years, when these current rates sunset in 2026, I believe, things will begin ticking back up. So are you prepared for that possibility of tax increases in the future, and I guess many people don't think that far ahead, right?
Ryan: It's very true. And it's also true that, like you've mentioned right there, that tax rates are going to go up, unless something changes between now and then. But based upon the law today, it's actually in 2025 is when the Tax Cuts and Jobs Act okay is going to sunset, and then in 2026, we're going to go back to the old rates and those old rates are higher than the rates that we have today. So we already know that that part is going to happen. And the other thing that we have to be thinking about is that as a country, we're about $31 trillion in debt now. And so where are we going to get the money to start paying this down? And you got two choices, you either start spending less or you start taxing more, and it's not very popular on either side of the aisle to start reducing benefits.
So I mean, maybe they'll reduce some, but I definitely think that they're going to increase taxes in the future, to be able to get the money to pay for these things. And so it's important to think about, especially if you have a substantial amount of your retirement savings and pre-tax retirement accounts.
Ben: Yeah, got to get ahead of that before it happens again, a couple years before that changes, but rates will be increasing, so got to again factor that in as you're building your complete financial plan. Another area where people overlook is RMDs and they know you have to take the money out, but it's not as simple as that, there are some challenges that come along with that.
Ryan: Yeah. And there's a lot of things here. I mean, number one, you have to make sure that you take out your RMDs on time, otherwise you're going to get hit with substantial penalties. So you have to be aware of that and know exactly what you need to take out year by year. The other challenge that's happening, although on the surface it kind of seems like a good thing, is that they keep pushing back the age when you have to start taking out your RMDs. So now with the passage of Secure Act 2.0, the RMD age or the age from which you have to start taking out your RMDs, has gotten pushed back, depending upon the year that you were born. And that's not necessarily a good thing to wait to delay when you're going to take that first RMD, you may want to consider withdrawing some money from your IRAs and 401Ks before that, to help manage the tax brackets more efficiently.
Because the other thing that's going to happen here, a lot of people are going to delay and keep deferring that money and then they're going to take money out of their IRA accounts and such. And when they do, they may be pushed into a much higher tax bracket because there's going to be a lot more that they have to take out. And then if they pass away, with the new rules under Secure Act, if the money goes to a child, for instance, they have to take that money out over 10 years. So that could lump in the amount that they have to take out over a shorter period of time, which could increase the tax rate that they're going to have to pay on that amount of money.
Ben: All right, RMDs, be thinking about that again, Secure Act, we talked a little bit about that in our last episode, encourage you to go back and listen to that a little bit, got a little bit deeper into RMDs there as well. But if you have questions about RMDs, feel free to reach out to ryancravitzfinancial.com. All right, long-term care, most people don't want to think about that, it's not going to happen to me, I'm not going to need it. It might be a little while before I need to, but the likelihood that you'll have a long-term care need before you die is something that people just don't think about or don't plan for.
Ryan: Yeah, it's definitely not something that most people want to think about. I would say anybody really wants to think about, to be quite frank, but you have to plan for it. The statistics show that about 70% of people are going to need long-term care of some kind. Now, that doesn't necessarily mean you're going to need long-term care for a long period of time, some people it's longer than others. But you need to make sure that if in fact you do need to have money to pay for care over the course of one year, two years, three years, maybe more, depending upon the situation, that you've got the money to pay for that or you've bought long-term care insurance or something. But whatever the solution is, you have to have a plan to make sure that it's addressed.
Ben: All right. We are finishing up our conversation on the incomplete estate plan with this one, and that's legacy planning. How do you pass assets smoothly and efficiently to the next generation or to beneficiaries in general? Do people, Ryan, just not think about the most efficient way, they just, "Hey, I know I want to leave this," but they don't think about what's the best way to do this?
Ryan: Yeah, it does happen a lot and a lot of times I find it's, I do get asked, it's always that balancing act because people want to spend the money versus they do want to pass, or many people anyways, want to pass along some money to their children as well, and just trying to figure out the best way to do that. And there's a lot to it, but one thing that unfortunately I've seen and you want to make sure that this is taken care of and it's so simple, is just do a beneficiary review, review your accounts, make sure there's a beneficiary on there, like on all of your IRA accounts, make sure that's taken care of. If you haven't done the estate planning, put together will and trust, you probably should be doing that, and then putting certain assets within the trust so that that can avoid probate. So you want to look at all that, get with an estate planner to take care of that part, but that stuff is really important
Ben: Yeah. And you want to make sure, I mean, you work so hard to save the money or whatever the assets are that you've been able to accumulate, you want to make sure they go to the person that you want to or the people that you want to, so you want to get that right and leave as much as possible. So just one of the eight items we wanted to go through today here on the podcast, talking about the incomplete estate plan. If you've overlooked any of these aspects or don't have a plan for some of the things we talked about today, please put that on your list to do. And if you want help with that, again, Ryan will be happy to talk with you. You can just call (714) 462-9155 or log on to cravitzfinancial.com. You'll find all of our podcasts there, plus some other great resources, but more importantly, an opportunity to connect with Ryan right there through the website.
So a lot of things to think about, Ryan, I know your complete comprehensive as planning processes will cover these things, but not everybody's doing that when they're out on their own.
Ryan: That's very true.
Ben: All right. Well, thank you for listening to Candid Conversations Retirement Talk with Ryan Cravitz. Hopefully we provided you a little bit more confidence, security, and peace of mind, that is the Cravitz Financial way. And Ryan, we appreciate your time today.