AAR19 - 5 Ways to Protect Your Retirement

0:00I remember starting my first business. I had no clue what I was doing. I just knew I had an idea and I didn't want to be that guy who talked about it forever but never actually did anything about it. So I went for it. And honestly, that one decision taught me more than I could have ever learned sitting on the sidelines. If you've got something like that sitting in the back of your head, my best advice, start. The timing is never going to be perfect. Summer's packed, fall gets busy, winter's coming soon, and before you know it, another year has gone by and that idea is still just an idea. Shopify makes it a whole lot easier to take the leap.

0:29They've got thousands of templates, so you don't need to know how to code or design. Just point, click, and your storefront looks professional from day one. Once customers start finding you, Shopify's checkout saves their info so they can buy with one click. And when you hit a wall, their built-in AI assistant sidekick has answers on the spot. No waiting, no digging. All you need is the idea. Shopify handles the rest. If you're serious about hearing your first... Start your free trial at Shopify.com slash beginners today. You heard that right. Start your free trial today at Shopify.com slash beginners.

1:03That's Shopify.com slash beginners. Best thing that's ever happened to you financially. Go. Easy. Sold my car on Carvana. Amazing offer. Really? I hit 200 on the scratcher. Did the scratcher come to your house and hand you a check? No. How many scratchers did you hit to get that? I hit a button on Carvana.com once. Okay, that's fair. It's like the lottery, except you always win. Not like the lottery at all, actually. Exactly. Inexplicably good. Offers worth bragging about. Sell your car today on Carvana. Pickup fees may apply.

1:47Dave Ahern:Welcome back, everyone. Hope you're having a fantastic day. Welcome back to At Any Rate. My name is Evan Ray, and we're here to help you make sustainable financial changes without breaking a sweat like every single time. And today, we are welcome back a fan-favorite co-host who will, not by choice, be a fantastic fit for this week's episode. You did not know I was going to say that. Dave, how are you doing? I'm good. Thanks, Evan. It's good to be back again. Yeah, absolutely. Always love to have you. So the reason that you're a better fit than I am for this topic, to be honest, is that we're going to be discussing retirement and ways to protect your retirement, strategies you can use ahead of retirement to ensure that you're going to give yourself the best possible chance to live a good life in retirement and not have many issues.

2:31Dave Ahern:I mean, when you think about the fact that it's nearly 50 years of working just towards retirement and so many aspects of your financial life, health life, where you're living life, whatever, are based around retirement, having a good retirement. And when I tried to look it up, the numbers that I was seeing were hovering around 50 % of people retiring by 65. and even though the average age that people live is increasing nowadays 65 is still obviously a pretty high up age to have been working towards to finally have the chance to you know fully enjoy life quote unquote and not have to work anymore and be retired and there's many indications financially economically that number might even trend downwards from 50 or something so it's just more important than ever to put tangible actionable thought into protecting your retirement and giving yourself the best possible shot.

3:24Yeah, exactly. My sister actually asked me the other day, when are you going to retire? And I probably won't. I probably will work until I drop just because I like what we do so much. And I look forward to the mental stimulation, the gymnastics that we go through to think about things. And so I enjoy that. So I don't know whether I'm going to hit the 65 mark. My wife is like counting the days to 65. So she's got, you know, she's got a virtual calendar in her head, like, okay, one more day down, one more day down. So she's looking forward to it. So yeah, it's interesting. As you get closer, it's an interesting thing to think about.

4:02Dave Ahern:Yeah. Yeah. I'm sure there's a lot of, it's a very personal experience for sure. As, as with everything, it's a very personal decision and how you want to go about it. As we'll even see in some of these points, it's a very personal experience that you can go about it in infinite different ways. But these are just some ways, if you're looking to maybe hit that 65 mark and just cut it off at that point or something, then these will be for you mostly, but also some will benefit anybody in any situation who's just looking to hit that age, essentially, as long as you're alive. Yeah, right. Exactly.

4:31That's always a side benefit, correct?

4:34Dave Ahern:Yeah. Being alive to be able to be retired is an upside for sure. So the first one to start us off is anything you can do to take advantage of tax benefits. Retirement accounts are very well known for having tax benefits to go along with them. And that just gives you so much leverage, so much power. And what we mean by tax advantages, tax leverage, those sorts of terms, is just that by investing or saving in whatever account it is, putting your money somewhere, you're getting some kind of tax benefit allowing you to pay less in taxes on maybe the interest that you're earning maybe the income or the money you're putting in there whatever it is you're saving taxes somewhere in the equation versus if you were to just take that money out in cash and then if you were to just take that money out in cash and just go spend it somewhere and up it you know at the casino or something like that if you were to up it somewhere else you're getting tax benefits on top of that so the stuff that doesn't have tax benefits that comes to mind, we have cash, Roth IRAs, any taxable investment account that you have, if you just open a Robinhood account and just open a taxable investment account, all of those aren't going to give you tax benefits.

5:42Dave Ahern:Now, none of this is saying that those accounts are bad or not useful or that they don't fit certain situations. But if we're just strictly talking about retirement, those are not going to give you the kind of leverage of something like bonds, 401ks, and 403bs are like a non-profit alternative to 401ks, depending on what the corporation is, those are incredibly powerful. Those are going to give you far more tax benefits over the long run. Again, that doesn't mean that they're the only thing you should be investing in, but in terms of saving towards retirement, those are going to give you the most power.

6:15Yeah, for sure. And it's really important to understand what kind of retirement or what kind of tax advantaged accounts you have and how those benefits can help you because in some cases they can set you up for success, but they can also maybe not hinder you, but they can catch you off guard if you don't really understand the ins and outs of them. So for example, with a Roth IRA, you have already paid taxes on the money that you're putting into that account. So as you get closer to retirement, let's say you're 63 years old, you don't have to think about when and how much you want to take out and how much of the cut the government is going to take from that money because you've already paid your dues.

7:02You've already paid the taxes. With a traditional IRA, you do have to consider that because you have not paid taxes on the money that is put in there. When you start reaching retirement age, you have to have what's called an RMD, a required minimum withdrawals. And what happens with those is that you have to go into the bank or you have to go into your brokerage provider and they will help you calculate how much you have to take out and they will also help calculate how much you have to pay in taxes. So at the end of the year, when you file your taxes, you have set aside an appropriate amount of money to account for any of those returns that you've had in that account.

7:49And so, albeit it may not be a huge dent to the money that you're going to be taking home or putting in your pocket, so to speak, if you're not aware of those things, then they will catch you off guard. And if you don't take care of those required minimum withdrawals, then you could get in trouble with the IRS. They could come in and audit your books. You may end up paying fines, which will take another bite out of the money that you are using to maybe take a trip to Spain, for example. So those are things to keep in mind as you're setting up your different retirement accounts in the early days.

8:28Evan is early on in his journey. I'm much later in my journey. So it's good that he knows some of those rules and is helping educate you, the listener, about those rules so that you can set yourself up. And something that Andrew and I always talk about on our show, the Investing for Beginners show, is if you are unfamiliar with these ideas or you're worried about how taxes are going to impact you as you get closer to retirement, by all means, seek out professional help. Talk to a licensed tax advisor or a licensed broker or retirement account manager to give you some benefits and to give you some options and strategies that you can set up to help yourself.

9:13If you're a high net worth income earner and you will probably have a bigger bite of taxes than other people, it'll save you a lot of money to go pay somebody to help you set all that up and to keep an eye on it, especially as you get closer. Because it could be complicated. The laws change. And that is really not our area of expertise. And so I would strongly encourage people to, as they're getting closer, to talk to somebody and help them make sure that they're taking advantage as best they can. We all have to pay taxes. Yes, it sucks. Nobody likes it, but it is part of the gig. And the better you can protect yourself, the better off you'll be.

9:52Dave Ahern:100%. And to add to that for reasoning to seek somebody out, especially like you said, the closer you get to retirement, because early on you can play with things. You've got so much time to sort of correct if you lean too heavily one direction or the other, because we can give you a ton of pros and cons for each of them. but for example if you said oh 401k sounds great i'm going to throw everything in a 401k and then five years ten years down the road you say okay i need to access some savings to do something well that money in that 401k is locked up unless you want to not only pay the taxes on it but also pay a bunch of additional fees on top of that and now the money that you put in is significantly drained from what it would have been otherwise whereas if beforehand you had balanced things out a little bit better had some money in a roth ira some money in a high savings account or something, you had money that was accessible while also having money in a 401k that's growing much more significantly.

10:42Dave Ahern:So each of them have their own pros and cons and reasons to invest them and not to invest in them. And if you get later on in life and you're not sure how to balance things, where to pull from or something like that, you maybe at that point in your life, you have much more complex finances going on. If you inherited things, inherited a state or any other kind of asset, then your finances are going to be much more complicated and where to pull from maybe at a certain point, what to let sit there and grow and everything to try to maximize your earnings is all going to be a very, not only very complex process that we can never cover in a podcast episode, but also a very personalized process that we would be doing call-ins every single day to try and cover something like that.

11:22Dave Ahern:So I definitely think that's worthwhile for a lot of people yeah i agree i think that's what dave ramsey does is taking collins for people talking about those very questions right yeah yeah and those that's an entire series by itself yes the second point that we have is the four percent rule is a very common rule of thumb out there that i would say is a great starting point but isn't the end-all be-all and what the gist of the four percent rule is that when you reach retirement you want to assume that you are able to pull out 4 % of your total investments each year and be able to sustain yourself for 30 years.

11:57Dave Ahern:That's really the gist of the goal of it. And that's also accounting for 2 % inflation is what people usually assume. So maybe you're able to take out 40 ,000 the first year, and then it's like 40 ,800 the second year or something like that. And you're able to chip away at it, but last you for 30 years of retirement. And I do think that is a great starting point, but I've got a few issues with just taking that and saying, okay, boom, that's what I need to plan for. One of them is this doesn't account for severe downturns, crazy high inflation. If your expenses increase later on in retirement, when you're higher up in age, you're so much more likely to have random medical issues that pop up or that were entirely out of your control and is going to take a lot of money out of your wallet.

12:38Dave Ahern:And if you were just very strictly prepped for a very specific timeline and pulling a very specific amount out, then that can be a, I mean, frankly, a life changer that can turn everything around if you're not prepped with something like that. And we'll discuss a little bit more later how to protect yourself from something like that. But that's, those are some of my issues with something so rigid. So something that I would instead lean towards is as you're pulling it out, basing it on what inflation is occurring and what returns you're generating. So maybe you use that 4 % rule as a starting point when you're starting off in retirement.

13:11Dave Ahern:And then as you're getting a little bit further on in retirement, maybe you're seeing that inflation is increasing like crazy. Maybe your returns aren't meeting what they need to meet. And maybe you cut back a little bit at that point. Or if inflation is really low, and so your dollar is worth a lot more than it might be otherwise, or if you're generating a ton of returns or something, obviously you could always argue, leave the money in there so it can grow more. But obviously everybody needs to live and enjoy life. So at that point, maybe you're able to pull out a little bit more. I would caution against being too rigid and assuming things are going to work out a certain way because that four percent rule is also heavily based on the historical performance of the market and while statistically speaking that is likely what's going to happen in the future you could theoretically retire during an eight-year downturn or something that could occur and if you're trying to pull out money at the same rate as you were always expecting to during a long-term downturn like that then that is going to set you back significantly and and require you to make much more significant shifts than like a minor cut in spending for the time being versus eight years from now having to go back to work when you weren't planning to or wanting to be able to make up for it.

14:15Dave Ahern:And the last thing that I would say is also that following something like the 4 % rule, to me, locks you in and makes you too blind to what's actually happening with your finances. So instead of paying attention to how is my, not how is my spending, but how are my returns actually looking? How is the market actually looking? What is inflation looking like? If you're just assuming, bang, I can just follow this, then you're not really tuned in to what's happening, you're not having those weekly, monthly financial check-ins or something to see where you're at and see where the economy's at and what your future looks like.

14:46Dave Ahern:You're just assuming I'm good to go because I planned on this ahead of time and I can set it all and forget it all. To me, that is not going to last you very long, or at least not last you for the length of time that you want it to. What if you could get a 25 % match on every dividend you earn? Well, now you can. When you earn dividends on the Plink app, you'll receive a 25 % cash boost up to$250 bonus per year. That means if you earn$1 ,000 in dividends, that's$250 more in your pocket. Your bonus can be taken as cash or reinvested, giving you potential to grow your earnings. No opt-in, no extra steps.

15:21As long as you own eligible dividend-paying stocks, ETFs, or funds on the Plink app, your dividends are automatically boosted each month. And to make sure you never miss a bonus or a payout, that's where the Income Hub comes in. It gives you one clear, simple view to track your bonus earnings, upcoming dividend payouts, and easily discover dividend earning opportunities. Goodbye, spreadsheets. Hello, smarter and more rewarding investment income management. Head to the show description to download Plink and start earning your 25 % bonus. Max dividend bonus is$250 per year, payouts made monthly.

15:52No opt-in required. Other terms apply. Investing involves risk, including risk of loss. Opinions expressed on this podcast are not necessarily those of Digital Brokerage Services, LLC, member FINRA, SIPC.

16:02Dave Ahern:I've been paying a lot more attention to what's actually happening inside my body when I train lately, especially when I hit a wall with my performance and nothing I do seems to move the needle. What surprised me is how much of how you perform and recover actually comes down to what's happening in your blood. Markers most people never think to check. Here's what most people overlook. Training gives your body the stimulus, but your internal environment determines what actually happens next. Things like your glucose, whether your body is burning clean or running on fumes. Your omega-6 to omega-3 ratio.

16:29Dave Ahern:Which one is winning the inflammation battle after pushing your body? Your DHEAS, one of the building blocks your body uses to make testosterone, and one of the first things to quietly decline without you noticing. When these markers are off, the right moves don't hit as hard, and the wrong moves hit way harder. When they're dialed in, the work you put in actually pays off. That's why I use Function. 160 plus lab tests a year so I can see exactly what's going on under the hood, not guess at it. If something is working against my performance, I want to know. That's what actually taking your training seriously looks like.

16:59Dave Ahern:I use this, and you should too. Check your health the way I do. Function provides 160 plus lab tests for a dollar a day and member pricing on MRI and CT scans. Join at functionhealth.com slash beginners or use gift code beginners25 for a$25 credit toward your membership. What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. Yeah, exactly. And I think one of the things that also could be challenging with the 4 % rule is a big part of it will depend on how you have your assets set up. So, for example, if you are, let's say that you're heavily concentrated in the stock market, for example, and you're heavily concentrated in, let's say, four or five companies in particular.

17:47Google, Microsoft, Amazon, Meta. Pick some of the big names just to make it easy. and those go through serious downturns for an extended period of time, that will have a huge impact on your future returns as well as the balance that you currently have. And so if you're just blindly just taking out 4 % and not paying attention to the fact that all of these are structurally damaged and are having severe problems, then that could really, to your point, you could run out of your money a lot faster than you think you will. And likewise, if you have it all in the bond market, for example, and the interest rates go down tremendously, then your returns will drop drastically as well.

18:37And so it's a really good idea as you get closer to not only think about the idea of the 4 % rule, but also to think about the structure of your portfolio and how you have it set up and make sure that you're, I hate to use this word, but I'm going to use it anyway, optimized for your retirement. It's okay to be strong in one asset class, but to have other assets that kind of help you diversify some of that will also help lengthen the time that you're going to be withdrawing money from your account and you're not having to go back to work at Walmart as a greeter when you're 87 years old because that would be a horrible place to be.

19:23And so it does definitely behoove you to use it as a guidepost, but to pay attention to what's going on with your accounts so that you are familiar with. You can't just turn a blind eye and go, okay, I got all this money and yay, I'm good to go. Unfortunately, it doesn't work quite that way. So it's a really, really good idea to keep an eye on things because to Evan's point, you might have to adjust. Maybe you have some good years and you could take up 5%. And so you have some bad years and maybe you're going to have to do 3 % or 2 % kind of thing. And maybe instead of eating caviar and filet, you got to eat ramen.

19:57So hopefully that doesn't happen. I'm not trying to be Debbie Downer, but I just want to make sure that everybody thinks about the rule. Just because it's a rule doesn't mean it's always something you have to follow exactly. and if you go into the fire community this can be a very very controversial topic and so there's lots of discussion about it but they've also done a ton of research on this and back tests and all kinds of scenario testing and things of that nature so it's a good starting point like evan said but don't treat it as the gospel understand that things will change and you need to kind of be able to be flexible when things do shift and that's even more reason like dave mentioned before

20:36Dave Ahern:Or to have some kind of an advisor, retirement advisor, that can help you work through these kinds of things and plan for, hey, I heard online that the market could turn down for six years in a row. What would I do in that kind of situation? And they could give you some very specific advice that would apply to you. Like maybe, oh, well, this asset class that you have isn't going to take that much of a hit. And so we can lean more on that. Or they can help you personalize and plan for how all of that would exactly affect you. because as long as 100 % of your money isn't in stocks or something like that, then you're going to have other ways to play around.

21:10Dave Ahern:And diversification is definitely a big part of that that gives you more leverage to pull certain levers when they're working and pull other levers when they're not. That's going to give you the most advantageous position. And speaking of pissing off the FIRE community, number three is talking about having some kind of passive or semi-passive income. And I know for a lot of people, you're going to argue that's not even retirement. But Dave was talking about, and I'm interested to hear his point of view on this as well. Retirement isn't just the same thing for everybody. It's not, well, I quit my job this day and I turn on the TV the next day and then that's where I am.

21:42Dave Ahern:That's not how it is for people and that's not what people want. And I kind of lean towards that not being what I want either. And so to me, in my opinion, the best thing that people could have is real estate. Real estate is overall more steady than the stock market. It may whether downturns much better. Everybody always needs houses. And so that can sustain you as well as ideally, if you have some kind of real estate income through renting something out, then that can give you a steady pace of income that, again, people are always going to need housing. Even if rent has to be cut or something like that, in the worst case scenario, you can still earn some kind of income that can help sustain you.

22:22Dave Ahern:And the way that I look at it in retirement, when we talk about income now, say you're earning$50 ,000 to make the math easy, and you say, okay, I'm earning 50, I want to save 20 of that. You're really only spending 30 on yourself, quote unquote, in this example. In retirement, assuming you're not trying to build up the savings as much, if you're earning even 30, that's essentially giving you the same spending power as you had when you were trying to save a portion of your income. And so even a quote unquote small amount of money that you might be earning from passive or semi passive income, like renting something out or doing a little bit of side work or seasonal work towards a hobby or passion that at least in my opinion means a lot more in retirement when you're not trying to build up your savings as much than it does when you're you know maybe younger like me and the whole target is just build up savings that doesn't feel as effectual as if that's a hundred percent going towards you being able to live so dave how do you how do you see that um these kinds of ideas for yourself uh i i think i think generally i think those are are great ideas.

23:24I think it's a great idea to have some side work or seasonal work around a hobby or passion because I think what I've seen with people that are older than me that have retired is a lot of them get bored. They don't have hobbies. If they don't have something that they're excited about, then they get bored and they have to work around trying to figure out what to do. And I think it's easier if you have something that you're excited about, that's something you want to do, whether it's volunteering, which is great. When I used to live in Minnesota, my daughter and I would go to the Minnesota Zoo and there's lots of elderly people there as volunteers that could help people or answer questions about the animals and things like that.

24:08And I thought that was great. And it looked like they enjoyed it and that would be awesome. But if you have a hobby, playing guitar and maybe teaching people how to play guitar, how to play guitar or it could be anything. And it doesn't have to necessarily be a big income earner or not even an income earner at all. It could just be something that you just enjoy doing that helps occupy your time, that kind of thing. Because not all of us are going to be able to sit on a beach and drink Mai Tais as the sun goes down, so to speak. So there are lots of things you could do and there's lots of things you could do to earn a little bit of money.

24:44I guess the real estate I think is a great idea. The, I guess the, the one thing I would like to caution people about real estate and is it's not as passive as it is sometimes portrayed to be. So in, if you're in the scenario where you own three properties, for example, and you're trying to manage those yourself, I would challenge you to think of that as not very passive because if you have to do all the work on the places, i.e. mow the yard, or fix the refrigerator when it breaks, or replace the air conditioning, or if there's a hole in a roof, or there's wind damage from a tornado. All of those things are far, far, far from passive.

25:26And that doesn't even include the fun, the joy that it is of trying to deal with a renter that is not paying you, or having to find good renters. All those things, I would argue, are far from passive. So after listening to, Andrew and I just went to a conference and hearing people talk about Airbnb, for example, is kind of the buzzword lately. And hearing about them talk about managing five or ten properties, to me, sounded far less passive than what they were claiming. It sounded very active to me. But there are ways you can get around that by hiring management teams to handle those kinds of things.