Frequently Asked Questions and Thoughts

1. My advisor told me I needed to cut my expenses as my plan is only 80% funded. What do you think?

This comment usually comes from an advisor using a Monte Carlo analysis. The Monte Carlo analysis runs thousands of scenarios around your investment numbers and gives a probability of success that after 30 years in retirement there will still be money to pay your expenses. It assumes the money you are withdrawing now will continue unchanged besides adjusting for inflation.

Firstly, how many of us never change our expenses. In retirement we talk about the go-go years, the slow-go years and the no-go years. Meaning early in retirement you will usually spend more as you travel and do the things you have been putting off. By the end of your life that rocking chair with a good book might look pretty good.

Instead of 80% funded we need to flip the number. What the number actually means is that you have a 20% chance of needing to make some adjustments to your spending. If you could easily spend less each month then keep having fun. If you rely on each penny that comes out of your savings to fund your retirement than you need to be careful.

2. My CPA told me to cut my expenses as my taxes are too high.

This is what I call ‘the tax tail wagging to dog’. Taxes are always due. The more you earn the higher your tax bill. The better the investments do the higher the tax bill. Never withdrawing from your IRA so you don’t pay taxes is not the point of retirement. You worked hard and saved hard so now you get to enjoy what you have saved. If you don’t withdraw from your IRA your heirs will have to and the taxes will still be due.

If it is a trust or taxable account you are living off then the taxes are more tied to how well the investments are performing and how tax efficient your investments are. Long term capital gains are taxed at a lower rate than ordinary income tax and will often be payable whether you withdraw the money or not.

3. My friend told me I need a trust as that is the only way to avoid probate.

There are many ways to avoid probate but the easiest is to ensure all your investment and bank accounts have a beneficiary designation. This can also be referred to as pay-on-death or transfer-on-death designation. It tells the financial institution where your money should go on your death. Probate is only used when someone who has died has assets in their name alone. The persons will or state law will then determine who inherits the assets and probate is the process to move those assets to the beneficiary.

A trust is useful if you want to control from the grave. For example, you only want your grandchild to receive their inheritance when they are 25 years old. Or you only want your beneficiary to receive a certain amount each month. A trust can also be useful for blended families where who gets what is complicated.

4. Should I keep money in my 401k after I retire.

Generally, I would say no. A 401k is designed to take money from your paycheck and invest it until you retire. It is not designed to pay out monthly after you retire. Taking money out of your 401k can be time consuming and complicated. An IRA is better designed for retirement. You can set it up to send you a certain amount each month and ensure that taxes are withheld as you go. 

It is also best to consolidate your accounts. Therefore, if you have multiple 401k and IRA accounts consolidate them into one larger account. As you get older it will be easier to manage one account and nothing will go missing. There are no tax consequences of moving your 401k and IRA assets around as long as they moves directly to the new account and not via your bank account.