S1 E2: Top 5 Retirement Mistakes

Description

Arvind Ven, the host and CEO of Capital V Group answers questions and talks about the Top 5 Mistakes made before and during retirement. While Financial Planning and Retirement Planning are closely related, planning for retirement has some areas that need a different approach. Your life and career at 35 looks a lot different from that at age 65.

Transcript

Introduction: 0:04

Hello, and welcome to the 15 minutes to financial freedom educational podcast series hosted by Arvind Ven these 15 minute or so. Podcasts are meant to educate and empower listeners about key financial topics towards the road to financial independence and plain English. And without financial jargon, Arvind Ven is independent financial advisor, founder and CEO of Capital V Group in Cupertino, California. He is regularly featured in leading national financial publications, such as Forbes and many others. And now for our host Arvind Ven.

Arvind Ven: 0:39

Hello everyone. This is Arvind Ven, CEO and founder of Capital V Group. And I want to welcome you to our 15 minutes to financial freedom podcast, where we answer your questions from real listeners about their financial situation and provide advice that may help them on their road to financial freedom, helping people with issues like this is something we have been doing for many years, and now I'm bringing to the world of podcasting for today. I'm going to talk about the top mistakes made before and during retirement. Any mountain climber will tell you that it created a number of accidents and fatalities happen on the way down then on the ascent to the summit. Similarly, during our working lives, we are busy working hard, providing and saving for retirement without too much thought on having a solid plan and how to make those funds last longer than our lifetimes in short people are very focused on the accumulation phase and not being enough attention to the distribution phase or the coming down phase. That starts right at the moment they stopped receiving a regular paycheck.

Question: 1:45

Can you give us some examples of some mistakes that people make during their pre-retirement and retirement phases?

Five Mistakes: 1:52

Sure. Here are the five mistakes. The first one is drawing social security too early without understanding the implications and here's why social security is a complex important, but misunderstood retirement income source. Choosing incorrect strategies without calculating the impact of waiting longer to collect taxation and other factors can potentially have a negative impact of hundreds of thousands of dollars over the retirement lifetimes of a married couple social security can start at age 62. And the benefit goes up annually about 8% every year that you wait until age 70, there is no benefit to waiting after age 70, you get an 8% bump up every year. Risk-free guaranteed by the government no less. So that's definitely something to calculate very carefully. Ask your financial advisor to run a social security income analysis with multiple water scenarios of drawing income at different ages, or come talk to us and we will be happy to run a complimentary analysis for you. It

Question: 2:57

Sounds like the second mistake is accounting for RMD. So what exactly is RMD and why is it important? Can you explain that a little bit more?

RMD: 3:07

Right. So RMDs required, minimum distribution must start at age 72, according to IRS guidelines at that age age 72, roughly about 3.8% of the total qualified assets, the assets as an new 401k, your IRAs retirement accounts, not the rod , but it must be withdrawn . And the IRS schedule prescribed and the percentage increases over the years. This is due to the fact that all of this money has been growing tax deferred for many years. And now the government says they want the taxes that they waited long enough, according to them. So these withdrawal amounts are taxed at ordinary income levels, and you must be drawing the minimum amounts regardless of your need, whether it needed or not. If you choose not to or forget to the penalties are steep and we have to withdrawal to not made on the schedule mandated, but this can be almost about 50%.

Long Term Care: 4:03

They're pretty steep. So you gotta be very careful and be aware of your schedule. The third one is ignoring the impact of long-term care in retirement planning with 10,000 baby boomers retiring every day for the next 15 years long-term care costs are forecast to increase is already fairly high. The bay area is an expensive place to live and long-term care, but we know different calculating say at around $ 150 ,000 per year for a three-year period, for example, puts a cost of long-term care for someone in their eighties at $450,000 for a total of three years. Remember that this is after tax money. So if you're using your IRA to pay for that, a relative out of long-term care policy, well before surely needed , could come in very handy investigating and evaluate a long-term care insurance costs and options early on. And before it is too late, it would be a wise thing to do.

Question: 5:00

The fourth mistake is sequence of return risks. What kind of risk is this? This is something we don't typically hear about every day. So can you explain that a little bit more Arvind?

Sequence of Returns Risk: 5:11

Right. I know that's a mouthful. So I know when I used this term , I sometimes hear That's right. Crickets . It's a term like you said, not very commonly heard. So let's demystify this and talk about why it is important and why we should know what exactly this is many advisers talk about the 4% withdrawal that is as long as it draw , no more than 4% of your assets annually during retirement, you could mean good shape. For example, if you're a million dollars in assets and you take $40,000 every year for the rest of your life or 4% of retirement, it is a push to be okay. I don't quite agree with that because of various reasons. While the number could be too optimistic into this low interest rate environment, this also does not consider the sequence of returns risk. So what is that? So consider someone who retired in 2007, if the great financial recession had not done to the assets from the time that a tired and while they withdrew a fixed amount from their portfolio, there may run the risk of their money running out during the lifetime. That's a pretty tough thing. And how that happens is that the million dollar portfolio fell by 50% began only five find a thousand. They still need to draw $40,000 a year. So from a 4% withdrawal, that becomes an 8% withdrawal, and that's not allowed the money to recover in time during the lifespans . However, for someone who retired in 2012, that person caught the market on an upswing and their money may last longer. So as we all know, market timing is generally not a good payment strategy. Neither is luck planning is always good. So the best options are to have a good time tested and individually tailored strategies, what fully diversification and risk mitigation. So what do you think Lauren did they do an okay job at explaining this one? I do think I have confused people even more.

Question: 7:04

No, no, no. I think you did a great job. I think I get the concept now and I think others definitely will . Also, you explained it great. The fifth and final example is underestimating the importance of fixed income in retirement. Can you go into that a little bit for us ?

Importance of Fixed Income: 7:24

Absolutely fixed income streams. As in social security income, pensions, annuities, bonds, and similar income streams should be considered pre-generated retirement income base or floor. Of course you need to also look at equities, but this at least gives you an income base because fixed as the word suggests, you know what you're getting every year, while if you're lucky once had pensions. In most cases, social security is the only guaranteed retirement income for most people. So one way to create your own quote unquote pension in retirement would be to fund you don't have fixed annuity fixed anybody's . These are bond-like instruments. They can offer portfolio diversification and risk mitigation. However, many of them have longer lock-in periods and have sizable surrender fees. So you should discuss with the financial advisor and educate yourself on the pros and cons and whether these instruments fit your overall retirement income needs. So that's it for this episode. Thank you so much for listening and make sure to watch the space for more upcoming podcast. Let us know if you have any topics that you'd like us to discuss. We have a lot of content on our website, www.capitalbgroup.com. Call us at (408) 725-7122 or email us. If we have questions we would love to hear from you until the next time stay well and stay safe.

Disclaimer: 8:50

Arvind Ven is a registered representative with advisory services and securities offered through LPL financial, a registered investment advisor member FINRA. And SIPC the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance reference is historical and is no guarantee of future results. The information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Financial planning offered through Capital V Group, a registered investment advisor, and a separate entity from LPL financial.