During this 30-minute webinar, Bill Northey, senior investment director at U.S. Bank Wealth Management, and Brent Chmielewski, wealth management advisor at U.S. Bancorp Investments, answer these questions:
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Creating a retirement paycheck that lasts
Hello. And welcome to our final quarterly webinar of the 2019 U.S. Bank Wealth Management webinar series. I'm Bill Northey, senior investment director for U.S. Bank Wealth Management. And I'll be facilitating today's discussion.
The wealth management professionals at U.S. Bank and U.S. Bancorp Investments are committed to providing timely and useful information for our clients. Throughout 2019, we've offered a webinar on a relevant topic, including information on financial strategies you may want to consider as a result. Today, we're here to talk about income planning in retirement. To give us an idea of who we're talking with today, we're going to post a quick poll on your screen.
Which of these statements most resonates with your situation? I've been saving for retirement, feel confident I have enough. I've been saving for retirement, but I'm worried that I won't have enough. And I have not been saving for retirement.
While you respond to the poll, I have one housekeeping item. In the bottom left of your screen, you'll see a tab labeled Ask a Question. If you click on the tab, you'll be able to submit any questions you may have. And we'll be addressing questions throughout the presentation today. If we're unable to answer your specific question during our time together, we'll follow up with a response directly to you afterwards.
As we wait for the final poll results to come in, let me tell you a little bit about myself and today's other presenter. Again, my name is Bill Northey. And I serve as senior investment director for U.S. Bank Wealth Management. As a member of the firm's investment leadership team, my responsibilities include participation in firm-wide activities, including investment strategy, asset allocation, policy, and due diligence processes.
Additionally, I am fortunate to lead an interface with a highly talented group of client-facing investment professionals stretching across our entire geographic footprint. It is my pleasure today to be joined by my colleague Brent Chmielewski, senior vice president and wealth management advisor for U.S. Bancorp Investments. Brent works with clients, providing investment and financial planning options with U.S. Bancorp Investments.
So now let's take a look at the results from poll number one. It looks as though our most-- we have about a tie here. It looks like our highest frequency answer is that I've been saving for retirement, but I'm a bit worried about not having enough, and those of you who feel very confident that you do have enough. Retirement is the ultimate goal for most Americans, the reward for years of hard work, planning, saving, and investing. The key to realizing your goals may be dependent on creating a reliable income stream in retirement.
During our time today, we'll provide answers to these questions. How much money do you need in retirement? How much money do you have for retirement? And how can you make those retirement savings last? Remember, everyone's situation is unique. And our wealth management professionals are available to help create your retirement income strategy.
So let's get started with the first question. And I'd like to bring in my colleague. So how much money do you need in retirement, Brent?
Yeah. One guideline is about 70% to 80% of your current working income after taxes. So that's for especially essential and nonessential expenses in retirement. The actual amount may vary, even during the course of your retirement. But reviewing your income plan on a regular basis with your financial advisor is always prudent.
A good starting point in preparing for retirement is to estimate what your likely expenses will be. These may vary over time. You may spend more in the early years, your go years. And you may spend less in your less active years or the stay years. For example, key factors that will probably continue to impact your overall cost of living are these-- housing, for one, is-- even if you own your house, it might be something where the expenses of taxes, insurance, house upkeep, may be something that may be looked at and alternative options may be considered.
Taxes, even though you're not earning a paycheck any longer, your taxes still continue. And as most people in 2018 realize, they pay a little bit more in taxes than retirement. Health care-- health care is an expense that is unpredictable. It's possible, for need of long-term care, will continue to increase over time. And Medicare does not cover all costs.
And then you always have the one large time expenses that may include a new car, a major home renovation, maybe being the sandwich generation, helping a parent and a child at the same time. With that, there is market volatility that may affect your account, and the early years having a down market might affect your account. And withdrawals may be a tough thing on your accounts and how they will react. Inflation is another one. A lot of people don't understand inflation, but basically it's the cost of goods going up over time. So for example, 3% basic cost of living expense may double over a 24-year period.
The other one I would throw in there is probably longevity. That affects a lot of people. Most people don't think that they're going to live as long in retirement. And most people live longer than they expect. So that is another challenge that people have.
So a good starting point-- actually, once expenses are identified, it should fall into one of three categories-- essential expenses, non-essential expenses, and unforeseen expenses. Essential expenses are your top priority in making certain that you have sufficient funds to cover the costs of necessities. These would be basic things like food, utilities, housing, transportation, health care, taxes, and et cetera.
Non-essential are the discretionary items. These might be the travel, the new car, the hobbies. They might be the gifting to charities, things of that nature as well. And then the unforeseen expenses-- typically this category includes things that are unexpected, maybe the breaking of a hip or major medical expense that comes up, or long-term care that no one wishes upon themselves, or, again, taking care of an elderly parent. Some expenses to note in retirement are fairly predictable, like housing, transportation, but others may vary over time and over years.
Well, appreciate that, Brent. Those are some helpful guidelines in knowing how much a person may need in retirement. And before we move on to the next section, I'd like to see if there are any questions. So as a reminder to our participants, in the bottom left of your screen you'll see a tab labeled Ask a Question. And if you click on that tab, you'll be able to submit any questions that you may have here today.
So our crack staff here has accumulated our first question, which is, one of my biggest concerns is knowing how much health care costs will be in retirement. I feel like they're unpredictable. Any advice?
Well, you're definitely not alone. Health care is the biggest component of retiring people. People are concerned about what health care will cost now and definitely in the future. One survey that came out from a health care-- or HealthView-- excuse me-- Services back in 2013 was a 65-year-old couple is likely to spend about $400,000 on average for overall health care expenses throughout their retirement.
Great. Thank you. And let's keep those questions coming. But for the second time, we're going to get moving on here. Again, if we're unable to answer your specific questions during our time here together, we will be sure to follow up with you directly afterward. So let's transition to our next section here, Brent. How can people think about determining how much money they have for retirement?
So one way to answer the question and how much money do you have for retirement is to understand what sources will make up your retirement income. The first income source for retirement, maybe social security or a pension benefit. Annuities fall into place there as well, or RMDs are required minimum distributions from your 401ks or 403bs. And then, of course, you have the traditional IRAs and distributions from those later in life as well. These sources are what should serve as a foundation for a retirement income plan.
So let's talk a little bit about social security. Social security is a hot topic most people have concerns about it lasting or not. But with social security, most individuals qualify at the age of 62 to receive benefits. If you do take benefits at the age of 62, you're likely to only receive about 73% of what your overall benefit should be.
One option is also to wait till 70. Every year you wait, your benefit increases each month you delay it. If you're 62 and you take it early, you're going to get that decrease. But if you are born in 1960, your full retirement age is 67. So taking that income early may be a benefit, or it might be a disadvantage to you over time.
As you can see from the chart, it comes out at 66 years of age is full retirement age for anyone that was born between-- I believe-- 1943 and '57. The current monthly average for social security at this point is $1,461. But from the start you can see that from 62 to 66, that there an 8% increase from that benefit until the individual takes it. And they could delay it all the way to age 70.
Really useful infographic here.
So pension plans-- if you're among the increasing fewer Americans that still have a pension plan, there's only about 13% of Americans that have a non-union, private pension plan today. So if you have one, you're very blessed. For pension plans, the ways you can take it-- or you can take it as a lump sum, meaning a distribution from that pension plan. You can work out payouts, a monthly payout, and replace your income or your check. You can move that as a whole and to make choices for you and your spouse, which are very important, based on your situation or even your situation of your spouse maybe being younger or older.
But another option with a pension is that you might be able to allow that as a rollover, a direct rollover from that pension to an IRA [INAUDIBLE] and allow that income or that money to defer for years down the road to use it later. Another option here is annuities. Annuities are offered through insurance companies. They most often are misunderstood, but they are a product that exists that is allowed or will provide an income stream that you [INAUDIBLE]. And there's a variety of different annuities, so please make sure you get all the information before you move forward with something of that nature.
And then required minimum distributions, RMDs, you have to take those from your traditional IRA over time. Once you turn 70 and 1/2, there's a factor that you will have to use which represents about three, a little bit over 3% that you'll have to take, a 3.65% that you'll have to take from that that increases every year. The government doesn't mind if you take all your RMDs from one account or if you take a little bit from each. So it's something that, again, you want to talk to your tax professional about before doing and moving forward with.
So the second income source that we are calling earnings and income, this may be another way of saying this is living off of your profits or just on your gains. These earnings may include interest from bonds, dividends from stocks, capital gain distributions from mutual funds, or even part-time work, or, you know, passive income from rental properties. The third income asset that we're working with is an investment drawdown, typically not the best situation to be in. But the goal here is to meet income needs while keeping the drawdown as tax efficient as possible.
Assets fall into three categories in tax treatment during accumulation-- taxable, or tax preferred they call it, tax deferred or tax free. Now that a person's in retirement, you're more in the distribution phase. So those still have-- very important just on the opposite side of the hill that you have now achieved in retirement. So with a taxable account, that might be your savings account. It might be a CD. It could be just a standard brokerage account.
Tax deferred would be something like your IRA, where money grows and stays in there tax deferred until you take out at some later date and becomes taxable to you. And then the tax free would be a Roth, for example, or maybe even HSA, where you put an asset in there. You do not pay taxes while it's in that account. And then upon distribution, it would be tax free to you.
So now that you know the sources, we often get asked which one of these to pull from first. When it comes to paying yourself in retirement, typically you do so in this order, predictable retirement sources. First, you aim between trying to do 80% to 100% from predictable sources to cover your essential expenses.
With earnings and incomes, ideally you should access earnings and income for retirement only after retirement sources have been exhausted. If income from these sources isn't needed to meet basic expenditures, the money can be retained, reinvested, and used for other priorities down the road. Assets and investments drawdown-- when other income sources are exhausted, liquidating becomes your only option at that point. And assets, you want to do that in a tax-efficient way.
Well, thanks, Brent. So we understand now how to work up towards that retirement paycheck. So it's helpful to understand what sources make up that retirement paycheck and understanding the general guidelines around which order to use them. So I appreciate your insights there.
We're going to go ahead and take a pause here and take a look at one of the second questions that came up that has been identified as broadly applicable to the audience. So when you talked about social security earlier, you said when people take it, it depends on several things. And what are those several things?
Yeah. So when you're about to take social security, again, please talk to your tax professional and your advisor, but best thing to do is look at several factors. You can take social security earlier. And if you do so, you may want to look at health issues, life expectancy, your limited sources of available funds to get you to 70 to even delay it. Or your returns on your portfolio may have a factor of that or just the aspect that social security is the only thing out there that is guaranteed to grow at 8% per year that you do not touch it.
On the other hand, there may be some influences to delay it. As I said earlier, you might have longevity where you'll live into your 80s and hit that break point versus if someone was on the other side of it, their family doesn't live that long, or you do have the available assets. Maybe you have other high pensions that pay out for a certain amount of years or annuities that pay you. Your plan may continue to work and earn money. So that will allow you to delay taking social security. Again, you have to consider all things. So please be sure to consult your wealth management advisor and professional.
It does sound like there's a lot of variables and that that consultation with someone who can help you guide through the process is really an important component. To our audience, please keep the questions coming in. We're going to go ahead and move on to the final section now, which is we're going to talk about some strategies to help make your retirement savings last. So Brent?
So as we talked about earlier, there's three types of accounts with different tax treatments-- taxable, tax preferable, tax deferred, or tax free. Through asset allocation, placing specific assets in different types of accounts and withdrawing funds strategically, your goal is to maximize savings and investments by strategically managing the tax impact. You can also help make your money last by understanding how tax rules may impact you in retirement or your income. Alternative minimum taxes, tax preferred treatment on gains or the 3.8% Medicare surtax a lot of people aren't aware of.
Ordinary income tax could be your savings account paying you interest. Your annuities will be ordinary income if you take income from them or your pensions. Alternative minimum tax or AMT is a flat tax, 26% or 28%, depending on your tax bracket. Has become less of an issue because of the tax ramifications in 2018, so we don't see as much of that.
Tax-preferred treatment with long-term capital gains-- as long as you hold an investment for over one year, it's going to get capital gains, which could be between 0% and 20% taxable to you. And it's not income or what your tax bracket is. And then the 3.8% Medicare surtax and net investments, that is for people that make over a certain amount of income. So for example, if you're single it's $200,000. If you're a family filing joint, it's $250,000. So again, I'm not a tax professional. I ask you to seek tax advice, and get the help, and get the questions you need answered.
So as you approach retirement, it's important to reposition investments and align them with your new investment priorities in generating income over your lifetime. This may mean to enhance focus on migrating the effects of market fluctuation, while still meeting income needs as you may make the adjustment you need to consider the composition of your company folio, your appetite for risk, and the level of income your portfolio needs to generate. Rebalancing investment risk and timing of your income needs, taxes, and longevity is a dynamic process. And it's wise to revisit our planning on an annual basis.
In addition to tax smart strategies, reallocating our portfolio and a few other supplemental strategies that may help your retirement income last include cash reserves. These would be your money markets, your CDs, possibly even the line of credit or asset-backed lending. Roth IRAs, which is an account, as we said earlier, that defers taxes until you take it out, and it's tax free.
A health savings account is one of the biggest advantages people have today that they don't quite all understand. Health savings accounts, most people use them right away. Again, talk to your advisor, but I would encourage people to maximize those out and leave them until retirement. Because when you turn 65, you can use that money in there tax free for Medicare premiums, and long-term care premiums, and pretty much for anything else after 65 as a regular income or-- excuse me-- regular taxes. So it's a great vehicle that mixes the IRA and the Roth together. So please be aware of that.
Annuities-- as I said earlier, a little bit misunderstood, but they were the very first trust in existence. So they've been around a long time. And they serve a purpose and can provide a reliable income if used properly. And then life insurance-- life insurance, people don't quite think of life insurance as an income solution. But for people that are retiring early, maybe retiring from a business at 55 and they can't touch their retirement accounts till 59 and 1/2 or 60, they may use life insurance to give themselves a tax-free income that they can use to bridge that gap and to get to that retirement income that they need.
So you offered quite a few options there. And those are, I think, really helpful to our participants to understand some of the sequencing around it. And it's a lot of good information. So let's summarize quickly how to create a retirement paycheck that lasts, which is the title of our presentation today and the theme of our discussion-- so determining expenses in retirement, as Brent talked about, and distinguishing between the essential and the non-essential expenses, identifying the various potential income sources, and to understand the tax implications when you go through the liquidation of those various assets, prioritizing the assets that you need to liquidate over time, to think about covering those essential expenses, and then addressing risk factors that impact retirement income, which we know are many and various that need to be evaluated through time. So you need to monitor your strategy on an annual basis in consultation with a professional.
If you're interested in more information on the topic of retirement income, there is a link at the bottom of your screen that says Retirement Income Articles, which will bring you to the financial IQ content hub that includes articles on various financial education topics, including retirement income. You'll also notice there's a Handouts tab at the top of your screen. And there, we've included a handout titled Income Planning in Retirement. It's one of the many thought leadership papers that we publish and includes a recap of all these strategies and more that were discussed today.
If you have questions about what to do next based on your situation, feel free to reach out to Brent or one of our other wealth management advisor colleagues. They'll be able to help you with any of the strategies we talked about today by offering the objectivity and insights that you need as you create your plan and periodically fine tune it over time. You can click on Find a Wealth Management Professional if you need to meet with one near you.
So today, we've offered an integrated approach, or we offer an integrated approach to wealth management that combines both banking and investment expertise to help you see your entire financial picture so you can make informed decisions for both today and tomorrow. And our approach with financial planning considers your unique goals. Your journey begins with wealth creation through your job, business, inheritance, other sources. Throughout your life, the help of a sound wealth plan based on your risk tolerance, investment goals, and time horizon may help you accumulate or grow those assets through time. And because the future is unpredictable, you should take steps to protect yourself and your family against unexpected events that can put your goals at risk. And lastly, you can increase the impact of your thoughtful planning by directing your assets towards the people and/or the causes that matter most in your life.
So it looks as though we have a bit more time here. And we're going to go ahead and take one or two more questions to wrap it up. And again, for our audience, remember that if we don't get to your questions today, you can still submit a question by selecting the Ask a Question tab in the bottom right-hand corner of your screen.
So another question that was highlighted from our team here is that, I have retirement accounts in a few different places. I always thought it would help manage risk better to spread it out. Is that true? Maybe we can turn that around from a closed end question and let you expand on it a little bit.
Yeah. The old adage of all your eggs in one basket probably does not serve as well today, in today's financial institutions and market. But most people, as they approach retirement, do start to consolidate their accounts for a few reasons. One, it makes things easier on them to just see everything in one place, makes things easier on potentially their heirs or their spouse that may have to take over the accounts at some point. It also makes it easier for the advisor to get a holistic view to be able to help them understand everything that's going on in their financial life and plan accordingly. So there's a few reasons probably to consolidate and make things work a little easier for them. And it also reduces overlap as well on things and reduces risks that may be unforeseen by either party.
Well, thank you, Brent. And thank you for all the questions from our audience. It looks as though we are getting close to time. But again, if you have submitted a question and we didn't get to it out of the handful that we're able to address here today, we'll follow up with you directly afterwards.
So I want to thank you for attending today's webinar. As a valued customer of the organization, we'd like to thank you and invite you for an initial free consultation with an experienced wealth management team member near you. There are several ways that you can learn about how we can help you, working toward your financial goals, and how you can schedule a free consultation.
Listed on your screen-- and I'll recount them here-- visit usbank.com/wealthmanagement. You can also find a wealth management team member near you online at that same site by calling 844-233-5836, or lastly, by clicking within this webinar Find a Wealth Management Professional in the link at the bottom of your screen. If you would like someone to contact you, fill out the information in the Contact Me tab at the top of your screen, and we'll have a team member reach out to you directly.
On behalf of U.S. Bank and U.S. Bancorp Investments, I want to thank you for attending our webinar today. Have a great day. And we look forward to seeing you at our next webinar.
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