Retirement: 'The backbone of feeling comfortable' is having a plan
Katharine George of Wealthstream Advisors joins Yahoo Finance Live to discuss some of the "scary" questions surrounding retirement planning.
Video Transcript
- The great resignation has led to a rise in the number of people retiring during the pandemic. Well, if you're looking to leave the workforce in the new year, there are some things you should be doing right now to prepare for a smooth transition. Here to walk us through it is Katharine George, a financial advisor at wealth stream advisors. Katharine, good to have you here. This is on lots of people's minds, some people looking to leave the workforce next year. What's the first thing they should be doing right now?
KATHARINE GEORGE: You know, a lot of people come to me and they're scared, because we spend most of our time accumulating assets, and once you have to start decumulating, it can be scary. So one of the main questions that I get is, can I afford to retire, can we take those extra vacations, can I buy that second home? And I think the backbone of feeling comfortable in retirement is-- is working with a fiduciary financial advisor to come up with a projection. So there are software where you can take your income, your expenses, all the assets that you have, project it out into the future to see what trajectory you're on. And that can really be a great guide to see if you are spending too much or if you can afford that extra trip. That's the first tip.
- And Katharine, you know, it's great to have a financial planner or advisor. Sometimes they are very busy, sometimes they can cost a lot of money, so what can people do before going to one? What are steps they can take on their own to make sure that they position themselves well for retirement?
KATHARINE GEORGE: It's a great question. I think the biggest-- the biggest thing that you can do is establish a cash reserve, and not only establish it, but come up with a plan to maintain it over time. Think about what income you'll have and how much you spend on a monthly or annual basis and what you'll need to supplement your lifestyle on a monthly, quarterly, or annual basis. Once you determine that, you can have a cash reserve from anywhere to a year or even more of cash. And come up with a plan of once my target hits half of what it is, can I-- can I rebalance my portfolio, sell some stocks, and top that cash off. Or is the market down.
And I think that the key position to be in is to not be in a place where you're out of cash and the stock market's down, and you're going to have to pull from a bad market at a time where you wouldn't be able to recoup your money if you sold. So I think staying ahead of that, having enough cash to withstand the ups and downs of the stock market is crucial once you're in retirement.
- And Katharine, I just want to note, talking about that cash reserve, of course, you want to weather the market ups and downs as you just said, but what should those cash reserves be used for? How do they get apportioned?
KATHARINE GEORGE: So for your monthly needs, once your income has stopped, and you're not receiving that paycheck, you're going to have to pay yourself from your investment account, from your savings account. And instead of selling stocks as you need them, having the guarantee that that cash is there and that it's ready for you, and if there's an emergency that comes up, you have it, is the most important thing. So paying yourself from your cash account. And then once it starts to get to a certain level, look at your portfolio, see if there's a place where you can top it off, and if it's an appropriate time.
- And Katharine, what are some tax considerations you should be thinking about when you're looking to draw upon some of those retirement funds?
KATHARINE GEORGE: So there's two main different types of accounts that we all have and especially once we exit retirement-- is your retirement accounts-- so your company 401(k)s. And kind of a side note, one thing that I see a lot from our clients or prospects is that there's all of these small retirement accounts all over. And it's really important to kind of know what accounts you have and keep track of everything. But your retirement accounts are taxed at what's called ordinary income rates, so just like your salary at your company.
Whereas taxable accounts, say an individual account or a joint account, those are taxed at capital gains rates, which is anywhere from 0 to 30% depending state and city taxes. So it's much preferential to kind of figure out where you're going to do that. You can either work with an accountant or an advisor or just kind of think about where is my tax bracket and, which buckets make the most sense to pull from right now.
- What do you think is the biggest mistake people are about to retire make-- access to information that they should know but they don't?
KATHARINE GEORGE: I think really, it's the cash. And then there's little things that you can do like maintaining your accounts. I've seen people put cash in a Roth account and not invest it. So really making sure that you know where your accounts are, what's in your accounts, and that you're maximizing all of your benefits. So any pensions that your employer offered or anything else that-- that you have an opportunity to take advantage of. But one of the other things that is really important is now a lot of employers are offering what's called Roth or after-tax 401(k) savings. And if you keep this in the employer 401(k), any growth on your after-tax or Roth savings kind of gets stuck back into a pre-tax IRA account. So you know, a lot of jargon to say that it's really beneficial as soon as you can to take any after-tax or Roth savings from your 401(k) and roll it into a Roth IRA so that all of the growth can stay tax-free and in your pockets.
- Good advice. Lots to consider there. Another thing while you're getting that all in order, make sure you have beneficiaries on all those accounts, right? We sometimes forget to do that. Katharine George of Wealthstream Advisors, thanks so much.
