Four Questions Everybody Asks Before They Retire. It’s the Fifth One That Ruins People.

By: J. Barry Watts, Expert Tax Strategist and Retirement Designer

We are asked questions all day long and hardly notice. What’s for dinner? When’s the meeting? How was your day? That last one isn’t really a question — nobody listens to the answer. I’ve tested it. Somebody asks how I’m doing and I’ll say, not well, the world is about to end, just to see whether they come back with, “That’s great, glad to hear it.” They usually do.

Then a person gets within sight of retirement, and the questions stop being easy. In more than three decades of this work, I’ve found that nearly everyone who sits down across from me is carrying four of them. Most people can articulate all four. Almost nobody asks the fifth, and the fifth is the one that does the damage.

Question One: Am I Ready?

Typically, the answer is no.

I don’t say that to discourage anybody. I say it because of what happens next. People come in ready to retire — I hate this job, I don’t want to work anymore, I’m mad. A good deal of the time that isn’t a retirement plan. It’s steam. But we take it seriously anyway, and I’ll say, all right, let’s do the math and find out whether you can.

Often enough we come back and say, good news: you can retire. And the man sits there a moment and says, “Well — I didn’t really want to. I’m not ready to do that.”

Which tells you what the question actually is. Readiness is not a feeling about your job on a bad Tuesday. It’s a condition you can verify, and the honest time to verify it is before you hand in the notice rather than after.

Question Two: When, Exactly?

For some people the date is set by something outside the money entirely. I had a man whose sixty-fifth birthday falls on the third of May, and the third of May is the first day of his retirement. Others want to finish a project, or see the company’s fiftieth anniversary from the inside.

People assume I have a proprietary method for arriving at that date. I do. It’s top secret and I really ought to copyright it: I ask you when you want to retire.

That’s half a joke, but the principle under it is serious. What ought to drive the date is what you want. Tell me the date you have in mind and your sitting on the porch number, and we can find out whether that date works — whether the income holds to age 100. If it does, wonderful, pull the trigger. If it doesn’t, we move the date out until we find the earliest one that does.

Occasionally somebody sits down and says, “All right, Barry, I heard you on the radio, so show me your plan.” Please don’t. There is no Barry plan for your retirement, because Barry doesn’t know you. That is precisely why we visit with people at length before they ever become clients. It never starts with what I have. It starts with what you want.

And while we’re on dates: most decisions in this business are hard to reverse, but Social Security has a door out that almost nobody knows about. If it’s been less than twelve months since you filed, you can withdraw the application, repay what you’ve received, and file again later at a higher benefit. Past twelve months it’s glued down, and you only get to do it once in your life — one Mulligan. Don’t walk into the Social Security office and ask about it, either; I’ve had clients told flatly it couldn’t be done, and one whose representative didn’t seem to understand the question. Go to ssa.gov and type “cancel your benefits application” into the search box. The form and the instructions are sitting right there.

Question Three: Have I Saved Enough?

You’d think this would be the easy one. It’s the question underneath all the others, and yet a great many people can’t quite get it out of their mouths. They only know there’s something they ought to be doing before they retire, without knowing what the something is.

So let me name it: you need a retirement income plan that lays out your income for every single year from the day you retire until the day you turn 100.

Have I saved enough? A million? Two? Ten? I don’t know, and neither does anyone else, because until you can convert what you’ve saved into income — and convert it in the most tax-efficient way available to you — the balance is very nearly irrelevant. Without that year-by-year plan you are guessing, and guess wrong and you may find yourself at eighty-five asking a different question: would you like fries with that? I’m not making light of anyone. I’m saddened every time the person waiting on me at a counter is well past eighty. Sometimes that’s a choice, and the work is vibrant for them, and good for them. But I don’t know anybody who works a whole life in order to go back to work.

Most Americans have exactly one source of retirement income, and it’s Social Security. The people we see usually have two — Social Security and whatever they’ve saved. A pension makes three. Scripture says a three-strand cord is not quickly broken, and the same holds for a stool; two legs will tip you over. When I retire I intend to have four: Social Security, savings, a life insurance retirement plan that pays me tax-free income out of the policy, and some real estate. If you’ve only got two, there are usually things we can do to get you to three. And here’s a question nobody thinks to raise that I always ask: are you expecting an inheritance? Whatever eventually comes adds to what you have.

Your Sitting on the Porch Number

How do I help people build a retirement budget? Mostly, I don’t. People hate budgets. If we could hear the applause from everyone reading this, I suspect half of you are pulling off the road to stand up and shout, that’s right, Barry, I hate budgets. My wife is the shining exception; Kelly keeps a spreadsheet and can tell you exactly what we spent on groceries and house maintenance this month. She taught it to our daughters, and they’re doing a fine job with it.

For everyone else I ask a different question: how much sitting on the porch money do you need? That’s the amount that has to hit your bank account every month to let you do whatever you intend to do — sit on the porch, or live a life that looks nothing like sitting on a porch.

Answer it precisely by tracking your spending for a full year: every trip to the grocery store, every tank of gas, every twenty dollars to a grandchild for a birthday. Most people won’t do that, so here’s how we cheat our way to a number. How much is hitting your account now? Thirty-seven hundred dollars. How often? Twice a month. So seventy-four hundred is coming in. How much of it goes to savings? None. Then seventy-four hundred is what you spend, and we have a starting number.

People miss in both directions, and how they answer tells me a great deal. A lady came in and told me twenty-two hundred a month, all in, everything. She currently takes home seventy-two hundred a month and saves none of it, which means she was proposing a five-thousand-dollar-a-month cut to her cost of living. I don’t believe her, and I told her so.

Others aim high, and that’s their right. I had a couple whose number was twelve thousand a month — a hundred forty-four thousand a year, a decent living — and they wanted to start at sixty-two. The math said broke before seventy. But watch what a year-by-year plan lets you do. We didn’t have to tell them no. We told them that working to sixty-five instead of sixty-two, and living on eleven thousand a month instead of twelve, carries the money to 100. They were in their early fifties. Could you work thirteen more years instead of ten? Probably. Could you live on eleven instead of twelve? Their house payment was seventeen hundred a month, and that payment goes away.

That is the whole argument for planning early. Small adjustments made now do work that enormous adjustments can’t do later.

Question Four: Will My Money Last?

What causes people to outlive their savings is, at bottom, overspending. So once we have a plan you like — income to 100 — we ask what could thwart it, and then we deliberately build the thwarting in. I want twelve thousand a year for travel: put it in. Every five years I’ll buy a vehicle and it’ll cost fifty thousand: put it in. I give each of my kids a thousand dollars at Christmas: that goes in too. Name every overspend you can think of, expect it, and fund it.

Then we stress test. Let’s have one spouse die early — does the plan still work for the other? Let’s put one spouse into long-term care. Let’s let Congress raise rates the way people keep saying they will. Let’s run the market down three years running the way it went in 2000, 2001, and 2002, or down thirty-seven percent the way it went in 2008. If the plan survives all that, hallelujah. If it starts to fail, we’ve just learned exactly what needs fixing while there’s still time to fix it.

A few risks sneak up on people. Longevity is the first — everybody tells me they won’t live that long, and more and more people do. I’d rather you were wrong in the direction of having money at 100. For Kelly I’m planning to 110. Concentration is the second. People tell me they don’t want all their eggs in one basket, and I’ll point out that what matters isn’t how many account statements arrive; money in one account can be spread across a great many different things. The real danger is owning your employer’s stock inside your IRA while you’re also feeding a stock option program at the same company. Remember Enron, where people lost the job, the 401(k), and the stock in one afternoon.

Inflation is the third, and it doesn’t stop at the retirement party. Nobody hands you a card that says no more inflation for you. Over the twenty-five years leading up to this conversation, the Bureau of Labor Statistics had food up roughly fifty-five percent, housing about fifty-seven, and medical care something like a hundred and fifteen — more than twice what you paid a quarter century earlier. Those are round numbers from one window, and they keep moving. The principle doesn’t.

Taxes are the fourth, and if you don’t get the taxes right, very little else you do will matter. Most people treat taxes as something that happens once a year on April 15 and is then forgotten. Carry that habit into retirement and it will bite you in the hindquarters. A former Comptroller General of the United States — the man who ran the Government Accountability Office, and a CPA himself — has argued for years that federal rates will eventually have to roughly double, because he sees no other arithmetic that closes the gap. A projection that travels with that argument imagines three brackets: twenty-five percent, sixty-three, and eighty-eight, with today’s ten and twelve percent brackets gone altogether. I want to be careful, because that is one man’s projection and not a statute, and nobody knows what a future Congress will do. But before you dismiss the top figure as fantasy, go look up the 1940s. The top bracket ran higher than that.

I’m not making a political argument. It’s popular in my part of the world to say rates will always come down, and I’d be delighted if they did; I simply don’t think the arithmetic allows it. So write down today’s date, bring me the paper, and I’ll sign it: Barry Watts says taxes are going higher. What we can do about it is move more and more of your money into buckets that will never be taxed again.

Question Five: Will My Loved Ones Be Okay?

Here is the one I’d bet you haven’t asked. Suppose you retire and six months later you drop over dead. It happens. Is your spouse going to be all right?

Two things occur at once, and they run in opposite directions. Her taxes go up, because she begins filing as a single person and the code is structured to favor married couples. At the same moment her income falls, because the smaller of the two Social Security checks simply disappears. Higher rate, less money, both arriving in the worst week of her life. We see people set back on their heels by it constantly.

So when we stress test, one of the things we key in is exactly that. What happens if he dies in 2034 — what happens to her? The math either says she’s fine or it says she’s in deep trouble, and if it’s the latter we start modifying today to cure it. You can only prepare for what you’ve named, so we invent these serious, made-up problems, force them into your plan, and see whether they wreck it.

Something I notice: sometimes a husband brings his wife in and never says the words, but you can feel what’s happening. It’s a handoff. I’m not going to be here forever, and when I’m not, I want to be sure she’s taken care of, and I’ve chosen you. We take that seriously — and it runs both ways. We want the surviving spouse cared for, and we want the spouse who expects to go first to have the settled confidence that he did what he needed to do.

The other stressor we force into every plan is long-term care, because that is the one cost Medicare stops short of and the one most likely to hollow out a surviving spouse. Whatever you decide to do about it — and there are exactly five ways to pay for it — decide it on paper, and then show the paper to your children. I chuckle every time somebody tells me, “Dad’s ninety and I have no idea whether there’s any money, because he never talks about it.” My own kids already know which drawer in my credenza holds all of it, and so does my son-in-law. The last thing I want is a panic-stricken moment for Kelly or for them.

The Bottom Line

Am I ready? When exactly? Have I saved enough? Will the money last? And the fifth one — will the people I love be all right without me?

Every one of those has a real answer, and none of the answers come from a feeling. They come from a plan that runs year by year to age 100, gets stress tested against the worst this country has actually lived through, and gets built around what you told us you wanted rather than what somebody wanted to sell you. That is what our six steps to retirement confidence are for.

There is enough that can go wrong in a financial life without adding your own guesswork to the pile. Let’s do the math instead.

Barry Watts is a retirement designer and tax strategist with WealthCare Retirement Solutions, the author of the book Watts on Wealth, and the host of a television program and radio show by the same name. Our YouTube channel is also called Watts on Wealth. If you are interested in listening to our podcast, it’s called The Truth about Taxes and Retirement and is available wherever you get your podcasts. Investment advisory services are offered through WealthCare Asset Management, LLC, an SEC registered investment advisor. Tax strategy, tax compliance, accounting, and insurance services are provided through its affiliate, WealthCare Tax Advisors, LLC. Remember: Investing involves risk, including the potential loss of principal, and past performance never guarantees future results. Any references to protection, safety, or lifetime income may refer to fixed insurance products. Insurance guarantees are backed by the financial strength and claims-paying ability of the issuing carrier. This article is for informational purposes only and should not be used as the basis for personal financial decisions without first consulting your personal qualified advisor. Case examples are illustrative of planning work performed for specific clients and are not a promise of similar results.

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