Preparing for Retirement: How to Win the Big Game

Key Points – Preparing for Retirement: How to Win the Big Game

The Parallels Between Preparing for a Big Game and Preparing for Retirement
While You’re the GM of Your Retirement, Preparing for Retirement Is a Team Effort
Having a Fluid Financial Plan That’s Stress Tested Against Various Economic Conditions
Planning Is Key to Jumping Out to a Big Lead in the Big Game of Retirement Rather Than Overcoming a Big Deficit
15 Minutes to Read | 34 Minutes to Listen

Preparing for Retirement: How to Win the Big Game

Logan DeGraeve and Bud Kasper are gearing up for the big game, but it’s not the big game on Sunday between the Kansas City Chiefs and Philadelphia Eagles. They’re preparing for the big game that is your retirement. Check out to see how they go about game planning with preparing for retirement.

Preparing for the Big Game of Retirement

Are you ready for the big game? Of course, the Kansas City Chiefs are gearing up to play the Philadelphia Eagles in Super Bowl LVII on Sunday in Phoenix, Ariz. The anticipation has definitely been building among Chiefs fans in the Kansas City area. But that’s not the only big game that is on our minds at Modern Wealth Management. We always thinking about preparing for your retirement because retirement is arguably the biggest game of your life.

Believe it or not but are several parallels between preparing for retirement and preparing for a football game. It’s about having a game plan. You might remember that just before this NFL season started, Dean Barber and Logan DeGraeve discussed Creating a Game Plan for Retirement on America’s Wealth Management Show. Logan and Bud Kasper will be reviewing some of those same points and more to help us break down how to go about preparing for retirement.

“The big game for most of us is retirement and preparing for retirement. It’s no different than a football team getting prepared for any game on any given Sunday. They have a game plan that’s associated with it and then they try to execute that plan to get the optimal result, which is a win. The parallel to that in terms of financial planning, retirement planning, and tax planning is integrated into an overarching plan that focuses on that result.” – Bud Kasper

Saving for Retirement

Planning for retirement or for a championship game isn’t something that you suddenly start preparing for a week beforehand. For example, let’s think about Patrick Mahomes II’s preparation for Super Bowl LVII. Obviously, he started preparing specifically for the Eagles shortly after the Chiefs defeated the Cincinnati Bengals in the AFC Championship Game. But he started preparing himself to play on the game’s biggest stage at a young age when he first picked up a football. He also was fortunate to see what life was like as a professional athlete as a little kid throughout his dad’s MLB career.

Then, think about when you get your first full-time job after college. You enroll in a 401(k) or some sort of employer retirement plan to begin preparing for retirement even though it will be a few decades before you retire.

“When you first get your job and you start saving, you’re really going to help yourself out. If you start saving at 25 versus 50, that’s really going to make a difference on when you can retire. For us, it’s helping our clients attain financial independence. That means that they can do whatever they want to do when they wake up in the morning.” – Logan DeGraeve

Leaving a Legacy

And, if your parents and/or grandparents were passionate about leaving a legacy, they might have even started saving for your education to help you get that first job so you can then be in a better position to start preparing for retirement.

Dean and Matt Kasper just thoroughly discussed Family Financial Planning on the Barber Financial Educational Series, so make sure to check that out to help yourself, your children, or your grandchildren get a good sense of how preparing for retirement can be a family team effort.

Working with a Team of Financial Professionals

Let’s circle back to Mahomes for a minute. There’s a good chance that he might win the MVP again. But he’ll be the first person to tell you that he couldn’t do that on his own.

For much of the season, the offensive line gave him a clean pocket to work with. Even without Tyreek Hill this season, Travis Kelce and the Chiefs receiving corps still had to haul in Mahomes’ passes for him to rack up his yardage and touchdowns. Isaiah Pacheco, Jerrick McKinnon, and the other Chiefs running backs also did enough to keep most opposing defenses honest and not just focus on the passing game. Speaking of defense, the Chiefs defense has kept the Chiefs in some games when Mahomes and the offense has struggled. And then there’s obviously Andy Reid, Eric Bieniemy, and rest of the coaching staff that’s putting Mahomes in position to make big plays.

So, getting to the biggest game of the season has been a team effort for the Chiefs. Along with your family possibly helping you prepare for the big game of retirement, you need a team of financial professionals that’s working together for you. That team of professionals is critical but remember that you’re the general manager of your retirement.

“What does that mean? Well, you go out and get a head coach. That’s your financial advisor. But that financial advisor has a team of people, too. For instance, a head coach has an offensive coordinator and your financial advisor should work with a CPA. The defensive coordinator can be like an estate planning attorney. The parallel for a special teams coordinator can be an insurance expert. All of that is so critical because if one thing is wrong, it hinders your ability to win the big game.” – Logan DeGraeve

Answering the Big Question About the Big Game

Leading up to any big game, there’s always one question on everyone’s mind. Can my team win the big game? It’s the same case when we’re meeting with people for the first time to discuss their retirement. They probably won’t ask if they can win the big game of retirement, but there’s a good chance they’ll ask, “Can I retire successfully?” or “How much do I need to retire?” That’s getting at the same point.

How Do You Think and Feel About Money?

Oftentimes, people are asking those loaded questions because they don’t know where to start with preparing for retirement. Well, preparing for retirement involves a lot more than just saving. Before we start talking with someone about specific financial talking points, we want to get to know them. What are your goals for retirement? We need to know how you think and feel about money.

A lot of people worry about having too much debt going into retirement. And they think about postponing their retirement because of it. Our team needs to know more about your situation before you immediately make that decision. It’s possible that you might need to delay your retirement. But in a lot of cases, we find that people can actually retire sooner than they originally thought.

Another Parallel for Preparing for Retirement

For some people who are worried about having too much debt or that have other concerns about their finances, it might have taken a lot of courage for them to muster of the confidence to meet with a financial professional in the first place. It’s kind of like overcoming the fear of going to the doctor’s office. But the thing is, we don’t know what we don’t know. Again, we need to get to know you and your financial situation. There might be opportunities that you’re not aware of that can help you with preparing for retirement. It’s no different than a doctor giving you a prescription that helps you feel better.

“I just had my annual physical to make sure there were no big changes from last year. It can really make you feel good when you go and get that done. It’s the same thing with financial planning. How did last year impact you? Because it had an impact on you. Hopefully, it didn’t derail your probability of success. And what happens if we see another year like last year? Where are you going to be?” – Logan DeGraeve

Staying Calm Amid Economic Uncertainty

That’s why you need to have a comprehensive financial plan that gives you clarity and confidence to know that you can get through difficult economic times. If you just listen to the news about things like the possibility of a recession, it’s just going to cause you to worry. And as we’ve pointed out on several occasions, fear and greed are dangerous emotions to be consumed by when it comes to your finances. A good forward-looking financial plan is stress tested against all kinds of economic conditions to see if you can withstand it. That’s why we stress (no pun intended) the importance of having a financial plan so that you aren’t overcome by fear or greed.

Assessing Your Financial Wellness

Last month, we published an article titled, What Is Financial Wellness? Rather than preparing for a big game, we compared preparing for retirement to training for a 5K. This brings us back to goal setting. If you decide to sign up for a 5K a few days before the 5K and do little to know training, odds are that it won’t go very well. If the Chiefs or Eagles decided to go out and party for two weeks and didn’t practice to the best of their ability, odds are that they wouldn’t perform very well in Super Bowl LVII. The same goes for your retirement. You can’t just say you’re going to retire tomorrow without doing any preparation for retirement.

The Three Buckets

Your desired lifestyle in retirement isn’t going to be exactly the same as your friend or family members, so preparing for retirement is going to look different for you than it will be for anyone else. We mentioned that saving to a 401(k) once you start working is a good way to get started with preparing for retirement. But there’s obviously more to it when it comes to saving for retirement.

One critical factor of a well-planned retirement is taxation. We want to know where you’re going to spend from. Because when you stop working, your assets become the fuel for your paycheck. So, what assets are you going to spend from first and how are they taxed? With taxation, there are three buckets to keep in mind with your retirement income. Let’s look at examples of potential taxable, tax-deferred, and tax-free assets.

Tax-Deferred

A lot of people that we meet with for the first time will primarily have tax-deferred assets. Those include Traditional 401(k)s and IRAs, which have never been taxed. You have a silent partner in those assets, and that partner’s name is Uncle Sam. Every time you take money out of your Traditional 401(k) or IRA, you have ordinary income. They’re taxable when you access them.

Tax-Free

Hopefully, you have some tax-free assets as well. That includes Roth 401(k)s and IRAs. That means when you’re accessing those assets, you don’t need to worry about taxes. The same goes for your loved ones if they inherit them after you pass away. We want to work on getting people more tax-free assets.

Prior to this year, the match for a 401(k) has been after-tax money. Now you can get a match in the Roth account. This is the first time that people are not only putting money into the Roth 401(k) on an after-tax basis so it comes out tax-free in the future, but the match can do that as well.

Taxable

The third bucket is the taxable bucket. Examples of those assets include brokerage accounts, joint accounts, or your bank account. That money has been taxed. It can be subject to dividends and capital gains.

Tax Planning Can Be a Difference Maker

The reality is that when you’re in your 20s and early 30s, how you’re saving is going to set the tone for what those buckets look like. If you come into retirement with all tax-differed assets, it’s hard to do tax planning.

“Most people are doing pre-tax contributions into a 401(k) plan. That means that that money going in is not being taxed before it goes into your plan. From an advantageous perspective, the money has an opportunity to grow without taxation up until the point you retire and take the distributions. And then, guess what? Uncle Sam has his hand out. You’re going to be taxed on those distributions.” – Bud Kasper

Could Roth Conversions Work for You?

Let’s say that someone comes to us for the first time and says they have $1 million between their 401(k) and IRAs. They probably don’t have $1 million because Uncle Sam hasn’t had his piece of the pie yet. They probably have closer to $700,000 or so.

“Why is that important? If you have multiple buckets, there may be a path to living off a taxable or brokerage account for the first year or two of retirement. You can supplement with Social Security. Right now, our CFP® Professionals and CPAs are sitting down with a lot of our clients and looking at a directionally correct tax plan for 2023. We don’t know everything that’s going to happen in 2023, but we do know that some clients might look at things like Roth conversions—which is moving money from a traditional IRA to a Roth—to speed up income to pre-pay some of that tax.” – Logan DeGraeve

Why would someone consider a Roth conversion? Well, maybe they’re in a 10% or 12% bracket right now. But with forward-looking proactive planning, they’re going to be in the 22% or 24% bracket in the future—and that will become the 25% or 28% bracket after the Tax Cuts and Jobs Act sunsets in 2026. In our Tax Reductions Strategies Guide, we highlight various tax planning strategies like Roth conversions and other key points about taxation. Download your copy of Tax Reductions Strategies below so that you’re paying as little tax as possible over your lifetime, not just in one year.

Download: Tax Reduction Strategies

Keeping Required Minimum Distributions in Mind

This is also a good time to remember how Required Minimum Distributions factor into the equation and how big those can be depending on your age. Logan likes to say that financial planning isn’t always a perfect stained-glass window. It’s great when a couple lives long healthy lives and passes away within a short time of each other so that the surviving spouse doesn’t bear the brunt of being a single tax filer. But that usually isn’t the case.

“What happens if one spouse lives to 80 and the other lives until 95? That’s 15 years as a single tax filer. Why does that matter? You’re potentially going to lose a Social Security benefit and a pension, but that Required Minimum Distribution on that qualified money—a 401(k) or IRA)—doesn’t get any smaller. But do you know what does? That tax bracket as a single filer.” – Logan DeGreave

A Big Debt Problem and the Correlation to Taxation

Before we dive too much into what’s going to happen in the future and how it relates to preparing for retirement, let’s look at a current issue that has become worse in recent years. Did you know that the U.S. hit its $31.4 trillion debt ceiling last month? How is that going to be whittled down?

Well, one way that the U.S. government can whittle it down is through taxation of the American people. We know that if Congress does nothing, tax rates will go up in 2026 to the higher rates we had in 2017. That’s a big part of why tax planning is becoming more and more important.

“When we look at this from a planning perspective, most people are making their 401(k) contributions and getting the company match. But there’s another way of doing this. It’s the Roth 401(k), which almost all companies have now. You’re paying tax on the contributions going into the account rather than when you’re taking the money out.” – Bud Kasper

When you’re in a low tax rate, you don’t want to differ those taxes to the future. Because as you have more earnings and more money saved, your tax bracket may go up. The big unknown is where tax brackets will go in the future. Some people may want to pay taxes now and get them out of the way rather than being subject to what Congress decides about tax rates.

These are critical issues that everyone is facing, but especially for retirees. As CFP® Professionals, Bud and Logan want to get the most money in people’s pockets in the least taxing way possible. That can’t happen if you don’t have a financial plan that gives you clarity and confidence about your financial life.

Thinking of Your Retirement as Being in the Red Zone

When you’re approaching retirement, think of it again in football terms and approaching the red zone (inside the 20-yard line and looking to score). You’re finishing up your career and being faced with the reality of whether you’ve done enough to prepare for retirement.

When you’re in the red zone or retirement (or approaching it), mistakes are even more costly. If your investment allocation isn’t correct when the market goes down and you lost 20-25% of your retirement income two years before you retire, are you going to be able to retire? Possibly not.

Making Sure Your Lifestyle Doesn’t Exceed Your Income

Make no mistake that saving for retirement can take some serious discipline. But saving and saving to the right buckets at the right time is critical so you can live out your desired lifestyle in retirement. Once you retire, you go from working for your paycheck to your paycheck working for you. So, you need to properly save so that your desired retirement lifestyle doesn’t exceed your retirement income.

“I kind of relate that to the players playing in the big game this weekend. It takes a lot of discipline and sacrifice to get to where they’re at. They can’t see their families and kids as much. They started training at an early age, and it’s paying dividends for them now with the opportunity they’re getting this weekend. It’s no different in retirement with how it takes discipline to save. If you don’t start saving, you’re going to be licking your wounds when you’re 50, 55. Suddenly, you could be working until you’re 75, 80 years old.” – Logan DeGraeve

The Clarity That Comes from a Comprehensive Financial Plan

Bud just encountered an example of that with a couple he met with recently. They were set to retire but had some house projects that they wanted to complete. They wanted to put in a pool, which was going to cost them about $100,000. To do that, one of them needed to work for two more years. While that was discouraging, having the clarity from financial plan gave them was crucial. If they had the pool put in and didn’t realize that he needed to go back to work, it could have derailed their retirement.

That was obviously a big change for that couple. But that’s why we want to meet with our clients two, three, or even four times throughout the year. Life changes. Having a few grandchildren can change your retirement goals. Unfortunately, health issues can drastically change your retirement lifestyle. No matter the case, you need to have a fluid financial plan that can withstand and or least be amended to withstand those life changes.

Working with a CFP® Professional to review your plan is critical as well. There have been many instances in which our CFP® Professionals have worked with people who haven’t realized that up to 50% or 85% of their Social Security can become taxable. But that can be avoided with proper planning.

Preparing for Retirement Amid Challenges in the Markets

As we wrap up with how to prepare for retirement, we want to address how challenging it’s been in the investing world for much of the past year. The S&P 500 was down close to 20%. People that were in the same portfolio at the end of the 2022 as they were at the beginning of 2022 probably felt quite a bit of pain. Adjusting your portfolio to mitigate market risk has been pivotal.

The traditional bond market also took a beating for much of 2022 as well, so people were suddenly looking for a new place for safety with their investments. This was another instance of how important it is to keep lines of communication open with your CFP® Professional to make necessary changes.

What Will the Federal Reserve Do Next?

Bud and Dean saw some strong signs of troubling times in the markets in the summer of 2021. They were hoping that the Federal Reserve would’ve started raising rates earlier rather than raise them sharply like they did for much of last year to slow inflation. In the FOMC’s first meet of 2023, Jerome Powell announced a 0.25% increase in the Fed funds rate. But there are several questions about what the Federal Reserve will do going forward as the battle with trying to slow inflation continues—all while fears of a recession are also running rampant. Powell is still holding firm to his goal of getting back down to 2% inflation, but there’s aways to go.

“We know that the Federal Reserve is the boiling point associated with interest rates. In March 2022 when they raised the Fed funds rate by 0.25%, that was a bit of a yawner. They were saying inflation was going to be transitory. Some people thought it was no big deal. But the next month, there was a 0.5% hike to move it up to 0.75%. Then, the capitulation in the bond market took place. If you didn’t exit bonds other than ultra short-term bonds, you were going to get hit hard as it evolved the rest of the year. The Barclay’s average on bonds was down a little more than 13%.” – Bud Kasper

The FOMC’s next meeting will be on March 21-22, so stay tuned to see what the Fed’s next move will be. We have several important dates and events like that outlined on our 2023 Retirement Planning Calendar, so make sure you’re in the know about those things that can impact your retirement. You can download your copy below.

2023 Retirement Planning Calendar

Opportunities in U.S. Treasuries

If you got out of traditional bonds sooner rather than later in 2022, kudos to you. But what do you want to be doing in bond funds right now? Well, that depends on your unique situation, but there is an opportunity that we didn’t have a year ago with looking into buying U.S. treasuries. The one-year treasury is at 4.87%, which is a wise opportunity to take advantage of for a lot of people.

If you’re sitting in a bond fund and lost 13% last year, where do you go from here to get 13% back? The bond market has come back a little bit this year, but we need to look for the safest opportunities. How do we protect assets moving forward?

We’ve talked a lot about the inverted yield curve. You’re getting paid more to be in a two-year treasury than you are in a 10-year treasury. That’s not normal. It will even out eventually, but people have been quite surprised when they see how steeply the yield curve is inverted.

“Think about a 4.5% CD that’s based on a three-month timeline. You’re not going to get that for 90 days, so divide that by four. But if you got that money safe, which it would be, and you still don’t feel any better about the market three months later, you do it again and you have a little more than 2%. My point is that if we had to go through the entire year, we would have that 4.5%. Well, what was the objective for the portfolio to begin with. Let’s say it was 6.5%-7%. Maybe 70% of the income was covered by that safe approach. Hopefully we get some rebound in the stock market that can cover that additional 30%.” – Bud Kasper

One of the Main Goals with Preparing for Retirement

Here’s the bottom line. How can you eliminate as many bad things that can happen as possible while preparing for retirement? There’s always an answer for eliminating those bad things, but sometimes you need to be patient and do some research. That’s why we’ve reviewed many of the key points to help you with preparing for retirement so that you can jump out to an early lead in the big game rather than battling back from a big deficit.

We’re giving you access to a resource to help you build a big lead with preparing for retirement. By using our industry-leading financial planning tool, you can begin building a plan that’s unique to you from the comfort of your own home. You can access it at no cost or obligation by clicking the “Start Planning” button below.

START PLANNING

Remember that winning the big game of preparing for retirement takes a team effort. You’ll be the GM of the team, but we’d be happy to play a role of your team to help you have a successful retirement. If you have any questions for us about preparing for retirement, you can schedule a 20-minute “ask anything” session or a complimentary consultation with one of our CFP® Professionals by clicking here. We’re ready to help you win the big game that is your retirement.

Preparing for Retirement: How to Win the Big Game | Watch Guide

Introduction: 00:00
Creating the Game Plan: 03:05
Setting Goals for Retirement: 03:50
The Tax Buckets: 08:22
Your Lifestyle and Your Income: 16:17
Investing with a Plan: 24:47
Conclusion: 32:06

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.