Transcription
I came across some research recently that stopped me in my tracks, and here's what it showed. If you've saved more than $500,000 for retirement, and that's not including your house, there's a very good chance you're going to die with almost all of it. And today I'll show you the research behind that and the two reasons why we let that happen, even when the math says that we don't have to.
If you're new to the channel, my name is Benjamin Brandt. I've been a retirement planner for the better part of 20 years, and I want to help you have an even better retirement. For my entire career, I've sat across from people trying to answer one simple question: Can I actually afford to stop working? And after thousands of these conversations, I noticed something pretty interesting and honestly a little frustrating. No matter how much I show them that they have surpluses on top of surpluses, some clients continue to be at least a little nervous about spending even small amounts of money out of their portfolio. And then I started to wonder, is there something wrong with how I'm explaining this? Or is it just my clients? Is it everybody?
Now, thankfully for my ego, it turns out it is everybody. There's a study from the Employee Benefit Research Institute that tracked retirees for two decades, watching what exactly happened to their savings. And they split people into groups based on how much they'd save the day that they retired. And here's what they found. For folks who had retired with less than $200,000, well, they spent down about a quarter of their total savings at the 20-year mark, which I guess makes sense, right? If you don't have that much, you have to use it to live. Life is expensive. The folks in the middle, $200,000 they spent down their assets a bit more. They spent down about 27% at that 20-year mark. But here's the one that got me. The people who had saved the most, again, over half a million dollars, you'd think they'd feel the most free to spend because they had the most money at the start, right? Well, in fact, they drew down the least. 20 years in, the median person in that group had spent under 12% of their savings. Just 12% 20 years in, which means they still had almost 90% of their assets two decades into retirement. In theory, over 60% of their retirement was already behind them, and they had yet to make a meaningful dent in their nest egg.
Now, I should also mention these are non-housing assets, which means we still have a house to plan for in most cases, future potential liquidity. So, the pattern is almost backwards at least from what I might assume. The less you have, the more you spend, the more you have, the more you just sit on it, which is probably not the reason you saved up all this money in the first place. And if you're watching this channel, you're probably in that top group around here we call them super savers.
So, why does this happen? Why do the people that save the most spend the least? Well, part of it is that's just who we are. I I am one of you, right? I'm talking to myself. I'm a fellow super saver. You don't save up a half a million dollars or more by being a big spender. You do it by being careful and by saving and by avoiding the expenses that you just don't have to spend money on. That instinct is exactly what got you here, but it doesn't switch off the day that you retire. It just goes looking for new things to worry about. And reliably, it finds two of them almost every time. The first is health insurance before age 65, health insurance before Medicare, and the second is a mortgage that isn't quite paid off by the time you retire.
And here's the thing about those two expenses. They don't just sit there passively. They act like accelerants to our increasing net worth, which might seem like a good thing, right? Who wouldn't want an increasing net worth? But, again, increasing to what end? We've already established that you're unlikely to put any kind of a meaningful dent in your net worth 20 years in if you're super saver. And super savers tend to avoid avoidable expenses, and we just accumulate assets, I guess, forever. Because the super saver inside of you looks at those costs and says, "Well, if that's at all avoidable, I'm going to avoid those. At least I'm not going to spend that money yet. Let me work one more year. Let me get closer to Medicare. Let me work some overtime and get that house paid off. Then I can retire."
So, what do you do? Well, you just keep working. Way past the day that the masses you are safe to retire, which then, of course, delays everything. You start drawing on your savings a little bit later. That pile of money that you're never going to spend anyway, based on the research, well, just keeps getting bigger and bigger and bigger. So, these two fears don't just make you nervous. They take the problem that you already have, being bad at spending, and they basically pour gasoline on the fire. That's why we've got to deal with these issues head-on.
So, we'll take them apart one at a time, starting with health insurance. If you want to retire at 60, you've got a gap to deal with. Medicare doesn't start until 65, so you're essentially on the hook for your own coverage for 5 years if you want to retire at 60. And it's not cheap. For a lot of people, that's a $1,000 a month, sometimes $2,000. In fact, I had a client recently who spent $3,000 a month on health insurance because they had some very specific needs that they had to plan around. This is real money, and I completely understand the hesitance to want to avoid an avoidable expense, right? Sometimes it's less painful to simply work for another year or two.
But what I want to do is try a reframe, and I read this one recently, and it really stopped me because I wish I had thought of it, of course, and I wish I had remembered who the original author was so I could credit them, but the idea goes like this. So, imagine I came to you with a job offer, and I said, "I'd like to hire you full-time, same hours you work right now, and I'm going to pay you $24,000 per year." What would you say? I think many of you would say, "Well, are you crazy? I can't work for that little." But here's the thing, if you're financially independent, which many of you are at or beyond that number, the only reason that you're still at your desk is to cover a $2,000 per month health insurance premium of $24,000 a year. Well, you're doing the exact same thing that you wouldn't accept my job offer for, right?
We can break down the math even further if you really want to see why you shouldn't just work for the benefits beyond the point of financial independence. $2,000 a month is $24,000 a year. A full-time job is about 2,000 hours per year. That comes out to about $12 an hour. And you're earning that $12 an hour during the years that you can least afford to give them back. Once we turn a 30-year retirement into a 28-year retirement just for the benefits, well, we can't give that time back, and we're likely giving up the best part of retirement, which is the early years, right? We call those the shiniest of our golden years. So, if that's you, you know, knock it off. If you're a super saver, your portfolio can easily absorb that cost without an issue. The portfolio is not the problem. You're the problem.
And I'll tell you something, I've I We have 10 or 15 of these conversations every week with retirees, and I've been doing this the better part of 20 years. I've helped a lot of clients through the entirety of their retirement, from the retirement party to the funeral. Not once, not one single time has one of those people said to me, "Ben, I really wish I had worked for those extra two years to cover my insurance. I wish I had that money back." And I'm being a little bit facetious here. But what they say is the opposite. They say, "I was too conservative. I should have retired sooner. I should have spent more money sooner. I should have taken those trips. I should have spent time with loved ones, right?" Unfortunately, we can't get that time back once it's gone, and that's why I want to pass that wisdom on to you. So, I'll say it to you the same way I said it to them. I'd rather you retire two years too soon than work six months too long.
And look, I know what I'm asking. I'm asking a super saver, right? I'm a super saver, too, so I know what I'm asking. I'm asking you to shoulder unavoidable expense. I'm asking you to do the exact opposite thing that got you here at the trickiest moment in the whole journey, right early on in retirement when you feel like you're least able to pull this off. I completely get it. But if I can get you there, if I can buy you an extra year or two or three in retirement in the very best years of retirement, that first part of retirement where you've got the most energy, if that's something I could possibly convince you to do, and the financial plan proves it out, I really want you to do that.
One more thing about health insurance, and this is a trap that I see people voluntarily fall into. Some people retire early, and they keep their income artificially low on purpose so they can qualify for subsidies on their insurance premiums. Now, there's a version of this that's okay if you saved up cash in advance or you have funds in a Roth IRA, for example, ahead of time, and that's how we're keeping your taxable income low on purpose. Great. There's nothing wrong with that. We help people do that all the time. But there's a version of this plan that's not fine. And that's when you intentionally underspend your portfolio just to grab a premium discount from the ACA. Now, think about what this costs you. One, well, you're not living the life that your portfolio is supposed to buy. Your health insurance is essentially acting like an anchor around your neck. And two, you're probably setting up a tax problem down the road. Every dollar we don't pull out of our IRA stays in our IRA and keeps growing, and it's going to be forced out later when we have our RMDs, required minimum distributions. And generally, that's a bill that's just going to keep getting bigger. So, you lose twice. You lose the fun now, and you lose the tax efficiency later, depending on the type of super saver you are, that might hurt a little bit more or a little bit less, depending on your situation. I get that it's a tough pill to swallow. I'm telling you to spend money you don't need to spend on health insurance, but I'd rather you see it now than, you know, I don't know, try to sugarcoat it later.
Okay, second item keeping people working longer than they otherwise would need to is the mortgage. A lot of people tell me they absolutely can't retire until that mortgage is gone, so of course, they just keep working, right? We're paying extra towards the loan. Maybe we're picking up overtime, all to get that balance to zero so that they can finally retire. And unless something pretty unusual is going on, paying off the house early, I don't think is a reason to keep working. Not if we've already proven that you are financially independent. If your mortgage already fits inside of your retirement budget, then we don't need to pay it off house to make the plan work. We already showed that the plan works. The payment's in the plan. So, working longer to kill the mortgage, that's our first mistake, but there's also a second one that's close by.
I don't want you to haphazardly yank a big chunk out of your IRA and pay a bunch of taxes just to wipe out the loan. The reason being is that your home equity is part of your net worth, and your portfolio is part of your net worth. They're both yours on your net worth statement. So, when you pull money out of your portfolio to pay off your house, really, your net worth doesn't change, right? The minute before you write the check and the minute after you write the check, your net worth is going to be about about the same number, right? All you did was move money from your right pocket to your left pocket. And if that money came out of an IRA, well, we probably paid a bunch of taxes for the privilege to do so.
Now, I'm not against paying off the house. There is a real benefit to getting rid of that mortgage. The moment that payment is gone, of course, our monthly income needs drop by the entirety of that payment, minus our taxes and insurance, which means our withdrawal net drops, and our sequence of returns risk drops. All good things. Related to paying off the house is the question regarding keeping or retiring a 3 or a 4% mortgage by taking withdrawal from your portfolio, which might be earning significantly more than the rate you're paying on your mortgage. There is a lot of debate around how to approach this thinking and which is right and what is wrong. Do we keep the money invested or retire the mortgage? If we just look at the math, the math would say keep the 4% mortgage and keep the portfolio earning 10% per year and you pocket the 6% difference, right? That's the method I think most people focus on, but there's a really important distinction that super savers face that makes all the difference.
Once you're financially independent, you don't have to let the math make every decision for you. I'll show you what I mean because very frequently let's say you want to buy a second home in retirement or you're debating retiring your mortgage, very similar ideas. And you've got a choice to make, take out a loan and leave the money invested or pull a big distribution from your portfolio and buy the house outright. So, as advisors we run the numbers, right? Both ways we calculate the interest on the loan and we calculate taxes on the distribution and then we just present those numbers side by side. And here's what I tell every client at that point. You don't have to pick the smaller number, you simply pick the number that you hate the least or like the most. Because you're financially independent, the math is here to inform you, not necessarily to boss you around or make the decision for you.
In fact, I once had a client look at both of the options that I presented and said Ben, I spent my whole life staying out of debt. I'm not going to start paying interest now once I'm retired. I don't care what it cost me in taxes, just take the money out of the portfolio and we're going to buy the house. And for him that was exactly the right choice, it's his choice to make. Flipping it around, I had another client look at nearly identical math and land on the opposite decision. They said I hate taxes more than I hate interest, I'll take the loan. And for her that was the right decision to make. Same decision, same math, two opposite answers and both are equally valid. Because once you're financially independent, you're not solving for the lowest number anymore, you're solving for the life that you want based on your goals. Again, you get to pick the option that you like the most or hate the least.
So, if paying off your house is one of the near-term retirement goals, there's actually a really smart way to do this, not by working three more years or making some sort of a haphazard lump sum distribution to to pay off the mortgage. We combine it with the tax planning that you're already going to be doing. So, late in the year, we look at your taxes and we find room for Roth conversions. And here's a little trick that I've used quite a few times. Let's say we are at our year-end tax meeting and the plan says, we need to do a $60,000 Roth conversion. So, I'll tell the client we can move that $60,000 from your IRA to your Roth or I could just send you the money instead. And then I do the hardest part about my job, which is shutting up and let them think about it. And every so often someone says, well, you know what? I've got $120,000 left on my mortgage. I think I'll take that 60,000, apply it to the mortgage and then probably do it again next year. And then by this time next year, my mortgage will be gone. So, in that case, ultimately the money doesn't land in the Roth, it lands on the house, but really tax-wise, we get the exact same place either way and we didn't have to keep working to get there. The money is still moving in a right pocket to left pocket situation, only now the left pocket is your home equity and not your Roth IRA.
So, let's look at what these two reframes really have in common. Are you continuing to work for your health insurance? Well, we could keep working, let someone else pay that bill, but because we're super savers and we have a plan, we just retire anyway, right? We earned the right through financial independence to ignore the math of someone else paying for our health insurance. Same idea with paying off your mortgage before you retire. You retire anyway, loan or no loan, because you've earned the right to ignore the math because you're super saver and you're financially independent.
For 30 or 40 years, we let the math drive the bus and that's a great thing. Thank goodness we did. That's exactly the discipline that built everything you have. If you're super saver, you've out-saved 90% of your peers. That's a good thing. But financial independence is the moment that you've earned the right to take back the wheel from the math and make your own decisions. It's not really about health insurance, it's not really about the mortgage, it's about the permission. The same amount of carefulness that made you successful in investing is the same thing standing between you and the retirement you saved so hard for and hopefully getting there a little bit sooner. Every year that we wait to retire, we're trading away the best stretch of retirement that we've got, the go-go years. The years where you've still got the health and you've still got the energy to actually enjoy all the money that you've saved.
If this is the kind of research you're interested in, this is what we source in our weekly newsletter, This Week in Retirement. Check it out at a link in the description or visit thisweekinretirement.com.
So, what should we actually do with all this new information? Well, my honest answer is that you need a plan, right? Not a vague sense of, yeah, you're probably fine, an actual plan that proves that you're fine. You want a plan that shows you in writing that you can in fact retire at 60, you can pay for your own health insurance, and you could even pay off the house if you want to and not run out of money. Because once you see your actual numbers on paper, that fear starts to lose its grip a little bit, and that's what gives you permission to act. And for a lot of people that means having somebody in your corner, right? A good retirement planner doesn't just build the plan, they coach you through actually living it. They're that little voice in your ear that says, you've got this, you've got surpluses, you can spend the money, you can take the trip, you can give the gift, you can pay off your house, whatever that is.
Now, of course, I'm a very biased here. I've been a financial advisor for almost 20 years. Yes, if you want to do this with my team, you can. You can click the link in the description and book a call. We call our process the Retiree Blueprint, but we are not the only good option. There's a lot of really sharp, really trustworthy retirement folks right here on YouTube, right? We've got James and Ari and Devin Carroll and yes, even Kevin Lum. We've got Julia, we've got Rachel, just to name a few hyper-talented YouTube financial advisors. Find somebody qualified, find somebody that you trust, and somebody that will push you in the ways that I'm describing. Because the worst outcome here isn't missing a chance to perfectly optimize your taxes. The actual worst outcome is getting to 90, sitting on a huge pile of money, and realizing that you were too careful with the one retirement you've got. Thanks for watching.