How to Retire with Fuchs Financial Ben Fuchs & Alex Cal BEN: Something I hear all the time is, “I think I’m almost ready to retire, but I still have some debt.” That one sentence contains a whole financial plan waiting to be written. Today, we’re going to dig into it. My colleague, Alex Cal, is with me. Alex works directly with clients on exactly these questions, and I can tell you from experience, the people who ask them early are the ones who retire on their terms. You’re watching How to Retire. I’m Ben Fuchs, head of Fuchs Financial, and with me is Alex Cal. Alex, let’s get into it. Can you retire if you’re still carrying credit card debt? ALEX: Sometimes, yes. You can have some debt, but generally, we want to get high-interest debt paid off. BEN: So if I’m still working and making more money than I theoretically will in retirement, but I have credit card debt charging me 30% interest? ALEX: Let’s get it paid off. Any extra funds should be prioritized toward that, especially as you approach retirement. BEN: I’d probably sacrifice a trip or two if getting rid of that 30% debt meant being in a better position for retirement. How do you have that conversation with someone? ALEX: A lot of the time, it’s about showing them the difference. If we get this paid off sooner, maybe that means retiring a year earlier. If we don’t, maybe retirement gets pushed back three or four years because you want to take a $30,000 trip to Africa. If you want to do that, no problem. We just need to understand how each decision impacts the overall plan. BEN: And to be clear, we want people to go on that $30,000 trip. We just don’t want you doing it while also owing debt at 30% interest. Should you ever use retirement savings to pay off high-interest debt? What are the tax consequences? ALEX: Sometimes we do, especially if someone is in a lower tax bracket and we can maintain enough of their principal. It can be an option. We may also combine that with transitioning debt to a lower interest rate. A lot of it comes down to the math. Are we mathematically coming out ahead, and are we emotionally comfortable with the decision? With credit card debt, we generally want to prioritize paying it down. But if it’s a mortgage at 2% or 3%, that can be very different. If we’re in a 12% tax bracket and can take money out at that rate to eliminate debt charging 30% interest, that may be worth considering. BEN: Are there other ways to pay down credit card debt? ALEX: Absolutely. One option is looking at refinancing or transferring the balance to a 0% card. But you have to consider balance-transfer fees. If you can pay the debt off within a few months, paying a transfer fee might not make sense. If it will take a year or two, paying a small transfer fee could potentially save you from continuing to pay 28% or 30% interest. BEN: It’s all math. Let’s move to retirement income. How do you turn a pile of retirement savings into a reliable monthly paycheck? ALEX: The first thing we want to do is segment the risk. What are we trying to accomplish? If we’re paying down debt, how can we do that safely without jeopardizing retirement? A lot of times, we can take a portion of the portfolio and invest it with the goal of maintaining principal while using interest or dividends to help provide income. BEN: Why do you like that approach? ALEX: Because we generally don’t want to take a tremendous amount of risk with money we need for income. We also want other portions of the portfolio to continue growing. If we put everything into the market because we want the highest possible return, then start withdrawing money, we can run into trouble if the market drops. If we’re building a cohesive plan, we want to segment the money and build in protection so that we can balance growth and income. BEN: That’s incredibly important. You see people online saying, “Just put everything into the S&P 500. Don’t worry about safety. You’ll come out ahead.” But that ignores periods like 2000 through 2009. People had to remain retired through those downturns and continue living on their savings. ALEX: Exactly. If someone retires and immediately experiences a market similar to 2007 or 2008, when the market dropped significantly, the numbers can change quickly. If the market is down and you continue withdrawing income, you’re widening that deficit. BEN: One of the biggest concerns I hear from people is that they don’t want to be forced to go back to work, and they don’t want to become a burden on their children. Having different segments of money can help because you know where your income is coming from. So what does being ready to retire actually mean? What should be on that checklist? ALEX: The first thing is expenses. Do we have a budget? Do we know what our lifestyle actually looks like and what we want to do in retirement? If we don’t know that, we’re guessing. Then we need to consider risk, taxes, whether there’s room for additional spending and, importantly, inflation. Without understanding your expenses and lifestyle, it’s difficult to map out whether retirement works. BEN: How do you help clients figure out their actual expenses? ALEX: I usually have them look at 12 months of bank statements. That gives us an idea of what their lifestyle actually costs. If you take big trips, enjoy nice dinners or like buying yourself something occasionally, great. I want that lifestyle to continue. We just need to account for it. People often give us a budget with electricity, the mortgage and other fixed bills, but they leave out food, entertainment and all the things that are important to maintaining their lifestyle. BEN: My food budget is always wrong. I plan for one thing and somehow it ends up being $100, $200 or $300 more. ALEX: Nobody here believes you spend money on anything except food. BEN: Only food. We also have people who come in with a very specific idea of what retirement should look like. Sometimes you have to help them shift their thinking, whether it’s about Social Security, budgeting or something else. How do you comfortably change someone’s mind? ALEX: A lot of the time, it starts with getting more information. Why do they believe a certain strategy is right? Maybe something happened to their parents or they saw someone else go through a particular situation. First, we understand why they feel that way. Then we relate it to their specific circumstances and show them alternatives. Sometimes a different strategy makes retirement work when it otherwise wouldn’t. Sometimes it’s more tax-efficient. Sometimes it allows them to leave more behind for their children. BEN: Is there one particular issue that tends to be the catalyst? ALEX: Usually it’s a blend of things. For people retiring before 65, healthcare is a big one. It can become one of the largest monthly expenses, and people don’t always account for it. Laws and guidance can also change, so we have to continually adjust the plan. But it’s all part of having a plan. DIY Investors and Retirement BEN: This next set of questions is for someone I have a lot of respect for: the do-it-yourself investor. You did the work. You saved. You read. You managed your own money for decades. Now retirement is close, and the question becomes: Will what got you here get you through the next 30 years? ALEX: Sometimes it will. Sometimes it won’t. A lot of DIY investors have spent their entire lives in the accumulation phase. The focus has always been: What stock or fund is going to make me the most money? As retirement approaches, that can become a risk because the strategy needs to change. BEN: Is taking too much risk one of the biggest mistakes you see DIY investors make? ALEX: Yes. That, and relying on selling investments every month to create income. If your retirement income depends entirely on deciding what to sell and when to sell it, market conditions can have a major impact. BEN: At what point should a self-directed investor consider getting a second set of eyes? ALEX: I think when you’re getting close to retirement, maybe five or 10 years away. You want to know whether you’re on the right track or maybe even ahead of schedule. Sometimes we also discover that someone has accumulated a lot of money in pre-tax accounts. That can create different tax considerations once retirement income begins. BEN: Some DIY investors think, “Why would I pay someone to put me into the same mutual funds I already own?” And in some cases, you agree with that. ALEX: Especially when someone is 20, 30 or 40 years old and has plenty of time. As retirement gets closer, the value is often having a second set of eyes and making sure all the pieces work together. One assumption we frequently see is expecting the market to sustainably return 8% or 9% every single year. Markets don’t work that way. A year like 2008 can change everything. BEN: So the concern is that there’s no safety net. ALEX: Right. We’ve had DIY investors become clients after we showed them the risks they were taking and what could happen in a worst-case scenario. Sometimes adding a little more safety means potentially giving up some upside, but it can also reduce the anxiety surrounding market crashes during retirement. BEN: A lot of people also have 401(k)s, IRAs and old accounts scattered around from different jobs. How do you know if those accounts are actually working together or if they’re just coexisting? ALEX: A lot of the time, they’re just coexisting. People may have money sitting in a target-date fund simply because that was the default option and they never changed it. BEN: How do you feel about target-date funds? ALEX: Personally, I’m not a big fan in every situation. Sometimes there can be multiple layers of fees, and the investment allocation might not match what we actually want. That said, they can serve a purpose for someone who doesn’t want to actively manage their investments because they provide diversified exposure rather than leaving the money sitting in cash. BEN: And the strategy should depend on the person’s timeline. Someone who is decades away from retirement has different needs than someone who is already retired. ALEX: Exactly. If someone is 40 and doesn’t need the money for another 20 or 25 years, short-term market movement means something very different than it does for someone who is 60 and about to retire. BEN: That’s the distinction. We don’t necessarily want someone who is already retired to have all of their money exposed to equity risk. ALEX: Correct. And ideally, we have that conversation before the day you want to retire. You don’t want to come in and say, “I want to retire tomorrow,” and only then start figuring out how the income is going to work. BEN: What about an old 401(k)? When does it make sense to move it, and when does it make sense to leave it alone? ALEX: One consideration is when you’ll need access to the money. If you need funds before age 59½, there can sometimes be value in keeping money within a 401(k), depending on your circumstances. For example, the Rule of 55 may allow certain people who separate from their employer during or after the year they turn 55 to access funds from that employer’s qualified retirement plan without the typical 10% early-withdrawal penalty. You still have to pay applicable income taxes, but it can provide another source of flexibility. BEN: And that’s important because we’re seeing more people in their 50s who want to retire early. Different pieces of money can have different purposes depending on when you need them and where they’re invested. Where Do You Start? BEN: Retirement doesn’t overwhelm people because they aren’t smart. It overwhelms them because there are so many connected decisions and no obvious starting point. Let’s untangle it. Is your retirement account ever too small to work with a financial advisor? ALEX: There’s never an amount that’s too small for advice. In many cases, when someone has a smaller balance, every decision matters even more because we want to get the most out of what they have. BEN: People sometimes think financial advisors only work with people who have huge amounts of money. That’s not necessarily the case. If we can help you, we want to have that conversation. When someone doesn’t have a huge retirement account, what are the most important moves they can make? ALEX: We look at when they’re retiring, when they’re taking Social Security, how much risk they’re taking and how much they need each month for expenses. Are you planning big trips immediately after retirement, or are you waiting? Every one of those decisions can affect taxes and the long-term growth of the portfolio. BEN: Everything has a domino effect. Retirement comes with hundreds of decisions: Social Security, Medicare, withdrawal order, Roth conversions. Where do you actually start? ALEX: I always start with expenses. If we don’t know what the expenses are, we can’t properly evaluate Social Security, Roth conversions, travel or other decisions. We need to understand what the lifestyle is going to look like, along with the person’s goals and concerns. If you tell me your expenses are $2,000 per month and they’re actually $8,000, that drastically changes everything. BEN: Aside from budgeting, which retirement decisions carry the most long-term weight? ALEX: Some decisions are easier to recover from than others. You may be able to adjust around taking Social Security earlier than planned. If you complete a large Roth conversion, you may have paid more taxes than necessary, but at least those converted funds are now positioned differently from a tax standpoint. But some decisions can be much harder to recover from, such as retiring too early without enough accessible money. If someone retires at 53 without enough funds available and then needs to return to work several years later, that can be difficult. Meanwhile, they may have already drawn down their retirement savings. BEN: That’s why retirement can feel overwhelming. There’s Social Security, capital gains, Roth conversions, income planning and so much more. For me, it starts with the budget. What are we spending? How much income do we need to generate? Then it becomes a tax question. How can we manage taxes efficiently and potentially leave more behind? But most importantly, I want people to do the things they actually want to do in retirement. ALEX: Exactly. BEN: I think it’s incredibly important for people to have the freedom, flexibility and confidence to do what they want. Creating a comprehensive plan can help give people confidence to spend their money without constantly worrying about watching their savings disappear. One of my favorite things during client reviews is showing someone what they started with, what they’ve withdrawn, what they’ve paid in fees and what their investments have earned. Even after taking money out for several years, sometimes they still have more than they started with. That gives people confidence. They’ll ask, “Are we still okay?” And sometimes the answer is, “Yes. You can even spend more.” Because what’s the point of saving your entire life if you never allow yourself to enjoy what you worked so hard to build? If you’re within five or 10 years of retirement, or you’re simply starting to think seriously about it and don’t have a plan you feel good about, that’s exactly where we start. Call us, visit taxesandincome.com, or come see us. We’d love to sit down with you. That’s How to Retire for this week. I’m Ben Fuchs. Straight talk. Solid strategy. We’ll see you next time.
