WSJ Your Money Briefing - Money Moves for the New Year: Gearing Up for Retirement

Episode Date: December 27, 2024

How can you ensure that you won’t outlast your nest egg in retirement? By making the right investing choices throughout your career. We hear from 60-year-old Colorado resident Daniel Paul, who wants to retire in the next few years, about when to start withdrawing funds, and from which retirement account. Host J.R. Whalen is joined by WSJ reporter Anne Tergesen, who explains how to budget for your retirement lifestyle. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Amazon Q Business is the generative AI assistant from AWS because business can be slow like wading through mud But Amazon Q helps streamline work so tasks like summarizing monthly results can be done in no time Learn what Amazon Q Business can do for you at AWS.com slash learn more Here's your money briefing for Friday, December 27th. I'm JR Whelan for the Wall Street Journal Welcome to the final installment of our series, Money Moves for the New Year. This week we've taken a look at your questions about meeting financial goals in 2025. We've looked at boosting your credit score and paying off debt, leveling up your career and saving for a big purchase.

But before we start the new year, today we're discussing getting your finances in order to retire. And retirement looks different for everyone. I think it's going to start out as just, do we nothing? Get that pinnacle? That's Daniel Paul. He's 60 years old and lives in Boulder, Colorado. Throughout his career, Daniel has worked in advertising and marketing for a few different

companies. Now he's a vice president of marketing for a multi-state cannabis company. In the next phase of his life, he wants to slow things down. But knowing my personality, I'm going to get very bored very quickly. I'm still young. I still feel young. Daniel is looking to retire in the next few years. His wife plans to work a bit more, but his long-term idea of retirement includes the two of them seeing the world.

We would like to go travel. We'd like to go experience things. We don't have this extravagance of a new home somewhere else. We like where we live. I think we'd like to go to Fiji. I think she'd like to go to Japan. I think we'd like to look at more off-the-beaten-path places. But to get to Fiji or Japan, Daniel wants to make sure he's taking all the right steps

in his last few working years to ensure smooth sailing into retirement. And naturally, he has some questions. Number one, which I think everybody has, is how long will my money last? What can I do to make it last as long as possible? Though that's the big thing is, how do I spend it wisely when I have no more money coming in? He also wants to know about pulling money out of his savings

and the big T word, taxes. But we'll get to that later. Let's talk about taking those first steps toward retirement. Whether you're set to retire in 2025 or just began working, Daniel's question about making your money last holds up. And before you go spending away as a retiree, you want to build up your savings as much as possible. So I talked to my colleague, Anne Turgeson.

She writes about retirement here at the Wall Street Journal. How could somebody gauge if they have enough money saved away? What are some questions they should ask themselves or their financial advisor? Right. So as people get closer to retirement, they probably have a better sense of what they're going to need, by which I mean, how much are they going to spend, say, per year? And so if you're two years away from retirement, that's probably a question you can answer with some degree of confidence. I'd say the first thing to do is look at your spending, try to figure out what's going to

remain. Are there certain things that you're no longer going to be spending money on? So try to get a ballpark sense of what's a reasonable amount that you're going to expect to spend with the idea that we all have these unexpected, non-recurring expenses, like maybe you need to maintain your home and your roof needs help. And then on the flip side, you need to answer the question of what kind of income can you reasonably expect in retirement. And a good place to start with that is at the Social Security Administration. They will give you an estimate of what kind of benefits you're likely to get. And as you get close to retirement, you can get a pretty precise estimate of Social Security benefits. And then, you know, you call your company. If

you're entitled to a pension, they should be able to give you an estimate of what that pension is going to be. And you should also ask whether it's suggested for inflation or not. We've also heard stories of retirees who take on part-time jobs to fill in the gaps. Exactly. If you expect to have some kind of income from a part-time job, if you have rental income, these are all sources of income that you, as you get close to retirement, you may have some pretty concrete visibility into whether you're going to have these things and if so, how much. So you can add up all your sources of income and look at your expected spending. And for example, if you expect to spend

$100,000 a year and you expect your Social Security and a pension to bring in $60,000, you have a $40,000 gap right there. And so the question then is have I saved enough to spend $40,000 a year adjusted for inflation in retirement? And one sort of ballpark way that advisors answer that question is they look at something called the 4% rule. The basic thing is if you need $40,000 and you've saved a million dollars or more, if you take 4% of the million dollars, that rule says you can afford to spend $40,000 adjusted for inflation and retirement. So what you try to do is use that 4% rule and assess whether 4% of what you've saved

is going to fill your gap. Heading into retirement, what changes should someone make to the way they budget their money? Jennifer Cooke It's important just to think about how are you spending your money now? I spend X amount on property taxes. I spend X amount on travel expenses or groceries, right? Don't forget that when you retire, certain expenses that you have now are probably going to go away. Commuting expenses may go away. Some people spend a lot less money on things like clothes. You're not going

to be buying lunch out often. Maybe you are, actually. It's important to think about those things, but a lot of people don't. And then other expenses may grow. Like after you leave a job that provides you with some kind of subsidized benefits, like health insurance, if you're not 65 and you don't qualify for Medicare, you might have to buy your own health insurance. That's going to be a big expense. Travel, a lot of people fantasize about traveling in retirement. That expense could grow a lot.

So, you kind of need to get your arms around what expenses are going to shrink, what expenses are going to grow, and how is that going to net out? You mentioned health insurance a moment ago. Daniel, like a lot of people around retirement age, has spent decades with a company providing insurance coverage. What's available once they leave the workforce? It depends on how old you are. If you're 65, you will qualify for Medicare.

A lot of people think that Medicare is free. They've paid into Medicare over the course of their career. But in fact, what you get with Medicare is not free. You still are paying premiums. And there's two buckets of Medicare. And whichever bucket you pursue, whether you're going to pursue private health insurance within Medicare or you're going to pursue traditional Medicare, which is people have heard of part B or part D, those types of things.

You still have to make decisions about how you're going to get that coverage and you're probably going to pay a monthly premium. Sometimes you don't, but when you don't pay a monthly premium, you have to look hard at what the other costs are that are involved. So if you're 65 or older and you qualify for Medicare, at least you have the option of getting some reasonably priced health insurance that's partly subsidized by the government because you've paid in over the years. If you're younger than 65, a lot of people either stay on their

company plan. Chances are you're gonna have to pay more than what you pay as an employee for that same coverage and it only allows you to stay on that coverage for a finite amount of time. Whether you're close to retirement or simply dreaming of it, the process can feel overwhelming. After the break, we'll hear more from Ann Turgeson about managing your finances in retirement and when to withdraw your funds. Popeyes Signature Chicken, four tasty chicken tenders, four regular size and everybody's favorite, four buttermilk biscuits. Hurry up though, like the holiday season,

Popeyes $25 festive family box deal will be over before you know it. Love that chicken from Popeyes. A 401k, IRA, a pension, maybe stock portfolios, A 401k, IRA, a pension, maybe stock portfolios? They're all potential sources of income you've built up over the years, for when the time comes to say Bon Voyage, to working a full-time job, and still maintain your standard of living. Your Money Briefing listener and Colorado resident Daniel Paul says he wants to know where he should start pulling from.

What is the best way to and timing of when to pull money out of which accounts? I know to let the Roths last the longest, but how do I minimize it for my traditional IRAs so I'm paying less in taxes? Reporter Ann Turgeson is back with us. The traditional advice has been first you spend from your taxable accounts like your brokerage accounts or your bank accounts. A lot of people stockpile five years worth of living expenses in cash in their bank account. With that in mind then you spend from traditional IRAs and 401ks and then you spend from Roth IRAs and 401Ks and then you spend from Roth IRAs and 401Ks. And the idea there is that the Roth 401Ks are tax-free, meaning you pay taxes on the

money you contribute and then it grows tax-free. So you have the power of compounding in that account like in no other because there is nothing you're going to pay in taxes once you pay the taxes and put the money in there. So the idea is you want to give that the most time to grow. Now, a lot of people who are retiring now or will retire soon, historically, during their careers, they have really not had the Roth 401k option.

The Roth 401k option is something that's caught on in the last decade or so. So advisors are increasingly seeing the value of having some money in Roth for people. And so that's something that they often recommend that people think about whether to convert money from a traditional IRA to a Roth in the early years of their retirement. That's something that's good to think about when maybe the year or two or three before you retire, start thinking about whether that kind of strategy

is going to make sense for you. What should somebody consider before doing that process? It's a complicated decision. A lot of people do hire and consult, or at least consult, with an advisor. You can pay advisors an hourly rate to help you assess this if you don't want an ongoing relationship with an advisor that you can pay advisors an hourly rate to help you assess this if you don't want an ongoing relationship with an advisor that can be costly.

So the basic decision comes down to, say I retire today and I think about I'm no longer going to be getting this paycheck that I've gotten, right? Say, for example, I'm currently earning enough money that I'm in the 32% tax bracket. But next year when I retire, I'm currently earning enough money that I'm in the 32% tax bracket. But next year, when I retire, I'm going to be living on money in my bank account. I'm going to be pulling cash out of my bank account. I'm going to be in a very low tax bracket next year. I might pay almost like nothing in taxes. So the idea is I need to think ahead to when I'm going to be turning 73 or whatever age your required minimum distribution start.

Those are required withdrawals from regular traditional IRAs and 401Ks. And those are taxable. And they're taxable at income tax rates. But you need to look at if I am pulling money out of my required distribution and the IRS, they have tables that tell you how much you're required to take out, what kind of tax rate am I going to have at that point? The answer is that if your current tax rate is lower than what you expect your tax rate to be in the future when you start pulling this money out. You're better off doing Roth conversions at

this lower tax rate and paying the tax upfront, which people don't like, at a much lower rate like 12% to avoid having to pay 24% in retirement when they have to start taking that money out in the future when their required distribution starts. So the analysis is really looking at what is your tax rate today versus your tax rate in the future. And if it's lower today, then there is some logic to thinking about Roth conversions. And that's where people maybe need some help getting all the pros and cons lined up for them. And the idea of retirement can be intimidating for a lot of people. How does someone know when it's time?

To some extent, some people they know they're ready to retire. The time comes and it's not a dramatic thing. For other people, you know, especially people who really love their jobs, it can be a very difficult decision and people probably go back and forth and it's very easy to delay it. But maybe at a certain point, people just need to embrace it and also to have confidence that if they have really put a lot of preparation and planning into it from a financial perspective, yes, they're going to be good years and bad years in the market. But hopefully the planning that you've done is sort of something that enables you to kind of ride out the bad times and hopefully have adequate foresight.

It's something ultimately that people have to just take the plunge and look forward to seeing what's on the other side and maybe trying something new or maybe trying something that they left behind or something that they have a pent-up desire to try to explore, if only taking their time and having their morning coffee at a more leisurely pace, going for walks with friends. There's sort of a world of new things to explore for a lot of people. Over the course of this series, we've talked about ways to boost your credit score, pay off debt, land a new job, plan for a big purchase, and finally, retire.

And all that starts with you. Some New Year's resolutions may be out of reach or quickly forgotten, but setting out to make smart moves with your money can pay off throughout the year and beyond. That's it for this special series from Your Money Briefing. Good luck and Happy New Year!