Hi friends. It’s Devin, founder and CEO of Choules Financial. On this week’s Key to Yes, we’re going to go over the common pitfalls to avoid before retirement.
As we approach retirement—and in the first few years of retirement—there are some really big pieces that we need to make sure we get right. So today, we’re going to go over a few of them.
The first one is to know what our needs are, specifically our income needs. We’ve talked about this before, where we discussed surviving versus thriving. We need to know the bare essentials to get us through. At Choules Financial, we don’t believe that just surviving is what anyone really wants. Sure, we all want some peace, but we’d rather thrive—do the things that make us feel alive, the things we’ve dreamt of our entire life. Those dreams factor into our income needs too. We need to understand how much money we’re going to be spending in retirement.
A quick way to help understand what it takes to live your lifestyle today is this: let’s say you make $100,000 a year and put 3% into your 401(k). We also have Social Security and Medicare deductions. Around 10% of your income never actually makes it into your household budget because deductions like FICA and 401(k) contributions come out beforehand. You can take your 401(k) contributions and add about 7% to figure out how much of your money you never see.
If you’re saving money outside of that, it adjusts this calculation. But if you’re only saving through your retirement plan, that’s okay. This helps estimate what percentage of your income you’ll need in retirement. We usually aim for 80 to 90 percent because people enjoy the lifestyle they have, and no one wants to take a step down in retirement. That’s why planning is so important.
Next, we need to make sure we account for healthcare costs. Are we retiring early? Where are we going to get healthcare if we don’t have an employer-sponsored plan? Will we go out to the exchange? Are there strategies to help reduce those costs? The answer is yes. You may also need to plan for long-term care. It’s expensive to age today. How will we set money aside for that? The federal government estimates around $250,000 in healthcare expenses from age 65 to the end of life. That number feels high, but with how expensive healthcare is, it’s possible.
The next point—and probably the most important—is to have a written income plan. This allows us to stop hoping we’ll make it through retirement and start knowing. If you don’t have a written plan that outlines exactly how much you’ll take from your 401(k), Roth, Social Security, pension, and so on each year, you’re setting yourself up for failure. You may still get by financially, but mentally, that uncertainty can take a toll. A written retirement income plan is the most important thing you can have, and unfortunately, around 90% of people don’t have one. It’s not commonly offered, but we believe it is critical to reducing stress and building a vision for the life you want.
We also need to talk about taxes. When money comes out, how much will it cost us? Will taxes go up or down in retirement? Most people are told to put money in their 401(k) to lower taxes now and let it grow tax-deferred, with the expectation they’ll be in a lower tax bracket in retirement. But a DALBAR study found that 50% of retirees actually pay more in taxes in retirement than they did while working.
This happens because during your working years, you had more deductions—like mortgage interest and dependents. Over time, your income likely increased, and by the time you retire, those deductions are gone. All you can take is the standard deduction. That means the pre-tax money you saved is now taxed when withdrawn, often at higher rates than expected. We’ve been led to save in pre-tax accounts when it might not have been the best move. We’ll cover that more in another video.
As someone with a master’s in accounting, I’m very passionate about taxes in retirement. Where you pull your money from—Roth, IRA, checking—can affect whether your Social Security is taxable and impacts your overall tax bill. The income plan is key here, because it guides these decisions. The impact can be significant.
We always talk about the five areas you need to cover: investments, income, taxes, healthcare, and legacy. These areas all work together.
We also need to consider asset allocation, which means how we hold our investments and manage risk. In retirement, we move from the accumulation stage, where we’re building and saving, to the distribution phase, where we’re withdrawing from those savings. At this point, it’s more important to focus on getting your money back than on the returns you’re earning. We’ll talk more about the concept of sequence of return risk in another video and show how the same investment can perform very differently when withdrawals begin.
To wrap up, when it comes to avoiding retirement pitfalls—whether you’ve just retired or are getting close—it’s important to understand your income needs, have a healthcare plan, build a written income plan, understand your tax situation, and make the right decisions with your investments. We always think it will be someone else who has to deal with healthcare or taxes, but these things matter to everyone, and we need to have plans in place.
This all comes back to the written retirement income plan. It’s the biggest takeaway. You need to have it in your life. From there, think about how you’ll manage taxes based on your income sources and how your assets are allocated. Getting a return of your money becomes more important than a return on your money. That’s the key if you want to thrive and not just survive in retirement.
Well, folks, that’s another week of the Key to Yes. Thank you so much. As always, subscribe, turn on notifications, and we’ll see you next week. Thank you.
