The Great Retirement Debate: What Are the Biggest Misconceptions in Retirement Hi, everybody, and welcome back to the Great Retirement Debate. I'm here with Jeff Levine. I'm Ed Slott. And, Jeff, what do we have now in season five? Well, I think today we're gonna discuss and debate what are the biggest misconceptions in retirement, or what are the biggest misconceptions people have about retirement? And Ed, I'll turn it over to you first. Like, what what in your mind, what's a big one? Well, whenever there's a new tax law, it creates massive confusion. Okay. If you remember, one of the big items last year, July fourth, the Oba Law, OBBA, the one big beautiful bill act, it was enacted what day? July fourth. July fourth. Everybody was at a barbecue except you and me. We were in there reading eight seventy pages. Yeah. A lot of fireworks in that bill. Yeah. A lot of information, but a lot of misinformation. You have a big problem now. You have something called influencers, TikTok video, podcasts, not this one, but other podcasts, where they wanna be first out there and people wanna see. And it really hadn't been dissected yet. So that's a perfect example. When there's a new tax law, it creates interest and confusion. So when the one big beautiful bill came out, one of the big items that they were touting was no tax on Social Security. Now fast forward, many people have already done their twenty twenty five tax returns. Yep. And I've heard complaints, I don't know if you have. I have. And what are they complaining about? Why is my Social Security being taxed? I thought there's no tax on Social Security. Well, that wasn't that maybe what they called it, but the actual name of the provision they were referring to was the enhanced senior deduction. Yeah, it wasn't that long ago actually where I believe there was a press conference held in front of a backdrop that said no tax on Social I saw the thing. Yeah, I didn't even want to get into that. But And the prepared signs of the audience said no tax. So some people were saying, how can that be? Well, so these are the kind of things that happen. So let's start with that. Yeah. They were similar, by the way, with no tax on tips and no tax on Both of those and by the way, that's what the law if you look at the provisional law two, that's what the law says. Right. It literally says in the law, the header is no tax on tips, no tax on overtime. That it's not exactly accurate. The better phrasing for that is no income tax on some tips and no income tax on some overtime. And it's not the overtime you thought it was. That's right. It's only half of tips you thought it was. In fact, I just saw an article recently as a result of the twenty twenty five tax returns that had these provisions on them. And they said people, because of the no tax on tips, more people that get tips were able to buy homes. And I was thinking, what? How much they make on tips? It wasn't that. It was the fact that to get the no tax on tips, you had to report the tips. And most people were, I don't want say it, but not most, but some people didn't report tips. I have heard of A lot of people are saying that they didn't report tips. Now that they do, they have higher income, they can qualify for a mortgage. It's amazing how that works, Yeah. So there is an income tax deduction on certain tips, as Jeff said, but you first have to report the tips, pay the payroll taxes, that's the FICA, Medicare taxes on those tips. Alright. That's a pretty that's a pretty good one. It's a very I'm gonna say it's a little bit more micro. I wanna go really macro for a second and talk about some of the big things, the big decisions that permeate throughout retirement. One of the first ones being like, as I get older, I should become more conservative with my investors. Now, that is true for some people. As you get older, your time horizon shrinks, at least your personal time horizon shrinks. And indeed, as your time horizon shrinks, you can make, less and less accurate predictions about certain investments. Right? You could say, over the long run, stocks are more likely to do better than bonds. But over a one year period, you could be less confident. Right? So as your time horizon shrinks, maybe you wanna become more conservative. But there are other individuals who, as they get older, they look and they go, I've actually done a good job. I'm not gonna need this money. I'm gonna leave it to my kids or grandkids. And they end up becoming more aggressive because they're not investing for them anymore. Oh, right. Right. All of a sudden, they go, I'm investing for my kids and my grandkids A different time That's right. A different time horizon. Eighty, they're not thinking I'm gonna die in five years. So I said, I have thirty years, forty, fifty years. That's right. It's not your time horizon anymore. It's your money's time horizon. Point. Yeah. So, you know, that's that's one of these ones. And, also, even the idea you know, people used to say, well, I'm sixty five. Now I have to be very conservative. Well, if you're sixty five, you might still need to plan for twenty five, thirty, thirty five years of retirement. Or if you're married and you're sixty five and you have a younger spouse, if you're planning together as a couple, you might need to go even more than that, which kind of leads me to my next big picture misconception. This idea that I can't take more than four percent out of my portfolio Otherwise, what happens? That's right. Otherwise, you go to retirement jail. Look, the four percent rule is a great rule of thumb. But like most rules of thumb, it's not meant to be dictatorial. It's not meant to say, like, this is the in fact, I hate that we call it the four percent rule. Just to explain. So somebody has a good amount of savings, a million dollars Yep. They can only take forty thousand? That's what the four percent rule says. The four percent rule says if you want to be able to sustain a retirement distribution over a thirty year period with inflation adjusted distributions each year. In other words, you start with forty thousand dollars and next year because you want to buy the same dozen eggs and not eleven eggs the next year, you take forty two thousand. And then you take a little bit more each year so that you continue to increase your cost of living or your income with cost of living as it rises. That four percent is a good rate to do that with. And this was done by research by a very famous financial adviser known as Bill Beneghan. And what he did was he looked at a history of market returns and said, if you only took four percent, then during the periods of time over which he analyzed, you never would have run out of money, which is true, a, for the period of times that he looked at. We don't know what the future holds. In some cases, the four percent rule may be too aggressive. Maybe you should start with a lower amount. But I think it's really important that people realize that when that research was done and the four percent quote unquote rule was created, it was done so that in all situations, you would not run out of money. Or said differently, in the worst possible scenarios that he looked at, the four percent quote unquote rule still worked, which means in every other scenario that wasn't the worst case scenario, people ended up with extra, if you will, money when they died. And in many cases, it wasn't a little bit extra. It was a lot extra. And so this idea that I can only spend four percent, you've got to be nimble in retirement. If you want to be able to maximize your retirement spending, if the markets are doing well, you can adjust upwards. If the markets don't do well, you may need to adjust downwards. But the idea that, like a robot, you should only take four percent is a big misconception. This four percent rule should be thought of as a general guideline and a starting point, but everyone's situation is different. Alright, Ed. Back to you. Well, let's go back on the four percent rule. First of all, you have to take into account other income, like Social security, and things like that. The four percent is what you can maybe take out of your portfolio. Right, right. But let's talk about lifestyles, the kind of life you want. Do you want to save it all for when you're ninety and you can't do anything? There's a case to be made for that. Do you have talk about that with clients where maybe you should spend more in your seventies when you can travel and do things? Yeah. Absolutely. And this is oftentimes referred to in three different phases, your go go years of retirement, your slow go years of retirement, and your no go years of retirement. And to the point you make, a lot of people are more excited about spending more of their money when they are in their, let's say, 70s, maybe even early 80s today, while they're able to get around, they're able to enjoy their time with their grandchildren, etcetera. And then as they get older, they say, well, I'll scale back my expenses. As we look at spending and the research throughout retirement, what's interesting is spending on real basis, in other words, when you adjust for inflation, actually tends to go down throughout retirement. Not a lot, but you tend to actually reduce spending on a year by year basis throughout retirement, A little bit more at the beginning of retirement and a little bit less later on as medical expenses start to be about. Should you deprive yourself in your 70s years, your go go years, and even the slower go years? I think the answer to that well, everybody's situation is different. But I think the answer usually is no, and a lot of people want to spend more earlier on. But you also have to be mindful of what is going on in the markets and outside because there are certain things where you may want to spend more earlier on, but you also are more likely to have higher medical expenses later in life where you have to reserve money, or you may be stuck with a plan that is not yours, or as you like to say, Ed, the government plan, which is not what a lot of people who have done a great job saving want. Right. And I think it doesn't even matter, at least from my experience, how much a person has. Everybody, as they get old, is worried about running out of money. It's just a thing. Yeah. I was just reading actually research that was released where they were citing the fact that people are two times more concerned or more worried. It keeps them up more worrying about running out of money than dying. Yeah. So the idea that I could be alive without money is more scary to people than the idea of dying. And I get it, right? Like, I mean, when you're dead, as you say, you're dead. Yeah. I think a lot of people say that. Listen, I was giving you credit. Take credit, all We call this a debate, but when you're dead, dead is an absolute All right. Fair enough. Yeah. So another item that people are worried about I'll give you another one. A misconception. Will Social Security be there for me? Will it be solvent? I mean, now they're talking about you know, every time they bring up a date when it's going to get insolvent, it seems to be closer. Like, we're in twenty six now. I think we're up to thirty three. I mean, that's close. It is. It's getting there. Yep. Alright. So what do you think? People are worried, and I think I think the general Well, I'm a third rail believer. Okay. They're not gonna touch the third rail, especially for people that are in the program like me. They're not going to maybe for you, but not for me. So no problem if if you're older people tend to vote too. That's fair. Yeah. And look, I think it is overblown to a large degree. People who are out there saying, Social Security won't exist. I'm not going to get anything. To me, I think highly look, even if we did nothing, and the likelihood of Congress doing nothing in general is actually not that bad. But in this particular case, to your point, people vote, people do not want to see Social Security There'll be something. It will probably be a last minute Like trimming around the edges and stuff. Yeah. Even if we said they didn't do anything, you may not be working at the time that this happens. Maybe you will. I hope you will. I hope we're back here. But I will be, and I'll still be paying into the Social Security. And that's good. Yeah, there you go. With many of my friends and peers from my generation, those a generation above me, those a generation below me. And if nothing happens, we're still looking at zero seven seven dollars zero seven eight dollars zero point seven nine dollars on the dollar, depending upon what year you're looking at the research. So look, I get it. Nobody getting a ten thousand dollars check today wants to receive an eight thousand dollars check tomorrow, right? Like, that is not ideal for anybody. But the idea that Social Security is just going to up and vanish and the Social Security check will be gone completely is sort of ridiculous. Yeah. On the other hand, I see more young people kind of preparing for that saving in other ways. You know, adding to their retirement accounts, saving more. I think that's fair. Look. There's nothing wrong, especially you pointed out the difference in ages. I think those who are in or close to the age at which they would be receiving Social Security are more likely not to have changes made to the amounts that they are receiving. Folks like me who are a little bit younger, I could see us getting a little bit less than we were promised at the moment or having to start Social Security a little bit later or having higher Social Security taxes on payroll or maybe having more of our income. So I think there are a lot of ways in which you can fix Social Security for the long run. It's just gonna amount to political courage to do so, and it probably won't happen until we get much closer to that twenty twenty twenty thirty two, twenty thirty three deadline. But getting closer. It I told them that it's article. Like, it's it's moved down. It was years ago. Now it's closer, and the years are going up. And here's one more popular misconception. I saw the new estate exemption. It's fifteen million a person under the ABBA law, thirty million for a married couple. Yeah. It covers ninety nine point nine ninety nine percent. A lot of nines out there, What do I have to worry about estate planning? Or even if it's a married couple, this is one of the big misconceptions and it could cause problems later on. Well, the first spouse dies. I left everything to my wife. Why do I have to even file? My tax guy, my lawyer says I should file an estate return. Why would I do that? Alright. Let's separate these. I'll take the first one. I'll kick it back to you for the second one. I think the first one is a more important question for people maybe with more modest means. Yeah. And the second one being a more important question for those with significant means. Not fifteen million today or thirty million, but significant. So the first one, why should I have an estate plan? Like, don't need an estate plan. I don't have enough money. Maybe I only have a million dollars or two million dollars. Maybe you say, hey. Everything is in my retirement account. Well, there's a lot of reasons you need an estate plan. Your estate plan covers a good estate plan, I should say, covers a lot of things. One is it covers things that happen when you die, but it also covers things that happen as you approach death. So having powers of attorney in place so that as you get older and can't pay your bills or things like that, someone else can do it legally on your behalf. We have the ability to have, medical decisions made via a medical power of attorney or sometimes referred to as a health care proxy, that your wishes are known because you have completed a living will. And then even things you might not think about. Like, you don't have to be rich to have email accounts or digital pictures or all of that. Those digital assets. You know when I say digital assets, I know a lot of people listening, they go, oh, cryptocurrency. That's what no. Not not that. That is a digital asset. No. That stays hidden. That's right. That that is hidden. In some cases, forever. But, I mean, I'm talking about the digital like, your your iCloud account, your photos, your Facebook account. Some people like, there's a I remember somebody coming up to me one day and going, it was really creepy. My aunt died last week, and I just got a happy birthday message from her on Facebook. It's like, Okay. Like, if you want that to go away, then somebody is going to need to legally be entitled to do these things. These are all taken care of on an estate return. It could even be that you're young and you have no assets, but maybe you have kids, and you wanna make sure that if something happens to you, there are guardians for them. There are a million and one reasons that everyone or almost everyone should consider a more formal estate plan than the one that is given to you by default under your look, if you don't have an estate plan, it all ends up under state law. That is what is going to control the assets. If you have no estate plan, if you have not completed your beneficiary forms, it largely ends up under state and testes see laws. And that may or may not be the way you want things to go. And at a bare minimum, it is likely to tie things up in court. So even if you have more modest means, you still should work with a qualified estate planning attorney. Right. Get all these things done. That's right. Get these things done. Absolutely. All right. So let me turn it back over to you, Ed. Let's talk about those with a little bit more wealth, but not at the fifteen million twenty million dollars Well, someone let's make them five million dollars Right. Okay? Someone with five million dollars dies and leaves it all to their spouse. And you don't have to file an estate tax return at the federal level unless your assets exceed the federal exemption amount. Most people today have a fifteen million dollars exemption. Right. If I die with five million dollars of assets, why should I pay someone to fill out an estate tax return when I don't have to? Right. Because that fifteen million, it sounds like what you just said makes sense. I have fifteen five million. The spouse has very little, we'll never be near that. First of all, you never know what that exemption will be when you die. It's constantly gone up and up and up, but we may be at a point where it may have to come down. Proposals right now that have been put forth to bring it back down to three point five million dollars which it hasn't been since before, I think, twenty ten. Right. Twenty ten was zero. That was an odd year, but great year to die that year. Ask George Steinbrenner. That's right. I remember George Steinbrenner died that year, yeah. So there's something called portability, which means that when one spouse dies, let's say he leaves everything just like you said to the surviving spouse, well then he has a zero estate. So he hasn't used his fifteen million. Yep. Now the reason you want to file a federal estate tax return is to lock in his fifteen million and elect what we call the not we call it right on the return, deceased spouse's unused exemption, which means in English, d s u e, means in English, now the spouse gets the thirty million if he didn't use any of his fifteen. So basically takes the deceased spouse's unused portion of that fifteen million dollars transfers it over to that surviving spouse. And you lock it in. You never know. Somebody wins the lottery. You get a big insurance settlement. Or as you said, the exemption goes down. And this is one big reason to do that. File the return. That's all you have to do. It's a zero return. You file it. That's how you elect portability. And as you said, what if it goes down low? IRS has already ruled on this that if you elect the portability, that amount is locked in. Yep. So effectively, if we went back down to that three and a half million dollars, barring any changes in federal law that would would alter this, that could still leave someone with eighteen and a half million dollars. Exactly. The fifteen million that you inherited, if you will, from your spouse. Yeah. Why not do it? And so there's a cost to filing the federal estate return. That's why some people don't do it. But I think it's a big deal, everybody, a married couple who dies, they should file a federal estate return at the first day. I agree. Think a lot of people are shortsighted. The way I always explain it to folks is it's like buying very inexpensive estate tax insurance. You you can go out there and you can buy a life insurance policy, which a lot of people did for years, and use that to pay an estate tax bill. Or you could just file an estate tax return and buy yourself, if you will, fifteen million dollars more of estate tax free assets Right. At a very low cost. That seems to be a better way to go. Alright. Time to wrap up. We've covered some of the big misconceptions. There's plenty more. We could probably do this show on every every program, but wrap it up. Alright. Yeah. We'll wrap it up, Ed. And look, there we talked about misconceptions today. One thing where there is no misconception is that when you are armed with more information, you are generally able to make better decisions, and better decisions lead to better outcomes. And, Ed, that is the mission that you and I are on each and every day here at The Great Retirement Debate. We thank you for taking some time out of your day to join us. We hope you found this valuable, and we'll see you next time right back here on the great retirement debate. Jeffrey Levine is chief planning officer at Focus Partners. This podcast is for informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information mentioned may be based on third party information which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The topic discussed and corresponding arguments are those of the speakers and may not accurately reflect those of focused partners.