Root Talks: How Do Smart Retirees Handle Big One-Time Expenses?

Summary

Summary of "Root Talks: How Do Smart Retirees Handle Big One-Time Expenses?"

Released on March 6, 2025, "Root Talks: How Do Smart Retirees Handle Big One-Time Expenses?" dives deep into strategies for managing significant, unexpected expenditures during retirement. Hosted by James Knoll and Ari, both experts from Root Financial Partners, this episode provides actionable insights to help retirees navigate financial challenges without derailing their retirement plans.

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1. Introduction to One-Time Expenses in Retirement

The episode kicks off with a discussion on the concept of goal post planning, where retirees continually adjust their retirement targets to accommodate unforeseen expenses. Ari introduces the topic by highlighting how unexpected costs, such as purchasing a new car or undertaking a home remodel, can delay retirement plans.

Notable Quote:

Ari (00:07): "Goal post planning is when people push back their retirement goals due to one-off expenses like buying a new car or remodeling a home."

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2. Listener's Scenario: Gary R.'s One-Time Expense

A significant portion of the episode revolves around a comment from Gary R., a member of the Root Collective community. Gary outlines his situation:

• Current Status: In his final months before retirement.
• Expense: Planning a home remodel costing approximately $40,000.
• Financial Considerations: Currently in the 24% tax bracket, anticipating a drop to 22% post-retirement.
• Withdrawal Options: Evaluates pulling funds from taxable accounts, tax-deferred accounts (like a 401k), Roth IRAs, or using cash reserves.

Notable Quote:

Gary R. (01:10): "I'm confident my portfolio can handle the hit without an impact on my retirement goals."

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3. Three-Part Framework for Handling One-Time Expenses

James Knoll introduces a structured approach to address Gary's query, emphasizing three critical components:

a. Assessing Retirement Sustainability

• Core Question: Can the portfolio meet the retiree's income needs beyond Social Security and other non-portfolio income sources?
• Example: A portfolio of $500,000 requiring $20,000 annually utilizes a 4% withdrawal rate, deemed sustainable for 30+ years. However, a $200,000 expense increases the withdrawal rate to over 6.5%, posing sustainability risks.

Notable Quote:

James Knoll (02:51): "Can your portfolio meet the needs that go beyond what Social Security or any potential other non-portfolio income sources can generate?"

b. Investment Strategy

• Diversification: Importance of a balanced investment portfolio to avoid significant losses from any single asset.
• Root Reserves: Allocating a portion of the portfolio to cover immediate outflows (e.g., five-year horizon funds) ensures stability even during market downturns.

Notable Quote:

James Knoll (04:30): "You have to sell assets at a discount if they're not diversified. It's crucial to have a balanced investment strategy."

c. Tax Strategy

• Tax Bracket Management: Strategically withdrawing funds to optimize tax liabilities, preventing retirees from jumping into higher tax brackets.
• Future Tax Landscape: Considering factors like Social Security benefits, required minimum distributions (RMDs), and potential changes in tax laws to project future tax brackets.

Notable Quote:

James Knoll (06:45): "Understand the full landscape of what your tax bracket will look like over the course of retirement to minimize lifetime tax liability."

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4. Behavioral Aspects and Psychological Comfort

The hosts delve into the psychological challenges of withdrawing large sums from retirement accounts:

• Attachment to Cash Reserves: Retirees often prefer liquid cash for the tangible sense of security it provides, even if it might not be the most tax-efficient method.
• Decision-Making Stress: Handling substantial withdrawals can lead to analysis paralysis, where overthinking hinders effective financial decisions.

Notable Quote:

James Knoll (09:50): "There might be a mental hangup. Preparing for that emotional aspect is as important as the financial strategy."

Ari adds that personal comfort levels, such as needing a specific amount of cash to "sleep better," should be factored into financial plans to ensure retirees feel secure and confident in their decisions.

Notable Quote:

Ari (10:01): "There is an amount of cash that you want to have at all times, no matter what... it’s not scientific. I just sleep better."

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5. Practical Tips: Implementing Sinking Funds

To manage future one-time expenses without strain, the hosts recommend sinking funds:

• Definition: Setting aside funds incrementally over time to cover anticipated large expenses.
• Application: Instead of withdrawing a lump sum from an IRA in the future, retirees can gradually divert funds into brokerage or cash accounts, leveraging lower tax brackets.

Notable Quote:

James Knoll (12:14): "Think of it like a sinking fund. Set aside enough in the years leading up to that expense to avoid high-tax withdrawals."

This strategy not only minimizes tax implications but also reduces the emotional burden of making large withdrawals during retirement.

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6. Recognizing and Managing Biases

Both hosts acknowledge that personal biases can influence financial decisions:

• Advisor Biases: Advisors may have inherent preferences (e.g., favoring cash withdrawals) that might not align with the retiree's best interests.
• Retiree Biases: Increased wealth can lead to decision-making stress, similar to the anxiety one might feel managing larger sums like $10 million versus $500,000.

Notable Quote:

Ari (16:43): "When you have more money, you have more decisions that feel like they weigh more because you're like, why is that the case though?"

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7. Community Engagement: The Root Collective

Towards the end of the episode, James and Ari promote the Root Collective, a free community platform for retirees to share tips, strategies, and experiences. With over 1,500 members, it serves as a supportive space for continuous learning and collaboration.

Notable Quote:

James Knoll (16:43): "Collective is free... join the collective. Link is in the show notes."

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8. Final Thoughts and Takeaways

The episode concludes by reinforcing the importance of:

• Comprehensive Planning: Addressing retirement sustainability, investment diversification, and tax optimization collectively.
• Emotional Preparedness: Recognizing and mitigating the psychological challenges associated with financial decisions in retirement.
• Intentional Saving: Utilizing strategies like sinking funds to manage large expenses smoothly.

Notable Quote:

James Knoll (14:02): "When we start thinking about the true purpose of our money, it's not to keep growing until we die, but to enrich our retirement experiences."

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By integrating financial strategies with behavioral insights, "Root Talks: How Do Smart Retirees Handle Big One-Time Expenses?" equips listeners with the knowledge and confidence to manage significant expenses confidently, ensuring a secure and fulfilling retirement.

Transcript

[James Knoll]

This is another episode of Ready for Retirement. I'm your host, James Knoll, and I'm.

[Ari]

Here to teach you how to get.

[James Knoll]

The most out of life with your money. And now onto the episode.

[Ari]

Hey, James. So there's a phrase we talk about called goal post planning. That's when people are like, I'm gonna retire. Once I have 2 million, maybe 2 and a half, 3 million, one more bonus. And they're just pushing back the goalpost to when they retire. Now, that's a nice phrase that we use to illustrate the concept, but there are people that will do this, and it can be because of one expense. Hey, should I push off retiring because I still need to buy a new car because I've had the same one for 20 years? And what if I do that at the same time of a home remodel? And which account do I pull from? Is it cash? Is it a Roth ira? Is it a traditional ira? What we're going to be going over today is a comment that was left in the root collective, which is our community. So if you have not seen the previous episodes where we go into detail on that root collective, certainly check that out. It is free. And in the description of this episode, whether you're watching on YouTube or listening on our various podcasts, I'm going to read this comment and then we're going to get to address it. So you ready, James?

[James Knoll]

I'm ready.

[Ari]

Cool. This comes from Gary R. And he posts and says his subject line is one time expense, soon to be retired. Howdy, y'all. I'm in my final recreational employment months. So he's speaking our language. Either 4 or 10 to retirement and thinking of having some work done on the house. Approximately 40K. This brings up the question of where to pull portfolio funds from. I'm firmly in the 24% tax bracket now. He's just flexing on us, guys. Okay? With the possibility of dropping to 22% post retirement, lower in retirement. Confident my portfolio can handle the hit without an impact on my retirement goals. That being said, I'd still like to pull the funds, as Ari would say, optimally. Here are the options as I see them. Taxable account, which we call the superhero of all potential sources. The 40k would represent the largest percentage of our brokerage account other than any cash we have. But we would get the benefit of the long term capital gains rate. So that's number one. Option one, option two, tax deferred account. So although I'm not 59 and a half, I'm still able to pull money from my 401k without incurring a 10 penalty. Whoa, whoa, whoa. How do you do that? We'll mention that in a little bit. I could pull from here and pay 24% without this fear of jumping to that next bracket. 32. And then the third option is tax free. He says I don't have access to all of the money in my Roth, but I believe I could pull from what represents my personal contributions. Which by the way, he is correct on that is allowed. Which brings us to option four. I could just use cash, but it would more severely deplete my cash reserves.

[James Knoll]

Thoughts?

[Ari]

All so the beautiful thing here James, is he's asking the whole group here, not just us. He probably doesn't even know that he was asking us, but he asked so we're going to give you the answer. Gary, thoughts on this, James?

[James Knoll]

There's at least a three part framework that I would want to go through to answer that. It sounds like he's actually already gone through part of this. The first part is just can you do this? And I think he's approaching this the right way. The, you know, generally we look at can I retire? Okay, what does that come down to? It comes down to can your portfolio meet the needs that you need it to meet that go beyond what Social Security or any potential other non portfolio income sources like a pension are going to generate? So basic example, you have $500,000 in a portfolio. You need $20,000 per year from your portfolio. Cool. That's a 4% withdrawal rate. That should be sustainable if your portfolio is invested the right way for call it 30 plus years, call it good. Well what about that person that needs $20,000 per year also has a major home renovation that's going to cost them $200,000. Well you take that $200,000 out of the 500, now you're down to $300,000. Can that 300,000 still support the $20,000 per year that you need? Now all of a sudden that's over a 6.5% per year withdrawal rate. So that changes the equation dramatically. So that's the first piece of what I would look at here as people tend to look at what are their expenses and they may be neglect those big one time purchases. Is that a new vehicle, is that a home remodel, Is that sending kids to college, is that paying for a wedding, is that all these different things. So think about that first, what portion of your portfolio is needed for these one off expenses and then is the remainder enough? Such that a sustainable withdrawal rate taken from that portfolio could continue to meet your. Call it your core basic income needs along the way. So it sounds like that's already been taken care of. Gary's already gone through that. He says something. I'm trying to look for the exact quote here. He says, I'm confident my portfolio can handle the hit without any impact on my retirement goals. So I'm going to make the assumption that Gary has looked at that. The second thing is, how are you invested, by the way? The third thing is taxes to skip at it. I think Gary's looking at the tax piece, and that's the question. There needs to be a progression here to get to that piece. The first piece is, can your retirement still support that? Number two is investments. And this is actually an important one of how should your investments be allocated in order to support that? So, for example, if 100% of Gary's assets are, and I'm using an extreme example here, he's 100% invested into McDonald's stock. Every single account, all McDonald's stock. He needs $40,000. And after one year of retirement, McDonald's stock has tanked 50% because no one wants their hamburgers anymore. Well, what's he gonna be required to do? He's gonna be required to sell McDonald's stock when it's down 50% to free up that $40,000. In other words, he's gonna have to sell a good chunk of stock at a severe discount. So what do you do? Number one, you don't just own one stock, obviously, but number two, you say, what's the right mix of investments between at a high level, growth investments and stable investments. We call it root reserves internally. So what's the growth allocation? Things are going to grow for you to keep up with inflation. What's the right things of internally as we speak about it? Root reserves. Root reserves is going to include any outflows you need from your portfolio over the next, call it five years. So this would be something that Gary would say, in addition to my monthly need from my portfolio, how much do I need to pull for this $40,000 to remodel? So now I'll finally get to his actual question. Once you've determined how much needs to be stable so that you have five years worth of that, so that even in a downturn in the market, you can still meet your needs. Now it's a tax piece. Now, this is where you should have a tax strategy that essentially is helping to understand what tax bracket do we want to be in now, of course, we all want to be in the 0%. If we could just wave a wand and say, I'm in the 0% tax bracket, cool, we'd do that. But what. What do I want to be in today so that I'm minimizing or not jumping into any extreme tax brackets in the future? So what Gary should do is today he's in the 24% bracket. It sounds like if I'm reading between the lines, he'll be in probably the 22% bracket when he retires. That's not the full picture, though. What are you going to be In, Gary, say 10 years from now, 20 years from now? Who knows? Some things. But specifically, what about when Social Security starts? What's that going to do to your tax bracket? What about when required minimum distributions kick in? What's that going to do to your tax bracket? What about when certain, I don't know if there's windfalls of selling a home, moving states, other pensions coming into play. Understanding the full landscape of what will your tax bracket look like over the course of retirement so that you're not just looking, okay, I'm in the 24% bracket today. Well, so what? What are we comparing that to? What we should compare that to is where you're going to be. Which, yes, is somewhat of an educated guess because tax brackets and tax law can and will change. But when he starts to do that, he can start to say, oh, maybe, for example, I shouldn't exceed the 12% bracket. Well, the good news about retirement planning is you get to fully dictate this. I shouldn't say fully to an extent, because you can pull the right amounts from cash versus taxable accounts versus traditional IRAs versus Roth IRAs. You can manufacture the taxable income that's right for you. So if he's looking at this and if he looks at his whole tax landscape and says I should never really be above the 12% bracket, well then come up with the right mix of withdrawals. Is that more from cash and brokerage and then a little bit from the IRA just to fill up the 12% bracket versus if he says I should really be filling up the 32% bracket today to avoid being in the 35% bracket in the future, probably means he has an enormous traditional ira. So that's kind of an extreme example, but it's essentially looking at where am I going to be, where am I today, as is. And then where should I pull funds from to try to fill up the right bracket. But here's One last thing. There's a theme here. Ari, you asked me a question. I take way too long to answer it. So sorry about that. But here's what I see some people doing. They have cash on hand, and we almost get addicted to that cash on hand because it's there and it's tangible. And we're going to, you know, we're going to implement our Roth conversion strategy because we're going to be living on this cash. Well, if Gary pulls more money from his IRA today and that pushes him into the 32% tax bracket because he wanted to preserve that cash, and now next year he's living on the cash and converting only up to the 22 or 24% bracket. He kind of shot himself in the foot doing that. Said, wait, use your cash to prevent going into the 32% bracket, not to allow you to convert in the 22 to 24% bracket. So we almost have to detach ourselves from being too connected to any of our specific accounts. That cash account tends to be something that people get pretty connected to to say objectively, where should I pull funds from today to minimize the lifetime tax liability I'm expected to pay?

[Ari]

Great answer. The fourth one I would add is sleep, which you're not going to see. If you look it up on any forum of analysis, it's not going to say the sleep analysis, but sleep. And so what I mean by that is, is there amount of cash that you want to have at all times, no matter what? I have clients that will say no matter what. I need 50,000. I couldn't tell you why. It's not scientific. I just sleep better. Okay, great. Then your analysis should not be cookie cutter. Even though the conversion analysis or the withdrawal strategy says you should pull from this account over that account, it should be based on. Yeah, take the finances into consideration and then go, wait a second. I'm a human. I'm not a robot. And the mistake that we'll see is. Let's just use Gary's example for a second. Let's assume Gary goes optimally. If I don't want to pull from cash, what are my options? Okay, so I could use this Rule of 55 thing. I could try this Roth tax free thing. I could do this superhero thing. Well, on paper, the capital gains rate seems great, but we have no idea if Gary's got all McDonald's because he hates Burger King. Like, we just don't know. So what we need to get clear on is like, hey, what's going to let you sleep at night. And what does the tax answer say? With assumptions that are well known. And I apologize because I've told this story a few times. But I'll do it one more time because I think this is helpful, which is I went to a doctor, this was months ago. And I said, doc, what you just said there, it sounded great. I. I think you think it sounded great. Don't know what you just said, so try again. So he goes, okay. So he starts explaining to me, the lab that the pills are made in that he wants to give me for my issue. And I said, doc, respectfully, I don't care about the lab. I need to know why I need to take this pill or why I don't need to take this pill. And I'm not going to take it blindly. So I want you to educate me as to why I'm going to take this pill. But you're going too deep in the lab. And sometimes this analysis paralysis occurs. Gary, I'm not calling you out to be mean, and I don't know if you're doing this, but if we are spending all of our time on the analysis, when in reality there's a simple answer that's going to allow you to take action, maybe it's not even optimal, which you know how much I hate saying that, since you called out my optimal word in here, sometimes that can be the best answer, too. So we want to give you guys, hey, here's like the pill. But here's what I need to know about first. What's your health goals? Legacy, Yada, yada.

[James Knoll]

Yeah. One more thing I'm going to add in this too is kind of just like a tip for people who are planning for one off expenses. Let's assume just for simplicity, that someone has, they're retired and all their money's in an IRA and they're pulling money out of their IRA and they're partway between the 12% and the 22% tax bracket. And they're not doing any Roth conversions because they say, you know what? We don't need to because required distributions aren't going to be a huge issue for us in the future. We're just going to. Who are going to live here in the middle between the technically in 12% bracket, but partway between 12 and 22%. And that individual is planning to have a big home remodel in five years. And that home remodel is going to cost $150,000. Well, what you would see is they're in the 12% bracket today. And then in year five, they might spike up into the 24% bracket and then back down to the 12. Well, how do you plan ahead for that? That's actually pretty simple. It's in the same concept of a sinking fund. You know, if I want to be able to take one big trip with my family once a year and it's going to cost $12,000 to use a easy math number. Well, I'm not going to try to pay $12,000 from one month of salary that month. I actually take the trip. I'm going to set aside $1,000 a month each month so that by the end of that 12th month, it's all there and I'm good to go to take my trip. Well, same thing here. Almost think of like a sinking fund. Don't just wait for year five to take out a giant amount from your IRA that pushes you up a couple of tax brackets. Take out enough in the years leading up to that to say, okay, I can still take a little bit more at a 12% rate. It may be I put that into a brokerage account or maybe a cash account, depending on how far out I am from the, the incurring the expense. And in doing that, you're preparing for this one off expense using your lower tax brackets as opposed to getting trapped in a much higher one.

[Ari]

Really good tip, especially with like an rv, because it's something that you get excited about. Also every month you're putting money away and you know, hey, I'm going to get that rv. And then you find an RV that you really like. So now you put even more away. Well, you probably weren't going to feel comfortable taking out $140,000 to buy an RV because you've probably never bought anything worth that amount of money, maybe aside from your home. But now you're able to do it because you're like, I was intentional about saving for that.

[James Knoll]

Yes, exactly. So this, you know, this is all going back to the very beginning, those one off expenses. Yes. We talked about a framework for thinking through it. Can you still meet your other retirement income goals? Do you have the right investment strategy to meet that? Do you have the right optimal withdrawal strategy to minimize your taxes? But still, there's oftentimes a mental hang up. It just hurts to pull out $40,000, $50,000, a hundred thousand dollars when that's your portfolio, that's your livelihood, that's what you've worked for. So keep that in mind too. It's not going to be easy even if you have the right Retirement and investment and tax strategy, there still might be a mental hangup. So prepare for that. Prepare that. It might not just be easy to do to write a five figure, six figure check, whatever it might be, but when we start thinking about what's the true purpose of our money, it's not to keep growing bigger and bigger, making us richer and richer until we die one day. To say what are the experiences I can have in my retirement to make the most of it. So just another perspective piece on those expenses in retirement.

[Ari]

Love it. Last one I have is we have biases as well as advisors, as humans, my gut, I go to one time expense right when Gary, I saw you post that and I decided to choose that for our episode today. My gut will go to do cash because no tax implications. You've already kind of saved for it, whether you know it or not. But I don't know, do you have an emergency fund? And when we think of an emergency fund, I'll think, what's the purpose of this? And this is, hey, an emergency fund is I want to go tap into something if I need it, if my car breaks. But when you're in retirement, you don't really need an emergency fund because yes, you want cash on hand, but the traditional sense is I don't want to have to go pull for my 401k where there's a penalty. And what if markets are down and you name it. Well, you already explained here, Gary, you have the ability to access those funds, so it puts you actually in a more difficult position, as odd as it may sound, because it's like, hey, when you have more money, you have more decisions that feel like they weigh more because you're like, why is that the case though? I saved and invested. It's the same reason people reach out to us going, hey, why am I more stressed with 10 million versus when I had 500,000? Well, there's more to lose and these decisions become really difficult. So just recognize you have biases, we.

[James Knoll]

Have biases, we all got them, we all got em and not a good excuse to give it to them. So very cool. Well, anything else today? I, I guess shout out collective if you're not in there. Collective is free. Collective is a community of as, as of now, it's launched what, a week ago, two weeks ago, 1500 plus people in that community interacting, sharing tips, really cool things happening. So join the collective. Link is in the show notes. Anything else already we missed?

[Ari]

Yeah, when you check out at McDonald's, if you tell them you're in the collective. You won't get any discount and they might look at you funny. But if you want to record it and share it with us, we'll post it.

[James Knoll]

We'll make a channel for that. All right, everyone, thank you for listening and we will see you all next time.

[Ari]

See ya.

[James Knoll]

The information presented is for educational purposes only and is not intended as an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk and are not guaranteed. Any mention of rates of return are historical and illustrative in nature and are not a guarantee of future returns. Past performance does not guarantee future performance.

[Ari]

Viewers are encouraged to seek advice from a qualified tax, legal or investment advisor professional to determine whether any information presented may be suitable for their specific situation.

[James Knoll]

Hey everyone, it's me again. For the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed this podcast, then go to rootfinancialpartners.com and click Start here where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss on this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.