retiring can be a very stressful thing. So people are getting ready to retire in the near future. What are some of the things that they should be thinking about? Be aware that understanding how to make tax code work for you is something that's really, really important. I think that understanding the expenses that people have that a retiree is going to have to determine, starting to get your mind around that is going to help people.
In addition to shaking up our lives, or school schedules, or work schedules and just about everything else, the Coronavirus pandemic has shaken up the nation's financial system and investment markets, and it has many people wondering about what the impact might be on their future on their retirement. Perhaps they were looking at retiring during this period and aren't sure what to do. This is random acts of knowledge presented by Heartland Community College. I'm your host, Steve fast. Today we're going to be talking about the impact of COVID 19 on our finances and our retirement will speak to a financial advisor who will give us the overview. I should caution that this is just a discussion. And before you make any decisions on how you will handle some of your personal finances, it's best to consult with a financial advisor. That said we have a lot of general questions to get to about the pandemic, our finances in retirement.
Hi, my name is Tyler Brzezinski. I am a lifelong Bloomington and McLean County resident. And I'm pleased to be working with Heartland and helping with some of the community education that's happening our heartland and my specialty is financial education. So I teach a lot of classes with Heartland, about taxes, Social Security, retirement planning. And just the variety of topics and Bunny trails we go down in those classes are pretty fascinating. I think people get a lot out of our classes.
Well, this pandemic has certainly touched just about every element of our lives. And certainly our financial lives have not been an exception to that. You seen changes in how you file your taxes, when you can file your taxes, how your investments might be performing. And it's certainly got to be a little bit unnerving if you are planning on retiring around this time, and you're still in the middle of a pandemic. So what would you say to folks that if you are planning to retire this year, or in the near future, is that something that you need to take into consideration because of the effects that the pandemic has had up on? A lot of these things that I just mentioned,
I think that a lot of people aren't feeling some uncertainty about that exact issue. We've kind of lived in some times that we haven't seen before. So as far as a pandemic, but we actually can look to the recent history, and we can see a period of time. For instance, in 2008. In 2009, we experienced a substantial bubble bursting with the mortgage bubble where people who were planning to retire were forced to reevaluate their strategy. And they're forced to re evaluate because the market crashed people's 401k case dropped substantially. They weren't sure if they're going to be able to afford care, and they weren't sure when the market was going to come back. And when their 401 K's were going to grow again. So I think that we can see a recent example that gives us a little bit of guidance. And while every single one of these drops is different, this COVID related pandemic related bubbles certainly has been unlike anything I've ever seen. We've had one of the largest bear markets and one of the largest bull markets in the history of our markets, all within a period of about six or seven months. That's pretty crazy, Steve. And people are really having to evaluate what they can do. So I am seeing people reevaluating. However, with the huge bounce back that we experienced. I think people are looking forward with more optimism than they have in the past when we've experienced large market crashes. The market recovery as quickly that happened is fueling this optimism. And I think in addition to that the promise of a quick vaccination that looks like it's going to be very effective for a large portion of our population is helping people to have some confidence that they're able to go forward with their planning. Now, that doesn't mean that there won't be issues to overcome. Perhaps some of these vaccines don't work as well as we'd hoped. There might be bumps in the road that are unforeseen. But I do think people have more confidence about proceeding with their retirement planning than they have in the past. Which means from my point of view, that it's even more important to get the education and do that properly. Since now, people who maybe in March of last year thought they're gonna have to put things off for years and years, are now actually able to have the confidence to think that, hey, my retirement plan may be back on track.
I think a lot of the uncertainty within the markets that was related to I guess you'd call it the pandemic freeze, travel, hospitality, those sorts of industries. I would expect that in the larger sense. We'll see that come back. When people can get out of doors and feel safe. They're probably going to do it at a great rate. But I think that also you have to look at the impact it's had on so many people who have really felt the brunt. And that's been in many cases, small businesses, folks that, you know, can't afford to weather that kind of interruption their business for months at a time. And that's been tough for people too, they've even had to take money out of the out of their savings and investments.
Yeah, if they were fortunate enough to be able to do it, I think there's a large portion of our workforce that has seen such a substantial shift in the way that they are working, whether their job was eliminated entirely, whether it was a small business that was started the wrong time, or didn't have the savings to see themselves through a very difficult time. And that probably will have some impact on the overall economy. Because there'll be a lot of people there who are trying to re enter into a small business, opening a new small business, trying to find a job, again, who are making big shifts and changes because the pandemic and such a large brunt, or a large impact on specific industries, and all those people as those industries reopen, it'll be very interesting to see, Steve, what happens and how quickly some of these industries and things specifically like the restaurant industry, for instance, how quickly does that actually recover? We know the impact has been huge. But how quickly will that actually come back? It should be pretty interesting to see. And I think a lot of it has to do with the confidence that the public has and the effectiveness of vaccinations, and the fact that we really have put the worst of this pandemic find.
One thing that I do want to talk about a little bit is on the personal impact that everybody has, you know, everybody has to file their taxes every year. And that kind of got out of whack a little bit. They extended the deadline. And I found a lot of that stuff was confusing to many people, you know, if you invest in an IRA, you have your maximums and that pans out over a certain period of time, but then they extended that. So are there any things that people need to look at? If they're thinking about their IRA, for instance, or they're thinking about what they can put into or take out of their protected accounts, there are tax accounts that they want to think about?
Yeah, you know, Steve, I'm not sure that there have been such huge drastic changes in that area, that there is one thing that I could say, you know, I'm not sure how, hey, three quick things you can do with your IRAs to make more money or to eliminate taxes or to do this, that or the other, because a lot of the changes that have happened are temporary, I think what is more important for people to understand when it comes to their IRAs, or retirement accounts or investments is being aware that there may be some opportunity now. And I actually think that that opportunity exists now and has for the last years, largely due to the tax code, the fact that taxes are for many people relatively lower now than they have been in the past or then they probably will be in the future. And that it's more relative to that change in the tax code than it is to any of these kinds of pandemic shifts, that what I mean by that is, retirement plans are by their very nature of long term. So people should be creating a long term plan with how am I going to take income from this in the future when I retire? That's one thing we need to be asking ourselves, what will the taxes look like I'm this income now. And this is the current thing I'm doing maximizing my benefit. And I'm maximizing my employer contribution, and maximizing any type of match. Am I using the 401 K, the Roth plan, and the Roth 401 K or whatever other retirement tools I have access to, to minimize the amount of taxes I pay over my lifetime. And I think one of the things that is very important for people to understand. Oftentimes, when it comes to tax savings, we kind of get lost in the woods for all the trees. And it's important for people to understand that they really do need to learn how to quantify the lifetime tax implications that their planning is forcing them. Are they opting into higher tax brackets in the future? Well, if so they need to re examine carefully whether to use Roth 401 K's IRAs. Now, I think it'd be in a lower tax bracket the future. Okay, well, how do we use those same tools to maximize the amount of money you keep in your pocket? I guess to sum that up, Steve, my thought process on this is rather than saying, Here are the top things, the list of things you should be doing right now, because of the pandemic, saying, Well, maybe there are a couple of those individual cases where people have been highly impacted. But in reality for most of us, examining the tax code on a year to year basis, and then how it's going to affect us over the course of our lifetime. And quantifying that, in our own personal lives is going to create a more effective tax plan. It's going to create a more effective retirement plan. And we're going to end when these pandemics and these unexpected things come along. We're going to weather them better, because we already have a long term view.
One of the things that the pandemic has also done is it's affected people's personal lives and the way that they've approached things like work One unexpected benefit that I had is that I discovered because I wasn't spending money on a vacation, I wasn't spending money on these things with those things. Now, you know, my air conditioning Bill probably went up over the summer, and my heating bill probably is gonna go up over the winter. But it really represented a lifestyle change. And I think that has also maybe affected a lot of people's thinking, especially if they are thinking about retirement on what they want their lifestyle to be like, and what what's maybe better or worse than, you know, going to the office every day or going to your workplace every day, I wonder if that puts people in the mindset of doing things differently, you know, of saving some money here, or not spending so much money there. And I wonder if that makes it a good time to evaluate what your plan might be, as you say, you ramp up towards that actual lifestyle change of retiring, because people have to think about what their budget might be when they retire? Well, and I wonder if that gives people I guess, an opportunity to try that out, as it were,
I think what you're bringing up here is maybe one of the more interesting things that is gonna come out of all this. I mean, interesting, obviously, a lot of people have been impacted very negatively. But when we step back and look at kind of the American culture and the way we've worked in this country for so long, I don't know about you, but I'm talking about a lot of my friends, who are agitating with their employer to be able to stay in work home part from home permanently. And I think that that cultural shift, with the thought process that, hey, virtual work is far more acceptable than it was in the past, it's gonna be very interesting to see how that impacts us over a long term, I'm noticing a lot of my peers are enjoying the fact that they can work from home, they're seeing their kids more, they're having lunch with their spouse or partner, they're going for a walk in the middle of the day, they're enjoying a little bit more work life balance, maybe. And I do think that puts people in the mindset of saying, the status quo doesn't have to be what we thought it was not just in our day to day work, but maybe over the course of our lifetime. So a lot of folks who are coming to me and going, hey, you know, we've saved a little bit of money this year, and it wasn't really too hard to do, we always thought it would be a sacrifice to save the amount of money we save. And we're finding that the sacrifice wasn't really that much. So I do think it is shifting the way that people are thinking they're enjoying that a silver lining to this is that they're enjoying the time home with their families. Of course, we all want this to be done with soon as possible. So we can get back out and do the fun things in our in our normal lives without having to think about a dangerous disease. But we are finding that it's shifting our mindset a little and I'm seeing people who are coming in who are going, You know what, I do want to retire a little bit earlier. And I do see an opportunity to change our spending habits to create possibility for that. I think that that's something that I'm actually personally really fascinated by. How is this shift in the way we work going to affect our family is going to affect our communities and going to affect our long term finding. And I see a lot of people struggling with that question. I don't have any answers on it yet. I don't know exactly what's going to happen. But I do think over the course of the next few years, we will see a substantial shift. And I'm interested to see how that will shift people's mindset when it comes to retirement.
Well, if nothing else, it provides an opportunity for you to kind of do a financial assessment or reassessment as it were, you think about what you spend money on. And in some cases, maybe you can think well, do I have to spend that kind of money? Could I use that somewhere else to plan for the future, or as you say, rethink maybe about how you do work, and what your opportunities are, maybe some people might have been thinking, I'm looking at retirement here. But you know, I've been working at home and a lot of the things I was looking forward to in retirement I'm getting while I'm also working. So it might change the way you approach things.
Our lives are what we make of them. And we are the architect of our destiny. And you know, of course unforeseen circumstances can pop up. But I do think that people are starting to kind of grapple with the fact that, hey, rather than being reactive, to my work, and to the work life balance and to and to my retirement planning, if I take a more proactive role, I may be able to shape my life to look a little bit differently. And that may be a good thing. Good thing for me for my family, maybe even it'd be a good thing for our community. Like I said, fascinating to see where that takes us think I do think that you're absolutely right, in that taking this moment, while it's fresh in our mind. While we're still grappling with all this and saying, what is it that I want? And how is my financial plan? How's the level of financial knowledge that I have supporting that? Do I need to add more financial knowledge? Do I need to get smarter about how I'm spending money? Do I need to actually think about my budget and the resources that I'm putting towards my return? aren't planning are my mortgage? Or my college planning for my kids or debt? And do I need to think about re engineering what I'm doing to create a better or different result?
So one thing I do want to ask about, we touched on it just a little bit earlier about people that may be we're looking at retirement around this time period. And if I understood, right, your overall thought on that was you don't necessarily need to be too scared about that. You can move forward, even in the wake of all this uncertainty. But if you are going to do that, what are the things you need to do to start to begin that process to build your exit strategy towards retirement? No matter what's going on? What are the things? If you're thinking about it in the foreseeable future? You need to start doing?
Yeah, great, great question, Steve. And, you know, there are a couple periods of our time in our life where our decisions have an outsized impact, and retirement, and when and how we decide to retire is one of those periods of time, we're shifting from having paychecks coming in every week, or every two weeks, however, you get paid to now having to pay ourselves and having no paychecks coming in. So a coordinating things like social security into your retirement planning, coordinating your benefit, making sure you're not leaving money on the table, understanding how to use a mortgage in retirement, these are all things that are going to help people create some additional success in their retirement, retiring can be a very stressful thing. So people are getting ready to retire in the near future. What are some of the things that they should be thinking about? One of the big things that I always harp on and anybody who's come to my classes or or heard me speak, be aware that understanding how to make tax code work for you, is something that's really, really important. Most retirees when they are asked, What will your biggest expense be during retirement, vastly overestimate the amount of money they'll spend on health care during retirement, I have an anecdotal story about this, I met with some folks recently, and we were just chatting about this. And they had budgeted for their health care costs per year in retirement close to $16,000 a year. Right. And they figure they're gonna need that between insurance and copiousness. None of the other Well, they didn't really understand exactly how Medicare worked. And they didn't realize that Medicare is actually a really efficient and effective program, and that their costs are going to be substantially lower than they had budgeted. Well, the great news about this is that that money can then be used someplace else, or saved for the future. Right. So I think that understanding the expenses that people have that a retiree is going to have to determine sort of get your mind around that is going to help people, particularly from the standpoint of tax planning, were saying, okay, hey, you know what, I have this big bucket of money. And it this probably was surprising, Steve, but the largest amount of wealth in this country is kept in 401, Ks and IRAs, retirement plans. And so the problem with that is that when people do start to withdraw money from those retirement plans, it is going to be taxed, we have a partner in the IRS. So without harping on this too long. One of the things that I think every retiree or pre retirees should be doing is taking a careful look at how they've saved so far, and what they can expect for a tax picture going forward from this point, especially once they hit retirement. And then they should be learning about how they can do things like tax free planning or Roth conversions, to maybe take advantage of the current tax rates or their current tax decision and create more wealth for themselves. And if they have kids that they like their heirs or their beneficiaries after they pass away, I think the other thing that's important for people who are within five years of their retirement date, this is an extremely important one of the five years prior to retirement. And the five years after retirement is a period of time that the Wall Street Journal called the fragile decade. What they mean by this is that any volatility in the market, especially in that period of time, has an outsized impact on the total amount of income and wealth will experience during our lifetime. There was a study that was conducted that just found that people who experienced high degrees of volatility during that tenure window, experienced less wealth, and ran out of income at a much higher rate than their peers who retired during a stable market. Now, neither one of these groups was smarter than the other either one had planned better than the other. One group just got lucky to retire during a stable market period. The other group got unlucky and returned during a very volatile market. So I think that one of the things that people who are close to retiring need to be very careful of is the volatility they have inside of their retirement accounts. And if there is some type of substantial drop in the market, how that's going to impact them long term. I think if people are listening to this, and they just look at the last year's history and their 401k statements or IRA statements, they'll see the end packed of volatility. And we can see that that March, April May period of time where people took humongous and substantial losses, in most down markets like that would have taken years to recover from and that the scary thing about that is that when the market crashes or corrects like that, most of the time, it does take years, and most of us don't have the years to give. So we've gotten almost a shot across the bow with this, or for people who are close to retirement in that, boy, there was a big drop in the market, but it came back quick. That's very lucky. It doesn't happen very often. It's pretty rare that a market does bounce back that quickly. So for those people who are in that group, saying, How do I miss that the next time, because I'll be retired, and I'll be taking money out of my account, at which point, a market drop hurts substantially more for taking money out of our retirement accounts, we take out 5% Out of our retirement count in a year for income, and the market drops 15%. Additionally, that's a 20% total loss, the market has to earn 40% In the next year, just to get back to where it was. So when we're starting to take market money out of our accounts, and there's a market drop, it's a huge impact. Very, very important for people who are preparing to retire or retire to understand how those drops will impact them, and to start to create a plan to minimize the impact of volatility inside their retirement plans.
Well, that raises a question for me, as somebody who's not approaching retirement quite yet. One of the first things that I consider for such an incident like that is my personal emergency fund, you know, they always say you should have so many months of salary set aside for an emergency fund in case something were to happen, medical condition, loss of a job, et cetera, et cetera. Is that something people should also do when they're planning their retirement picture? They're planning on drawing on that retirement income. But should they set aside an emergency fund in case there is an interruption that they have to deal with?
Yeah, I think that it's important for everybody to have some cash reserves on hand, for unforeseen circumstances, I think that there are a few areas that specifically impact people who are close to retiring, or who are retired, where they're going to have large expenses during their lifetime. So just for instance, if you are retired, and let's say you're getting Social Security, taking a little bit of money out of your 401 K, and maybe you're lucky enough to have a pension, those are three different income sources, things have to be going very badly, because you have such stable income from different sources for you to really have a super substantial financial problem. In addition to that, if you're somebody who's over the age of 65, and you're on Medicare, and you have a Medicare supplement to go along with that, you have a very high likelihood of having your total out of pocket costs fixed, depending on exactly how you've done your planning. So in any given year, regardless of a physical or health issue, in all likelihood, your income is still going to be coming in. It's not like you're 30 years old, and you can't work because you're sick, in which case, you need some kind of disability income replacement plan. But you have this pension and Social Security in the 401k that are kicking off a fixed amount of income, you don't have to show up to work to get a paycheck. All the hard years of work are now paying you back. In addition to that, if you have proper health insurance coverage through Medicare, a large health issue isn't going to derail things. I do think that people have a comfort level of having kind of a in retirement having a cash reserve. But I do find in actual experience and practicality in talking with hundreds and 1000s of retirees that people build up that cash reserve, and then never really access or use it, that reserve the tends to become a hey, we're redoing the kitchen, or we want to go on vacation, it kind of turns into a different type of account. Because their income is fixed and coming in, they don't worry nearly as much because they know Social Security is not going broke, and Social Security won't fire them. Right. So they're not going to lose their Social Security like they could potentially lose a job. And I do think the one caveat to that is making sure that people have enough money saved up if they do require long term care, or home health care or assisted living of some type. Because the government benefits for that are very limited. And it is extremely expensive. And it's also very common for us, unfortunately, as we get older to require some help, because we're just not as healthy as we once were. And we maybe need some more professional assistance that can be administered to us in our home. So I think people do need to plan for that long term. I would never argue with anybody who told me hey, I want to have some cash reserves over here, several months worth of expenses. But I would also say that if somebody is in retirement and completely fixated on that, then they probably need to be stepping back and taking a look at our overall plan, understand what their income looks like on a month to month basis, and how long that's going to last them during their lifetime because we might get really focused on having a bunch of cash reserves in the bank for three or six months of expenses. But we might be missing the point that the planning path that we're on now we're gonna run out of money in 20 years, and you're only 65 years old, and you might live to be 95. Both of these things can be done at the same time. But I would say that it's far more important to put an emphasis on understanding the long term plan and the impacts of that than it is to be extremely concerned, because maybe you don't have, maybe you feel like you need to have five or 6000 more dollars in the bank for short term expenses. Neither one of those things is wrong. But if I were to say, hey, let's put a serious emphasis on the lawn, I would say, educate yourself, so that over the long term, you know what's going to happen, and then slowly build up any cash reserves or anything that you want there. Both sides of that coin have a place in everybody's plan. I think the success that you get in your retirement plan is going to be due to the amount of attention you give it, and the amount of education that you give it. And the big question I would be asking myself for someone to listen to this is, hey, you know, what can my retirement plan stand the test of time? And if I'm not positive of that, how can I get some additional education to make sure that I am confident that the planning I've done will stand the test of time.
All right, Tyler, thanks so much for joining and talking to us about this today.
My pleasure, Steve, can't wait to do it again.
Thank you. Tyler is insky teaches financial education in personal financial awareness classes for Heartland Community College. If you're interested in learning more about finance, and other personal enrichment topics, check out our other random acts of knowledge podcasts on Spotify, Apple podcasts, or wherever you found this one. Thanks for listening
