CFP® Explains: How To Organize Your Retirement (7 Must-Have Accounts)

Let's take a look at the seven accounts that we need in order to get our retirement life organized. These are going to be seven accounts that you've heard of before, so I'm going to fly through it in the first part of this video, all seven of them, but then I'll share some of the common mistakes that people make when trying to use these accounts, and then I'll go over a few specific strategies you might be able to apply to really maximize the benefit of these accounts before and then also during retirement. Because as you know, knowledge and understanding is good. That's why we watch these videos or read and get up to speed with retirement planning strategies, but knowledge alone doesn't do much good unless we actually apply it to our specific situation. Now, the tricky part about doing this video is that even though I'm a certified financial planner professional, I'm not your CFP, so this is educational, and it's up to you to do the research and to really ... I recommend finding a CFP who specializes in retirement to see what works best for your situation. If you don't have one, look for the link below, but let's get into these seven accounts, and I'll go over a brief explanation and then get into the important part, which is the strategies for each one. The first one you already have, most likely, and it's your checking account. Now, the only thing that changes in retirement is how you use the floor of the checking account, which I'll explain in the strategy section coming up. There's really not much else to explain here for this type of account. This is your frequent use account where you want to have enough money to cover your monthly expenses. This is the account, usually, where when retired, done with work income, you've got income coming from your different accounts into one spot. That's your main account. Next, though, number two is the high-yield savings account. Currently, some of these high-yield accounts, they're offering ... Really, when you look at the numbers, up to 6,000 to 8,000% more than the national average. Now, in dollar terms, that means the difference between earning $60 a year or $5,000 per year if you had $100,000 in cash in a high-yield savings. The mistake that we see people still make quite often is that people often hold excess cash in checking accounts or in low-yield savings accounts, and they could be getting the same benefits, the same FDIC insurance and security, but they just have a much higher interest rate. It's surprising because some of the studies show that only about 20% of people are taking advantage of these high-yield accounts. If you're not getting a good interest rate, then talk to the financial professional and check out some of the online-only banks out there that are FDIC insured up to 250K. It seems to be the ones, the online-only ones seem to be the ones that have the highest interest rates out there, most likely because they don't have the brick and mortar bank locations and they can pass on some of those savings to their customers. Now, the negative of high-yield accounts are you may be limited to the number of withdrawals or transactions you can make each month. The one that I use, the limit is six withdrawals, but I rarely make withdrawals, so it's never been a problem for me. The other negative is that it takes a few days to transfer between one account to your main checking account, so you'd want to make sure you have enough time to do that. And then the final one is that this rate, currently pretty high, at least looking in the past 10, 20 years, but the rate can change based on what the Fed decides. Now, specifically for retirement, it's common to have a few months or often it could be a few years set aside in cash or money market, and that amount depends on your income plan, which I'm going to get to in the strategy part coming up. Now, let's move on to the next account, which is one of my favorites, but not a lot of people use it. And the reason why I like it is because it's the triple tax-advantaged health savings account. The money that you contribute should be tax-deductible. Now, there's some limits here, but it's tax-deductible up to a certain limit. It can grow tax-free, kind of like a Roth IRA. And if you use it, the money saved in there for qualified medical expenses, it's not taxed when you make a withdrawal. So you get a deduction, like a traditional IRA, and then you get to use it, pull it out, like a Roth IRA without paying tax as long as it's used for medical. Plus, it can also be invested when it's in the HSA account. And if you end up not using it at all, and you turn 65, you can actually turn it into a regular IRA. Now, the negative for this one is you don't want to have... I mean, you never know what's going to happen in the future, but if you could plan for it, you don't want to have someone inherit this because it becomes all taxable to the beneficiary the year that they inherit it. And when we get to the strategy part of this video, I'll share how retirees and pre-retirees are using HSAs. Now, to open an HSA, you've got to be 18. That's easy. And then you've got to be enrolled in a high-deductible health plan. So if you're employed, ask your HR person if you can contribute to an HSA. And if you're self-employed, look for healthcare plans that are HSA eligible. Now, we've got four more accounts to run through, and then get to the practical strategies to think about to improve your retirement. But I'd love to know if you're liking this video so far. If you are, please click the like button or leave a comment so that I know this is helpful. Now, on to account number four, and that's your work retirement accounts. That's like the 401k, the 403b. And I'm going to guess that you've got a pretty good idea of these types of accounts and how they work, and probably a good chunk of retirement savings is there. But the strategy part of this video, we're going to talk about some of the pitfalls to be aware of when you have a big percentage of your net worth in your 401k or 403b. So moving on to the next one now is the IRA and the Roth IRA. That's number five and six here. So these have similar advantages to a 401k, but they're not employer-sponsored. So you can open up a Roth IRA or a IRA and really any custodian out there. And one question that we get often is, can I contribute to a Roth IRA or an IRA and get a deduction if I also have a 401k? So I'm going to put up a picture here on the screen and then take a snapshot just so you can see where you are in this table and then see if you can contribute and deduct. Let me pull it up right now. So this one is deductibility of IRA contributions if you already have an employer plan. And this is 2023 numbers. So find out where you are here, take a screenshot, and then you'll be able to see how much you can deduct, if any, and what filing status you have over here. But then there's also the Roth contributions. Now there's just income limits here where some people cannot contribute at all, but I've got a strategy for that if that's you. But take a screenshot of this. This is Roth IRA contributions. And remember, we're not getting a tax deduction the year we contribute to a Roth, but you're just getting money in. That's the advantage. So on to account number seven, and then we'll get into the actual strategies here for each one of these accounts. And account number seven is the brokerage account. This one's important because it offers much needed flexibility in order to design that ideal tax-efficient withdrawal plan. Taxable brokerage accounts, they're kind of like a bank account, meaning you can add money, you can take money out at any time. The difference is that it's invested in stocks or bonds or mutual funds or other types of investments. And it has favorable tax rates if you hold those investments for more than one year. We're talking about the long-term capital gain tax, usually sometimes lower than what your ordinary tax rate is. Now the mistake that we often see people make is when they're saving for retirement, they're doing a good thing and they're saving to their retirement accounts like 401k, IRA, Roth, and all that, but they don't consider the brokerage account as important. But it can become a really vital part of the retirement plan, as I said before, the tax-efficient withdrawal plan. And we'll get into that coming up shortly. The negative though, compared to a 401k or a Roth IRA, is that the dividends, the interest, any capital gains that you have within the ETFs or funds, they're recognized or they're realized the year that they happen, if that makes sense. You pay tax on it each year, whereas in an IRA, it's all sheltered until you start to take withdrawals. So tax-efficient investments are very important for that brokerage account. And there's a few more strategies to go over for this account specifically and how it relates to the withdrawal, the IRA and 401k withdrawal strategy. So those were the seven accounts, but now let's get into the really important part of this video, which is the strategy behind these accounts. And really, how are people using these to get max benefit in their retirement? Because as you know, retirement success is not just about the investments that we have or our savings rate anymore. We now have to get these three things right for retirement success. It's the investment plan, that's one of them, but it's also the income plan and then the tax plan, which kind of encompasses all parts of the plan. That's why I often recommend finding a retirement specialist over a investment-only advisor. Now, the strategies that we're getting into, they're really going to be applying mostly to the tax plan and then also to the income plan. So let's get into it. Now for the checking account strategy, the only thing we have to think about here is really related to the floor or the minimum amount you want to have in the account. Because before retirement, you're most likely had a surplus coming into the bank, coming into the checking account. But after retirement, it's now normal to have a set amount coming in each month from the various accounts. And really sometimes that amount that's coming in is closer to your monthly expenses. Now let's pull up the screen really quick. Pretend you had your normal checking account. Let's see if I can get this going here. Your normal checking account and now in retirement, let's pretend you're doing 10K a month going in and expenses are close to 10K as well. You might not want the floor of the checking account to be zero, right? That's not much buffer for each month to month. Because say an unexpected expense comes up, you want to be able to pay for it quickly. You won't want to have to go to other accounts and figure it out really. What we often see retirees do is they raise their checking account floor to maybe one to two months of expenses. So in this case, the person is saying it's not zero as the anymore. It's now going to be 20K. So at the beginning of every month, 20K is the new floor and they get 10K coming in. It goes up to 30 and then they spend it down back to 20 at the end of the month. This is personal preference sometimes and it just gives you some buffer so that you don't have to worry about moving money around or watch the account too closely month to month. Now for strategy for the high yield account, this really impacts your investment plan and income plan. Because in retirement, we're starting to draw from our investment accounts and it's important that one of the key rules of investing or retirement is we don't want to sell when things are down. So having cash or cash like funds available for a few months or a few years of income is really important. So it could make sense to have, again, this is not specific for you, but it could make sense to have one to two years of withdrawals in an account that's not fluctuating too much. You've seen this before if you've seen any videos on this channel, but you might remember the bucket strategy. And this first account is going to be the account that is most likely sending money to your checking account. And a lot of times, this might be the conservative, might be cash like investments here. It could be a place for a high yield savings account. And the purpose of this, again, is if we've got an extended bear market or bad market scenario, and many of the long-term investments are down, we don't want to rely on those investments that are down for income. But we've got a backup plan and we've got that first few years covered. Maybe it's working the high yield account into this. But the mistake here is that we often see people keeping the money that's in this first bucket here in low yield checking accounts or savings accounts when they could be getting the same FDIC protection and safety, but also get a lot more interest made. And if you just put a couple numbers here, for one years of interest, if it was 100K, right now, again, it changes every once in a while, but it's 5% right now. That's 5,000 bucks a year versus maybe $60 if you're looking at the national average. So that's a huge difference for not a big change. But take a look at what is currently available. And also, again, talk to your financial pros. But one thing that we see is people thinking, wow, 5%, that's pretty good. That's actually the minimum rate of return I need for a successful retirement plan. I'll just keep much or all of my money in the high yield account and then I'll just live off that. Now, the negative of that is that interest rates fluctuate quickly based on what the Federal Reserve decides to do. If they cut interest rates, then that high yield savings account is going to change. So it's not locked in, it's not in your control. CDs could be worth looking at for a part of this, because those do lock in interest rates, but there's less flexibility if you need to use that money. In my opinion, there's better alternatives. This is just my thoughts, better alternatives to CDs that still provide that first bucket that we were looking at of safety money. Now, let's move into the HSA strategy for retirees, then to 401k, IRA, and then brokerage strategy. That's where the real magic happens, in my opinion. So for HSAs, if you retire before 65, it could, possibly could be used to help bridge the gap to Medicare. Now, generally, HSAs can't be used to pay private health insurance premiums, but there's two exceptions. It's paying for health care coverage purchased through an employer-sponsored plan under COBRA, or paying premiums while receiving unemployment compensation. Those are two options you might want to look into. The second thing retirees might do is cover Medicare premiums. You could be able to use your HSA to pay certain Medicare expenses, including premiums for Part B and Part D. That's a prescription drug coverage, but not supplemental MediCap policy premiums. And then for retirees who are over 65 who have employer-sponsored health coverage, an HSA can be used to just pay for your share of the costs, the out-of-pocket costs that you have. Again, not advice for you. It's important you talk to the people that you can work with for your specific situation. There's a bunch of different HSAs, a bunch of different accounts out there. Find the ones that make sense for you. Now let's move on to 401k, IRA, and Roth strategies, and brokerage strategies. It's all kind of related here. And just a warning, there's a lot here. Don't feel bad if it's not all sinking in. There's a few tools you can use. There's one called My Favorite Retirement Planner. It's a software you can get access to below. You can also reach out to Streamline and see if you'd like to talk about your situation. The only negative of that is that we get a lot reaching out every month, and our current clients are our number one focus. So we might not have time right away to talk, but we'll get back to you either way and let you know. So back to the strategies. If you're still working, the first thing to evaluate now is should you consider or should you continue to just contribute to the pre-tax 401k, or would it make sense to do more of the Roth contributions if they have a Roth 401k option? Because some retirees, many of the retirees that we talk to, they find out and they've got this tax bomb where they get into their 70s, and then they're forced to take out of these accounts because of just rules, IRS rules, Congress rules around 401ks. It's that required minimum distribution that you have to take out. And they're caught off guard about actually how much they have to take out. They're forced to take out and pay tax on right away, even if they don't need the money. Now, the best way to find out if a Roth or pre-tax makes sense is a retirement calculator, or find a financial planner, a retirement person that can look at your current tax rate, what you have now, and then what you're expected to be. What tax rate you're expected to be when you're close to 73 or 75. That's going to help you make a decision on whether pre-tax or Roth makes sense. And doing that will also give you an idea of whether you should do this next strategy, which is Roth conversions. I've talked quite a bit about Roth conversions on this channel, but we often see that Roth conversion sweet spot is right after you're done working, and then before you start Social Security or IRA withdrawals. So that's a big one. Now, another Roth IRA strategy that's often overlooked is the spousal IRA contribution. So if you're working and your spouse is not, they might be able to contribute to their own IRA or Roth IRA, even if they have no earned income. And another strategy, quickly, is if you want to contribute more to Roth, but your spouse is not.