Ep # 56: Considering A Big Purchase In Retirement

Benjamin Haas |
  • Feedback on affordability of the decision - 2:50
  • Getting a loan vs. paying for the purchase outright - 7:06
  • Tax impacts if you chose to withdraw money from a retirement account - 10:53
  • If you have to liquidate some savings, what are you liquidating? - 14:45



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Full Transcript:

Benjamin Haas  00:03

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!


Adam Werner  00:26

Hey, Ben.


Benjamin Haas  00:27

Hey, Adam.


Adam Werner  00:29

What you up to? 


Benjamin Haas  00:32

Knock, Knock. Wake up.  Podcast time.


Adam Werner  00:36

Oh, I thought you were going to finish that.


Benjamin Haas  00:39

Nope, no joke. Just knock, knock. Let's do this. Let's open the door and enter into podcast conversation this week.


Adam Werner  00:47

Worst knock, knock joke ever.


Benjamin Haas  00:50

Yep. Knock, knock. I'm here. Guess what?


Adam Werner  00:53

Somebody's home.


Benjamin Haas  00:55

So topic this week. We often like to build a podcast around questions that we sometimes get and then how we would respond to it situationally. We do a lot of retirement planning and I'll say there are times where clients will come to us or even prospects on the front end and say, I'm thinking about making this big purchase or this big withdrawal from my savings in retirement. And I think that kind of lends itself into two different forms of a question. One, hey, do you think I can afford this opportunity? Or two? I really want to do this and what's maybe the most efficient way to go about it? Because certainly as we get into that retirement phase of life, making big changes that weren't planned for big purchases when you don't have paychecks coming in, I think there's a little elevated stress to that. A little more anxiety around. Is this a good idea or not?


Adam Werner  01:49



Benjamin Haas  01:50

Yeah. What do you think? How would we start to talk about big purchases in retirement?


Adam Werner  01:57

I think you kind of hit on it. There's two components. Number one, give me some feedback, do you think this is something I can afford? And usually that means it's somewhat of a flexible decision. It's not, hey, this is what I'm doing, now just help me do this in the most efficient way possible. And then I split that into two different takes on that, too. Is this something that can be planned for? Is there some sort of timeline? Or is it something that may not be imminent versus I have to put a roof on the house and it's happening, so help me take care of that. The difference between something that feels more spontaneous and now we have to find the path of least resistance to get it done in an efficient manner versus here's something I'm thinking about that is bigger picture. Help me plan for that thoughtfully moving forward.


Benjamin Haas  02:50

Yeah, so then let's just start with that. Maybe the second side of that that's not as spontaneous where we're going to be giving some feedback on affordability of this decision? Or maybe what would make it affordable versus not? So my thought is to just go into our concept on making big withdrawals from savings that really was going to be relied on to produce some income. Maybe I'll toss it to you. Like we call that the geese laying eggs versus having a good meal on a goose. That's where I would start the conversation.


Adam Werner  03:27

Okay, yeah. So I'll just I'll throw out that analogy or is that an analogy? I don't know. I'm not good with words today but it is yes.


Benjamin Haas  03:36

A great day to be podcasting.


Adam Werner  03:39

Hey, we got nowhere to go but up. It is, yes, we've talked about it in other forms but it truly is, we view when people get to that point and I'll say retirement because that's typically where we see this decision, really feeling stressful when there isn't earned income to help absorb maybe some of that additional expense. It truly is, here is my pot of savings. This is what I have. I'm not earning any more to be able to add to this so I need to make this last as long as possible. And we would say that pot of savings is your flock of golden geese, gaggle, sorry, gaggle of golden geese that are going to lay your future golden eggs in the form of some income to live off of. We would hate to have somebody feel like they are killing those geese in the short term and then we know that you are always now foregoing the eggs that they could have laid well into the future.


Benjamin Haas  04:43

So situationally, we get the question a lot and I know we talked about it in a much earlier podcast, like should I just pay off my mortgage, they make this big withdrawal to now not have this expense? It's a version of the same question, right? Am I going to be killing too many geese. I want to go, we want to get an RV, we want to put an addition on a home, buy another property, I think those are the types of things we're talking about as a big purchase that maybe wasn't a part of the original plan and the affordability question does come down to that withdrawal and what it's going to mean for the long-term part of the plan.


Adam Werner  05:23

So in that sense, it really to us then I guess the first path is, what are those other dominoes that would fall based on that decision? If this is a withdrawal that is going to be made, then it really comes down to well, what is the situation? Depending where those funds are going to come from really does factor into taxes. What are the tax implications going to be of that given withdrawal and the difference between pulling money from a retirement account, pulling money from savings, pulling money from a non-retirement investment account? The outcomes are very different and can have much, I already said Domino's, but the trickledown effect of pulling money from any one of those different areas can be wildly different depending on the type of an account that you're pulling from.


Benjamin Haas  06:30

Alright, so my thought there goes back to if this is all in the camp of both, is it affordable and what's the most efficient way to do it, I'll go back to some of the scenarios. As I think about an addition on a home or buying a second property, I think one of the things we would want to talk with people right off the bat is if killing geese doesn't feel great or there may be dominoes that we don't want to deal with, is it an okay idea for somebody retirement? Because I think, psychologically, we're trained to like I shouldn't have in retirement but I mean, let's talk about the environment today. Please.


Adam Werner  07:08

So yes. I'm sorry, I missed that part of it. But yeah, that is kind of, I guess that first decision of am I taking from savings or is a loan of an appealing prospect. And we would view that through the lens of at least the interest rate environment right now, while not great for your savings at the bank, it is a decent environment for those that are borrowing, right, in short interest rates on mortgages, home equity lines, car loans, whatever that may be, are pretty much at historical lows, in that sense. So we would look at that through the lens of if my savings can earn a higher rate of return than the interest rate that I'm paying, then maybe it makes sense to allow my golden geese to continue to lay those golden eggs if that interest rate on the loan is low enough to be palatable.


Benjamin Haas  08:07

Yeah, and I guess I also just think in terms of net worth and future value of things. So if you're going to borrow something to make a purchase that is, I said, RV or travel right now and COVID world. I guess, an addition on the home, buying another property, you are tying that to something that is collateral, right? From a net worth standpoint, you now have something or we're owning something that has a value and that liability is pretty much an even trade off, what are you losing in that it's the interest that you're paying over time because you borrowed the money? I do think it's somewhat situational. Can I afford it? If that's falling underneath the income, can I afford to make payments on this to eventually own it? That is very different to me, then, does it make sense to liquidate these investments or liquidate the savings in order to at that point, not have the payment.


Adam Werner  09:03

And I think so oftentimes, the financial side of this discussion and that decision making process sometimes does take somewhat of a backseat to just the psychological component. We certainly have talked to people or have clients that debt is the enemy. And even just framing the way that we have of, if your savings or your investments are earning you know, X percent and that's higher than the interest rate, like that's an okay way to go about it. But even just knowing that there are still people that again, debt is just never a good thing. Being able to sleep at night, knowing that they have the savings, they can just take this and do what they want to do is there's definitely a psychological component to that and we certainly talked about that when it came down to the should I pay off my mortgage conversation as you alluded to, that was like one of our first five podcasts. I guess the backstop to taking a loan, even if that didn't necessarily feel comfortable, is knowing that at any point, if you did feel strongly that you know what, I had this payment now for six months or a year, whatever that is, I thought I could try it, I don't like it. Knowing that you do, then have the savings that you could just take from and pay it off, we would hope gives people at least the ability to give themselves that chance to allow their investments to continue to do their thing and you're not cannibalizing those to meet maybe a shorter-term goal.


Benjamin Haas  10:53

Yeah, I like that because that does move the conversation a little bit into the efficiency realm and I think one of the things that does get lost in taking big chunks of withdrawals are those taxes. Even the Domino's to those taxes, the more income you take out of an IRA, maybe the more you're paying on Social Security taxes, maybe the higher Medicare premiums you're paying. There certainly are dominoes to this. We're going back to one of your first comments, if it is able to be planned for and there is some time to pay something off. If you weren't going to take a loan, then yes, I think there is absolutely a conversation to be had on spreading those taxes out over multiple years and I know we've made this comment before, you can hit three different tax years in 367 days: December 31, anytime the next year, and January 1 the following.  There is an opportunity to make sure that the tax liability doesn't push you into higher tax brackets really for no good reason.


Adam Werner  11:53

Yeah. So then let me just be clear on what you just said. That tax liability mainly comes from withdrawals from retirement accounts, right IRA’s, 401K's, things like that. Where for every dollar that you take out, that's taxable income to you. If it's coming from savings at the bank, that's treated much differently. If it's coming from just non-retirement investment dollars that has its own taxable component, potentially, depending on what you started with, what it's grown to, what you're selling all of those little details. But I just wanted to be clear that when we're talking, taking money out of investments and then paying taxes, that is mainly a retirement account, specific problem.


Benjamin Haas  12:42

Yeah, which is where we see most wealth generated. So I think that's why we want to be super sensitive to it.


Adam Werner  12:51

So to your point, being able to, even in the instance where it's something you can plan for or even if it is something that's more spontaneous, if there is a loan component tied to that, just being able to spread those taxes out. Essentially, you could hit three tax years and 367 days. We would hope that the tradeoff of what you would pay an interest would still be far less than taking a big lump sum in any one given tax year and then the taxes that you would pay in that one tax year, we're assuming it all depends on the situation but those taxes are probably much higher than the interest that you would pay. Again, thinking of pure percentages.


Benjamin Haas  13:37

Not even close. Probably.


Adam Werner  13:39

A mortgage right now you can get 3% or less, you're probably not paying 3% tax rate I'm guessing for most of the people listening to this.


Benjamin Haas  13:48

Yeah. 12, 22, 24, 30. So that is absolutely a key component to the efficiency of going about this and I think about clients’ situations that it's not just even these huge purchases, right? A pretty recent situation where somebody is going to move into an addition that child is putting on the home for them. Want to be able to give them some money to do it, maybe we do that through annual gifting laws. $15,000 chunks you can spread that out over a couple years and work that out with somebody so that it doesn't become a tax nightmare to do $50,000 all in one year or something like that. So, it definitely is situational but I think when we move beyond the can I afford this opportunity or to make this big purchase? It really is our job to try to find the most efficient way to do that. Taxes is one of those things. Are there other considerations to efficiently doing that?


Adam Werner  14:43



Benjamin Haas  14:45

I'll go. I think then if it is tapping into savings, one of the things that we're often asked or we're just supposed to figure out for them is okay, if I have to liquidate some savings, what am I liquidating?


Adam Werner  15:00

And that was a recent conversation that we had with somebody of we need to liquidate this chunk of money. I need it and for us as the investment management on that account, it's what are we selling to generate this cash? Are we selling from our stocks because they've done well? Are we selling from the bonds because we don't really feel great about the outlook for bonds to really generate any high-level rate of return moving forward. And that ultimately, it is situational, it comes down to just general risk tolerance for that for that person but there certainly can be that smaller decision on timing depending what the market environment looks like, depending how the economic data looks. Selling from one, the other, combination of the two, you can make the case kind of either direction.


Benjamin Haas  16:04

And I think what I would want people to take away from that is sometimes a lot of this is really just the mental accounting side of things. When we say loan versus liquidating things, which account should it come from? Should it come from stocks and bonds? When I say it's situational, we've had a really good run in the market here. Maybe this is the time where people could say, hey, I'm going to take some of my gains and mental accounting, I'm going to put that over here. So if there was something that we were looking to do in the future or there was a new goal that we had, we have earmarked that in a way that you don't need to have that not planned for and try to make some sort of spontaneous withdrawal later in life where you can't control the variables. Part of planning ahead is doing that. I mean, we from an investment standpoint, we call that rebalancing but it is part of the conversation here, I think.


Adam Werner  16:56

Yeah, and that for me kind of goes back to the before. Usually before we would go through that investment process with somebody, we would go through that three-bucket theory to make sure that they have an ample amount of cash on the front end, those income producing assets that are usually much safer in the middle, and then you have your stocks on the end, kind of being your growth engine for long term inflation protection. So yeah, we would hate to have that scenario where you said stocks have done well, we don't really feel terrible selling them now if it's to fulfill a need or at least take some gains off the table. It would feel much differently if someone needed a chunk of money for an expense in March of 2020 while the stock market is down 30% at any given point and now you backed yourself into a corner when it comes to just those decisions and not having those options and the flexibility that comes along with it.


Benjamin Haas  17:59

I guess my biggest takeaway here is this really is a financial planning question where if you have the ability to plan ahead on these things, there are ways that we, you and I as planners, with Holly, with Devon can go about giving advice that's going to feel a little bit more efficient in the way that you go about that. The three-bucket theory is based on that. If it is some sort of spontaneous expense, hopefully we built certain buffers into your plan but if we haven't, there still are some things that we would really want to talk about. Does it come straight from savings depending on what tax bucket it's in? Do we take some sort of loan? Are there other liquidity issues all the way down to what are we buying and selling to make that happen?


Adam Werner  18:42

Yeah, and oftentimes, it's all of those things combined. It's a little from Column A, a little from Column B. So that it doesn't feel like you are overweighting or leaning too far in one direction or another. You are taking a little bit from everything to hopefully find that efficient path down the middle.


Benjamin Haas  19:05

Yeah, and I guess what we're trying to tell people is yes, hopefully everyone's got that nest egg to rely on. You know, I've got X amount of dollars, oh, I only need to take this as a withdrawal. It feels like a big purchase but I only need to take this so I'll just do it. Now there really can be deeper conversations, multiple questions to try to funnel down to how to best do it. Yeah, and that's the point today.


Adam Werner  19:29

Yes. Well said.


Benjamin Haas  19:32

Alright. So I'll uh, I'll finish with it. Knock, knock, Adam.


Adam Werner  19:39

Who's there?


Benjamin Haas  19:40



Adam Werner  19:42

Boo Who?


Benjamin Haas  19:43

Oh, stop your crying. Alright. Have a great week. Thanks once again, for all your help with this podcast on big purchases in retirement.  Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

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