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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, social security, health care and more. This show is an extension of the book, How to Retire on Time, which you can grab on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much talk about it all. Now that said, please remember, this is just a show.
Mike:Everything you hear should be considered informational. That's it. It's not financial advice. If you want personalized financial advice, then you can request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen.
Mike:Thanks for being here.
David:Yes. I'm glad to be here.
Mike:And David's gonna be reading your questions as they're submitted, and I'm gonna do my best to answer them. Now you can send your questions in by either texting them to 913-363-1234. Text them anytime during the week. 913-363-1234. Or you can email them to heymike@howtorettime.com.
Mike:Let's begin.
David:Hey, Mike. What are some common risks you believe many retirees do not account for when they retire?
Mike:We could do the whole show on this if we wanted to.
David:We could spend a long time. Yeah.
Mike:Let's do the high level ones. The ones that I see more often. And I'm gonna try and categorize this in themes because if you understand the theme or kind of where the disconnect is, it can open up all sorts of other disconnects or misnomers that would be out there. Is that fair?
David:Sure. Yeah.
Mike:I used to listen, way back in the day when I thought I was gonna be an attorney. And I was listening to this podcast years years ago. It was l sat in everyday life, and I loved this phrase. Many people draw conclusions not based on the evidence given. And I thought that was so profound.
Mike:Not based on the evidence given. Now I later realized that there are many logical leaps. There are many cognitive distortions. There are many things that we as humans do to try to force reality into the narrative or the result that we want. And we'll do anything we can to make just make that work.
David:Mhmm.
Mike:With that in mind, that we we often create conclusions not based on the evidence given that that would be in inefficiency with finance. I want to start this off with kind of talk about oversimplified plans. We like simple. Yeah. I mean, think about the pop tart.
Mike:Oh. It's a simple, quote, unquote, breakfast item.
David:Yeah.
Mike:You put it in the toaster. It comes up and you eat it. Right? Or breakfast cereal is simple. Uh-huh.
Mike:All fast food is simple. You drive up, you get it and you eat it right. Yeah. The simpler it is many times, the more attractive we are to it because we are inundated by fear, by sales pitches. I mean, just go down the list.
Mike:We're inundated by marketing and and the drama of life. And so we like simple. Many people gravitate towards simplicity. I think someone once said simplicity is the highest form of intelligence. But even that can be distorted because you can have an oversimplified situation.
Mike:So let me give you some examples of oversimplified plans. These are plans where people will gravitate to it because it's easier to understand. That doesn't necessarily mean that it is better for you. It just means that it is easier to understand.
David:Okay.
Mike:Many oversimplified plans are built on long term averages. So, oh, the markets average, let's say, 6% year over year. If you buy and hold, I should be fine. Well, the markets also have gone flat as a no returns for 10 plus years. And then the next 10 years, it maybe it was double the return.
Mike:But those 10 years, that sequence of the return each year, that hurts. It's really hard to stay retired if you're depending on the growth and the average that you projected isn't actually happening for an extended period of time. These are called flat market cycles. There are long term averages overlook the effects of if a market were to crash, what would happen? Right?
Mike:So, David, you remember these market crashes. Right?
David:Sure. Yes.
Mike:You're not retired. So did you really care about the recovery? Probably no.
David:I guess 2,008 comes to mind. I wasn't thinking about the market really.
Mike:Because there's time to recover. In your working life, there's time to recover.
David:Yeah. Yeah. Yeah. For me, there was.
Mike:When you retire, if you take income out of an account that's lost money, you're accentuating the losses. Here's the simple math. So if your accounts go down 10%, it would take an 11% return to break even. That's not the end of the world. Right?
Mike:No. And the markets will correct. They'll do a 10% drop every year and a half or 1.8 years or whatever it is. Not the end of the world. But the markets tend to crash every 7 or 8 years.
Mike:So let's say your accounts go down 30%. Is that the end of the world? No. Because 100% of the time, the markets have recovered. It just takes time.
Mike:But if you were if your accounts were to go down, let's say 30%, you need 43% of an increase to break even. So do you see how the deeper it goes down, the harder it is to recover? Yeah. Well, now imagine your accounts are down 30%, and you took out a 4% distribution because you need income in retirement. How else are you gonna pay the bills?
Mike:So now you're down 34%. That would be a 50% return just to break even, assuming you don't touch your accounts and assuming the markets recover in a timely manner. I don't remember many 50% recoveries very quickly.
David:Seems like a tall order. Yeah.
Mike:You know, 2, 3 years or so. So these are oversimplified strategies where we just assume that, oh, a 6% average return. I can just put everything in the market and it will magically work out. You're putting the blinders on in this situation. Even if you're diversifying between stocks and bonds, just look back a couple of years and you'll realize that stocks and bond funds can both lose money at the same time.
Mike:These are oversimplified portfolios. Let me let me throw another one on there. One of the most clever things that the insurance industry has done is the creation of the annuity. Now I don't want to disparage the annuity.
David:Alright.
Mike:But the idea that an insurance company can pull a bunch of people together and give them their own money back at a rate that's fair to the insurance company and to the person. I do wanna admit to the person. It is. It's fair to all sides, but the insurance company wins because most people will die soon enough that the odds are in their favor and they can afford to pay these these other outliers. The annuity is how you transfer longevity risk to an insurance company and the insurance company takes the risk.
Mike:But because they can pull people together, the odds are in their favor. Mhmm. I'm fine with that. Right? I have term life insurance.
Mike:I don't plan to die anytime soon, but I'm still paying it in case that risk happens, my family is covered. That's what insurance is. Yeah. So my qualm isn't necessarily from a financial standpoint of getting your own money back, though I do have many qualms about that. You can read about in my book, How to Retire on Time.
Mike:Shameless plug there. But my qualm is setting up your retirement based on fixed income. Think of every movie you've ever seen where the old grandpa or the old grandma is struggling to pay for something because they're completely dependent on fixed income.
David:Right.
Mike:So if you go out and buy a bunch of annuities and you take the income at the flat rate, so it's the one that looks the best at the beginning. But if you live long enough, it could hurt because inflation erodes how much the dollar can go in that situation. That's a risk I see a lot of people taking and they'd have no idea. Well, I can buy this annuity and it's guaranteed. I have allegedly gotten rid of all the risks.
Mike:It's guaranteed for life. I'm gonna get this income stream. Well, they'll probably keep paying it. Yeah. If you're working with an a rated insurance company.
Mike:But I just it gives me a little heartburn because it is oversimplified. And I've actually heard financial professionals say things like, well, we do our tax planning through annuity income. I say, well, how does that work? Well, we sell the annuity and we explain here's the income that you want. Here's the projected tax.
Mike:And this income stream will just take care of it all. That's not tax planning. That's tax spending. I can't think of a good expression. But the tax planning is how do you minimize your taxes?
Mike:When you turn on that income stream, it you're not really doing any sort of optimization from that point. And if taxes go up, if inflation goes up, your income goes down.
David:Yeah. If if you think about, like, whatever you and I were making, like, 10 years ago. What if our what if our incomes were fixed? Yeah. What if we're making 10 years ago?
David:And now here we are in 2024.
Mike:And How horrible would that be?
David:That would not be good.
Mike:Right? So these things do matter. It's easy to understand. I can put money in here. Let's say I put a $1,000,000 into an annuity, and I'm gonna get 80,000 for life back.
Mike:And the rates change. I'm just making up numbers here. Well, 80,000 plus my Social Security, 40,000. That's a 120,000. I can live off that.
Mike:I'm set. You might be set today. But in 10 to 15 years, that money isn't gonna buy you as much as as it once did.
David:Right.
Mike:But do you see how it's so easy to understand that people latch onto these oversimplified plans? And it's dangerous.
David:It's very appealing, like, on paper. Like, oh, yeah. To that, I get that money forever. Okay.
Mike:Yeah. Some other in the oversimplified category, you've got not enough growth. So growth is associated with risk. The more risk you take, the more growth potential you have. It's not guaranteed growth.
Mike:So some people say, well, I don't want any risk. Okay. Well, then you might fall into the category where you don't have enough growth Yeah. To keep up with inflation, tax changes, or whatever might happen, and no one knows what the future has in store. Think of what how much has changed over the past 10 years in policy and regulation and taxes.
David:Mhmm. There have
Mike:been a few twists and turns. So the oversimplified is is the first one I wanna really highlight here. If your plan seems really simple, you just you got it right out of the gate. Question it. What risks are you unaware of that you may experience?
Mike:It's a very healthy exercise to kind of look into the mirror and say, I want to see what I don't wanna see and then let's address it. Now the next one I wanna talk about is conflicting advice from who you're working with. I do not believe that there are many financial professionals out there that are bad people. I think almost all of them are well intending good people trying to do their best. So what I'm about to say is not disparaging.
Mike:I wanna open your eyes on the how you get paid conflict of interest. I'm gonna include myself in this category just for kicks and giggles.
David:Okay.
Mike:K. So let's say you have a $100,000 of cash and you wanna do something about that. What would happen? Well, if you're gonna talk to an insurance agent, let's say you're younger, they might say, well, let's let's look at some permanent life insurance because you can fund it over a period of time. You have a cash value.
Mike:It can grow tax free. You can borrow against the policy tax free. There's a death benefit associated with it. You know, you could replace your term life insurance and other policies. Let's grow your money.
Mike:Let's do that. And then they can explore whole life, which is kind of the more steady Eddie growth. It's like a not exactly fixed income, but it's meant to be similar to you just get kind of a rate each year regardless of market conditions. And then you've got universal life, which would be based on like an index. Index universal life.
Mike:If the index goes up, you make money. Right? So you got more growth potential in that. But you've got all these cool options in this whole sphere of permanent life insurance. And that's probably the conversation you would have if you were younger with a $100,000 to explore options to do with that money.
Mike:And there may be some situations where this makes sense. There may be some situations where this doesn't make sense. Now, let's say you're talking with the insurance agent with that same 100,000, but you're 55, 60 years old. They might not say the IUL is the right path. They might say, well, here's an annuity and you could buy the income stream and, you know, this wouldn't be all of your plan, but it'd be some of your plan and you could supplement some income, you know, kind of layered in with your Social Security and other things like that.
Mike:And that could be fine. It may not be fine. But do you see how there's an inherent conflict of interest where if you talk to someone that's only insurance agent, they're gonna show you the options within their category.
David:Yeah. Yeah. Makes sense.
Mike:You're not gonna get a salad at See's candy. No. Right? Does that make See's candy bad? No.
David:No. We love See's.
Mike:Or I should probably say Russell Stouffer's.
David:No. That's right.
Mike:That's a Kansas company.
David:Keep it local.
Mike:I do love Russell Stouffer's, though. Me too. They're delicious. But you're not gonna get a salad from them. Nope.
Mike:So now let's let's take it up a notch. And let's say you take the 100,000, you say, you know, hey, financial adviser, investment adviser, what should I do? They're gonna say, you know, gosh, let's put in the market. Let's grow, baby, grow, Grow your money. I've got these models, these portfolios, these ETFs, whatever it is.
Mike:And then you have to ask yourself. Okay. Well, how do they get paid and all that? And is it the right amount of growth versus the risk? And and you're assessing these things, but maybe that's the right place.
Mike:But that's probably what they're gonna be talking about because that's how they get paid. Is it wrong that they get paid that way? No. But can you see the already inherent conflict of interest? One's talking about the benefits of insurance products.
Mike:One's talking about the benefits of a portfolio, and you can see where I'm
David:going with it.
Mike:And then let's say you go to the CPA.
David:Okay.
Mike:Now I love CPAs. If I had to pick one group of financial professionals, these are my people.
David:Alright.
Mike:They are so matter of fact. Technically, a CPA is not supposed to give you specific investment advice. So you might go to the CPA and they might say, you know yeah. Then they'll quote some Dave Ramsey isms
David:Okay.
Mike:Which are not necessarily good or bad. They're just his opinions.
David:Yeah.
Mike:They might say, you know, put it in the market. I can't tell you what specifically to buy, but, you know, go buy some mutual funds or ETFs. You know, they could say whatever they want, but they can't really give you specific investment advice. But usually, it's do this so you pay less in taxes. Okay.
Mike:Well, what if it was better to pay more in taxes now for less in taxes later or whatever it might be. So you have an inherent conflict of interest by who you talk with. Now in my mind, let me just have some fun with the comparison standpoint. And I'm gonna kinda talk myself out of a job here a little bit.
David:Okay.
Mike:But in my mind, let's say you're younger. Maybe you're not. Maybe you're a little bit older, but you're not retired yet. But why don't you just buy and hold some ETFs, some growth ETFs? You don't need to pay an adviser 1% or whatever it is for your non qualified, so your brokerage, your cash that you could do whatever you want with.
Mike:K? You don't need a financial adviser for that. It's so easy. Open up a Schwab account, a Vanguard account, a Fidelity account. But anyway, you can see where I'm going with this.
Mike:Yeah. And then maybe you set up a situation to where you sell a little bit each year. You see, you keep the liquidity enough that you can sell a little bit each year and make sure that you have the asset available to max out your Roth contributions.
David:Okay.
Mike:So we're being kind of strategic with this. And maybe we use the Roth and do something more aggressive, more actively traded within the Roth because Roth doesn't create capital gains. And maybe we dive a little bit deeper and say, hey. You've got some 401 k. Well, what if you have a 401 k that's old?
Mike:Let's roll that over into an IRA. Maybe we take some of your IRA funds that are not associated with your employer plan, your current 401 k, some IRA funds at Schwab or Vanguard, whatever. And maybe we do some IRA to Roth conversions. There's no limit on that. And you could use some of the 100,000 cash that you have to pay the taxes.
Mike:So there's no penalty allowing you to get more money into an after tax qualified account, AKA the Roth Uh-huh. Which has more growth potential and won't pay taxes when you distribute from it. So maybe you just use this to pay off the taxes so you have more money in the qualified umbrella. And do you see how the complexities start to unfold. Right.
Mike:But it all starts with the idea of, well, what do you want? Where are you? What are your goals? And what are the different strategies that could be implemented with your money? Working with someone that can talk to you about the benefits and detriments of insurance, investments and taxes, and make decisions based on a comprehensive strategy and not a just grow and figure it out later strategy.
David:Right.
Mike:It makes a difference overall. And I can't tell you how many times I've had people come into the office here. Corporate Woods. Right? Here in, Overland Park, Kansas.
Mike:And they'll come in. And this the recommendation is, well, I shouldn't actually manage these assets here. This is what you should do. And then here's your tax strategy. And that's kind of it.
Mike:Other people, maybe 40% of their assets, they're self managing and we're helping them place other things. I mean, the conversations are so fun. They're so detailed, but there's also no one right way to do anything. That's the big thing is oversimplified strategies are typically around. Here's a strategy that I sell.
Mike:Do that. Here's the benefits. Complex comprehensive strategies explore multiple options and then they they also review the benefits and the detriments so you can pick what's right for you. You know the trade that you're making. If you're taking more risk for more growth potential, if you're paying for a life insurance policy and you're okay with the payments for the potential benefits that you understand the tax planning not now.
Mike:But when I talk to someone that's 30 years old, 40 years old, we're doing investment planning based on even the RMDs they're gonna start paying in in 40 plus years. Woah. That's how financial planning is done. Look at any strip mall advisor. Are you having those conversations?
Mike:Probably not. They're probably working within the simplified scope of business, the simplified structure of investments. Yeah. Couple of other ones here and, you know, appreciate you let me be a little bit long winded on this one, but not planning for flexibility. I'll be a little facetious here, but, you know, David, when the iPhone first came out
David:Yeah.
Mike:And I actually don't know the answer for this, but did you think you needed an iPhone, that you wanted an iPhone, or was it kind of overhyped? You didn't need it. Your BlackBerry, your brick phone worked just fine. But what was your answer to that?
David:I watched Steve Jobs make the announcement, and I wanted it immediately immediately.
Mike:So you're in that category?
David:Yes. But I didn't get it, but I wanted it.
Mike:So I stuck with the brick phone Yeah. For years. You could throw that thing off a building and it wouldn't break. I loved it. And I'm going, who needs the Internet all the time?
Mike:That was me. But you you had more foresight. You understood the benefit of it.
David:Yeah. Well,
Mike:we're both sitting here today with iPhones.
David:That's true.
Mike:Can you imagine how life could change in the future? Some bills that you currently pay today Uh-huh. Might be new bills that you didn't expect years ago. Some bills that you expected years ago might not be the same today. I don't know many people that are paying for a landline anymore.
David:Yeah. That's pretty rare now.
Mike:The cable TV Oh. Situation's being disrupted a lot.
David:It's getting reduced.
Mike:Change. Yeah. Basing your entire plan on a rigid strategy, I think is an oversimplification that's risky. You want to have flexibility. Can you adjust your income up or down each year based on lifestyle developments?
Mike:Can you adjust the sources of your income for tax benefits? Can you adopt life events? If you get sick, usually costs money. Can you pay for that?
David:And
Mike:then how does that also correlate with your current health insurance? Right? Whether you're on Medicare Advantage Supplement or original Medicare, Affordable Care Act and Retirement or your current employer. These things matter. Do you have growth to help offset inflation, tax changes, market changes, whatever it is?
Mike:The list just goes on. And then a few other things too that I think oversimplified strategies do not incorporate enough is understanding tax limits. So if if you can't get tax free Social Security, you're gonna have to work within a limit. Are you aware of that? Are you planning around that?
Mike:Capital gains. Long term capital gains. Are you aware of that? And 20%, it really isn't the highest capital gain. If you have enough if you have enough income from long term capital gains, you can get the 20% tax bracket and you can even get higher Woah.
Mike:Technically because there are other taxes that happen when you sell long term capital gains. I can't remember. I think it's like 20.38 percent technically. So 23.8 percent will be the total taxes. These are little technical things that people miss.
Mike:Running into IRMAA. So Medicare surcharges. This is another one that a lot of people don't talk about in retirement for the higher net worth person. But the net net investment income tax, the additional tax they'll throw on there if you don't do things correctly or efficiently. I'm not looking at RMDs in the future to make it efficient.
Mike:The list just goes on and on and on.
David:And no disrespect to the insurance agents out there, but do they know about Capital Gains or Irma or
Mike:They do. Now how much do they know is it's a very convenient disclosure. There's a company locally here. I won't say who because I don't wanna disparage them, but their disclosure says we don't offer investment tax or or any advice. Seek a qualified professional for everything.
Mike:It's like, well, what do you really do? It's just if you're driving a car, do you wanna drive with someone that's driving the car that's a good driver or a bad driver? You can still drive the car. Yeah. But one's a better experience.
Mike:If you wanna get more out of money, you gotta take it, in my opinion, from a comprehensive standpoint. Those who take their time and really dive into the planning side of things typically get much more out of their money, whether it's for income in retirement, whether it's for legacy purposes or whatever else you can fill the gap in. Here's the recipe. You first put a plan together. Do not talk about investments or products.
Mike:You put a plan together first. Once you have the overarching plan with a very safe, generic, conservative, estimated growth, then you explore strategies, efficiencies. Are you gonna do extensive IRA to Roth conversions? If so, how long? When are you gonna file for social security?
Mike:And if so, why? And how does that affect your estate planning, your portfolio income? And do you want a pension? Do you want the lump sum? What's the difference on the overall plan?
Mike:You've got to dive into the strategies. Then you start picking the investments and products and design your portfolio in such a way that allows you to implement those strategies and support the plan. Strategic planning is really kind of a weird expression because it doesn't make sense to me. A plan is what you want to accomplish. The strategies are what's gonna bring the plan to life.
Mike:Yeah. So in chess, what's the plan? To checkmate the other opponent.
David:Right.
Mike:The strategies are what make it actually possible. So when it comes down to it, be very careful of oversimplified plans. If it seems like the planning process was too quick or there's not enough flexibility or there's not enough growth or whatever it is, pump the brakes, ask a few more questions and try to find someone like us at Kedrick that offers investment insurance and tax advice all under one umbrella, so it's comprehensive. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast.
Mike:Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.