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Is Retirement Even POSSIBLE?

We want to thank Google's Science Journal App for supporting PBS Digital Studios. Imagine you had a time machine and with the
press of a button you could transport yourself to your own 75th birthday. Assuming you’re still around, what do you
hope to find yourself doing? Writing your memoirs? Sailing around the world? Partying in San Junipero? Very few of us would answer “cleaning toilets
at a fast-food joint,” or “begging for change on the street.” No one wants their story to end that way,
yet shockingly few of us are taking the basic steps to avoid it. The
simple fact is that if we’re lucky to live long enough, one day we will lose our desire
(or physical ability) to keep earning a paycheck. The older we get, the harder it becomes to
maintain a rigid work schedule. And as modern medicine allows us to live longer
and longer, the time we expect to spend in retirement might easily pass 30 years. Think of that for a second. 30 years without income. Nervous yet? Good. So how much would you need to not spend those
years in abject poverty.

Well, that depends on your personal needs,
standard of living, health issues, etc., but as a starting point, the AARP recommends that
to replace a $40,000 per year income for 30 years, you’ll need to start your retirement
with–take a deep breath–$1.18 million. If that number makes you feel a little dizzy…
well, you’re not alone. In one survey, Americans between 55 and 64
reported a median retirement savings of $120,000–only 10% of the amount advised by the AARP! Another survey found that 75% of Americans
over 40 are behind saving for retirement and 28% over 55 have no retirement savings at
all! There are many factors that contributed to
this problem. For one thing, wage growth declined in the
70s and 80s. It picked back up in the 90s, but then the
housing boom convinced a lot of Americans to go into debt to buy overpriced homes, and,
well, we know how that turned out. We’ve also seen an increase in cultural
pressure to show “visual displays of wealth.” A study published in the Quarterly Journal
of Economics suggests that Americans are uniquely concerned about seeming poor to others, so
they spend a disproportionate amount on things like shoes, clothes and cars.

It’s been great business for designer labels
and advertisers–not so much for our savings accounts. Lastly, changes in government policies have
made it easier to not save money. In the past, employees were automatically
enrolled in “defined benefit plans” with pre-set funding amounts to match their retirement
needs. Today’s workers have to “opt in” to
retirement plans like 401(k)s, and figure out for themselves how much to set aside. Furthermore, these plans are often “leaky,”
meaning you’re allowed to remove funds prematurely, which makes it easy to steal from your own
retirement. Does all this mean that saving for retirement
is hopeless and you should just blow your extra dough leasing a sports car? No! It’s still very possible to save up large
amounts of money on a modest income. The three special ingredients are Good Markets,
Compound Interest, and Time. To show you how these elements work together,
it’s time to… RUN THE NUMBERS! Betty is 30 years old and makes $50,000/yr.

She hasn’t saved a dime for retirement yet,
but this year she’s decided to start. Between the amount she is going to save into
her Roth IRA, her 401(k) at work, and her 401(k) match, she’s putting away $625 a
month, or $7,500 a year, That’s 15% of her income–which many experts recommend as a
good savings target. At this rate, by the time she’s 65, Betty
will have personally deposited $262,500 into her retirement account. Impressive, but still a long way from the
million dollars plus she’ll need to retire. But now we add our special ingredients! Over the last 90 years, the stock market has
grown an average of 9.8% per year. But let’s assume a little less than that…
say, 7.5% If Betty can put together a decent portfolio, she can expect her savings to grow
by an average of 7.5% per year. And as long as Betty doesn’t touch that
account, the dividends and interest she earns will generate even more dividends and interest! And over time, her savings doesn’t just
increase in a straight line… it increases exponentially! Now, by the time she’s 65, that $262,500
of her original money has ballooned to $1,277,158.92.

Nice job Betty! A couple things to keep in mind with this
scenario. It’s very likely that goods and services
will cost more in the future due to inflation. However, it’s also very likely that a 30
year old like Betty will see her salary increase as she gains more experience and skill. If she sticks to that same 15% of her salary,
she can expect to have even more set aside for retirement. What if you’re older than Betty and getting
a late start? Well, that may mean that you need to set aside
more of your paycheck, say 20 or 25 percent.

Or you may have to wait until your 70s to
retire. Either of these options is better than doing
nothing or counting on winning the lottery. There are many other factors that can change
your specific situation. Inheritances, social security, pensions, medical
conditions. If you’re not sure where to begin, you can
seek out the help of a financial planner who is a sworn fiduciary. They can outline a plan that fits your needs
and show you that preparing for retirement is not as intimidating as you may think. You don’t have to be into shuffleboard or
bird-watching to expect a little time off in your golden years. And some people want to work as long as they
can. But everyone wants the power to decide that
for themselves, especially after a lifetime of hard work. Of course, if you do manage to get access
to a time machine, you can always fall back on the old “Sports Almanac Retirement Plan.” And that’s our two cents! Thanks to Google for supporting PBS Digital Studios.

Their mobile app, Science Journal lets you take notes and measure scientific phenomena such as light, sound, and motion, using your phone, tablet or Chromebook. You can find activity ideas and additional information on their website at g.co/sciencejournal.

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How 2024’s Record Retirement Numbers Could Spark a Recession | WSJ

– [Narrator] You're looking at
a chart of the US population, and these are the baby boomers. This year, a record number of them will reach
traditional retirement age. By 2030, they'll all be 65 or older. This is creating a fiscal problem because fewer taxable
workers means less money for social security. – If Congress does nothing,
we're gonna hit a major crisis.

– [Narrator] Here's how
this demographic shift threatens the future of one of the country's most
important government programs and what can be done to fix it. Baby boomers or those born between 1946 and 1964 have been propping
up the US economy for decades. – Their mere numbers
contributed for a long time to rapid economic growth and because every worker
contributed social security that made social security
look very healthy. – [Narrator] But as boomers
started exiting the workforce in 2008, the number of
retirees grew rapidly. – Not only do you have more
retirees collecting benefits for more years, you
have fewer young people entering the workforce
because birth rates were lower for their parents' generation, and that creates a squeeze
on both directions.

Higher expenses from all
those retirees living longer, lower payroll tax revenue from fewer people entering the labor force because of those declining birth rates. – [Narrator] This puts a lot
of pressure on social security and without policy change, projections show the trust
funds will be depleted in 2034. – There's a misconception out there that when the social security
trust fund is exhausted, the system is somehow
bankrupt and there's no money. Social security is an integral part of the federal government, and as long as the federal
government is not bankrupt, social security is not bankrupt. – What's really happening is
the program is running out of treasury bonds, which are basically IOUs
from the government. For many years, social security
was taking in more money than it needed to pay out in
benefits, so it lent money to the government to
use for other programs, and it got IOUs in return. – Around 10 years ago though,
that situation flipped around.

For the last decade, we've been
paying out more in benefits than we've been collecting
in social security revenue. – [Narrator] But because the program had so many IOUs stashed
away from previous years, it's been able to keep
paying benefits in full by cashing in on those IOUs. – Right now, there's
roughly $3 trillion in IOUs, but each year that $3 trillion stash gets a little bit smaller. By the year 2034, all of the
IOUs will have been cashed in. – That means retirees would see overnight about a 25% benefit cut. – [Narrator] This number will
likely increase as the number of workers per retiree continues to fall. – Simply because we're not about to go bankrupt doesn't
mean there's no problem.

There very much is a problem. – [Narrator] Studies
show that the majority of Americans rely on these
monthly benefits checks for retirement income. According to census bureau
data, about 50% of people between 55 and 66 years old
have no retirement savings. – Can you imagine right now if you had to take a 25% reduction
in your take home pay, you still have to pay rent. You gotta buy groceries,
you gotta pay utilities. – It's especially important for those who don't have college degrees, people on the lower end
of the income spectrum. – [Narrator] Fichtner says, when retirees have less retirement income, they also generally spend less money. – That means less economic activity. That means less employment because employers have to lay off people 'cause no longer is that money coming in. It's a ripple effect that could be basically a
senior induced recession. – But social security is only
meant to replace a percentage of a worker's pre-retirement income based on lifetime earnings. So as much as 78% for very
low earners to about 42% for medium earners and
28% for maximum earners. – This is three legged stool
we talk about all the time.

It's supposed to be social
security is one leg, your employer provided pension is a second leg and your
personal savings a third. Well, social security
is financial challenges. We don't have pensions really anymore. About 10% of the population has pensions and then it's hard to save on your own when you've gotta pay off student loans and housing costs are so high. – [Narrator] About half of Americans do have retirement accounts
like 401Ks and IRAs, but those are all subject to market risk. – I hear a lot, well,
those are 65 year olds.

Why do I have to worry
about the boomers today? Well, this impacts every
generation that's coming up behind. – They might not be asked to pay a slightly higher payroll tax. More important, they might be asked to work a little bit longer. – [Narrator] And like most
things in the economy, social security's funding
shortfall isn't an isolated issue. – It's one of the reasons
the federal budget deficits is as large as it is. It means that we have to borrow money, which means issuing bonds. That tends to put up
pressure on interest rates, which means it's harder to afford a house. It means that Congress might have to cut spending on other
programs like the military or the environment in order to make sure that there's enough money
for social security. – [Narrator] So what needs to
happen to put social security on more sound footing? Congress needs to pass a law. – Congress has stood still and not enhanced social
security since Richard Nixon.

– [Narrator] When and what kind of law, that we still don't know. There's been a number of proposed
solutions over the years. – This legislation demands that the wealthiest people in this country start paying their fair share of taxes, – But policymakers generally
disagree on whether to raise taxes or cut benefits. – You'll have two approaches
to how to solve this problem, and you're not gonna do it. – There's probably no single magic bullet, which will put social security
on a long-term footing. Instead, Congress is
probably going to have to look at a variety of steps which will collectively fix the problem.

– [Narrator] But economists
don't expect action to be taken anytime soon. – Everybody, including on Capitol Hill, knows that social security has a problem. Nobody, especially those in Capitol Hill, are prepared to do anything about it. – As we all apparently
agree, social security and Medicare is off the books now, right? They're not to be smart.
(clapping and cheering) – We all would wish that
politicians would show the political courage
necessary to tackle this now and not wait until the 11th hour. Benefits and changes to retirement programs
take a while to phase in. One of the last major reforms we had for social security were the 1983 reforms. – [Narrator] Those amendments
raised the retirement age to 67, but it took nearly
40 years to phase them in.

– There is a 10 year window, but we don't have 10 years to act. – There has to be some kind
of a legislative solution that comes along between now and then. By law, the program can't
borrow anywhere else. The program's too important,
too popular for it to basically be allowed
to run out of money..

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The Ultimate Retirement Plan | Wade Pfau | Ep 63

[Music] welcome to the market call show where we discuss what's happening in the markets and the impact on your Investments tune in every Thursday on Apple podcast Google play Spotify or wherever you listen to podcasts hi Wade how are you doing I'm doing great thanks for having me on the show you know I'm so happy to have you here if you're in the retirement income planning business or if you're a financial advisor or a money manager somehow managing money in the space for retirement income planning everybody has heard your name you've been around in this field for a long time and as I was looking through your uh resume from various sources it's like okay well what are we going to exclude you know there's because there's so many things that you have done but I thought I would just kind of just fill in for viewers that don't know you a little bit about you um you know you're an active researcher and educator about retirement income strategies you know you do a lot of speaking I know you're going to be speaking here in Denver uh pretty soon uh you are a professor are you still a professor of retirement income at the American College of financial services I am currently yes and the director of Retirement Research for McLean asset management and in-stream uh you did your PhD in economics from Princeton and you did interestingly you did a dissertation on Social Security reform which we hopefully we'll talk a little bit about later uh you're also a fellow CFA Charter holder like myself um and you've got lots of AD you know accolades and some great books in particular one that I really like that you've done is a retirement planning guidebook uh 2021 uh and then you have that safety first retirement planning how much can I spend in retirement etc etc you've done some stuff on reverse mortgages The Unwanted stepchild that actually is a useful tool for many people yet not quite known by many so uh with that said I I was just curious tell me a little bit about your background where did you grow up so uh well I was born outside of Detroit I lived there until I was 15 moved to Iowa after that my my mother is originally from Southwest Iowa so I graduated high school in Des Moines Iowa and then went to the University of Iowa after that so pretty much midwesterner lived a number of different places afterwards including New Jersey Pennsylvania Tokyo Japan for 10 years and then now I live in Texas you live in Texas now yeah actually these pictures behind me and all are all the places I've lived over the years so it's so so you so you grew up in Detroit mostly it sounds like but moved all traveled a lot um how did you go from you know studying what did you study Finance initially when you were in college in undergrad economics and finance economics okay so how did you go from economics and finance to just being so focused it seems like you're focused on retirement income planning well yeah I mean uh financial planning as an academic field is still pretty new and even I entered the PHD program uh in 1999 and actually Texas Tech University started the First Financial Planning PhD program in the year 2000 so it wasn't even an option at that time but academic economics is very mathematical and theoretical and I was always looking for ways to apply to more real world type activities and that's ultimately how I made my way into financial planning indirectly you mentioned the my dissertation on Social Security reform that was testing how in the early 2000s there was a proposal to create personal retirement accounts to carve out part of the Social Security tax and put that into like a 401k style account and I was simulating how that might perform and ultimately that's the same sort of thing I've made my career on at this point which is just writing computer programs to test how different retirement strategies perform in looking for ways to get more efficiency out of one's asset base for retirement now that was during the bush 2 Administration if I remember correctly wasn't it and so and uh what were your findings in that what was your general thesis or not thesis but your general conclusion well at the time what I determined was that it could be made to work but it wasn't obviously a better approach and now in hindsight I realize more and more that there's so little in the way of protected lifetime income that carving out more of Social Security which is that inflation-adjusted protected lifetime income and exposing that to the market as well uh probably would lead to worse outcomes for many people than we do need some risk-fooled income and so now that traditional pensions are going away Social Security is one of the last holdouts and so it probably wouldn't be the best idea to private or not privatize but uh create personal the defined contribution 401K style accounts out of those Social Security contributions very interesting and we'll we'll touch a little bit more I have a lot a few questions on Social Security uh in general um you know from a macro perspective and also a micro perspective personally for uh people so um one of the things that I really like about what you've done is that you kind of take more of a approach that I'm kind of used to like more of an asset liability management approach when you think about funding ratios rather than the traditional way that you hear financial planners talk about it I really like your overall framework and one of the things that I I think is very helpful is your retirement income style protocol your resubm Matrix can you explain a little bit uh to the viewers about your ideas there and and what how that helps an individual determine their overall approach to how they should tackle their retirement income plan yeah absolutely and that's really one of the the confusing aspects of retirement income is there are different strategies that people can use and unfortunately just there's a lot of disagreement and arguments about one strategy is better than all the others and and by what I mean by that is you have What I Call Total return which is just a you build an Investment Portfolio and you take distributions from it throughout retirement you have different bucketing or time segmentation strategies and then you also have strategies that will focus more on having protected lifetime income through annuities or other tools to cover your Basics before you start investing on top of that and they're all viable strategies at the end of the day and that's an important point that Advocates of Investments only don't appreciate how powerful the risk pooling that annuities can do to offer more income how that is competitive with anything that the stock market might do and so people really have options about what they're most comfortable with and that's what the retirement income style awareness is about developing a questionnaire to help guide people in the direction as a starting point which of these different retirement strategies resonates best with your personal Outlook and preferences you may not ultimately choose the the strategy coming out of that but at least it gives you a starting point to say okay it seems like I might look here first as a way to build my retirement strategy and ultimately if that helps me connect to a strategy that resonates and that I can stick with through thick and thin in retirement that can help give a better outcome because they're all viable strategies but where a strategy doesn't work is if you're not comfortable with it and you don't stick with it and you you bail on it during a market downturn or something like that that that's what the retirement income style awareness is really designed to do is just provide that initial talking point on which kind of approach might work best for me to to think about as a starting point yeah I like that because what it's doing is it's basically more holistically looking at how you would can solve the problem and typically you'll find advisory firms that will will overweight if you will one over the other they're like I'm a Time segment guy or I I hate annuities it's all Total return annuities are a scam or uh you know I will never buy an annuity or uh you know Etc et cetera and risk pooling is is something that's really important but it's also very complicated and I think that's why a lot of people have shunned annuities and annuities have changed a lot over the years um and you know coming from my background you know which is more of a total return approach that's great if you have a lot of money but in in other cases you know I think that you can you can you can look at the problem from a optimal way of doing it or you can look at the problem from a way that's actually going to get implemented and work and what I like about Risa is it's practical pretty much all the stuff that you're doing is practical it's not completely theoretical one problem though with that is that you can have somebody who has a safety first for example mindset but their situation is such that if they have a Safety First with 100 of their Capital that they're very unlikely to be successful can you can you expound a little bit upon how you would think about that in terms of giving advice to people in that scenario yeah so that scenario is probably more they do have a safety first mindset but they've been pigeonholed into a total return strategy but they're ultimately not comfortable with the stock market and therefore maybe most of their Holdings are in cash or in bonds which doesn't support a whole lot of spending power and that's you kind of there's three basic ways you could fund a retirement spending goal the first is just with bonds or with cash not really offering much yield on top of that and then to try to spend more than that the um the probability base perspective is invest in the stock market and the stock should outperform bonds and that should allow you to spend more throughout retirement the safety first approach is more now let's build a floor of protected lifetime income that then brings in with an annuity the the risk pooling the the support to the long-lived helps provide more spending power than bonds alone as well and people have that option and it's when the safety first person gets pushed into a total returns probability based strategy and just doesn't invest in the stock market they're ultimately left with bonds which which is the least efficient way to fund a retirement spending goal over an unknown lifetime very true and you know I guess a lot of people did take that approach probably when I first got in this business 20 over 20 years ago there was a lot of people that were doing that who were retired back where the municipal bonds were paying it was it was conducive the market was conducive for that we had high interest rates that were in the long-term secular decline so you had capital appreciation from those bonds he also had reasonably good uh tax-free interest yields that were working for people and inflation was falling um and so now we potentially could be in the opposite inflation Rising who knows how yields are going to work themselves out but um it when you're looking at this um you you bring up this concept of some of the retirement risks and and you have like these uh longevity sequence of returns spending shocks Etc of of the risks that you're seeing out there which one would you say has had the largest impact negative impact on people that they really need to solve for you know longevity sequence of returns spending shocks and surprises well longevity in a way it's the overarching risk of retirement and it's misnamed because it's a good thing it's if you live a long time it's just as an economist will point out that the longer you live the more expensive your retirement becomes just because every year you live you have to fund your expenses for that year so the cost of retirement grows with the length of retirement and then it's when you live a long time not only is there that issue that you're having to fund your budget but then there's just more time for all those other types of risks to become a problem as well with the macroeconomic environment with changing public policy with inflation even a lower inflation rate still is slowly eating away at the purchasing power of assets and then the spending shocks are things like big Health Care bills helping adult family members having to support a long-term care need to to pay for care due to declining cognitive or physical abilities and so forth and so so it's really that longevity is if you don't have longevity there's not really time for the other risk to disrupt your retirement too much and that's why longevity usually gets listed as the primary risk of retirement interesting I hadn't thought about that so a lot of the other risks are kind of correlated to the longevity element um so so really tackling that that that could be one of the biggest parts of all the surrounding risks around that you you talk a little bit in your book a retirement planning guidebook you talk about quantifying goals and assessing preparedness and I I had mentioned before that I like that you're taking your approach more like a Alm or asset liability management type of of an approach which basically that's what it is um and uh and I don't think the average person thinks about it that way they tend to think about it as like I have so much money and I'll be able to with draw so much from it sometimes there's unrealistic expectations about it but one of the common things that I've seen is that most people are not spending the time they need to do on budgeting really to actually even come up with a number or help come up with a number of what your present value of assets need to be to be prepared do you have any kind of practical tips for people and their advisors on how they can actually think about and execute a good budget not only just you know come up with one but actually implement it well now that technology can really help with that and so if people are comfortable with some of the the different websites or software that Aggregates all of your different expenses different credit cards and so forth into one Excel spreadsheet that's a very easy way to to start budgeting now for people who mostly pay in cash that can be a lot more complicated these days I don't use a lot of cash so I just simply when in the rare case that I have an ATM withdrawal I'll just kind of call that a household expense for that time period and not worry about breaking that down much more but uh when you start having those credit cards or debit card type expenses now the the software may not categorize them in the way you desire and so I usually try to not more frequently than once a month but maybe once a month once a quarter download the expenses while I can still remember well enough if I have to change some of these categories and so forth to then be able to keep track of all my expenses and know exactly then pretty much to the scent almost what I spent that year and then to start thinking about well were there any anomalies of course there's always going to be anomalies and to make sure you budget in that sort of thing but that really once you have a few years of expenses down and once you think about bigger Big Ticket items like car purchases and things that can really give you a foundation to start projecting ahead at what your expenses may be in the future as well and then then you have a way to start thinking about well how much do I need to fund those expenses and that's the whole idea of that asset liability matching do I have the resources necessary to fund your expenses are just your liabilities and do you have the resources to be able to fund that with a level of confidence that you feel comfortable with hmm interesting so I I had a meeting with a client actually who was forced into early retirement and a former engineer and keeps meticulous records has for years and uh he gave us the actual numbers for the last three years and I I figured out what the compounded rate was and it was a lot higher than the inflation rate reported by the bl by the government so um I I think there's some disconnect there between you know how we model and reality um you know uh when you look at financial planning software and you look at the assumptions that are the number of assumptions that are involved in the financial software and you know even if you're not taking Point estimates if you're doing Monte Carlo or whatever stochastic process it's very difficult to come up with a robust plan so I'd like I'd like for you to give me some and I know this is kind of a big general question do you have any general tips to people who are doing this modeling on how and for and for clients actually for for individuals and how they can make their retirement more robust to be able to deal with all the changes that can happen in the world like you said public policy changes Market changes Etc yeah you will have to revisit things over time and and as you get new information about your spending make revisions to the budgeting but uh it's still just a matter of when you're like round up your expenses or be conservative with some of your projections there's some categories that are challenging as well like healthcare and when someone switches to MediCare at age 65 that could lead to an entirely different set of health care expenses and with all your expenses on Health Care in the past you might have to completely upend that and and and do a reset there so it is challenging but if you're trying to build in conservative projections the default is usually whatever you believe your expenses will be you just adjust that for inflation every year and most people don't really do that they tend their expenses don't tend to necessarily keep up with inflation over time now that can get complicated but the way I describe it in the retirement planning guidebook is you'll have one particular budget through ajd and then you'll have another lower expense budget after ajd but also building in what if there's a long-term care event and so forth how much additional Reserve assets would I like to have set aside for out-of-pocket expenses that sort of thing and then it's not going to be perfect and it's going to need revised over time but I think you can start to get fairly confident like I've sort of done these exercises I'm still far away from the retirement date and of course I may be wrong but I I think at this point I have a sense of what my expenditures will be or what they can be at least uh over the longer term Horizon of course subject to new technologies new inventions everything else that can happen uh that would change your expenses but at least roughly speaking I think you can start to figure these things out yeah um I guess I'm coming from a practitioner who's been doing it for you know 25 years and seeing the the the conventional wisdom by the best experts at each point in time and looking at how people have actually fared without advice and what I've found consistently is that changes in in particular with government policy has led to uh sub-optimal choices for people who are trying to optimize to the typical cfp advice so and let me let me uh back that up a little bit with with uh some some examples um education planning what was optimal has changed in my career probably four or five times um let me just put it this way I I have put more emphasis in tax diversification and diversification and stuff in how you do things now because what if you if you over optimize in these scenarios it's sub-optimal does that make sense right if like if you designed everything to handle one particular public policy and then it changes on you like right now Roth IRAs or Roth accounts are incredibly attractive to have Assets in but something could change it could just be not that they might necessarily ever tax a Roth distribution but they could add a required minimum distributions or they could count it in the modified adjusted gross income measures used to calculate taxes on Social Security benefits or to calculate higher medicare premiums and so forth and so if something like that happened and you'd been doing all these Roth conversions to get everything into the Roth account yeah that would be overdoing it and subjecting you to that particular risk so I do think tax diversification is is quite important so that you still have flexibility and options because the the uncertainty is the rules will change and we see that every couple of years we just in late December 2022 secure act 2.2.0 came out and that has changed a number of different public policy matters related to retirement income it's gonna and that will continue to happen over time so so be flexible and part of that is just not overdoing things making sure you stay Diversified with with how you're approaching planning yeah in today's environment what we see a lot is is people that have taken the advice of Max 401K uh you'll get a lot of tax deferred and and what's happening is is they're coming to retirement with a large very large 401K plans and things like that and then they just get nailed in taxes and in fact I'm finding a lot of people pay more taxes when they're retired than they did in some cases than when they were not retired um and uh and and it becomes an issue it becomes a real issue then they have estate planning issues and things like that so um uh I just I'm glad that you said that about the the tax diversification I think more than ever especially given our our current you know country's economic condition there's a lot there's we're going to have lots of changes and they could be very large changes uh in particular if you considered quote unquote rich um so I'm sorry I put my little uh two cents in there but getting back to your book uh you have this concept of the retirement income optimization map um again going back to the assets and liabilities and all of that and when you're you when you're you talk about optimizing that's that's why I brought up the the concept of optimizing I I think there's optimizing within ranges one of the concepts that I've kind of looked at and you talked about you talk about different people's retirement styles um one of the issues that you can look at is like matching the duration of your expected liabilities up for a certain period of time so let's say you have a certain percentage of your portfolios in a total return portfolio and then and then another percent that you're you're cash matching or your duration matching matching for one to five years or whatever uh I think some people call that time segmentation you can call it many different things if forget about psychology and how somebody feels if you are just a rational investor a rational person what would you say the optimal length of time is on average for somebody retiring 65 say to cash match or to duration match uh you know their near-term expenses at one year is it five years is it 10 years I know that's a a loaded question but if you forget about forget about psychology and just go pure rational mm-hmm well pure rational the the total return investing approach which has less emphasis on trying to duration match uh can work and also if you then use a an income protection or wrist wrap type strategy you you have that income floor in place that is lifetime so it's already kind of duration matched to your liability so time segmentation is certainly a viable strategy in terms of my personal preferences it's my least favorite strategy so the whole behavioral point about time segmentation is if I have five years of expenses in in cash or other fixed income assets I don't have to worry about a market downturn because I feel confident that the market will recover within five years and I'll be fine and that that story that's a behavioral story and it just doesn't resonate with me personally I I can understand it resonates with others but it doesn't resonate with me personally and therefore I don't necessarily think about what sort of like front end buffer you need in place too to somehow be rational or optimal also that's where something like a reverse mortgage can fit in in a really interesting manner because if you set up the growing line of credit on a reverse mortgage that can be the the type of contingency fund that you can draw from so that you don't necessarily need to have as much cash or other assets sitting on the sidelines to fulfill that role so I would look more at some other of course you need some some cash but I tend to say less rather than more and maybe look at some other options as well about how to have that liquid contingency fund that's great so so basically the in in the guaranteed income sources plus plus reverse mortgage could uh provide a buffer provide a floor so that you could have uh less cash and and you're generally getting a higher expected rate of return on the annuity than fixed income securities and your at at least at the present time a reverse mortgage line of credit grows at a faster rate than the cash which can be used tax-free when you need the money uh so you can see that Evolution that Carol davinsky is one of the famous planners and researchers in this area and in the 1980s he talked about the five-year Mantra which was have five years of expenses in cash now cash you create drag on you're not able to get as high of potential returns with the money you have in cash so he gradually lowered that down to two years in cash and then when he came across reverse mortgages and in subsequent research and and descriptions he talked about having six months of cash alongside a reverse mortgage growing line of credit so I think that's an example of I I think something like that sounds pretty reasonable that's that's that's that's really helpful so and I want to Circle back to reverse mortgages here but before we do if you don't mind I'd like to talk a little bit more about social security uh so we're kind of getting into the realm of the the guaranteed side of things not the total return side of things um or or I more more knowable income sources um I was just looking at the kind of the statistics right now total debt in the United States is really huge um we're running very large deficits project to be like 2 trillion we have a Pago system right now in Social Security and even if we taxed it's been argued by many people even if we taxed every billionaire 100 that would barely make a dent in our current situation so we have huge unfunded liabilities off balance sheet uh type unfunded liabilities how can we really expect Social Security to keep up with inflation and will it be there for quote unquote you know what I'm saying well it will need reforms it's very unlikely to Simply disappear for my own personal planning I I assume I'll get 75 percent of my presently legislated benefits but for people who are younger as well further away from their their 60s uh the social security statement they receive assumes the zero percent average wage growth as well as zero percent inflation and the reality is there's probably going to be a positive real wage growth over time so you're presently legislative benefit could be a lot higher than what your social security statement is implying and therefore when you offset a benefit cut with the uh the wage growth that can be expected over time you may not have that much less in terms of what you're going to plug into your financial plan but yeah I certainly we don't know how the reforms will shake out but if nothing is done sometime in the 2030s Congress would have to legislate a benefit cut and to keep the system so that enough payroll contributions are coming in to cover exist current benefits that cut would have to be somewhere in the ballpark of 20 to 25 percent so I just simply assume I'll get 75 percent of my presently legislated benefit as part of my financial plan is is it fee Is it feasible feasible to actually get Social Security in a funded situation or is it gonna is it most likely going to stay Pago in your if you had a crystal ball oh it yeah it's always been pay-as-you-go and right so the buildup of the trust fund was an effort to just build up some reserves in anticipation of the changing demographics where there's more and more retirees relative to the workers paying contributions uh they try to keep Social Security funded over the 75-year time Horizon and so it's never permanently funded but yeah with a 25 20 to 25 percent benefit cut that would be sufficient to get the system to be expected funding funded fully over the subsequent 75-year time Horizon that's that's really helpful um thinking about it that way in terms of just potentially a 25 less is a reasonable way to look at it I think um the that part of it's not so hard what's harder to understand or to get a grasp on is whether or not that's going to be what that means in real terms for for a retiree um if we continue on a certain path and inflation is is in a different scenario in the future how how do you think about scenario when or inflation when you're when you would set up a plan or a retirement plan what how would you what kind of what kind of uh of Monte Carlos if you will would you put on on your inflation expectation so I do well I tend to just try to think of everything in today's dollars so that the inflation's factored out of it but I the way I think about long-term inflation is the markets tell us what they expect inflation to be if you just look at the difference between a treasury bond and then a tips treasury inflation protected security with the same maturity uh the difference between those two is what the markets expect inflation to be in if they thought it would be different they would invest in one or the other to get that aligned inflation is coming down now and even over the next five years at this point markets are only factoring in an average inflation rate of about 2.1 to 2.3 percent so it seems like markets really expect inflation to come over to come under control even over 30 years right now the markets are building in about a 2.3 percent average inflation rate which is below historical numbers and in terms of if I'm building a Monte Carlo simulation right now I'd to be a little more conservative there I'd base it around a two and a half percent inflation rate with historical volatility and inflation is around four percent so so you're basically an average of 2.4 or 2.5 and then uh standard deviation is like four basically okay so uh that that sounds reasonable um I I guess what is interesting about that is I guess if you assume that we have typical real rates of return for different asset classes that that all works itself out if you put it in present value terms um but if that's not the case and and it should stay that way ultimately it should stay that way but you could have major moves in markets in people's uh time Horizon when they retire which leads us to sequence of returns conversation uh when people retire you can have these you can have these big shifts in markets things things are rough right when somebody retires uh we uh remember I told you about that engineer we had a conversation with forced into early retirement right when the market topped uh the good news is is he had two types of annuities that worked out perfectly for him in the sequence return can you explain sequence return risk for listeners and and what it means and how to you know strategies to mitigate that a little bit more and just one quick last comment on the inflation too like if you thought when I said these low inflation numbers that that's ridiculous inflation would be much higher well then you'd benefit from investing in tips because they'll provide you a real yield plus whatever inflation ends up being and so they'll perform better if inflation is higher and they've already discounted that that was one of the best performing uh fixed income markets uh in the last couple years so but anyhow but but yeah a sequence of returns risks so that's it whenever you have cash flows going in or out of a portfolio the order of returns matters and it's when you start spending in retirement that it matters a lot more so it's like the market could do fine on average over the next 30 Years but if the market goes down at the start of my retirement I'm not having to sell more and more shares to meet my spending needs and sell a bigger percentage of what's left to meet my spending needs such that when the market subsequently recovers my portfolio doesn't get to enjoy that recovery and so it can dig a hole for the portfolio and the the average return could be pretty high but if you get a bad sequence of market returns right at the start of retirement it can really disrupt that retirement and lead to an implied much lower average rate of return than what the overall markets were doing over your retirement Horizon yeah so and in terms of actually uh let's say you're coming up on retirement so this is a common scenario you're retiring in 10 years or five years what should an investor be thinking about doing to transition from that accumulation to distribution phase to kind of mitigate that sequence of return risk so when people start thinking about retirement I think that's where the first step take that retirement income style awareness to get a sense of what sort of retirement strategy might work for you because that's where you then have um different options if you're more of a total return investor that's the whole logic of the target date fund and so forth is just start lowering your stock allocation but still investing in a diversified portfolio as part of that transition into retirement if your time segmentation the easiest way to think about the transition is instead of holding those Bond mutual funds you start exchanging those in for holding individual bonds to maturity like if I'm 10 years before retirement every year for the next 10 years I could start buying a 10-year bond and then when I get to my retirement date I have the next 10 years of expenses covered through these maturing bonds if you have more of an income protection or risk draft strategy the the options would then to be thinking about well if I have an income gap I'm trying to fill where after I account for Social Security or any pensions I'd really like to have more reliable income to meet some basic expenses well you could start looking at purchasing annuities that would turn on income around your projected retirement date as a way to have that transition into retirement and so they're all viable options and it's just a matter of taking the the route that you feel most comfortable with very good that's really really helpful um now I I guess at least is a little bit into the what I would call the traditionally unloved unwanted stepchildren annuities and reverse mortgages uh you know they've gotten a bad a bad rap for so long but they're so useful in in as tools I would say probably the reverse mortgage is the least understood and uh and and one very helpful um tool I think maybe because of just the history of them and how they used to be structured versus how they're structured now um can you give me a sense about how to think about reverse mortgages for people is it only for people who are you know can barely get their their plan together with their assets or or does this also work for people who have a cushion but they should still do a reverse mortgage more yeah I mean the conventional wisdom a lot of times is that the reverse mortgage is a last resort consideration after everything else has failed and maybe then just a way to Kick the Can down the road a little bit but ultimately that retirement wasn't necessarily sustainable since about 2012 that really the focus of the kind of research retirement planning financial planning type research was looking at how reverse mortgages can be used as part of a responsible retirement plan and so it's not that a lot of advisors may just think the reverse mortgage is only for someone who's run out of options but but that's really not the idea it's we have different assets and it's back to that real map the retirement income optimization how do we position those assets to fund our goals and the reverse mortgage provides a lot of flexibility about how to incorporate our home equity asset to help fund our retirement plan and it can lead to a lot more efficient outcomes than just simply say leaving the home sitting on the sidelines and saying well I've got the home if I have long-term care needs I'll sell my home to fund the long-term care something like that otherwise I'll just leave the home as a legacy asset for my beneficiaries there's much more efficient ways to incorporate home equity into a retirement plan and that's what the whole discussion around reverse mortgages is how can I I use a reverse mortgage to help build a more efficient retirement plan and not as a last resort but as part of a responsible well-funded retirement plan it's just another Diversified tool to a source of source of of assets that you can use that's not just sitting there I just had a conversation with a client yesterday that is about to retire in a few years and uh that is exactly what he said that other property that I have in that other State uh I'm just gonna keep that as a that'll be my I'll sell it if I need to you know there was a conversation about health care contingency and um uh long-term care and things like that and that was his rationale um and and in discussions with clients there has been a a ton of resistance you've been really good at putting out information that shows why it makes sense to have it as a potential use so can you explain a little bit about the the line of credit portion of it and how that how use how that could be advantageous yeah and it really it goes back to this idea of sequence of returns risk and if you look at a reverse mortgage in isolation it may look expensive or whatever else but it's how does it fit into the plan and by reducing pressure on the Investments it can help lay the foundation for a better outcome and the the growing line of credit is one of the most misunderstood aspects of the reverse mortgage and I think it was partly unintentional and it may sound too good to be true in a way it probably is and we saw in in October 2017 the government put some limitations on the growing line of credits so it was incredibly powerful before then it still quite powerful not as powerful as before for new uh anyone who opened a reverse mortgage before October 2017 was protected to have those Provisions in place for the entire life alone but if you wait and then after October 2017 you still have the growing line of credit it's not as powerful but but the idea is I believe the government assumed people would open reverse mortgages because they want to tap into the funds but financial planners realized with the variable rate not with a fixed rate but with a variable rate home equity conversion mortgage you do have to keep a minimal loan balance of say 50 to 100 dollars but otherwise the rest can be left as a line of credit and that line of credit grows at the same way the loan balance would grow and so you can understand why if you borrow money the what the loan balance will grow over time well it just happens to be the case that the kind of neat planning trick is if you open the reverse mortgage and 99 of it is in the line of credit the line of credit is growing over time at the same rate that the loan balance would have been growing and ultimately this improves the odds dramatically of having a lot more access to funds over time if you open it sooner and let the line of credit grow versus just waiting to open it at the time you might actually want to start spending from it yeah how has it been limited uh limited versus the way it used to be what what are the limitations well they increased the initial mortgage insurance premium which is not directly to the line of credit but then every every so often used to be more frequently we're now getting overdue at this point with it's been over five years but they revised the tables that determine the principal limit factors of what percentage of the home value can you borrow and so as part of that 2017 change they uh lowered the the borrowing percentages and also they lowered I mean this this part's a good thing but they lowered the ongoing mortgage insurance premium that would cause the loan balance to grow at a slower rate but it also in turn caused the line of credit to grow at a slower rate so it before that change I was running simulations where if you opened a reverse mortgage at age 62 there was like a 50 chance that within 20 years the line of credit could be worth more than the home and that's no longer the case it's still there's still a probability that the line of credit could grow to be worth more than the home but it's not nearly as dramatic as what I was Finding before the rule change that's very interesting because the line of credit growth rate is tied to interest rates and home prices have somewhat of an inverse relationship to interest rates to some degree but it's basically positively skewed so it's not it's hard to know but uh uh but yeah that's that is a great planning tip and it's interesting because we have had a lot of friction with this discussion with uh clients uh mentioning to them because they just have it in their head that I'm going to lose my home and I'm going to there's all these things that can go wrong and then you have to explain it's a big education process and of course they are required to do education as well no we don't sell reverse mortgages but we always you know if we if we you know we mention it to people as a source and you know having it there makes a lot of sense uh and and the same thing with the annuities um you know I have a love hate relationship with annuities but I'm becoming to love them more and let me tell you why before it was all commission driven you know and we're fiduciaries we don't do commission stuff now with the Advent of finally the insurance companies have really gotten to the point where there's at least enough of them now doing products that make sense with the guarantees I mean there was always companies out for a long time there's companies out there like Americas Etc that had just pure plain vanilla uh va's variable annuities that had just lowered your expenses and maybe eliminated a surrender or something but the guarantees is where the real there were folks too much on tax deferral and not enough on guarantees what were the guarantees is really really what we're really looking for here uh and the only way you could even get them you guarantees would be if you did a commissionable product so we'd be handing you know we would be referring people to Insurance guys who were selling commissionable products and then sometimes you don't know what's going to happen after that happens uh with that client so now thank God we have uh we're in a scenario now where the where the financial industry has finally caught up to what needed to happen with annuities yeah the only annuities yeah yeah the only annuities and there's it still has a lot more to be done it's it's you shouldn't be overlooked and I think what happens one of the reasons that I think they're so helpful uh for people is that risk tolerance is time variant people say their risk tolerance is X and then as soon as you have a market decline then their risk tolerance is all all of a sudden why which is more conservative and and uh these annuities can help people psychologically overcome that right you can always look to something that is either staying equal or growing and you can also have growing income streams during the Gap we see that a lot there's a gap between uh when they get Social Security and when they retire and it kind of fills that Gap and it's funny when I was when I was I actually had my assistant who's also a CPA excuse about my financial planning system I had to read this book first and she uh she said it sounded like like you uh were like in the room with him uh because there's so much stuff in here that you and I agree with it's amazing uh before not even knowing you so and I think it might have to do more with the approach of taking things more from uh your academic background and your CFA background it gives you a different perspective than what kind of the traditional financial planners had who had come more from a sales background and now what's happening is is we have uh the whole industry is now moving in the I think moving in the right direction and I think you've been a big uh reason why that's happening so I I really want to thank you for that all your work is really making a difference I want to talk a little bit about Medicare if we can and health insurance this is probably one of the most the hardest part is the medical the medical discussions in some ways um people don't want to think about long-term care people don't want to think about health costs I was looking at some of the statistics you know long-term care statistics is how much it costs it's a big number how would you how would you model the contingency planning you know for let's just start with long-term care how would you model that would you model it as a present value number or would you try to put it as a as something that's over time how how would you how do you approach that yeah actually so I did try to make the retirement planning guidebook as comprehensive as possible and and so I as part of that developed a long-term care calculator and the the basic logic of it is develop a scenario that you would feel comfortable that if you could fund that scenario uh you'll feel like okay things things will work out whether that's three years in a nursing home whatever the case may be but develop that scenario where you're saying okay at age 90 I will spend the next three years in a nursing home right now in the United States the average cost for a semi-private room in a nursing home is a little bit under a hundred thousand dollars I'll say in today's dollars a hundred thousand dollars a year but then I'm gonna plug in the the math gets complicated but you've got what's the inflation rate in long-term care what's the overall inflation rate and then back to this whole idea of the asset liability matching like what's the investment return discount rate you're comfortable assuming as well and also recognizing that if I do go into a nursing home I don't have to also fund my entire budget of a like if I thought I was going to spend 80 000 a year well I'm not going to be going on any sort of trips I don't have to go to restaurants or anything uh a lot of my other expenses would reduce not not 100 but they would reduce so plug it in what I think is a reasonable reduction to the rest of my budget and then you get calculated a present value of here's how much money I'd have to have set aside as a reserve asset to feel comfortable that I would be able to fund this long-term care need and and be able to have a successful retirement and for people who are worried about and who may be paying out of pocket for long-term care that could be several hundred thousand dollars to be blunted on average that's what it comes out to I actually had a coffee with a gentleman and he said uh what is it just tell me what the number is I said well it depends on your age he says no just tell me what the number I said it's roughly about 300 000 roughly on average it could be more it could be less uh you know uh okay and and there's there's there's different ways you can fund it right you can do long-term care insurance uh traditional Standalone you could do um you know life insurance policies that have embedded features you could do if you can't like qualify for um you know you know get a policy you can maybe get it embedded in an annuity of some sort you can sell fund um so it's not an easy thing that you can uh solve it with a quick answer um but but it's important to have in a plan and I and I like the fact that that uh you've emphasized that a lot in your work um it's just it's just great that that people are thinking about it from that perspective I want to switch gears a little bit um and talk a little bit about tax efficiency uh you know taxes are such a huge part of the impact of a plan and there's so many different angles to it and and the tax rules change so much um I'll tell you one of the challenges that I have asset location the concept of balancing you know where you put a certain asset according to us is tax efficiency versus keeping an asset allocation in line right up you know operationally keeping it in line with the objectives and then as money is being spent taking it from the right place it's a challenge even with excellent software and then sometimes I'm finding that it doesn't actually work out as planned so can you can you give me some practical tips on how to deal with asset location well the the basic logic of asset location but yeah I mean in practice it gets incredibly complicated as you're spending from these accounts to think about also rebalancing and making sure you're keeping the right asset allocation between stocks and bonds and the NASA location is where do you keep these things but generally just is a basic guideline your taxable brokerage accounts of course you want some cash there for your liquidity but otherwise that's your most tax efficient stock Investments so if you own stock index funds and so forth the on a relative basis they're most likely to be best off in your taxable account because a lot more of their returns will be those long-term capital gains that get the preferential tax treatment then with like your tax deferred IRAs and 401ks that's more of a place where less tax efficiency so bonds and so forth maybe lower returning type asset classes and then for your Roth accounts the Roth IRA and so forth that's where less tax efficient but higher expected return type asset classes could go the Emerging Market funds and small cap value and that sort of thing and that does also work with distribution ordering as well because the Roth will be what you tend to spend last and so also having these uh riskier asset classes that may have more growth prospects over the long term that can be a good place to set them aside since you're not likely to be spending from those accounts until later in retirement okay yeah it I think for a lot of people it's a little bit of a daunting thing and in practice it can be with contingencies and things like that can be hard to to do correctly and keep managed and I know there's good news is there's good software now that that helps with that um as far as tax efficiency the other you mentioned the order of withdrawals I mean traditionally you know you have the you know your traditional order of withdrawal that you would you would uh do in in the past a lot a lot of recommendations has been you know you want to take from your taxable accounts first right let those tax-free tax deferred accounts grow and then and then you start taking from those other sources but you make a really good point that that's not always the best thing to draw that taxable account down too fast can you expand upon that a little bit well the yeah the the basic tax efficient distribution is spent down taxable assets than tax deferred like IRAs and then tax exempt like Roth against last but you you can do better and so the the better approach is to have a blend of taxable and tax deferred until the taxable account depletes and then a blend of tax deferred and tax exempt after that and as part of that blend you can do rock conversions to in the short term pay higher taxes if that can better position you to pay less taxes over the long term and to have a higher Legacy value from assets over the long term yeah and then getting more specific than that it's there's no you really got to run the the individual numbers on a case-by-case basis but generally there's the opportunities to sustain your assets for much longer by having a more tax efficient distribution strategy that digs into that taxable plus tax deferred and then later tax deferred plus tax exempt exactly and and that's why it's important while you when you're an accumulation phase make sure you have some tax diversification if you can yeah have Assets in all those different types of accounts yeah so that you're not nailed so bad uh later on uh and then there's a lot of complexities that can happen with happen that we see quite a bit with concentrated stock positions and things like that which is probably outside the scope what we're talking about today so um and lastly here last last topic here non-financial aspects of retirement this is a huge huge huge thing uh it's funny it was the last towards the end of your book and I'm glad that you talked about it uh because uh there's I can't tell you how many times um you know you see people think that they're going to be happy sitting on the beach and then they they do that and they're miserable uh or or spouses that wind up hating each other for some reason can you tell can you give us some ideas about um like what should people be doing like say they're five years into retiring or ten years into retirement retirement What should people be thinking about doing to kind of get their their overall lifestyle satisfactory when they actually do retire yeah and and that's this is in some ways more important than any other Financial stuff because with the finances it's easier to adapt but work does so many things in a person's life it's not just that it provides a salary and you need a way to replace all the other aspects of work such as structure to the day camaraderie feeling part of a team feeling like you're creating value for a society all these different aspects that you need to be able to replace with something that gives you motivation to wake up in the morning in retirement and so to say simply it's not the best starting scenario if you retire because you hate your job you want to be able not to retire away from something but to be able to retire to something you want to have and it gives you purpose and passion and meaning to give you the motivation to wake up and and have something be active each day because in all too many cases people just they start doing passive things like watching too much television or surfing the internet too much and that can lead to a really miserable and unsatisfactory retirement wow that's huge that's interesting have something to retire to so uh and and start figuring that out sooner rather than later right not don't wait till the very end and go yeah what am I doing uh and sitting there staring at your wife or your husband yeah that's the idea that there's all these things you you want to get done but you just think well when I retire then I'll have more time to do it well if it's something you've been holding off on doing for the past 40 years it's not likely that just having more time in retirement is what you need you may just simply either not be interested if it's a hobby like oh I want to go back to playing the guitar or something if you're waiting for retirement to do that sort of thing there you go that retiring may not be enough and then people might start feeling bad that you no longer have the excuse and that's where if that sort of bad feeling compounds it can create a spiral like a downward spiral where people just become less engaged and less positive and it can even impact Health which then in turn makes it harder to be engaged and involved and and can lead to downward spirals it's really important to try to avoid that and as part of that not waiting for retirement to to consider all these other aspects of your life outside of work but making sure you're nurturing relationships and having hobbies and having things outside of work so that it will then be easier to transition into the retirement yeah that's great so is there anything as we close here is there anything that you're really excited about that you're working on right now that you want to share or is there at all right now I am just trying to get the updates done for the retirement planning guidebook and where we're doing the best we can to build out that retirement income Styles ideas uh something that people can benefit from and uh the other main research area is with the tax planning as well that I think this will be a Hot Topic and I've already done a lot of work in that area but it is such a complicated area that just trying to push forward as well about like Roth conversion strategies and and how to best Implement those in a most of the work in that area just assumes a fixed rate of return and with the reality of not fixed rates of Returns on your Investment Portfolio that also dramatically complicates some of those tax planning decisions so I'm continuing to push ahead in those areas interesting so more stochastic modeling in your future yes stochastic modeling and now you're probably going to be uh that Technology's got to be in there somewhere too any plans uh that you want to announce or share with new technology that you're going to be coming out with or software programs or anything like that or I mean I just have this Vision in my head if I were you I'd be doing something like that but I mean I'm just saying yeah don't Envision creating tax planning software but uh the retirement income style awareness that's where I'm putting on my efforts in terms of having software and that's an easier problem than the tax planning problem definitely yeah there's a lot of changes always yeah you'll be coding to your uh blue in the face all your staff would be so uh the uh it's interesting I I I'm actually going to be diving into that that profiling software that you have um I had a conversation yesterday about that so that's very good so where would people uh would you like people to send you see learn more about you um anything that you're up to oh yeah uh so my website retirementresearcher.com all one word retirement researcher and if you go there you can sign up every Saturday morning we send out an email with different articles and things and then my retirement planning guidebook is on Amazon or any other major book retailer and also I do have a podcast as well they're retire with style podcast with Alex mergia who's my a co-co-researcher and and co-founder of the retirement income style awareness excellent all right Wade thank you so much appreciate you coming on it's been a pleasure thank you the information in this podcast is informational and General in nature and does not take into consideration the listeners personal circumstances therefore it is not intended to be a substitute for specific individualized Financial legal or tax advice to determine which strategies or Investments may be suitable for you consult the appropriate qualified professional prior to making a final decision wealthnet Investments is a registered investment advisor advisory services are only offered to clients or prospective clients where wealthnet Investments and as representatives are properly licensed or exempt from licensure [Music] foreign

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👉Retirement Planning At 60 in 2024 – 6 Tips💥

imagine this you're approaching your 60s and starting to think about retirement you've worked hard all your life and it's time to enjoy the fruits of your labor but before you kick back and relax it's time to get laser focused on your retirement plan in this video we'll cover six important tips to help you plan for your retirement at 60. tip one assess your financial situation Jane has a woman who's been working as a nurse for 30 years she's always been Frugal and saved as much as she could but she's not sure she's accumulated enough for a comfortable retirement to assess her financial situation she makes a list of all her assets and her expenses she realizes that she needs to save more if she wants to maintain her lifestyle in retirement tip two explore different retirement options Bob's a 62 year old man has been working as an engineer for the last 40 years his employer has a 401k and he's been contributing to it for years Bob also explores other retirement options such as an IRA to maximize his retirement savings tip three diversify your Investments Mike is a 65 year old man who's been retired for a few years he Diversified his portfolio by investing in many different stock and bond index funds by diversifying his Investments might minimize risk and ensure a stable retirement income tip 4 plan for health care costs Sarah is a 63 year old woman who's been working as a teacher for the last 35 years she's healthy now but she knows health care costs can be expensive in retirement to plan for health care costs Sarah bought long-term care insurance to cover any medical expenses that could arise in the future tip five consider your Social Security benefits Tom is a 64 year old man's been working in construction for the last 45 years he's not sure when to start receiving his social security benefits he decides to wait till 67 to start taking his social security so he'll get a higher benefit which will give him a more comfortable retirement tip six have an actual retirement plan in place Lisa is a 61 year old woman has been working as a sales manager for the last 25 years she has a plan in place that includes a budget for her retirement expenses and a plan for Hospital spend her time in retirement Lisa plans to travel volunteer and take up a new hobby in retirement to stay active and engaged following these tips and learning from the experience of others you can ensure a comfortable and fulfilling retirement it's a great idea to consult with a good financial advisor click on the link in the description if you'd like to set a time to talk with us

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Retirement Planning FACTORS | Age and Income

what to look for when selecting the right 
retirement plan so age is a big factor when   it comes to deciding which plan is right for you 
if you're offered a pension that's fantastic not   many companies do offer those nowadays however 
if you have the benefit of getting one then yes   take it but I also think you should also have a 
retirement plan in addition to your pension just   to diversify your savings another situation to 
consider is your financial situation so someone   with a higher income level is most likely going 
to want to prefer choosing their own retirement   plan because then they're going to be able to 
not only write off those contributions but also   distribute it later in life so it maximizes their 
potential to not incur penalties or other taxable   income kind of situations essentially the more 
money you make you're looking for more write-offs   you're looking to claim less you're looking to 
you know have security but you got to be a little   more deaf and clever in how you're taking your 
distributions so to not trigger taxable events

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The Ultimate Retirement Plan | Wade Pfau | Ep 63

[Music] welcome to the market call show where we discuss what's happening in the markets and the impact on your Investments tune in every Thursday on Apple podcast Google play Spotify or wherever you listen to podcasts hi Wade how are you doing I'm doing great thanks for having me on the show you know I'm so happy to have you here if you're in the retirement income planning business or if you're a financial advisor or a money manager somehow managing money in the space for retirement income planning everybody has heard your name you've been around in this field for a long time and as I was looking through your uh resume from various sources it's like okay well what are we going to exclude you know there's because there's so many things that you have done but I thought I would just kind of just fill in for viewers that don't know you a little bit about you um you know you're an active researcher and educator about retirement income strategies you know you do a lot of speaking I know you're going to be speaking here in Denver uh pretty soon uh you are a professor are you still a professor of retirement income at the American College of financial services I am currently yes and the director of Retirement Research for McLean asset management and in-stream uh you did your PhD in economics from Princeton and you did interestingly you did a dissertation on Social Security reform which we hopefully we'll talk a little bit about later uh you're also a fellow CFA Charter holder like myself um and you've got lots of AD you know accolades and some great books in particular one that I really like that you've done is a retirement planning guidebook uh 2021 uh and then you have that safety first retirement planning how much can I spend in retirement etc etc you've done some stuff on reverse mortgages The Unwanted stepchild that actually is a useful tool for many people yet not quite known by many so uh with that said I I was just curious tell me a little bit about your background where did you grow up so uh well I was born outside of Detroit I lived there until I was 15 moved to Iowa after that my my mother is originally from Southwest Iowa so I graduated high school in Des Moines Iowa and then went to the University of Iowa after that so pretty much midwesterner lived a number of different places afterwards including New Jersey Pennsylvania Tokyo Japan for 10 years and then now I live in Texas you live in Texas now yeah actually these pictures behind me and all are all the places I've lived over the years so it's so so you so you grew up in Detroit mostly it sounds like but moved all traveled a lot um how did you go from you know studying what did you study Finance initially when you were in college in undergrad economics and finance economics okay so how did you go from economics and finance to just being so focused it seems like you're focused on retirement income planning well yeah I mean uh financial planning as an academic field is still pretty new and even I entered the PHD program uh in 1999 and actually Texas Tech University started the First Financial Planning PhD program in the year 2000 so it wasn't even an option at that time but academic economics is very mathematical and theoretical and I was always looking for ways to apply to more real world type activities and that's ultimately how I made my way into financial planning indirectly you mentioned the my dissertation on Social Security reform that was testing how in the early 2000s there was a proposal to create personal retirement accounts to carve out part of the Social Security tax and put that into like a 401k style account and I was simulating how that might perform and ultimately that's the same sort of thing I've made my career on at this point which is just writing computer programs to test how different retirement strategies perform in looking for ways to get more efficiency out of one's asset base for retirement now that was during the bush 2 Administration if I remember correctly wasn't it and so and uh what were your findings in that what was your general thesis or not thesis but your general conclusion well at the time what I determined was that it could be made to work but it wasn't obviously a better approach and now in hindsight I realize more and more that there's so little in the way of protected lifetime income that carving out more of Social Security which is that inflation-adjusted protected lifetime income and exposing that to the market as well uh probably would lead to worse outcomes for many people than we do need some risk-fooled income and so now that traditional pensions are going away Social Security is one of the last holdouts and so it probably wouldn't be the best idea to private or not privatize but uh create personal the defined contribution 401K style accounts out of those Social Security contributions very interesting and we'll we'll touch a little bit more I have a lot a few questions on Social Security uh in general um you know from a macro perspective and also a micro perspective personally for uh people so um one of the things that I really like about what you've done is that you kind of take more of a approach that I'm kind of used to like more of an asset liability management approach when you think about funding ratios rather than the traditional way that you hear financial planners talk about it I really like your overall framework and one of the things that I I think is very helpful is your retirement income style protocol your resubm Matrix can you explain a little bit uh to the viewers about your ideas there and and what how that helps an individual determine their overall approach to how they should tackle their retirement income plan yeah absolutely and that's really one of the the confusing aspects of retirement income is there are different strategies that people can use and unfortunately just there's a lot of disagreement and arguments about one strategy is better than all the others and and by what I mean by that is you have What I Call Total return which is just a you build an Investment Portfolio and you take distributions from it throughout retirement you have different bucketing or time segmentation strategies and then you also have strategies that will focus more on having protected lifetime income through annuities or other tools to cover your Basics before you start investing on top of that and they're all viable strategies at the end of the day and that's an important point that Advocates of Investments only don't appreciate how powerful the risk pooling that annuities can do to offer more income how that is competitive with anything that the stock market might do and so people really have options about what they're most comfortable with and that's what the retirement income style awareness is about developing a questionnaire to help guide people in the direction as a starting point which of these different retirement strategies resonates best with your personal Outlook and preferences you may not ultimately choose the the strategy coming out of that but at least it gives you a starting point to say okay it seems like I might look here first as a way to build my retirement strategy and ultimately if that helps me connect to a strategy that resonates and that I can stick with through thick and thin in retirement that can help give a better outcome because they're all viable strategies but where a strategy doesn't work is if you're not comfortable with it and you don't stick with it and you you bail on it during a market downturn or something like that that that's what the retirement income style awareness is really designed to do is just provide that initial talking point on which kind of approach might work best for me to to think about as a starting point yeah I like that because what it's doing is it's basically more holistically looking at how you would can solve the problem and typically you'll find advisory firms that will will overweight if you will one over the other they're like I'm a Time segment guy or I I hate annuities it's all Total return annuities are a scam or uh you know I will never buy an annuity or uh you know Etc et cetera and risk pooling is is something that's really important but it's also very complicated and I think that's why a lot of people have shunned annuities and annuities have changed a lot over the years um and you know coming from my background you know which is more of a total return approach that's great if you have a lot of money but in in other cases you know I think that you can you can you can look at the problem from a optimal way of doing it or you can look at the problem from a way that's actually going to get implemented and work and what I like about Risa is it's practical pretty much all the stuff that you're doing is practical it's not completely theoretical one problem though with that is that you can have somebody who has a safety first for example mindset but their situation is such that if they have a Safety First with 100 of their Capital that they're very unlikely to be successful can you can you expound a little bit upon how you would think about that in terms of giving advice to people in that scenario yeah so that scenario is probably more they do have a safety first mindset but they've been pigeonholed into a total return strategy but they're ultimately not comfortable with the stock market and therefore maybe most of their Holdings are in cash or in bonds which doesn't support a whole lot of spending power and that's you kind of there's three basic ways you could fund a retirement spending goal the first is just with bonds or with cash not really offering much yield on top of that and then to try to spend more than that the um the probability base perspective is invest in the stock market and the stock should outperform bonds and that should allow you to spend more throughout retirement the safety first approach is more now let's build a floor of protected lifetime income that then brings in with an annuity the the risk pooling the the support to the long-lived helps provide more spending power than bonds alone as well and people have that option and it's when the safety first person gets pushed into a total returns probability based strategy and just doesn't invest in the stock market they're ultimately left with bonds which which is the least efficient way to fund a retirement spending goal over an unknown lifetime very true and you know I guess a lot of people did take that approach probably when I first got in this business 20 over 20 years ago there was a lot of people that were doing that who were retired back where the municipal bonds were paying it was it was conducive the market was conducive for that we had high interest rates that were in the long-term secular decline so you had capital appreciation from those bonds he also had reasonably good uh tax-free interest yields that were working for people and inflation was falling um and so now we potentially could be in the opposite inflation Rising who knows how yields are going to work themselves out but um it when you're looking at this um you you bring up this concept of some of the retirement risks and and you have like these uh longevity sequence of returns spending shocks Etc of of the risks that you're seeing out there which one would you say has had the largest impact negative impact on people that they really need to solve for you know longevity sequence of returns spending shocks and surprises well longevity in a way it's the overarching risk of retirement and it's misnamed because it's a good thing it's if you live a long time it's just as an economist will point out that the longer you live the more expensive your retirement becomes just because every year you live you have to fund your expenses for that year so the cost of retirement grows with the length of retirement and then it's when you live a long time not only is there that issue that you're having to fund your budget but then there's just more time for all those other types of risks to become a problem as well with the macroeconomic environment with changing public policy with inflation even a lower inflation rate still is slowly eating away at the purchasing power of assets and then the spending shocks are things like big Health Care bills helping adult family members having to support a long-term care need to to pay for care due to declining cognitive or physical abilities and so forth and so so it's really that longevity is if you don't have longevity there's not really time for the other risk to disrupt your retirement too much and that's why longevity usually gets listed as the primary risk of retirement interesting I hadn't thought about that so a lot of the other risks are kind of correlated to the longevity element um so so really tackling that that that could be one of the biggest parts of all the surrounding risks around that you you talk a little bit in your book a retirement planning guidebook you talk about quantifying goals and assessing preparedness and I I had mentioned before that I like that you're taking your approach more like a Alm or asset liability management type of of an approach which basically that's what it is um and uh and I don't think the average person thinks about it that way they tend to think about it as like I have so much money and I'll be able to with draw so much from it sometimes there's unrealistic expectations about it but one of the common things that I've seen is that most people are not spending the time they need to do on budgeting really to actually even come up with a number or help come up with a number of what your present value of assets need to be to be prepared do you have any kind of practical tips for people and their advisors on how they can actually think about and execute a good budget not only just you know come up with one but actually implement it well now that technology can really help with that and so if people are comfortable with some of the the different websites or software that Aggregates all of your different expenses different credit cards and so forth into one Excel spreadsheet that's a very easy way to to start budgeting now for people who mostly pay in cash that can be a lot more complicated these days I don't use a lot of cash so I just simply when in the rare case that I have an ATM withdrawal I'll just kind of call that a household expense for that time period and not worry about breaking that down much more but uh when you start having those credit cards or debit card type expenses now the the software may not categorize them in the way you desire and so I usually try to not more frequently than once a month but maybe once a month once a quarter download the expenses while I can still remember well enough if I have to change some of these categories and so forth to then be able to keep track of all my expenses and know exactly then pretty much to the scent almost what I spent that year and then to start thinking about well were there any anomalies of course there's always going to be anomalies and to make sure you budget in that sort of thing but that really once you have a few years of expenses down and once you think about bigger Big Ticket items like car purchases and things that can really give you a foundation to start projecting ahead at what your expenses may be in the future as well and then then you have a way to start thinking about well how much do I need to fund those expenses and that's the whole idea of that asset liability matching do I have the resources necessary to fund your expenses are just your liabilities and do you have the resources to be able to fund that with a level of confidence that you feel comfortable with hmm interesting so I I had a meeting with a client actually who was forced into early retirement and a former engineer and keeps meticulous records has for years and uh he gave us the actual numbers for the last three years and I I figured out what the compounded rate was and it was a lot higher than the inflation rate reported by the bl by the government so um I I think there's some disconnect there between you know how we model and reality um you know uh when you look at financial planning software and you look at the assumptions that are the number of assumptions that are involved in the financial software and you know even if you're not taking Point estimates if you're doing Monte Carlo or whatever stochastic process it's very difficult to come up with a robust plan so I'd like I'd like for you to give me some and I know this is kind of a big general question do you have any general tips to people who are doing this modeling on how and for and for clients actually for for individuals and how they can make their retirement more robust to be able to deal with all the changes that can happen in the world like you said public policy changes Market changes Etc yeah you will have to revisit things over time and and as you get new information about your spending make revisions to the budgeting but uh it's still just a matter of when you're like round up your expenses or be conservative with some of your projections there's some categories that are challenging as well like healthcare and when someone switches to MediCare at age 65 that could lead to an entirely different set of health care expenses and with all your expenses on Health Care in the past you might have to completely upend that and and and do a reset there so it is challenging but if you're trying to build in conservative projections the default is usually whatever you believe your expenses will be you just adjust that for inflation every year and most people don't really do that they tend their expenses don't tend to necessarily keep up with inflation over time now that can get complicated but the way I describe it in the retirement planning guidebook is you'll have one particular budget through ajd and then you'll have another lower expense budget after ajd but also building in what if there's a long-term care event and so forth how much additional Reserve assets would I like to have set aside for out-of-pocket expenses that sort of thing and then it's not going to be perfect and it's going to need revised over time but I think you can start to get fairly confident like I've sort of done these exercises I'm still far away from the retirement date and of course I may be wrong but I I think at this point I have a sense of what my expenditures will be or what they can be at least uh over the longer term Horizon of course subject to new technologies new inventions everything else that can happen uh that would change your expenses but at least roughly speaking I think you can start to figure these things out yeah um I guess I'm coming from a practitioner who's been doing it for you know 25 years and seeing the the the conventional wisdom by the best experts at each point in time and looking at how people have actually fared without advice and what I've found consistently is that changes in in particular with government policy has led to uh sub-optimal choices for people who are trying to optimize to the typical cfp advice so and let me let me uh back that up a little bit with with uh some some examples um education planning what was optimal has changed in my career probably four or five times um let me just put it this way I I have put more emphasis in tax diversification and diversification and stuff in how you do things now because what if you if you over optimize in these scenarios it's sub-optimal does that make sense right if like if you designed everything to handle one particular public policy and then it changes on you like right now Roth IRAs or Roth accounts are incredibly attractive to have Assets in but something could change it could just be not that they might necessarily ever tax a Roth distribution but they could add a required minimum distributions or they could count it in the modified adjusted gross income measures used to calculate taxes on Social Security benefits or to calculate higher medicare premiums and so forth and so if something like that happened and you'd been doing all these Roth conversions to get everything into the Roth account yeah that would be overdoing it and subjecting you to that particular risk so I do think tax diversification is is quite important so that you still have flexibility and options because the the uncertainty is the rules will change and we see that every couple of years we just in late December 2022 secure act 2.2.0 came out and that has changed a number of different public policy matters related to retirement income it's gonna and that will continue to happen over time so so be flexible and part of that is just not overdoing things making sure you stay Diversified with with how you're approaching planning yeah in today's environment what we see a lot is is people that have taken the advice of Max 401K uh you'll get a lot of tax deferred and and what's happening is is they're coming to retirement with a large very large 401K plans and things like that and then they just get nailed in taxes and in fact I'm finding a lot of people pay more taxes when they're retired than they did in some cases than when they were not retired um and uh and and it becomes an issue it becomes a real issue then they have estate planning issues and things like that so um uh I just I'm glad that you said that about the the tax diversification I think more than ever especially given our our current you know country's economic condition there's a lot there's we're going to have lots of changes and they could be very large changes uh in particular if you considered quote unquote rich um so I'm sorry I put my little uh two cents in there but getting back to your book uh you have this concept of the retirement income optimization map um again going back to the assets and liabilities and all of that and when you're you when you're you talk about optimizing that's that's why I brought up the the concept of optimizing I I think there's optimizing within ranges one of the concepts that I've kind of looked at and you talked about you talk about different people's retirement styles um one of the issues that you can look at is like matching the duration of your expected liabilities up for a certain period of time so let's say you have a certain percentage of your portfolios in a total return portfolio and then and then another percent that you're you're cash matching or your duration matching matching for one to five years or whatever uh I think some people call that time segmentation you can call it many different things if forget about psychology and how somebody feels if you are just a rational investor a rational person what would you say the optimal length of time is on average for somebody retiring 65 say to cash match or to duration match uh you know their near-term expenses at one year is it five years is it 10 years I know that's a a loaded question but if you forget about forget about psychology and just go pure rational mm-hmm well pure rational the the total return investing approach which has less emphasis on trying to duration match uh can work and also if you then use a an income protection or wrist wrap type strategy you you have that income floor in place that is lifetime so it's already kind of duration matched to your liability so time segmentation is certainly a viable strategy in terms of my personal preferences it's my least favorite strategy so the whole behavioral point about time segmentation is if I have five years of expenses in in cash or other fixed income assets I don't have to worry about a market downturn because I feel confident that the market will recover within five years and I'll be fine and that that story that's a behavioral story and it just doesn't resonate with me personally I I can understand it resonates with others but it doesn't resonate with me personally and therefore I don't necessarily think about what sort of like front end buffer you need in place too to somehow be rational or optimal also that's where something like a reverse mortgage can fit in in a really interesting manner because if you set up the growing line of credit on a reverse mortgage that can be the the type of contingency fund that you can draw from so that you don't necessarily need to have as much cash or other assets sitting on the sidelines to fulfill that role so I would look more at some other of course you need some some cash but I tend to say less rather than more and maybe look at some other options as well about how to have that liquid contingency fund that's great so so basically the in in the guaranteed income sources plus plus reverse mortgage could uh provide a buffer provide a floor so that you could have uh less cash and and you're generally getting a higher expected rate of return on the annuity than fixed income securities and your at at least at the present time a reverse mortgage line of credit grows at a faster rate than the cash which can be used tax-free when you need the money uh so you can see that Evolution that Carol davinsky is one of the famous planners and researchers in this area and in the 1980s he talked about the five-year Mantra which was have five years of expenses in cash now cash you create drag on you're not able to get as high of potential returns with the money you have in cash so he gradually lowered that down to two years in cash and then when he came across reverse mortgages and in subsequent research and and descriptions he talked about having six months of cash alongside a reverse mortgage growing line of credit so I think that's an example of I I think something like that sounds pretty reasonable that's that's that's that's really helpful so and I want to Circle back to reverse mortgages here but before we do if you don't mind I'd like to talk a little bit more about social security uh so we're kind of getting into the realm of the the guaranteed side of things not the total return side of things um or or I more more knowable income sources um I was just looking at the kind of the statistics right now total debt in the United States is really huge um we're running very large deficits project to be like 2 trillion we have a Pago system right now in Social Security and even if we taxed it's been argued by many people even if we taxed every billionaire 100 that would barely make a dent in our current situation so we have huge unfunded liabilities off balance sheet uh type unfunded liabilities how can we really expect Social Security to keep up with inflation and will it be there for quote unquote you know what I'm saying well it will need reforms it's very unlikely to Simply disappear for my own personal planning I I assume I'll get 75 percent of my presently legislated benefits but for people who are younger as well further away from their their 60s uh the social security statement they receive assumes the zero percent average wage growth as well as zero percent inflation and the reality is there's probably going to be a positive real wage growth over time so you're presently legislative benefit could be a lot higher than what your social security statement is implying and therefore when you offset a benefit cut with the uh the wage growth that can be expected over time you may not have that much less in terms of what you're going to plug into your financial plan but yeah I certainly we don't know how the reforms will shake out but if nothing is done sometime in the 2030s Congress would have to legislate a benefit cut and to keep the system so that enough payroll contributions are coming in to cover exist current benefits that cut would have to be somewhere in the ballpark of 20 to 25 percent so I just simply assume I'll get 75 percent of my presently legislated benefit as part of my financial plan is is it fee Is it feasible feasible to actually get Social Security in a funded situation or is it gonna is it most likely going to stay Pago in your if you had a crystal ball oh it yeah it's always been pay-as-you-go and right so the buildup of the trust fund was an effort to just build up some reserves in anticipation of the changing demographics where there's more and more retirees relative to the workers paying contributions uh they try to keep Social Security funded over the 75-year time Horizon and so it's never permanently funded but yeah with a 25 20 to 25 percent benefit cut that would be sufficient to get the system to be expected funding funded fully over the subsequent 75-year time Horizon that's that's really helpful um thinking about it that way in terms of just potentially a 25 less is a reasonable way to look at it I think um the that part of it's not so hard what's harder to understand or to get a grasp on is whether or not that's going to be what that means in real terms for for a retiree um if we continue on a certain path and inflation is is in a different scenario in the future how how do you think about scenario when or inflation when you're when you would set up a plan or a retirement plan what how would you what kind of what kind of uh of Monte Carlos if you will would you put on on your inflation expectation so I do well I tend to just try to think of everything in today's dollars so that the inflation's factored out of it but I the way I think about long-term inflation is the markets tell us what they expect inflation to be if you just look at the difference between a treasury bond and then a tips treasury inflation protected security with the same maturity uh the difference between those two is what the markets expect inflation to be in if they thought it would be different they would invest in one or the other to get that aligned inflation is coming down now and even over the next five years at this point markets are only factoring in an average inflation rate of about 2.1 to 2.3 percent so it seems like markets really expect inflation to come over to come under control even over 30 years right now the markets are building in about a 2.3 percent average inflation rate which is below historical numbers and in terms of if I'm building a Monte Carlo simulation right now I'd to be a little more conservative there I'd base it around a two and a half percent inflation rate with historical volatility and inflation is around four percent so so you're basically an average of 2.4 or 2.5 and then uh standard deviation is like four basically okay so uh that that sounds reasonable um I I guess what is interesting about that is I guess if you assume that we have typical real rates of return for different asset classes that that all works itself out if you put it in present value terms um but if that's not the case and and it should stay that way ultimately it should stay that way but you could have major moves in markets in people's uh time Horizon when they retire which leads us to sequence of returns conversation uh when people retire you can have these you can have these big shifts in markets things things are rough right when somebody retires uh we uh remember I told you about that engineer we had a conversation with forced into early retirement right when the market topped uh the good news is is he had two types of annuities that worked out perfectly for him in the sequence return can you explain sequence return risk for listeners and and what it means and how to you know strategies to mitigate that a little bit more and just one quick last comment on the inflation too like if you thought when I said these low inflation numbers that that's ridiculous inflation would be much higher well then you'd benefit from investing in tips because they'll provide you a real yield plus whatever inflation ends up being and so they'll perform better if inflation is higher and they've already discounted that that was one of the best performing uh fixed income markets uh in the last couple years so but anyhow but but yeah a sequence of returns risks so that's it whenever you have cash flows going in or out of a portfolio the order of returns matters and it's when you start spending in retirement that it matters a lot more so it's like the market could do fine on average over the next 30 Years but if the market goes down at the start of my retirement I'm not having to sell more and more shares to meet my spending needs and sell a bigger percentage of what's left to meet my spending needs such that when the market subsequently recovers my portfolio doesn't get to enjoy that recovery and so it can dig a hole for the portfolio and the the average return could be pretty high but if you get a bad sequence of market returns right at the start of retirement it can really disrupt that retirement and lead to an implied much lower average rate of return than what the overall markets were doing over your retirement Horizon yeah so and in terms of actually uh let's say you're coming up on retirement so this is a common scenario you're retiring in 10 years or five years what should an investor be thinking about doing to transition from that accumulation to distribution phase to kind of mitigate that sequence of return risk so when people start thinking about retirement I think that's where the first step take that retirement income style awareness to get a sense of what sort of retirement strategy might work for you because that's where you then have um different options if you're more of a total return investor that's the whole logic of the target date fund and so forth is just start lowering your stock allocation but still investing in a diversified portfolio as part of that transition into retirement if your time segmentation the easiest way to think about the transition is instead of holding those Bond mutual funds you start exchanging those in for holding individual bonds to maturity like if I'm 10 years before retirement every year for the next 10 years I could start buying a 10-year bond and then when I get to my retirement date I have the next 10 years of expenses covered through these maturing bonds if you have more of an income protection or risk draft strategy the the options would then to be thinking about well if I have an income gap I'm trying to fill where after I account for Social Security or any pensions I'd really like to have more reliable income to meet some basic expenses well you could start looking at purchasing annuities that would turn on income around your projected retirement date as a way to have that transition into retirement and so they're all viable options and it's just a matter of taking the the route that you feel most comfortable with very good that's really really helpful um now I I guess at least is a little bit into the what I would call the traditionally unloved unwanted stepchildren annuities and reverse mortgages uh you know they've gotten a bad a bad rap for so long but they're so useful in in as tools I would say probably the reverse mortgage is the least understood and uh and and one very helpful um tool I think maybe because of just the history of them and how they used to be structured versus how they're structured now um can you give me a sense about how to think about reverse mortgages for people is it only for people who are you know can barely get their their plan together with their assets or or does this also work for people who have a cushion but they should still do a reverse mortgage more yeah I mean the conventional wisdom a lot of times is that the reverse mortgage is a last resort consideration after everything else has failed and maybe then just a way to Kick the Can down the road a little bit but ultimately that retirement wasn't necessarily sustainable since about 2012 that really the focus of the kind of research retirement planning financial planning type research was looking at how reverse mortgages can be used as part of a responsible retirement plan and so it's not that a lot of advisors may just think the reverse mortgage is only for someone who's run out of options but but that's really not the idea it's we have different assets and it's back to that real map the retirement income optimization how do we position those assets to fund our goals and the reverse mortgage provides a lot of flexibility about how to incorporate our home equity asset to help fund our retirement plan and it can lead to a lot more efficient outcomes than just simply say leaving the home sitting on the sidelines and saying well I've got the home if I have long-term care needs I'll sell my home to fund the long-term care something like that otherwise I'll just leave the home as a legacy asset for my beneficiaries there's much more efficient ways to incorporate home equity into a retirement plan and that's what the whole discussion around reverse mortgages is how can I I use a reverse mortgage to help build a more efficient retirement plan and not as a last resort but as part of a responsible well-funded retirement plan it's just another Diversified tool to a source of source of of assets that you can use that's not just sitting there I just had a conversation with a client yesterday that is about to retire in a few years and uh that is exactly what he said that other property that I have in that other State uh I'm just gonna keep that as a that'll be my I'll sell it if I need to you know there was a conversation about health care contingency and um uh long-term care and things like that and that was his rationale um and and in discussions with clients there has been a a ton of resistance you've been really good at putting out information that shows why it makes sense to have it as a potential use so can you explain a little bit about the the line of credit portion of it and how that how use how that could be advantageous yeah and it really it goes back to this idea of sequence of returns risk and if you look at a reverse mortgage in isolation it may look expensive or whatever else but it's how does it fit into the plan and by reducing pressure on the Investments it can help lay the foundation for a better outcome and the the growing line of credit is one of the most misunderstood aspects of the reverse mortgage and I think it was partly unintentional and it may sound too good to be true in a way it probably is and we saw in in October 2017 the government put some limitations on the growing line of credits so it was incredibly powerful before then it still quite powerful not as powerful as before for new uh anyone who opened a reverse mortgage before October 2017 was protected to have those Provisions in place for the entire life alone but if you wait and then after October 2017 you still have the growing line of credit it's not as powerful but but the idea is I believe the government assumed people would open reverse mortgages because they want to tap into the funds but financial planners realized with the variable rate not with a fixed rate but with a variable rate home equity conversion mortgage you do have to keep a minimal loan balance of say 50 to 100 dollars but otherwise the rest can be left as a line of credit and that line of credit grows at the same way the loan balance would grow and so you can understand why if you borrow money the what the loan balance will grow over time well it just happens to be the case that the kind of neat planning trick is if you open the reverse mortgage and 99 of it is in the line of credit the line of credit is growing over time at the same rate that the loan balance would have been growing and ultimately this improves the odds dramatically of having a lot more access to funds over time if you open it sooner and let the line of credit grow versus just waiting to open it at the time you might actually want to start spending from it yeah how has it been limited uh limited versus the way it used to be what what are the limitations well they increased the initial mortgage insurance premium which is not directly to the line of credit but then every every so often used to be more frequently we're now getting overdue at this point with it's been over five years but they revised the tables that determine the principal limit factors of what percentage of the home value can you borrow and so as part of that 2017 change they uh lowered the the borrowing percentages and also they lowered I mean this this part's a good thing but they lowered the ongoing mortgage insurance premium that would cause the loan balance to grow at a slower rate but it also in turn caused the line of credit to grow at a slower rate so it before that change I was running simulations where if you opened a reverse mortgage at age 62 there was like a 50 chance that within 20 years the line of credit could be worth more than the home and that's no longer the case it's still there's still a probability that the line of credit could grow to be worth more than the home but it's not nearly as dramatic as what I was Finding before the rule change that's very interesting because the line of credit growth rate is tied to interest rates and home prices have somewhat of an inverse relationship to interest rates to some degree but it's basically positively skewed so it's not it's hard to know but uh uh but yeah that's that is a great planning tip and it's interesting because we have had a lot of friction with this discussion with uh clients uh mentioning to them because they just have it in their head that I'm going to lose my home and I'm going to there's all these things that can go wrong and then you have to explain it's a big education process and of course they are required to do education as well no we don't sell reverse mortgages but we always you know if we if we you know we mention it to people as a source and you know having it there makes a lot of sense uh and and the same thing with the annuities um you know I have a love hate relationship with annuities but I'm becoming to love them more and let me tell you why before it was all commission driven you know and we're fiduciaries we don't do commission stuff now with the Advent of finally the insurance companies have really gotten to the point where there's at least enough of them now doing products that make sense with the guarantees I mean there was always companies out for a long time there's companies out there like Americas Etc that had just pure plain vanilla uh va's variable annuities that had just lowered your expenses and maybe eliminated a surrender or something but the guarantees is where the real there were folks too much on tax deferral and not enough on guarantees what were the guarantees is really really what we're really looking for here uh and the only way you could even get them you guarantees would be if you did a commissionable product so we'd be handing you know we would be referring people to Insurance guys who were selling commissionable products and then sometimes you don't know what's going to happen after that happens uh with that client so now thank God we have uh we're in a scenario now where the where the financial industry has finally caught up to what needed to happen with annuities yeah the only annuities yeah yeah the only annuities and there's it still has a lot more to be done it's it's you shouldn't be overlooked and I think what happens one of the reasons that I think they're so helpful uh for people is that risk tolerance is time variant people say their risk tolerance is X and then as soon as you have a market decline then their risk tolerance is all all of a sudden why which is more conservative and and uh these annuities can help people psychologically overcome that right you can always look to something that is either staying equal or growing and you can also have growing income streams during the Gap we see that a lot there's a gap between uh when they get Social Security and when they retire and it kind of fills that Gap and it's funny when I was when I was I actually had my assistant who's also a CPA excuse about my financial planning system I had to read this book first and she uh she said it sounded like like you uh were like in the room with him uh because there's so much stuff in here that you and I agree with it's amazing uh before not even knowing you so and I think it might have to do more with the approach of taking things more from uh your academic background and your CFA background it gives you a different perspective than what kind of the traditional financial planners had who had come more from a sales background and now what's happening is is we have uh the whole industry is now moving in the I think moving in the right direction and I think you've been a big uh reason why that's happening so I I really want to thank you for that all your work is really making a difference I want to talk a little bit about Medicare if we can and health insurance this is probably one of the most the hardest part is the medical the medical discussions in some ways um people don't want to think about long-term care people don't want to think about health costs I was looking at some of the statistics you know long-term care statistics is how much it costs it's a big number how would you how would you model the contingency planning you know for let's just start with long-term care how would you model that would you model it as a present value number or would you try to put it as a as something that's over time how how would you how do you approach that yeah actually so I did try to make the retirement planning guidebook as comprehensive as possible and and so I as part of that developed a long-term care calculator and the the basic logic of it is develop a scenario that you would feel comfortable that if you could fund that scenario uh you'll feel like okay things things will work out whether that's three years in a nursing home whatever the case may be but develop that scenario where you're saying okay at age 90 I will spend the next three years in a nursing home right now in the United States the average cost for a semi-private room in a nursing home is a little bit under a hundred thousand dollars I'll say in today's dollars a hundred thousand dollars a year but then I'm gonna plug in the the math gets complicated but you've got what's the inflation rate in long-term care what's the overall inflation rate and then back to this whole idea of the asset liability matching like what's the investment return discount rate you're comfortable assuming as well and also recognizing that if I do go into a nursing home I don't have to also fund my entire budget of a like if I thought I was going to spend 80 000 a year well I'm not going to be going on any sort of trips I don't have to go to restaurants or anything uh a lot of my other expenses would reduce not not 100 but they would reduce so plug it in what I think is a reasonable reduction to the rest of my budget and then you get calculated a present value of here's how much money I'd have to have set aside as a reserve asset to feel comfortable that I would be able to fund this long-term care need and and be able to have a successful retirement and for people who are worried about and who may be paying out of pocket for long-term care that could be several hundred thousand dollars to be blunted on average that's what it comes out to I actually had a coffee with a gentleman and he said uh what is it just tell me what the number is I said well it depends on your age he says no just tell me what the number I said it's roughly about 300 000 roughly on average it could be more it could be less uh you know uh okay and and there's there's there's different ways you can fund it right you can do long-term care insurance uh traditional Standalone you could do um you know life insurance policies that have embedded features you could do if you can't like qualify for um you know you know get a policy you can maybe get it embedded in an annuity of some sort you can sell fund um so it's not an easy thing that you can uh solve it with a quick answer um but but it's important to have in a plan and I and I like the fact that that uh you've emphasized that a lot in your work um it's just it's just great that that people are thinking about it from that perspective I want to switch gears a little bit um and talk a little bit about tax efficiency uh you know taxes are such a huge part of the impact of a plan and there's so many different angles to it and and the tax rules change so much um I'll tell you one of the challenges that I have asset location the concept of balancing you know where you put a certain asset according to us is tax efficiency versus keeping an asset allocation in line right up you know operationally keeping it in line with the objectives and then as money is being spent taking it from the right place it's a challenge even with excellent software and then sometimes I'm finding that it doesn't actually work out as planned so can you can you give me some practical tips on how to deal with asset location well the the basic logic of asset location but yeah I mean in practice it gets incredibly complicated as you're spending from these accounts to think about also rebalancing and making sure you're keeping the right asset allocation between stocks and bonds and the NASA location is where do you keep these things but generally just is a basic guideline your taxable brokerage accounts of course you want some cash there for your liquidity but otherwise that's your most tax efficient stock Investments so if you own stock index funds and so forth the on a relative basis they're most likely to be best off in your taxable account because a lot more of their returns will be those long-term capital gains that get the preferential tax treatment then with like your tax deferred IRAs and 401ks that's more of a place where less tax efficiency so bonds and so forth maybe lower returning type asset classes and then for your Roth accounts the Roth IRA and so forth that's where less tax efficient but higher expected return type asset classes could go the Emerging Market funds and small cap value and that sort of thing and that does also work with distribution ordering as well because the Roth will be what you tend to spend last and so also having these uh riskier asset classes that may have more growth prospects over the long term that can be a good place to set them aside since you're not likely to be spending from those accounts until later in retirement okay yeah it I think for a lot of people it's a little bit of a daunting thing and in practice it can be with contingencies and things like that can be hard to to do correctly and keep managed and I know there's good news is there's good software now that that helps with that um as far as tax efficiency the other you mentioned the order of withdrawals I mean traditionally you know you have the you know your traditional order of withdrawal that you would you would uh do in in the past a lot a lot of recommendations has been you know you want to take from your taxable accounts first right let those tax-free tax deferred accounts grow and then and then you start taking from those other sources but you make a really good point that that's not always the best thing to draw that taxable account down too fast can you expand upon that a little bit well the yeah the the basic tax efficient distribution is spent down taxable assets than tax deferred like IRAs and then tax exempt like Roth against last but you you can do better and so the the better approach is to have a blend of taxable and tax deferred until the taxable account depletes and then a blend of tax deferred and tax exempt after that and as part of that blend you can do rock conversions to in the short term pay higher taxes if that can better position you to pay less taxes over the long term and to have a higher Legacy value from assets over the long term yeah and then getting more specific than that it's there's no you really got to run the the individual numbers on a case-by-case basis but generally there's the opportunities to sustain your assets for much longer by having a more tax efficient distribution strategy that digs into that taxable plus tax deferred and then later tax deferred plus tax exempt exactly and and that's why it's important while you when you're an accumulation phase make sure you have some tax diversification if you can yeah have Assets in all those different types of accounts yeah so that you're not nailed so bad uh later on uh and then there's a lot of complexities that can happen with happen that we see quite a bit with concentrated stock positions and things like that which is probably outside the scope what we're talking about today so um and lastly here last last topic here non-financial aspects of retirement this is a huge huge huge thing uh it's funny it was the last towards the end of your book and I'm glad that you talked about it uh because uh there's I can't tell you how many times um you know you see people think that they're going to be happy sitting on the beach and then they they do that and they're miserable uh or or spouses that wind up hating each other for some reason can you tell can you give us some ideas about um like what should people be doing like say they're five years into retiring or ten years into retirement retirement What should people be thinking about doing to kind of get their their overall lifestyle satisfactory when they actually do retire yeah and and that's this is in some ways more important than any other Financial stuff because with the finances it's easier to adapt but work does so many things in a person's life it's not just that it provides a salary and you need a way to replace all the other aspects of work such as structure to the day camaraderie feeling part of a team feeling like you're creating value for a society all these different aspects that you need to be able to replace with something that gives you motivation to wake up in the morning in retirement and so to say simply it's not the best starting scenario if you retire because you hate your job you want to be able not to retire away from something but to be able to retire to something you want to have and it gives you purpose and passion and meaning to give you the motivation to wake up and and have something be active each day because in all too many cases people just they start doing passive things like watching too much television or surfing the internet too much and that can lead to a really miserable and unsatisfactory retirement wow that's huge that's interesting have something to retire to so uh and and start figuring that out sooner rather than later right not don't wait till the very end and go yeah what am I doing uh and sitting there staring at your wife or your husband yeah that's the idea that there's all these things you you want to get done but you just think well when I retire then I'll have more time to do it well if it's something you've been holding off on doing for the past 40 years it's not likely that just having more time in retirement is what you need you may just simply either not be interested if it's a hobby like oh I want to go back to playing the guitar or something if you're waiting for retirement to do that sort of thing there you go that retiring may not be enough and then people might start feeling bad that you no longer have the excuse and that's where if that sort of bad feeling compounds it can create a spiral like a downward spiral where people just become less engaged and less positive and it can even impact Health which then in turn makes it harder to be engaged and involved and and can lead to downward spirals it's really important to try to avoid that and as part of that not waiting for retirement to to consider all these other aspects of your life outside of work but making sure you're nurturing relationships and having hobbies and having things outside of work so that it will then be easier to transition into the retirement yeah that's great so is there anything as we close here is there anything that you're really excited about that you're working on right now that you want to share or is there at all right now I am just trying to get the updates done for the retirement planning guidebook and where we're doing the best we can to build out that retirement income Styles ideas uh something that people can benefit from and uh the other main research area is with the tax planning as well that I think this will be a Hot Topic and I've already done a lot of work in that area but it is such a complicated area that just trying to push forward as well about like Roth conversion strategies and and how to best Implement those in a most of the work in that area just assumes a fixed rate of return and with the reality of not fixed rates of Returns on your Investment Portfolio that also dramatically complicates some of those tax planning decisions so I'm continuing to push ahead in those areas interesting so more stochastic modeling in your future yes stochastic modeling and now you're probably going to be uh that Technology's got to be in there somewhere too any plans uh that you want to announce or share with new technology that you're going to be coming out with or software programs or anything like that or I mean I just have this Vision in my head if I were you I'd be doing something like that but I mean I'm just saying yeah don't Envision creating tax planning software but uh the retirement income style awareness that's where I'm putting on my efforts in terms of having software and that's an easier problem than the tax planning problem definitely yeah there's a lot of changes always yeah you'll be coding to your uh blue in the face all your staff would be so uh the uh it's interesting I I I'm actually going to be diving into that that profiling software that you have um I had a conversation yesterday about that so that's very good so where would people uh would you like people to send you see learn more about you um anything that you're up to oh yeah uh so my website retirementresearcher.com all one word retirement researcher and if you go there you can sign up every Saturday morning we send out an email with different articles and things and then my retirement planning guidebook is on Amazon or any other major book retailer and also I do have a podcast as well they're retire with style podcast with Alex mergia who's my a co-co-researcher and and co-founder of the retirement income style awareness excellent all right Wade thank you so much appreciate you coming on it's been a pleasure thank you the information in this podcast is informational and General in nature and does not take into consideration the listeners personal circumstances therefore it is not intended to be a substitute for specific individualized Financial legal or tax advice to determine which strategies or Investments may be suitable for you consult the appropriate qualified professional prior to making a final decision wealthnet Investments is a registered investment advisor advisory services are only offered to clients or prospective clients where wealthnet Investments and as representatives are properly licensed or exempt from licensure [Music] foreign

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Retirement Planning From a CFP® Professional: 6 Keys to a Happy and Successful Retirement

sometimes I feel like I've lived through my 60s and 70s thousands of times sitting with people in retirement or those that are entering retirement we come across a lot of the same fears negative thoughts and feelings that really hold people back from having a happier retirement now we try to address those through retirement strategy and implementing plans but in today's video instead of talking about strategy I want to talk to you about how we look at retirement so you can hopefully look at retirement through a different lens and I believe this will help you have a happier retirement foreign [Music] Happy Gilmore recently and there's this place that he goes to and he calls it his happy place and if you remember the movie the lead actress she's sitting there by like a fountain of beer with pictures and Happy's grandmothers there and it's just his happy place and this helps Happy Gilmore putt a little bit better to find your happy place in retirement I want you to shift your focus away from simply trying to maximize return in retirement it's not about growing Your Nest Egg anymore what we want to do is have an acceptable level of risk something that when the market goes down we can still stay invested we can stay committed to that plan but at the same time for that level of risk we have an expected return that can help make sure that you don't run out of money and generate enough growth to provide the income that you need to maintain your standard of living so here is one of the tools that we use to help understand your willingness to take risk so risk tolerance really has two components it has a capacity component meaning given a certain level of income that you desire from your portfolio can your portfolio withstand a certain level of risk and still provide that income so that's what we call risk capacity but then you have your willingness to stay invested in a down market so when we look here this is a standard 60 40 portfolio 600 000 stocks 400 000 in bonds has a risk number on a scale of 1 to 99 of 54.

now in isolation that means absolutely nothing to you but when we start to break it down into percentages and also or I should say more importantly dollars over a six month period your standard 60 40 portfolio has the potential to lose a hundred thousand dollars with a million invested this is a statistical quantitative analysis of volatility of this portfolio going back many years now over a 12-month period that means you could lose two hundred and twelve thousand dollars mathematically speaking is that a comfortable level of risk for you if you have a million dollars it's not for me to answer that's for you to answer that's your willingness to take risk so over a 12-month period mathematically you should expect to lose at some point in time up to twenty percent you could lose more of course this is a 95 probability or what we call two standard deviations but we have what we want to achieve here is a more optimal level of risk for an expected return so we have asymmetry here where the possible upside mathematically speaking is 15.92 percent over a six month period so we do have some asymmetry here but when we look a little bit deeper the annual range midpoint is 5.27 so this would be the expected return kind of moving forward with a two percent dividend this GPA this is a pretty cool feature of this software it's designed to help you understand what we call risk adjusted returns and this is this concept is kind of what I'm talking about here they've developed this GPA and a 4.3 would be most Optimum now not every portfolio that fits your particular needs is going to be a 4.3 we're not necessarily trying to achieve that but the higher we can get to that it means we have more expected return for the For Less risk so the question really becomes are you comfortable with this range of expected outcome if not this is too aggressive of a portfolio for you but instead of just focusing on like most people do the upside we need to focus more on this downside in having a plan that is optimized or having an investment strategy that's optimized for your happy place number two I want you to start to look at all of your investment choices in retirement for what they actually are now this is much different than in the accumulation phase in the retirement phase your financial investments all the various choices out there they're really nothing more than tools tools that are used to accomplish a certain objective similar to ingredients in a recipe if you have too much sugar or too much salt or not enough herbs or spices is it may not come out the way you want it to taste we want to use the appropriate tools to accomplish the objectives that you have in retirement stocks for example they aren't used to accumulate anymore stocks are designed to help keep you ahead of inflation so you can generate income that lasts as long as you do now in the accumulation phase that's exactly what stocks are designed to do they're designed to give you the best opportunity historically speaking to accumulate a larger and larger Nest Egg of course that assumes that you save enough money but in retirement you are no longer accumulating you are Distributing so stocks are used to help keep you ahead of inflation now the downside to stocks you could lose a lot of money especially if you get too aggressive or if you invest in things that don't perform well now does that make stocks bad because you could lose a whole bunch of money no they're just a tool and once you understand how to use that tool in conjunction with other tools now you can actually construct whatever project that you're building or have a retirement plan that provides you the income you need to maintain your standard of living the number three key for a happier retirement I want you to accept that you're in the distribution phase don't expect your accounts to continue to grow each and every single year this may seem like common sense but in reality and in practice it's much harder for many people to do now you've seen your accounts hopefully grow grow grow you've been putting money in the market has performed well over most years in the past even when the market performed poorly you are still putting money into your 401k getting that match hopefully saving money elsewhere now that you're in the retirement phase you're putting a lot of stress on your portfolio through distributions now I'm not saying your accounts can't still continue to accumulate especially if we have consecutive years in the market that that does really really well but what I'm saying is don't expect it you are in the distribution phase that means you're probably taking three percent four percent five percent out when we have years where the market is also down your portfolio is down you're digging a bigger hole than you were in the accumulation phase that means that hole is harder and harder to climb out of this is why the allocation of your Investments is so important and not taking too much risk you don't want to dig such a big hole that you can never get out but at the same time you need a certain level of risk to achieve a return that can give you a Secure Retirement so mentally let's not look at our accounts every single year and say oh man they're not going up they're not increasing in value I'm going to run out I need to stop spending my money now actually if you look at it appropriately you should not expect your accounts to continue to appreciate every single year in retirement that very May well happen but if it doesn't if you're just staying level or even going down a little bit it's okay you just need to have a plan monitor your progress with respect to your goals and stay on top of it number four I want you to understand the value of secure income in retirement the more secure income you have the less you have to withdraw from your portfolio and the less emotionally you're impacted by the stock market ups and downs by political goings on by economic slow Downs if you don't have to withdraw large percentages from your Investments because you're living on passive income from Real Estate from Social Security from annuities from a pension but the point is the more income you have coming in from multiple different places that is independent of the stock market going up typically the happier you'll be in retirement also I don't want you to underestimate the power of Social Security as part of your overall retirement income plan now I hear a lot of people making comments on some of the Social Security videos that we do and also just day to day having conversations with clients that Social Security seems to be an extremely underestimated part of retirement many people want to take it early and that may be the case maybe it makes sense for you to take it early but if a husband and wife have combined Social Security of 60 000 a year and you live let's say 25 years that's 600 000 1.2 1.5 million dollars of retirement income and for many of you watch watching this your Social Security is going to be a lot more than sixty thousand dollars per year so we're talking anywhere from one million to possibly over three million dollars of retirement income for a married couple for someone who's single Social Security you can just basically cut that in half so it's a significant part don't underestimate the power of secure sources of income in retirement and also don't underestimate how valuable deferring Social Security could potentially be if you're going to live past age 80 81 or so number five I would like you to stop looking at short-term outcomes whether your portfolio is up or down whether you pull too much out whether you had an unforeseen expense and you had to spend x amount of dollars I'd like you to start looking at these short-term outcomes of things that happen to you or decisions that you've made as nothing more than bumps in the road don't get too high don't get too low retirement is a very long and windy and arduous Journey this is why it's so important to have a plan and stay connected to that because when you have visibility into the future and you're looking at things not in the short term lens but over a 20 25 30 year time frame you can see a lot of times how actually unimportant these short-term events are so don't get too high don't get too low understand that these are bumps in the road in the short term but if you have a plan these bumps in the road have been accounted for next time the Market's down and your portfolio is down 10 or 12 or 15 or more say you know what I have a plan I expected this to happen this is not a surprise and retirement is a very long journey this is nothing more than a bump in the road the number six key to a happier retirement and I know this is going to be virtually impossible for many of you watching but the number six key probably the number one is to not look at your accounts more than once a month I would prefer it once a quarter so I know some of you right now are saying Troy that's impossible I look at it every single day I need to know what my stocks are doing what my accounts are doing how am I ever going to know if I'm going to be okay well there are numerous studies on this I encourage you to look some of them up the more frequently you look at your accounts typically the worst performance you'll have over long periods of time but the person who looks at it every single day over a long period of time I think it's 25 or 30 years averages somewhere around two to three percent per year the person who looks at it once a month averages somewhere around four to five the person who looks at it once a year averages somewhere around six to seven and the person who never looks at it has averaged around 10 or 11 percent and it makes sense because we are emotional beings when we see that something isn't going right we want to Tinker we want to make adjustments this typically leads to holding on to bad Investments maybe a little bit too long or getting rid of good Investments that just haven't really had the Catalyst that maybe you were expecting and selling them too soon or we're selling our winners and cutting our losers without giving them a chance to really perform well whatever the situation may be Studies have proven this over and over again the more frequently you look at your portfolio the worse you should expect to do so instead of discussing strategy and execution in today's video hopefully today's content helps shift your perspective just a little bit with the goal of helping you to have a happier retirement [Music] foreign [Music]

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Retirement: I’m 60 Years Old with $900K in Savings. Can I Retire Now? What is My Risk Capacity?

so you're 60 years old with nine hundred thousand dollars saved and the question is can you retire in today's video we're going to look at a few different decisions that could be made the impact those decisions have on the plan with the overall goal of not running out of money hi I'm Troy sharp CEO of Oak Harvest Financial Group a certified financial planner professional host of the retirement income show and a certified tax specialist in today's case study we're going to look at a situation that's not too dissimilar from what we normally encounter in our day-to-day operations here at Oak Harvest Financial Group so we have James who's 60 years old he comes in and he says Troy I want to spend about seventy thousand dollars and I'm just tired of working I want to to this year to be my last year so I want to spend seventy thousand dollars I think I'm going to live to about 90 years old pretty good health and I want this fifty thousand dollars to increase with inflation over the course of my retirement but for the first 10 years and what I hear you talk about in this go go spending phase I want to spend an additional 20 000 per year bringing that first 10 years of spending up to 70 000 per year then that go go spending goes away and then we have the inflation adjusted 50 000 to plan for from age 70 to age 90.

Hey just a brief Interruption here to ask you to subscribe to the channel now what that does for you is that puts us Oak Harvest Financial Group and all the content we produce in your little TV Guide so you have a much easier way to come back and find it later share this video with a friend or family member and also comment down below I love to respond to the comments now if you have any questions about your particular situation or you'd like to consider becoming a client of Oak Harvest feel free to reach out to us there's a link in the description below but you can always reach out to us and give us a call and have a conversation to see if we might be a good fit for each other James tells us that since he wants to retire as soon as possible he he thinks it makes sense to take Social Security the first time available so claiming at 62 a little more than two thousand dollars a month at twenty five thousand dollars per year he also has that nine hundred thousand dollars broken out to four 401K money of 700 Grand then 200 000 in a taxable account or what we call non-qualified outside of the retirement account very important to point out here that the tax characteristic of these two accounts and the Investments inside them and the interest and dividends and the withdrawals from them are taxed differently so that's part of an overall tax plan now James also has a home that's completely paid for and worth six hundred thousand dollars but he's told me that I don't want to use this to fund any of my retirement goals I've lived in this home for a long time I want to stay in the home but we know from a planning perspective that we do have that in our back pocket if it's needed down the road so James's total net worth here is about 1.5 million looking at the paid off home of six hundred thousand the 700 Grand inside the 401K and the 200 000 of non-qualified or taxable account assets now as part of the process to understand where someone is and where they're trying to get to we have to understand how is the portfolio currently allocated so James tells us that Troy I know I've wanted to retire so I've been investing aggressively and trying to get ahead of the game but here we are in 2022 and the markets have pulled back some so that double-edged sword is starting to kind of rear its rear its head but we see James's 93 stock so one of the questions that we have from an internal planning perspective is if we keep this same level of risk while we retire and start taking income out of the portfolio what does that do for what we call the risk capacity or the portfolio's ability to take on risk while Distributing income in the retirement phase so we have to look at the guard rails and guard rails are essentially a statistical calculation of probabilities of the portfolio returning this much on the high side and a good year and this much on the downside in a bad year if these guard rails are too far apart and we're taking in income out if we run into a bad couple of years that bump up against that bottom guardrail but we significantly increase the risk of running out of money so part of the analysis of the planning is is this an appropriate guard rail for this type of portfolio given the desired income level so with everything we've looked at so far the question is if James continues doing what he's currently doing and retires with the desired spending level the assets that he's accumulated living until age 90 what is the probability that he has success well it comes in at about 61 so that's probably not a good retirement number it's something we want to see if we can work to improve so I'm going to pull up the what if analysis here and start to look at some of these different decisions that we could make and see if we can get this probability to increase okay so now we have the what if analysis where we have two different columns up here on the board right now they're identical we're going to keep this one the same as the base case everything that we just went through but now we're going to start to change some of these variables to see what the impact those decisions have on the overall retirement plan and this is much more of an art at this stage than it is a science because we want to start to explore different scenarios and then see what is most comfortable for you once you understand the impact of these different decisions you can take some time to kind of way think about them weigh the the pros and cons and now we're starting to work together to craft you a retirement plan that gives us increased probabilities of success but also something that you feel very very comfortable with so the first couple of options we have which are the most simple and usually have the biggest impact on the plan is that we can either work longer or spend less so James says no I don't want to spend less I have a specific plan I want to get my RV I want to travel the country I want to play some golf I've done my budget I need to spend that 70 000 for the first 10 years so the first thing we'll look at is the impact of working another couple of years so I've changed the age here to 63 as far as Retirement the only variable we're going to change at this time I don't want to change too many variables at once I want to see the impact of different decisions how they impact the overall plan okay so that gives us a bit of an increase but the next thing I want to look at here is social security so Social Security is a very valuable source of guaranteed lifetime income first it's an increasing stream of income it increases with inflation but two no matter what happens with the stock market that income is always going to be coming in so instead of taking the 62 and having a significant reduction in the lifetime income that we receive because I don't want to change spending we still have the 50 and 20 in here I want to change the Social Security from taking it a 62 to taking it at full retirement age okay so changing the Social Security election day gets us up to 76 we're definitely moving in the right direction here after a conversation with James and he realizing that you know what I do feel really secure with that increased social security income because if the market doesn't cooperate I know I'm still going to have that much higher income later in life so that would lead us down the road to say okay let's look at adding more guaranteed lifetime income if we can get your Baseline income to cover a majority of your spending needs then we don't need the market to perform necessarily as well later in life so now we want to look at the impact of adding more guaranteed income to the plan which has the effect of providing more security later in life because if the markets don't cooperate we know we have a certain level of income being deposited every single month no matter how long we live so if you go to our website here it's Oak harvestfinancialgroup.com com we have up top an income writer quote where this is constantly searching for the highest amounts of guaranteed lifetime income that are available in the marketplace simply input the variables here so in Texas age 60 Ira money income starts we're going to start looking at seven years here and I know the dollar amount I would want to put in 300 000.

The good news here is you can input any of these different variables we don't ask for your information so it's a calculator tool that you can play with on your own Single Life payout and we get quote okay so here's the output screen we have all of these different companies over here when you see the same company twice it's because that company offers multiple different products with the same income Rider so an income writer is just an addendum or an attachment to a contract that guarantees no matter what the stock market does a certain amount of Lifetime income based on the specifications you input so about thirty three thousand dollars here so that's about 11 percent of the initial deposit with that income starting in year seven this is why we call it a deferred income annuity because it gets a guaranteed growth to calculate a guaranteed lifetime income that you then would incorporate into your plan so in this what-if analysis we come down here we I've already inputted so three hundred thousand dollars and then we just calculate these scenarios okay now we're up to 87 percent here so now things are starting to look a little bit better let's make a couple of different adjustments here because remember when I talked about the guard rails that's too aggressive of a portfolio given the income need especially in the beginning years but now that we've added some deferred income into the plan the portfolio's capacity for risk increases later in life and all that means is because there's so much income coming in the portfolio can withstand a bit more volatility later once Social Security and the Deferred income annuity kick on because you're needing to take less from the portfolio so let's make a couple more adjustments here so after retirement we don't want to keep the the current investment strategy let's get a little bit more conservative here go from an aggressive plan to something a little bit more conservative and then you know what let's also say now that we're starting to move in the right direction instead of retiring at 63 what happens if we retire at 62.

Get your retired one year earlier than some of these other numbers okay now we're at 83 percent retiring at 62. I want to look at one more variable here because you may want to get a part-time job James may want to be a starter at a golf course maybe he wants to work in the church and he can get ten thousand or fifteen thousand dollars a year maybe just wants to work two three months out of the year so the next thing I want to look at is if we've done all this now what happens if during this first 10 years of retirement he decides he wants to work three months out of the year or maybe just a part-time job and work one or two days a week so instead of needing twenty thousand dollars per year we just need another ten thousand let's say from the portfolio so really that's only earning ten thousand dollars extra in retirement income you could do that driving Uber many different choices there you know what I'm just going to decrease this no I'll leave it there now with James deciding to maybe work part-time here to reduce that spending need in the first 10 years let's see if we can also get them retired at 61.

Okay so now James has decided that working part-time and hey we're talking 10 grand here so this isn't a lot of money now I want to see what happens if we go back to the original goal that James had of retiring as soon as possible at age 61. so we're going to change this back to his original goal 61 calculate all scenarios and now this gets us up to 94 so we started at 61 if where James was originally at whenever he came in if he kept doing whatever he was already doing we got him up to 94 percent here okay I want to take a minute before we finish the final Concept in this video to discuss some of the adjustments we've made so far to get James from 61 to 94 so first and foremost we adjusted the Social Security election strategy secondly we added that deferred income annuity thirdly James has decided to work part-time to generate ten thousand dollars per year in those beginning years to help reduce the burden of taking out an additional twenty thousand dollars of retirement income and then finally we've brought the guardrails in on the Investment Portfolio which helps to eliminate very bad outcomes that could happen with his original 93 allocation to stocks we haven't totally went to bonds or cash we've just brought those guard rails in by reducing our Equity exposure in the beginning years of retirement we can always adjust that later now last thing I want to do is look at what we call the combined details all of these things together in a spreadsheet just so we can see how these different pieces are working together and then look at what we call different Monte Carlo analyzes so now I want to share with you some of the individual trial analysis that we run just like we would for a normal client to help identify not only where the weak spots are in the portfolio but how these different decisions that we're making impact the overall client balance and it's not just looking at what we call an average rate of return it's looking at a thousand different simulations we're going to look at a couple here and the Order of the return so check out the video if you want to understand more about this concept you can click the link up above and the title of the video is how eleven percent average returns could destroy your retirement and that'll really get home that concept of it's not about what you average but it's about the order in which you realize returns over the course of your retirement during the day distribution phase so here we have this individual trial and we're gonna it's the median scenario out of a thousand different scenarios so I just want to go through this fairly quickly with you and based on some of the adjustments to the portfolio we see the investment return column here so all of this I think averaged out to I think it was about four and a half percent gross returns I can go back and double check that in a second but you see it's it's never four four four four four four four four or six six six six this is what it looks like in the real world so James retires essentially the beginning of 2023 we have the Deferred income annuity clicking on here we've changed Social Security to click on here so if we add these two together come heck or high water there will be minimally 74 000 almost 75 000 deposited into his bank account every single year now if we look at the retirement need it's about sixty one thousand dollars plus the discretionary Go-Go spending is about twelve thousand two ninety nine so about seventy three thousand dollars but what this does is because we're getting so much from these two sources it really reduces the need for the portfolio to perform and if we kind of go out go on out through retirement you see Social Security isn't increasing income so later in life now we're up to about 89 almost 90 000 of income and our ninety thousand dollars inflation adjusted retirement income need is covered by the amount of guaranteed lifetime income that we have in the portfolio which then allows our portfolio balances to stabilize because we're not needing it to support our lifestyle later in life so this is just one example here but we see the ending portfolio value even though it spends down a little bit in the beginning years okay it starts to stabilize because the income provided from the decisions that we've made put us in a situation where we don't have to withdraw so much from the portfolio Okay so now I want to look at a different trial and just to confirm here the 500th scenario was an average of 4.6 but you saw the different order of those returns and how we actually got to 4.6 okay so if we slide this up here let's assume it's a pretty bad scenario this is going to let me change it here find a worse return okay so this brings the average down to 3.05 and we still see in bar graph form here that the portfolio value still is stabilized and it's primarily because that change in the Social Security decision and adding the Deferred income annuity it still puts us into that position to where if the market doesn't perform we have enough income from guaranteed sources that we're not dependent on the stock market to provide us income in retirement especially later in life when we typically are more conservative and most people that I've worked with don't have the same stomach at 80 or 82 to stay invested in Big Market pullbacks as they did when they were 52 or 62.

Now what I want to show you is the comparison to what we just looked at in the individual trial analysis to the original plan that came in at 61 percent with all the original inputs so if James just wanted to retire not go see anyone make any adjustments I want to show you what that looks like on the individual trial analysis so remember in this scenario we kept Social Security at 62 no job so the spending stayed at seventy thousand twenty thousand was that go go spending no change to the portfolio so we still have the aggressive portfolio which brings in the possibility of some pretty bad outcomes and no deferred income annuity here to help stabilize the income generation later in life as well as the volatility impact on the portfolio so when we when we look at this so here we go um had James has a 900 000.

You see we have none of the annuity income here Social Security starts out at about 26 000 for him a little more than two thousand a month now look at the investment returns here because it's a more aggressive portfolio the range the guard rails are increased here and then finally the spending we have the fifty thousand plus twenty thousand increasing for inflation with the Go-Go lasting 10 years so in the first 10 years of retirement we see things are going pretty well even at this spending level because we have some pretty good returns in here even though we have a couple bad years but what happens is the income because of inflation the income need increases later in life and we see it really just takes a couple of bad years here minus 21 minus 12 we go from a million to 755 and then it's pretty much all downhill from there in this particular scenario running out of income except for Social Security which is now only up to about forty four thousand dollars per year compared to the other plan with the Deferred Social Security so full retirement age and the Deferred income annuity we were at I wanted to say it was around 85 88 000 um of income not dependent on the stock market here we're only at 45 in the mid 80s so that means we have to take more out of the portfolio so it's more susceptible to bad returns later in retirement now the big takeaway here is this is what a good retirement planner does it's not necessarily about the investment returns it's about determining how much money you should have in the market when you should take Social Security we didn't even get into taxes here additional benefits could be provided through tax planning but what you should do with taxes and identifying those spending goals and those needs in order to get you retired and stay retired and then staying connected to this plan over time that's what a good retirement advisor does it's not about outperforming the market it's about finding a plan that gets you and keeps you retired just a brief reminder here to subscribe to the channel now what that does is that puts us in your TV Guide here on YouTube so it doesn't cost anything but if you subscribe to the channel you can come back to us much more easily down the road make sure to comment down below and also share this video with a friend or family member that you think could benefit from what we're talking about today [Music] foreign

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Retirement: I’m 60 Years Old with $900K in Savings. Can I Retire Now? What is My Risk Capacity?

so you're 60 years old with nine hundred thousand dollars saved and the question is can you retire in today's video we're going to look at a few different decisions that could be made the impact those decisions have on the plan with the overall goal of not running out of money hi I'm Troy sharp CEO of Oak Harvest Financial Group a certified financial planner professional host of the retirement income show and a certified tax specialist in today's case study we're going to look at a situation that's not too dissimilar from what we normally encounter in our day-to-day operations here at Oak Harvest Financial Group so we have James who's 60 years old he comes in and he says Troy I want to spend about seventy thousand dollars and I'm just tired of working I want to to this year to be my last year so I want to spend seventy thousand dollars I think I'm going to live to about 90 years old pretty good health and I want this fifty thousand dollars to increase with inflation over the course of my retirement but for the first 10 years and what I hear you talk about in this go go spending phase I want to spend an additional 20 000 per year bringing that first 10 years of spending up to 70 000 per year then that go go spending goes away and then we have the inflation adjusted 50 000 to plan for from age 70 to age 90.

Hey just a brief Interruption here to ask you to subscribe to the channel now what that does for you is that puts us Oak Harvest Financial Group and all the content we produce in your little TV Guide so you have a much easier way to come back and find it later share this video with a friend or family member and also comment down below I love to respond to the comments now if you have any questions about your particular situation or you'd like to consider becoming a client of Oak Harvest feel free to reach out to us there's a link in the description below but you can always reach out to us and give us a call and have a conversation to see if we might be a good fit for each other James tells us that since he wants to retire as soon as possible he he thinks it makes sense to take Social Security the first time available so claiming at 62 a little more than two thousand dollars a month at twenty five thousand dollars per year he also has that nine hundred thousand dollars broken out to four 401K money of 700 Grand then 200 000 in a taxable account or what we call non-qualified outside of the retirement account very important to point out here that the tax characteristic of these two accounts and the Investments inside them and the interest and dividends and the withdrawals from them are taxed differently so that's part of an overall tax plan now James also has a home that's completely paid for and worth six hundred thousand dollars but he's told me that I don't want to use this to fund any of my retirement goals I've lived in this home for a long time I want to stay in the home but we know from a planning perspective that we do have that in our back pocket if it's needed down the road so James's total net worth here is about 1.5 million looking at the paid off home of six hundred thousand the 700 Grand inside the 401K and the 200 000 of non-qualified or taxable account assets now as part of the process to understand where someone is and where they're trying to get to we have to understand how is the portfolio currently allocated so James tells us that Troy I know I've wanted to retire so I've been investing aggressively and trying to get ahead of the game but here we are in 2022 and the markets have pulled back some so that double-edged sword is starting to kind of rear its rear its head but we see James's 93 stock so one of the questions that we have from an internal planning perspective is if we keep this same level of risk while we retire and start taking income out of the portfolio what does that do for what we call the risk capacity or the portfolio's ability to take on risk while Distributing income in the retirement phase so we have to look at the guard rails and guard rails are essentially a statistical calculation of probabilities of the portfolio returning this much on the high side and a good year and this much on the downside in a bad year if these guard rails are too far apart and we're taking in income out if we run into a bad couple of years that bump up against that bottom guardrail but we significantly increase the risk of running out of money so part of the analysis of the planning is is this an appropriate guard rail for this type of portfolio given the desired income level so with everything we've looked at so far the question is if James continues doing what he's currently doing and retires with the desired spending level the assets that he's accumulated living until age 90 what is the probability that he has success well it comes in at about 61 so that's probably not a good retirement number it's something we want to see if we can work to improve so I'm going to pull up the what if analysis here and start to look at some of these different decisions that we could make and see if we can get this probability to increase okay so now we have the what if analysis where we have two different columns up here on the board right now they're identical we're going to keep this one the same as the base case everything that we just went through but now we're going to start to change some of these variables to see what the impact those decisions have on the overall retirement plan and this is much more of an art at this stage than it is a science because we want to start to explore different scenarios and then see what is most comfortable for you once you understand the impact of these different decisions you can take some time to kind of way think about them weigh the the pros and cons and now we're starting to work together to craft you a retirement plan that gives us increased probabilities of success but also something that you feel very very comfortable with so the first couple of options we have which are the most simple and usually have the biggest impact on the plan is that we can either work longer or spend less so James says no I don't want to spend less I have a specific plan I want to get my RV I want to travel the country I want to play some golf I've done my budget I need to spend that 70 000 for the first 10 years so the first thing we'll look at is the impact of working another couple of years so I've changed the age here to 63 as far as Retirement the only variable we're going to change at this time I don't want to change too many variables at once I want to see the impact of different decisions how they impact the overall plan okay so that gives us a bit of an increase but the next thing I want to look at here is social security so Social Security is a very valuable source of guaranteed lifetime income first it's an increasing stream of income it increases with inflation but two no matter what happens with the stock market that income is always going to be coming in so instead of taking the 62 and having a significant reduction in the lifetime income that we receive because I don't want to change spending we still have the 50 and 20 in here I want to change the Social Security from taking it a 62 to taking it at full retirement age okay so changing the Social Security election day gets us up to 76 we're definitely moving in the right direction here after a conversation with James and he realizing that you know what I do feel really secure with that increased social security income because if the market doesn't cooperate I know I'm still going to have that much higher income later in life so that would lead us down the road to say okay let's look at adding more guaranteed lifetime income if we can get your Baseline income to cover a majority of your spending needs then we don't need the market to perform necessarily as well later in life so now we want to look at the impact of adding more guaranteed income to the plan which has the effect of providing more security later in life because if the markets don't cooperate we know we have a certain level of income being deposited every single month no matter how long we live so if you go to our website here it's Oak harvestfinancialgroup.com com we have up top an income writer quote where this is constantly searching for the highest amounts of guaranteed lifetime income that are available in the marketplace simply input the variables here so in Texas age 60 Ira money income starts we're going to start looking at seven years here and I know the dollar amount I would want to put in 300 000.

The good news here is you can input any of these different variables we don't ask for your information so it's a calculator tool that you can play with on your own Single Life payout and we get quote okay so here's the output screen we have all of these different companies over here when you see the same company twice it's because that company offers multiple different products with the same income Rider so an income writer is just an addendum or an attachment to a contract that guarantees no matter what the stock market does a certain amount of Lifetime income based on the specifications you input so about thirty three thousand dollars here so that's about 11 percent of the initial deposit with that income starting in year seven this is why we call it a deferred income annuity because it gets a guaranteed growth to calculate a guaranteed lifetime income that you then would incorporate into your plan so in this what-if analysis we come down here we I've already inputted so three hundred thousand dollars and then we just calculate these scenarios okay now we're up to 87 percent here so now things are starting to look a little bit better let's make a couple of different adjustments here because remember when I talked about the guard rails that's too aggressive of a portfolio given the income need especially in the beginning years but now that we've added some deferred income into the plan the portfolio's capacity for risk increases later in life and all that means is because there's so much income coming in the portfolio can withstand a bit more volatility later once Social Security and the Deferred income annuity kick on because you're needing to take less from the portfolio so let's make a couple more adjustments here so after retirement we don't want to keep the the current investment strategy let's get a little bit more conservative here go from an aggressive plan to something a little bit more conservative and then you know what let's also say now that we're starting to move in the right direction instead of retiring at 63 what happens if we retire at 62.

Get your retired one year earlier than some of these other numbers okay now we're at 83 percent retiring at 62. I want to look at one more variable here because you may want to get a part-time job James may want to be a starter at a golf course maybe he wants to work in the church and he can get ten thousand or fifteen thousand dollars a year maybe just wants to work two three months out of the year so the next thing I want to look at is if we've done all this now what happens if during this first 10 years of retirement he decides he wants to work three months out of the year or maybe just a part-time job and work one or two days a week so instead of needing twenty thousand dollars per year we just need another ten thousand let's say from the portfolio so really that's only earning ten thousand dollars extra in retirement income you could do that driving Uber many different choices there you know what I'm just going to decrease this no I'll leave it there now with James deciding to maybe work part-time here to reduce that spending need in the first 10 years let's see if we can also get them retired at 61.

Okay so now James has decided that working part-time and hey we're talking 10 grand here so this isn't a lot of money now I want to see what happens if we go back to the original goal that James had of retiring as soon as possible at age 61. so we're going to change this back to his original goal 61 calculate all scenarios and now this gets us up to 94 so we started at 61 if where James was originally at whenever he came in if he kept doing whatever he was already doing we got him up to 94 percent here okay I want to take a minute before we finish the final Concept in this video to discuss some of the adjustments we've made so far to get James from 61 to 94 so first and foremost we adjusted the Social Security election strategy secondly we added that deferred income annuity thirdly James has decided to work part-time to generate ten thousand dollars per year in those beginning years to help reduce the burden of taking out an additional twenty thousand dollars of retirement income and then finally we've brought the guardrails in on the Investment Portfolio which helps to eliminate very bad outcomes that could happen with his original 93 allocation to stocks we haven't totally went to bonds or cash we've just brought those guard rails in by reducing our Equity exposure in the beginning years of retirement we can always adjust that later now last thing I want to do is look at what we call the combined details all of these things together in a spreadsheet just so we can see how these different pieces are working together and then look at what we call different Monte Carlo analyzes so now I want to share with you some of the individual trial analysis that we run just like we would for a normal client to help identify not only where the weak spots are in the portfolio but how these different decisions that we're making impact the overall client balance and it's not just looking at what we call an average rate of return it's looking at a thousand different simulations we're going to look at a couple here and the Order of the return so check out the video if you want to understand more about this concept you can click the link up above and the title of the video is how eleven percent average returns could destroy your retirement and that'll really get home that concept of it's not about what you average but it's about the order in which you realize returns over the course of your retirement during the day distribution phase so here we have this individual trial and we're gonna it's the median scenario out of a thousand different scenarios so I just want to go through this fairly quickly with you and based on some of the adjustments to the portfolio we see the investment return column here so all of this I think averaged out to I think it was about four and a half percent gross returns I can go back and double check that in a second but you see it's it's never four four four four four four four four or six six six six this is what it looks like in the real world so James retires essentially the beginning of 2023 we have the Deferred income annuity clicking on here we've changed Social Security to click on here so if we add these two together come heck or high water there will be minimally 74 000 almost 75 000 deposited into his bank account every single year now if we look at the retirement need it's about sixty one thousand dollars plus the discretionary Go-Go spending is about twelve thousand two ninety nine so about seventy three thousand dollars but what this does is because we're getting so much from these two sources it really reduces the need for the portfolio to perform and if we kind of go out go on out through retirement you see Social Security isn't increasing income so later in life now we're up to about 89 almost 90 000 of income and our ninety thousand dollars inflation adjusted retirement income need is covered by the amount of guaranteed lifetime income that we have in the portfolio which then allows our portfolio balances to stabilize because we're not needing it to support our lifestyle later in life so this is just one example here but we see the ending portfolio value even though it spends down a little bit in the beginning years okay it starts to stabilize because the income provided from the decisions that we've made put us in a situation where we don't have to withdraw so much from the portfolio Okay so now I want to look at a different trial and just to confirm here the 500th scenario was an average of 4.6 but you saw the different order of those returns and how we actually got to 4.6 okay so if we slide this up here let's assume it's a pretty bad scenario this is going to let me change it here find a worse return okay so this brings the average down to 3.05 and we still see in bar graph form here that the portfolio value still is stabilized and it's primarily because that change in the Social Security decision and adding the Deferred income annuity it still puts us into that position to where if the market doesn't perform we have enough income from guaranteed sources that we're not dependent on the stock market to provide us income in retirement especially later in life when we typically are more conservative and most people that I've worked with don't have the same stomach at 80 or 82 to stay invested in Big Market pullbacks as they did when they were 52 or 62.

Now what I want to show you is the comparison to what we just looked at in the individual trial analysis to the original plan that came in at 61 percent with all the original inputs so if James just wanted to retire not go see anyone make any adjustments I want to show you what that looks like on the individual trial analysis so remember in this scenario we kept Social Security at 62 no job so the spending stayed at seventy thousand twenty thousand was that go go spending no change to the portfolio so we still have the aggressive portfolio which brings in the possibility of some pretty bad outcomes and no deferred income annuity here to help stabilize the income generation later in life as well as the volatility impact on the portfolio so when we when we look at this so here we go um had James has a 900 000.

You see we have none of the annuity income here Social Security starts out at about 26 000 for him a little more than two thousand a month now look at the investment returns here because it's a more aggressive portfolio the range the guard rails are increased here and then finally the spending we have the fifty thousand plus twenty thousand increasing for inflation with the Go-Go lasting 10 years so in the first 10 years of retirement we see things are going pretty well even at this spending level because we have some pretty good returns in here even though we have a couple bad years but what happens is the income because of inflation the income need increases later in life and we see it really just takes a couple of bad years here minus 21 minus 12 we go from a million to 755 and then it's pretty much all downhill from there in this particular scenario running out of income except for Social Security which is now only up to about forty four thousand dollars per year compared to the other plan with the Deferred Social Security so full retirement age and the Deferred income annuity we were at I wanted to say it was around 85 88 000 um of income not dependent on the stock market here we're only at 45 in the mid 80s so that means we have to take more out of the portfolio so it's more susceptible to bad returns later in retirement now the big takeaway here is this is what a good retirement planner does it's not necessarily about the investment returns it's about determining how much money you should have in the market when you should take Social Security we didn't even get into taxes here additional benefits could be provided through tax planning but what you should do with taxes and identifying those spending goals and those needs in order to get you retired and stay retired and then staying connected to this plan over time that's what a good retirement advisor does it's not about outperforming the market it's about finding a plan that gets you and keeps you retired just a brief reminder here to subscribe to the channel now what that does is that puts us in your TV Guide here on YouTube so it doesn't cost anything but if you subscribe to the channel you can come back to us much more easily down the road make sure to comment down below and also share this video with a friend or family member that you think could benefit from what we're talking about today [Music] foreign

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Your Retirement Questions Answered

Nobody teaches you how to retire in school, so you might have a lot of unanswered questions as you approach retirement. We're going to talk about some of the most frequently asked questions, including Social Security, health care, how much money you need, and more… So let's start with how much money you need to retire. There are a couple of ways to answer that, and the best and most honest way is that it depends on a lot of factors, including how much money you have saved up, what you're going to earn or lose on that money, and over what period of time you're going to take withdrawals.

Some people want a quicker answer, so a couple of tips for you: one is to use a chart that shows you some basic check points and it make some assumptions that you need to make sure that you're comfortable with and on board with. But you can use this to at least get a ballpark idea of where you stand for retirement. The other way to do it is to multiply the amount you want to withdraw from your savings (this is not necessarily the amount you want to spend in retirement because you might also have income from Social Security and pensions, but the amount you want to withdraw) multiply that by 25 and that can give you a lump sum amount that you might want to have saved or retirement.

This is just based on sort of a rule of thumb, and it's not a perfect number, it's not gonna guarantee anything, but it can help you estimate using the opposite of the 4% rule, how much money you might want to have, so as an example, if you wanted to withdraw $40,000 per year from your savings, we would multiply that by 25 to arrive at a number of $1 million that you would want to have saved a retirement. Again, 40,000 times 25 equals 1 million. That's going to be your goal. Again, neither the chart or the multiply by 25 who are perfect, and we would love for you to actually do a detailed cash flow projection and estimate taxes and all that other stuff, but these can at least give you a ballpark idea, next is when to take your social security benefits, you can claim your benefits as early as age 62, but if you do that, you get a reduced benefit as compared to your full retirement age benefit, so that reduced benefit means you get less money each month, and if a surviving spouse takes over your Social Security income, they are also stuck with that permanently reduced amount, so it can be problematic to claim early, now you can claim at your full retirement age, and that depends on your birthday, or you can delay claiming and wait until age 70 as you delay.

You get effectively about an 8% per year race, it happens every month, so you don't have to do it on your birthday, but you get about an 8% per year raise, and then those increases stop once you reach age 70, so there's not much benefit. And waiting past that, this confuses a lot of people because they might think, Well, if I retire at age 62, I think I wanna start taking Social Security right away at age 62. And that might make sense and that might be the right answer for you, but it's always helpful to do some calculations to figure out maybe you can spend from your assets and delay claiming and get a bigger social security paycheck when you claim later in life by the way in the meantime, they're in between your retirement date and your first social security payment, you might have the opportunity to do things like convert some assets to rot or pre pay some taxes during your very low income earning years.

So a number of strategies you have, in general, for a lot of people, unless you have major health issues, it pays to wait to claim Social Security. Next is How much will healthcare cost in retirement during your working years, your employer has probably been paying a portion were all of your health insurance premiums, and when you retire, that changes and you are responsible for those costs. So if you are age 65, you're typically gonna go on Medicare, and that's fairly straightforward, although you have a couple of options, and we'll go over some rough cost there, but if you're retired before age 65, it's quite a bit more challenging. You might need to get a plan from the exchange, or you might need to use Cobra or your state's continuation program, so that you can keep using your former employer's healthcare for, let's say, 18 months at a maximum unless California.

But that can be quite expensive. So you need to be aware of those costs, you might also be able to switch to a spouse's coverage. So Let's talk about some Medicare cost. If you're a 65 year old woman, you might expect to spend about 7000 on your first year of retirement on out of pocket expenses, and that assumes you have decent health, but one or two issues, and if you have poor health, it's gonna be more expensive than that. A study from Fidelity tells us each year what retirees should expect in terms of healthcare spending for 2020, that number was 295000 of out of pocket costs, and that ignores any potential long term care costs, so this isn't something that you need to write a check for at the beginning of retirement, that full 295000, but it's what two people might spend between age 65 and the end of their life.

Next is a logistical question. People often wonder, How do I actually spend the money that I have saved up? It's in this account, how do I actually get it out and pay whoever I'm paying, and the answer is, oftentimes, you're gonna move your money to an IRA or an Individual Retirement Account, and you can typically link that account, let's say it's an investment account, with a discount broker or with a financial advisor, you can link that account to your bank account and you can just transfer money over electronically, it's very easy, you can also set up automatic monthly payments to kind of replicate what your income was like during your working years, or if you need a lump sum, you can call them up and say, The furnace broke, send me several thousand dollars, whatever the case may be, and you can make that happen and you get the money within a couple of days, so that's typically how the logistics work.

You should be aware that if you're taking withdrawals from retirement accounts, that's gonna generate taxable income for you, so you can't necessarily spend every penny that you have saved in retirement accounts, if you have 100000 in a retirement account, you're gonna have to pay… Who knows, it might be 18 30000 in taxes to the IRS. So you don't necessarily wanna spend every penny of that Talk to your CPA and figure out exactly what that's gonna look like, just be aware for now that you can't spend all that money. The Other thing to know is that you wanna make sure that this money lasts for the rest of your life, we don't want you to outlive your money, so you need to withdraw at a rate that draws down your account balances gradually or slowly enough so that you don't run out of money, a couple of techniques for that, one of them we touched on with that 4% roll above, and you can learn more about that elsewhere.

Next is, when do most people retire, and you can, of course, retire whenever you have the financial resources to stop working, according to the Employee Benefits Research Institute, most people retire around age 62, an interesting fact that is a lot of people find themselves forced into retirement earlier than they expected. So that's about 40% of people, and a lot of times the reason for that is healthcare, you might be experiencing problems yourself, or you might be caring for a loved one, and that takes you out of the workforce, so that creates a challenge in terms of planning for retirement, because you might not work as long as you had initially thought, the other leading cause of leaving the workforce early at an unexpected time as changes in your job, your employer might reorganize, start doing things differently. Who knows what the case is, but that can often surprise people and put them out of the workforce for the rest of their lives, that Leads us to the question of working longer…

Is that beneficial? So if you work part time or if you're looking at your retirement prospects and it doesn't look as good as you want, should you keep working a couple of extra years, and the answer is it typically is quite helpful for you, and here's why. Number one, your Social Security benefits might improve because social security looks at your 35 highest earning years, and if you continue working later in life, you're typically at your peak earning years, you have earned your promotions, you've developed in a career, and you might presumably be learning some of the IS salary you've ever earned in your life, so as you can add more years at that higher salary, that helps your social security… The concept is the same for pensions, many pension systems look at your highest three years of earnings and they're gonna base your pension payout on that, so if you've got higher earnings for more years, that can just help you out.

The Other way it helps is that you might delay taking your Social Security or your pension at a later age, and as you take those benefits later, you tend to get more each month, so again, we said Social Security, you can claim as early as age 62, but you get that reduction. And if you wait a couple of years till your full retirement age, you get more than at age 62, and you can further increase that by waiting until age 70. Another way that working longer helps is that you have fewer years of retirement to fund, this might sound morbid, but essentially we're looking at the period of time between when you stop working and when you die, and we need you to have an income during that period, but if you keep working longer, that puts you closer to the day you die, and that means fewer years of funding that we need to provide, and finally, as you keep on working, you have the opportunity to say more, you have income, so you can set aside some of that money in your retirement accounts and that provides resources that you can spend later.

Next is the question of annuities. Does an annuity make sense for you? This is a huge and complicated world to deal with, and we can't possibly cover it in a couple of minutes here, but what I would say is that the simplest and purest form of an annuity is something where you just give the insurance company some money and a lump sum, then they pay that money back out to you over time, and they typically guarantee that those payments would last maybe for the rest of your life, or maybe for you and a spouse is life, or maybe for at least 10 years, if you are both of you died within just a few years, those are the simplest types of annuities, and those tend to make the most sense. Other types of annuities get extremely complicated, they can be problematic, you wanna be very careful in approaching those kind of annuities, so just be aware that there are different flavors of annuities out there, and I would suggest talking with the only financial planner to evaluate which annuities might or might not make sense for you.

The only advisors don't get any commission, and so that can take the commission piece out of the question, if somebody is recommending an annuity, you wanna know if they're getting a commission and exactly how much that commission is, it is pretty much never clear. You're probably not gonna know that, so you wanna try and get unbiased advice on these questions, next is the question of taxes in retirement, you are going to most likely pay some taxes, so as I mentioned earlier, is you take money out of pre tax retirement accounts, you typically generate taxable income, and you might have to pay taxes on that income, people also wonder about Social Security, so do you owe taxes on that? And the answer is, it depends. If your earnings go above a certain level, and that number can change from time to time, so probably not worth getting into it, but if you go above a certain level, 50% of your Social Security income might be taxable if you go above a higher level, 85% of your Social Security income could be taxable income, so you wanna try and manage what your taxes are gonna be in retirement, there are several strategies for doing that, that can include timing when you take different withdraws from different accounts, it might include strategies like Roth conversions, you just wanna look at all of these different opportunities to manage what you've pay in taxes so that you have as much as possible to spend on things in retirement.

Will social security run out of money? That's always a big question, and I have a separate video that pretty much just talks about this, but the answer is we don't know, but probably not… So the Social Security trust fund, as you've probably heard, was scheduled to run out of money in 2035, but that could be accelerated due to covid 19, more like 20 29. What you wanna know is that Social Security is a pay as you go system for the most part, so about 75% of the money that's needed to pay out beneficiaries to pay retirement income, let's say, on social security, comes from people's payroll taxes each year.

So if the Social Security trust fund just went away and nothing happened, when people might still receive about 75% of what they were promised, there Are several other ways to fix Social Security, and those include just making small tweaks the US, especially as a retiree, probably would not notice, we don't wanna guarantee anything 'cause we just don't know what the future will bring, but it's likely that you'll probably get the benefits that you were promised, especially if you're over…

Let's say 60 years old today, and for those who are younger, probably smart to expect the Social Security will one way or another be less generous than it has been in the past. Next is the question on pensions, so your employer pays you a pension, maybe it's a city, maybe it's a private employer, a company, and what happens if that company goes bankrupt? Well. You might not necessarily be of luck, many pensions are covered by the PGC or the pension benefit guarantee corporation, that is an agency of the US government, but it does have some limits on how much it's going to pay you, so if you are a particularly high earner, you might not get as much after your organization goes bankrupt as you were before, for 2021, the maxim a monthly benefit for a 65 year old with 634 per month, so if your pension was higher than that, you might suffer some losses in the event of a bankruptcy, but if you're below that, you might be relatively comfortable that you wouldn't see major changes… I hope this information has been helpful.

I'd love to help you plan your retirement, if you'd like to chat, please reach you out, we can look at how your retirement years might unfold, we can uncover maybe some opportunities to help you manage taxes or just to improve your chances in retirement. So please reach out, I'd love to talk. Please subscribe to this channel, and you can do that with the little red graphic there in the bottom right now, that does not cost you anything, what it does is helps you stay informed and get more information like this, and it also helps me out a teeny bit so thank you and thanks everybody. Who is already subscribed?.

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