Avoidable Retirement Mistakes


If you prefer to listen while you are on the road, click below!

This image has an empty alt attribute; its file name is Spotify.png
This image has an empty alt attribute; its file name is Google-Podcast.png
This image has an empty alt attribute; its file name is Apple-Podcast.png

Transcript

Mike:

But here’s one of the things that people miss all the time. And that is if the market doesn’t cooperate in the early years of your retirement, you are hosed. You’re in huge trouble. If you have a market based type of portfolio,

Zach:

You’re listening to retirement today. I’m your co-host Zach Holcomb and alongside me as always, we have Michael Reese, he’s a certified financial planning professional, and he’s helped people through and into retirement for the last 25 years. He’s here with us as always on Retirement Today. Mike, how are you this evening?

Mike:

We’re doing great.

Zach:

We are. And we’ve got a great show in our hands today. Mike, we’re going to be talking about a topic. That’s going to be really, really important to a lot of our listeners. We’re going to be talking about the three things that you need to plan for in retirement. That’s not your investing, not about your investing.

Mike:

That’s right. So here’s, here’s how this works. As a lot of, you know, you know, we focus on retirement planning,

Zach:

Complete Retirement planning,

Mike:

Complete retirement, and we want to provide the easiest path towards that complete retirement plan. And one of the things that actually kind of sticks under my craw a little bit here is that, you know, I talked to so many people who say, yeah, I’ve got a retirement plan. And I say, tell me about it. And when you think about it, when, when you listen to them, describe their retirement plan. I’m doing this in my air quotations here. What they’re really describing is they have what they consider to be an investment plan.

Zach:

Right? Like a balanced portfolio for retirement.

Mike:

Something like that. There you go. And an investment plan is not a retirement plan. So tonight we’re going to go through the three different areas that you need to think about that you need to plan for that are not investing guys, things that you, and, and by the way, if you get these three things wrong, you are, there’s a pretty good chance that your retirement will crash and burn. That you’ll be at a stage in life where you’re saying, oh, I guess I have to go back to work.

Zach:

Yeah. So if you’re retiring in the next few years, and maybe you recently retired, you definitely need to be listening across the next hour.

Mike:

So here’s our first story. Couple comes to the office, right? And they end up talking to one of the advisors and I ended up the advisor, brought me in to show me how this all went down. So we have kind of a simple process in our office. You know, it’s a three-step process. You know, you have a 15 minute call with one of our, let’s say, you call us, you say, Hey, I’m interested in maybe getting some help with my planning. And then based on that call, if they can answer your questions quick and easy, they will. But if it needs a little bit of work, they move you to the next step, which is called a discovery meeting. And that’s about a hour meeting where, you know, it gives you and the advisor time to really drill down and, and learn more about you, what you’re trying to accomplish.

Mike:

And you know, what resources you have, all that good stuff. And they literally like in front of your very eyes, they start putting your information in the planning system, right? And then by the end of that visit, they’re able to identify whether or not you might have a problem. So here’s a couple, this couple comes in, we’ll call them John and Mary. And one of the advisors brought this to me just to show me and John and Mary, you know, they had this, they had money that they had saved for their retirement. In fact, they had like a million and a half dollars. Right, right. Doing a great job. They’re doing great saving money. And they had a financial advisor. And the reason they had called by the way had to do with taxes, they had questions about their tax planning because in their case, like a lot of people, they, their financial advisor didn’t help with taxes.

Mike:

Sure. And they had, they were listening to one of the shows and they said, Hey, I wanna, you know, make sure I’m not missing out on the tax side of things. We’ll talk about that a little bit more later tonight. But anyway, so they’d saved a million and a half, but they felt comfortable. In fact, they were confident that they were invested in the proper way right. Now, when we went through this discovery meeting where we were starting to put their information in the system, you know, one of the things we ask is, well, what kind of rate of return represents a reasonable assumption? And they said, well, my advisor says, I should average about 7% a year. We said, okay, should we plan on that? Or should we scale that back a little bit to, you know, to be conservative on our estimates?

Mike:

They said, yeah, scale it back. Good idea. So we bumped it down to five. So when we went through this meeting in the financial system, by the end of that discovery meeting, one of the things that if you go through this, this is what you would see, you would see, okay, how long will your money last, assuming that earns that rate of return, you know, given the amount of income you want and all that kind of jazz. And based upon a 5% return, you know, assuming inflation and all that other stuff, everything looked good. Like the money, basically their money should last till they’re a hundred years old, which according to this couple, John and Mary they’re like, that’s great. We’re in great shape from an investment perspective. But one of the tabs on our software is very interesting because on one of these tabs, we can click this tab and we can go back in time.

Mike:

We can say, well, what if you had retired in 1970? We’re assuming you’re going to earn 5% a year. Well, did you, what if you retired in 1973, what if you retired in 1981? What if you retired in 2000, you know, we can pick all these different years just to explore, you know, in the real world, would you have earned more than your 5% target? Remember we made that a conservative number. We were starting at seven, but I said, no, let’s make it five. You would think that a market portfolio would have no problem beating 5% over time. But here’s one of the things that people miss all the time. And that is if the market doesn’t cooperate in the early years of your retirement, you are hosed. You’re in huge trouble. If you have a market based type of portfolio,

Zach:

Right. You don’t have time to make up those losses in retirement.

Mike:

Yeah. So here’s the deal. So here’s a couple of years. If this couple had retired in the year 2000 with the portfolio, the way it was structured instead of their money lasting for their lifetime to age 100, averaging 5% a year, they wouldn’t run out of money at age 82.

Zach:

It’s not according to plan

Mike:

Oops. Why? Because the market didn’t cooperate early on. You know, if they would have retired in 1971, their money would have lasted to age. Now, listen to this. This was interesting. If they retired in 1971, their money would have lasted age 92, which was probably fine. If they retired in 1972, their money only last to age 80q, if they retired in like 1973, it was like 83. If they retired in 1974 was back to like 95. So in other words, one year makes such a huge difference. But here’s my entire point. We said that retirement planning is so much more than just investment planning, right? This couple, if they just earned 5% of an average, they’re fine. The problem is the order of returns could really mess them up. Especially if they had bad returns early. And what’s kind of interesting is this, we asked him this question. We said, Hey. And when I say we, I mean the advisor, you said, so I got a question for you. It looks like everything should work out. But as we’re seeing here, sometimes if we look historically some years when you retire, you’re fine. Some years you retire, you’re not fine. Is that what you want? Do you want to go into retirement with that big unknown of maybe you’ll be okay. Maybe you won’t be okay. It all depends on how the market decides to do.

Zach:

I don’t like the feeling of uncertainty. And I think a lot of people would agree with me on that.

Mike:

Yeah. I mean, it’s like maybe good. Maybe not good. Is that what we want?

Zach:

No,

Mike:

But the thing is, they thought they were fine because their advisor told them they were fine. The problem is the overwhelming majority of financial advisors. They want you to think they’re really good at retirement planning and they’re not.

Mike:

Outside of investing. Number one thing you need to get, right? You’ve got to have an income plan. You’ve got to have a plan that replaces your paycheck, where a plan that delivers stable, predictable income that lasts as long as you do that grows over time to fight inflation. And guess what? You can’t have the stock market, you know, determining whether or not you’re going to have income. So stable, predictable lifetime income that grows over time. So that’s one area you’ve got to get. Right? I’ll talk a little bit more about that in a few minutes.

Mike:

Next second area. You have to have a tax plan. I mean, goodness gracious. If you do, if you follow conventional wisdom, odds are high that you’re going to get the IRS tens of thousands. If not hundreds of thousands of dollars that you do not legally have to give them, are you visiting with advisors every single year? Whether it’s tax advisors, financial advisors, are you sitting down every year to get your tax planning done right? If you’re not, you’re just likely throwing money away. You don’t want to do that. Well, at least. Okay. I should say you don’t want to do that. I do about two or three times a year. Those Zach, I do come across someone that does want to do that.

Zach:

Interesting.

Mike:

Yeah. They, I get the letter, right. You know, I do these shows, I, you know, I hate taxes. Oh my God.

Mike:

I hate taxes. Anyway. at least two, three times a year, you know, we get a letter from someone that says, you know, maybe you shouldn’t be telling people how to reduce their taxes because the government really needs that money. Right? Yeah, sure. They do. Nobody wastes money, teenagers don’t waste money. You know, a teenager with their first credit card that mom and dad pay off every month. Doesn’t waste money. The way our government wastes money. Right. Don’t tell me the government needs our money. No, it’s not their money. It’s our money. And so I respectfully disagree with that thinking. Yes. So we said, you have to have a paycheck replacement plan or an income plan. You need to have a tax plan. And then the third areas, you have to have a protection plan because there’s a couple of things that can happen in life that we don’t control.

Mike:

So first of all, Zach, do you control when the market has a good year or a bad year.

Zach:

I wish I did, but we don’t.

Mike:

Oh, that’d be awesome. Right?

Zach:

Yeah.

Mike:

But yeah, we don’t control when the markets have good years or bad years, you got to have a plan in place to protect yourself when they have bad years. What about your health? Now, no matter how, you know, if you eat healthy, you diet and exercise, let’s say you exercise really, really well. You’re you do a lot of extra exercise regularly. You eat properly in a healthy manner. Does that mean you’re never going to get sick or die early?

Zach:

I wish I could say you’re right. But I mean, sometimes it just happens.

Mike:

Now the reality is when the big guy upstairs says, Hey time. Yeah, it’s your time. So the point is outside of investing, you have to have a paycheck replacement plan or an income plan.

Mike:

You know, how are you going to generate stable, consistent income. Number two, you need to have a tax plan. How are you going to reduce your taxes over time? Or at least pay the IRS, the minimum amount you owe. And then number three, how are you going to protect yourself from things, the threats out there that you don’t control? That’s what I’m talking about. You can’t just invest money and say, we’re done. You need to cover these three other areas. So let me pick on one of those, right. Let’s pick on, I don’t know, income planning. Right? So here’s the challenge that we have today. Most people when they’re entering into retirement. So let’s, let’s imagine that you want to retire two years from now, right? If you’re like most people, these days, retirement for you is really social security plus your investment portfolio.

Mike:

Now, back when my father retired 22 years ago, in those days we had what was called the three legged stool in retirement. We had social security, like how did my dad retire? He had social security for both the, in his, my mom, a pension was like number two. And leg number three would be your savings. Like a 401k. Yup. So when my father retired, he had social security pension, 401k. What do two of those legs have in common?

Zach:

Well, we don’t really see pensions too often anymore these days.

Mike:

Right? We don’t. So we could say social security in our savings are still part of it. Right? And that’s a good observation, but not what I was thinking. Right. What I was thinking more is this social security and a pension. When my dad retired, had two things in common, or they both had something in common, and those are two streams of income that lasts as long as you live guaranteed,

Zach:

Guaranteed,

Mike:

Guaranteed lifetime income, your savings, not so much.

Mike:

But the idea was in those days you would social security or pension would cover your base income. So basically your base needs your financial needs and retirement recovered with guaranteed streams of lifetime income. That also grew with inflation like social security does. And then your extra spending, that’s your 401k? Well, the problem is many people retiring today. They don’t have that pension. And by the way, if you work for the state or you’re a teacher or something, you have a pension good for you. You should count yourself. Lucky. The reality is most people to retire today, don’t have that. Most people retiring, they have social security in their portfolio, their 401k. And so one of the things you should be thinking about is, okay, well now you only one of those stool legs is gone. It’s kind of like social security still there. And by the way, don’t give me all this crap about, but what if it goes away?

Mike:

Okay, don’t be like, that’s scare tactics. It’s not going anywhere. As long as people over the age of 50 can vote, social security is always going to be there. It’s that simple. Yeah. But you’ve got to think about, okay, stool number one, social security is still there still number two or leg number two of the stool pension gone, like number three, personal savings 401ks. Now a huge one. It’s like huge. So what I want you to be thinking about is how do you take that 401k or those retirement accounts? You know, how do you take part of those accounts, a portion of those accounts and use it to replace that missing leg. Number three, or number two, the pension. How do you create a pension for part of your 401k money? And by the way, for what it’s worth, that’s where nudies come into play.

Mike:

You know, we had Ed Slott, who’s, America’s tax expert, I guess he could be called an expert. Anyway, he came and spoke to our, our clients and, and some of their friends. You it’s funny. He said that the smart retirement planning part now it’s not just tax planning. It’s about having guaranteed streams of income. The happiest people in retirement are those people that don’t have to worry about their income coming in every single month. Definitely agree with that. So for a lot of you taking a portion of your money out of your 401k, using it to buy annuities that provide guaranteed lifetime income might make sense, or it might not. It all depends. Here’s something, this is a message I want to get out there loud and clear. Okay.

Mike:

Avoid the financial advisor. Okay. Ready? That’s what this is titled.

Zach:

It’s a bold statement.

Mike:

Avoid the financial advisor, who either number one says everyone should have annuities as part of what they do. And also avoid the financial advisor, who says you should never use annuities because in both cases, those are not financial advisors. Those are financial salespeople who are trying to sell you something. Here’s what it look. As, as you mentioned, I’ve been doing this over 25 years for over 25 years now, I’ve been helping families get to and through retirement safely, securely. And I am proud to say that over that 25 years, not one client has ever had to go back to work because financially they had to. Yep. And I’ve had a lot of clients go back to work. Not because they needed to, it had to do more with, they wanted to, you know, I’ve got a gentleman in Georgetown that told me the other day.

Mike:

I mean, comfortably retired, playing a lot of golf, right. Enjoying, enjoying his retirement. Next thing I know he’s working, part-time at a company and I’m like, why are you doing that? You don’t need the money. He’s like, oh no, no. I know I don’t need the money it’s gone. But here’s the reality. It helps keep my brain, you know, engaged. He goes, I just egos. I really liked doing it. He goes, I love what I’m doing. Part-Time he goes, I’m a consultant. So I can, you know, work when I want to, or not work. When I don’t want to, they pay me a nice amount of money, but he goes, it’s, it’s kinda like, he goes, don’t tell him this, but I would do this for free for them because I enjoy it. That’s why you want to go back to work. Not because you need the money.

Mike:

Right. And what I’ve learned in over 25 years is when it comes to retirement planning is this for some families using annuities to create guaranteed income works really, really well. And for other families using annuities to create guaranteed income is not really necessary or needed. So everybody’s different. Now we’re going to talk a little bit about taxes. Oh yes. Now, by the way, for those of you on the podcast who are on the, what is it? The YouTube channel. If you’re watching my face is probably getting all red now. Cause I hate taxes,

Zach:

He’s perking up. He’s getting excited.

Mike:

Yeah. Yeah. Give me something to throw.

Mike:

But yeah, here’s the thing. Number one, mistake we see from a tax planning perspective. So if you want to know, how do you give the IRS more money than you have to, right. So let’s imagine you want to give the IRS more money than you have to. Okay. I know that’s probably not you okay? That’s like nobody hardly, but here’s how you do it. Follow conventional wisdom. Now, what, what does that mean? Explain that like so conventional wisdom is this, think about your 401k or your IRAs. What have you been told over the years?

Zach:

Stuff as much money away as you can. And those things, every single year.

Mike:

There you are shove as much money in those as you can. And then defer, defer, defer. You don’t want to pull any money out of those things until you’re forced to. And with these types of tools, these financial tools by the way, they’re the only financial tools that you’re forced to pull money out.

Mike:

Right? And that is once you in current law, once you turn 72, they’re talking about making that 75, but once you turn 72, you are forced to make what are called required, minimum distributions. And every year from that point on for the rest of your life, you must pull a certain amount out each year and every year, the percentage that you have to withdraw, that you must withdraw that you think it goes up or down Zach,

Zach:

Oh, it goes up.

Mike:

It goes out. It gets bigger and bigger and bigger. In fact, I think I’ve seen Forbes magazine a couple of years ago. They said that required minimum distributions are the tools of mass tax destruction.

Zach:

That’s a bold statement.

Mike:

Instead of like weapons of mass destruction they’re, the financial tools, attacks, mass tax destruction or something like that.

Zach:

That’s funny.

Mike:

But you know what, if you do the math, they are, yeah, they are. In retirement, you need to understand this. This is really important that you understand what I’m about to say while you are working 401ks, 403Bs, 4 57 plans, IRAs. They are wonderful tax shelters. They are wonderful tools when you’re working. But the instant, not the month or the year, not the week, not the day, not the hour, not the minute. The instant you retire that instant in time is the instant that the switch is flipped. You know, the light switches flip from off to on the tax switch is flipped. These things go from wonderful tax shelters to, for most people, the absolute worst possible asset you can own in retirement from a tax perspective, they are your highest taxed asset and even worse as you withdraw money, not only is it taxed at whatever your highest marginal rate is, it often makes other streams of income on your tax return, taxed as well. So you get double tax. These things are horrible from a tax perspective in retirement.

Mike:

So what do you do about it? What should you do about it? Well, you should be doing about these tools is this every single year it’s like in our office, what do we do with our clients? Every single year tax planning, every year tax planning, every single year, we sit down with them. Our CPA sits down with them and the CPA says, Hey, let’s review where you’re at this year. Let’s identify how much money can you take from these weapons of mass tax destruction called 401ks and IRAs, the worst asset you could possibly own in retirement, how much money can we take from those and move to something that would be tax free in retirement or tax friendly. And usually that’s a Roth IRA, a Roth 401k, or it might even be a life insurance that’s designed in a real, really unique and special way.

Mike:

I would tell you that for most people, the Roth approach is the easiest and safe and it works really well. It’s a great way to go. If you have over a million dollars in your 401k or your IRA using life, insurance might be an effective strategy. Again, notice I said, might be.

Zach:

Yeah, cause it’s not for everybody.

Mike:

Everybody’s different. Yes. But I asked you the question, how much money are you moving every year? Do you sit down with your advisors every single year and identify how much money you should be moving from the weapons of mass tax destruction known as IRAs or 401ks into things like Roth IRAs or specially designed life insurance. If you’re not doing that, you’re basically saying to the IRS here, please take as much of my money as you want, because you are leaving yourself fully exposed to tax Armageddon.

Mike:

Right? I know that sounds like over the top,

Zach:

The world’s ending,

Mike:

But I’m telling you, I’ve seen it over and over again. You need to do tax planning. Well, what’s the third thing. Well, the third thing we need to think about is you need to have some kind of protection plan in place. And what I’m referencing here is there are really two areas where, you know, threats, if you will, that there are two things could happen that could really threaten your retirement, that could really threaten your financial security in your retirement. And those two things are number one. What if the stock market decides to crash and burn on you, especially early in your retirement, that’s a threat. And the second threat is what, what happens if you either die too early or get sick along the way. So let me give you kind of an example of this.

Mike:

And we talked a little bit about the market crash in earlier, so I’ll, I’ll share this story. So one of my good friends has, he he’s just recently turned 60, right? So here we go, we are on vacation. Okay. And Becky and I with my friend and his wife, let’s call him bill, not his real name, but for privacy should call him bill, bill, and his wife, Sharon bill and Sharon, not their real names. So we’re on vacation with them and having a good time. And we noticed though, that bill is having to go to the bathroom pretty regularly. Okay. Right. And you know, one of the one on one of his many visits, we said to his wife, Sharon, like, you know, what’s going on there. I mean, he seems to be gone a lot. And she’s like, yeah, he’s got some kind of bladder thing going on infection.

Mike:

The doctors are looking at it and you know, it just, you know, something that came up right now, by the way, bill eats healthy, he exercises on a regular basis. Right. Pretty healthy guy. Anyway. So as he come, I remember one time he came out of the bathroom and you know, we’re all making fun of him, by the way, he’s making fun of himself. He’s like, yeah. Stupid medicine just isn’t quite cutting it yet. Right. Right. Well, okay. Vacations over and about a month goes by and out of the blue. I get a call from bill. He says, Mike I don’t know how to tell you this. I just came from the doctor and apparently I have stage four bladder cancer.

Zach:

Oh my gosh.

Mike:

Right now stage four basically means if you’re not familiar with the stages of cancer, stage four basically means it’s terminal.

Mike:

Right. And the only reason he found out about it was that he had a lump in his shoulder. He’s like, man, I got this lump in my shoulder kind of hurts. So he goes to the doctor, they do a biopsy and it turns out it’s cancer. And then when they do more research, they find out, well, actually it’s bladder cancer is where it started. And then it’s kind of worked its way through his entire body now. Right? Yeah. So here’s a guy who, you know, diet his diet. I mean, I’ve not seen so many more salads in my life. Right. I mean, he eats really well. He exercises regularly and at the age of 60, right. It is like he finds, this was the week before his 60th birthday that he finds this out. Right. And he goes to, he comes down here to Houston MD Anderson and cause you know, they’re the big experts.

Mike:

And they basically said, this is what they tell him. And this is what kills me. They say, well, here’s the deal? Good news is what you have is very common. We know what it is so we can it’s treatable. The bad news is it’s not curable. And so like, well, what does that mean? Well, what it means is, Hey, we can treat it with, but all we’re doing is pushing out your life. They said, look, if you do nothing, you’re going to live about six months with chemo, maybe a year. Right. So basically we can extend your time on the planet, but we can’t fix it. Right. But here’s the question from a financial planning perspective now, by the way, he’s not even retired yet. He was going to retire in a couple of years. He ain’t going to hit retirement. But let me ask you this question.

Mike:

What about his wife, Sharon? You know, there’s nothing that we can do financially to help with the emotional challenges here, but she can be okay financially. Well, in their case, I know they will. Right. I know they will because we help them with their planning. And I made sure they have enough life insurance, so that she’s going to be okay. Right. But you know, think about this. How many people’s act do we talk to that are within a couple of years of retirement, they might have some insurance through their work, but let’s be honest. If something happened to them, their surviving spouse is not, they don’t have enough insurance to take care of their spouse. Right? Or what if it wasn’t cancer? What if it were, I had a client? This is a couple of years ago. Great guy, perfectly great shape. And around the age of 73, like over a six month period, he went from perfectly healthy to essentially full blown.

Mike:

Alzheimer’s right. Where he was perfectly good. Until six months later he needed 24/7 care. Was that free?

Zach:

Unfortunately it’s not,

Mike:

No again, thank goodness we did the planning for them so that they had the resources to pay for it. How many people ignore that though?

Zach:

A lot of people do.

Mike:

Zach. It’s never going to happen to me.

Zach:

These are tough conversations to have.

Mike:

Never going to happen to me. How many times have we heard that?

Zach:

I’m so healthy. I take care of myself so well,

Mike:

Yeah, if it happens to me, I got a gun and I know how to use it. Oh, I’ve heard that one where I did have that. Where a guy really said to me in the office, Mike, if something happens to me like that, I’ve got a gun. I know how to use it. And his wife piped up right there.

Mike:

She jumped in. She’s like, wait a minute. We’ll call him Harold, wait a minute, Harold. Yeah, you’ll have, that’s great that you have a gun. You know how to use it. The problem is you’ll have Alzheimer’s. You won’t remember where you put the bullets. Yeah. We can have a little fun with this, but it’s it’s reality. What are you doing with your protection planning? No matter how good of a job you’ve done, investing your money, no matter how good of a job you set up paychecks for the rest of your life, no matter how good of a job you’ve done with your tax planning.

Mike:

If the market crashes at the wrong time, you still might be in trouble. If you haven’t taken, if you haven’t accounted for that, if your health goes south, whether it’s you might need long-term care or you die too early, right? Again, for your family members, your surviving spouse or your family, right? If you haven’t done the right job, it could really, it throws your financial security, you know, out the window. You don’t want that. So as we wrap up the show, I want you to do something. This is really important. So maybe you’ve been listening to us for a long time and that’s great, but you haven’t done anything. Look enough of that. Let’s do something, right? Let’s make sure that you are 100% in great shape. What? You might have an advisory. You might not have an advisor who cares. Let’s make sure that you’re in great shape with your retirement planning.

Mike:

It is free. It is easy. It is simple. Here’s how it works. All you have to do. You pick up the phone, do it right now. And you call the number (512) 886-5850. You will reach our answering service. They will schedule a 15 minute call. It’s free 15 minutes, not very long, easy with one of our advisors. And on that call, you’ll get a chance to learn a little bit about us. We’ll learn a little bit about you and we’ll find out where you’re at and if necessary, we’ll even schedule a follow-up visit a little more intense visit where we can really dive into your details. Again, that’s free just to get you your answers. Let’s make sure 100% sure that you are in great shape. No reason not to. Right. So if you’re retired, nearing retirement, this is for you do it. Now, Zach, as we wrap up the show, what’s the number to call.

Zach:

Mike it’s (512) 886-5850. Again, that’s (512) 886-5850. All right. That’s our show this week. Mike had a great time with you.

Mike:

We’ll see y’all, or listen in next week.

Leave a Reply

Your email address will not be published. Required fields are marked *

© 2022 Centennial Advisors LLC ยท