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Transcript
Zach:
Welcome to retirement today. I’m your co-host Zach Holcomb, and alongside me we have Michael Reese. He’s a certified financial planning professional and retirement planning specialist, who spent the last 25 years helping families get into and through retirement. It’s Michael Reese. Mike, super happy to have you back with me on the show this evening. But before we dive into the show tonight, how are you today?
Mike:
I’m doing great as always love living in Austin, Texas. And I’m excited about tonight’s show because you know, I know we are gonna be talking about this thing called what, what is it called now?
Zach:
The great resignation.
Mike:
Yes, the great resignation. So we’re gonna talk about that. And we’re gonna talk about, you know, really the three things you have to get, right when it comes to your retirement planning, you know, this is really important now, because you gave me some statistics before the show. I I’m, I was blown away by these statistics.
Zach:
So this information, the source is from the pew research center. So they’ve done these studies, they’ve gathered the data. So by the third quarter of this year in 2021, about 50% of us adults, 55 and older, they’re retired. They’ve left the workforce for good.
Mike:
For the population above the age of 55, half of ’em are outta the workforce.
Zach:
Yeah. And that’s a crazy number to think about cuz 55. I mean that’s still relatively young. When I generally think retirement, I’m thinking like, you know, mid sixties or later that’s conventional thinking.
Mike:
My wife says that I am not gonna be able to retire. She is going to make me work forever. Cuz she said, if I have to deal with you being home all day, you’re gonna drive me crazy. That’s what she says to me.
Zach:
Thanks Becky.
Mike:
So you guys gotta put up with me for a while. And what was that other? There’s another statistic. Something about how like the average, what was it? The average number of people who retire each year’s like a million people.
Zach:
Yeah. From like from 08 to 2019, everybody over the age of 55, it’s growing by about a million a year. The people retire people retiring.
Mike:
Okay. So between 2009 or 2008?
Zach:
Yeah, 2008 and 2019,
Mike:
2008 to 2019. That group, people over the age of 55, about a million of them would retire each year. That’s what it was. And then COVID hit.
Zach:
The last two years instead of a million per year, 3.5 million.
Mike:
Wow. So three and a half times the number of people that normally retire are retiring. In that age group. All these people are retiring. Are they making the right decisions here financially? You know, what’s your favorite phrase again?
Zach:
An investment plan’s not a retirement plan.
Mike:
An investment plan is not a retirement plan. And you know, I, I wanna share this story. Let’s call ’em Bob and Susie. Not their real names.
Zach:
Names changed to protect the innocent.
Mike:
To protect. Yes. The names have changed to protect the innocent. Thank you Jack. I think Jack Webb would say that and- you don’t even know who that is, right?
Zach:
No, no idea.
Mike:
Anyway, this couple they were listening to the radio show, kinda like what you’re doing right now. And I don’t know what we were talking about the day they were listening, but they, I know they had called in cuz they said, man, we, we need a second opinion.
Mike:
You know, something we said resonated with them and they said, you know, we just need a second opinion. So they came in and I actually talked to them you know, and in our office we have, you know, gosh, we have a whole team of people that help that help all of our radio listeners that call in that, you know that, and that’s fine. Right. But I, for whatever reason, and I happened to draw the straw and they talked to me and they actually said, they said, that’s what they said to me. They said, Mike, you know, I said, the first thing I always ask, you know, how can I be helpful? What, what brings you in to talk to me today? I said, you know, Mike, we were listening to you guys on the radio. And I, they couldn’t even remember Zach.
Mike:
We were talking about. All they remembered was they said, you know, we just, I, I don’t remember what you’re talking about. We just felt like we needed a second opinion. And you know, like they said, they said, you know, you can’t get a second opinion from the person that gave you the first opinion. Right? So in any event, they, they said we were getting ready to retire. We, we want retire here. At the end of the year, they were part of this over 55 group. And they just wanted to make sure that they had all their planning ducks in a row. They wanted to make sure they’re dotting their I’s, crossing their Ts, that they hadn’t missed anything. And when we sat down with them, I said, well, tell me, you know, what’s going on now? Well, they had this advisor that they’re working with for the past, like 15 plus years, really good person, a good guy.
Mike:
They liked him a lot. He worked at one of these big firms, you know, you see him all over the place. And I said, okay, well tell me a little bit about what he’s recommending for you with your retirement. I’m sure you’ve told him you’re retiring. What what’s he recommending?
Zach:
Yeah. What’s the plan.
Mike:
What’s the plan. And they said, well, that kind is what brings us in here because you know, he, when we visit with him, you know, that, the way it works is, you know, he shares like here’s our investment portfolio. Here’s how we’re doing. Yeah.
Zach:
Here’s your returns. Here’s your numbers, right?
Mike:
Here’s your numbers. Here’s how you’re doing. Here’s how you’re earning. Like, Hey, we’re earning a lot of money. Right. That’s great. But the question then we asked him, well like, well, we’re getting ready to retire.
Mike:
How are we gonna generate income? And his comment to us, this is what they said. So this was a quote, the quote was his comment was, and oh my gosh. I said, it’s a quote. Now I may, if I don’t get the words exactly. Right. I’m probably falling into some kind of compliance quagmire. So essentially what they said, let’s not say quote, essentially what they said was I said, well, he says, don’t worry about it. You’re good. I’m like, what do you mean? You’re good? He said, well, I that’s what we said, like, we’re good. He said, you’ve got enough money. You don’t have to worry about anything. We’re just gonna take, you know, we’re just gonna scrape off your income. It’s not a big deal. And that’s about where he left it. And so then I, I said, well, okay, what about. Okay, income.
Mike:
Okay. What about your social security? Did he give you some ideas of when you should take that? No, not really. Okay. What about your taxes? You know, did he talk about how you’re gonna manage, like in this case? I mean, these people had over a million dollars in IRAs. How you gonna manage all the taxes that you’re gonna have to pay on those IRAs, you know? Should you be doing Roth conversions or not right now? What, what was his thought? Did he give you some thoughts on that?
Zach:
No, they, they don’t do taxes.
Mike:
Again that wasn’t, yeah, we don’t really know. And that’s and they said, that’s why we’re here. We don’t like, we’re not getting these answers. I okay. What about, what about some of the risks out there? Like, you know, what, if the market earns nothing for the next 10 years, are you still gonna be okay?
Mike:
What if inflation goes crazy? What if you, you know, we wanna live a long time. What if you die? One of you die too soon. Yeah. Will the surviving spouse be okay? What about if you need long term care, you get sick a along the way are you, is, is the surviving spouse gonna be okay? What about all these things? Their response was Mike, that’s why we’re here. All he talks about is investing. And we’re starting to realize we’re suspecting that there’s more to retirement just how we invest money. And we really want a second opinion here to see if, you know, are we really doing the right thing? Do we need to change advisors? You know, what, what should we really be doing here? We said, there are three things we gotta get. Right. And if you think about it, it’s your money, your taxes and your risk.
Mike:
You gotta get your money. Right. Which means, yes, you have to have an investment plan obviously, but you also have to have an income plan. When are you gonna take social security? If you have a pension, when are you gonna take your pension? Should you take the lump sum benefit if it’s available or should you take the traditional payment plan? You know, what about, do you have to, for comp, do you have rental income? Do, are you gonna work? Part-Time are you gonna have like a consulting business? You know, a lot of different factors come into play as to when you know how you gonna structure your income. Because when you retire you’re you need to replace your paycheck. You need a paycheck replacement plan, right. Is how I like to say it. Yep. So you gotta get your money, right? Investing and income. What else do you have to get?
Mike:
Right taxes? You know, this couple that came in the office, they had over a million dollars in their retirement plans, their 401ks and their IRAs. That’s gonna generate a lot of taxes. The IRS is gonna want an increasingly large share of that over time. So, you know, what is your plan? You, you, you’re probably not too different from them. You probably have a lot of money in your 401k, your IRAs, or four, three B. What’s your plan. How you gonna keep more of that money in your pocket versus, you know, giving it to the IRS. And then of course, risk management. I think of three things with risk management. One is what if the market goes sideways for several years? Two. What if inflation goes crazy? We’ve seen that lately. Yep. And three. What about your health? We all wanna live a long, happy, healthy life, but <affirmative> what if you get sick along the way?
Mike:
What if you die too soon is your surviving spouse. If you’re married that you lead behind, will that person be in good shape? So these are the things that we need to think about. So let’s dive into the first one, which is income. So here, we’ve got this couple coming in and let’s say they had an even million dollars. They add more, a little bit more in that, but let’s say it was even million dollars. Yeah. Just keep it simple. Yep. Yep. And, and as you’re listening, you might have more than that. You might have less than that. And that’s okay. Just listen to the concept here. So as we went through their, our conversation, they said, you know, they needed the, the classic 4%, right. 4%. They wanted that portfolio to generate 40,000 a year. Okay. And I said, okay, great. Million dollars. You want 40,000 a year.
Mike:
Well, how much does your portfolio generate for income? Now? Guess what? Their answer was like $12,000. Sure. They had no idea. They had no idea they had, we don’t know. Yeah. Yeah. And guess what? Most people don’t know. Yeah. Right. So he said, all right, well let’s, let’s figure it out. So they had their statements with ’em and we put it in our, our system, like our, our analysis system. And it told us, oh, look on your million dollars, you are getting 15,000 a year of income. And how much did they want? They want for 40, they want 40,000. So they’re thinking, oh, we’re a little short. You want 40? I got 15. But it was worse than that because their advisor did, did their advisor work for free? Oh, absolutely not. No. Their advisor was charging them an annual fee, a fee that was pretty standard kind of across the industry.
Mike:
They were charging them 1%. What’s 1% of a million dollars. Well, that’s a pretty good chunk of that portfolio. $10,000. Right. So the portfolio was generating 15,000. So let’s go back to where we were. Let’s start at the beginning. Yeah. They wanted, how much did they want, what was the goal? 40,000, $40,000 of income. But their portfolio, like a lot of portfolios today, cuz interest rates are low, was only generating 15. So they want 40, they’re getting 15, but the 15 that they’re getting an income, 10,000 of that’s going where? To the advisor to the advisor. So what do they have left? Five, five is even bigger gap now, 5,000. So they’re short $35,000. So I asked them, I said, okay. And, and I, I kind of know the answer because they didn’t even know how much report for those generating for income. But I said, look, how do you think your advisor is going to generate the other 35,000?
Mike:
I mean, they’re not getting income and dividends, interest and dividends. So how where’s the other 35,000 gonna come from? How they gonna get that? What does that other advisor have to do to get the other 35,000? You gotta start selling shares. Yeah. Gotta sell shares. Now if the market is up, is that a problem? No, that’s great. No worries at all because yeah, cuz what do we wanna do? We wanna, we buy low, but when do we sell? We sell, sell high. Yeah. Sell high. What if we’re in a bad market environment? Well, that’s a BL because then we would have to sell what low. We don’t wanna sell low. That that’s what, that’s how we run outta money. So this is kinda like this little example. Let’s imagine that there are million dollars. So they had a million dollar portfolio. Let’s imagine it was comprised of a hundred apartments that were each worth 10,000 each.
Mike:
Okay. So a hundred apartments, 10,000 each that’s a million dollars. Okay. And their apartment complex, you know, that complex a hundred unit complex. It generates rental income of what’d we say $15,000. Yeah. Right. U right for the year. Yeah. But they gotta pay a management company. $10,000. So their net income’s like $5,000. Mm-Hmm <affirmative> and by the way, anyone who’s in the real estate industry would say that’s a crummy deal. Right, right. You got a million dollars of property and you’re netting 5,000. You are a crummy real estate owner. All the real estate people are picking up the food right now. Yeah. Like you guys are idiots. Right. But that’s kinda what it’s like. So if that were you, you own a hundred rental units each, you know, and, and you get 5,000 net, but you need 40. How do you make up the 35,000?
Mike:
You have to do what? Gotta sell the apartments. You gotta start selling apartments. Yeah. You start with a hundred. You gotta sell like three or four apartments. Well, now you’re down to 96. Mm-Hmm <affirmative> what happens next year. Gotta sell a few more. Yeah. Because next year, guess what? Your rents, hopefully they’re going up. Yeah. But if they’re not now we gotta, our gap is bigger. We gotta sell more. And next year we gotta sell more. We gotta sell more. We got some more, what happens is eventually we run outta money. So one of the big challenges you talk about this, an investment plan is not, it’s not a retirement plan. Okay. The big challenge that this couple Bob and Susie had was this. They had no income plan. They had no way to, they, they had no clear way to get the 40,000 a year from their million dollars that they wanted.
Mike:
Other than let’s just hope the market goes up every year and we’ll sell shares. Yep. Right. That’s not a plan. That’s hope. Okay. Hope is not a plan. A plan is we’re going to structure the portfolio in such a way that you get that 40,000 every year, no matter what the market does, it shouldn’t matter what the market does. It should not matter. And there are ways to do that. But this couple, there were no conversations there. So what about you? You know, what about you? Are you looking to retire soon? How are you gonna generate income from your portfolio? Is your advisor laid out for you a clear path to generating that income? No matter what the market does, good or bad, they got over a million in there, 401k. And so one of, of the things that we did in our software planning, it helps us map out in a very clear way.
Mike:
You know, here’s how long your money’s gonna last at certain, at different rates of return. But also here’s what your tax obligations are likely going to look like in the future. So this is an area that I think very few financial advisors spend time on. Cuz of course they don’t get paid to do it so they don’t care. Right. But I believe I’ve learned over the years, it is really important to know the tax path that you’re currently on. It’s really important to have that mapped out. So, you know, every advisor out there, they say, oh look, your money’s gonna last. Yeah, yeah, yeah. Yay. But what they ignore a lot of times is they don’t show you here are the taxes that you’re projected to pay year in and year out over your retirement time horizon. And then you add it all up a like, what does that look like?
Mike:
You know? So in any event with Bob and Susie, that’s what we did. I showed them. I said, look, if you retire next year and they wanted like, I think it was 85,000 of income AF after taxes, about 7,000 a month. Yeah. You know, they had everything paid for, they had, they had no mortgage in their home, no car loans. Like they owed nothing. So, and they, they, they kinda lived a, a normal life in between their biggest bill I think, was their property tax and their insurance. But outside of that, it’s like, yeah, we’re we really don’t spend a lot. Right. So they wanted 7,000 a month. And so 85,000, what they wanted is we kind of went through it. We said, okay, what does the tax bill look like for you in the first year? And it was like, you know, $6,000 or something as I recall, not a big deal.
Mike:
Yeah. And I said, okay, so let’s let me ask you the you’ve got 85,000 that you can spend. Right. You’re gonna have to give 6,000 to the IRS. That means you really gotta bring in whatever that is. 94,000 or 90, 90, 90 1000. Sorry, my math is off. You gotta bring in 91,006,000 goes to the IRS, 85,000 goes to you. How do you feel about that? Do you have a tax problem? No, not right now. I don’t think so. They, don’t not early on. I mean, gosh, what is that like six or 7% tax rates effective. Yeah. They have no tax problem then. And then we went down the road. We said, well, what about when you’re 70? What do your taxes look like now? And you know, they needed more income because of inflation. And again, though, their tax bracket was still about eight or 9% effective.
Mike:
So again, no big deal. Yep. But then a magic thing happened two years later when they were 72, we said, well, what happens when you’re 72, something magic happened in that year? Ooh. The required minimum distribution year. Yes. Suddenly they’re forced to take required distributions. And in their case, you know, that million dollars had been sitting there mm-hmm <affirmative> and had been growing. Cause they had other money outside of that. Right. Mm-hmm <affirmative> that million has been just sitting there growing for several years. And now they’re required of distribution was like 60, 70 grand the first year, 60 to 70,000 of money that they did not need at that point. But it doesn’t matter. They gotta pull it out and they ha and then pull it out. Guess what? They gotta pay, gotta pay the tax. They get paid tax on it. But here’s the thing.
Mike:
It’s not just tax on the money. They pulled it out. They also have to pay more tax on their social security. They gotta pay more tax on their capital gains. They gotta pay more tax on everything else. So they get double whammied. And that’s when their tax liability suddenly jumped to a rate of CLO a net rate from, they were at like maybe 8% mm-hmm <affirmative> at like double to like 16. Do they have a tax problem now starting to kind of, you know, get up on one to look at one. Right? Yeah. And so we fast forward. What about when you’re 75? What about when you’re 80? What about when you’re 85? You know, we just start forwarding saying, look, this is the road you’re on. This is where you’re going. Like in this couple’s case, by the time they were 85, you know, they’re paying like $32,000 of tax.
Mike:
And remember they started out just saying, we just want 85,000 to live on. Now they’re paying 32,000 of tax. And then the husband dies at 85 leaving the surviving spouse as a single tax payer. And what would her tax bill look like gonna be even higher? Yeah. It was like 40 grand. And it’s like, we start out in retirement and we’re like, yeah, our tax is not big tax problem, but the further we go, the worse it gets and the worse it gets and the worse it gets and the worse it gets, it just gets worse and worse and worse. The IRS just wants more and more and more and it gets, and that all assumes that tax rates do not go up, which is a very silly assumption. Right. So the question I asked was, have you ever seen anything like this? It shows you where you’re going from a tax perspective.
Mike:
Like this is a tax road you’re on. Has anyone showed that to you? Like ever? And their response was no, this is the first time we’ve ever seen something like this. And they had worked with a financial advisor for the last 15 plus years and oh, by the way, they also had a CPA who did their taxes. He’d been doing their taxes. I’m sorry. She rather had been doing their taxes for the past 10 plus years. And neither one of them have, have ever bothered to show this couple, that information. I said, how do we feel about that? They said, well, early on, it’s good. But we don’t like where this is going. I said, guess what? I don’t like it either. Would it make sense to maybe look at doing some tax planning today that could avoid all these taxes later on? Well, what do you mean?
Mike:
Well, what if we did some Roth conversions today to avoid a bunch of tax later on? Well, gosh, Mike, what might that look like? And so I just using our system, I just plugged in some different ideas and we learned really quickly that even we didn’t even have to do these huge Roth conversions, right. Even just a series of smaller Roth conversions, you know? Yeah. They had to pay a little bit more tax today, but oh my goodness, it saved so much tax later on, instead of the surviving spouse paying 40,000 of tax, she was paying like 3000, right. Instead of paying 32 or $33,000 of tax, when they’re in their eighties, they’re paying maybe 2,500. It’s a big change. I mean, it’s just huge what the changes can be, but you can only make those changes. If you first know where you are now, how can you fix a problem that you don’t know you have because here’s the, you can make all the right choices with your money.
Mike:
You can make all the right choices with your taxes, but there are some things that can happen out there in the world that can throw you for a loop that you don’t control the unexpected. So you need to think about how are you going to structure your planning to protect you for of that. They might be market related. They might be inflation related or economy related, or they might be healthcare related. So I went to this couple, I said, okay, based on what we’re seeing, Bob Suzy, based on what we’re seeing here, based on what we’re seeing here, as long as you can get you know, a 5% return, I guess I think we wanted to assume conservatively, you get a 5% return. Your money should last for your lifetime. Now let’s take a look at some different risks out there to see if it could cause some problems.
Mike:
So over the last, you know, from 2000, 2009, that was a 10 year period. The stock market earned essentially nothing. In fact, it lost money over a 10 year period from 1970 to 1979, same thing, the market based was flat over a 10 year period. The market does that from time to time, you will have, you know, over time we know it goes up, up, up, right. But there are periods where it kind of takes a rest. You know, it’s kind of like a race car, you know, you can’t sit there and go whipping around the track. Yeah. Forever. You gotta take pit stops. And the market’s take 10 year pit stops from time to time. So the first question in our software helps show them this. We said, Bob, Susie, your money should last you a hundred. But what if, what if the market decides it’s time to pull over and take a pit stop for the next 10 years and just kind of be flat for the next 10 years?
Mike:
How would that have fact the ability of your money to last given how you’re structured today? And we learned uhoh, they would run outta money when they’re 87 years old. And by the way, Bob’s like, oh, it’s not a problem for me. Cause I, I figure I’ll be dead by then. But Susie here, you know, her mom is and still kicking. So that’s probably a problem for her. Yeah. Right. I said, are you okay with that? No, we are not okay with that. <Laugh> right. Okay. That’s something we need to maybe work on. How about this risk? What about the economy? What if you know, inflation has been nothing or the past 30 years, right? What if inflation suddenly starts going crazy again? Like it has recently. What if inflation instead of being two or 3% is suddenly four or 5%. Plug that in the system.
Mike:
Oh boy. Guess what? Now money’s running out at age 85. Well, what if you get both the market goes to the, you know, goes sideways for several years and you have inflation. Well now their money’s running out when they’re like 82 and they’re starting to freak out a little bit. Yeah. And do we control what the market does? Nope. Do we control what inflation does? Nope. Well, we think we’re gonna live a long, healthy life. Bob, what if you die early? Because it would never be politically, politically correct to pick on Susie dying early. Right. Can never do that. We’ll pick on Bob. Yeah. It’s more. And, and you know us men, sorry to all Bob’s out there. Sorry to Bob’s. Yeah. <Laugh> yeah. Bob, what if you die early Suzi gonna be okay. What if you don’t die, but instead you get sick and you need some kind of long-term care for a few years.
Mike:
Will Suzie be okay again, both scenarios. No, Susie is not okay. And then you start stacking em together. Well, what if the market goes side sideways and we get inflation and you get sick along the way, or somebody dies along, you know, you start stacking these together. It’s like, guess what? Congratulations, your money’s gonna last age 100. Your retirement’s all set. As long as all this other stuff doesn’t happen. As long as the world turns in a perfect rotate for the of your life. But if something wrong happens, Bob, Susie, you’re in trouble. What’s your current advisor telling you to do here? I don’t know. Current advisor never even talked to him about it. Yeah. Right. They never even talked to ’em about it. See, here’s the deal. What do we say? An investment plan is a retirement plan. And if you don’t, if you can’t tell that crystal clear by right now, it’s like, look, you gotta deal with income planning.
Mike:
You gotta deal with tax planning. You have to deal with these different risks out there. How do you address those risks? Now? The good news is, you know, by the way, can I sit here and guarantee Bob and Susie, they’re gonna be set for the rest, their lives. I can’t do that because I don’t control all these unknowns. Can I help them plan though, to mitigate the effects of those risks happening that we can do? Yep. But you can only do it if you first do what, talk about it, explore it, analyze it. The challenge is very few financial advisors do that. So here we are. We’re coming up to the end of the show, right? And here’s the deal. We have a special offer this week, first 10 callers. We’re going to absolutely free give you a second opinion. Just like I did for Bob and Susie.
Mike:
I can do, you know, we’ll do for you. It’s a busy time of year, but we said, what the heck? Let’s carve out 10 spots and you know, it’s free. It’s no obligation, right? What we’ll do you call in? We will give you absolutely for free a complete 360 degree, a second opinion on your planning. You can’t get a second opinion from the person that gave you the first. Why not get a second opinion from someone who has done this for 20 plus years, that is really focused on this time of life. When you are getting ready to retire. When you get into retirement, if you’re, if you’re recently retired, if you’re retiring soon, this is for you and it’s free. But here’s the deal. We started with 10 spots. How many do we have left? Zach? There’s like two left. We got like two left.
Mike:
So here’s what I’m gonna do. You gotta call now. And you know what, Zach, I don’t know how I’m gonna do this. I’m this gonna be your problem? Not my problem. I’m gonna be nice enough. I’ll even open up one more. So we’ll say you got three spots left. First three colors. They’re yours, but the deal is now, listen. Here’s the deal. You have to have saved at least 500,000 for your retirement. So as long as you saved at least 500,000, you want to call now there’s only three spots left. Let’s make sure you get your retirement planning ducks in a row. Zach, what’s the number to call it’s after hours you get our answering service. They’ll set you up with a phone call with either myself or the team. What’s the phone number? Mike? It’s
Zach:
Easy. It’s 5 1 2 8, 8, 6 58 50. Again, one last time tonight. It’s 1, 2 8, 8, 6 58 50.
Mike:
All right, gang. You heard the number (512) 886-5850. Call it. Now let’s get your retirement planning ducks in a row. You will be glad you did. And if you miss out, well, you’re not gonna be happy. You missed out. So just call now. All right. That’s our show. See you next week.
