What is Retirement Risk?


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Transcript

Mike:

Here’s what nobody talks about. And this article does such a great job. This article really, it focuses in on how sensitive your planning is in the first 10 years of your retirement. So the first 10 years are hugely in important and what this article says it talks about and they do all the math, right? And they say, if there is a market drop of 20% or more at any point during the first 10 years of your retirement, if you’re plan, if you just have like a diversified portfolio are up the Creek with no paddle,

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 he spent the last 25 plus years helping develop plans to get families into and through retirement. This is retirement today, but before we get started on today’s program, Mike, tell me how you are this evening

Mike:

As always doing fantastic. I mean, I live in Austin, Texas. How’s that? Not a that’s how’s that? Not a good

Zach:

Thing. I know. There’s no reason to not be happy living here. It’s awesome.

Mike:

Except for traffic sometimes. Yeah.

Zach:

And the real estate prices

Mike:

That’s, they’ve been good to at me.

Zach:

Yeah. Yeah, definitely. Well, I’m excited for the show today. I think we have a great topic that we’re gonna discuss that our listeners are really gonna take a lot out of. We’re gonna be talking about retirement income planning and some of the risk associated with it.

Mike:

Yeah, that’s right. And you know, we’ve got this great article that came out and, you know, titled planning for retirement income within an increasing volatile and uncertain world.

Zach:

That’s scary. Yeah.

Mike:

Yeah. It’s up. The problem is, you know, this is written by of course, some kind of a, I don’t know, academic person. So there’s about, I don’t know a hundred percent or 150% more words than needed. Yes.

Zach:

It is very article wordy, but you know what? We’ve taken away, so, and good points from it.

Mike:

Yeah. You know, what’s kind of interesting. I do wanna read this sure. And this is by the way, this, for all of you listening out there in radio land, this is the kind of stuff we have to read through just so that we can share with you what’s really happening. So here’s what this says. Retirement income planning is one of the most highly personal complex and least understood financial journeys individuals face today. And they goes more Americans enter retirement without the protection of a defined benefit pension plan the potential ramifications of inadequate income plan. It become even more immediate and they talk about, Hey, you’ve got these questions. How long are you gonna live? How healthy are you gonna be? And what a about inflation? What about taxes? There’s a lot of moving parts. And essentially what they’re talking about in this articles are saying this, they’re saying, Hey, everybody, it used to be, when you retired, you had social security and a pension and your personal savings, the three-legged stool. So again, leg number one, social security leg, number two, pension leg, number three, personal savings. Two of those leg, Zack are lifetime income streams. Yep. Right? Guaranteed stream of lifetime income. You cannot outlive them. It’s always gonna be there. One of those streams, personal savings, ah, you know, it’s kind of for extra stuff. Sure. But what they’re saying is today there’s a ton of people. I think the article references something like 80% of people do not have pensions.

Zach:

Yeah. It seems pretty accurate. Maybe even more.

Mike:

Yeah. So all they have is social security and retirement savings. Right. And they gotta make it work. Yep. And what’s really important in this article is, I mean, this article destroys what the financial industry, as a whole tells you, you should do it, destroys it. Because think about this. If you go to an investment advisor today, if you go there and you ask them, how do I structure my portfolio for retirement?

Zach:

Oh, I think I know the answer to this one. What

Mike:

Do you think? They’re gonna say,

Zach:

They’re gonna give you a nice colorful pie chart. They’re gonna diversify between stocks and bonds, throwing some international in there. You know, it’s gonna look so pretty and great and perfect.

Mike:

That’s right. They they’re going to give you the balanced portfolio. Right. They’re going to tell you, you just need to invest in a balanced, diversified portfolio and it’s all gonna be fine. Yep. Right yet. Here’s what this article tells. And this article’s it’s, it’s done by people. They don’t have a dog in the fight, right. This is actually done by let’s see. It was by Colin divine, who’s an education fellow at the Alliance for lifetime income and Ken Mongan chairman of Milliman. Milliman’s nothing more than a think tank. I mean, they’re just crunching numbers. They’re a bunch of actuaries. You know, they are, by the way, you know what an actuary is?

Zach:

I need the definition.

Mike:

It’s an accountant without a sense of humor.

Speaker 3:

Da da, da, da.

Mike:

Yeah, me and my, me and my jokes. But here’s what they tell you. They say, if you do this balanced portfolio and you wanna say, take 4% income, right? That’s classic. You got a million dollars. You wanna take a out 40,000 a year, you got 500,000 take out 20,000, whatever it is they say, as long as everything goes really, really well, you still got a 20% chance that you’re gonna run outta money.

Zach:

And that’s, if everything goes really well.

Mike:

Yeah. In here, check this out. They say, if you get one, just one market correction, 20%, just one in the next 10 years or the first 10 years of your retirement, by the way, probability on that is extraordinarily high. Check this out. Now you’ve got a 43% chance you’re gonna run outta money. I

Zach:

Don’t like that number.

Mike:

That’s not good. No. And what if you want 5% income, same 60, 40 portfolio, five per if you want 5% income and everything goes well, 44.6% chance you run outta money. And if you have 20% drop, you have a 70% chance you’re gonna run outta money. Essentially. What are they saying? They saying this idea of the classic diversified, balanced portfolio. The idea that that’s gonna serve you well in retirement, not only is that wrong, that’s just really,

Speaker 4:

Really, really

Mike:

Wrong. And I could have told ’em that because I experienced that with my own parents, right? Over 20 years ago, right? Over 20 years ago, when my parents retired, they retired in the late nineties. And at the time, what did the industry teach us? Use a balanced, diversified portfolio. That’s what they taught us. And what happened was I, so I did that for my parents and I did it perfectly well. And by the end of 2002, which was, you know, 2000, 2000, 2002 was a three year period where the stock market lost about half by the end of 2002, half of their money was gone and they were diversified. But you a diversified portfolio with distributions in a market. That’s going down. You know what? You have chaos. Yep. It just doesn’t work. That’s what this article says. It’s like these balance portfolios are great. If you’re trying to grow money, but to be a solution for retirement planning, once you’re retired, it’s like, that’s a loser. And what, what makes me so angry? This is why, as you’re listening to us, you wonder like, why do you do what you do? It’s right here. It’s this article is why we do what we do. Because the financial industries, they know here’s a part. They know it doesn’t work. That’s what drives me create. They know that a balanced portfolio is very likely to fail you during your retirement and they don’t care.

Zach:

Right. Cause you mentioned it failed when your parents retired 25 years ago, they’re doing the same thing now.

Mike:

Yeah. And it failed in 2008 as well. Yeah. So they know it’s gonna fail. When the market goes south, they don’t care. They don’t care. Just keep your money invested so they can make their fees. And they’re happy. I, that just offends me. I am a big believer that you deserve to enjoy the retirement of your dreams. You work your whole fricking life to save money. You deserve to enjoy the fruits of your labor, but a balanced poor portfolio. Isn’t gonna cut it. You need to have a more sophisticated strategy to help you manage your money wisely, to get you through retirement. Right? You need a plan to get you to retirement, but you need also a plan to get you through retirement. What gets you to retirement is not the same thing that gets you through retirement. There’s four things that this article points out. I think. Yeah. Four things. Yep. I think they missed one. I think they

Zach:

Missed one. So there might be five.

Mike:

There might be five. Okay. But the article talks about that. We’ve been rough referencing here today. Talks about four different risks. And when you think about ’em, they all make such perfect sense. And the first one Zach is longevity.

Zach:

Yeah. And this one kind of hits home with me. I mean, my great grandma lived to one oh two hundred and two.

Mike:

Yeah. But I’ve, I’ve seen how you take care of yourself. I don’t know that you’re gonna make it

Zach:

All right. Maybe I’ll make it to 95.

Mike:

But here’s the question. You know, one of the things they talk about in this article and it’s very, very true when it comes to retirement planning. Here’s there’s good news and bad news. The good news is we’re all living longer, right? Longevity. We don’t know how we’re gonna live, but we do know that we’re living longer. What’s the bad news we’re living longer. Which means our money has to last longer. It’s a bigger

Zach:

Job. Now this is gonna blow you away. They’ve got some stats in here that are gonna blow your mind. Okay. I gotta hear it. Let’s a married couple, one out of every three. One of them is gonna live past age 90.

Mike:

What? 90 I’m. Okay. I see married couple. That’s his 50% chance.

Zach:

So about a third of all 65 year olds today will live past age 90. Is

Mike:

That what they say? Yeah. One, there it is

Zach:

One in seven making it to 95.

Mike:

Well, okay, so you saw yeah. By the way, for all of you out there in Radioland Zack and at the same article, he’s reading the text and I’m looking at the picture. Cause I like pictures. I’m visual learner.

Zach:

It’s very colorful too. It is.

Mike:

Yeah. So they do, they break that down I think is what they do in the picture. Yeah. Cause they say one out of three will make it to age 90. Yes. Or about a third. Yeah. But then they say, what if you’re married? Yep. Right. If you’re married, if you’re married, there’s a 50% chance that at least one of you will make it to 91. There’s a 25% chance that at least one of you might be both make it to 96.

Zach:

So if you retire in your 60, you might have to structure income to last 30 to 35 years.

Mike:

Exactly. I can’t tell you how many families we talked to today. We’ve we saw a study Zach in a previous show where they said that the average age that people are wanting to retire is 62. Remember that? Yep. So if, imagine that you retired 62 and you lived to 92, that’s 30 years. That’s a long time. Your money’s gotta last. Yep. 30 years where, I mean, we don’t know how long we’re gonna live, but what else can happen during those 30 years? That brings up some other of the four risks that this article talks about. What’s the next one?

Zach:

It’s health.

Mike:

Yeah. If you live until your 92, is your health what’s gonna happen? Is it gonna get better or worse over that time?

Zach:

Well ID, well, not ideally, but it’s gonna probably get worse.

Mike:

Well, good news is at first, early in retirement, maybe you got a chance to work out. And we had a event the other night and this gal showed up. I think she was like 63 years old or something, but she was wearing this CrossFit jacket. Yeah. Oh my gosh. She was in such great shape.

Zach:

She would beat us up bro. She

Mike:

Would, oh, she could just, she could beat me up with two hands tied behind her back. She was in great shape. I was so proud of her. The point is, you know, during the early years of retirement, certainly you can spend some time with your health and your physical fitness, but you know, you get in your late eighties, nineties, your health goes downhill. And the question is what’s that gonna cost you? That’s a big unknown, isn’t it? Yep. So it’s okay. So we great. We’re living a long time, but towards the end stages of our lives, maybe our life, you know, quality of life, isn’t what it used to be. And this is where we have to bring in some people to help out. So you know, I think about my, my own my wife’s parents, right? His, her dad, Harry, who is like a Saint of a man he’s still alive. Her mom passed away a couple years ago. Her mom had Alzheimer’s for the last five years of her life. And you know, Harry did everything he could to take care of her. But at some point, you know, you gotta bring people in to help out. Sure. And that cost money. It’s

Zach:

Not cheap.

Mike:

They were very fortunate because they were able to stay at home the whole time. And they were able to pay for people to come in and help. But not everybody can do that. Right. Some people have to go to an assisted living facility to a nursing home. What’s that gonna cost? So we don’t know how long we’re gonna live. We don’t know what we’re gonna pay for healthcare. By the way. I think I saw some where that the average price, if you are 65 years old, that you know, fidelity does a study every year, they said that you’re likely gonna spend right around 390,000 on healthcare total. Wow. Over your expected lifetime. Most of that towards the end, by the way, that assumes no long term care. Right? Add, add in long term care on top of that, you got what they call real money, right? So we’ve got longevity. We don’t know is a risk health. We don’t know what’s the next, next one,

Zach:

The market volatility. And you touched on that a little bit in the last segment.

Mike:

Here’s what nobody talks about. And this article does such a great job. This article really, it focuses in on how sensitive your planning is in the first 10 years of your retirement. So the first 10 years are hugely important. And what this article says, it talks about and they do all the math, right? And they say, if there is a market drop of 20% or more at any point during the first 10 years of your retirement, if you’re plan, if you just have like a diversified portfolio, you are up the, with no paddle, you are in trouble. And by the way, think about that. Do you know how often 20% drops have happened in the markets? Historically, usually they come about once every five or six years. It’s been a while since we’ve had a 20% drop, right. It’s been, I mean, really it’s been 2008 since we’ve had a major and you could say, oh no, wait, Mike, what about, you know the, the coronavirus March of 2020, the market was down 30% in a month.

Mike:

Yeah. And it’s snapped right back. That’s not what they’re talking about. They’re talking about a bear market and they’re talking about recessions. It happened in the economy that knock you backwards. 20, 30, 40%. And all has to be is one time, one year markets down for one year, 20% or more in the next, in the first 10 years of retirement. And you are just hugely in trouble. It’s not good. What are the odds of that happening? I high very, that’s a, that’s an enormous risk. And then we’ve got our fourth risk that they bring up. What’s that inflation.

Zach:

And that’s a hot topic right

Mike:

Now. It sure is what hap what’s inflation gonna be. We don’t know, but good news, Zach social security, I hear increases their payout with inflation. Really. It’s amazing that they do that. They never increase it as much as inflation. Yeah. Here’s the fun part though. Magically your Medicare premium increases as well and usually an amount pretty close to the increase that you got in your social security checks. So it’s fun break even. Right? So, but here’s the thing. When it comes to your retirement income planning, you gotta think about what are those risks? Number one, how long are you gonna live? What’s your health gonna be? What about market volatility? And what about inflation? By the way, there’s a fifth one. I’ll talk about in another segment, but question, do you have a plan to address all of those odds? Are you don’t if your plan is, oh, I’m just diversified portfolio, which is what most people have.

Mike:

Guess what? That doesn’t cut it. This article says you will likely fail. If that’s your plan. This is so important. This is an area that we specialize in in our office. Look, I’ve helped people with their retirement plan for 25 plus years. We know how to plan for retirement. I, we know how to set up your portfolio in a strategic way. So you could protect yourself against each one of these risk factors. You deserve to enjoy the fruits of your labor. You deserve to enjoy a great retirement. Don’t let poor planning, mess it up. Even if you have an advisor right now, why not double check where you’re at, what harm is there? Why not get a double check to make sure you’re doing the right things? That, what number are we calling?

Zach:

Mike? They’re gonna call 5 1, 2 8, 8, 6 58 50. Again, that number’s 5 1, 2 8, 8, 6 58 50.

Mike:

And we’re up against a break, right? So we will good to talk about that fifth risk. That’s not in the article and we’ll see again next week.

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