WEDNESDAY, FEBRUARY 28, 2018
JIM: Welcome to today’s program. I am proud to have back with us Tim Kiesling who is a national speaker who really travels around the country helping advisors and teaching advisors different strategies and many different topics. One of the topics that is really key today especially with 10,000 Baby Boomers a day retiring is talking about retirement risks. If you’ve not sit down with your advisor and dealt with these risks or discussed these, it doesn’t mean necessarily that you have a solution to all of them, but if you understand what the risks are and determine whether or not you’re feeling comfortable going it the way you are currently at and how you have things positioned and what types of insurance and other things that you have or if there are some weaknesses in your plan that might need to be addressed, we’ll help expose some of those areas that you may not have thought about that might be worth taking a look at. Welcome, Tim.
TIM: Thanks Jim, it’s great to be with you again. I would agree. I think the challenge here is that there are a number of risks out there and I just want to encourage everyone to have a plan to best address those risks as they see fit. During our time together today, let’s just see if we can talk about some of these things today that these retirees are facing and hopefully we can stir some interest and get some people that maybe weren’t thinking about some of these risks and how they might address them within their retirement plan.
JIM: All right, let’s talk about the things that really affect their purchasing power, their income and just having a retirement. In the old days, retirement was kind of a new term where people felt if they just made it to 65, maybe they’d live six months or a year or two and that was retirement. They just relaxed and let their bodies heal after being beaten up in the mines or the farm fields or whatever. Life is a lot different today. We have better medical technology. The work that people do, the hard labor, a lot of that hard labor has been replaced by machines and people are living sometimes 30 or 40 years in retirement. Now you couple that with the fact that pensions for the most part are a thing of the past. Most corporations have replaced pension plans with 401(k)s. We’ve seen in the public sector, reductions or changes in the way pension plans are being administered. It really looks like pensions are maybe going the way of the dinosaurs. Then we have social security which is our federal pension plan for all citizens and we hear about the problems with that with the lack of funding, that there is not any money in the system. If we don’t have those things to rely on, what are some of the other things we need to take into consideration especially if we are having more of the burden placed on ourselves and our own ability to save. Let’s talk about those risks, Tim.
TIM: You’re right. It sounds like there is a lot of risk there and we certainly don’t want to be doom and gloom, but there are a number of challenges that are out there right now. I think the one that you hit the nail on the head is longevity as we’re living longer and longer, all these other risks become more and more applicable. Right now, statistics say if we have a husband and wife that are both 65, there’s a 50% chance one of them will be around at age 92 and there is a one in four, a 25% chance, one of them will live to 97. I share all the time, I remember when Willard Scott used to be on the Today Show and he did his little Smuckers episode and if you were 92 or 93, that was a pretty big deal. Now when he’s subbing for Al Roker if you’re not 102 or 103 and still driving, it’s really not that impressive anymore. People are continuing to live longer and longer and that just puts more stress on their retirement portfolio making that last. Market volatility, inflation, all those other things that you alluded to, Jim, just become more and more impactful simply the longer we’re around. Certainly we need to take and address some of these. What I found is I’ve talked to advisors and clients across the country, those folks that have taken and at least have put some type of plan in place to address some of these risks, those are the folks that are happiest during retirement.
JIM: Let’s talk about the inflation/deflation risk. What is the risk there that you feel?
TIM: The concern when I retire is always that inflation is going to continue to increase the cost of goods during my retirement and certainly with all the money that’s been printed by the Fed over the last couple years in excess of $3 trillion, certainly we would think inflation is going to be ramped, maybe even hyper-inflation in the next couple of years. Then there is also those folks that say we could be entering into a prolonged deflationary environment and that with the massive amounts of spending the government has done and with the reduced spending that pays retiring are going to be doing that we may actually be in a long, long period of deflation. The challenge there is with any type of plan that we put in place, we want it to be mobile and flexible enough that we can address if we’re in an inflationary environment we have some options that we can make some changes. If we’re in a deflationary environment, I want to be able to address that as well. It certainly is not where we want to lock in all of our dollars into one strategy that doesn’t give us the opportunity to be aware of what’s going on in the market, what’s going on with different inflation or deflation, different regulation changes. All those things are going to come into play as we plan for retirement. We want to maintain the flexibility so we can adjust for those changes.
TONY: I think over the last 15 years or so, a lot of people have been exposed to market volatility are well aware of that, but I think what a lot of people are not aware of is the risk of the sequence of returns and their withdrawal rate risk. A lot of people unfortunately that retired at the peak of the market in ’99 with expectations. I remember reading one survey where they surveyed a bunch of people and they said, what would you expect where you would consider it a fair rate of return. I remember the average respondent saying 37% and that was just before the tech bubble. Here you had people retiring saying, yeah, if I make 10 to 12, I should be able to withdraw 7% or 8% and live happily ever after. I’ve worked personally with a lot of clients that retired with that attitude back at that time. They came to me when they were almost out of retirement funds and headed back to the work force. Talk a little bit about that market volatility and withdrawal rate risk.
TIM: That’s one of the biggest challenges, the mindset change from what I’m accumulating dollars when I want to see maybe what the average rate of return is and that’s the number I’m focusing on to the distribution phase where in all honesty the average rate of return doesn’t mean anything. It’s the sequence of returns. what I mean by that is as you alluded to if I’ve got a portfolio that suffers a significant downturn and we’ve been through two of them recently, but I have a portfolio that suffers a significant downturn, the first five years of my retirement it’s going to be very, very challenging to make those assets last. While I’m focused on the average retirement during accumulation, on the distribution side that average retirement doesn’t play nearly as important as to what is the sequence or the order of those returns. If I take a big, big hit in the beginning, I doubt that portfolio is going to run out over time. That’s where structuring things like a consistent reliable income stream helps to take some of that market volatility off the table because that’s not the dollars that are being used to generate income.
TONY: Way back when you know when we had the 2001/2002 crash in the stock market, bonds did okay and real estate was thriving. I think 2008/2009 was a real wake-up call where we had all three major asset classes of real estate, stocks and bonds all going down in unison. I know you referenced in the outline here a Wall Street Journal article. I think back to what the studies that I had seen back in the ‘80s and early ‘90s and all the way through the 2000s even where they all talked about a 5% withdrawal rate and some of them even talked about higher rates than that was reasonable. That was back when bond interest rates might have been 7%, 8%, 10%, 12% in the higher yield category. Government treasuries, you know you could be in a U.S. Government Fund and count on 4.5%/5%. With interest rates low, we’re a ways away from bonds performing the way they have the last 30 years so we have some challenges and I know the Wall Street Journal article now stated 2% is the bullet-proof withdrawal rate. At a million bucks, you’re counting on 20,000 of income, you need to have a strategy in this environment or you may have a hard time being comfortable once your 15 year or 20 years into retirement. If you’re still around, now you have some other issues facing you and if you’re without a paycheck anymore because your money has been exhausted, you definitely need to have a strategy.
TIM: It’s a lot that the 4% withdrawal rate has always been the standard for what would be a traditional or conservative withdrawal rate to make their portfolio last, the advisor, the developer of that now recently retired, William Bengen, and he’s even questioning that in this prolonged low interest rate environment is 4% really valid anymore. He’s suggesting that he’s going to be three or even as you alluded to in the Wall Street Journal article, 2% might be that new rate. I think it’s going to be a very challenging discussion if someone has a million dollars and is used to a million dollar lifestyle to say that they can support an income stream of $20,000 a year to make sure that it doesn’t run out.
TONY: Let’s take a short break and when we come back, we’re going to talk about some of these other risks that you may want to play for if you want to have a comfortable and lasting retirement so please stay tuned.
TONY: Welcome back as we continue to visit with Tim Kiesling, a national speaker and consultant to many different advisors throughout the country in helping them plan strategies for their clients. Today he’s talking about the retirement risks that need to be considered. If you haven’t addressed these risks with your advisor, make that the first priority when you’re done listening to the show, schedule an appointment to make sure you understand some of the options to deal with some of these risks that you may face in retirement. We talked about longevity and the market risk and all that, if that isn’t enough here you are well into your golden years, you might be 80/85 years old, things are good, your money is doing good and all of a sudden you have some health issues and you’re facing long-term care. Talk about that a little bit.
TIM: I think that’s the one risk that could wipe out all the good planning you’ve done, right? You just said Jim, everything is moving along fine and then all of a sudden we have a long-term care event. My father was 51 years old and had a brain aneurism. They had told us time and time again that he wasn’t going to survive the night, then 30 days, then three months, then six months. The challenge was my father lived for 17 years following that brain aneurism. He did not have long-term care is. He had done all the other planning that he needed to, but he didn’t have long-term care insurance and that one event completely devastated my parents’ retirement portfolio. It wiped out everything because he lived 17 years. Even with all the planning that we can do, if we haven’t addressed for that one long-term care event, that can wipe out a portfolio. I think the challenge there is there is always that mindset is I don’t want to pay the premiums because what happens if I never need to use it. What if I’m the healthy one that doesn’t have that long-term care event? My response is the same: (1) Count your blessings because nobody ever wants to see someone they care about go through that event; but (2) I view it as very similar to my homeowners insurance. I pay those premiums every single month and I don’t sit back and think at some point I just really wish my house would burn down so I would get back the value of all those premiums. Obviously none of us think that way, but sometimes when we think about long-term care, we tend to shift into that mood. I would say if we pay long-term care premiums and it addressed the risks and given us the peace of mind that we can do the other things we want with our retirement assets, it’s done exactly what it’s designed to do and I think that’s a good thing.
JIM: I look at my own family, my great grandparents. They all died in their 50s and 60s so this wasn’t really an issue for them although I had one great grandparent make it to 93 and they spent the last six months of their life in a nursing home. Then I get to my grandparents and they all lived into their 90s and they all needed long-term care ranging from five years to seven and a half years. Then I get down to my parents, my mom passed away of cancer. She ended up needing long-term care. She started with home healthcare and then transferred to a nursing home. Her cancer was very aggressive. She only needed care for about six months and now I have my mother-in-law. She has macular degeneration, she’s lost her husband and she’s at a point where she needs at least some help because she can’t even see what medications she should be taking or making sure she’s taking the right ones. She’s perfectly fine, but she’s in an assisted living facility. She’s been there for about a year and a half. Prior to that, she was spending time between different ones of us at their homes to kind of help oversee her. The thing is, I’ve seen it in my own family, we’re batting right about the statistics right now and the jury is still out on a few of the survivors that we have yet. I think it’s probably one of the most important issues you need to address and make sure you have a plan. Your plan may be I’m just going to wing it and take chances with it. You owe it to yourselves to understand what the options are and what the risks are and that’s something definitely you want to sit down with your advisor and talk about. Talk to us a little bit about legacy risks.
TIM: One comment, Jim, to the long-term care, the biggest challenge with long-term care is we have to qualify for it. Again, not the doom and gloom, but that’s the one that a lot of times folks will say it’s so hard to get when they’ve already experienced the health event that’s going to prevent them from getting that type of policy. Odds are we’re never going to be healthier than we are right now today so today is the time that we want to sit down and at least have that discussion. Again, at some point they’re not going to have the opportunity. Once my father had the brain aneurism, he couldn’t get long-term care anymore; nobody would give it to him at any price. Take advantage of that opportunity today to at least have that discussion. In regard to the legacy risk, I think this is just the opportunity of what do we want to leave onto the next generation? I’ve talked to so many clients that are living what I refer to as a just-in-case retirement; that they’re not using their assets as efficiently as they could because they want to leave something to the kids or to the grandkids. This is the classic example where they don’t buy the new car or they don’t take the cruise, they don’t join the country club because they want to make sure that they have something left for the kids. When mom and dad pass away, the kids take the money and they buy the new car and go on the cruise and join the country club. You wonder why did that happen. With the legacy risk, I think it’s just trying to find the most appropriate produce to pass dollars onto the next generation and then once we’ve done that, that gives us permission to spend our other assets for the retirement that we want. I think the ability to take that risk off the table by using a product such as life insurance to pass those assets onto the next generation in a tax-advantaged manner now gives me permission to do what I want with the other dollars. That might be things to a church or to my alma mater or things like that, but it just gives me permission to use those dollars in other ways because I’ve taken that legacy risk off the table.
JIM: That’s a great point and I want to add to that because a lot of times when we talk about legacy risk, we’re always talking about kids and grandkids, but if you’re married you have a legacy risk to your spouse. A lot of times people don’t think about it, but I see this here all the time because we have a tax practice in our office building for my clients that use that service. For a lot of them I’m delivering the returns. What I see happening when a spouse dies (1) they’re losing a social security check; and (2) their tax brackets get compressed in half, their taxes on their social security start at much lower levels. I know we had a case study we did recently where a couple was making about $61,000 a year of income when the one spouse died, the surviving spouse ended up needing about the same amount of income because even though one of them had passed away the property pass bill didn’t get cut in half. As a matter of fact, the maintenance on the house went up because the husband took care of maintaining the car, took care of cutting the grass and all that stuff. The wife wasn’t in a positon physically where she could do a lot of that stuff much less having the knowledge that her husband had on some of the issues when it came to car repairs and all that. She ended up spending just as much money as they were as a couple. What ended up happening is her income decreased by 17% by virtue of the loss of the social security check, but her actual tax dollars paid increased by 63%. Sometimes having life insurance for each of the spouses, you might have enough money to replace that lost income check, but also maybe enough extra money to make up for those extra taxes that are going to have to be paid. Don’t forget the legacy between spouses.
TIM: That’s a great point.
JIM: Tim, again I want to thank you for joining us. This has been a great discussion. I know a lot of times we just want to bury our heads in the sand and forget about all these risks and just kind of hope things magically go away, but the thing is with all these risks that we’re talking about the sooner you deal with them the easier they are to deal with. Now, just because you may have put it off for a few years doesn’t mean it’s insurmountable, that you can’t address these risks. One thing you certainly don’t want to do is go it alone and make sure you analyze and quantify and weight out and prioritize which of these risks you want to deal with. Maybe there are some of them there that you just say, you know what, it’s more important for me to go on a cruise this year and enjoy my time while I’m healthy than having long-term care insurance. That’s okay, you at least took the time to plan it. You don’t have to necessarily have to protect yourself from everything, but at least understand what those risks are, what the solutions are and then make an informed decision as you go forward. Thanks again, Tim.
TIM: You’re welcome, Jim, thank you.
TONY: Thanks for joining us this week. Tune in again next week as we explore another phase of the Real Wealth process. Remember if anything you heard in today’s show you’d like to get more information about, contact your Prism Insurance Agency Advisor. Also, if you feel that any of this information would be helpful to a friend or family member, just click the forward to a friend button.
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