Latest / Retire and Thrive / 3 Retirement Risks That Matter More Than a Market Crash

Transcript

3 Retirement Risks That Matter More Than a Market Crash · Retire and Thrive

• 0:00
  Welcome back to another edition of Retire and Thrive, the
• 0:03
  podcast where we help you live your life with purpose, wealth,
• 0:05
  and confidence. I'm Kami alongside Dan.
• 0:07
  Thanks so much for joining us this week.
• 0:09
  We really appreciate it. We are focusing this week once
• 0:11
  again on retirement and some things that maybe you should
• 0:16
  look into if you are reaching that age.
• 0:18
  Dan has a lot of advice for you here this week.
• 0:21
  So, Dan, how are you, by the way?
• 0:23
  Everything's good. Weather's turning.
• 0:25
  I, I feel like every year I get to the same stage where you just
• 0:29
  get, it's super, super excited. But one rule of thumb, just for
• 0:34
  everybody who's not familiar with the the Midwest, don't ever
• 0:37
  do your annual planting before Memorial Day.
• 0:40
  Because I did that a few years ago when I spent hundreds of
• 0:43
  dollars. And then I went in and put them
• 0:46
  all in and spent an entire Saturday.
• 0:47
  And about a week later it got down to like 32 and they died.
• 0:50
  Yeah. That's some good advice because
• 0:53
  you can see the plants at the stores and they look so
• 0:55
  beautiful and it's like I want to buy them now.
• 0:57
  It's a nice day. But yes, that is some good
• 1:00
  advice. Wait till Memorial Day.
• 1:01
  I like. That and I feel like you always
• 1:03
  say, how am I doing? I'm going to just do the
• 1:05
  boomerang. How are you doing?
• 1:06
  Oh. I'm doing well, I'm doing great.
• 1:08
  I have a new baby so we're busy with that, but I can't imagine
• 1:11
  we love him. Minor at minor at the other end
• 1:13
  of the spectrum. But yeah, it's when you get to
• 1:16
  be my age, you know, you look at kids, you know, toddlers and
• 1:19
  everything, you're like, boy, I can't imagine having that energy
• 1:21
  level. So I'm glad you and your husband
• 1:23
  have the energy to. Yes, yes, we're doing well.
• 1:25
  We're doing well. So let's focus on that
• 1:27
  retirement age and some different things that maybe you
• 1:29
  should do or maybe some advice that Dan has for you if you are
• 1:32
  concerned about certain things. So people often worry about
• 1:37
  market crashes when they're looking, I mean, at all ages.
• 1:41
  But when we reach that retirement age, it's a little
• 1:43
  bit more scary. So these really one of the
• 1:47
  biggest threats to retirement. Yeah, I think I smile because
• 1:54
  you use the word crashes and I think of things just crumbling
• 1:57
  down. I that's.
• 1:58
  What it feels like sometimes. Yeah, at times it does feel
• 2:00
  like, you know, the sky is falling.
• 2:02
  Things you read make you feel that way.
• 2:04
  We we use like downturns and we use bear markets and corrections
• 2:08
  and things like that. But yeah, so we'll keep the the
• 2:10
  term crashes kind of broad and loose, but is that the biggest
• 2:15
  uncertainty to a retirement? It certainly can affect it, but
• 2:21
  there's a little caveat there. It'll affect it if you change
• 2:24
  directions because of the downturn or the crash, if you
• 2:28
  will. And so that can affect it if if
• 2:31
  you make unnecessary changes or panic or you get emotional over
• 2:36
  it. But I think there's a lot of
• 2:37
  other things that do affect it. So in essence, this is one of
• 2:41
  the things that we convey to a lot of our clients is, you know,
• 2:44
  whether you get a 7.2% return or a 5.8% return, that number
• 2:50
  doesn't necessarily determine the success in your retirement
• 2:54
  plan as much as some of the other things.
• 2:56
  Some of the other things might be inflation.
• 2:58
  I mean, that's a big one. We don't talk a lot about it,
• 3:01
  but what's interesting is when we work with people and they
• 3:05
  retire and let's just say they say, you know what, I know me
• 3:10
  and my spouse, we can live very comfortably on 4000 bucks a
• 3:13
  month. So we build all of that into the
• 3:16
  financial plan, of course. And so we start backing out
• 3:18
  Social Security. If they've got a pension, it's
• 3:20
  like, OK, well then this is, you know, those are secure income
• 3:24
  sources, pension, Social Security.
• 3:26
  And then we figure out what's the gap?
• 3:27
  How much do we need to pull out of their portfolio?
• 3:29
  And so we figure all this out and we always account for a #4
• 3:34
  inflation, but often times they're like, well, I don't
• 3:38
  think we'll need to increase. It's only $4000 a month.
• 3:41
  Well, Fast forward the last few years, you know, going to
• 3:45
  grocery stores, going to out to dinner.
• 3:49
  I mean, I mean, I don't want to throw any restaurants under the
• 3:53
  bus, but it's almost more expensive to go through Dr.
• 3:55
  throughs to, to go to a sit down restaurant.
• 3:57
  Sometimes It's ridiculous. So that's inflation.
• 4:00
  And so I think inflation can definitely have a massive,
• 4:02
  massive impact on retirement plans.
• 4:06
  Another one that's a big, and I can maybe go into it depending
• 4:11
  on what you want to ask, but is longevity how long you live?
• 4:15
  I mean, we have a number that we typically use for people when
• 4:18
  they retire. How long is it?
• 4:21
  We typically go to 90. Oh, OK.
• 4:23
  Yeah, and statistically, the numbers are now, this is
• 4:28
  probably 5 or 6 years old, but the average person turning 65
• 4:35
  has a one in five chance to live to be 90.
• 4:38
  And that may not mean much to you, but if you do the math,
• 4:40
  that's a 20% chance. So I take a a husband and a
• 4:44
  wife, that means there's a 40% chance one of them to live will
• 4:47
  be 90. But here's what's really
• 4:49
  interesting about that number. 20 years ago, statistically the
• 4:53
  average person turning 65 only had a one in 20 chance to live
• 4:57
  to be. 90. I mean, that tells you, you
• 5:00
  literally went from 20 years ago, a 5% chance to a 20%
• 5:04
  chance. The medical advancements in
• 5:08
  technological medical advancements is incredible.
• 5:11
  And it's it's, it's continuing to extend people's lives.
• 5:15
  And it doesn't happen often, but we do have people that have
• 5:19
  actually been retired longer than they've actually worked.
• 5:23
  Wow. It doesn't have it often, but
• 5:24
  that's a goal, people. Well, the point is, is we're
• 5:27
  talking about running out of money, right?
• 5:28
  And what to do? And one of the risks is living
• 5:31
  too long. Sure, sure.
• 5:33
  Wow. Do you deal with that with
• 5:35
  clients that you have? Yeah.
• 5:36
  I mean, we had some that have lived that long.
• 5:39
  This is a little bit bizarre and we're going to go off off the
• 5:41
  track a little bit here, but I do remember 11 client in
• 5:44
  particular is probably 5-6 years ago and we built out a plan and
• 5:47
  our default is always age 90 for longevity.
• 5:51
  He shook his hand, he shook his head.
• 5:52
  He was 60 and he says none of my family's ever made it past 75.
• 5:56
  S put me in 75 and I said what would life look like if you
• 5:59
  lived to be 80? He's like, I won't make it to
• 6:01
  80. He said I've lived too good a
• 6:03
  life, that you don't have to worry about me living to 80,
• 6:08
  without going into a lot of detail.
• 6:09
  And so he said I I want to, I want to have my plan account for
• 6:14
  me at 75. In other words, I would rather
• 6:16
  enjoy life now between 60 and 75.
• 6:18
  And if I happen to live to be age 80 and I don't have any
• 6:20
  money, I'm OK with that. So.
• 6:21
  But to answer your question, usually it's 90, yeah.
• 6:24
  OK, that's interesting. Let's talk taxes.
• 6:27
  How do taxes affect retirement income?
• 6:30
  That's a big one. That is a really, really big
• 6:32
  one. And you know, we talked about
• 6:35
  accumulators versus distributors and you would ask one of the
• 6:40
  episodes earlier about when you get a financial advisor.
• 6:44
  And I said if you're just accumulating, you know, it's not
• 6:46
  that critical. It's critical from the
• 6:47
  standpoint that if you start putting money into Roth accounts
• 6:51
  in your 30s and 40s, that will bode well for you when you
• 6:54
  retire. So I'm a huge, huge, huge Roth
• 6:57
  fan that when you're in your 30s, forties and and even 50s
• 7:00
  that you should be contributing because it takes away that
• 7:02
  element of uncertainty about what are future tax rates.
• 7:05
  So how does that play in? That's a major impact that can
• 7:08
  derail the financial plan. Back to your original question.
• 7:11
  So if you've got a lot of money and you're retiring and it's all
• 7:17
  in retirement accounts, you are 100% dependent on what tax rates
• 7:23
  are currently and where they're going to be at in the future.
• 7:27
  I talked about this in the book and it's a little bit of a corny
• 7:29
  analogy, but I'm going to use it anyways because I think it's
• 7:30
  relevant to your question. And the analogy is this, and
• 7:35
  I've said this in front of larger groups too.
• 7:37
  I said, would you borrow from a rich uncle under these
• 7:39
  conditions? You walk up to your uncle and
• 7:41
  you say I need 100,000 bucks and your uncle says Yep, I've got
• 7:45
  the money. Write your check gives you the
• 7:47
  $100,000 and you look at him and you say, what's my interest
• 7:50
  rate? And your uncle looks at you and
• 7:52
  says, I'm pretty flush with cash, don't worry about it.
• 7:55
  And you're a little bit confused and you're like, well, what do
• 7:58
  you mean don't worry about it? He's like, I'll let you know.
• 8:01
  And then you say, by the way, what are my payments like?
• 8:04
  How much a month? I'll let you know when I need
• 8:06
  the money. And my question to the audience,
• 8:10
  when I present that, they all kind of chuckle and they think
• 8:12
  it's funny. And I'm like, would you borrow
• 8:15
  from an uncle like that? And most people say, well, no.
• 8:17
  And I said that's what happens when you're borrowing from the
• 8:20
  IRS. If you're putting money pre tax,
• 8:22
  it's reducing your income, IE borrowing, then you just
• 8:26
  basically got free money. But at some point the
• 8:29
  government's going to come back and say, Cammy, we want our
• 8:31
  money. You need to pay taxes on that.
• 8:33
  And you don't know what the rate is.
• 8:34
  You don't know when you have to pay it back, how much it's going
• 8:36
  to be. And so the point how important
• 8:38
  is taxes in retirement? It's a big deal.
• 8:41
  And there's really three different buckets.
• 8:42
  There's tax free, IE Roth, there's there's after tax money,
• 8:47
  like just what we call an unqualified account.
• 8:49
  And then there's pre tax money. Pre tax, you've never paid taxes
• 8:51
  on it. So having the ability to pull
• 8:53
  from three different types of tax types is crucial.
• 8:58
  Because if you retire and you got 80% of your money tied up in
• 9:01
  a, in a four O 1K or 4-O3B and it's never been taxed and tax
• 9:04
  rates go higher. Or more importantly, you have a
• 9:07
  big ticket item that you want to buy.
• 9:08
  Maybe it's a second home or a camp or something.
• 9:11
  Taxes definitely play in sure. Did that answer your?
• 9:14
  Question. It did.
• 9:15
  It did. Why?
• 9:16
  Would you ever advise you wouldn't?
• 9:18
  But would you ever advise folks to just use the Roth component
• 9:21
  then? Well, if, if, again, I think
• 9:25
  it's a balance, if you're in a, in a very, very high tax
• 9:28
  bracket, let's say the state of Minnesota, you know, we're,
• 9:32
  we're pushing 10% on the state of Minnesota.
• 9:34
  You got the federal level currently at 37%.
• 9:37
  So that puts you just close to 47%.
• 9:39
  And then you got Social Security, then you got Medicare
• 9:41
  and then you got the excise tax. You could be pushing 50%.
• 9:44
  And if you don't have a lot of money, let's say you're 50 years
• 9:47
  old and you're making, you know, very high income and you don't
• 9:50
  have a lot set aside for retirement.
• 9:53
  It's realistic that you might be in a lower bracket in retirement
• 9:56
  and then it may not make sense to put it all into the Roth.
• 9:59
  Sure, sure. Any other advice you'd have for
• 10:01
  folks to help them in retirement and help avoid some of these
• 10:06
  long term risks? I think my go to answer is
• 10:13
  always, you know, review your financial plan, have a financial
• 10:16
  plan, review the financial plan. But I think it's important,
• 10:20
  regardless of how knowledgeable or how active you want to be
• 10:23
  into this, that just keep up with some trends like what is
• 10:27
  inflation rates right now? How important is that?
• 10:31
  Because again, I mentioned earlier, I think we've all felt
• 10:34
  the pinch in the last few years of how things get more and more
• 10:37
  expensive. And so I think that's part of
• 10:40
  it. The other thing is not just
• 10:43
  review your investments, but review your spending habits.
• 10:47
  You know, when you're working it's very easy to spend money
• 10:49
  because guess what, in two weeks you got another paycheck coming
• 10:51
  in or however often you're paid. When you're retired, you don't
• 10:54
  get that paycheck and you don't get that automatic increase of 3
• 10:58
  to 4% as a pay raise. So it's almost like a double
• 11:03
  edged sword. When you're working, you don't
• 11:05
  have time to spend money so you save it.
• 11:07
  And when you're retired, you have all the time in the world
• 11:09
  to spend it and you're not saving.
• 11:11
  So it's kind of a double edged sword.
• 11:13
  So be cognizant of your budget would would be another thing.
• 11:16
  You touched on inflation again. And when we go to the grocery
• 11:19
  store, we might think how can this go up anymore?
• 11:23
  How can this cost anymore? But if you look 10 years down
• 11:26
  the road, it very well may be more expensive to go grocery
• 11:29
  shopping. So how do you advise that when
• 11:31
  you work with clients? Inflation?
• 11:34
  It's very real. And So what we typically do is
• 11:36
  we build in approximately a 2 1/2% inflation rate and that
• 11:41
  seems fairly minimal. But even at a even at a 3% rate,
• 11:46
  you can expect things to double about every 20 years is kind of
• 11:50
  a just a general without going into a full on financial plan.
• 11:53
  So if my budget calls for me spending 60,000 bucks in 2025 in
• 11:59
  2000, and 4520 years from now if I'm spending 60,000 today, you
• 12:04
  can assume that you should be spending about 120,000, which
• 12:07
  seems ridiculous, but it's true and we've seen it.
• 12:11
  And businesses need to, when they're employing people, right?
• 12:13
  Take that into account. Or if you're looking for a job
• 12:16
  and you see, you know you're only going to get that one
• 12:19
  percent, 2% raise each year, right?
• 12:22
  That's not great when you're. Looking at inflation and
• 12:24
  inflation's so real, but it doesn't feel real because we
• 12:28
  don't see it every day. I mean, the markets, we can look
• 12:31
  at the markets and we say, Oh my gosh, the markets were up.
• 12:33
  They were down. And we we can quantify that, but
• 12:35
  inflation, those numbers come out once a month.
• 12:37
  And most people are like, Yep, CPI was great, not a big deal.
• 12:40
  Core inflation was this don't really pay that much attention.
• 12:43
  But as you know, during COVID, right, it was real.
• 12:46
  Yeah. We had a lot of people with a
• 12:48
  lot of excess money because they couldn't travel, they couldn't
• 12:50
  do the things they want to do. So money started building up.
• 12:53
  And so then they started buying a bunch of things, home
• 12:55
  improvements or maybe buying a second home.
• 12:57
  And that's kind of what started driving this whole inflation
• 12:59
  thing. And all sudden when the economy
• 13:02
  finally did open up, people were just shell shocked at how
• 13:05
  expensive things were. Absolutely.
• 13:07
  Anything more that you'd like to add, Dan?
• 13:08
  I don't. Think so.
• 13:09
  OK. Thanks again for joining us this
• 13:11
  week. We really appreciate it.
• 13:12
  And you can get each episode wherever you get your podcast.
• 13:16
  You can also subscribe and like the channel of where you get it
• 13:19
  because then you will be notified when we drop a new
• 13:22
  episode each week. We hope you have a great week.
• 13:24
  Thanks for joining us. Fortress Financial Group, LLC is
• 13:27
  a registered investment advisor. Advisory services are only
• 13:30
  offered to clients or prospective active clients where
• 13:32
  Fortress and its representatives are properly licensed or exempt
• 13:35
  for licensure. The opinions voiced in this
• 13:37
  material are for general information only and are not
• 13:40
  intended to provide specific advice or recommendations for
• 13:42
  any individual. All indexes are unmanaged and
• 13:45
  may not be invested into directly.
• 13:47
  Investing involves risk, including loss of principal.