Retirement Income Planning With Wade Pfau

Welcome to Finishing Well, brought to you by CardinalGuide.com with certified financial planner Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes.

Now, let's get started with Finishing Well. Welcome to Finishing Well with Certified Financial Planner Han Schile and today's show Very interesting. Retirement income planning. With Wade Pfau. And so Wade Pfau is a New name for some of you.

He is actually a professor at American University, the professor of retirement planning. And he got some of his degrees from Princeton.

So he's very well trained. He's got some amazing wisdom that we're going to discuss in today's show. Uh but it it falls along the lines of what Um Paul told us in 1 Timothy 6:17, he said, Command those who are rich not to put their hope in wealth, which is so uncertain. but to put their hope in God. And and The idea of God being the provider is is amazing.

But when we're talking about retirement planning, Uh you know part of the plan is Obviously if you stored this stuff up is to distribute it's to Distribute it. And so, you know, in Luke 12, you might remember the story of the rich fool who stored everything in the barn. He didn't have a distribution plan, which he wasn't going to be rich to God or even to his own joy. And so we're going to get into some of that today, but also talk about. You know, where the risks actually lie and we know God is big about Us taking risks because it requires faith.

And so, with that said, Hans.

Well, let's head on into Wade's teaching. Yeah. And so it would be nice if we had Wade on the radio today.

So he's on the video, and we interviewed him. Tom and I did.

So if you want to see him and hear him directly. Just go to YouTube, to our YouTube channel, or go to our website, cardinalguide.com, and find this retirement income planning. uh show Wade Fowl Yeah. The way I met Wade is at an industry conference where Um he is speaking. Yeah, and we we we go to a lot of stuff, Tom and I do.

And Um we read things. We get attend webinars. We're reading books. And I've read most of Wade's books Yeah, you know, he's a PhD, a professor of economics. Yeah, and he's kind of the The the brains and the academic where you've got a bunch of insurance salesmen and Financial advisors in the room, and he's part of the team of academics.

that add some academic credibility to the whole thing that we do in financial planning. And so I asked him to come on the show. It was actually a referral from Heather Schreiber, who we had on earlier. I asked her, you know, I asked her for a referral to another expert. I asked her a referral to him because I knew they were friends.

Yeah. So Tom and I interviewed him and we had a little pre-meeting for the interview. And what we talked about. He says, I wanted him talk about the use of annuities. which we're going to call tools.

in retirement income planning. Because I know he talks about it in his books. Yeah. You know, we don't just sell people annuities for this reason and that reason. I mean, when we implement financial plans.

For clients. And if we're going to implement a financial plan for you, We're going to look at all your money. all your investments All your sources of income and your Social Security, and we're going to put it all together. The money that you've got outside of your regular income, which is your retirement savings. Most people need to create a retirement income.

Yeah. There's people all over the board with risk. I mean, we have some people come into us and they've got all their money. Inequities. Yeah.

They're either nervous about it or they're not. But if they have all their money in equities and they're invested in stocks, Yeah. Um if they're not nervous, they probably ought to be a bit. And then we have the other extreme is we have people that have it all in the bank. Where they've got it all in fixed income and they're taking very little risk and they're earning very little interest.

And they're just kind of stuck in fear. And a lot of people end up around a number if they're in their sixties of 60% equities. Forty percent. Um fixed income. Yeah.

You know, we can have another show where we can talk about asset allocation and just to kind of jump in here for those out there like me that don't have a clue what you're talking about. Yeah. And I apologize, but I don't know what equities mean. I'm assuming, based on what you just said. It stocks.

But I don't know the term. I guess you're buying equity in a company's. When you're investing in equities, you're investing in stocks. They're synonyms.

Okay. And equities are what we say when we're around the high-falutin people like Wade Fowler.

Okay. Stocks are what we say when we're talking to you, Robbie.

Okay. That really was my mistake. And that's okay. And then. Fixed income, another word that just kind of flew over my bonds.

It's bonds.

Okay. Yeah, that's bonds. It could be a few other things, but it's something where It's fixed. I mean you know what you're going to get with a bond. You're going to get you know a hundred bucks a month or you're going to get you know, 4.2%.

And the principle is this. And so when we say sixty percent equities, we're saying sixty percent stocks. And then 40% fixed income, we're saying 40% bonds.

Okay, I just wanted to, you know, for though, because I was thinking, there's other people out there like me that, like, whoa, you just went right off. I'm glad you did. Yeah. Okay. Every now and then I teach this to the people that work for me: it's like we're talking in tongues.

Yeah, and you don't know the tongue. And we do that as industry people. We use acronyms and we say things and I try to use language that is very simple for people to understand. And so You know, what I was saying at the beginning of the show is some people come in here and they're 100% in stocks. And they've had their 401k like that.

Um and they've done very well, especially if you look at the last 15 years. Um And for those people, we generally start talking to them about risk and we show them What could happen? if things all of a sudden we had some bad years, we had another 2008.

So the risk there Yes. you could lose a bunch of it all of a sudden. And that's quite unnerving during retirement. Especially when you're pulling out money for income out of there. Um So And then the 40% in bonds.

Um he is is trying to mitigate that risk a little bit. And what weighed point is he studies all this stuff and you know, his point of the whole show was Let's take a look at that fixed income portion. And let's take a part of it. Possibly all of it. and put it in a few annuities.

because we're going to get even more protection from risks. Um Yeah.

So I what what I'd like to do is just kind of jump into the risks. That The retirement investor is facing Yeah, and some of these may be Um Redundant to you all, but let's just talk about this. And this is by no means all of the risks. But some of the common ones The first one is sequence of returns risk. And the real risk there is that you're going to have some down years early.

So this is the couple. that has $400,000 in their 401k. Yeah. have it all in stocks. They retire, they maybe roll it over to an IRA.

It still is 100% in stocks. and they decide they're going to pull out $3,000 a month for retirement and they've had all kinds of projections And then in the second year after retirement, the 400,000 turns into 280,000 because we've had a disaster in the stock market. I mean, and so it's called a sequence of returns, is that the stock market goes up. The stock market's kind of flat. stock market goes down, you don't know the series, you don't know how that's going to play out.

and the sequence of returns risk that every retirement investor or retirement planner faces. is what if you have a really bad year early in the equation. That makes sense? Yeah, so You know, my understanding, limited as it may be, is that, you know. for a lot of folks that their four hundred one K or their their investment you know, they watched it grow over a period of like thirty years.

And so if there was a market downturn somewhere in that period, right, six, seven years later, they earned it back and then some. But if somebody is is gonna need that money in their late seventies and all of a sudden it takes a real bad downturn when they're seventy three, then oh no, right?

Well, yeah, that's part of it. But I'm going to go back to 30 years ago for this person. that started putting money in, well first of all, there wasn't a lot of risk 30 years ago because they didn't have much in there.

So let's go 20 years ago after they've been in for 10 years and they've done real well with this thing. And then it all of a sudden went down. And like you said, they didn't panic. Maybe they didn't like it. But they recovered it six or seven years later.

And so they've got that as history. kind of to refute what I'm saying. But where it's different when you're older is number one, is you're not putting money in this thing every year once you retire. Because that's part of how the way we've recovered it is Sure, it went back up, but they were adding every year so that it makes it look better than it really is. Yeah, in retirement, you're not adding money.

In fact, in retirement, many people are withdrawing money.

So now you're pulling money out to live on. That's the whole reason you have the thing in the first place. And you've had this proposal from a guy like me. that shows you six, seven percent returns. just linear.

They just you know, that proposal the proposals we make just project into the future like you're going to earn 6% every year. or 7% or some number that we agree on. Yeah. The stock market doesn't work that way. And so we're saying what happens to that proposal what happens to your real money Yeah.

You know, we make 9% the first year. 13%. the second year and then negative 24 the third year. And then all three of those years, you're pulling out your $3,000 a month or whatever. number we decided to do, it's it's devastating.

Yeah, I think that makes sense. Absolutely. Absolutely. And actually, this would be a really good time to remind you that the show is brought to you by Cardinal Guide, CardinalGuide.com. And if you go to CardinalGuide.com, there you're going to see the seven worries tabs or their seven little menus that we talk about every week, these seven different worries, which today is retirement income.

And so, how fun, as Hans mentioned earlier, on their YouTube channel, there's an amazing video with Wade himself talking about these principles we're going to talk about today in today's show. And if, like I said, you click on that worries tab on retirement income, you know, there you'll see this, and it's got show notes and all this amazing resources all there at cardinalguide.com, as well as, of course, Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. By the way, having read that, I can tell you there's a whole lot about risk that's delineated in his book and the workbook that goes along with it. And of course, to make it easier, like me. You just go to cardinalguy.com, click on ask.

Hans or ask Tom right and end. and they'll give you their contact information and you can Ask them yourself. And and and you know get right in on What they can do for you. Again, we're going to be right back with a whole lot more retirement income planning based on Wade Pfau and what he teaches. We'll be right back.

Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM. A registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency.

Welcome back to Finishing Well with Certified Financial Planner Hans Scheil and today's show, Income Retirement Planning. With Wade Pfau, again a very esteemed professor of retirement planning at American University. And really, really fascinating stuff as we learned from their video that is also there again at CardinalGuy.com. Hans? Yeah, so uh listen to Wade speak a lot.

You know, he's the kind of guy, along with his colleagues, that validate a lot of the planning. I mean gets pretty sophisticated and When you start making predictions about people's money, You better be ready to back it up and You know, that's what he provides for us. as well as just learning and teaching. He's written six books.

So we interviewed him on the Cardinal Guide or the Cardinal Advisors. YouTube channel. And you can go watch that on our website or go to YouTube. And you can actually hear it straight from him. But what we were talking about in the first half of the show is the risks that using various annuities how this risk can be Dealt with and reduced.

And so the first one we talked a lot about is sequence of returns, meaning that. When you get a retirement plan put together when if we put one together for you We're going to show a return on your stocks. I mean, and it would show a return on the whole portfolio. which will be a combination of stocks and bonds. Yeah.

We're going to predict. It's going to do, and that's going to be a linear return. We're going to use either six or seven percent. or for people that want to be real conservative, 5%. Um Maybe people that want to be real aggressive, 8%.

Although I don't like putting out predictions of that. But it's going to be the same amount every year going into the future. And no up years, or no years that eclipse that, and no years that are down, and that's not realistic. And so a risk that he's identifying in the real world is the sequence of those returns that you get. And we We talked about that in the first part of the show.

The second risk is really Just a simpler way of saying the thing on the first risk. is there's market risk in any portfolio, and that means that the stock market is liable to take A big drop. And it could happen quickly at any time. And people have a lot fun time just like predicting that and you hear this doom and gloom and It's really hard to predict. But To a sense, you know it's common.

And we're just identifying that as a risk. that can be mitigated with annuities. Is we've got annuities that are going to pay you a guaranteed return. And then there's going to be no down years. You're not going to have.

you're not going to have when the stock market goes way down, you're not going to lose anything in these annuities.

So Um that's an oversimplification, but Um So the third risk. that we talked about with Wade and we had him talk was about longevity risk. or living too long. I mean, and th this causes a lot of people to um not spend any of their money. They're just They're terrified that Um you know, they're going to live to a hundred.

And if they start spending their money at 68 or 70 or 73, Or just some of it. Um that all of a sudden when they're 90, they're going to be out of money.

So A lot of people will Um have very low withdrawal rates. and they're effectively hoarding their money. Um And a fear. And you can that can be mitigated with annuities. We can take part of your money and put it in something.

that's going to give you a consistent withdrawal amount that's going to stay the same. as long as either you or your spouse is alive. Um That's it's pretty nasty. And you know, a lot of people, when they get done and they really understand, they say, how do they do that? How do they keep paying me?

when my annuity is effectively out of principal or out of money. Yeah. You know, what I always tell people is the insurance companies are very good at taking care of themselves. You know, and we could have another conversation on another day, but There's a product available. that we can take a set amount of money per month and the insurance company will guarantee that you get a check for that.

as long as either you. or your spouse are alive. Um Whether that's 96. 105. or eighty four, it's all the same.

You get checks until you're gone. Um So that's what we have to offer to deal with longevity risk. And we're not going to cover that totally. but we're going to take a piece of your money. typically and recommend some of it.

So you got a guaranteed check. Yeah, yeah. Go ahead. You know, and listening to the show and become and listening to Wade, actually, it was kind of cool. He said, Well, it's not really a risk that you're going to live long.

It's kind of a misnomer the way it's that and I thought I found his humor hilarious, actually. But Oh yeah. I mean you find out where people are about that because A lot of people are saying, Well, how's that a risk? That's what I want to do, I want to live a long time.

Okay, and then you find other people that say, oh, I don't want to live a long time. You know, what I want to say to them, that doesn't mean you're not going to. In fact, Okay. Yeah, th th there's just so. Yeah, it's an idea.

But nonetheless, I you know, until I started seeing the studies that you guys talked about in this show and other shows, I had no sense. Of how Much older people are living, and you know, I started to think about it. Oh, wait, yeah, you know, my grandparents were dying in their 50s and 60s, and you know, and my parents more in the 80s to late 80s, and more and more lots of folks were making it into their 90s. In fact, my stepfather made it to 97, I think. And, like, oh my goodness, I mean, this is common.

Very common. Yeah. You know, you think about it, you know, if you're seventy now. And You're assessing this and you're saying, ah, you know, I might make it in my 90s, like a lot of people are doing that. But when you get to be 89, There's a good chance that people that are 89 Will be living into their hundreds and hundred and tens.

I mean, you don't know. If this keeps up at the same rate. People are living longer and longer and longer. And if we talk about this too much, I'm going to have everybody. Yes.

Mm-hmm. hoarding their money because you know man if i live for long and Right. Your Social Security check's going to keep coming in. Ian. Um But if you spend all your money enjoying it You can't outspend this type of annuity that I'm talking about, which gives you a guaranteed paycheck.

You know, like in my case. to Rhonda and me. And then if I go Rhonda still gets the same check until she's gone. And I got a bunch of those. Um, it's not all my money, but it gives me a lot of comfort, it also.

She she would not be spending money unless she's getting a check every month. Because Sh she just would? I would be, but It's going to force a check to her every month, a large check. And my advice to her is you either spend it and enjoy it on yourself or give it away to the kids. Because there's going to be another check next month.

And there's going to be one after that and one after that, and they're going to keep coming in.

So you're gone. Yeah, so Um and that's the way we intend to live our retirement.

So Um And of course, giving a good piece of that. And then the fourth Worry that we or risk that we want to talk about is we've kind of been talking about it now as underspending. You know I love when I run into these people because they end up making great clients. But what I'm doing is talking them into spending more. for maybe instead of talking them into spending more, Maybe a better way to put that would be empowering them.

to live a little bit. And spend a little bit of that money, give a little bit of it away. Because you're just Living off of too little relative to what you have.

Okay, and especially with IRA money because people With IRE money, they don't want to pay those taxes.

So Uh and that's creating a problem in and of itself. that when you get to be 73, the government's going to make you. take that money out and pay the tax. Yeah. That gets pretty ugly when you're in your 80s and 90s.

So Again, underspending risk. And what an annuity will do is The right kind of annuity is we can set up a check coming in that you can't outlive.

So you can safely spend That money every month because you know there's going to be another check next month and another check next month and when you're 97 there's still checks coming in. Make sense? Oh, I absolutely love it. Yeah, it's It's a wonderful strategy and and again you know, the with the not being any risk on the Principle that money. In other words, it's going to be there and it's going to continue to provide an income.

And when you have it, like you said, when you have a check coming in every month, And you know that it's going to be there for the rest of your life, it gives you the liberty to say, Oh, I do want my kids to have some of this because I don't need all this, or I do want my church. Or my you know, whatever You know 501c3 or something else that you feel God's put on your heart to fund. How fun, right? Get in there and enjoy it. Yeah.

So and what Wade did is just validated all this. that I'm kind of spitting out to you from an academic perspective and understand i'm not giving advice over the radio okay and on the podcast. This is just... discussing things that we do with some people and You know, we're really going to need to sit down with you. and learn about you.

Learn w what your money is, where it is, how much it is. Yeah. By the way, it doesn't take a lot of money. To benefit from all this stuff, somebody that's got $50,000 that they don't quite know what to do with. Um we we very well could find a solution in one of these types of annuities that we have.

Um But it you know, it it it it it is These these are risks. that you're facing, whether you understand it or not. bringing in annuities and life insurance possibly. and having the guarantees that come with that Yeah. part of a person's retirement strategy.

has been real helpful to us.

Well, we want to remind you again, this show is brought to you by Cardinal Guide, CardinalGuide.com. And if you go to cardinalguy.com, there you're going to see the seven worries menu items, seven worries tabs. And if you click on retirement income today, you'll get to see Wade himself. And as he discussed this wonderful man, and as well as Tom and Hans in a video right there, if you click on that same tab with the show notes and all that information, and of course, there at cardinalguy.com, you'll also find Hans's book in the workbook, The Complete Cardinal Guide to Planning for and Living in Retirement. And my favorite, just contact Hans or Tom, right?

You click on that, and they'll give you how to get up with them. And they, they, by the way, if you didn't know, They have these wonderful video conferences.

So you actually get to see Hans and Tom and they put up charts and all sorts of stuff for you to look at. Really cool stuff. If you have an opportunity to contact Hans and Tom all there at CardinalGuide.com. Thanks, Hans. Great show.

Thank you and God bless you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Investments involve risk and unless otherwise stated are not guaranteed.

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Investment advisory services offered through Brookstrone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and carbon. Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency.

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