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April 22, 2019 11:11 am
Plan to fail. When planning matters radio program. Ladies and gentlemen planning matters radio Sean John wife Amber. We are here to entertain and inform this morning discussing some of the greatest challenges to planning for a more stable, sick financial future challenging the status quo in the talking heads from Wall Street on what it takes to do just that.
And if you got questions or concerns about your plan about your investments about war retirement. We encourage you to stay tuned for the course of the program learn a little bit more. I have a little fun with us and we also invite you to give us a call if you'd like an individual review of your investment folio or retirement plan, we make our time available to you on a complementary no cost, no obligation basis to sit down with you and do a retirement review and strategy session 800-338-5944, 800-338-5944 Amber what's on the plate for today will breaking your retirement to do list can make retirement planning easier. No matter what stage of retirement here and right Peter, we all like lists right is easy to go down the list and then check things off that you've accomplished and see what you have left to do a got several lists in front of me right now and one of those is the retirement planning checklist for the pre-retirement checklist will collect tips for how to prepare for retirement absolutely and and really this whole process should begin as soon as you start earning money save something for the future we want to get to a point where we can stop doing what we have to do and start doing more of what we want to do in order to accomplish that.
We've got to set aside some of what we make a lot of people work a very long time work very hard in order to reach the point in their lives where they can stop doing what they have to do and start doing more of what they want to do but along the way. After you start the job after your paying your bills after your doing a little bit of saving and investing, you should do some regular checkups. Let's start with 10 years from retirement. What should that look like, what should I be doing what steps should I be taking probably about 10 years out from retirement. We should start talking about and setting our tentative retirement date. So when were 20 years old.
We could have an ideal notion of I'd like to retire at 55, but at maybe 45. We need to evaluate whether that's still realistic whether it's still something we want to have happen. We may have landed into a career that we really enjoy. We may have had a few setbacks and feel little underprepared so about 10 years out from your ideal retirement date. You should really set that tentative date and begin to put the pieces in into place and and the plans in motion including you want to review what your current accounts are your current 401(k) easier annuity than other types of retirement income sources yet and really look at how they will turn into income sources because during our working career. It's all about the growth and accumulation of the dollars that we managed to save and invest those those dollars. Then there's number one and really their only job is to try to grow for us, but in retirement. There have to replace that paycheck. So about 10 years out really start looking at examining how those dollars are going to work to replace that paycheck. You want to make sure you have the right tools, absolutely.
And there are number of tools available. Retirement planning tools to gather information help pay her for retirement such as the retirement toolkit prepared by the US Department of Labor, Social Security Administration, and the centers for Medicare and Medicaid services now for 10 years out from retirement were probably not reliant on any of those foundational pieces, but we want to understand what they could potentially mean for us ahead of time so 10 years out from retirement, really just kind of getting the ideas together and beginning to formulate the plan. Also check up on that investment portfolio. Make sure that's on track and doing what it's supposed to maybe consider beginning to move some money off the table and being a little bit more conservative. So that you've got the ability to count on the progress that you've made so far. Being there for you when you do retire. So what if were a little bit closer to retirement.
Let's say five years from retirement. What is that look like for me will another great time to do a check up. We've we've outlined our 10 year time horizon and being 10 years out.
We can be flexible right if it if it ends up taking us 12 years. We can account for that.
If we could find out at that tenure market. We could probably do it in eight fantastic but you want to review it again. You know it's not set in stone so about five years out from that retirement date.
Now we really want to start estimating our future expenses for retirement are we going to carry a mortgage over into retirement. What is the power bill generally look like.
What are some of the big ticket items that we envision lifestyle to be about what's the insurance with the property taxes. Consider the type, the size of the house that you want to live in. If you are planning on relocating. Here's the 800 pound gorilla in the room what about your plan for healthcare. How are you going to pay for insurance, especially if you do plan on retiring before 65 you. How are you going to cover that the health insurance premiums and and the healthcare and update your estate plan. By this time you know minor kids are are now grown there, probably out of the house. You can leave them as beneficiaries are. You can set up that plan to make sure that spouses and family members are taking care of in the in the proper way that you've got your orders for who would be power of attorney, both financial and medical. If you're no longer able to make those decisions. So update those beneficiaries get pay on death designations on your accounts and policies. Make sure that you got the estate plan.
Complementing the financial plan and picture that you have put together that's -5 years from retirement. But that's also good to do the second that you have kids correct yeah I mean I think that as as Dave Ramsey talks about really any functioning adult anyone over the age of 18. Probably should at least have a simple, absolutely important. Once you have children or once you have a spouse once you're married and have somebody sort of dependent for their financial security on what happens to you have those in place. Probably starting out day one in your financial plan. But again, they're not set in stone your life changes involves your documents and your wishes need to evolve with your changing life's circumstances and is not something that we do here Rochon planning we don't do the legal documents right. I'm not a lawyer so I don't draft the will, but I certainly see where they're needed and it's part of the review process when doing comprehensive planning. I'm asking people about their tax situation about their legal situation and integrating that with the financial picture I and in fact you could probably have the the absolute best legal mind on your side on your payroll. The absolute best tax professional on your payroll. The absolute best financial professional on your payroll if they're not communicating and coordinating their efforts.
You're not getting the most out of your planning team. So from a tax planning perspective from a legal planning perspective from a financial planning perspective. All these things really needs to be all brought into and integrated into a conversation and then that conversation needs to be updated and and rehashed on an ongoing basis.
10 years out, five years out one year out from retirement so that definitely brings us to when you're out. Let's say that I'm crossing the finish line and getting there.
I can see my retirement number inside.
I'm one year away.
What's the plan. Let's decide how we want to spend our time right by this point time of your one year out from retirement. The financial part of painting that picture you know that that section of the paint by numbers picture really should be kind of completed kind of field in maybe a couple couple spaces left to to fill in the detail, but by and large one year out from retirement. Financially you're kind of where your going to be there. You're not miraculously going to a quadruple your money in one year before retirement and hopefully you position so you don't lose half of it. One year before retirement. But now we really need to decide how we want to spend our free time.
What is life going to look like what you going to do with your time and begin to think about not showing up to work not having your same peer group not having those activities that kept you busy life I talked with a number of a financial advisor throughout the years. It tell me you know they they have clients that all of a sudden they realize they got way too much free time to spend with their their spouse and their driving each other crazy. Once they retire. I heard that a metal detector or some kind of hobby is a common birthday present one year after retirement. Tina got find something to get you out of my way.
What is your time going to be spent looking like that's really the big thing there.
Evaluate your additional sources of income during retirement really nail down on your strategy for Social Security, pensions, partnerships, rental income and how can your 401(k) or your retirement assets turn into the rest of what you need to consider whether you intend to continue working is pretty funny statement right were one year out from retirement. We wanted consider whether we want to continue working. Let's not retirement. We yet is actually you know retirees are not what they once were in retirement is not what it once was. We got have a new definition of retirement the baby boom generation by and large is very capable able-bodied, motivated, and many of them are finding second or third careers, maybe doing volunteer work or little consulting on the side or something.
To continue, just being active, so consider if that's what you want and create a plan for your physical and your mental health needs and and your long term care not to fear mongering or to scare anybody but this is absolutely a part of your financial plan with Amber between you and I flash forward 30 years here were entering into retirement and our joint living expenses are $75,000 a year and then I have some kind of healthcare need. That doesn't mean that the 75,000 that we are used to living off of suddenly gets redirected to me those healthcare needs that expense is in addition to the 75,000 that you would need to maintain to continue living your life setting, your income is decreasing.
Your expenses are increasing so so having a plan is absolutely part of the financial picture of retirement and I should definitely start way before one year before your retirement age is really absolutely yes and and if you got questions about how to handle an address that there are all sorts of options and and there are options that are not use it or lose it.
There are ways to cover that where you know you will receive at least some benefit from from dollars you're paying.
There's ways to get that included and in other financial tools so lots of different ways to to address that issue. Again, kind of, the elephant in the room that a lot of people choose to ignore.
But the officers with his head in the sand still has backside exposed so so don't just ignore that problem absolutely address that.
That one year out from retirement and then once you do retire checking up on this every year I get continuing to update that plan just because you set that income plan and a financial plan up doesn't mean that it's forever done and you never need to address it again times will change your life circumstances will change the economic environment will change in your plan needs to continue to adapt with all of those changes so if you'd like to get that plan put together double check on that plan. Give us a call 800-338-5944, 800-338-5944 be happy to talk with you about that hammer interesting release that I just read came across another list here. This is the list of 2019's property taxes by state. A state-by-state listing of of property taxes are one thing is for sure the taxes are going to be a factor.
They get you coming to get you going to get you just staying put.
When you earn income you have to pay income taxes when you spend your money you have to pay sales taxes, and even if you live in a paid off house and and you're just staying there, not earning or spending you got property taxes, but this list put together by wallet hub our ranks every state and the District of Columbia in order of their their property taxes.
I found that on average American household spend about $2200 per year in taxes on their homes. According to the US Census Bureau. Somebody surprise me that number one lowest state in the country for property taxes take a guess Hawaii Hawaii number one and I think it's because they bring so much money off of tourism. They don't need to tax the residents that live there, but Hawaiians actually pay more in property tax then many of the next states on this list as a percentage of property value. They are the lowest but the average median home sale price that the state median home value in Hawaii $563,000 interesting so yeah it's a low percentage. But when you talk about half of the homes are worth more than 1/2 $1 million. Hawaiians are spending on average about $1500 a year in property taxes Alabama very low number two on the list, the average child of Bam median alum, Alabama, and in let that window the average person living in Alabama pays $558 a year in property taxes from Alabama. Give us a call. Let us know you. How do you pronounce that one out Alabamians Alabamians.
I would think. But the average home in Alabama. Median home value hundred and 32,000 so significantly lower even though the percentage they pay property taxes higher than Hawaii. They're paying significantly less because the home values are are less so. District of Columbia actually number number five on the list there, like Hawaii average home price $537,000 and in DC, North Carolina work sort of right smack dab in the middle, tied for number 21 with 5.86% property tax rate. Good place to live for. Not too high not to low on this list.
Florida, Texas, Tennessee a lot of places that people relocate to an retirement they go to because they have no state income tax. But guess what, they get you one way or another, so that the property taxes may be a little higher yet. The income taxes low. But the state still needs money.
No surprise here the top of the list. I would consider carefully relocating in retirement to New Hampshire to Illinois and New Jersey. They taught our list for the highest and most expensive states to live in when looking at a perspective from property taxes.
Just… List was was pretty interesting especially for those in retirement who when going through that Rick pre-retirement planning checklist are considering moving or relocating to a different state. Deftly be aware of of that cost of living so Amber we got another list here.
It is the seven financial myths.
Some common planning mistakes misconceptions some assumptions that a lot of plans are based on that you really want to reconsider number one on the left.
The market always goes up right and and we've been taught this right there. We we've heard traditionally that when we talk about challenging the status quo, the status quo is that the market always goes up. That's what the talking heads from Wall Street and on the financial news networks will tell you well. If this were true, would we also commonly hear the other saying when the market does go down. Don't worry, the market always comes back right if the market always went up.
Why would it need to ever come back from anywhere. We know through through experience market doesn't always go up. However, a lot of people's plans for retirement are based on hypothetical projections that the market will always go up. I see a lot of people come in and their their plan for financial lifestyle security is based on the market consistently going up 7% each year, or 10% each year and no say it's an average, you know, as long as the market averages, but the plan the structure of how that plan works is based on that being a consistent number and unfortunately that just does not happen consistently and you know there 20 periods of time where the market has gone up, but often times are followed by prolonged periods of time where the market kind of move sideways and this can be for a very long time as well most recent example 2000 through 2013. If we had invested hundred thousand dollars in the market. In the year 2000.
We lost money gained back lost again and gained it back and we really didn't have $100,000 back until about 2012 2013 1213 years there. They referred to it as the lost decade. Well, if we had been retired and taking money out during that time we would've run out of money and so the market basing your plan on the premise the market always goes up is a very dangerous thing. It's an assumption that I see many people's plans based on and I would strongly encourage you to examine that assumption and and you determine whether you really feel comfortable basing your lifestyle security on the fact that the markets always going to go up consistently in your on planning. We have lots of different options for your retirement.
Whether you want to take a more aggressive approach in the market or more safe approach, we could share in the gains with none of the loss.
Pick up the phone and give us a call 800-338-5944. Again, that's 800-3385 94 port number two on this list here of the seven financial myths. Not only do people assume that the market is always going to go up but they assume that it's going to go way up. The average 10% mythical market return over the course of history. The market has always averaged 10%.
While many market proponents quote that however studies of investor returns say something quite differently and in fact dowel bar is a Institute that studies investor returns as compared to the market. They they study investor behavior and how it affects investor returns they've been studying this for more than 25 years. So 1/4 of a century. They have looked at investor returns compared to the market and said hey investors don't get nearly what the market returns and most of the time it's because were making the wrong moves at the wrong time were making mistakes so there 2018 report just came out as the 25th year. They've done this in 2018.
The S&P lost 4.38%, but the average American investor lost more than twice that they lost 9.42%. So even if an and this is a biggie.
Even if even if the market has historically averaged a 10% rate of return, the average investor has not in fax these studies show that the average investor over that same period has gotten a return of about 3.42%. So a big difference there.
And so when our plan for financial security for for our financial lifestyle.
Confidence moving into a period of decades, were no longer planning on working or earning a paycheck is based on an average rate of return of 10% we really need to examine again this is stuff that we sort through that week we sift through the details and we help people identify where assumptions that their plans are based on may or may not be realistic. So that average 10% market rate of return absolutely a financial myths that I encourage you to to re-examine with you some quick math right okay and I know numbers don't translate well over the radio, some to try to keep this simple.
But if we got three years where we average a 10% rate of return on $100,000. How much would we expect to have about hundred and 30,000 little bit more than hundred and $30,000 right three years with average 10% rate of return on $100,000, 10% per year plus just to simple interest hundred and $30,000. Now let's look at a real scenario average 10% rate of return.
The first year we gain 60% the second year we lost 50 the third year we gained 2060-50+20 that's 30÷3 that's 10 so over that three-year scenario we had an average 10% rate of return.
We start with 100,060% return we got hundred and 60 lose 50% were down to 80 gained 20% were up to 96. So with that average 10% rate of return were expecting our money to be 130,000 are monies that at 96,000 we have less than we started with and have an average rate of return of 10%. So again, just examine this if your plan is based off of some hypothetical historical past performance can never guarantee future results. But people's plans are based on them. And if that's your plan examine that very carefully. Are you comfortable with that assumption. What happens if that doesn't occur.
What is your lifestyle look like forget the financial plan. What does your life look like if the assumptions that your plan is based on don't work out in your favor or or do the opposite. This brings us to number 384% retirement cash flow. I think this is the result of people thinking that the market is going to average 10% what I should be able to take out 4%. Studies have shown that that is not a safe withdrawal rate. This has been the rule of thumb, the 4% rule has been what most Wall Street retirement plans are based off of saying how much income you should be able to pull for your portfolio. Once you retire. There are several problems with this theory and application first.
It includes the words should be and hopefully you and those are not concrete.
You may not feel comfortable basing your plan for retirement on on hope.
Hope is good. Hope is not a plan. We hope for the best. We plan for the work straight. That's the difference. Second, under many market conditions, especially with down years.
Early on in retirement and we never know for retiring into a down market. You can tell that after the fact shouldn't of retired in 2007 because the next couple years, but you couldn't tell that in 2006 right but if you have down years. Early on in retirement, a 4% cash flow becomes unsustainable and increases the probability of running out of money. Third problem that 4% rule was designed for a 30 year retirement and even in that time. It had a probability of failure well today were living longer and most retirees need a plan that will last as long as retirement does for themselves and their spouse.
And finally, it does leave a tremendous amount of doubt and worry if the weatherman says there is a 10% chance of rain. Amber you feel comfortable leaving your house without your umbrella.
I'm taking my umbrella 10% chance of rain like this slim slim to none, write a 10% chance of rain, planner okay so even if it does rain.
You know you're not to ruin your day and your taking precautions or taking extra steps to protect yourself from that slim chance.
Well, this 4% rule has always left a 10% probability of failure. I'm much more worried that my plan leaves a one in 10 chance of me running out of money than I am of that 10% chance of rain.
I guess it really all boils down to. Are you comfortable basing your lifestyle in a plan with the probability of failure and and I would not be know I'm worried about being the one in 10.
But even if I'm not, I'm trying to figure out you and make sure that I'm not that one intent so real problem is that most people don't realize that their retirement plan relies on them falling on the right side of statistical outcomes and and having good fortune when again we hope for the best but we plan for the worst of the plan should show you what happens if you're on the wrong side of statistical outcomes and and still provide for your financial security and stability.
And these are just a few.
We've got a a longer list year of seven financial common very common there. Probably in your plan financial myths, misconceptions and assumptions that you may want to examine or not have time for the full list today, but I encourage you to make sure that your plan your lifestyle once you retire is not dependent upon entities and and a lot of people's are right Peter, I think we do have time for one more and that's number four. Taxes will be lower in retirement right show me where that's written in stone or in the tax code that retirees automatically pay lower taxes in retirement. Spoiler alert here.
It's not so if you plan to live on approximately the same amount of net income if you if you would like to be able to spend the same amount of money in retirement as you did during your working career, then your expenses will stay about the same and there's a good chance you will not change tax brackets dramatically in retirement. I'm your biggest deductions are gone that house might be paid off. The kids are gone.
Even your Social Security can potentially be taxable right, absolutely.
So here's the problem most savers are saving and restructuring their plan under the assumption under the pretense that they will be paying lower taxes in retirement. So what if they're wrong.
What if they did say the same. Yet, what if's taxes stay the same. Will that means that you have less money to live off of than you thought than you anticipated and it could mean that we have to use up more of our money and increase the probability of running out sooner than we would like.
Now what if taxes go up. That's the assumption that I base my plans on me personally, looking at $22 trillion in debt.
Looking at the demographic shift as baby boomers continue to retire by the millions. I think that taxes could go up to me up in Washington right now, there talk about 70% income tax rates that talk about 90% income tax rates and by the way taxes have been there before in our history. They are dramatically lower today, but I think they could go back up in the future if they do and that is the assumption that my plan is based off of.
I'll be fine, but I'm assuming I'm to be paying lower taxes in retirement and then suddenly things change and were paying higher taxes that is going to be one of our largest known expenses in retirement and could jeopardize your financial security. Taxes are a risk depending on what your assumptions are about them in the way that you're planning. Finally, under just wrap one up your number seven the assumption that it's too late to plan or I don't have enough ladies and gentlemen, it's never too late. You better late than never. There's no time like the present. It be great if you got started sooner but if not now, when I would say it's never too early to get a plan put together I see grandparents planning for their children for their grandchildren. Parents making IRA accounts, a priority or Roth IRA accounts, a priority for their kids. Fantastic never too early but if you're 50 if you're 55. If you if you're 68 and you have questions or concerns about what is retirement going to eventually look like I see it, not me, a little faster than before and I don't know if I'm prepared probably started too late. Get a review get that plan put together, figure out where you are and then make some decision, some decisions may be easier than others.
You may face some tough choices but knowing your options and the likely outcomes can provide a lot of comfort and confidence that these are some of the financial myths again didn't have time to get to all of them but be happy to provide you with this list or with the time to sit down, ask a few questions of myself or my wife or her team and even come in for the complementary review by the way, we also for your convenience, offer a virtual review. If you want to do it over the phone over the computer we can get started very conveniently and again never at any cost or obligation for radio show listeners give us call 800-338-5944 is 800-338-5944 visit us online rich on planning.com that's rich on planning.com. Forgive us call now 800-338-5944 40 hearing from you soon will talk to you next week here on planning that is the content of this radio show