20 Planning Matters Radio - MYTHS

If you fail to plan, plan to fail.

How do you want your future to look? We want you to plan for success. Welcome to Planning Matters Radio.

And welcome into the program. This is Rich on Planning and Planning Matters Radio. I am Peter Rishon, founder and advisor at Rishon Planning, along with my lovely wife, Amber Rishon, here again with another Saturday morning radio show for you guys. We appreciate you tuning in to Planning Matters Radio and in fact, planning does matter. And at Rishon Planning, we strive to help people identify opportunities and protect what's important, primarily protecting your paycheck through all walks of life. And on this program, we will be addressing some of the big mistakes planners make.

The biggest is not having a plan. Absolutely. Yeah, there's a lot of people unfortunately, sort of just winging it, a hope and a prayer, right? I hope that things work out. I believe that I'm making progress. I think that I'm doing the right things, but without a plan, there's no knowing there. And so the plan is what allows you to remove that hope, that think, that believe, and replace that word with know as you are talking about your financial progress. So we want to help you identify some common planning myths and mistakes and misconceptions that we see people making as they fall for conventional wisdom or what they have been told, what we have been told, without really examining the facts. And so today we're going to go through some myth or misconception. We're going to go through some fact or fiction and identify some opportunities maybe for you to examine some of the assumptions that your plan is based on that may result in you not achieving the goals that you have set out to achieve.

That sounds great, Peter. So fact or fiction? Social security is tax free.

Well, it's a little bit of both. The answer to that one is it depends. As social security was originally designed and intended, it was supposed to always be tax free.

However, in 1983 under Ronald Reagan and then again in 1993 under Bill Clinton, that changed. And social security could still potentially be tax free, but it also can potentially be up to 85% taxable. And it all depends on your adjustable gross income, your other income.

It depends on how much income you are bringing in. If social security was to stand alone and be your only income in retirement, then most likely it is a tax free source of income for you. However, social security itself gets added into the equation half of your social security plus just about all your other forms of income. And if that meets or exceeds certain thresholds and if you're married over $32,000, pretty low threshold there, if you are bringing in over $32,000 including half of your social security, then your social security income is going to be 50% taxable. If you're earning over $44,000 or bringing in over $44,000 of taxable income, then your social security is going to be 85% taxable.

So bottom line, what does that mean? If we assume that social security is tax free and then we find out in actuality it's taxed, that means we get to keep less of what we anticipated we would. And therefore, we have to pull more money out of our personal accounts or lower our standard of living in retirement.

So very important for you to identify when and where and how your social security may become taxable and how much you'll actually get to keep. Once we identify that though, are there things that we can put into place to help our money be more safe and secure? Absolutely. And we talk about it often. It's not what you make, it's what you keep and Uncle Sam stands in the middle there.

That's the difference. There are strategies and especially if you begin planning early on. If you really examine this assumption of I'm going to be in a better tax environment when I retire, that's the way that everybody's planning. That's why we defer and delay paying our taxes in our 401Ks.

If we examine that early on and say, well, let's rethink that, maybe that's not always the case. And we begin planning to have a tax-free retirement, there are absolutely strategies that you can keep much more of the money that you earn over your lifetime. So as we help people plan and prepare, we help them identify strategies to create more tax-free income.

And before we jump into any further of these myths or misconceptions, Amber, why don't we remind folks that we always offer the opportunity for a complimentary review of your game plan for retirement and of your strategies to set yourself up to achieve your goals. We sure would love to sit down and have a free complimentary review with you guys if you would just pick up the phone and give us a call at 800-338-5944. Again, that number is 800-338-5944. You can also go to richonplanning.com. It's our last name, for Sean, but it looks like richonplanning.com. You can listen to past editions of the Planning Matters radio podcast.

There's lots of great resources, including my new book, Understanding Your Investment Options, now available on Amazon. You can go to our website richonplanning.com and link through and order your copy of that book. Also, if you'd like to get access to some of those old podcasts, you can ask Siri or Alexa, hey Alexa, play the Rich On Planning podcast. Both of those are phonetic spellers, Siri and Alexa. They are hooked on phonics, so they understand us as Rich On Planning rather than Richon, the way the name is pronounced. Anyway, if you'd like to hear more editions of Richon Planning, you can ask Siri, you can ask Alexa, you can search on iTunes or iHeart, lots of different ways to find us.

We always try to present some important information. I think all of the myths and misconceptions that we are talking about today can unfortunately lead to mistakes if you count and rely on them. Absolutely, and getting back on topic, fact or fiction, I can work and collect social security. Absolutely you can.

You can absolutely do that. However, before full retirement age, you may want to seriously consider the implications and the penalty that you could incur. So, the government gives us a full retirement age, and on our social security statement, there's three numbers. You can take your social security benefit at your entitled full retirement age, and that's somewhere between 65 and 67, depending on the year that you were born. You can wait until 70 to maximize your benefit, or if you really need it, you could begin claiming and collecting social security as early as 62. They let you file and collect early.

However, that's if you need it. If you're out there working and earning an income, the government doesn't really view that as truly needing it. They view that as double dipping. If you earn more than $17,640 and are collecting social security before your full retirement age, for every $2 you earn above that low, low limit of $17,640, for every $2 above that, they take back a dollar of your social security benefit. If you begin claiming and collecting early, that stops the potential growth because your social security benefit could have been much higher had you waited a few additional years. So, it's kind of a double whammy there. So, I hear a lot of people saying, get social security at 62. Get it as soon as you can.

Not so fast. That's a very individual decision, and it's a lifelong decision. It's got permanent implications. Amber, you and I both know there are some decisions that we have made that are lifelong lasting decisions.

Some are beautiful. The decision to ask you out on a first date. A great, great decision. Lifelong lasting implications.

But there's also a few things that I say, if I could do that again, I would have done that different. You don't want social security to be one of those decisions. And so, claiming and collecting at 62, if you need the income is one thing, but if you're thinking, I just want to rack up and supercharge my retirement savings, so I'm going to go ahead and start social security while I'm still working, there are actually negative implications to that that you need to carefully consider. And again, all of these that we're talking about today, these common planning myths or misconceptions, somewhere they may be based in truth, but you need to understand how they apply to your situation before you make any kind of decision. And that's where consulting with a qualified financial and retirement planning professional is really going to pay off in spades and benefits for you in the long run. Invest just a little bit of your time so that you can have a better, more comfortable and confident financial future. And if you're willing to invest that time, we're willing to donate a bit of ours and help you in that process, answer and address any of your questions directly. Just give us a call, 800-338-5944.

800-338-5944. Following through with those myths and misconceptions of planning, two seem to kind of go together. Most people feel like they already have an idea of what that retirement number is, and a lot of people also feel like taxes are going to be lower in retirement. What would you say to that?

Right. So, you know, again, a seed of truth there, because back when that idea first started, when the American economy really began adopting the 401k, the idea that you would be paying lower taxes in retirement probably was more universally true than it is today. But today we are in a lower tax environment. Tax brackets and tax rates have gone down, and we've got $22 trillion in debt.

We just broke that $22 trillion threshold. We've got 75 million baby boomers who are moving into retirement, so they're beginning to pull money from and depend on Social Security and Medicare and pull dollars from their retirement savings accounts rather than contributing to all of those things. And I don't see where taxes are going to remain as low as they are today. And in fact, up in Washington right now, there are some out there that are talking about a 70% tax bracket or a 90% tax bracket. They're already talking about substantially increasing the amount of taxes that Americans are paying. Now, they're also offering to pay for everything for free, but on the other hand, that money's got to come from somewhere. Taxes is where that's going to come from.

So myth or misconception? Yeah, I think that this is a misconception because nowhere is it written in the tax code that taxes will automatically be lower in retirement. I have not met one retiree yet that got a nice heart bubbly letter from the IRS saying, you've made it to retirement. We're no longer going to charge you taxes.

It doesn't happen. Taxes are based on income, the amount of income that you earn. So if you want your income to stay about the same in retirement, you're likely going to pay about the same amount in taxes unless you've done some very proactive tax planning, building up some money in those Roth accounts, building up some money that you've already paid a great deal of tax on.

But that's not the way most people are doing it. Most people are saving in that 401k where they have deferred the tax. They've kicked that can down the road and now they have an even larger bill waiting for them when they retire. And we can definitely help with that here at Rashaan Planning.

If you are interested in that free complimentary review, pick up the phone and give us a call at 800-338-5944. Or if you'd like a copy of my husband's brand new book, Understanding Your Investment Options, pick up the phone and give us a shout at 800-338-5944. And there definitely are strategies available to help you morally, legally, and ethically minimize that tax liability. But nowhere is it written in stone that taxes are lower in retirement. And really two of your biggest potential deductions are probably gone or on their way to being gone once you reach retirement. The children are out of the house, if they were a deduction previously, and your home is paid off.

So the mortgage interest tax deduction is either gone or you're making your way toward a paid off house and it could be gone into the future. So again, basing your plan upon the assumption that taxes are lower in retirement. You always have to ask yourself, what if this assumption is incorrect?

Right? Every plan is based on some amount of assumptions. And so right now we're assuming taxes are going to be lower in retirement. What if we're wrong about that? That means that we don't have as much, we don't get to keep as much of our income. Which means we've got to pull more out of our accounts or lower our standard of living or risk running out of money sooner than we would like to think about. And so if we reverse that and we assume taxes could be higher into the future and we're wrong about that assumption, if we've planned around the premise that taxes could go up and then they don't, they stay the same, then we get to keep more money than we thought we would be able to. That's a much better situation.

I like that side of things a whole lot better. So I am basing all of my planning under the assumption that taxes could go up into the future. And for anyone who is maybe 45 and below, I would base all of your plans upon that. And again, there are some times and places for tax deferral, but I think that you will, under that assumption, be putting yourself in a better, more advantageous situation. And if you've already built up a large tax deferred balance, well there are still strategies to move some of those dollars from tax deferred to tax free, and we can work through some of those with you and show you where you can take advantage of some opportunities to pay the least amount on those dollars as possible in taxes. So a lot of people have built up a large balance. How do they plan for retirement? Right, that's that retirement number, right?

And there was a real clever commercial a few years back and it had big green numbers floating over people's heads. A million dollars, two million dollars, that's your retirement number. Well, just because you've built up to some certain amount, pick your number, a million dollars, 1.5 million dollars, 500,000 dollars, whatever it is, that arbitrary lump sum number does not indicate if you are financially prepared to face 25, 30, 35 years of unemployment where that dollar figure has to generate your income.

Along with health issues. Right, and I mean day one of retirement, it does not really tell you if you're prepared, but extend that out. Most people have trouble making financial decisions to budget a finite amount of money just through the month. Now we've got to budget a finite amount of money for 30 years plus.

It's very difficult to do and the lump sum figure alone does not indicate that you're prepared. Neither does an age. You know, I see a lot of people kind of picking an arbitrary age. I'm 62, I'm going to retire. I'm 65, I'm going to retire. When I hit 67, I'm going to retire.

That age does not tell you if you're financially prepared to face retirement. What does tell you what your true retirement number is, is based not in the lump sum but in the budget. And we go through a pretty standard exercise with our clients and with radio show listeners all the time and it is identifying that retirement number or what we call the income gap. We look back over your average spending and you don't have to keep a very detailed budget for this.

There are ways to figure out what your average spending is pretty quickly and easily. But from that average spending, we reduce that by any sources of income that you don't have to generate from your savings and your investments, which are social security and pensions mostly. What you're left with is your monthly income gap. That's the amount that your assets have to be able to generate for you, consistently month in month out to cover your lifestyle, what you're used to living off of.

And we can reverse engineer that and figure out what that retirement number really is. So I think that pairs great with our next myth and misconception of folks believing that they only need the 70 to 80% of their income in retirement. Right. You know, I'm joking here a little bit, but I have not yet met anyone that wants to drop income when they have more free time.

Right. Right now, I'm either working, earning an income, or I have free time where I am spending money. Bills are still due in retirement. Taxes are still due in retirement.

If you're saving in a tax deferred account, then those dollars are going to be taxed just like brand new income in retirement and more free time equals more spending. So when we plan for only needing 70 to 80% of our pre-retirement income once we leave that paycheck behind, that is a plan to drop lifestyle. Only if you are currently saving 20 to 30% of your wage income, of your salary, into retirement accounts does a plan for only 70 to 80% of your income, once you retire, constitute the same lifestyle.

Right. So you earn X amount. Let's, nice round numbers here, let's say that we're earning $100,000 a year and we're doing our retirement savings off the top. We're saving 15% of our income and then Uncle Sam is taking another 20% of our income.

Right. So we're bringing home 65% of what we actually earn. After those two things are done, we're bringing home 65%. Well, if we're saving in that tax deferred account, we've got to add that back because those dollars that we have saved are still going to be taxable to us. So that tax, we've got to add that 20% back.

So now we need 85% just to bring home the same amount of money. And by the way, inflation is real, right? At 3% historical average inflation, the need for income doubles in 24 years. So this is another planning myth or mistake. Like compounding inflation?

Right. Inflation compounds our need for income and over 24 years at 3%, the need for income doubles. And this is another common mistake that I see people counting and relying on all the time thinking that in 30 years their need for income is going to be the same as the day that they retire.

It is not. Yes, you might have a little bit more activity the first few years because you're excited and you're healthy and you're traveling and you're doing things that are on your bucket list and then activity may be reduced a little bit as you get into your retirement routine. But the cost of bare essentials goes up over time. And so if we need $5,000 a month on the day that we retire, you're likely never going to need less than that per month in order to maintain your standard of living. And in all likelihood, that is going to rise significantly over the years in retirement. So basing a plan on a flat level income throughout your entire retirement is another big planning mistake that I see. And I do help people address with that written retirement income plan that we put together, we help to incorporate inflation protection and additional streams of income that can kick on into future years.

And if these are your concerns here at Roshan Planning, we would love to help if you would pick up the phone and give us a call at 800-338-5944. And again, if you would like to pick up a copy of my husband's book for free, Understanding Your Investment Options, pick up the phone and give us a call at 800-338-5944. Now we also have a great report that I've put together that details a few additional financial myths. In fact, it's titled The Seven Financial Myths, Common Planning Mistakes and Misconceptions to Reconsider. And if you would like a copy of this report which details a few of the things that we've talked about but several additional planning myths and misconceptions, give us a call at that same number or visit us online, richonplanning.com or 800-338-5944.

You can request a copy of that report. We'll email out a copy to you and you can look it over and make sure that your plan is not reliant on any of these myths or misconceptions to hold true. Just to give you guys a brief overview of the seven financial myths, number one on the list is the market always goes up. Well the market, we hear the language, the market has always gone up or the market always goes up over time. But if you have any kind of recent memories of the market, you know that's not always true.

If that was always true we wouldn't need statements like it's just a paper loss, don't worry the market always comes back and we wouldn't have suffered through a down year like 2018, a down year like 2008, a down year like 2000, 2001 through 2002. There have been many periods where the market has not always gone up. But many people's plans are reliant on the market always going up.

I have seen, I can't tell you how many, it's a large percentage of the plans for retirement, the so called plans, they're really projections, they're not plans. But when people come in and say here is my plan for retirement, it is based on a projection of a steady increasing positive rate of return. Those projections assume that the market is always going to move up six or seven or eight or nine or 10%.

That's not the way that the market works. The market goes up, goes down, goes up, goes down in a very random nature and we may have an average rate of return of seven or eight or nine or 10%. But that's not the real return that an investor makes and in fact that's number two on this report, the seven financial myths is the average 10% market rate of return. That's right, many market proponents quote the mythical 10% average return over the history of the stock market. That does bring us to number two on the list Peter, the 10% average market return. And I think that this is one of the greatest fallacies in the financial world where funds get to advertise their previous rates of return and they talk about the past performance, the past 10 year rate of return has been over 10%. Let's examine that.

Let's look at the way that works. So if we've got a situation where we have a 60% rate of return in the first year and then a negative 50% in the second and then a positive 20% rate of return in the third year, and I know numbers over the radio, I get it, but positive 60, negative 50, plus 20. So 60 minus 50 is 10, plus 20 is 30, divided by three, that's an average 10% rate of return over that three year period. But what if we had invested $100,000 over that same period and the first year we got a 60% rate of return, our $100,000 turns to $160,000. The next year we lose 50%, we're down to $80,000. The next year we get a 20% positive return, we are up to $96,000. With an average 10% rate of return over a three year period, our $100,000 turned into $96,000. And we weren't even taking money out, that's just what happens to our actual money and that's the difference between linear averaging and geometric averaging, which is what actually happens to your money.

So this myth of the 10% average rate of return, a lot of people count on that for how much income they think they should be able to generate and that's not the way that money works when you're withdrawing money at all. That's why it's important to have a conversation with an advisor who has your best interest in mind. So pick up the phone and give us a call at 800-338-5944. We will offer you a complimentary review and sit down with you and discuss what your best options are.

Again, pick up the phone, give us a call, 800-338-5944. And that's really where I see a lot of people having a conversation with an advisor. It goes something like, we believe that we have identified good funds for you to get a positive rate of return. We think that we've identified a strategy to diversify and protect you on the downside. And we believe based on our strategies that you will have a secure retirement. All of that boils down to the person walking out thinking I hope they're right. You know, when it's just a projection, when it's I think, I feel, I believe, all of that is I hope.

I hope this plan works. Hope is not a strategy. So in order to replace those, we need to understand math. And I feel like when I look at a lot of retirement plan projections, they're not based in reality nor are they based in math.

What actually happens to money in the market? And that's why a lot of people think they can withdraw a much higher cash flow from their assets than they really are going to be able to count and rely on throughout retirement. That's why I see a lot of people making the assumption that somehow they'll be keeping more of their money in retirement and that taxes will be lower. That's why I see a lot of people believing that they no longer have a need for life insurance in retirement. Now that big lump sum, that $500,000, that million dollars that we've built up on the day that we retire is probably the largest amount of personal wealth we've ever had.

That gives a lot of people a false sense of confidence saying, well, I've got all this money right here. I don't really need life insurance. I'm not replacing my paycheck. I don't have debts.

I don't have kids at home that I need to get through college. Why would I need life insurance? And they forget that over retirement, a period of 25, 30, 35 years, they're going to be spending out of that lump sum and the market is going to be going up and down at the same time. And lump sums have a way of declining and depreciating over decades.

Wouldn't you feel a lot more confident spending time with your spouse, enjoying doing things together if you knew you had set up a way for them to replace the lump sum that's giving you that confidence rather than being uncomfortable sitting there looking at each other watching your account balances dwindle away? Life insurance is an important part of retirement planning. And I know the saying is buy term and invest the rest.

And that's absolutely accurate. If you start out buying term insurance, which is the cheapest way to cover the potential need if you were to pass away, and then you invest the rest, then you can build up a lump sum that's sufficient to cover that. But most people forget to invest the rest. And the rest is the difference between the cost of the cheap term and the cost of the permanent insurance that you really need to have in place in order to cover this need.

Most people don't invest the rest and therefore the term expires and they are not properly insured at that point in time. So a lot of different aspects here that we've covered today as we've discussed some myths, mistakes, misconceptions. But the number one thing, Amber, I think is that it's too late for me to plan or I don't have enough to plan. We hear that a lot here at Rashawn Planning. Again, we have covered a lot of different topics today. Planning for your retirement as well as some life insurance needs.

If you are interested in a free consultation, please pick up the phone and give us a call at 800-338-5944. It's better late than never, ladies and gentlemen. There's no time like the present. Procrastination is not preparation.

It is not providing for forward progress. So if not now, when? Let's get that plan put together. Whether you're 25 and just starting out, whether you're 65 and looking at retirement in the near future or anywhere in between or even beyond those. If you want to get a better handle on your finances, if you want to get a plan put together, give us a call. Come in and see us. It's a direct conversation. We'll answer your questions with specific answers and after just a little bit of time, if we decide together mutually that it would be beneficial to continue our conversations and form a relationship, fantastic.

If not, at least you have some answers. We may have helped you identify some holes that have been left unaddressed, some red flags in your plan. And if you'd like to get started with my new book, Understanding Your Investment Options, great way to get started in understanding some different choices and options and benefits and disadvantages of each there in that book. Pick up the phone, give us a call. First 10 callers to the program today will send the book out to you for free, Understanding Your Investment Options. Give us a call now. 800-338-5944.

800-338-5944. Always a pleasure talking to you, ladies and gentlemen. We appreciate your time.

From our family to yours, we look forward to hearing from you soon or talking with you next week. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax, or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss of principal.

Advisory services offered through Brookstone Capital Management, a registered investment advisor. Annuity guarantees are based solely on the financial strength and claims paying ability of the issuing company. Withdrawals of growth from annuities may be taxable as ordinary income in the year it is taken. Individuals should review contracts for specific details of the product's features and costs. Early withdrawals may subject the owner to penalties, fees, or taxes. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker-dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.