20 PMR Tom Hegna Interview

Welcome in. This is Peter Rochon, President and Founder of Rochon Insurance and Investments.

This is August 2, 2016. Today we are going to be joined by a very special guest. He is a multiply published financial author and host of a PBS special, Don't Worry, Retire Happy. Tom Hegna now joins us. Tom, thank you for taking the time out to speak with us today. Thank you, Peter.

Great to be with you. What are some of the most unprecedented challenges that are facing today's retiring generation that maybe we have not seen before? I'll start out by saying that I'm a reluctant author. I never wanted to write a book. I didn't dream of writing a book. It wasn't on my bucket list. So why did I write a book?

Well, here's why. Because right now if your listeners talk to 50 different financial advisors and ask this very simple question, how should I retire, they're probably going to get 50 different opinions of what they ought to do. But you see, retirement's been studied in depth by PhDs all over the world, people like Dr. David Battle of London, Dr. Moshe Milevsky of Toronto, Dr. Menachem Yary of Israel, most recently Dr. Robert C. Merton, a Nobel Prize winner who was just published in the Harvard Business Review.

I've read their research, and you know what their research says? There are not 50 optimal ways to retire. There's really one optimal way to retire, and that's not my opinion. It's based on mathematical, scientific, and economic facts. So what I write about is the math and science of how to retire the optimal way.

Nobody knows what will be the best way, but I talk about the optimal way, and optimal simply means it will be the best more often than anything else will be the best, and it will never be the worst. You know, to get to your question of what these people are facing, they're facing a life where most people don't have a pension anymore, and at a time when they need guaranteed lifetime income more than ever, they're living longer than ever, the market is very volatile, we've printed $4 trillion, the government's $19 trillion in debt with $100 trillion of unfunded obligations, there's a lot to be worried about. You've written extensively about these mathematical and scientific formulas. How do we arrive at our own mathematical or scientific equation in our own individual retirement preparedness? Yeah, so paychecks and playchecks, there were four simple steps, and don't worry, retire happy seven. So let me go over the four simple steps of paychecks and playchecks. Step number one, you've got to cover your basic living expenses with guaranteed lifetime income. So figure out how much you need to live, you know, month to month, day to day, and that should be covered with guaranteed lifetime income. So that's not where stocks fit, that's not where bonds fit, that's not where real estate fits, that's where guaranteed lifetime income fits. But then step number two, you need to optimize the rest of your portfolio to protect yourself against inflation, because you can't just have a steady income the rest of your life, you have to have increasing income for the rest of your life.

That's where stocks and real estate and other things can fit. Step number three, you got to have a plan for long term care. See, that's the one thing most people forget about that can wipe out their entire life's work. I say no retirement plan is complete without a plan for long term care. And then step number four, the most efficient way to pass your wealth to your children and grandchildren is with life insurance.

I tell people all the time, don't leave your kids any money, spend your money, leave them life insurance because you can leave them so much more for so much less. So those were the four simple steps based on math and science and how to take key risks off the table, and how to make sure you're going to be happy and then I expanded on that in the TV special and the other book Don't Worry, Retire Happy. And you go into depth on what some of those key risks are. Can you explain a few of those key risks to retirement?

Sure. I mean, if you think about it, there's quite a few risks. There's market risk, we've seen that markets can go up, markets can go down, if they crash right before you retire, you're in big trouble. There's withdrawal rate risk, you might take out too much money, you know, what's the safe withdrawal rate of taking money out? There's this thing called sequence of returns risk that people don't understand.

We could do a follow up on that if you want to. We might have inflation, might have deflation, you might need long term care, you might die, you might live a long time. There's a lot of risks in retirement, but when you study it, there's only one number one risk. And the number one risk by far, nothing if you've been close, is longevity risk.

Because longevity is not just a risk, it's a risk multiplier of all the other risks. See, if you think about it, the longer you live, the more likely the market will crash. The longer you live, the more likely you're going to take out too much money. The longer you live, the more likely inflation will decimate your purchasing power. The longer you live, the more likely you're going to need long term care. You see, if you retire when you're 65 and you drop dead when you're 68, it doesn't matter if the market crashes 10,000 points. It doesn't matter if inflation is 15%. It doesn't matter if you were drunk 12% a year. It doesn't matter if you forgot to buy long term care insurance because you didn't live long enough. But if you live to be 75, 80, 85, 90, it's all those other risks that can wipe you out.

So Tom, why has the general public been reluctant to adopt some of these scientific and mathematical formulas that you say can help overcome some of these key risks? Well, because look, in the 80s and 90s the market was going so well. Everybody was a saver and investor and they were investing and they were in the market. It was all about diversification and asset allocation and they were just making money and making more money and the 401k was going up. Well, then 2000s hit and we had two major market crashes in 2008 and the 401ks are turning to 201ks and then it happened again and some people are out. They're bitter.

They're never going back in. And when you're an investor and you're a saver, you have one mindset and that's diversification, allocation and that type of thing when you're growing retirement funds. But once you're in retirement or nearing retirement, once you get in your 50s and 60s, you can't do that anymore, okay? Because if you lose money right before or right after retirement, it can devastate your whole retirement. So once you get into the retirement phase, it's way different than the accumulation phase. If you think you're going to retire with a portfolio and just withdraw money off it, I'm telling you that isn't going to happen.

That's the way you run out of money. And so in the distribution phase, what you've got to have is you've got to have guaranteed lifetime income, you've got to take longevity risk off the table, you've got to take long term care risk off the table, you've got to take withdrawal rate risk off the table, sequence of returns risk off the table. So you've got to take these various risks off the table to retire successfully. And that's what the math and science shows.

These aren't my opinions. These are what all the PhDs who study retirement say you've got to do. And it's really a simple formula once you figure it out. And we've spoken about the importance of having an income plan for retirement or an income allocation as we have called it. That income allocation is vastly different dynamically than the old asset allocation that you are discussing.

Can you discuss some of the key differences there and why that income plan is so vital for retirement success? Yeah, well, it kind of comes back to the sequence of returns risk. The stock market's averaged 12% a year since 1924. So people say, well, geez, I'll just put my money in the market and then I'll just withdraw money out of that. Well, if you give your money in a diversified portfolio and you're taking income off, you can't withdraw 12% a year, you can't withdraw 10% a year or 8% or 6%, not even 4%.

Morning star says the safe withdrawal rate is 2.8%. But see, to some people, that doesn't make sense. If the market's averaged 12% a year, certainly it can take up more than 2.8. And they don't understand that.

No, you can't. Because if you have a diversified portfolio, I don't care who's running that. It could be Warren Buffett. If the first three years of your retirement, the market goes down, down, down, there isn't much else I can do for you. You're either going to have to put in more, take out less, or you likely will run out of money.

That's called the sequence of returns risk. And because of this sequence of returns risk, you cannot go into retirement the same way that you saved and accumulated money. And so you've got to have a base level of guaranteed lifetime income. Now, there are three sources of guaranteed lifetime income.

The first source is Social Security. A lot of people know about Social Security, but they don't know what it is. Social Security is a lifetime income annuity. It's a guaranteed paycheck for life. The second source is a pension. Now, people know about pensions, but do they know that a pension is a lifetime income annuity?

A guaranteed paycheck for life. And as I said, math and science says your basic living expenses need to be covered with guaranteed lifetime income. So Social Security counts and pension counts. But whatever your short, you're supposed to go find an insurance company and buy some form of lifetime income annuity.

Now, Peter, you and I have been around the block enough that we know, I've spoken all over the world. People come up to me and they say, Tom, we don't like annuities around here. Susie doesn't like annuities. Dave doesn't like annuities.

Ken Fisher takes out full beige ads. I hate annuities and so should you. We don't like annuities around here. I'm surprised. It's like, seriously, you're telling me you don't like annuities?

So let me understand what you just said. You paid into Social Security for 35 years, but you're going to call up the Social Security administration, say stop those checks. We don't want another Social Security check in this house. We don't like annuities.

Are you seriously going to do that? You work for that company for 42 years, but you're going to call up HR, say stop those pension checks. We don't want another pension check in this house. We don't like annuities. Well, then they say, well, I guess we like those kind of annuities. It's just those insurance company annuities we don't like. And I say, really? Why is that? Well, because they're all loaded up with fees.

Really? Do you know what the total ongoing fees and a lifetime income annuity are? There's zero. It's not even a fee product. If you're guaranteed $1,000 a month for the rest of your life, get so much, you get $1,000 a month for the rest of your life. Now, there are annuities that have fees. Variable annuities have fees. Some index annuity riders have fees.

It doesn't mean they're bad. What you got to do is you got to weigh out what is the guarantee versus what is the fee. But basic lifetime income annuities are not even fee products and people just don't understand that. And a lot of times in annuities of the past and in your examples of Social Security and pensions, Tom, the lump sum is not transferable. If you die early with Social Security or pension, oftentimes that lump sum, the money that you've paid in, goes back into the pool to pay other people who are living longer. Whereas the private annuities, a lot of times you can keep those within your estate and within your family, correct?

Yeah. And you can have the check continue to a spouse, you could have the check continue to a child, or you could have the check continue to a grandchild. I tell people these things can pay for 100 years. The key is to have guaranteed lifetime income to at least cover those basic living expenses. If your listeners only got that out of this interview, I'd be happy because they would be much more likely to be happy and successful in retirement than the people who say, well, I got a broker and my broker handles all that.

Oh yeah? If they don't have some guaranteed lifetime income in your portfolio, you're likely to have problems down the road. Well, Tom, you mentioned the difficulty, especially with the sequence of returns risk. If we have some down market years in the early years of retirement, I think that's an easy one. We'll all just retire in years that we know that the market's going to be up for the first several years. Yeah.

Wouldn't that be nice? A lot of people retired at a lot of different times. You and I both know examples. I have them in my book where somebody retired one year and five years later, another person retired, one person's a multimillionaire, the other person's broke.

They did the same things, but they did it at different times with different markets. People just don't understand how that sequence of returns risk can just decimate portfolios. But that's why I went into the research. You know, nobody's reading these PhDs, white papers, but I did.

And then I put it into a book that people can simply understand. Well, Tom, why do you see that Wall Street is failing today's generation of retirees in creating the security so that they can not worry and retire happy? Well, because the Wall Street way is just put it in the market and the market does good over time and by dividends and by utilities and by real estate, that's the Wall Street way. Well, I don't see any PhDs writing white papers on that's the way to be optimal in retirement. Certainly those things can play a role in your retirement. That's where you optimize to protect against inflation. But I don't see anybody out there saying, oh, buy real estate and buy dividends to cover your basic living expenses in retirement.

That'd be ridiculous. And so I just don't think a lot of the Wall Street people understand the math and science behind a successful retirement. And I always, you know, there's always a doubter out there, Peter. So I always give people a chance to prove me wrong. I said, here's all you got to do.

You think that I'm that I'm filling you full of bull or you don't believe me, here's all you got to do. Put together a portfolio that is both stocks and bonds. It's always going to have stocks and bonds. Take some of the bonds out, put a lifetime income annuity in. Do you know what that'll do to every single one of your portfolios? It'll lower the risk and increase returns.

And I tell people, if you don't believe me, prove me wrong. But here's why you can't. Inside of a portfolio, the way that a lifetime income annuity works, it works like a triple A rated bond with a triple C rated yield with zero standard deviation. What if you had a triple A rated bond with a triple C rated yield with zero standard deviation? What would it do to every one of your portfolios? It would lower the risk and increase returns.

Tommy's not making this stuff up. These are mathematical, scientific and economic facts. Well, the economy that we are facing is more difficult than ever. And folks, you want to add some security, some stability to your portfolio. And that's what Tom Hegner has written about in his books, Paychecks and Playchecks. And don't worry, retire happy. Tom, we appreciate you sharing your time, your knowledge and your insight on successful retirement planning with us today. Thank you for being here.

Thank you, Peter. I am Peter Rochon, president and founder of Rochon Insurance and Investments. This is Planning Matters Radio. If you have questions about how to design or implement strategies for your financial future, you're welcome to give us a call. 800-338-5944.

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