2021 EP1127 - PLANNING MATTERS RADIO - THANKSGIVING

We want you to plan for success. Welcome to Planning Matters Radio.

And welcome into the program. This is Planning Matters Radio. I am Peter Rochon, founder advisor at Rochon Planning. You can find us online at richonplanning.com. That's where you can download a free copy of my book, Understanding Your Investment Options. And I appreciate you tuning in to this special best of Thanksgiving edition of the program. If you've got any questions about your financial, your investment, your retirement planning and progress, I encourage you to give us a call at Rochon Planning, 919-300-5886.

919-300-5886. We're going to get right to it because on this edition of the program, we're going to highlight some of our favorite interviews over the past couple years. We've got some fantastic guests. The first of which is the former Comptroller General of the United States of America, David M. Walker. Now in his role as Comptroller General, David basically balanced the checkbook for the United States. In his interview, he discussed the role, the reasons why he resigned from the role, and how he is personally planning for a more confident and secure financial future.

So without further ado, let's get into some of these best of interviews from Planning Matters Radio. David, it probably took a lot of hard work and dedication to obtain that high level position basically as the Government Accountability Officer as the Comptroller General. And you made the hard decision to step down from that position.

What led to that difficult decision? Well, when I became Comptroller General of the United States and head of the Government Accountability Office, I had three goals that I set for myself. And I had accomplished two of the three goals after about nine years. And I ultimately determined that I was not going to be able to accomplish the third goal in that position. And that third goal being being able to not just talk about the problem with regard to our nation's finances, but to be able to address sensible solutions that are nonpartisan in nature, but should be able to gain bipartisan support.

So that's why I left. The mission of the GAO is to support the Congress to help improve performance and assure accountability. And the Congress generally does not want the GAO to be in the policy development business. So to the extent that you are going to be making specific recommendations about these are the type of tax reforms you need to consider. These are the types of reforms to social insurance programs. This is what you need to do in the area of defense spending.

This is what you need to do in the area of government organization operations. It crossed the line between what historically they wanted GAO to do and what I felt needed to be done. The only one that I didn't get accomplished was to have a meaningful down payment made to be able to put our nation's finances in order.

And that's what I felt you had to get into specific reforms, which the Congress didn't really want the controller general to do. So I ended up founding my own Comeback America initiative. And I proved that the American people were a lot smarter than the politicians realized. They can handle the truth. They're willing to accept tough choices, as long as they're part of a comprehensive and integrated plan. It's designed to achieve a specific goal that they deemed to be fair.

So I proved that in particular, we did a $10 million a minute tour, which is how fast the unfunded obligation and debt was going up at the time, 10 million a minute. And we were able to engage the public and gained a super majority support for a range of budget, social security, Medicare, Medicaid, health care, defense, tax, and other reforms that were designed to achieve a specific goal. And the whole point is, if you want to solve this problem, you can't do it with an inside the beltway solution. The people need to put pressure on their elected officials to be able to come up with solutions, because the far right is going to have to compromise, and the far left is going to have to compromise in order to get this job done. Now what we need is the Congress work together to operationalize.

But that by itself is not going to get the job done. The President has not talked much about how do we eliminate waste in the Defense Department? How do we end up separating the weak from the chaff between which government programs are working and which ones aren't? How do we reform social security and Medicare to make them solvent, sustainable, secure, while not busting the bank? And those are the things he's going to have to address. We're not going to be able to grow our way out of this problem. Debt as a percentage of the economy continues to grow. And while I agree that we need to grow the economy, create more job opportunities, we're also going to have to end up reforming health care, social insurance programs, defense spending, and other areas.

And what I haven't seen is much talk about that. The fact of the matter is the federal government's grown too big, promised too much, and it's going to have to restructure. If we can get the economy growing faster, that will help. But tough choices are going to have to be made with regard to spending, including social insurance programs. People need to understand that eventually those reforms will be made. They're likely to live longer than they expect. They're likely to have to pay more for health care than they expect. So they need to plan, save, invest, preserve, try to get out of debt as soon as they can so that they can have the flexibility to be able to deal with the kinds of changes that ultimately are going to have to happen.

Former Comptroller General David M. Walker then expanded on the conversation by discussing his greatest concern with some specific government programs. Well first, social security is arguably the most important and clearly the most popular federal program. It is underfunded by about 11 trillion dollars. When the so-called trust fund goes to zero in, you know, frankly less than 20 years from now, it's still got about 78 cents in revenue for every dollar of promised benefits.

So it's not like it's going to have no money. But we need to reform it now to try to be able to make it solvent, sustainable, secure indefinitely. People may have to work somewhat longer, they may get somewhat a different amount than they think they're going to get, but they're going to get something. The real changes are going to be in the health care area. The government is way over promised on health care. Medicare is underfunded about 30 trillion dollars in current dollar terms. Its trust fund is going to run out quicker than social security and obviously we have to end up deciding what are we going to do about the Affordable Care Act. So the biggest changes are going to come in the health care area and people better understand that they're likely to have to pay more for health care than they expected.

To address the concerns that David Walker expressed about our fiscal policy on a governmental level, he explained what he is doing and what he feels we as individuals should do in order to help secure our financial future. Well you have to plan, save, invest, preserve. When you get closer to retirement, look at your investment strategy or asset allocation to make sure that you don't have as much volatility. And when you get to the point of retirement, you need to think about how do you want to convert your savings? Do you want to consider annuities as an option, which protect you against longer life expectancy than you expected? You know, myself, you know, I've gotten out of debt. I've got a significant amount in an IRA.

I've got several life annuities, two of which are indexed for inflation or other factors. And so I think I'm in good shape. But you know, that didn't just happen overnight. I had to contemplate that and take steps over many years in order to put myself from the position that I am today. And others need to do the same. I'm not worried about myself. I'm not real worried about my kids. But I'm very concerned for my grandkids' future. And that's one of the reasons that I'm still engaged in this fight to try to be able to put our finances in order because I think what's going on now is irresponsible. It's unethical. It's immoral. We're burdening the future of our children and grandchildren when they're going to have a lot tougher competition in an increasingly competitive and global economy.

That's not the right thing to do. And I'm going to do what I can to change that. As the former comptroller general, Mr. David M. Walker certainly has a uniquely qualified perspective on how the government will raise the capital to meet their ongoing obligations. Well, nobody likes to pay higher taxes, especially if they don't think they're getting a good deal with regard to the taxes they're already paying. And there's no question that we can generate additional revenue through more economic growth. Most of the changes we're going to have to make are going to come on the spending side. But I believe that in time, we're going to have to end up getting more tax revenue as a percentage of the economy than we have historically. So there will be somewhat higher tax burdens over time, but the bigger changes are going to take place on the spending side, as they should. For sure, I think you need to save and invest for the future. Reasonable people can and will differ on whether or not you want to do it through, for example, a Roth IRA or a regular IRA.

The difference being is when do you pay taxes? Obviously, most all Americans are covered by Social Security, which is the foundation of retirement security. Many Americans are included in employer-sponsored plans like 401k plans.

And so those are already set up. You need to take advantage of those to the maximum extent possible, at least to the employer match. So the real decision is, what, if anything, do you do beyond that with regard to an IRA? And do you want to do it through a Roth or through a regular IRA?

And you can obviously talk to your people about the tax differences there. Well, if you would like to hear more or learn more about what David Walker was describing as the way that he was personally planning for a more stable, secure, and confident financial future, give us a call at Rashaan, planning 919-300-5886, 919-300-5886. Next up on this special holiday Thanksgiving best of edition of Planning Matters radio, we have the man who was credited with incepting the four percent rule for generating income in retirement. Now, this is a rule or model that has been used by the majority of Wall Street retirement forecasts for nearly 30 years.

William Bengan is the planner that designed that model. And we talked with him about how he came up with the four percent rule and reflecting on that rule, what careful savers, planners, and investors need to pay attention to in their specific situation. Great to be here. We appreciate you taking the time. Now, I know that you are retired. Do you miss the financial industry? You know, it was a great, a noble profession. I really enjoyed the years I spent it. Of course, I still keep in touch with a lot of my former colleagues, so I still feel involved.

Still keeping in contact. Well, if you don't mind, could you give us a little history? Can you explain the original concept of your four percent withdrawal rate model? What prompted you to come up with it, and how did it work, if you could describe it?

Sure. You know, I began as a financial planner in the late 80s, and by the early 90s, I had clients who were asking me, you know, they're thinking ahead 15 to 20 years retirement, how much do I need to save for retirement, and once I get there, how much can I take without running out of money if I live 30, 35 years or more? And quite frankly, you know, I would not remember anything being published in that area, nothing in my CFP courses, so I did a lot of research.

I couldn't find anything, so I decided to just adopt it as a research project myself. I started using historical data on investment returns, inflation, going way back into the 1920s, and basically reconstructed the experience that retirees would have had, and the four percent rule came out of that. What I did, I looked for the worst case that happened to any retiree, and it turned out the retiree that retired in the late 60s, 1968, 69, ran into a couple of really bad bear markets early in retirement, and then he was hit with really high inflation, and that turned out to be the situation that created the worst case four percent rule. And with that four percent rule, can you explain what it means as far as when a retiree is looking at how much they saved, how much they should be able to generate for that income?

Yeah, sure. Well, in terms of withdrawal, let's say you have a hundred thousand dollars in an IRA account when you retire. If you use the four percent rule, you would take out four thousand dollars the first year, and then you would throw that four percent number away, and then each year increase your four thousand dollars by the percentage of inflation that you experienced the year before. So if you start out with four thousand and there was three percent inflation, you go to 4120 the second year, and so on.

The idea of that is basically that your lifestyle, your withdrawals, would keep pace with inflation so that your lifestyle is maintained. And this would give somebody a pretty high probability of success in retirement, you felt? Well, based on history, since it was the worst case situation, it was a hundred percent. But, you know, you have to take that with a grain of salt because the four percent rule is not like Newton's laws of motion, which is a law of nature. It's a rule based on experience in markets, and markets could change. It's possible that in the future we might end up with something lower than four percent, but it's held for 50 years, so. Well, since the time that you did incept and publicized this four percent rule, both the interest rate environment and the stability of the market at times have changed, I guess more so with the interest rates at present time staying pretty low for an extended period.

Do these kinds of changes affect how you would predict cash flow to be created? You know, so far I haven't seen any effects that would invalidate the four percent rule. I've taken a look at two thousand investors who retired right when it was a used bear market, and I've taken a look at the 2008 retirees who also retired when it was a used bear market. And both of them are doing okay through retirement.

They don't appear to have any problems. And the reason, of course, is that stocks tend to recover over time. But I think the most important factor is that nowhere in the last 50 years have we had a burst of inflation like we had in the 1970s. And if you remember, when I talked about how the four percent rule is used, you have to increase your withdrawals by inflation every year. So if inflation is 10 percent and you're increasing your withdrawals by every year, it's really putting a hole in your investments very rapidly. Without high inflation, I don't, I think it would take something really drastic, which we haven't experienced before, to invalidate the four percent rule. So you think that the higher inflation may have more of an effect on us ultimately over time than the lower interest rates or some amount of market volatility along the way? Yes, because we've experienced market volatility in the past.

We've experienced periods of low interest rates in the past. But inflation, I think, is the greatest danger for retirees now. If we get a return to 1970s style inflation, that can be very dangerous for portfolio retirees. I've read in other sources where you also made some special considerations based on the tax status of the accounts from which the income was being pulled. How do taxes affect our income in retirement and your four percent model? Okay, the more, the higher your tax rate, you know, the higher, and this is, let's say, this is dealing with a taxable account. Okay, now we're in the four percent rule really applies to taxed deferred accounts like IRAs, Roth IRAs, 401Ks. If you're investing in taxable account for retirement, you have to figure that it could be as much as a 10 percent lower withdrawal rate. And if tax rates were to go up much higher than they are today, it could be even less than that. So taxes are very important if you're dealing with a taxable account. So where we have seen down years, where we have seen people creating income from accounts that may have taken a loss.

For the individual who may have retired in 2000 and then experienced a couple down years right at the beginning, or somebody who retired in the year 2006 and experienced a couple down years, what would your advice be for them to have confidence in their retirement? Markets are going to fluctuate. That's their nature.

They go down, they recover. I don't think people need to be overly concerned about that. The only reason they might be, if they started out very aggressively and decided to take out five or five and a half or six percent and they run into a big bear market, then they may have to have their plan redrawn based on the new valuations of the market. It's the beauty of it is that you don't have to, when you start with a plan, you don't have to stick with it your whole retirement. You can redo it every year if you want. Take a look at it. It probably should be reviewed periodically. Absolutely.

I believe they should be reviewed periodically. For some of the American public, though, that may not be familiar with you or this model for forecasting a safe withdrawal rate in retirement, I feel like some of the expectations are to be able to generate much higher cash flow in retirement, an eight percent, a 10 percent withdrawal rate because people look at historical returns. What would you say to folks about the reasonable withdrawal rate that you have predicted? When I started doing this research, that was pretty much the mindset that you described because people would make these straight line projections and say, well, stocks will earn 10 percent and bonds will earn five, so you can take out seven percent and seven and a half. It completely ignores the fact that if you get a big bear market early in retirement, it diminishes your portfolio so much it can't recover.

It reduces the amount of years it can last. You cannot ignore bear markets. You can't do those high withdrawal rates with confidence, you know, particularly if you're starting from high valuations.

That's another researcher, Mark Michael Kitz. He looked at this and he said, when the stock market is very expensive, like it is now, stick with the most conservative withdrawal rate. You know, don't don't get frisky. And that's certainly what I would advise clients right now. Don't stretch.

It's dangerous. It was a pleasure having William Bengan on the program to talk about the four percent rule. If you've got questions about generating your own cash flow in retirement, give us a call at Rashaan Planning, 919-300-5886, 919-300-5886.

And finally, here on this best of Thanksgiving holiday edition of Planning Matters Radio, we have industry thought leader Tom Hegna, author of the books Don't Worry, Retire Happy, and Paychecks and Playchecks. And he reflected on some of the fundamental premises behind structuring a more stable, secure, and confident retirement. See, retirement's been studied and dealt by PhDs all over the world.

Well, I've read their research and you know what the research says? There's really one optimal way to retire based on mathematical, scientific, and economic facts. So what I write about is the math and science of how to retire the optimal way. You know, nobody knows what will be the best way, but I talk about the optimal way. And optimal simply means it'll be the best more often than anything else would be the best.

And it'll never be the worst. People are 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 printed $4 trillion. The government's in debt with 100 trillion of unfunded obligations.

There's a lot to be worried about. Step number one, you got to cover your basic living expenses with guaranteed lifetime income. So figure out how much you need to live 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. They 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. Author Tom Hegna went on to detail and explain some of the key financial risks we face during retirement. 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. What's the safe withdrawal rate of taking money out? There's this thing called sequence of returns risks 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 is even 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're withdrawing 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. Tom continued to explain why he believes many workers, savers, and investors have been reluctant to learn about and adopt some of the fundamental planning methods crucial for a secure retirement. 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. Then it happened again, and some people are out. They're bitter.

They're never going back in. 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 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. 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. 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. Author of the book and host of the PBS special Don't Worry, Retire Happy, Tom Hegna then explained the difference between an investment plan and an income plan and why having an income plan is so important in structuring a plan that provides for stability.

Yeah, well, it kind of comes back to the sequence of returns receipt. You know, the stock market has 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 average 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 few 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. Well, 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 I've been around the block enough.

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 off full beige abs. 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 worked for that company for 42 years, but you're going to call up HR, say, stop those pension checks. We do not want another pension check in this house. We don't like annuities. Well then they say, well, I guess we like those kinds 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 a thousand bucks a month for the rest of your life, get so much, you get a thousand bucks a month for the rest of your life. Now there are annuities that have fees, bearable 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 you can have a 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 a hundred 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, 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 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, 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 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. There's 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. Hey, 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.

These are mathematical, scientific, and economic. We hope you've enjoyed the interviews on this week's edition of Planning Matters Radio with David Walker, Bill Bengen, and Tom Hegna, some fantastic guests that we've featured. If you've got questions or concerns about your own planning, give us a call at Rashaan Planning and we will sit down with you, talk about your goals, and help you formulate an optimized retirement plan. 919-300-5886, 919-300-5886. We hope you didn't get overstuffed with Thanksgiving turkey and we hope that you're enjoying the holiday weekend, maybe doing a little bit of shopping, but certainly being safe, healthy, and happy. We'll talk to you soon.

Take care. 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 principle. Advisory services offered through Brookzone Capital Management, a registered investment advisor. Reduciary 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.