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2022 EP0129 - Planning Matters Radio - 8 Retirement Tips For 2022

Planning Matters Radio / Peter Richon
The Truth Network Radio
January 30, 2022 9:00 pm

2022 EP0129 - Planning Matters Radio - 8 Retirement Tips For 2022

Planning Matters Radio / Peter Richon

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January 30, 2022 9:00 pm

We all probably have a laundry list of things we look back on and could say we “would have/should have done things differently". This is especially painful when it comes to our money. This week Planning Matters Radio discusses some of the most common mistakes to hopefully help you avoid them.

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We want you to plan for success. Welcome to Planning Matters Radio. Welcome once again to Planning Matters Radio, the show where we try to shed a little light on the financial matters of the day and have a little fun along the way. I'm Scott Wallace, and with me today is a Ramsey trusted SmartVestor Pro, the author of Understanding Your Investment Options, and a fiduciary financial investment and retirement planner serving his clients throughout the great state of North Carolina. Peter and Sean, welcome to the show.

Welcome back. Another hit episode of Planning Matters Radio. Lots of fantastic riveting information about your money, about your planning, about how to achieve your goals and and secure that confident retirement future. So today we're going to talk about some of the best retirement tips for 2022. It's a it's a new year. It's probably a good time to kind of focus on some of those things. And maybe one of the first tips would be to review your retirement plan. What's already in place?

Right, Peter? Absolutely. I mean, you know, Covid has done a number on our world and on the economy and on a lot of our personal goals. I mean, I talk to a lot of people who have really enjoyed this extra time at home and with the family. Some companies have made announcements that they've they've cut some staff and labor force. So a lot of people's timelines have shifted. So our own personal situation can change.

The world around us changes. So keeping that plan up to date, reviewing that plan is vitally important to making sure you're on track and that the plan reflects your current status and future goals. So these tips that we're going to talk about today, Scott, while I say these are great tips for 2022, really, these are time tested tips.

All of these tips really work. No matter what year we were doing this program in, all of these tips are relevant and important for you to remember on an ongoing basis. And reviewing the plan is essential to making the progress that you should be making. Yeah, it's interesting that we don't know how things are going to change.

We don't know how things will stay the same. But there are certain things that are useful regardless kind of of the situation. And those are so valuable to understand. And one of them is risk tolerance. Right. How much are you willing to risk?

How much is prudent for you to risk? And where do those two kind of meet? Right.

Yeah. And a lot of people, they don't meet, unfortunately. We review the plan. We review the investments that are held with inside the various accounts.

And we also talk with them. We have a number of of risk related questions to gauge how much risk somebody is willing to take on. And then we compare the two. OK, here are your investments.

Here are your answers to the questions about how much you are willing to lose or risk. Why are these things so off? Why why are they not congruent with each other? And we learn a lot during that period. One is that we've got this expectation that the market is going to do the work for us, that we are going to see these consistent, positive, linear rates of return. Oh, well, the market has always averaged 10 percent or whatever we have been told and choose to believe. And that becomes our expectation. And we're told that we have to take more risk in order to get that kind of reward. And so we're actually pushed to take more risk than we may truly be comfortable and confident taking.

Well, here's the thing. Risk is not a gauge of the return that you want to achieve. If that were the case, everybody would be aggressive, speculative investors because we all want the highest possible rate of return. Risk is a gauge of how much you are willing to lose, what you are willing to put on the table and see wiped away without you having anything to show for it. And when you put it in that perspective, a lot of people tone back the risk tolerance that they have a step or two.

And when you quantify that in dollars rather than percentages, it has a different feel. Well, what would you be comfortable, Mr. or Mrs. Investor, in losing if the market was down 50 percent? If we had another dot com bubble, if we had another 2007, 2008 kind of great recession event and the market was down 50 percent, how much of your portfolio would you be comfortable losing is a question that I will pose.

And I may give a few suggestions. Would it be 10 percent? Would it be 15?

Would it be 20? Would you like to see the full impacts of the market reflected in your portfolio? And everybody says, no, I don't want to lose half of my money. Maybe my comfort level is 10 percent or 15 percent or whatever the case is. And then I equate that to their actual portfolio value.

OK, well, you've done a great job working a number of years here. You've built up a million dollars. So that means you're telling me that you'd be comfortable seeing one hundred thousand dollar loss, one hundred and fifty thousand dollar loss in your portfolio if the market does have a downturn. And suddenly there's a spark of realization and connection there that a percent actually represents a dollar value.

And a lot of times, well, no, I don't I don't want to. That's more than I paid for the home that we live in. Yes, the value has gone up now, but that's more than I paid for. No, I don't want to lose that kind of money, especially now that I'm close to retirement. And so we have a discussion and we we address the overall risk exposure. And I look at the positions in the portfolio and I do what's called a peak to trough ratio. I kind of look back at previous downturns. Well, this position has lost this much in previous market downturns. If we have a similar kind of circumstance into the future, if we see another pullback in the market, we could stand to lose a similar kind of amount.

Are you comfortable with that or is that something that that we should be addressing? Look, and at the bottom line of it, Scott, the the expectation that a lot of people have for rates of return, positive rates of return, I have to say, are grossly misleading because people have this expectation that the market, again, is going to generate some eight or nine or 10 or 12 percent rate of return. And if you get in good growth stock mutual funds, that you will beat the market.

Well, beating the market when it's going up means that you are also positioned to potentially lose more than the market when it goes down. And whatever rate of return you are assuming, the market does not generate that on a consistent basis. And I can show you throughout history where in reality, even over a good period of time, it doesn't generate that kind of return.

We went back and we back tested looking at data, looking at science, looking at the math. We looked at every 15 year period, complete 15 year period from 1996 till 2021. And we looked at the rates of return in those period. The average rate of return was just over five percent for all of those 15 year periods. So if you are in the market expecting 10 percent and you only get five before fees, before expenses, before income is taken out.

You only get five. Does your plan work? If it counts on 10, if the assumption is that you're going to get a 10 percent rate of return and then you only get five. Does that mean that the plan survives? And those are the kind of questions that we go through really drilling down on the investments and the assumptions that a plan is based on. Because your plan success is only as good as those assumptions that your plan is based on.

And if it assumes 10 and then we only get five, by and large, most people's plans don't survive. And they are then subject to that big fear of either running out of money or having to significantly cut spending and quality of life. So that's why reassessing your risk tolerance is so important.

Actually, that's just one of the reasons why. Another reason why, Scott, is we've seen a fantastic market, thankfully, over the last decade. Well, because we've seen so much growth in the equities side of your portfolio, of your investments. That means inherently that that side has grown and we are taking on more risk than we had five years ago or 10 years ago. When in most cases we actually want to decrease risk as we get closer to retirement and as the years go by. So style drift as a result of the movement of the market is one part of reassessing your risk tolerance.

And then just drilling down on what that risk tolerance really is and what it really means is another. Pretty smart stuff coming from Peter Rishon here. If you want to talk with him about your own personal retirement situation, you can talk to the man himself by calling nine one nine three zero zero five eight eight six.

They're going to his Web site, w w w dot rich on planning dot com. Peter, it's one thing if someone has a plan, it doesn't work. But like you said, what if you had a plan and it did work and it still doesn't work for you? That must be a really a really tough feeling.

Hey, not everybody's situation is the same. That's a great point, Scott. Yeah, you can have a plan and the plan works. The accounts, the investments do what they're supposed to.

But what if they are misaligned with your goals? And Scott, we've got a lot of that going on right now. I promise you there are listeners to this program that that is a description of what is going on with their money.

One of the number one reasons is that laws and legislative changes have occurred. Four years ago, an IRA was a pretty good generational wealth transfer tool. And there's a lot of people out there with IRAs. They don't necessarily need them.

They don't want to touch them. The government is forcing these required minimum distributions, but they don't want to pay more in tax than necessary. And they would like to leave any remaining amount to their children.

Well, guess what? Legislative changes have occurred that make IRAs and tax deferred accounts in particular terrible generational wealth transfer tools. And when they transfer to the next generation, you're going to end up paying just about the highest tax possible on those dollars before they get to your children or grandchildren.

The IRS, if you've got a situation where you've got two second generation beneficiaries, meaning you've got two kids or more, the IRS generally is your biggest beneficiary with those tax deferred accounts. Because what happens is that the IRA is taxed at about a 35 to 40 percent tax rate, federal and state. And then your two kids get to split the remaining 60 to 65 percent, meaning each one of them ends up getting less than the IRS got. And the new rules say that that has to be distributed over a 10 year period. And that's why it ends up being taxed at what is likely the highest tax rates. Because your kids probably inherit that money during some of their peak earning years or they have income of their own. And then this IRA amount is thrown on top of that and a forced distribution of a maximum amount occurs over at most a 10 year period.

So if you've got IRAs or tax deferred accounts and your goal is to leave them to children or grandchildren, guess what? The plan may be working, but it may not be working for your specific goals and may not accomplish what you want it to accomplish because the government has changed the rules. And that's just one example that I can think of pretty quickly. But there are many, many more where, yeah, the plan's doing what it's supposed to do, but it's not doing what it's supposed to do for you. And what makes that even more frightening, as you alluded to, is that that was a good plan at the time. It wasn't even folly at the time it was put in. But the goalposts have moved. The landscape has shifted. And that's why you need to talk to someone like Peter or Sean.

Call 919-300-5886 or go to www.richonplanning.com. So what this may be a conversation that's too big for our topic here. What would be something that you would recommend in terms of a tax advantage retirement situation for passing down that money? If IRAs are falling out of favor, what are maybe some of the trends looking forward? Well, nobody loves to pay taxes. I will say that I fall into that category and so does every person that I have ever met and talked to about their money. However, paying a tax up front a lot of times means that you pay less than if you defer and delay it.

And I know that's not what we have been taught. For 35 years of 401Ks, we have been taught to pay taxes later to defer and delay those taxes and kick that can down the road. Well, the IRS does not forget. They will not forget about those dollars that you saved in that account. They are co-owner of that account, in fact, and they get to set the rules. That's why these rules have changed to now make them less favorable for generational wealth transfer is that the IRS is looking around saying, hey, where can we get a few extra dollars from? Well, generally, people who receive a large inheritance don't complain too much and dead people sure don't. So let's tax it right there.

That's where that is occurring. That's why that initiative has happened. So if IRAs are not great wealth transfer tools, well, what are? Roth IRAs are pretty good. Removing money and just having an after tax non-qualified investment is pretty good. If your goal is to pass as much money on as possible and to keep the IRS completely out of that part of your financial affairs, then life insurance is a fantastic vehicle.

You know, we need to look at what the particular goals are. But if you take an IRA and you convert it to Roth, there is still the 10 year liquidation requirement, but at least the taxes will have been prepaid. Right. So when your children or grandchildren or beneficiaries receive that money, they don't have to deal with taxation. They just have to take out money over 10 years.

If you take money out of an IRA and invest it in just an after tax, non-qualified, non-retirement investment account, as tax laws stand today, you could potentially still benefit pretty greatly from a stepped up cost basis, meaning you buy into some new investments today and you live and let the investments grow for another 20 years. And then it passes on to your next generation beneficiaries. Well, all the growth that happened over that 20 year period basically transfers on to your children or grandchildren tax free, rather than sharing all of that additional growth with the IRS and having them in your business and controlling the rules. So non-qualified after tax investment is great. And then life insurance is a fantastic, fantastic way to look at generational wealth transfer. You can literally buy tax free dollars for dimes or quarters going into it. And the newer types of life insurance also have a lot of additional flexibilities that old life insurance didn't, where you can actually advance yourself some of that death benefit if you have a long term care kind of need. So it's sort of knocking out two birds with one stone. Again, you're leveraging your money for a tax free inheritance value. But if it so happens that you do require care and have those kind of extensive expenses that go along with it, well, let's let's back off on what we're leaving behind. But we've still leveraged our money for a tax free ability to pay for those care costs, therefore not putting burden on the family that we originally intended to leave money to.

So a couple win win win scenarios there. Any of those really are better for passing assets along than the current laws and rules and regulations as it pertains to IRAs. That's not to say that IRAs are not good accounts. But IRAs were always, always intended to be retirement accounts, not generational wealth transfer tools. So IRA, Individual Retirement Account, it says right in the name what it was intended for. The government has sort of just changed the rules, moved the goalpost a little bit to really solidify that that is their intended purpose. And that's what you should use it for.

That's very interesting. Nine one nine three zero zero five eight eight six is the number if you want to talk to Peter or Sean about your personal retirement situation. We're talking a lot about how much we can save, how much we can invest, how much we can pass on. Another big part of the retirement equation is spending. How does someone analyze their current spending and how that may reflect going on in years? Well, I think this is an important step and really the foundation for all other further financial progress is understanding your budget and your spending and your expenses and making sure that more is coming in than is going out. And part of what is going out is going towards saving or investment so that we can continue to afford quality of life. Analyzing and understanding your budget and your expenses and your income need is something that a lot of people unfortunately overlook.

They they they think that it's below them almost that that it is an elementary step that they are beyond. And I don't mean that negatively like I deal with people who make good money, who who have been blessed, who have been lucky, who have been hard working enough to be considered relatively affluent. That's generally the people that I work best with and benefit the most because those same people generally don't pinch every penny and stretch every dollar and pay attention to where every dollar is going.

If you do fantastic, then you've got this one knocked out. But most people who are lucky or blessed or have worked hard enough to put themselves in a very comfortable position where there's more income than there are expenses at the end of every month don't pay as much attention as they should to their budget. Now, here's the question. When the paycheck goes away, is that situation going to continue? It's not. For most people that are in that category that fit that description, actually the change in income is going to be even more dramatic than somebody who was not previously in that position.

Right? If somebody's been used to pinching every penny and stretching every dollar, then moving into retirement is not a huge jolt to the system. But for somebody who has not been, who has been earning money, spending freely, not paying attention to the budget, it really can be a big jolt to the system because now you've got a finite amount of money and an unknown amount of time that you've got to make that money last and all of a sudden we get real conservative with our spending. We don't want to spend anything. And budgeting is where that comes into play.

If we formulate a spending plan for retirement based on current expenses and extrapolate out a reasonable rate of assumption for inflation into the future, we can pretty well guess and estimate and hopefully overachieve on the amount of retirement income that you're going to need over your lifetime. That's interesting. Right. It's counterintuitive. Those who had perhaps the least need to pinch their pennies, of course, need to change their behavior the most.

And you wouldn't think those would be the people that would need the most help, but it is counterintuitively correct. Tied in with the spending, there's debt. Yeah. Be proactive with your debt. Yeah. How can someone be proactive with their debt?

You said it. What's the best way to go about that? So I am a Ramsey trusted smart investor. We've talked about Dave Ramsey and his beliefs and his system in dealing with debt.

And I believe in that. I think that we should be proactive with that debt snowball. That's why it is step number two in the baby steps for financial progress in life. Handle the debts. Now, we sort of set the home mortgage off to the side for that step, but everything else, vehicles, credit cards, medical bills, student loans, if we can avoid it, we should avoid it.

If we have it, we should pay it off as quick as possible because money in the bank generally is not earning as much as the debt is working against you in interest. So you've got a negative arbitrage there if your money is safe. If you go to invest that money, there's no guarantee.

So I could have a $10,000 credit card bill over here, probably working against me at about 14 to 24 percent interest per year, and I could have $10,000 in my hand over here. My decision is do I invest this money? Do I put it in the bank or do I pay off the credit card? Well, if I put it in the bank, I'm not earning as much as the credit card is working against me. If I invest that money and look back at it one year later, there's no guarantee of a rate of return. In fact, there's no guarantee that I still have $10,000. I could have less, but I guarantee if you don't pay off the credit card, there will be more debt by the end of the year at whatever interest rate that credit card is charging you.

So it's kind of a bird in the hand type of thing. Be proactive with paying off that debt. It is a foundational piece to further financial progress. And paying off the house is a great milestone to sort of signify true financial freedom and that you're ready for retirement.

Now, it's not a requirement to be ready for retirement. Interest rates are pretty low. If you've refinanced or gotten into a home recently, you know you've got a pretty fantastic interest rate.

It's not absolutely required to have that paid off in order to retire, but there's nothing mentally and emotionally as freeing with your money as being completely debt free. It literally will change your whole attitude about how your money gets handled. You mentioned interest rates, if I may ask you a question, Peter. Interest rates at historic lows, everything, savings accounts, things like that. And yet credit card numbers are still extremely high, the interest rates. Are those numbers linked at all?

What's going on there? Why does it seem like credit card interest rates are as high as ever? Because people use them. I mean, bottom line, people use them.

And you know what? There were laws passed against predatory lending practices, but there are still payday loan places out there. You can put the title of your car up as collateral, and some of those places charge 200, 300% interest. And you know why they do? Because people will do it. You know, if there is somebody out there that is willing to pay 24% interest from loaning them money and chances are reasonably good that they're going to eventually pay it back, or I can do it in large enough numbers to where even if a few don't pay it back, I'm still making profit, which is what credit card companies do, then they're going to continue doing it as long as it's legal and allowed. Yes, there is some aspect of that that is linked to prevailing interest rates, but not much. It's more a supply and demand thing. If people are willing to pay it, then they're going to charge it. And unfortunately, I sort of think the same thing is true with inflation. I know we've heard this talk about how the inflation is transitory. I don't see any big motivation for companies to start bringing their prices back down to where they were a couple years ago, because people are paying those prices. And if people are willing to pay it, they're going to keep charging it. Right. We're boiling the frog a little bit on the prices here.

919-300-5886 is the number if you want to talk about these issues with Peter Rashan himself. Another equation of the retirement strategy is your health care. You know, there's how much money you save, how much money you spend, what can you invest, and then your health care. And of course, we all want to be as healthy as we can for as long as we can. But there are financial implications with that as well.

Yeah. Well, first and foremost, you know, treat yourself right in life. Do the things to try to keep yourself healthy. But unfortunately, even that is no guarantee. And when we encounter medical expenses, they can be extensive.

They can be pretty costly. You really need to look at that health care strategy, especially with a couple of the other things that we've already discussed. There are a lot of people with changing timelines.

In fact, I just did another program where I cited an article. 60% of Americans retire unexpectedly. Either they can't work any longer or their employer tells them that their services are no longer needed. Whatever the case is, unexpected retirement is a big one.

And then there are those that have moved their timeline up and chose to retire early. Well, what do we do to cover medical expenses between now and Medicare age? And then Fidelity released an article recently, and I've seen this updated throughout the years, but the most recent one that I saw was that the average 65 year old couple over the course of their lifetime will pay more than $300,000 just in the routine costs of care. Deductibles, copays, and the rest. The premium payments.

And then prescription drugs and things like that along the way. But long term care expenses are not included in that number. So I see people that say, I don't need long term care insurance. Well, 70% of people at some point in time have a care need during their lifetime. That's the Department of Health and Human Services. It's like 69.8%.

As close to 70 as you can get. 9 out of 10 people have no plan for how to cover those costs. So we are grossly, grossly underprepared for medical expenses.

It literally is the 800 pound gorilla in the room, the twister in the trailer park that can lay ruin to even a well built financial plan. So definitely look at that. There are alternatives. There are ways to cover health care expenses pre-65. There are ways to protect yourself against long term care expenses. And no matter what your situation in your wealth, I know that some people have the wealth that can kind of convince themselves they're self insured. But for a fraction of a percent of that money, you can protect the money that is giving you that confidence. So really, no matter what your status is, you definitely need to look at this. And I guess, Scott, we're probably not going to have time to get to the last one.

I'm just going to run through them real quick. Maximizing HSA contributions, a fantastic way to at least be a little bit more prepared for those medical expenses. And then understanding retirement income options. There are a lot of different ways to generate retirement income. I know you hear a lot about dividend producing stocks. I know you hear a lot about annuities. I know you hear a lot about bond yields.

I know you hear a lot about rental income. There are a number of other ways. None of them are perfect.

None of them are necessarily always evil. You've got to understand all of the options that can replace that paycheck for you and then weigh them as part of the plan. There's the plan, the accounts, and then the investments inside them.

And there's kind of the tiers and the layer of the cake there. And the plan supports it all, the accounts that you hold them in, and then the investments on top. You need to understand those investment options that can generate income for you to make the plan work. And if you want to discuss those investment options, no better person to call than Peter Rishon himself, 919-300-5886 or www.richonplanning.com. He offers an optimized retirement plan.

It may be the time to talk to him about that for you. Peter, thanks so much for this great information. Anything you want to take us home with today on this episode? It's always a pleasure, Scott. And if you'd like to go through these eight tips and then more for your specific situation, give a call. You will talk to me personally. And I always enjoy talking to radio show listeners or podcast viewers. Thanks so much, Peter.

919-300-5886. And we hope you enjoyed us next time on Planning Matters Radio. 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 take 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 Brooks own capital management, a registered investment advisor, 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.
Whisper: medium.en / 2023-06-15 14:59:21 / 2023-06-15 15:10:50 / 11

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