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January 30, 2022 9:00 pm
We want you to plan for success planning matters radio welcome once again to planning matters radio show try to shed a little light on the financial matters of the day and have a little fun along the way, I'm Scott Wollaston with me today is a Ramsey trusted smart investor probe, 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.
John, welcome to the show. Welcome back another hit episode of landing matters radio lots of fantastic riveting information about your money about your planning about how to achieve your goals and secure that confident retirement future. So today were to talk about some of the best retirement tips for 2022.
It's a new year, it's probably a good time to kinda 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 here absolutely yummy Unico that 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 for 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 were 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 here 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 of the situation. Those are so valuable to understand.
This is risk tolerance right. How much are you willing to risk how much is prudent for you to risk and word of those two kind of meat right yeah and a lot of people they don't meet. Unfortunately, we review the plan. We review the investments that are held within side.
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. Okay, 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 learned a lot during that. One is that we 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, though the market has always averaged 10% or whatever we have been told in and choose to believe and that becomes our expectation and were told that we have to take more risk in order to get that kind of reward and so were 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 it. 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 and when you put 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 will what would you be comfortable. Mr. Orr or Mrs. investor in losing if the market was down 50%.
If we had another.com bubble if we had another 2007, 2008. Kind of great recession event and the market was down 50%. How much of your portfolio. Would you be comfortable losing is a question that I will pose and I make give a few suggestions would be 10% would be 15 would 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% or 15% or whatever the case is and then I equate that to their actual portfolio value. Okay, we have done a great job working a number of years here you've built up $1 million. So that means you're telling me that you be comfortable seeing hundred thousand dollar loss, $150,000 loss in your portfolio. If the market does have a downturn and suddenly there's a spark of realization in connection there that a percent actually represents a dollar value and a lot of times will know I don't I don't that's more than I paid for the home that we live in. Yes, the value has gone up.
Now 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. II kind of look back at previous downturns will this position has lost this much in previous market downturns. If we have a similar kind of circumstance in 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 its got that 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% rate of return and if you get in good growth stock mutual funds that you will beat the market will 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 wheat we went back we back tested looking at data looking at science looking at the math we looked at every 15 year.
Complete 15 year period from 1996 till 2021, and we looked at the rates of return in those. The average rate of return was just over 5% for all of those 15 year periods. So if you are in the market expecting 10% and you only get five before fees before expenses before income is taken out. The only get five. Does your plan work if if it counts on 10 if the assumption is that you're going to get a 10% 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 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 site has grown and we are taking on more risk then 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 really means is another pretty smart stuff coming from a purist on here if you want to talk with him about your own personal retirement situation you can talk to the man himself by calling 919-300-5886 to go.
It was website www.richenplanning.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 really tough feeling and 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 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 the 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 will 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 got a situation where you've got to second generation beneficiaries, meaning you 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% tax rate federal and state and then your two kids get to split the remaining 60 to 65%, 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 to accomplish because the government has change the rules and that's just one example that I can think of your pray quickly, but there are many many more. Where yeah the plans doing what it's supposed to do, but it is not doing what is supposed to do for you and what makes it 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 is shifted and that's why you need to talk to someone like Peter Rochon call 919-300-5886 or go to www.richenplanning.com so what this may be a conversation.
It's too big for our topic here. What would be something that you would recommend in terms of a tax-advantaged retirement situation for passing down that money if IRAs are falling out of favor one or maybe some of the trends. Looking forward were 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 upfront. A lot of times means that you pay less than if you defer and delay it. I know that's not what we have been taught for 35 years of 401(k)s. We have been taught to pay taxes later to defer and delay those taxes and kick the can down the road. Will 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, in they get to set the rules.
That's why these rules have changed to now make within them less favorable for generational wealth transfer is that the IRS is look 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 in dead people sure don't.
So let's tax it right there that's 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 and just having an after-tax nonqualified 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 knowing we need to look at what the particular goals are, but if you take an IRA and you converted 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 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 nonqualified nonretirement 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 will all the growth that happened over that 20 year. Basically, transfers on to your children or grandchildren tax-free, rather than sharing all of that additional growth with the IRS and and having them in your business and controlling the rules so nonqualified 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 or times 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, your 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 were 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 soak a couple win win win scenario. Is 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 change the rules. Moved the goalpost a little bit to really solidify that is their intended purpose and that's what you should use it for a very interesting 919-300-5886 is the number if you want to talk to Peter Rochon about your personal retirement situation talking a lot about how much we can say how much we can invest how much we can pass on another big part of your retirement equation is spending how to how to someone analyze their current spending and how that may reflect going on in years why I think this is 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 then is going out and part of what is going out is going toward 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 odd that that it is an elementary step that they are beyond. I don't mean that negatively like I deal with people who make good money who have been blessed to have been lucky who have been hard-working enough to be considered relatively affluent. That's generally the people that I work best with an 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 that you 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 if something'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 is not been who has been earning money, spending freely, not paying attention to budget it really can be a big jolt to the system because now you got a finite amount of money and an unknown amount of time that you've gotta make that money last and all the sudden we get real conservative with our spending. We don't want to spend anything and and budgeting is where that comes into play if we if we formulate a spending plan for retirement based on current expenses and extrapolate out a reasonable rate of assumption for inflation in the future we can pretty well guess and estimate and and hopefully overachieve on the amount of retirement income that you're going need of your lifetime.
It's interesting right it's counterintuitive those who had perhaps the lease need to pinch their pennies. Of course need to change their behavior.
The most and you wouldn't think those are the people that would need the most help, but it is counterintuitively a correct tied in with the spending there's debt.
Be proactive with your debt.
How can someone be proactive with their debt you you said it, what's the what's the best way to go about that. So I am a Ramsey trusted smart investor. We've talked about Dave Ramsey and and his beliefs in his system in dealing with that 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 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% interest per year, and I can have $10,000 in my hand over here. My decision is do I invest this money do I put in the bank or do I pay off the credit card will I put it in the bank. I'm not earning as much of the credit card is working against me if I invest that money and look back at it. One year later, there is no guarantee of a rate of return. In fact, there is 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 a thing be proactive with paying off that debt is a foundational piece to further financial progress and paying off the house is a great milestone to sort of signify true financial freedom in 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 home recently. You know you 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 mentioned interest rates of him asking a question Peter interest rates as store close everything, savings accounts, things like that. And yet, credit card numbers are still extremely high 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 that I mean bottom-line people people use them and and you know what, there were laws passed against predatory lending practices, but there are still payday loan places out there are you can you can put the title of your car up as collateral and some of those places charge 200, 300% interest in you know why they do because people will do it you know it it if 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 a large enough numbers to where even if you 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 gonna 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 right if people are willing to pay it. They're going to keep charging right were boiling the frog a little bit of the prices here 919300586 is the number if you want to talk about these issues of Peter shot himself. Another equation of the retirement strategy is has your healthcare. The others, how much money save how much money you spend.
What can you invest in your healthcare and of course we all want to be as healthy as we can, as long as we can with our financial implications with that as well yeah will first and foremost, you know, treat yourself right in life do 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 healthcare 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 did another program where I cited in article 60% of Americans retire unexpectedly.
Either they 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, will what 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 force of their lifetime will pay more than $300,000 just in the routine costs of care deductibles and co-pays and end the rest the premium payments and then you 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 Department of Health and Human Services like 69.8% is close to 70s. You can get a 9/10 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 healthcare expenses pre-65. There are ways to protect yourself against long-term care expenses and no matter what your situation and your wealth. I know that some people have the wealth that 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 as you. You definitely need to look at this and I guess I will probably not can have time to to get the last one, just in a run through them real quick but maximizing HSA contributions. A fantastic way to at least be a little bit more prepared for those medical expenses and an 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 about lot about rental income. There are 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 their kind of the. The tears in the layer of the cake there and the plan supports all the accounts that you hold the men and the investments on top you need to understand those investment options that can generate income for you to make the plan work. If you want to discuss those investment options no better person to call the Peter shot himself.
919-300-5886 or www.richenplanning.com he offers and optimize retirement plan.
It may be the time to talk to him about that for you. Peter excellent for this great information. If you want to take us home with today on this episode just 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 over our podcast viewers. Thanks so much Peter 919300586 and hope you enjoy this next time on planning matters radio matters radio the content of this radio shows were fighting for informational purposes only and is not a solicitation or recommendation of any investment strategy you are encouraged to think investment tax or legal advice from an independent professional advisor.
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