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Peter, it's really good to see you. A really important discussion today. Three retirement risks that could cause you to run out of money. And I think, again, you've probably heard the number one biggest fear among retirees is running out of money, right? So life expectancies are at an all-time high. Today, a couple that's age 65 has a 50% chance of living beyond 90. So the first risk is known as longevity risk.
Yeah, something that we hope for. And in fact, it multiplies all of the other risks that we face in retirement. The longer that we live, the more likely we are going to be affected by several numerous other risks.
And in many cases, multiple times over a long life. You know, this number one fear of retirees of running out of money. Aaron really begs the question of is the way that we are planning for retirement really the best way? Is the status quo and the traditional way that we are taught to plan for retirement, if it were really so effective, would we see this as such a common fear and reality?
It does happen, by the way. And it is a big shock to lifestyle in retirement. And yeah, those numbers of longevity, when we look at 50% of men are going to live to 85, 50% of women are going to live to 88, that's half. So half live beyond that number. And the chances are pretty high that we make it into our 90s.
In fact, with a healthy 65 year old couple, 50% chance that at least one of them lives to 92 and beyond. So we really do need to plan for longevity. We need to make sure that we've got a plan that our dollars last longer than we do. And unfortunately, I see people planning that, hey, mom and dad only made it to 78 or 80. So that's all I need to plan for.
We really don't want to be wrong on this one. And if we are going to be wrong, we want to be on the side where we have planned to need money for funding many more years than less years. So what is that plan? How do you address longevity risk? Well, that is part of our optimized retirement planning process, and it's really reverse engineering the retirement planning.
We don't look at a lump sum or some arbitrary age of 62 or 65 as being a key indicator that we are truly financially prepared to enter into and face the years, the decades of retirement. We look at the need for income, the expenses, and how we are going to create that income. And we look at maximizing available sources of income. How can we get the most out of Social Security?
I'm sure we'll talk about that in a second. How, if there are choices and decisions to face with pensions, how to maximize those and then how to fill the rest of the income gap, effectively utilizing our assets. And by doing so and including several of the core risks and variables that can impact our retirement, we really get a more confident sense of are we ready to retire? Or maybe do we need to continue to work a little longer or change our investment strategy or do one of the things to help to address this fear, this reality of the potential of running out of money. Better to figure that out sooner rather than later.
Absolutely. You brought up risk number two, of course, changes to Social Security. We should all have a plan that doesn't rely on Social Security. It's very likely benefits will be reduced in the future.
And I was really surprised to learn these stats. Among those who rely on Social Security, the benefit makes up 50% of their income. Yeah, well, I think in some amount, everybody relies on Social Security, even if we could be self-sufficient and maintain our lifestyle without Social Security, it's there and we use it. And that is helping to preserve and protect more of the assets that are giving us that confidence for our later years.
So it is a system designed that everybody has some skin in the game and everybody has the ability to receive and benefit from it. And so, yes, I think too many people are solely reliant on Social Security, which, by the way, does not typically cover all of the retirement expenses. And so we really do need to do a better job of planning to maximize what we can save and supplement that Social Security with. And by the way, we also need to plan strategically to maximize and optimize Social Security itself. A lot of people don't really do a lot of due diligence on the choices and the options and when and how to claim and strategize with Social Security and can potentially leave hundreds of thousands of dollars on the table. This is money that either comes from Social Security if you make a good decision or comes from your assets that you don't or that you just don't have in retirement if you if you really do it wrong. And so we need to do a better job of educating ourselves on the choices for timing of when and how to claim and collect and the implications later in life, because this is a decision that we're making in our early to mid 60s very often that doesn't have its full implications into our 80s or sometimes even beyond our own lifetime with spouses who depend on that Social Security income.
So we really need to do a better job with that. And Aaron, when they say they're going to reduce benefits, I'm not sure exactly how that's going to look because they won't go ahead and address it proactively. They like to kick that can down the road as much as possible. However, my inclination is that they will probably make a few changes that don't involve slashing the benefits of those who are reliant on Social Security. I think that they will probably make more of the Social Security benefit taxable.
They've done that twice. 1983, 1993, they made different tiers based on your income of Social Security taxable. At some point in time, they'll probably make 100 percent of it taxable. They'll probably raise the full retirement age as they have also done before. And at some point in time, I think that they either increase or remove the earnings cap on Social Security deductions.
At a certain point in time, if you make enough money during the course of the year, you actually stop paying into Social Security. And I believe that they will probably remove that. And those three things could probably go a long way in fixing the Social Security shortfall that we face. Risk number three was kind of the headline of last year, this year as well. Inflation, of course. I just want to take a quick look at historical inflation rates, Peter. But basically, while the core inflation numbers have been ticking downward for the past few months, we are still at historically high levels. And inflation simply means that you're going to have to use more of your retirement savings to maintain your quality of life. Well, inflation has been called the silent thief, and at least for the last couple of years, it has not been so silent. And I think that we will continue to hear an awful lot about inflation. And in particular, its impacts on retirement for years into the future, because even at historically relatively stable and low inflation rates, retirees are more susceptible to the impacts of inflation.
And by and large, Aaron, unfortunately, I have seen have done a poor job in planning for inflation. A lot of the retirement projections that I see from people coming into the office for reviews actually don't include much, if any, accounting for inflation. Sort of an assumption that we're going to need the same income for decades and decades into the future.
That's not the way that it is. Even at historically average, like 3% inflation rates, your need for income doubles about every 24 years. That's well within a retirement lifespan. And so we need to account for inflation. We need to have that specifically addressed in the planning process by having either increasing streams of income or additional streams of income that we can kick on into the future. And by the way, going back to number two with Social Security, Aaron, Social Security has a cost of living adjustment. But by and large, it does a very poor job of actually addressing inflation because you stated that it makes up about 50% of a lot of retirees income. Well, let's say that I've got four thousand dollars a month of expenses and two thousand dollars a month in Social Security. If inflation and the cost of living are both 8%, which the cost of living doesn't usually keep up with inflation.
But let's say it does. They're both 8%. That's half of my income that that cost of living adjustment did not account for that still went up. So we really need to understand how inflation works and all the printing of money that we've done for the last 14 years, I think is going to lead to continued higher than average inflation. We need to include that into our plans. So did you address this then? What are the solutions for planning for this kind of inflation?
Because it's very much out of our hands, right? Yeah. Well, I think there are solutions for each of these problems is that you need to have a specific written retirement income plan. And you need to talk about the variables that can impact that income plan. Longevity, market risks, sequence risks, Social Security perhaps being reduced.
Right. We're going to include that even if I don't believe that's how it's actually going to happen. Let's take them at face value at their word and include a reduction in Social Security around the time that they're talking about 2033.
They say they'll only be able to pay 75 cents on the dollar. Let's include that in our plan. Let's include inflation on our expenses. And oh, by the way, let's also talk about taxes, one of your largest known expenses in retirement. You can absolutely make a significant impact by thinking of that proactively and paying some of those taxes while we are working. This this generation retiring now, by and large, deferred and delayed paying their tax bill. Well, taxes have a window of opportunity that we could go ahead and pay them proactively. And by paying your taxes early, that's 15 to 20 percent more money.
Essentially, if you've got the same dollar value in your retirement accounts, but you've already paid your taxes, that's a lot more spendable income over retirement. So just a few of the things that we look at with the optimized retirement planning process. Right. Right.
What I'm hearing is the sooner you can start working this into your plan, the better it is proactive, not reactive. Peter, if somebody wants to have that conversation with you, what's the best way to reach you? Give us a call.
Nine one nine three zero zero five eight eight six nine one nine three hundred fifty eight eighty six. Or you can go online. Rashaan planning dot com. It looks like rich on planning dot com. Or you can email me, Peter, at Rashaan planning dot com. All right, Peter, thank you.
Always a pleasure. 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 adviser. Any investment and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooks own capital management. A registered investment adviser 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.
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