2023 EP0422 | Peter Richon | Retiring Confident with Tom Hegna

We want you to plan for success. Welcome to Planning Matters Radio. And we are privileged to be joined by a very special guest on today's program. He is Tom Hegna, author of the book, maybe your most well-known book, Tom, Paychex and Playchex. And this is really a guide to retirement that has been utilized by individual planners as well as financial advisors across the nation for quite some time in how to structure and set up an ideal retirement.

So, one, thank you for joining us on the program. Two, given the changes in the economy since the last time we spoke, I mean, we've had COVID, we've had inflation, we've had high interest rates and market volatility, what is your take on the state of today's retirement? Well, I think it's, if people follow the math and science of how you should set up a retirement plan, that's what I write about in Paychex and Playchex and Don't Worry, Retire Happy. If you do that, I think you're going to weather the storm just fine. You know, I'm 75% retired. I'm not just talking the talk.

I'm walking the walk. I've got, you know, guaranteed lifetime income coming in so I can go out and play golf and do all the things I want to. I also have stock investments that some of them may be down right now, but I don't need them.

So I just can let them go up and down. The problem comes when people put too much of their money in the market and then they're pulling money out of a portfolio when the portfolio is going down, that is a recipe for disaster. And I'm afraid there are too many people who have too much of their money in the stock market.

I'm not against the stock market, but in the right place in the right amount. Tommy, in both Paychex and Playchex and Don't Worry, Retire Happy, you spoke about the issue of longevity and how it multiplied all of these other risks. Now we are seeing all of these other risks play out right in front of us, but how does longevity magnify these issues? Well, you know, of all the risks of retirement and there's market risk, there's inflation, there's taxes, there's long-term care, there's sequence of returns, withdrawal rate risks. There's a lot of risks, but the number one risk is longevity risk, because as you said, it's not just a risk.

It multiplies all the other risks. See, the longer you live, the more likely the stock market is going to crash. The longer you live, the more likely you're going to take too much money out. The longer you live, the more likely you'll see inflation, the more likely you'll see your taxes go up, and the more likely you're going to need long-term care.

And so what the PhDs who study retirement say is, and they're unanimous on this, that in order to have an optimal retirement, you must take that longevity risk off the table. Well, stocks can't do that. Bonds can't do that. Real estate can't do that.

Bitcoin cannot do it. Only some form of lifetime income annuity can do that. And so that's where the annuity fits is to at least cover your basic living expenses.

Now, social security counts. Why? Because it's a lifetime income annuity. Pensions count.

Why? Because they're lifetime income annuity. So you take how much money that you need to live your normal retirement, subtract out your social security, subtract out your pension, whatever's left, that's where the annuity fits as a minimum. Now, I don't just have paychecks for annuity. I own 11 annuities.

I don't sell any annuities. I own them. I buy them. And so I've got income that starts at age 60. I got more that starts at age 62. I got more that starts at age 65. I got more that starts at age 70. So I'm guaranteed to have increasing income for the rest of my life. Most of those are in Roth IRAs. So I'm going to have a guaranteed increasing tax-free income for the rest of my life.

And I would encourage as many of your listeners as possible to do the same. Well, I appreciate the fact that you specifically mentioned social security as a guaranteed lifetime income annuity, because it was my next question. Recent news, sort of just a reconfirmation from the Social Security Board of Trustees. But they came out and basically stated, yes, the Social Security Trust Fund is in trouble and will run dry by 2033, meaning that they can only pay out what is estimated to be 77 cents on the dollar of promised benefits.

What is the solution here, Tom? Well, I don't believe Social Security will go bust. You know, Social Security recipients are voters. OK. And so I don't think the politicians can let it go bust.

But changes do need to be made. OK. And like Social Security is not the big problem. Medicare is the big problem. But I could fix Social Security in less than 15 minutes for the next 100 years. We're going to have to raise the retirement age, not on older people, but on younger people like my dad got it at 65.

Right. I don't my full retirement age is until 67. My daughter's full retirement shouldn't be till she's 69 or 70. It just needs to increase as people are living longer.

You know, the retirement, the full retirement age needs to go up. But we're also probably going to have to pay some more taxes. You know, right now we pay what, six and a quarter and the employer pays six and a quarter or whatever, whatever those numbers are. That might have to go up to seven and a quarter, eight percent or something. And now we only pay on up to like one hundred and forty something thousand dollars. Maybe that's go up to two hundred thousand.

I don't know the exact numbers, but it's not a very tough solution. And, you know, the problem is the Republicans can't fix it because they're going to say, oh, they're throwing granny off the cliff. The Democrats can't solve it. All those people are just raising taxes. What they have to do is they have to get in a room together, just like they did under Reagan's administration. Reagan and Tip O'Neill and all those guys back then, they fixed it for another 50 years.

They got to get in a room together. They got to say, OK, we got to raise some taxes. We got to raise retirement age. No, we're not throwing granny off the cliff. We're saving the system.

We're not cutting benefits. And, you know, because it's all about the rhetoric, but they have to come out together and say, look, here is what we recommend as Republicans and Democrats. It can't be one party or the other party will just tear them apart.

You're right. They have addressed issues with Social Security before in extending full retirement age. But they also did that at a time where they seemed to be able to reconcile differences and face difficult issues more directly and head on. Do you see that this is ever going to happen?

Well, it has to happen. I mean, but, you know, unfortunately, with Congress, they don't do anything until there's a crisis. So if the money is going to run dry in 2034, they'll probably do it in 2034 or 2033. And the problem with that is the longer we wait, the bigger the tax increase will have to be, the higher the start date will have to be for retirement. If we could fix things now, the pain would be very minimal. You wouldn't even notice it. I mean, it come out of your check. Would you really notice if 8.25 came out instead of 6.75? You know, nobody's really going to notice that. And so I think the changes could be, you know, relatively small if we do it soon.

But I don't see that happening. Well, while Congress has delayed in addressing the Social Security looming crisis or shortfall there, they have made other changes, Tom, when it comes to retirement accounts. What, if anything, have you paid attention to from the SECURE Act and the SECURE Act 2.0 that you believe impacts retirement minded planners, savers and investors? Well, I mean, they did a number of things. Number one, they raised the age for RMDs, you know, used to be seven and a half, then went to 72. Now it's 73.

Is that a good thing or a bad thing, though? Well, I don't know. I mean, you know, I tell people all the time, what did you save money in your IRA for? What did you save money or 401k for? You saved it for retirement. If you're 70, guess what?

You're probably in retirement. And so, you know, it's just that people don't want to pay the taxes. And I say don't let the tax tail wag the dog.

And, you know, I had a whole strategy in RMD maximization and paychecks and playchecks where I showed how you can literally get the insurance company to pay the taxes because they'll pay a higher payout rate than what you're getting if you just did it on your own. But that's a strategy that's in paychecks and playchecks. But, you know, I do believe people should be taking their retirement money. That's the worst money to leave to your kids.

Don't leave your kids, your IRA and your 401k. They won't be happy. They won't. They'll barely get 50 cents on the dollar. Which, by the way, the SECURE Act pretty much guaranteed, correct? It really reinforced that retirement dollars are not generational wealth.

Yeah, I mean, so I mean, that that's out there. They did reduce the penalties. If you don't do your RMD, it used to be a 50 percent penalty.

Now it's a 25 percent penalty. There's some higher ketchup contributions. You know, it used to be five thousand to six thousand.

I think it's seventy five hundred. It's going to go to ten thousand on ketchup provisions once you're over age 50. There's some things to for emergency getting money out for emergencies. But one of the big things that is never talked about is QLACs, Qualified Longevity Annuity Contracts. And what a QLAC allows you to do is take a little bit of money today to buy income if you live a long life.

So to start like at age 85. And just just because I knew we're going to talk about this. I went on the system today.

I ran I ran a quote. Again, I don't sell annuities. I go to the public site immediate annuities dot com and I just plug it in there. But if I put in two hundred thousand today and I'm almost sixty two, I'm sixty one, but I'm almost sixty two to start in twenty three years when I'm eighty five, if I put in two hundred thousand, that's the new you're allowed to put up to two hundred thousand.

There's no more twenty five percent. So if I put in the two hundred thousand today, when I'm eighty five, that will pay me one hundred and forty thousand dollars a year every year, no matter how long I live. So what this does is protects you against the tail risk of living longer.

What if they cure diabetes, heart disease, cancer, and they've got all these little mini bots they shoot into and affixes everything and they can print you a new kidney and they can print you a new, you know, lung or something. If all that stuff comes true and people live to be one hundred fifty, one hundred eighty, two hundred, that that's been one of the best investments you could ever make. So you take a little bit of money today to start way in the future to protect.

And then you can run a portfolio from sixty two to eighty five, because, you know, if you live longer than that, you got this other thing that'll kick in protecting against that number one risk of longevity. Now, what do you what do you make of the feds direction over the last 18 months as they've sort of turned the corner from making money cheap to access widely available to more of a restrictive positioning and raising interest rates? How do you feel this has affected retirement? Well, it's not just that they raised interest rates, it's the speed that they've raised interest rates. We've never seen interest rates raised this rapidly. And so to go from zero to almost five percent, just like that, you know, in about a year, year and a half, that's unprecedented.

And so, you know, he said he keep raising. And the reason they have to do it is we're thirty one trillion dollars in debt. When when interest rates are one percent, that's three hundred ten billion dollars of interest. We can handle that. But at five percent, that's one point five trillion dollars of interest.

We can't handle that. I mean, it's literally an existential threat to the country if we don't get interest rates back down. And so the way he gets interest rates back down is he's got to raise them enough to break the back of inflation so that prices fall and then he can lower rates again.

But he's got to break things. And we already saw Silicon Valley Bank broke. A signature bank got taken over. And now the commercial real estate, there's all these open office buildings in New York. That's going to be a big problem. They're owned by regional banks.

Seventy percent of the commercial real estate is owned by local and regional banks. So, I mean, that's going to be more of a problem. So but I think he has to keep raising interest rates. The market thinks he's going to stop. He's going to pause.

He's going to pivot. He said he's not going to. OK, he said he's not going to stop until inflation gets back down to two percent. We're not anywhere near two percent.

We're like six percent, five percent. So he's still got to raise rates. I think the market is offsides here. I think the market is going to be in for some extended volatility.

But, you know, let's let's see what happens. Well, they say that history does not repeat, but it often rhymes. And I think that we are rhyming very closely with kind of the late 70s, early 1980s, inflationary interest rate and then subsequent market recessionary environment. But the difference now versus then, Tom, I believe, is that the American public, by and large, did not have nearly as much invested in the market during that time. So the public could be much more hurt by market volatility and downturns. We were more savers at that time. So we actually benefited from the interest rates. And today we have much more debt where we'll be hurt much more by these interest rates. Do you think that we are maybe positioned with our savings and investments that this time around it's going to be much more painful potentially? Well, you know, the good news about higher interest rates is now people can get a higher interest rate on a money market fund or on a bond. And so so bonds are more attractive today than they were when they're paying, you know, one percent or less than one percent.

Next. But but, you know, anybody who's in debt, especially if it's a variable interest rate loan, they're in big trouble. And I think there was a thing that came across that 24 percent of the Russell 3000 stocks or the 3000 largest companies in America, 24 percent are zombie companies. They're not even making enough to pay the interest on their debt. So they're kind of like our government.

They just keep adding more debt, adding more debt, adding more debt. And as you know, a family can't run that way. Business can't run that way.

And our government can't run that way either. And we're going to see this play out over the next five, 10 years. What should we be doing then, Tom, for income generation, fixed income or taking advantage of interest rates for retirement in this environment?

Yeah, so I mean, I'll show you what I do. OK, I own 11 annuity. So I mean, I'm a big believer in income annuities, you know, and people say, oh, annuities are expensive, not income annuities. There are no fees and income annuity. So, you know, if you're guaranteed two thousand bucks a month for us life, that's exactly what you're going to get.

So I used I have that as a basis. I also own dividend paying stocks. There's really great pipeline stocks right now and some some other energy type related stocks and other, you know, real estate investment trusts and things that offer alternatives.

See, for years, everybody who's in the market because of Tina, there is no alternative. Can't put your money in the bank is paying less than one percent. Can't put your money in a money market fund paying less than a quarter percent. Where are you going to put your money? You can put in stocks.

Well, now they say it's it's tata. There are tons of alternatives. So so I don't think people need to be fully invested in the stock market. You can have guaranteed income. I mean, look at what the payout rates are on annuity. So the highest I've seen in in over a decade, you know, you can lock in six, seven, eight, nine, 10, 11, 12, 13 percent a year guaranteed for the rest of your life, depending on your age. And I showed you how I can lock in 71 percent a year for the rest of my life with a QLAC, but that's deferring it for 23 years.

So I mean, there are a lot of alternatives out there. So I would say you want to have at least enough guaranteed income to cover your basic living expenses in retirement. And then you need to invest to protect yourself against inflation or do what I've done with multiple annuities so that you can, you know, turn on increased income because you want increasing income. And as much of that to be tax free as possible. I've moved more of my personal wealth to cash value life insurance, because that's another source of tax free income that I'll flip on here soon.

I don't need it yet, but when I do, I'll just flip that switch and it'll start sending me tax free income for the rest of my life out of there, too. He is Tom Hegner, author of Paychex and Playchex and Don't Worry, Retire Happy. Tom, it had just been a while since we caught up, wanted to get your stance on the state of retirement post covid, post interest rate increases to see what, if anything, had changed in your stance since writing the books on how to structure retirement. And sounds like you're you're still in the mindset that guaranteed lifetime income equals peace of mind and confidence in retirement. Yeah, and the math and science proves that you're likely to be happier. And now the research shows you're likely to live longer as well.

So, I mean, there's a lot of good reasons to have at least a little bit of guaranteed lifetime income. Well, we appreciate you joining us, Tom. Thank you.

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