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Episode #544 - Retirement Plan Live: Legal Tender - Tallying Their Resources

Roger: The show is a proud member of the Retirement Podcast Network. 

Welcome to the show dedicated to helping you not just survive retirement, but to have the confidence because you're doing the work to really lean in and rock it. 

Hey there, Roger Whitney here. By day, I'm a practicing retirement planner with over 30 years’ experience, founder of Agile Retirement Management, and over the last 10 years or so, you and I have been able to hang out in this show and really think about how do you actually do this retirement planning well, not so you can create a second job or a new job for yourself in retirement, but so you can go off and create a great life with confidence. I've had the honor of doing this with you, and hopefully this is my own mastery journey and getting better at my skills.

So today, we've got a good show. Last week with Mike and Judy, our case study that we're working on right now, we had them think with levity about their life. What could they do if they could have everything? What would everything be to them? What would they want? That's a hard thing for a lot of us to think about, but it's an important step doesn't mean we get to have everything but thinking in that levity of what if allows us to identify priorities and tease out preferences that might not come out in a normal planning process, but we can't live like we can have everything there are always constraints on us.

Right, so we can't live way up in the air, like we're flying away. We need to bring in some gravity, which is the constraints of our financial resources and our choices. The reason we always start with something that's really uncomfortable. What if you can have everything? What would that be? Like we did with Mike and Judy is because the default in retirement planning generally is too overrated in gravity. We have to be careful. We can't run out of money. I should continue working. I don't know what I want to do. This is serious. I can't mess this up. I only get one shot. A lot of those things are true, but if we have too much of that, it can cause us to miss our life. Just like if we have too much levity way up in the air, we can have a lot of fun right now, but really put ourselves in a pickle later on in life.

What do you get if you have levity and gravity? You get buoyancy. That's what every one of us should be shooting for the balance between those two things.

Today we're going to bring in the gravity part with Mike and Judy. In addition to that, We're going to answer some of your questions and we're going to share two worksheets in our six shot Saturday email. 

Number one is going to be a worksheet to update your resources, your human capital, financial capital and social capital.

So, you can bring that gravity to your planning. In addition to that, we're going to answer a question related to long term care today. And I'm going to share a worksheet that we have as part of a decision pod course in the Rock Retirement Club, where we walk through how to think through long term care management in terms of that risk.

In a organized way, so we're going to share that worksheet and I'll walk through it a little bit as we talk through the question, but there's a whole training around that that's within the club and we want to preview that a little bit. Of course, we do, because we'd love to have you join the club, but we'll share that resource at least the worksheet with you in our 6-Shot Saturday email.

If you're not signed up for that, you can go to our website sixshotsaturday.com or rogerwhitney.com and you can grab those worksheets. With that, let's get on with Mike and Judy and their financial resources.

MIKE AND JUDY’S RESOURCES

We're back with Mike and Judy to get out of all the fun of thinking about all the cool stuff you want to do and get down to how we're going to pay for it. Excited? 

Back to reality. Back to reality. I'm just joking. It's good exercise. Anything from our last conversation that came up after we got done chatting?

Judy: Yeah, there were a couple of things 

One is I’m not sure what number we said was the cost of our place in Florida per year but I have figured out and based on the five-year average the actual cost is twenty-eight thousand.

Roger: Twenty-eight thousand a year. Okay, perfect and we'll get to the income part of that here in a moment.

Judy: Right and the only other thing that I don't think we mentioned because we started going down the craziness of a golf house in the backyard was, we did have on the list, like, 8, 000 a year for extra travel for the first, like, at least every other year, if not every year for the first, 20 years, and I think 20 years seems long. But both my parents traveled extensively after they retired, and I just want to have that opportunity. I know, like after they retired, they went to 17 different countries and like exotic countries, you know, the Philippines and Tajikistan and India, Morocco and Romania, and they built habitat houses on every continent. Singapore, I've got a list. India. Then also after they retired, my dad hiked Appalachian Trail and they did like a Lewis and Clark trail trip and some crazy sailing school in New England.

I didn't really know what they were doing. I just took them to the airport and picked them up when they told me to, because we had young children at the time and couldn't keep up with what part of the world they were going to, but they did a lot after retirement. And I just want to make sure we have some options though. 

Roger: Is that a desire of yours to emulate that?

Judy: No.

Mike: We already have several trips in mind and we're already planning them out. We're already probably like 3 or 4 years out as soon as we retire, places we're going where we're going to stay for a month and things like that. So, I do anticipate a lot of travel.

Roger: Do you feel like the numbers that we talked about last time provide that from a financial perspective?

Judy: I think so with like adding 8, 000 more for travel because if we do this travel then we would not spend as much time in Florida. So, we would rent that out more so it would all work out. 

Roger: It sort of helps balance it out. Okay. Assuming you did all the travel months in the premier time of Florida rental.

Mike: Right. 

Roger: Okay. Interesting. All right. Anything else that came to mind after we got done chatting? 

Judy: No. No, I don't think so. 

Roger: It's good to have the space in between this because it creates some, well, space to contemplate and fill in the blanks and, Oh, I forgot about this and this is actually what those costs.

It's good to have some time to step away and not just think you can just go from A to Z. 

So, we're going to start off with how we're going to pay for this today. That's the objective today, and that will set us up well for doing the initial feasibility test. But after this, I do want to have one more conversation if you two are open to it in terms of biggest concerns and what your style is around money. Perhaps we can do that again if time permits.

We're going to pay for life from three basic resources. 

One is what we call social capital, socialized income of some sort, social security being the most common one, and we have a wrinkle there. What is your current estimate of what, Judy, your social security benefit will be at full retirement age?

Judy: My benefit at full retirement age, which is 67, is about 41 or 42, 000. 

Roger: Okay. We'll use 42, 000. 

Judy: That assumes no income after last year. I just, I go into the social security website and I put down zeros going forward because you never know.

Roger: You make a great point because that estimate on the statement that we get assumes you continue to work up to your full retirement age.

Did you notice a big difference between the detail calculator that you used and your statement? 

Judy: Not a big difference. Not as much as I would have expected. 

Roger: Okay. Mike, what's your social security amount? 

Mike: Zero. 

Roger: What? Freeloader. 

Mike: I get no social security. None. 

Roger: Do you get spousal benefit? 

Mike: I do not. 

Roger: Do you get survivor benefit?

Mike: No. I don't think so.

Roger: Okay. So that's a wrinkle. 

Judy: Yes. 

Roger: The good thing is the guy usually dies first so it won't be as big of issue for a survivor.

Mike: It's in the bag.

Judy: There's the whole age thing. 

Roger: Oh, yes, there's an age thing, too. Okay, so you don't have any social security. 

Other forms of social capital would be Like annuity income that you're going to be receiving or pensions.

Mike: I have a pension. 

Roger: That's what I figured because you’re in education. You have a teacher pension. Okay.

Mike: Yes.

Roger: Do you know an estimate of what that is? 

Judy: Yeah, if he retires 2 years from now, which was the kind of the plan. There's many, many options, but the 1. We are looking at, which is the full survivor benefit for me is 57, 000 with 100 percent survivorship.

Roger: Okay. It's 57, 000. That's 100 percent survived, which means if he predeceases you, that you continue on with that benefit. It has a one and a half percent COLA adjustment. So pretty good. I think social security average is about 2. 7-ish.

So not bad. 

Now, Mike, you're 53, right? 

Mike: Yes.

Roger: If you retire at 55, I'm assuming this changes if you retire at 58 or if you retire it because it continues to accrue, right?

Mike: We'll never know 

Roger: Because you're not doing it. That's not happening

Mike: it does it goes up three percent each year.

Judy: It looks like based on what they told us the last time we met with them if he retires next year, It's 52 instead of 57 If he retires any year after he's 55, then it increases about $3,000 a year.

Roger: Let's assume he retired at age 55. What year does the income begin? 

Judy: Right. Immediately. 

Mike: Immediately. 

Roger: This is beyond probably what we're doing here, but it would be interesting to see if could you continue to defer it even after you retired, or do they require you to turn it on? 

Mike: I've never heard of anybody deferring it.

Roger: Okay. I've had a few instances, so it's always good to check. Okay. 

All right. Well, that's a good benefit. He doesn't have to wait to full retirement age like you do, Judy, and that would be a hundred percent survivor. Any other social capital sources? 

Judy: No. 

Roger: So, the next is going to be human capital, which is money from work, income from maybe if you had a Florida property.

So, are you going to work once you retire? 

Yeah, I'll definitely plan to substitute teach and may even for the first few years, my work on the maintenance staff at our country club the golf course. Okay, and so let's just take one of those, let's say substitute teach How many years would you say you do that after you retire just as a guesstimate?

Mike: I'd say six or seven 

Roger: Okay for six or seven years. What would you estimate to be an annual income off of? Whatever you do whether it's subbing or maintenance or whatever?

Judy: The state limits how many days he can serve. 

Mike: Yeah, I would say at the most around. I mean, even if you can only like, make 8, 000 as a substitute because you only clear about 80 dollars a day after taxes, and then, and you're limited to 100 days a year. 

So, if I subbed every single day, I'm allowed to, which 100 days would be a lot. 

Roger: All right, well, let's, so maybe 5, 000, 4, 000?

Mike: Yeah, I would say around, yeah, 5, 000. 

Roger: Then, how seriously is the, like, maintenance crew?

Mike: It's just something I've been planning. I wouldn't count it right now. 

Roger: Okay. 

Mike: It's just something I've been, I've thought about. 

Roger: Okay. One quick question is, I remember you saying how much you were ready to get out. Why would you go back even for a day? 

Mike: Oh, it's just, I still enjoy my job. Yeah. I still enjoy the students and things like that.

It's just the, it's the day-to-day things. Plus, a lot of the headaches of the job. I wouldn't be required to do it anymore. The meetings. The parent meetings, the after-school tasks, the grading, you don't do that as a sub, unless I took a long-term sub position, which would be not looking to do that. Yeah. I need a lot of flexibility and subbing.

Roger: Okay. So, it's like you enjoy your job. It's just all the administrative and the pace of all the stuff that has to get done. 

Mike: Okay. Right. Okay. 

Roger: Are you going to work at all? You can't see it, but Mike is, is shaking his head no.

Judy: I would like, there's certain things that I would like to do, and none of which provide an income volunteering.

But yeah, with the organizations that I volunteer with there are also paid seasonal positions that I would definitely do but they're in different parts of the country. So, you go and live for a month in these different areas So I think it would kind of be a wash like the amount of money I would make would pay for the hotel 

Roger: Right, right, whatever.

Okay, we'll just say none. We'll just say no, and then the Florida property, we have income that can be dialed up and down based on your use and rentals, right? 

So, Judy, you mentioned a five-year average on the expense side. Do you have a five-year average on the income side? 

Judy: Yes. Based on how we're currently renting it, it's 22, 000 in rental income.

Roger: Then In retirement, do you project that to be roughly the same or do you think that's going to go down because of more use? 

Judy: Right if we use it in the winters, then it would only be fourteen thousand in rental income.

Mike: Which obviously that would be the dream.

Roger: So, we'll go with fourteen thousand but at least we have a range of what that would be, right? 

I just want to backtrack for a second on the annual expenses That is gross expenses before any offsets of income, etc. 

Judy: Right. Okay. That's every dollar. 

Roger: Okay, perfect. So, we have 42, 000 in Social Security, not for a long time. We have 57, 000 in pension for Mike that starts relatively early. We got 5, 000 for Mike in substitute teaching. Sounds like early on Mike's really carrying the load here. Just mentioning it.

Then we have the Florida property 14, 000 to 22, 000. Okay. 

Judy: Yeah, there's one more thing. At retirement, Mike gets like 13, 000 in a lump sum for sick day pay, or it can be rolled into something and taken over time. I don't really understand that part. We didn't even know that was an option, but somebody did it.

But I guess for tax purposes, you don't have to take it all at once. 

Roger: Got it. Okay, okay, I'm glad you mentioned that. Thank you. 

Mike: I thought we were working on the possibility of it only going one more year. 

Judy: No. 

Roger: I got that in there, Mike. That's where I'll start. I got that in there. Yeah. Okay. Anything's possible until you run the study.

 So those will offset all of the spending goals that we talked about last week. What they don't offset is going to have to come from your assets, your money, right? When we have three categories, we have after tax we have pretax and then we have tax free.

So, let's start with after-tax assets.

We can do this any way you want. We can go account by account or we can just say after tax pretax and tax free, but either way works for me.

Judy: Okay, I can do it either way. 

Roger: Okay, let's just go big picture. We don't need the details for this exercise. So, after tax assets.

Judy: So, after tax assets are like cash.

Roger: Cash joint accounts savings accounts Investment accounts that are like brokerage accounts.

Judy: Well, like we have said 30, 000 in cash and short-term CDs. We have 150, 000 in brokerage accounts, but that's like emergency fund and also, it's for the little bit remaining of our daughter's graduate school and for my dad's care in case he needs it. So, I'd rather just not do that 150,000. Leave that out. 

Roger: Okay.

I made a note of that. 

Judy: I think that's all we have in cash.

Roger: Anything after tax investments?

Judy: No. I mean, we have just our Roth's. 

Roger: Okay. Those are tax free. So, let's go to the pretax. So that generally is going to be mostly 401k, 403b that has not ever been taxed. So, it's not going to be the Roth portion if you have any of those.

Judy: So, including my 401k and inherited IRA that I have. And Mike's deferred comp IRA with The state, it all adds up to 1, 650, 000. 

Roger: Okay, so you have an inherited IRA. Now you mentioned the word deferred comp for Mike. That is a thing. Sometimes deferred comp has a payment schedule that's dictated, and usually you choose it.

Do you know it? 

Judy: We don't know, but it's only 10, 000. So, we don't know.

Roger: Okay, so no 403B or other type of 401k equivalent? 

Judy: No. No. 

Roger: Okay. All right. So, we have 30, 000 in cash that we're counting, 150 that we're not. We have 1. 65 million in pretax assets via 401k, and Mike, what do you have in tax free or Roth in HSA?

Judy: 130, 000 with, I have some Roth in my 401k, then Mike has a Roth, and then I have a little Roth that was a rollover from when I had a different job.

Roger: No health savings account or anything like that? 

Judy: No. 

Roger: Okay. Any other financial assets? 

Judy: I have a, like a little whole life policy that I've just never cashed out, but that's got like 16, 000 current cash value.

Roger: Okay. 

Judy: My parents purchased it years ago. 

Roger: Okay, I'll include that.

Judy: Then, that's it. 

Roger: Okay. Do you think that you're going to have any inheritance from anybody?

Judy: Dependent on long term care issues. I would say the most would be a hundred thousand. 

Roger: If you had to put a probability to that number or getting anything?

Judy: Yeah, I'd say probably a hundred thousand. 

Roger: Pretty high probability. Thirty years from now? 

Judy: Five years from now. 

Roger: It's always a weird question. I know you have this reserve at 150 for grad school plus assisting with care, right? You feel pretty good about that. You think you're going to have to go deeper or are you already funding or subsidizing care?

Judy: No, it's good right now. It’s just if memory care comes into play, then it'll be more and my dad has 50, 000 of his own before we would have to go into that amount and then his house and different things. But right now, it's all good. He's got enough in retirement annuity, whatever if memory care comes into play, everything doubles.

Roger: So, yes, so if it doubled, this is out, you know, we don't have to do that as a guess. If it doubled, how quickly would he burn through all the things that you mentioned? If he had to sell the house.

Judy: Two or three years. 

Roger: I'm looking at faces. They're contemplating. So, I'm being quiet. 

Judy: Yeah, I have to do the math.

It would be like, say, 4, 000 a month. Too much math.

Roger: 4, 000 a month. Yeah. I hate live math. So, I relate to you. That's 48, 000 a year. 

Judy: Yeah. So, I'd say 3 years. That'd be about 144, 000. 

Roger: Now let's talk about what we call use assets, right? So, you have your home. So, I'll just call that home. If you had to guess the value of that, what would you call it?

Judy: Per Zillow, it's 315. 

Roger: Okay, and then you have the Florida property. What's the value of that? 

Judy: 425. 

Roger: Isn't it weird to own a second property that's worth more than your house? 

Mike: Yes, it was weird when we paid for it too, when we bought it.

Roger: There's some quirkiness about the Florida property. We don't need to get into the details, but this is a rental in a happy place that you guys use, but not during the high season right now that you want to use a lot.

In your current state, is this like a forever? This is like our place and I can't wait to pass this on to the kids. We know this is a really happy place or is this like a season of ownership or how do you guys think about it? 

Mike: I don't think we agree on how we think about it. 

Judy: I think about it as like a season, but we do have family like our son is down there. How quickly we would sell it in the future. I don't know. 

Mike: I think it'll be a really nice thing to have once we're retired and I don't think she understands how much we will enjoy it once we've retired. So, I could see us. using it for at least the next 20 years until the travel gets to be too much and things like that.

Judy: That's about what I would say. 

Roger: Yeah. Okay. So, you're in agreement more than you think. 

Mike: Yeah. 

Roger: You're in agreement more than you think. So, we're just going to assume that we keep that. What about debt? 

Judy: Oh, we also have one more real property, which is our Disney Vacation Club. 

Roger: Oh yeah, that's right. I forgot about that.

Judy: Right. But we don't plan to sell it, but today if we sold it, it would be 70, 000. 

Roger: Which is amazing to me. I don't even know the concept of that. I don't want you to explain it to me. 

Judy: No, it's too much. It's too much. But yeah, if we sold our contracts right now, today it would be 70, 000, but we don't plan to sell them.

Roger: So, okay. Do you have any other assets, reuse assets, real property? 

Now, let's go to the other side of the ledger. Let's talk about debt. She's just shaking her head Debt, what are you talking about? I don't know what debt is. 

Judy: No, we don't have any debt. 

Roger: Okay, good for you. There’s nothing bad about that.

I have debt good for you. 

Judy: My parents were very anti debt, I mean very much so and never financed a car, barely, barely financed their house. That was just because they got such a great interest rate through the university that my mom taught at. So, they just beat it into me as a child, and we've done the same with our kids.

Roger: Keeps you out of a lot of trouble. You mentioned the whole life insurance. Do you have any other life insurance terms or otherwise? 

Judy: I have probably 300, 000 through work, but I'll lose that retirement. 400, 000. Mike has like a 5, 000 policy with his pension, like in the pension. So that would be part that he'll always have.

We both had 800, 000 term policies that just expired a month or two ago. We didn't replace them. 

Roger: Okay. Do you have long term care insurance? What is your expectation? What's your plan? If you have a plan.

Judy: The plan is to use the Florida property and sell it. So that's possible. My parents really got burned on long term care insurance, and I'm very frustrated with it at the moment.

Roger: Can I pick that wound a little bit? 

Judy: Yeah, they bought long term care insurance in the 90s. Like a long time ago and they've paid over a hundred thousand dollars in premiums. My mom never used it and now my Dad is currently Getting fifty dollars a day.

Mike: That was a battle to get that. 

Judy: Yeah, it is not good and we're still paying four hundred dollars a month to get the fifty dollars a day.

It's just okay. 

Roger: So, you still have to pay the premiums?

Judy: Yes 

Roger: You always hear about the older policies like the Cadillac policies, right? 

Judy: That's what everyone told me. Everybody told me, oh, this is a Cadillac policy. This will cover everything. This will be great. That's what I believed, and that's what I told my father.

He believes his assistant living is completely covered by insurance.

Roger: Because why, why? Bring that up. Yeah, at this point. What's the point right.

Judy: But I believed it and just kept paying every year I would get that letter that said your premium is going up by x amount and I'd be that's okay, we're just you know, I didn't even look at the policy and then now that it's time to look at it. I'm so frustrated. 

Roger: Yeah, I think a good standard is every two years if you have a policy even like just look at it right and try to remember what it actually does. 

Mike: What it is. Yeah. 

Roger: Because it's so easy to forget. I mean, even as a professional, I have to go put eyes on it. You don't remember this stuff. It's complicated, and there are a zillion other things. So, I'm sorry to hear that.

Judy: It was a big shock when I found out what the terms really are.

Mike: It does go up.

Judy: It's 50 a day for assisted living and 100 a day for nursing care. Yeah, and but there's no cap. 

Roger: That's a good feature. Right? Whereas now, usually it's a bucket of 3 to 400, 000.

Judy: It had a good, like, annual increase.

Roger: Inflation rider?

Judy: Right, it had a good inflation rider and that inflation rider was canceled in 2008. 

Roger: So, is that part of a premium increase that was usually you get choices? 

Judy: Yeah, and I don't think that. My mother understood that it dropped back down to the 50.

Like I think she thought they were at a certain point after this many years of increase that it would maintain at that point, and it didn't. I've been burned, I always intended to get long term care insurance, but now I would rather not. 

Roger: Because even if you examined it, I think you can go through it in a logical way, but if there's no trust that even what you're looking at is real or not, right?

I understand that. 

Judy: I know there's a lot of different ways you can do long-term care insurance now with life insurance, right? Just all the products out there, but I just haven't been able to wrap my mind around any of those yet. 

Roger: Once we get to a feasible plan, we'll stress test potential long term care events just to examine whether that's a risk that needs to be thought about a little bit more, whether it's the Florida property or something else. So, we'll stress test it to see. Just like what happens if one of you dies early, et cetera, but let's get to a feasible plan first, and then we can figure out. 

Okay. All right. I think I have everything I need. We've basically built a network statement so I can actually get to the business of creating the first feasibility study that we'll look at together and come up with if assuming it's not feasible and I don't know and then I'll come up with some ideas of what could be feasible so we could negotiate. We'll do that when we're all live together as part of this case study. Anything that you wanted to tell me that you forgot?

Judy: No, no.

Roger: No. Okay. I'll get to work on that. We'll see you guys soon. 

Judy: Okay. All right. 

Mike: Thank you

LISTENER QUESTIONS

Roger: Now it's time to answer your questions. Before we do that if you have a question for the show That's a good place to start go to askroger.me and you can type in a question. You can leave an audio question. You can just say hi. 

In July, we're going to spend the entire month answering your questions. We're not doing it a lot in June because of the case study, but in July, we're going to do that. So, if you have a question, you go there. 

ON INVESTING ONLY TO KEEP PACE WITH INFLATION

Our first question comes from Chris, which is a question related to feasibility and resilience. So, there's four pillars of a sound retirement plan, having a vision, organizing your resources and determining whether it's feasible and then making it resilient and then optimizing.

So, this is going to be in the feasible resilient area of the project.

Chris says, 

"Hey, I'm a long-time listener. Really appreciate your efforts to elevate retirement planning beyond just the numbers. Back in the day, maybe 10, 20 years ago, I seem to remember recommendations that someone retired should have very little to no stock investments.

I have to say this appeals to me, no longer having to track the stock market or worry about the ups and downs. Imagine, no longer having the stock market widget on my phone."

Well, here's a quick tip, Chris. I challenge you to take off the stock market widget right now, regardless.

Chris says, 

"Do you have any thoughts around this? Maybe I'm misremembering, but would it make sense to divest from all stocks, just accept what you've got at some point? No more upside, but no more loss too. Maybe just shoot to invest to keep pace with inflation."

That is a very good thought exercise, Chris. I think, so I think you're going down a good path here as a thought exercise.

Why do we take investment risk in terms of ups and downs, et cetera?

In order to try to grow our assets to provide us with something we value more, right? So, if you don't need the investment risk in terms of equities, why take it, right? Where's the utility in taking it if you don't need it? I think from a thought experiment standpoint, Chris, this is a really good way to approach it.

Well, before I go into the numbers on that, there are a lot of differences between traditional retirement and modern retirement. Probably more than 20, 10, 20 years ago, Chris, this has been an evolution. But if you think about back in the day, think of your grandparents, maybe your parents. They probably didn't own stocks. They barely had a 401k because they retired before then. They had a pension. They had social security. They lived much more local lives than modern retirees and they didn't live as long. Their time horizon in retirement was maybe 10 to 15, maybe 20 years.

A modern retiree, Chris, is likely not going to have a pension or not near as attractive a pension. They are going to view retirement not as a chance to sit on the park bench of life like past generations, but they view retirement as a chance to finally do all the things they want to do. They want to get in the playground and create experiences and do things. All those things cost money, by the way, and they're going to have a time frame of 20 or 30 years in retirement, not 10 to 15 or 20. That dynamic has shifted how we have to approach retirement, no pension, all these things. 

So the way to determine this Chris is figure out what you need for your base great life, organize your financial resources, your social capital, pension and social security, et cetera, your human capital, any part time work you do, and then the money that you have, and given a timeframe based on the spending and the resources you have, let's assume it's 30 years. How feasible is it for you to keep up with inflation and live that life? That's what this feasibility pillar, the second stage of a retirement plan does.

In that stage, Chris, you can actually experiment with, well, what if I had zero equities, which means you would have a lot less volatility and you would have a lot less expected return relative to something in between, balanced, and you can run a feasibility study using Monte Carlo scenarios et cetera, to give you a sense of how bad is inflation going to be for me if I have zero equity risk and I just have bonds and you can run a feasibility test to see, would I still be okay? Or am I really going to hamstring my future self?

That's the balance, right? Balance between feeling comfortable with your investments today, but also making sure future dude, future Chris, in this case is doing okay. You can just run the test and tease out with the second and third order consequences of having zero equities. But I like that idea.

Why not go from a minimum effective dose of risk? Then you can proactively choose perhaps to take equity risk above what you need because you want to build capital for to help protect against spending shocks, et cetera. I think that's a great thought experiment. That's why I think you need to have a very tight process where you do it in an organized way. Ours is the agile process. So, you can do that because I've had clients, Chris, where they were so overfunded, meaning they had so much more resources than they had anticipated spending that if they took zero equity risks. The feasibility of their plan working was for sure, no problem. Now they were faced with, I don't have to take any equity risk, and I've had clients that have not done that. They've built long term bond ladders. They've just managed bond or CD portfolios. They've bought guaranteed payments. They'd taken some of the money and just bought pensions via annuities. And they said, forget about it. I don't even want to think about it, but you have to know whether you have enough resources to do that, and you also have to know what the cost is of doing that. It may mean that you have to live less of a lifestyle if you're not drastically overfunded. I love this kind of thought experiment, Chris, because it helps to tease out the choices that we have. between managing inflation and managing sequence of return risk. So that's how I would approach it. 

Now, I don't think it's a bad idea at all to explore so you can make organized decisions that you can have confidence in. 

SHOULD KURT TAKE HIS RMDS MONTHLY OR YEARLY

Our next question comes from Kurt related to required minimum distributions. 

Kurt says, 

"In my case, my wife and I are both 70. We will not be starting our required minimum distributions until age 73.

We have about 3. 6 million in IRAs, Roth IRAs, brokerage accounts, and cash. 10 percent of that is the value of our home, which has no mortgage. We have not needed to tap these investments yet in retirement. By your definition, I guess we are overfunded for our retirement. Well, perhaps, Kurt. Before I heard your segment, I was planning to take required minimum distributions at age 73 and roll the proceeds into a non-tax deferred index mutual fund. We have established 529 accounts for our four grandchildren already, but some of those RMDs will go towards starting legacy 529 accounts for great grandchildren that are not born yet. 

My question is, would it be wise to take our required minimum distributions once a month instead of once a year to truly dollar cost average out our retirement accounts in the form of annual required minimum distributions."

So, this is a relatively green banana, Kurt, because we have three years for you to make this decision, and this would be an optimization question, meaning that you already have a feasible resilient plan. It sounds like, so this is an optimization question, assuming that you're going to take the money and invest it in index funds in an after tax account like you said I don't really think it matters because you're likely going to say, have said index fund in your IRA, and then you can take the amount you need for your required minimum distributions, pay tax on it, and then have it invested in an after tax account, so it's going from like investment to like investment. I don't think it really matters whether you do it on a dollar cost averaging monthly basis or on an annual basis. I don't really think it matters one way or the other, assuming it's in a very similar investment that you're going to move from your IRA to your brokerage account.

Now, my normal answer on this Kurt is if you're taking the required minimum distributions, and this is going to help fund your life is that you'd want to put that into a liquidity bucket. So, it's not at risk because that's a distribution that you're going to actually use to fund your life. But if that's not the case, then you can invest those monies like they're for your grandchildren or great grandchildren in the IRA, and then when you get to the point of required minimum distributions, then you can just take the money and put it in a similar investment because it still has the same purpose, these great grandchildren, in the after-tax brokerage account. So, it doesn't really matter whether it's monthly or annual.

A couple of things to think about though, Kurt. Number one, by doing it on a monthly basis, it creates more mental mindshare to make sure that they happen. Whereas if you just do it once a year, you're done with it and you don't have to worry about it. One thing I think you should start thinking about right now, if you haven't already, that is not quite related to this, Kurt, is once you and your spouse are 70 and a half, you can start doing qualified charitable distributions if you have any charitable intent. For 2024, I believe the maximum amount you can do per person is 105,000, which this is always adjusted for inflation, meaning that you could do a charitable distribution from your IRA for 105, 000 and it is not taxable, and then your wife could do the same once you hit 70 and a half, and then you could consider doing that each year.

if you have any charitable intent, and this will assist you in lowering your future required minimum distributions. Another thing I would suggest that you do is calculate what your expected required minimum distributions would be when you hit 73 that way you'll get an idea of how much you're going to have to take out and you can overlay that on your tax estimates and what you normally pay in taxes to see what impact that could have to IRMAA Medicare surcharges or to your tax brackets because you may face a cliff of sorts where all of a sudden you and your wife turn on your required minimum distributions and you're starting to get up in higher tax brackets later on.

It's a good idea to estimate what your required minimum distributions would be. So, let's do some basic math here. I have to be careful. I'm not very good at live basic math, any kind of math live, but let's try it. 

I'm going to get out my trusty HP 12C. We're going to assume that Kurt, you have 2, 000, 000 in a tax deferred account. I'm just going to treat it as one of you for now, and then we have three years until your required minimum distributions, and we have a 5 percent interest rate. Let's assume it grows by 5 percent over the next three years, Kurt. We have zero payments out of it. So that future value is going to be about 2. 3 million, a little over 2. 3 million. So here we are, after earning 5 percent for three years, we went from 2 million to 2. 3 million. And at that point, and I'm just going to look at the single life table. Actually, no, we're supposed to use the uniform life table. I want to make sure I use the right table.

At age 73, I'm going to use the life expectancy factor. So, your first year estimated required minimum distribution with that fact set is going to be about 87, 369. If you don't take any money and it grows at 5 percent a year and it's 2 million, that is in pretax accounts, so that's going to be taxable income and your wife may have her own taxable income. You could do QCDs to lower that. Now, the other thing that you should consider Is doing just qualified distributions. If you don't have any charitable intent each year, you should be assessing. Should I just proactively take money out of my IRA within whatever tax brackets you want to manage and reinvest that as after-tax cash for the great grandchildren.

Last option would be, do you do a Roth conversion at some level? You could get it, go down the rabbit hole and Roth conversion strategies. But I want you to think dynamically about this so you don't miss potential opportunities, but I don't really think it matters whether you take it monthly or all at once in terms of your RMD.

FUNDING LATER IN LIFE HEALTHCARE COSTS

Our next question is about long-term care expenses from Julie. This is where I'm going to walk through the long term care decision worksheet that we have as part of our course on thinking through long term care So we have that in the rock retirement club of course I’m previewing this but I’m going to give you the worksheet in 6-Shot Saturday but we believe that you approach these topics in a structured way so you can have an organized decision, which essentially is most of the time a judgment call, because it could go either way. Since there is no clarity as yes, this is right or this is wrong, you want to be confident that you thought through it in an organized way. So, let's get to Julie's question first. 

"Hey Roger, would love to hear more about how to factor implants for funding later in life healthcare costs. I took care of my parents during their last five years of life. The costs are so incredibly expensive and not covered by regular insurance. My financial advisor has said self-pay from savings makes more sense for our future than long term care insurance. It seems like a real wild card and I wouldn't want to burden my children or live in a Medicaid nursing home.

Appreciate your perspective. P. S. very much looking forward to your discussion about buying your property in Colorado. Thank you. Both my kids are there and a dream would be to relocate from New Jersey to there."

I had that as an addendum last week, Julie, so you can check that out. 

So, the fact set is your advisor is telling you, no, you should self-fund it. So, I'm assuming that he did some testing to see how resilient your plan was to a long-term care shock. And that's what I would suggest you do if it hasn't been done, meaning get to a feasible plan of record and then as you're thinking about how do you make it resilient model? Well, what happens to Julie if at age 80 there's three years of Healthcare shock expenses at 80, 000 a year, inflation adjusted, is her plan still feasible? What happens if it happens to Julie and her husband, if she has one, and see the impact of some of these shocks to see if you could self-insure via self-pay.

If your advisor is intuiting this, I would encourage you to go back to him and say, well, wait a second, I want to know I have a feasible plan for my retirement. Once the feasible plan is in place, let's stress test it and don't just tell me, show me with numbers and forecasts of the impact of, well, what if this happened? If they're not doing that, you need a new advisor because they should be doing that and poking at this from different directions.

 Let's assume that they are correct for now. How do you decide whether you buy long term care assurance or not? 

Well, there's going to be some qualitative considerations and some quantitative considerations. I'm going to pull up the worksheet that we're going to share. This is called the long-term care decision workbook. It is part of a decision pod or training that we have.

The first part is observe, gain some information. Okay. So first we want to observe from a qualitative standpoint, what does your social network look like? Are you married or have a partner, or not? Do you have children? Yes, or no? Do you have extended family, aunts, uncles, cousins, et cetera? Yes, or no? We want to know what kind of social network you have around you. If you answer yes, then the next step is to start to list the names of your social network, their name, their relationship, and approximate miles away, because you could have a vast social network, but they live thousands of miles away.

All we're doing is building a dashboard. So, you just want to collate this information. So that's step one. 

Step two is to ponder and answer the question, Who would be willing and able to assist you if you needed help? You can think about yourself now and you can think about the future. Who would be willing and able to assist you?

The next question, and you shared a little bit of your thoughts on this, Julie, is what is your view on having this social network, this family care for you, even if it's your spouse? What are your thoughts on that? You had articulated that you don't want to be a burden to your kids, and sometimes we don't want to be a burden to our spouses either, because that's who does the majority of the work, having to help you, but also emotional and mental journey as well. But you want to articulate this so you can have it outside these floating ideas in your head. 

The next question on the worksheet is, What is your experience with long term care? Have you known someone that had a long-term care event?

You answered yes. Have you provided support for someone? Yes, or no? This is going to influence your view on this. And you articulate that you definitely had someone in your family that did. Then the question is, well, if you needed care, who would you turn to? Answer the question as best you can right now in thinking about your life and circumstance. Who would you turn to? You may have a big question mark. 

Once you answer that, answer the question, how would you prefer it to be funded? This is totally separate from quantitatively, whether it's insurance or money, whether you have enough money to self-pay or not, how would you prefer to fund it? 

Now you go to the quantitative. So that gets some qualitative framework in observing your life. Now we go, well, let's observe the quantitative part, the money part of it. 

Step one is we suggest that you go to a website. I think Genworth has a cost of care survey that they've done for years and you can enter your zip code. You set the period for annual, you calculate how much care would be in the year you turn 85. It'll spit out a report and give you an idea of the estimate for different types of care for you, where you live in future dollars and today's dollars. The types that it will give you will tell you an estimate of what currently in home care is, home health aide, adult health care, daycare, assisted living, semiprivate, private, and on the worksheet, you enter the data of what the costs are for your zip code for these different levels of care.

Then the next step is, the process in this observe is, well, let's get some quotes for long term care insurance. It's worth the exercise, I think, if you're going through this process to get information.

We suggest using an insurance broker because there's no cost to you, additional cost anyway, and they can help determine insurability for you before you do some things that could hurt you and choose carriers that fit your profile and help you craft the quote and get quotes from multiple carriers. This is an important step because you want somebody to have an initial interview when you're getting long term care insurance.

Because if you just go apply for it and you get denied, it can be like a scarlet letter because every other insurance company you go to, well, have you ever been denied before? And you say yes, they may just say, no thank you right from the bat. So, you want to have an informal interview with the insurance broker. So, one, they can say, Oh, I wouldn't even apply because if you're not going to get insurance or they might say, well, based on this fact that you have this condition, we definitely shouldn't go to those companies because they don't like that condition but these companies are pretty cool with it. That's how an insurance broker can help you. That goes through the healthcare screening qualifier, and then you get the quote that you and the insurance broker work through. We suggest that you get a quote for traditional life insurance, which is the normal, you pay a monthly premium and that you get a quote for what these newer hybrid long term care insurances, which are insurance based, which have some advantages and disadvantages.

Now you're starting to gather the information. 

Step four in this worksheet, Julie, is you already have your feasible plan of record that you should have had in place with your advisor, especially in this case. What is the impact if you stress test your plan against you having a long-term care event? Then you can put the confidence number from, say, the software that without any event, and then you can do a what if scenario modeling if you had no insurance, and then you can do a what if scenario if you paid the premiums for a traditional policy that you have a quote on, so you have an idea of what the cost will be, and you can do another what if scenario on a hybrid policy and see the impact to your feasible plan of record with a healthcare event that you self-pay, the premiums of traditional long term care, and as well as the hybrid. Now you have a framework, some scaffolding to glean some insights for yourself, and it also will help you in this process if maybe you're not even insurable. Now you can start thinking of different things that might be able to help you with this. Home equity, conversion, mortgage, government programs, the VA, et cetera, and start to game plan how you will decide. Then at the end of this worksheet, you start to think creatively, and we talked through this in the course within the club of mind mapping and brainstorming and putting estimates on what's the likelihood of these potential impacts happening. What's the likelihood and what's the worst, best case if we did buy longer term care insurance, because you got to flesh a lot of this stuff out of your head. Otherwise, it just bounces around. 

A lot of this was adopted from Annie Duke and how to decide, which are these decision frameworks. But the point of the exercise is to get to a decision feeling like I've looked at the facts, I've poked at it from different angles and this is my judgment call at the time.

Then you document the decision, and you put your reasoning behind the decision, and then on the worksheet, you put what's the next date I'm going to review this. That is essentially an OODA loop. Observe, orient yourself, decide, and then act. It's an organized way of thinking about it that takes a lot longer then, oh, I think you'll be okay, or I definitely want it because you're always going to be dealing with incomplete information. In the Rock Retirement Club, we have the long-term care decision pod, which walks through using an example, creating each one of these so you can tease out what's right for you.

Part of this, Julie, is just because you financially can self-fund doesn't mean it's the right answer for you. Quantitatively, it may be, but qualitatively, it may not be. You may want to use insurance to transfer. In fact, if you can self-fund, you probably can afford the insurance so it's a preference of do I want the resources that I can leverage with insurance, not just simply the amounts that they're going to pay, but the fact that they have a guide and someone helps coordinate benefits.

There's some, all these extraordinary benefits, that can come with that kind of insurance. So that's the framework. We'll have this worksheet in our 6-Shot Saturday email. That is part of a bigger course on walking through this to help you navigate this decision, Julie. 

With that, let's move on and set a smart sprint.

TODAY’S SMART SPRINT SEGMENT

On your marks, get set,

and we're off to set a little baby step we can take the next seven days to not just rock retirement, but rock life. 

All right. In the next seven days, grab the second worksheet that we'll have in our 6-Shot Saturday email, you can get that at rogerwhitney.com to sign up for it, and organize your resources. The gravity part. Update the numbers that you have for your net worth, your social security estimates, maybe a pension estimate, so you can start to use that gravity of the constraints you have financially to the levity of this great life you dreamt up so you can work your way to a feasible plan. 

CONCLUSION

Thanks for hanging out with me today next week we're going to talk with Mike and Judy about their views on investing to try to match a retirement withdrawal strategy to who they are as people and it's about the people right? I hope you have a great day 









The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All performance references are historical and do not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal tax or financial advisor before making any decisions.