A Complete Retirement Plan

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Transcript

Zach:

Welcome to the retirement today podcast. My name is Zach Holcomb and alongside me as always, we have Michael Reese. He’s a certified financial planner, retirement planning expert, and founder, and president of Centennial Advisors located right here in Austin, Texas. Mike, how are you today?

Mike:

We’re doing great. We’ve got a great topic this week. I know we’re talking about whether or not you have a complete retirement plan.

Zach:

Awesome. I’m really looking forward to it.

Mike:

Yeah. It’s going to be a great conversation by the way, before we forget, right. If you enjoy this episode or any of our episodes, make sure you hit the like button below, the subscribe button and hey, please feel comfortable sharing this with all of your friends, relatives, neighbors, you know, the mailman, anyone that might appreciate it, right?

Zach:

Yeah, no, we love sharing this content, so that’s great. So, okay. Full retirement plan. We’re going to be talking about what that consists of and especially how important it is.

Mike:

Yeah. So one of the things that a lot of people have, and we talk about this a lot, Zach, is a lot of people have what we would call an incomplete retirement plan. And what I mean by that is, you know, maybe you’ve got your investments, you think, okay, I’ve got an investment plan, I’ve got a diversified investment portfolio, but what do you like to say all the time, Zach, what’s one of your favorite things to say,

Zach:

Oh, it’s ‘an investment plan is not a retirement plan,’

Mike:

Not a retirement plan. Correct. So a complete retirement plan. It considers a lot of areas other than just. So for example,you know, I guess the way to really think about this is that retirement planning is so much more than just investing. And the reality though is until you get to retirement, there’s a lot of questions you don’t even think about asking. So for example, you’re working, you’re just cruising right along. All you really care about is, Hey, I want to invest this money. I want to grow it. I want to accumulate. That’s all I care about. When you get to retirement, especially when you’re getting close though, additional questions start to surface. And this is where this idea of a complete retirement plan comes into play. One additional question is simply, how am I going to get my income?

Mike:

Right? So I was talking to a gentleman the other day, great guy, great guy. And he was sharing with me. He said, well, Mike, here’s what I’ve got my whole life. I’ve been saving and accumulating. I want to retire in about a year and a half. And he told me, he said, here’s what I got. I’ve got my 401k, I’ve got some money. I’ve got some individual stock that I’ve been investing in outside of my 401k. And I got social security. How in the world am I supposed to turn that into an income plan? It’s like, how do I take what I’ve saved and how do I turn it into steady and consistent income? How do I do that? When should I be taking my social security? He goes, I’ve heard kinds of different things. You know, I’ll be 65 when I retire. Should I take it right then?

Mike:

My, when I get my social security statement, it says something about my full retirement age of 67. What does that really mean? I’ve heard that I could delay until 70 and I’d get more. Is that true? And if it is true, is that the right approach? So a, this is a great example of, he was really, really good at saving money. Sure. Really, really good at investing those savings. He was diversified in his 401k. It was really set up pretty well for growth and accumulation. But you know, when we ran the analysis on that portfolio and his portfolio, we learned that it was only kicking out 1.7% in income. So what does that mean? If he had a million dollars, it was only given him 17,000 of income and he needed a lot more than that,

Zach:

Right? I’m glad you brought up income planning first because when he retires, he’s going to want to maintain a similar level of lifestyle, getting $17,000 in income a year. That’s not going to allow them to maintain that.

Mike:

That’s not gonna cut it. And, and in his case, so he had saved $2 million. So, and he needed, his goal was to have about a hundred grand. Well, great. $2 million at 1.7%, he was getting 34,000 of income from his portfolio. And his question me is like, Hey, I know that doesn’t cut it. He goes, I know I would have to sell positions to make up the difference. That doesn’t seem like a smart approach. And he’s like, how do I do that? So that’s one area where this gentleman, you would think, okay, you got your, you know, you’ve got all your ducks in a row. I mean, gosh, you saved a couple million dollars. How could this go wrong? And his comment was, Hey, I know how to save. And I know how to grow. I don’t know how to generate income. So that’s, that’s one question that has to be answered for retirement.

Mike:

You need that steady paycheck. And if you don’t have an income plan, a plan to figure out strategically, how are we going to make this work? Then your retirement plan would be incomplete, right? So that’s one area that we would talk about. Here’s another area. Hey Zach, what, what do you think is one of the number one concerns people have as they’re any entering into retirement?

Zach:

Oh, it’s always going to be taxes.

Mike:

You would say, you would say that that’s a big issue. Not what I was thinking about. I will talk about taxes. I’ll do that a little bit.

Zach:

We’re not there yet, alright.

Mike:

What, what do you think if, if you know, like, let’s say we’re doing a public event and I pull out a little white board, like a flip chart and I just asked the audience, I say, tell me, what are some of your biggest concerns for your retirement?

Mike:

What are some of your biggest financial concerns? And they start, you know, making money last taxes, but there’s one that comes up all the right that we might not think of originally. What, what do you think that might be any guesses?

Zach:

Health?

Mike:

Healthcare, very good.

Zach:

There we go.

Mike:

I give you a gold star for the day. So healthcare, the cost of healthcare, it’s just going through the roof. And if you think about it, when you’re younger, I mean, gosh, you’re 27 years old. How often do you use the healthcare system?

Zach:

Very infrequently

Mike:

Like when you get sick. I’m 56. Right? I had to think about that for a minute. I’m 56. I’m approximately 30 years older than yeah. How often do I actually go see the doctor?

Zach:

More often than me?

Mike:

No, I don’t. I’m a guy. I don’t. But maybe what about Becky, Becky? My wife. We won’t talk about her age younger than me obviously, but you know, women that she goes to the doctor on a regular basis for checkups. Us men.

Mike:

We just stink at this. But if you think about it though, when you’re younger and healthier, you really don’t use the system as much. So when do you use the healthcare system? When you’re old, when you’re older, when your body’s breaking down? You know, you’re in your eighties, it’s like, you’re seeing your doctor every week. So here’s the question we said, healthcare costs are going up. So this is an issue where we’re going to use it more and more and more as we get older and older, what’s happening to cost though. At the same time, as we get older and older, they are going,

Zach:

It’s increasing.

Mike:

It’s like the hockey stick growth that compounding. Right? Right. So you’ve got, it’s natural that people say, well, gosh, what am I going to do about healthcare costs later in life, Medicare is a great healthcare or health insurance system.

Mike:

It covers a lot of stuff, but you know, Medicare, you know, we talk about our national debt being a problem. Medicare is in the hole more than the national debt. It’s a bigger problem than our national debt. Medicare as a financial system is so far underwater. It’s it’s laughable. Are they going to have to increase some of your Medicare expenses later on.

Zach:

110%.

Mike:

I think it’s very likely. Yeah. Right. But it’s not just that. There’s a lot of things Medicare doesn’t cover. So the question I would ask you, and by the way, that’s like, longer-term care types of things. Maybe Alzheimer’s Parkinson’s things like that. And you may not be in a home. You may not be in a nursing home. You may not be in assisted living. You might be in your own home, but you’re suffering from these things and you have to pay a nurse or somebody to come in and help out.

Zach:

It’s still expensive.

Mike:

Right. And I like to ask this question, do you know anyone? Do you know anyone who’s ever had to, you know, financially spend through pretty much all their savings because of healthcare later in life?

Zach:

I know a few people. Yeah.

Mike:

Like everybody knows someone.

Zach:

Sad stories.

Mike:

This is a normal concern. So the question is, okay, great. What if that happens to you? What if you need healthcare issues? You’re you experience healthcare issues later in life? What’s your plan? How are you going to pay for it? Right. Do you have a plan? And you know what the answer is for most people,

Zach:

They shrug their shoulders and say,

Mike:

Yeah, I hope it doesn’t happen to me. I guess I’ll just use savings. This happens to 70% of people, right? 70% people need long-term care at some point before they die. Well, if that happens, that’s a high enough probability. I think you need to have as a, as a, as an adult, you need to have a plan, so if you don’t have a plan, well then guess what, your retirement plan is incomplete.

Zach:

Right? I think most people would rather plan their next vacation than a healthcare plan. But it’s so important. You can’t neglect it. You have to do it.

Mike:

I love that statement. I’d rather plan my vacation than a healthcare plan. By the way, we can talk about estate planning is another area that people, you know, Hey, when’s the last time you updated your estate planning? Oh, I’ve got a will. And I think it’s about as old as I am.

Zach:

Yeah. The paper’s like falling apart.

Mike:

It’s like 20 years old. We got it. When our kids were little again, another area, a complete retirement plan is one in which your Will’s trust, your state planning is up to date as well. Right. You gotta take care of your family. And then we’ll bring up the one that you brought up earlier. The, the area that I think many people fall short on our taxes. So when we talk about having a complete retirement plan, taxes are a big part of that. Now just like healthcare costs, healthcare costs are doing what over time?

Zach:

They’re going up,

Mike:

They’re going up. What are tax rates likely to do over time?

Zach:

Ultimately, probably go up.

Mike:

You know they’re increasing. Right? It’s just a matter of time. It’s not, are they going to go up? It’s just when, and by how much we know taxes are going to increase over time.

Mike:

And for many people they’ve been following what I would call conventional wisdom. So what do I mean by that? What I mean is that when you are working, if you ever go, you know, you have a 401k, right. That’s always the big thing. 401K. And there’s always these meetings, right? What does, so this person presenting and that person comes in, they’re always dressed up super nice, like suit tie, maybe, you know, very business attire. And they say you should be saving tax today. Like put money in this 401k. And the greatest thing, like you save tax today, right? If you put 10,000 into this 401k plan, that’s like 10, it’s like a tax deduction. $10,000 is that cool save tax day, you’re working. You’re making a bunch of money. You’re in a high tax bracket today instead. So save tax today, pay tax later when you’re retired, tack, because you’re going to be in a lower tax bracket then.

Zach:

Sure. Conventional thinking. That’s what people think.

Mike:

That’s it. That story has given since 401ks were invented in the eighties. Right. I think actually the first 401ks technically came out and I think it’s 78 maybe, but for years, that story has been told. But here’s the problem. You know what I see every day I see that we can call there is a card game out there called BS, right? Where you, you try to lie to your fellow card players. And if they catch you, they call BS. And for it’s a family show. So I’m not going to actually lay it out there. But when I talk about, Hey, your taxes will be lower in retirement. I can call a big BS in a lot of cases.

Zach:

We see it every single day,

Mike:

All the time,

Zach:

Literally every day.

Mike:

And what happens is, guess what? Your taxes might be lower in the early stages of retirement. Sure. But here’s what happens as you get older, you know what happens when you’re 72 years old,

Zach:

You got to take those RMDs.

New Speaker:

Required distributions. What if you don’t want to take it out? And you say, I don’t need the money. Right? Why the IRS says I got to pull $24,000 out of my account.

Zach:

Well, if I don’t want to, I still have to.

Mike:

Yeah. But you’re, let’s say you’re stubborn. Sure. You’re stubborn Zach. And you’re like, ah, I’m not going to, I don’t care what the IRS says. I don’t need the money. I’m not going to do it. What happened?

Zach:

They’re going to penalize me.

Mike:

Ah, yeah. How much are they going to penalize you.

Zach:

Fifty percent.

Mike:

Five, zero, 50%. And you still that take it out and pay tax. So before, you know, you’re paying like 70, 75% tax on that distribution.

Mike:

Cause you were stubborn, right? So you gotta take it out. And here’s a dirty little secret that the IRS doesn’t want you to know with required distributions. The percentage that you have to take out each year, it grows. So your first distribution, age, 72, it might be like 4% or something. You start getting out into your eighties. Those distributions get to be enormous. And the taxes on those distributions. I mean, not only do you pay tax on the money coming out of that IRA, you’re paying tax. A lot of times that distribution makes you pay more tax on social security, more tax on your, on capital gains and dividends. It makes you pay more tax everywhere. So what happens is you may say, Oh, Hey, I’m retired. Look at how low my taxes are today. Just fast forward a few years and look at what they look like then.

Mike:

And a lot of times they’re more than you’ve ever paid in your life. Now here’s the deal. If you had a complete retirement plan, you would know the tax road you’re on. You would know, Hey, this is where I’m going. From a tax perspective. If you had a complete retirement plan, you would be sitting down with your advisors every year, looking at your tax return and identifying what can you do now to alter what your future might look like in a positive way. A complete retirement looks at taxes a lot of times, even more than it looks at the investments. I find most people though. That’s not the case, that was the same gentleman I was talking to. You saved a couple of million dollars. He had asked me that question as well. I said, you know, Mike, when it comes to that, my taxes he’s like, man, he was on one of our masterclasses.

Mike:

You know, we do these online masterclasses and he was on one of those and he asked me, he said, Mike, you gave us that example in the class about, you know, what taxes look like during retirement. He goes, I’ve never seen anything like that. And I’m, I really like, I need to know what about me? Right? What does that look like for me? Cause he goes, in my case, it’s probably going to be worse because the example you gave in the class, they have, you know, I’ve got more money than they do and I want more income. So it’s probably going to be worse for me than it was for them. And I wanna know like, what can I do? He goes, Hey, I’m I’m 63. I’m going to be retiring in a couple of years, but Hey, what should I be doing now? So it doesn’t look so bad.

Mike:

Right? A complete retirement plan includes that. So one of the things that we wanted to talk about today is, you know, what’s what makes for a complete retirement plan. So let’s kind of work our way through that. Number one, we said investing, is that going to be part of a retirement plan?

Zach:

Absolutely.

Mike:

Of course it is. You’ve got to have an investment plan. And by the way, I’m just going to throw this out there. We don’t have time. This might be a topic for a podcast another day, but when it comes to your investing, now this is really key. You want to have, what’s called an asymmetrical plan versus a symmetrical investment plan, right? Asymmetrical versus symmetrical. And by the way, the key difference there is symmetrical means, Hey, I start the year. I expect I’m going to average say 8% this year, but I might be up 30% of them will be down 30%.

Mike:

In other words, my up and down is about the same. Asymmetrical is, Hey, I think I’m going to an 8% this year. I might be up 25 or it might be down 10. In other words, different range, right? It’s not the same. It’s not plus 30 minus 30 it’s plus 25 minutes. 10. Sure. You need the second. Asymmetrical. So you need an investment plan. What else do we need?

Zach:

You need an income plan.

Mike:

Income. Income is a lifeblood or retirement. Right. And I know it’s not sexy to talk about investing is sexy and it’s cool. And it’s interesting. Income should be boring. It should be the exact opposite. You should have an income plan that is generating that steady, reliable paycheck to you every month, no matter what the markets do,

Zach:

Old reliable, don’t want to have to worry about an income plan.

Mike:

I know. And it’s, it’s not, it’s a little boring, but that’s what it’s supposed to be. A boring income like knowing that your income is coming, a boring income makes for an exciting retirement. Right? So you’ve got to have an income plan. We said, investments, income, what else?

Zach:

Health care,

Mike:

Health care. Got it. You got to have a healthcare plan. That’s number three. How are you going to address the cost of health care later in life? And by the way, the answer might be from your personal savings. That might be okay. It might be perfectly fine. This gentleman that I’ve been talking about today, save $2 million. If he needs healthcare later in life, can he probably afford it?

Zach:

Most likely.

Mike:

Probably. Does he need to get insurance or anything like that to protect himself? Probably not. What’s interesting is those are the people that are the fastest to buy insurance by the way, notice how they think.

Mike:

Right. But you need to at least talk about it and address it. So we said investing income, healthcare, next one is estate.

Zach:

Can’t leave that out.

Mike:

You gotta make sure that you protect the people you leave behind. You know, I’ve been doing this for 25 years and I like to joke about this Zach, but you know, whenever I talk to someone about all right, where do you want your money to go after you’re gone? You know what they say? They say my spouse, my children, grandchildren, maybe a charity. You know who they never say?

Zach:

The IRS,

Mike:

The IRS. They never say, Oh, I’m really hoping I can send, like when I die, I hope a whole bunch of my money goes, does the IRS.

Zach:

Just want to write a big check to them.

Mike:

Nobody says that right. Yet for most people, the IRS is one of the largest beneficiaries.

Mike:

Why isn’t anybody talking about that? Why aren’t, why aren’t we helping people make better choices there again, that’s part of a complete plan. So what do we have now? Investing income, health care estate planning and our fifth area. My favorite area is what?

New Speaker:

Taxes,

New Speaker:

Taxes. You got to cover the tax buckets. Right? You got to make sure that you’re being smart about your tax planning. If you just follow conventional wisdom, the IRS is going to like you a lot. They’re going to think you’re the coolest person there was because that’s who they collect on. They love conventional wisdom. They love people that defer their investments. And here’s the issue. The cool part about it is it doesn’t often take like these huge planning swings. It’s not like, Oh my gosh, I’ve got to convert all of my IRA to Roth IRA overnight. Or I’ve got, you know, it’s not that type of thing.

Mike:

A lot of times with tax planning, it’s not about making big, big changes. It’s about the little hinges, swing, big doors. It’s like, I have a great example where someone with a million dollars in their 401k, they don’t have to convert all of it. But if they just converted maybe 50,000 of it, 5% of it a year for maybe six or seven years. Huge outcomes for that. I mean, huge benefits for doing that. And notice that you don’t have to convert, you know, 300,000 all at once, little bits over a period of time, make for big differences. And as you’re listening, what about you? Or if you’re watching, right. If you’re watching, what about you? What is your tax future look like? And what could it look like if you just paid attention and utilize some intelligent tax planning strategies? So that’s a complete plan. It’s not just investing, it’s investing income, healthcare, family, or estate planning and tax.

Zach:

Right. So my biggest takeaway from this discussion, Mike and I hope it’s the same for our viewers and listeners, all five of these areas are so important, but just missing one of them can wreck havoc on a retirement plan.

Mike:

Right? Miss one, it affects all the others,

Zach:

Right? It’s like, Oh, I’ll get to the healthcare planning later. Or maybe the estate, but then maybe a bad day comes you miss that area. Havoc rises. Yeah.

Mike:

It’s like a or a good example of that. I came across a widow. She was referred to us and you know, what happened was her husband. He got sick and very quickly within a couple of months passed away. There wills and trust were last updated like 23 years ago. And you know what, those documents, what they represented had nothing to do with their current reality. So that was a mess. Beneficiary paperwork was all over the place. So there estate planning, it was a mess. Did he want to leave his widow in a place where it would just be a mess for her?

Zach:

No,

Mike:

Of course not. They hadn’t done any tax planning. So now as a single, as a widow, her taxes are gonna go up through the roof. So, you know, we got to do some crash planning on that.

Mike:

We looked at from an investment perspective, you know, taking on way more risk than she’s comfortable with income. He had one of these pensions, but when he died, you know, she only gets like, I think a third of it. So what is she going to do for income? I mean, like all of these areas, the investments, Hey, probably more risk than they should, but at least it was diversified, but it’s like, they almost ignored all the other areas. Don’t, things happen. Don’t ignore them. One, you overlook one thing, it can just cascade like Domino’s and affect all the rest.

Zach:

You have to plan for the unexpected,

Mike:

Get your ducks in a row. Have a complete plan, not an incomplete plan.

Zach:

Right. Well, I’m really glad we had this discussion because it is really so important. Absolutely.

Mike:

Right. So, you know, as you’re watching, by the way, if you’re a client, you know, the good news is as you know, we visit with you throughout the year and you know, we talk about this stuff, right. We make sure that you’re on target and all of these areas. If you’re not a client and you’re thinking to yourself, wow. That kind of hit home. I mean, I, maybe you feel like you have an incomplete plan, you know, you can always just give us a call. You know, our number here is 512-265-5000. The easiest thing in the world to do though, I would go to what does it talk to Mike, like the number to talk to mike.com?

Zach:

No, T-O, talktoMike.com.

Mike:

Talk to, Oh, it’s to, not the numbers. So talktomike.com and if they go there, they can set up a quick 15 minute call with you. Zack, you learn a little bit about what they’re trying to accomplish, and then you put them with the person on the team, whether it’s me, Kevin Elizabeth, somebody on the team who can best help them,answer their questions and, and give them advice that they need.

Zach:

Yep. It’s a great opportunity to talk about those five areas that we just discussed. See where you’re at in those areas of planning and maybe see, Hey, are there room for improvement in some of those.

Mike:

Sometimes it’s good just to get a double check. Right. You might say I have that happen all the time where someone says, you know, I think I’m doing okay, but it’d be great to have a third party, someone who’s a true fiduciary, double check what we’re doing here to make sure we’re on the right path.

Zach:

Absolutely. Right. 100%.

Mike:

All right. Hey, that’s our show this week. You know, I know we tried to do this every week. Try to give you great content. Any final thoughts before we wrap up?

Zach:

If you enjoyed today’s discussion. If you’re watching us on YouTube, remember to like comment and subscribe, we’d love to keep you notified about all of our latest videos and content.

Mike:

Fantastic. Take care. Everyone.

Zach:

We’ll see you next week.

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