At Decker Retirement Planning, we’ve helped hundreds of people with their retirement planning, and as a result, we’ve uncovered many potential problems that can arise when you’re retired. We consider it our job to plan for the pitfalls, and that’s why we’ve developed a list over the years we’ve been helping retirees, which we use to help ensure that your retirement plan holds up no matter what may arise.
1. In retirement, more time equals more money spent.
A lot of people think that they’ll spend less money in retirement, but we’ve seen the opposite. Most of us never consider that when we retire and stop working, we’ll want to spend more money because we’ll have a lot more time and will want to do more things. Think about this for a minute. You used to be commuting back and forth to a job, racing back home and gobbling down a quick dinner before waking up to do it all over again. As a retiree, it’s a whole different ballgame. You’ll want to spend your time differently—perhaps sitting at a nice outdoor café for breakfast, playing a leisurely round of golf all day, going to a movie or concert afterwards.
Our rule of thumb is to add 20% to your projected budget, especially during the first 10 years or so. We want you to enjoy your retirement, not be constricted by it.
2. Income that could last for as long as you live.
None of us knows how long we will live, but most people over 50 share one fear more than dying—that fear is running out of money in retirement. This is not unfounded, given what we saw happen in 2008, when many retirees lost their retirement money in the stock market and had to sell their houses or go back to work taking whatever jobs they could get—in retail, at fast food restaurants or as greeters at Walmart.
We can guarantee you that Decker Retirement Planning does not use the flawed and discredited 4% Rule, nor do we use the Rule of 100 responsible for destroying so many retirements a decade ago. Quite the opposite. We use a laddered approach with guaranteed* products to help protect your retirement nest egg. Our clients barely blinked an eye in 2008.
*Read about the three types of guarantees about halfway down in this article.
We actively work to educate people about the dangers of the 4% Rule and Rule of 100, and we cannot understand why those destructive “rules” are still in use by bankers and brokers for retirement. We handle retirement planning completely differently—we actually use math, and create written, customized retirement spreadsheets, showing you your income up to age 100.
In fact, research says that income planning and analysis is one of the most sought-after pieces of advice for retirement. You really can’t know where you stand in terms of retirement income unless someone runs the actual numbers that apply to your unique situation. You certainly can’t know from a pie chart of your stocks and bond funds handed to you by your broker—all investments subject to stock market risk—while guessing about the returns or dividends you might or might not receive from them.
3. Inflation
Back in the 60s, the cost for a house was around $12-15,000. A car was around $800-1,500. Fast-forward to now, 58 years later in 2018, and costs have multiplied exponentially. And here’s the problem, many people today will spend from 30-40 years in retirement, meaning that planning for inflation is difficult, but critical. What will houses and cars cost 40 years from now? Ten times what they cost now? What about food?
Although overall inflation rates have been low for the last few years, costs for certain things, like housing, automobiles, digital services (which didn’t even exist in the past), healthcare and college tuition, have all gone up. Including realistic yearly inflation factors to cover projected cost-of-living increases is vital to the success of your retirement plan. And taking some calculated risk—with the goal of growth in both up and down markets to hedge against inflation—may actually make sense for some people with a small percentage of money designated for the latest part of your retirement.
4. Stock Market Crashes
Bigger than inflation, perhaps the biggest problem people can face in retirement are potential stock market crashes. (A stock market correction is defined as a 10 percent drop, a market crash is 20 percent or greater.) And get this, stock markets crash typically every seven or eight years. We are overdue for one now. We’re at year 10!
Quite simply, when the market drops, any investments you have in it drop in value. And if your broker is using the 4% Rule, you’ll be taking money out of the market at this much-lower value, completely comprising your financial future. You’re retired, you don’t have the time horizon to “hold” and wait until the market comes back up like young people still getting a paycheck do.
With flawed retirement concepts like the 4% Rule, people go broke. Decker Retirement Planning has a completely different retirement planning model that we have developed, and which has seen hundreds of retirees well through the past years.
When our clients do want or need to take market risk with some of their money—usually 25% or less of what they have saved for retirement—it’s invested in two-sided, trend-following computer algorithms that have made money collectively for years. We have six managers that made a lot of money in 2001, 2002 and 2008. The two-sided models we use are designed to protect your principal and grow regardless of market performance, because they were developed to follow and move with trends—to benefit from both up and down markets.
5. Death of a Spouse
Even though it’s difficult to think and talk about, you must consider the problem of how much income will be lost at the death of a spouse. Your retirement plan needs to include contingencies for what happens if he dies, or if she dies first. Women are often worried about their security, and discussing the actual facts and figures and having a plan in place could bring them great relief.
At Decker Retirement Planning, we look at Social Security lost, because remember the surviving spouse will now only get one check, the largest. We will look at pensions to see if those transfer to the other spouse or not. We’ll look at other income sources, and at potential ways to replace income using insurance if indicated. We will discuss what each spouse will do—where they will live, whether or not they will downsize— we’ll walk through each scenario and put the plan down on paper.
6. Taxes and RMDs
Paying taxes is something that doesn’t end with retirement, which surprises a lot of people. If you don’t create a retirement plan that spells out your distributions from qualified, tax-deferred retirement accounts, you could get a big tax bill starting at age 70-1/2 when RMDs (Required Minimum Distributions) are mandated by law.
We are very careful about RMDs, and take on responsibility for helping you deal with these, because the IRS has complicated rules and calculations to arrive at what you must take out of which accounts, and there is a 50% penalty in addition to the tax you owe for doing it incorrectly. We have developed specific methodologies to optimize your taxes (meaning minimize the amount of tax you have to pay) by doing the math specific to your situation, and using an RMD strategy that optimizes your overall retirement plan through the decades, up to age 100.
We often use a tax strategy called “placement,” keeping your already-taxed money as cash to live on in the front-end of your plan. This can lower your AGI (Adjusted Gross Income), which determines how much tax will be charged on your Social Security. Sometimes we will run the numbers and show you how much converting money from a traditional IRA to a Roth IRA over a period of years may save you over the long-term. (Remember, most Roth accounts are not subject to taxation if you have used after-tax dollars to fund them.) This can be one of the most important tax optimization tactics in your retirement plan, and for most people we’ve worked with, is their biggest tax-saving strategy. But there are many others that we use as well, including some legal/estate strategies designed specifically for those with high net worth.
7. Kids: Your bleeding heart is bleeding you dry.
Some retirees are fine with spending every penny they have, leaving nothing to their heirs, since their parents gave nothing to them. Other people worry about spending any money at all, and wait until they pass away, leaving a big inheritance and legacy for heirs to remember them by. Others squander all of their retirement money on their grown children, bailing them out of all their various financial problems or spoiling them with all the luxuries the kids think they need.
We believe there is a way to spend any extra money you may have on family experiences, together with your adult kids, while you’re alive. We’re talking about events or trips that will never be forgotten, if you have the money for them. However, as you might guess, we’ve seen too many people give too much to their children, so much so that they may have to sell their home or take other drastic measures to survive. We believe that it’s better to let your kids work through their own financial issues without draining away the money that you need in order to live comfortably through retirement. Letting them be responsible helps them, and helps you.
8. Unexpected Liability
Although you may have homeowners as well as automobile insurance, in our lawsuit-happy society, you may not have as much protection as you think. If you bump someone in a parking lot or they trip on your lawn right next to the sidewalk, you may find that certain people will begin litigation, seeing you as their prosperous “blank-check” opportunity. And guess what, the insurance companies providing homeowners and auto policies typically try not to pay out for liability claims if they can help it.
We recommend that our clients protect their hard-earned retirement nest egg through the purchase of an umbrella liability policy, typically sold in increments of $1 million of coverage for around $3-400 per year. It’s there to “follow you around” and provide umbrella coverage for adverse events like a lawsuit or liability judgment or award.
9. Incapacity
Long-term care (LTC) is sometimes required as you get older, whether in your home or in a long-term care facility like a nursing home. The common LTC hyperbole that “70% of Americans will need it” is just that—hyperbole. But truthfully, around 14% of Americans do spend time in a facility, which means that approximately 14% of married retirees carry the risk of being bankrupted by their spouse if they can’t cover the exorbitant costs and have to rely on Medicaid.
We look at the many options that might work in your case, and usually land on self-financing as the best option for most of our clients, using either their investments or home equity to fund LTC costs if they become necessary. In our experience, none of the other options really hold up that well under scrutiny, which we’re happy to explain to you.
For instance, traditional long-term care insurance is not recommended, because even policies marketed as “level premium” can skyrocket in your late 60s to become unaffordable, as the carrier actually hopes you drop your policy, or at least reduce the policy coverage amount. (The result being that all the premiums you paid in through the years become money thrown out the window.)
There is one insurance option we sometimes do recommend for LTC called “asset-based long-term care.” This is where you have an account and you fund it with $10,000 per year per spouse for 10 years until you build up about $100,000 available for each of you. If you die without needing LTC, your beneficiary gets a 2x death benefit. If you go to a long-term care facility, you get a 3x long-term care benefit. So, either way you’re going to use the money. And not only that, but if you change your mind at any time, you can get all your money back—it’s completely liquid. The trouble is that these policies are not affordable for most people, and the ones that can afford it probably don’t need it.
10. Interest Rate Risk and Market Risk
Interest rates move in cycles. If you look at a 100-year interest rate chart, you’ll see that interest rates on the 10-year Treasury have only hit the 2% low twice. Once was last year, 2017, and the other was 1940. You have to go back that far to see interest rates this low. All the other times, interest rates have been higher. Interest rates are low right now, but the Fed is raising them, and plans to raise them even more in 2018.
The problem with interest rates (and the reason they’re a risk) is that in retirement, you need a steady, reliable income stream that will last for the rest of your life. Rising interest rates negatively affect the value of bond funds—the part of the pie chart that brokers tell you is “safe” for retirement. When interest rates go up, bond funds go down. And when interest rates trend higher, they trend higher for 15-20 years. Can you imagine? You’ve got your “safe” money losing money every year when interest rates are trending higher. That makes no sense.
And what about the stock market? Well, it dropped again, more than 700 points on March 22, 2018.
One way to measure and look at the stock market is price-earnings ratios. There have been three times in history that the stock market has hit 25 times trailing earnings. One was 1929, the other was 1999, and the third time was mid-January of 2018. In 1929, when the stock market hit 25 times trailing earnings, it took more than 10 years for people to get their money back from that point. In 1999, it took more than 10 years to get your money back from that point. In 2018, it’s possible that the stock market is going to do something that it’s never done before, and that is go up from here. Or not.
For the first time in a long time, we could have interest rates going up—losing money on your bonds, and the stock market going down—losing money on your growth portions of your portfolio. In other words, you could lose on your entire portfolio where “diversification” between “stocks and bonds” amounts to no downside protection.
We want to make sure you know that drawing retirement money from a fluctuating account—stocks and bond funds—is self-defeating. It is financial suicide to use the 4% Rule. With the asset allocation pie chart and 4% Rule that bankers and brokers still use today, people are basically guessing on how much income they can have for the rest of their lives. As far as we are concerned, it’s the most toxic, destructive financial strategy out there.
At Decker Retirement Planning, we’re a math-based firm. Market ups and downs don’t devastate our clients’ portfolios because our “safe” money doesn’t typically lose money, our emergency cash doesn’t typically lose money, and our “risk” money is invested in two-sided models that we expect to make money.
Our clients’ retirement plans allow them to draw income from principal guaranteed* accounts that are laddered, so that “bucket one” is responsible for the first five years of monthly income, “bucket two” is responsible for years six through 10, and “bucket three” is responsible for years 11 through 20. And the plan goes on from there, up to age 100. Our clients’ risk buckets at the tail-end of retirement (if they have them), are designed to make money in both up and down markets.