As you enter retirement, your strategy for generating retirement income should be deliberate and should match your individual circumstances. In this episode, I discuss three different approaches to retirement income planning, and share which one(s) I recommend.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
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Bert: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host, Victor Medina, an estate planning and elder law attorney, and certified financial planner.
Victor J. Medina: Everybody, welcome back to Make It Last. I’m your host Victor Medina. Thank you for joining us. I am excited about this show. It’s Make It Last, helping you keep your legal ducks in a row, your financial nest egg secure.
It is a wonderful Saturday morning. If you’re listening here live on the radio and if you are a podcast subscriber, thank you so much for joining us on the podcast. Don’t forget to leave a great review on iTunes if you like the show.
Well, I don’t know if you noticed, but we have new music. I’m excited about the new [laughs] music. It’s great, we’re going to spice it up a little bit.
I’ve got a good show for you today because one of the biggest questions that people have as they approach retirement is how are they going to generate income from their savings, or how are they going to make it through retirement based on what they have ‑‑ Social security, pensions. We get income from different sources.
How do we generate income from our assets, the things that we’ve saved? I’m going to share with you some more academic research on here. So much of the financial news that is out there is geared towards selling you a particular product. You that have been listening to us long enough understand that we are not about that.
We’re not about any particular product in order to help you get through retirement. I’m going to go with the research that suggests that there are some theories about how to get retirement income going and what they are. From that, I’ll give you what we believe, when we help clients, so that you understand that there is an opinion that we hold out of those three.
It’s going to be really, a really interesting show. I think it’s the first time many of you are going to get an opportunity to hear about this kind of stuff. Before we get going here, a few quick notes on news of the day. The first is just some terrible, terrible news coming from the multiple hurricanes that have been hitting between Harvey and Irma.
Just devastating results on that and, of course, our hearts go out to those folks. I have family in Puerto Rico affected by that. In fact, I had a little personal emergency because I had my mom in Puerto Rico as the hurricane was bearing down on there. She was visiting some of our family and really worked hard to get out there.
I have to give a shout out to my brother’s wife, or fiancÈ’s, mother, so his mother‑in‑law, who was able to secure a flight for her for her to get out of Puerto Rico and into Atlanta, from Atlanta into White Plains, and get out of the harm’s way of the storm.
Big thanks to the family members that helped out with that, but lots of devastation from there and lots of clean up coming up. Hopefully everyone will be, and continue to be, OK. We’ve going to keep an eye on that.
The next news of the day, which is more apropos for this show, is really about the introduction to a proposal of delaying the fiduciary rule. Get out here your horses and your soap box. You know I’m getting on mine and I’m riding mine.
This fiduciary rule has been something that I have been shouting from the rooftops, and I’ve been shouting it from a couple of different vantage points. The first one has been my plea to you to not rely on the existence of the fiduciary rule to think that all of a sudden the advice that you are getting is conflict‑free.
All of the rules that are currently in place suggest that that’s not the case. If we need a reminder on that because, if you’re joining us new on this show or you’ve forgotten the 16 other times that I’ve talked about this, the fiduciary rule is imperfect in its goal to help you protect assets from conflicted advise.
One of these things is on the basis of it only applies to your retirement money. Anything outside of your IRA, your 401(k), your 403(b), that’s not really covered by the new fiduciary rule because the fiduciary rule was promulgated under the rules of ERISA, which is where we do our retirement stuff.
You have savings after the fact, they can absolutely sell you a bad product, an investment, and it doesn’t sound like sales. These individuals are very well‑rehearsed, practiced. In fact, dare I say coached on how to sell you on terrible investments.
If you have after tax money savings that you have, they can absolutely offer that to you and do. We still see people owning real estate investment trusts, REITs, and unit investments, some terrible investments that pay a lot in commissions. You want to go and check out whether or not you’ve been sold one of these bill of goods.
Go ahead and check your statement. If you see anything that says UIT or REIT, or if you have a variable annuity, most of the time they were sold to you because they generate a lot of commissions for the person that was recommending them.
They don’t have to disclose that to you. In fact, they didn’t have to put you in the best thing possible. They still don’t with the fiduciary rule. The first problem is that it doesn’t cover everything. Then, here, we get to the next news of the day, which is that the Department of Labor, under the new administration, has suggested a proposal.
It’s not enacted yet, but it is on the path to be enacted. It’s an administrative law thing that needs to happen, administrative procedures where they’re going to delay the full implementation until July of 2019, so another 18 months’ worth of a delay.
Now, let’s review where we are. On June 9th, 2017, a ramp up of the rules was put in place. We had a fiduciary rule light that was put in place in June, and in January of 2018 we are ready to go full bore on the fiduciary rule.
In fact, most of the financial companies were re‑engineering their practices to conform to it. By the way, [laughs] the whole idea that they had to re‑engineer what they were doing should be hint enough to you that they were raking you over the coals for the advice that they were giving you before. In fact, these are the largest firms that you have the most comfort with.
Me being my own lawyer here for a second, I can’t name them. I won’t name them, but if you think about the largest wire houses, the investment houses, the places you’d think are out there managing the most money, these are the people that have been the most egregious in their violations of what the fiduciary rule’s supposed to be.
They’ve been re‑engineering their practices, ready to launch, essentially, on January of 2018. Here we come with a new rule that will delay it another 18 months. We will still live in the rule of fiduciary light for at least another 18 months, if it’s put through. Then, after that, supposedly we’ll have the full rule.
Here’s the thing, if you’re reading the political tea leaves, this is a step to repealing the fiduciary rule altogether. If they’re able to kick the can down the road another 18 months, it gives them the space, on a congressional basis, to pass a law to overturn the fiduciary rule.
The fiduciary rule was a…We call it a rule, by the way, because it is underneath the Administrative Procedures Act. It’s underneath a regulatory agency under federal law, and they promulgate rules. We call it a fiduciary rule, and this rule was promulgated the right way. In other words, it stands up to constitutional scrutiny about the way that it was put in place.
It dotted every I and crossed every T. It’s going to be very difficult for them to undo it on a rules basis or on a legal challenge, but one of the ways that they can undo it is simply just to pass a new law. The statute overrides any of the rules.
Now, reading the political tea leaves, we have delayed the full implementation for 18 months, which now gives us the congressional space to draft a law that will essentially render the fiduciary rule meaningless.
Those are your elected officials being lobbied by special interests who are really interested in their business model that allows them to make a lot of money on your money, and not give you the best possible advice. Now, that’s the majority. That’s the majority of financial advice that’s out there.
There is a minority of advisers who are fiduciaries by their own volition. There’s no rule asking me to be a fiduciary. We are fiduciaries. I’m a fiduciary when it comes to being a lawyer.
Victor: I’m a fiduciary when it comes to being a financial adviser because I have chosen that because it’s right for the client. You deserve that kind of advice as well. I’m feeling myself get emotional about this. [laughs] I should take a break.
When we come back, I’m going to talk to you about retirement income. It is, in fact, one of the most important things that you can do in terms of getting yourself set up to a peaceful retirement. We’re going to talk about three different strategies and three different approaches to doing that. Stick with us on Make It Last, and we’ll be right back.
Victor: All right, everyone. Welcome back to Make It Last. Today’s show is going to be about retirement income planning and, specifically, how you can use academic theories to help you plan for your retirement income.
I was made aware of these mostly because, over the course of my legal planning career, most of the folks that finally pay attention to their estate planning, the ones that realize that they’re not going to live forever, are people who are facing retirement.
They say, “OK, it’s time to be a grown‑up now and re‑evaluate my estate planning because I got it well when my kids were born, but that named guardians and I lost touch with those people, so it’s time now to review this, and put my adulting hat on, and make sure that my plan is in order.”
When I meet them on the legal side, they’re looking at retirement, looking at making retirement decisions. Retirement is one of the biggest decisions that you can make. There is a lot of time in your working career to make up for bad decisions.
You take the wrong job and you take the wrong career path in your twenties. You have time to make a course correction, if that’s required. If you don’t save in the beginning part of your career a little bit so that it grows very large, we get that whole concept of compounding interest, you can save a larger portion of your money when you get older and try to make up for that.
We’ve got time. I often link it to getting a bad haircut. Your hair’s going to grow back. You’ll have an opportunity [laughs] to fix it, but once we get to retirement, this is a huge, huge decision. Every decision that you make is largely one you can’t come back from.
If you’re going to decide to take Social Security, when you elect to do that, there’s a very small window to change your mind. If you’re going to elect a pension benefit based on having worked a certain number of years for a company that offers a pension, it’s going to be very difficult to make a different decision later.
Similarly, your decision on how you are going to spend your assets in retirement and what you’re going to use for income is, again, something that’s very hard to come back from. You can’t go back to work. Most of us cannot go back to work in retirement. Certainly not making the most that we were making at the height of our career.
Thinking about that, thinking about in terms of retirement income, it’s important to understand the academic research around different retirement income theories. I was made aware of it first on the legal side. Then, as you all know, I got my certified financial professional, or my CFP, credential. I’m a CFP now. I just completed a course for retirement income planning.
I’ll tell you just briefly that this course is meant to be completed over the course of a year. They hope that you would do within a year. I registered for it on August 10th. I took the third and final test on September 5th. I got it done in less than 30 days.
One of the reasons why I was able to complete it so quickly is, in large part, because this is the stuff that I’ve been dealing with for a while with clients. The concepts were not…I kind of did self‑education on it. I was already thinking about how best to counsel clients in retirement.
It was pretty easy to get the RICP, which is one of the designations that even the “Wall Street Journal,” “Money” magazine so many of these other places are saying you should look for in an advisor who is advising you in retirement.
There’s probably three or four that are good ones, RMA. You can get the CPRC, a chartered professional retirement counselor. The RMA is a retirement management analyst. Then the one that I got is the RICP, which is a retirement income certified professional. Those are good ones to have as graduate school education on top of the CFB.
I think you start with the CFB and then you add to that as necessary. As I was going through the course, we came across three different strategies that are ones that are commonly discussed as retirement income, and I want to go over them. I’ll outline them for you in the beginning, then go dive a little deeper in there. Then tell you the ones that we believe are the appropriate ones for clients.
I’m going to go over three. I think that there are two that probably make the most sense in different circumstances. The one that most people do, I think is the least effective for it, for the planning.
The one that is most commonly done is called a systematic withdrawal or safe withdrawal. This comes off of research that was conducted that said that you can take up to four percent out of your retirement assets on an annual basis. That constitutes safe withdrawal. Systematic withdrawal, four percent, adjusted for inflation.
What most people don’t know is, first, that that research was arrived at, the conclusion, was trying to figure out the withdrawal strategy that could avoid the worst possible scenario. What you’re looking at is not maximizing retirement income, but maximizing the chances that you won’t have some failure in it.
The second thing is that that strategy is not inclusive of fees for investing ‑‑ there are always fees involved in investing ‑‑ and not inclusive of taxes. They just looked at academic numbers saying, “Here’s starting value. Here’s ending value. We will use historical data to model out what we think are the best withdrawal strategies for that, and we arrived at that number, four percent.”
We know why that doesn’t often work is that that number becomes independent of need or spending utility. If you just look and say, “OK, I’m going get four percent,” you haven’t quantified what your need is, and you haven’t tied your retirement income or retirement income strategy to achieving any particular goals. You’re just withdrawing that money out.
Then, acting like a child again instead of an adult, and just saying, “I guess my budget is whatever I have to spend here,” and you’re not being deliberate about it. You can have some failures from there, especially on this concept of sequence of returns.
I haven’t spent a lot of time on the show about sequence of returns. I’m going to try to do this now and hit on it in future shows because it’s an important topic. The idea here is that, when you go to withdraw money from your account, your decision to get out of investing will have a different impact based on what the portfolio value is.
What that means is that, if you decide to withdraw money at the height of the market, that is a better position to be in than deciding to take money at the valley, or the downside, of the market. The reason for that is that, for you to enjoy the best possible results of investing, you have to be in the market at the bottom portion of it to ride the upswing.
If you need to get out when it’s down, that is going to affect the sustainability of your investments. Now, you say yourself, “Well, that’s OK. I get that, so I’ll only withdraw money at the height.” There’re a couple of problems with that.
First, you don’t know what the height is. No one does. Second, you may not have a choice as to the timing of when you need money and what the market’s doing. In retirement, while the academic theory says that holding long for 30 years is a good idea, at retirement you may need to withdraw money in years two, three, four, five, six, seven, eight, well before the 30‑year cycle off of that.
What if you have to withdraw that money on a down cycle?
Victor: Well, it turns out, in those cases, could be ended up with not enough money. That’s the systematic withdraw method. We don’t advocate for it. We don’t use that in our strategies with clients. When we come back I’m going to give you the two other theories that we do use and the ones that we think you should consider in planning with your financial professionals.
Stick with us with Make It Last. We’ll be right back telling you about retirement income planning.
Victor: Hey, everybody. Welcome back to Make It Last. Today we’ve been talking about retirement income strategies. I spent the last segment telling you about a strategy that most people use, but we think doesn’t work and it isn’t the optimal strategy, which is systematical withdrawal. Take out four percent every year and just use that as your retirement income.
Remember, the reason why I don’t think that that works is that it’s independent of any goals that you’re trying to set or the need of what you have for retirement income. It has the highest chance of failure because you could need or take out money at the time where you can least afford to do so, when the markets down and you need to be in the market for the rise up off of it.
We can’t always time the market. In fact, I spent a whole other show telling you not to time the market. There’s two other strategies that we think are really much, much more sound and we recommend them in different situations. It really has to do with how much wealth clients come to us with and what their needs are in retirement. Then, based on that, we’re able to recommend a strategy for them.
One of the strategies has to do with flooring, like your flooring, like wood paneling, [laughs] , wood flooring, and the other one’s bucketing. Now, flooring is a strategy in which you look at your mandatory and necessary spending. That’s going to be things like your housing costs, your food costs, medical costs. The things that are not discretionary.
It has nothing to do with your travel. Although, I suppose it can if that’s a mandatory thing for you. I have some clients that have to go on a Viking cruise every year, which is great for me because I get to hear about the cruises. Then I tell my wife about it and say, “This is what we’re going to do when we go retire.”
Anyway, they have their mandatory spending and then they have their discretionary spending. The mandatory spending creates a floor of retirement income need. A need. What you want to do is make sure that you have met that need by dedicating resources to that.
The first thing you’re going to do is you’re going to look at Social Security. Then you’re going to maximize Social Security so that you are now filling the cup of that need with guaranteed income.
The next thing you’re going to take a look is any pensions. Then to that extent that there’s a shortfall, that you don’t have enough money there to make the need, you’re going to meet that need with some of those retirement assets so that you never have to worry about your mandatory spending.
Many times that’s in a form of an immediate annuity, or a deferred income annuity, a form of bond ladders that are going to pay out interest income. The idea is that you have met the floor of your spending needs in retirement and then you use the rest of the assets on discretionary spending.
Those assets can be invested a little bit more aggressively because, if you have to tighten the belt on discretionary spending based on the market performance, you can always choose to do that and not worry that you’re affecting your mandatory spending needs.
That flooring approach works well for people of what I would call average to high average wealth in retirement. What numbers are you looking at? It’s hard to say because people have different retirement income starting positions.
My parents have a great floor on retirement because they were both teachers. They have very high pensions and their floor is very high. That means that their investment assets, which they’ve entrusted to their dear son, can be invested a little more aggressively because they don’t need that to make their monthly, yearly retirement spending needs.
We’ve got a flooring strategy for them, but their investment assets would be considered…I wouldn’t say they were low, but really not an average to high average. It’s really hard to peg it to a number. It’s often driven by your source of income from other places. That’s for that strategy.
The other strategy for people that have got a little bit more money. I’m looking at people with about a million dollars in retirement or more. You look at a different strategy called bucketing. You look at the bucketing strategy as three different time needs. Mostly it’s three, but different time needs. You allocate investments to each of those needs.
You might think about them in terms of short, medium or middle, and long‑term. On the short‑term are your one to two year cash needs, the things that you need in the very short term. You’re not looking at them as spending needs. You’re looking at them as availability of assets. The medium‑term is anywhere between the two and five years. Then the long‑term is anything over the five years.
Now, you can allocate the investments so that they meet the needs of the bucketing strategy. In the short‑term bucket, you’re going to hold cash and you’re going to hold one‑ and two‑year returns for bond funds and different things that are going to have very short yield time, you’re going to get your money back.
There are even funds that we recommend that are one‑ and two‑year fund returns. Their sole goal is to maximize one‑ and two‑year returns. They’re not going to be as high as investing in the market in equities. They’re not designed to because what we need is liquidity. We need cash available. That’s in the short‑term.
In the medium‑term, this is the bucket that then refills the short‑term. The two‑ to five‑year horizon on that are in assets that are safe, that are meant to return principal and then some for that period, but which we can liquidate in the next two to five years and not be worried that we’re out of the market for those assets because their whole goal is to fill the short‑term bucket.
Then we’ve got the long‑term bucket. The long‑term bucket are anything over that five years whose horizon and diversity in the portfolio is really there to meet inflation hedges as the cost of goods go up over time, legacy needs. We don’t tie it to retirement spending in those cases. We let people look at the spending on their own, but we do tie them to time frames.
The reason why there’s two different strategies for two different classes of wealth is because, on the people with more modest needs, the flooring strategy’s essential because they don’t have flexibility. They can’t adjust it. What they have there is small enough that they’re a little closer to the knife’s edge. They need to guarantee that income going forward.
When we look at people that have a little more wealth, those people can weather the ups and down of retirement. If they have just their cash available for short‑term, they can choose to spend it or not, but they will always have enough cash to meet those needs in the short‑term. They don’t have to worry about market returns up and down. They don’t need a flooring strategy.
We approach them two different ways, as I suggested. It depends on who comes in and what they look like. There’s also risk tolerance, right? Some people feel better sleeping at night knowing that they’ve got their guaranteed retirement income set up. Then other people aren’t as concerned with that.
We have put in flooring strategies for people who have got higher wealth because it’s what suits them, and they’re more comfortable with that in retirement. Two different strategies, flooring and bucketing. I urge you to go over these with your financial advisor.
If you don’t have one, you can always reach out to us to see if we might be able to help because these strategies are essential. They are product independent. I hope that I’ve made that clear. This is not about buying anything in particular.
No one should be selling you anything in particular for retirement, say, “You need this,” but you need the right strategy. You need the right academic research that suggests that this is going to be successful. Those two are our two favorite for retirement income. I hope this has been good for you.
I want to thank you for joining us on today’s show. We’re going to follow up on these kinds of topics going forward. I’m excited for the new exit music, so listen up for that. If you’ve got any questions for the show go ahead and email them to email@example.com.
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Share this with a friend. I think this is the kind of subject ‑‑ this retirement income ‑‑ that probably is a question in the minds of your friends and neighbors. This would be a great episode to send over to them and let the know that they can go to Make It Last and either go on the website or go on iTunes and pick up the show, all right?
Victor: Thanks for joining us. We will catch you next week, next Saturday for the next show on Making It Last, helping you keep your legal ducks in a row and your financial nest egg secure.
Bert: The foregoing content reflects the opinions of Medina Law Group, LLC and Private Client Capital Group, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment or legal advice, or a recommendation regarding the purchase or sale of any security, or to follow any legal strategy.
There is no guarantee that the strategies, statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
All investing involves risk, including the potential for loss of principle. There’s no guarantee that any investment plan or strategy will be successful. We recommend that you consult with a professional dedicated to your needs.