And we found that clients in that situation would retire and have more money in income in retirement than they did when they were working cause the mortgage was paid off, kids were out from under them. Here they were in the 70’s and actually saving money. They built up about 40,000 dollars of money, which in the 70’s was a decent amount of money and they said, “We want to set this money aside for our grandsons.” And they had four. And so they said they met with a financial advisor of sorts and said, “We want to put this money away for our grandsons, so that no matter what happens and they say, screw up their lives financially, they’ll have a big nest egg down the road.” And so, that was what was put in place.

Well, as it turns out, these people that we’re talking about are my grandparents. And they are now deceased and so, fast forward years later. Well, the story was, I remember being told at 6 or 7 years of age that no matter what you do, you screw up your life financially, you’re gonna be a millionaire down the road with what was put in place. And I remember after finishing my business degree in finance at Stanford and I was talking to my mom about wanting to see some of these documents or what this was, as it was set up. They’re like, “This is a trust. You’re not even supposed to … You’re not even supposed to remember that. That’s for you down the road. Forget about it.” Well, I kept pressing and long story short, they allowed me to sit down and look with my mom and my grandmother. My grandfather had been deceased at that time and we looked at what was set up. And come to find out that this was nothing more than 40,000 dollars that they had invested into four life insurance policies with a 10,000 dollar front end premium payment into each of them. So, four policies, 10,000 dollars up front on the lives of four boys, which is in this case were ranging from like age seven to eight or something like that. Or seven to nine.

And so, if you remember in the 70’s, where was inflation and interest rates at that time? Crazy high.

Andrea Tice:

Yeah.

Jeff Roberts:

So, you might have seen like, 12% interest rates. Well, sure. If you took 10,000 dollars and stuck it in some life insurance policy and you grew it out and project it into the future at 12%, sure that 10,000 dollars would be a million bucks 60 years down the road. But what happened to interest rates?

Andrea Tice:

The 80’s came.

Jeff Roberts:

Jeff Roberts:

At that rate, say 39%, the United States is the third highest corporate tax rate in the world. The highest is the United Arab Emirates at 55%. Puerto Rico has 39%, and we’re actually, it’s 38.9. so we’re among the top highest three. So it would be great if we could lower our corporate tax rate down and not just personally, but corporately as well. If we want to move to … I can’t even pronounce it. Uzbekistan or however that’s pronouncing has a corporate tax rate at 7.5%. People say, “Well, Jeff, why do we care about these corporations? They’re making all this money. They need to pay taxes.” Well, of course. But keep one thing in mind. Most of us have our money invested. You’ve got things like 401K plans, retirement accounts and your money’s invested in account where you want the markets to improve and to grow.

Okay. This is huge, and repatriation really involves how corporations can mostly effectively bring profits that have been made overseas back into the United States, and the way the United States works right now, we kind of work on the concept of what’s called a deferral type plan, it’s a worldwide plan. Essentially the idea is that United States says, “if you make money overseas and you bring that money back into the United States, you basically pay 35% of it. So what essentially happens is companies say, “Well, if I bring that back, I’ll lose a third, up to 40%,” and so they end up keeping the money overseas held in various locations. Some of the largest corporations in the world have literally billions and billions, in some cases, hundreds of billions of dollars sitting, say, in Ireland where they have incredibly low tax rates.

So the money stays overseas and is not available back in the United States for companies to pay out dividends to shareholders or buy back shares of company stock. You’re only allowed to do that with dollars earned within the United States. So companies are limited on what dividends they can pay if they have overseas earnings and they don’t want to bring that money back here. So companies have billions of dollars overseas and the estimated number’s about, there’s about 1.2 trillion in corporate cash, US cash, held overseas. There’s a white paper done here at Ameriprise recently that talked about that. A guy name Justin Burgin, and he wrote about 1.2 trillion being in cash that’s US assets held overseas that’s just sitting there.

What happens is if they bring it back here in the United States, they’re gonna lose a third so they say, “Well, we’ll just build and do things overseas with it.” Well, wouldn’t we rather than build and do things with it here in the United States? So in the past we’ve seen the tax law change to allow a window of opportunity to bring that money back into the United States and do it at a lower tax rate to try and harvest some of that cash back in the United states, money that’s not being taxed and not gonna be taxed, because it’s gonna stay overseas. Entice them to bring them back in.

Jeff, great chatting with you today. Jeff of Jeff Roberts and Associates. Appreciate you being on. We’ll chat with you again next Wednesday, sir.

Jeff Roberts:

See you guys.

Scott Chambers:

All right. Take care. Yellow Hammer Radio, we’re back from the [inaudible 00:15:17].com heating and air studio right after this.

The full conversation with Mr. Roberts can be heard on the Yellowhammer Radio podcast or in the video above, and a lightly edited transcript of his interview with Yellowhammer’s Scott Chambers and guest Chris Reid can be read below.

Subscribe to the Yellowhammer Radio Podcast on iTunes. Learn more about Jeff Roberts’ private wealth advisory practice at JeffRobertsAndAssociates.com.

Scott Chambers:

Welcome back. It’s Yellow Hammer Radio, super station 101, WYDE. 866-551-9933. We will get to your calls coming up. Right now on the show with us today is our local financial guru, Jeff Roberts. He’s the founder of Jeff Roberts and Associates. He and his team of seven advisors can help simplify your complex wealth management needs. They are an exceptional financial advisor team, who have provided sophisticated financial planning and advice to high net worth clients for up to 131 combined years.

Exactly. It’s Wednesday. On the show with us is our local financial guru Jeff Roberts. Jeff is, of course, the founder of Jeff Roberts and Associates. His team of seven advisors can help simplify your complex wealth management needs. They’re exceptional financial advisors who have provided sophisticated financial planning and advice to high net worth clients for a combined 131 years.

Andrea Tice:

Mm-hmm (affirmative).

Jeff Roberts:

Jeff Roberts:

Well, long term care references is people that are in retirement. They become sick or ill for an extended period of time. And as we know, Americans are living longer than ever. This means that many will require long term care at some point in their retirement. An estimated 70 percent of the individuals age 65 or older will need long term care services during their lifetime.

And so, so many people don’t even have a simple policy that might have a million dollar limit or two million dollar limit. Simple, simple way of transferring risk and often times very inexpensive. That’s one.

And so people have disability insurance often times through their employer, but the national average is- it’s around 40 to 50 percent of their base pay is what they would be covering, or covered with. And so having some sort of supplemental disability can make a tremendous difference in their ability to achieve their goals in the home stretch if they end up being sick or ill for an extended period. 50 percent of people are forced to stop working before they planned, and in half of those cases, it’s because of disability that has prevented them from working.

And the last example that we see most common is people that are under-insured for life insurance. Oh my gosh, you know, I cannot emphasize this as well, and especially when we see the young folks that have kids still under their wings, and responsible for food on the table for all of them. If a spouse might be working or not working as well. A rule of thumb might be 10 times someone’s annual income, as a minimum standard.

I just can’t emphasize enough how inexpensively you can get some, perhaps term insurance, either through through their employer or individually, that can help sure-up that gap.

No. Not at all. Well, Jeff. It’s good to hear your voice, my friend. You know, two weeks ago you introduced your three minute confident retirement check. Which can be found at jeffrobertsandassociates.com. Now since, then we’ve been drilling down on your confident retirement approach and it’s four principles. So, let’s review that a little bit. What is the confident retirement approach, Jeff?

Jeff Roberts:

Jeff Roberts:

Today’s going to be helpful … If anyone who’s listening has access to a computer, pull up a browser because we may be going to an online site. Today we’re going to talk about retirement planning, and whether you’re currently retired or trying to get there, when it comes to retirement, we know that there’s one thing that everybody wants. You’re likely to say, “Well, a huge bucket of money, right Jeff?” That would be great, but really the one thing that everyone wants when it comes to retirement is the word confidence. People want to be confident that they can maintain their choice of financial lifestyle and preserve their next egg throughout a retirement that may be longer than expected. They want to be confident that they won’t run out of money. They want to be confident that they haven’t left out or forgotten a key planning consideration that could hurt them down the road.

Scott Chambers:

Oh yeah.

Jeff Roberts:

But be aligned in the end, and disagreeing is fine as long as they actively and continually engage in open financial planning dialogue. Getting frustrated and stopping talking or stopping communicating, that’s real bad when it comes to money.

Scott Chambers:

Absolutely. We’re talking with Jeff Roberts of Jeff Roberts and Associates. One of the other things you mentioned, Jeff, was sharing that financial responsibility. What’s the best way to do that?

Jeff Roberts:

Yeah. Sharing responsibilities could mean that you take turns managing the expenses. You can take time to share regular financial talks to discuss long term goals, which is one of the reasons why we sit down with our clients, say, every six months, to do that exact thing for them, to infuse that into their lives. Another is both participate in, specifically, the investment planning piece rather than just one spouse that handles the money or investing. Our study shows that couples who actively discuss financial roles were excited and satisfied with the arrangement that they’ve made because they made an arrangement. Working with an advisor can help get couples on the same page financially. If they disagree or have a disagreement or they don’t see eye to eye, a skilled advisor can help them navigate these discussions, and ground the couples in goals that are aligned with their own personal core values.

Subscribe to the Yellowhammer Radio Podcast on iTunes. Learn more about Jeff Roberts’ private wealth advisory practice at JeffRobertsAndAssociates.com.

Birmingham, Alabama-based financial guru Jeff Roberts, who was recently named one of the top private wealth advisors in the nation by Barron’s®, came on Yellowhammer Radio Tuesday to lay out the facts so people can decide for themselves.

The full conversation with Mr. Roberts can be heard on the Yellowhammer Radio podcast or in the video above, and a lightly edited transcript of his interview with Yellowhammer’s Cliff Sims can be read below.

Subscribe to the Yellowhammer Radio Podcast on iTunes. Learn more about Jeff Roberts’ private wealth advisory practice at JeffRobertsAndAssociates.com.

Scott:
For the last couple weeks we’ve been discussing retirement planning and I’m telling you, the things that you’ve said meant so much to me. I’ve always thought retirement planning was, okay save as much as I can and just ride it out. You’ve pointed out that it’s not quite so simple but there have been many lessons. Two big ones, you should begin planning as early as possible and retirement planning continues throughout retirement. That’s something I had not thought about. But today, we’re just going to talk about how crucial those points are. Is that right?

Jeff:
You’ve got it, brother. The key issue is making sure people understand the accumulation phase of retirement, which happens before retirement and the distribution phase, which happens once you are retired. And as you eloquently put they are two completely separate components to retirement planning.

Scott:
We talked about those. Those two segments of retirement planning, we’ve covered a lot of ground and I hope people will go listen to the podcast, it’s up at YellowhammerRadio.com so you can get these things. I know a lot of people have asked me, ‘Hey look, I listed to you and Jeff Roberts but I’m in and out of the car how could I find out more about it?’ So folks remember, it’s up over at YellowhammerRadio.com. What more do we need to know than the things we’ve talked about the past couple weeks?

Jeff:
Good question. The big piece today and what I’m going to drill down on is helping people to understand exactly why it is so critical to start early and why you must continue to plan for retirement in retirement.

Scott:
You’re talking to people like me and you’re a private wealth advisor. What are most people doing wrong? And I’m sure it’s going to apply to me but what are most people doing wrong?

Jeff:
I won’t pic on you today but I might use you as an example a couple times today. People commonly do not understand the impact of time on their retirement plans and that’s what today’s lesson is going to be about. Not correctly taking advantage of the time that they have to plan before they retire and then not correctly planning for the impact of time on their retirement plans once they retire. So today I’m going to speak to both people that are pre-retirement and the people that are in retirement. So bare with me as I explain this because it’s going to take a minute and there will be some numbers I’m going to throw out and I might use you as an example. People must understand the power of compounding returns and there is nothing better to aid in that concept than our old friend Rule 72. And the Rule of 72 is very simple. It is a simplified way to approximate how long an investment will take to double given a 6% annual rate of return. Let me walk you through this and then I’ll explain why it is so crucial to both your accumulation phase and distribution phase. So you divide the number 72 by whatever annual return so investors can get a rough estimate of how many years it’ll take for their initial investment to duplicate itself or to double in other words. Let me give you an example, pretend you went to the bank and purchased a CD with $100,000 of your money. I could ask just the general audience, do you have any idea of what interest rate a twelve month CD at the bank is paying right now? And I’ll save you the research, I looked to see in Birmingham and surrounding cities. I’ve seen somewhere around a rate of .3% and 1% if you tied your money up for a year in a CD. And maybe 1.25% if you were shopping different banks, CDs for one year on the internet. Now of course those aren’t me offering those rates or anything like that it’s just hypothetical numbers in what we’re seeing. Okay, so let’s keep the math simple. As soon as you buy a certificate or deposit at 1% hypothetically. So to determine how long it’s going to take your $100,000 in the CD paying %1 to double all you do is apply our friend, Rule 72 and divide 72 by that number 1 which represents the 1%. And Scott what do we get if we divide 72 by 1?

Scott:
That’s tough math, Jeff but I’m going to go with 72.

Jeff:
You are a genius. You are a scholar indeed.

Scott:
I’m glad you kept it easy numbers.

Jeff:
I’m not putting you on the spot. We’re not going to complicate stuff. So you’re correct. 72 divided by 1 is 72. So if you have $100,000 invested in a rate of return at 1%, your $100,00 will double one time in 72 years. One double. Now, let’s change the scenario. Let’s pretend like the banks we’re actually paying 3% on their CDs for one year which they’re most likely not. Before the 2008 global financial crisis 3% on a one year CD was not uncommon. So if you put your money, $100,000 earning 3%, we divide 72 by 3 and this time, Scott what do you get?

Scott:
I’m going to go with 24 since I have a calculator with me.

Jeff:
You’re spot on. Correct again. If you have $100,000 invested at 3% it’ll double one time in 24 years, approximately in 24 years it’ll give you $200,000.

Scott:
Yeah but Jeff if you’re 40 years old you’re only going to have 24 years until you retire so you better get more than that if you want your money to double.

Jeff:
Exactly and here lies the problem. Follow me on this as I walk through it. Most Americans fail to get the last double of their money that they need to retire with financial independence and confidence throughout their life. In fact base on my personal experience working the last 24 years in financial planning I would say most Americans fail to get the last two doubles of their nest egg that they need to retire comfortably throughout their life. The last doubles of your money count the most. Let’s play a game with the numbers. So I have to ask a rhetorical question to our listening audience and for illustration purposes pretend like you didn’t have any social security and on rare occasion there’s a company pension plan which let’s remove pensions and social security from this discussion. Just ask yourself this, if you’re 60 years old can you retire today with $250,000 total in retirement savings and let’s comfortably throw out your life expectancy. And most people would say, ‘Yeah, probably not.’ Alright, then double that, let’s get one more double. Let’s go from $250,000 to $500,000. Can you retire with $500,000 total in retirement savings and live a long life in retirement and be comfortable? Well, maybe maybe not. Let’s double that. Can you retire with $1M in total retirement savings. Now, many people will say, ‘Well, yeah I can do that with a million bucks.’ But remember, let’s go back to our discussion last week. Most people when getting a lump sum of a million bucks you should only carve off safely, off your nest egg, at most a 4% annual distribution. And remember, in low interest rate environments like we’re in right now that number should even really be a maximum of 3% or slightly less. So if you have a million bucks, because we doubled our money but to a million bucks enough times, that’s only $30,000 a year. Well $40,000 a year if you’re stretching it. So then let’s say we double to two million bucks to try and get $60,000 or $80,000 a year in income when we’re retired. My point is that most of us are going to need a substantial amount of money built up and if we’re going to have a shot at maintaining our pre-retirement lifestyle and to get there people need to save a bunch and are going to need to have plenty of doubles.

Scott:
So the ability to double our savings over and over is crucial but how do people miss this? I understand it but how do people miss it?

Jeff:
It’s primarily because you can’t see the progress that’s occurring as you make doubles early on because the doubles are of a small number. So when you go up from $2,000 to $4,000, $4,000 to $8,000, $8,000 to $16,000 you’re not feeling that as much because the numbers are small compared to when you’re going from $200,000 to $400,000, $400,000 to $800,000. So the earlier victories you’re not feeling. Secondly, most of us haven’t done the math to realize how many doubles that we need to get. And they haven’t calculated the time that they have within to work. Like you were just saying from then before, you’ve only got 24 years or so before I retire so we have got to realize here’s the time table how many more doubles do I need to get? So Scott, let’s do another example, hypothetical. So Scott you have in your pocket right now $500,000 in cash, right now in your pocket.

Scott:
Oh heck yeah man. I like this. Do my wife and kids know about this money?

Jeff:
I’m going to say for this example we’re going to keep it our secret.

Scott:
That’s a good plan.

Jeff:
Now in fact you and I are having lunch together talking about our secret money and we’re talking about what we want to do with it because it’s literally burning a hole in our pockets. Only I have $100 and you have $500,000. We both agree that we need to save our cash so we go see a financial advisor and pretend with me for a second that we invest our money in some magical portfolio that gives us an 8% annual rate of return on our money. Now again, this is just hypothetical. So take 72 divided it by the 8% that gives us the number 9. So 9 years later after we had lunch together and made that investment with the advisor we cash our money out. We cash our money out 9 years later and we’re having lunch together again. Now you have $1M in your pocket 9 years later and I have $200. How are you feeling?

Scott:
I’m feeling great. I’ve got 2 commas worth of money now.

Jeff:
Exactly and how am I feeling with my $200? Well I’m feeling that you’re going to be buying my lunch.

Scott:
I was probably going to make you buy because that’s how I got my first $500,000 was mooching off of everyone else.

Jeff:
Each of us just got one double. I hardly noticed mine and yours starts to change the game a little bit. Scott, you and I are around the same age and my friend, that $1M that we were talking about in your example is likely not enough savings for you to retire and maintain your current standard of living. You need another double of that my two maybe three depending on your own personal goals. Maybe you’ve heard of the penny challenge which is this, this is another good illustration. Which would you rather have, would you rather have $100,000 on December 1st or the lump sum of money at the strike of New Years 30 days later determined by taking a penny a day, on the first day, and doubling every day for a month? So day 1, 1 penny. Day 2, 2 pennies. 4 pennies on day 3. 8 pennies, 16 and doubling each day for one month. Which would you rather have, $100,000 on December 1st or the lump sum on the 31st? Now, most people say, ‘I love $100,000 but I think I’m going to be better off if I do that lump sum even though I’m not sure how much it is.’ Any clue how much money that is after 31 days of doubling?

Scott:
I have no idea because I would have gone with the $100,000.

Jeff:
The lump sum that occurs starting with one penny and doubling every day for a month from the first day is $10,700,000 in change. And it’s amazing to think about that. I’ve got some analytics out there that the audience is likely going to have to get out their excel spreadsheets and do math and make sure but I promise it works. What’s amazing is that if you look at the trend and I mentioned 1 penny, 2 penny, 4, 8, 16, 32 pennies. What’s amazing is on Christmas Day on the 25th you’ve built up $167,000 which is a long way from the $10M but it just shows you how those last doubles are so huge. On the 28th day of the month you have $1.83M and then 3 days later you have $10.7M. Those last doubles are huge and again, most Americans fail to get the last double or two that they need before they retire.

Scott:
Well this makes sense. So that’s why you said earlier that people commonly do not understand the impact of time on their retirement plan. I would not have guessed that what you just told me even though it makes sense.

Jeff:
Let’s just keep it simple for a moment. For folks that are working towards retirement, you are on a clock. And it’s just like a shot clock in basketball or a play clock in the college football games in that you have a limited amount of time and if you want to win then you better put a lot of points on the board or in this case build a nest egg large enough that you can retire. So let’s say that you’re gonna work until you’re 65 years of age. You’re 35 today that means you’ve got 30 years if you make all the right decisions. Now, if you’re 45 years of age well now you’ve got 20 years to make all of the right decisions and if you’re 55 years of age and you retire at 65 you only have 10 years. To get what ever doubles that are necessary before you retire and many people are not starting soon enough and making the right decisions. And keep in mind when you’re at 55 and you only have 10 years left to build your nest egg and double it that’s a time when people are dialing back the risk in their portfolio as opposed to taking more risk in their portfolio.

Scott:
This all makes perfect sense. I’ve been in the accumulation phase and I know we’re gonna talk about this as we move forward, Jeff. And these are things that people are asking about. Do you have any last thoughts before we go to our break?

Jeff:
Just basically this, when in doubt go to JeffRobertsandAssociates.com. On our main page we have a 3 minute confident retirement check. It helps you figure out how confident you are towards your own future and compare that to other people’s. so if we can help in anyway dial us as 205-313-9150 for a complimentary consultation.

Subscribe to the Yellowhammer Radio Podcast on iTunes. Learn more about Jeff Roberts’ private wealth advisory practice at JeffRobertsAndAssociates.com.

Scott:
I know you’re going to finish up with some of the stuff we talked about last week. We were talking about retirement, how we make that happen, the different phases of it. This is a subject we’re all going to have to master or we’ll face significant problems down the road. I may be one of those people. Can you catch us up a little bit? Can you recap last week, what were the highlights?

Jeff:
Certainly. We learned last week that there are two phases of retirement planning. First there is the accumulation phase, which is where it involves planning for retirement before you retire. The accumulation of savings. Secondly there’s the distribution phase, which occurs during retirement. Often times when people are distributing savings from their nest egg to cover living expenses. And last week we drilled down specifically on the accumulation phase a good bit and we learned that a good retirement obviously does not just happen. It has to be very carefully planned out and we only get one shot at it. Remember that the goal is to get to a point where work is optional and retirement is affordable. Today we’re going to discuss the second half of retirement planning and that is the distribution phase.

Scott:
So distribution is how we’re going to spend our money when we’re retired, I guess. So what do we need to know about the distribution phase, Jeff?

Jeff:
You’re right. And again, as I explained last week many people think that retirement planning is only for people that have not yet retired and this is not at all true. Getting to retirement is just half of the planning. The rest occurs during retirement itself. There is a tremendous amount of work that must occur in retirement.

Scott:
Work? Jeff, I was planning on not working in retirement. What do you mean by “work”?

Jeff:
In this case I’m really speaking of financial planning work not necessarily employment work. And the point of retirement of course is not to have to work but you bring up a good point. Many people are choosing to work in retirement. Let me give you some background on that. For decades Americans had three legs to the retirement stool. One leg is a company pension that paid an income for life after working your entire life for a particular company. Another leg to the stool would be social security retirement benefits and like it’s sister, the pension plan, you would receive from social security as you do now an income for life. And the third leg to the retirement stool is what people may accumulate on their own. Their personal savings outside of work. Now today most companies no longer provide pension benefits or defined benefit plans, where you receive an income for life. Those were traded in for things like 401k plans and if you’re a nonprofit organization, things like 403b plans. So there’s really, with only two legs to that retirement stool, being a personal savings and a 401k plan and social security that changes things you really have to maximize your years in the accumulation phase. So if you add it all up, pensions are gone mostly. Social security is likely going to be paying less not more, most people agree with that. People aren’t really saving enough into things like their 401k plan and we’re living longer. So for some people that may mean retiring from their job or career and then transitioning to another job that may be something that they actually love with all their hearts. And I’ve seen people retire who’ve earned $100,000 – $200,000 or more but then they go on to do something where they only earn a fraction of that amount but they’re passionate about what they do, they stay active in retirement, and they’ve created a third leg to their retirement stool of having a little bit of part time work that comes in.

Scott:
So tell us more about this financial work in retirement that people need to be thinking about.

Jeff:
Here’s how I explain this to clients in retirement or entering retirement. I want you to picture a bucket. You know the one, a galvanized metal bucket with a handle on it. You can probably buy them at Home Depot. during the accumulation phase the emphasis is on putting money into the bucket and filling up our water level almost to the top. That’s your nest egg. So when our bucket is full of savings we enter the distribution phase and if you only have two legs to your retirement stool, which is your savings and your social security, then you may need to start taking some income off of your bucket. So you attach a spigot to the bucket down at the bottom and your bucket is hopefully full of savings. So here is the important part of the planning work in retirement. Very, very important. We both know that if you go to that spigot and you just crank it open as far as it’ll go the contents of that bucket will come flowing out overwhelmingly. And the water level of the bucket will drop precipitously. In no time at all your bucket will be half empty. So retirement planning in retirement, the distribution phase is about spigot control and as a rule of thumb, generally you should not plan to distribute more than 4% of your nest egg on an annual basis. 4% coming out of the bucket on an annual basis. And in low interest rates environments like what we’re experiencing right now it may be necessary to target only a 3% annual distribution if you want your money to last throughout your lifetime.

Scott:
So Jeff, you’re talking about only 3% or 4% what’s significant about those numbers? Why do you pick those numbers out?

Jeff:
In the distribution phase, actually retired, you have many important issues to consider. Here are three in the form of a question. This is very important. How much money do you need to take out of your nest egg to live comfortably during retirement? What is inflation? How much is inflation right now? And then, how much is my portfolio growing on an annual basis? Or in some cases, not growing. So, how much money do I need to take out of my bucket? What is inflation? And what is my portfolio growing by? The answer to the first two questions tells us the answer to number three and what it needs to be. So lets play with the numbers for example. So for question number one, how much money do I need to take out of my nest egg to live comfortably in retirement? Well let’s assume for purposes of our conversation that you need to be distributing the full 4% out of your nest egg, out of your bucket. Turn the spigot on and the 4% comes out. Question number two, what is inflation, the wear and tear on my dollar? Let’s assume inflation is at 2%. So if my income distribution, my nest egg is spitting out 4% to cover the expenses plus a 2% inflation that means your portfolio has to grow at 6% just to break even. And as an advisor I’m going to ask that person in that situation, “Where are you going to get a consistent return of 6% on your portfolio year after year being in retirement? And what happens in years that your portfolio doesn’t grow at 6%?” Let’s say markings actually decline by 6%, then what do you do? So people in retirement need to be adjusting the amount of their income distributions base on the size of their portfolio as it ebbs and flows. Let me give you an example. Take a million dollar portfolio, if you’re lucky enough to have a million bucks. Let me use a big round number so it’s easier. So if you have a portfolio of a million bucks and let’s say you take out 4% income distribution, that’s $40,000 you’re taking out of the portfolio. Now, let’s assume the portfolio declines by 10% and that’s due to the market falls 6% and you’re taking out your 4% distribution so those two combined cause the portfolio to be down 10%. So your million bucks goes to $900,000 left in your portfolio. So if you still pay out $40,000 which was 4% of the original amount. That’s no longer a 4% distribution, that’s a 4.44% distribution. So you’re taking the same amount of money dollar amount wise nut it’s a higher percentage of the smaller number and that’s where you have to be really careful. You’re distribution then should be adjusted. Now you should only take 4% of $900,000 which is $36,000 a year where originally we were taking out $40,000 a year. So remember, basically safely pick a piece of fruit off of your tree but you don’t want to break a branch when you’re in retirement.

Scott:
That makes a lot of sense. Some people think they have to retire and they’re set on this automatic schedule and they’re just taking this money out and if you’re not watching it closely you can end up taking out too much because you’re not paying too much attention to your portfolio. I understand that inflation can be a problem, so what does that mean to people in retirement? Because I understand not taking out too much on my own but I think when inflation begins to start muddying the waters a little bit.

Jeff:
It’s a very important piece. Inflation is a general increase in prices and a fall of purchasing power of money and it’s the silent killer. Inflation right now is around 1% or so today which is very low historically. Since the 1920’s if you look at long term averages, inflation is really averaged about 3% historically. So when we’re doing forecasting with clients we generally assume a 3% number verses where we actually are today is kind of a little low. So at 3% inflation means prices of goods and services are going to double on average about every twenty-four years. So whatever your nest egg is worth on the first day of your retirement, it will have to be worth twice that amount twenty-four years later assuming a 3% average inflation. All while carving you off income distributions so that you can enjoy your retirement each year.

Scott:
That’s something I had not thought about. So you have to retire with large amounts of savings. Live off a small portion of your nest egg. Grow your retirement savings to compete with the impact of inflation. All while managing to adjust your living income as your portfolio naturally increases or decreases. How do you do all that in retirement?

Jeff:
It’s a lot. My suggestion is you work with my team. We develop long term relationships with clients that are going to last throughout retirement because this kind of planning spans again over your entire life before and during retirement. By working together the goal is to help clients to know what questions to ask, know what problems may lie ahead and know what adjustments they need to be making. and our goal is for clients to live in retirement with financial confidence and we believe that comes with a relationship with our firm.

Scott:
Jeff what are some of the most common mistakes that people make in this distribution phase?

Jeff:
I’ll ramble off a few bullet points and they’re in random order. Number one, carrying too much debt in retirement. In my opinion debt at all in retirement. People should be as debt free as possible when they want to retire. People being unaware of the risk exposure in their portfolio. As you are retired you better be crystal clear on the components of your portfolio that can create the most volatility and making sure regularly you’re adjusting your portfolio to make sure it doesn’t creep in risk in the wrong direction. Three would be enabling dependent or financially irresponsible children. We see a tremendous amount of this from people in retirement that are still just paying the bills or helping out people that are just financially irresponsible and that often times doesn’t improve. Four is taking social security retirement benefits too early. The longer you delay social security, generally speaking, will increase about 8% on an annual basis if you don’t take them. So if I don’t take my benefits at age 65 and I take them at 66 I just got an 8% raise in my social security benefits. If I delay it from 66 to 67 I get an 8% raise in my social security benefits. Take them too early you lose some growth of your benefits. Number five would be not implementing a tax plan to harvest IRA qualified money assets that are sometimes in lower tax brackets. Sometimes that’s possible for some people. Pulling income distributions too large for their nest egg to possibly be able to support is another issue. Kind of what we talked about when people turn the spigot on to much. Failing to adjust the retirement income distributions that they’re making in years where the market of their portfolio is down or has dropped in value. And not protecting the sales against incredibly high costs of long term care that can stem from an illness or an injury while being retired. I also think another common mistake is not working with someone to help address all these issues that we just talked about.

Scott:
Jeff one thing that you brought up today that I had not thought about, when I look at retirement planning, when I hear people talk about retirement planning it’s always in that accumulation phase. And it sounds like you’re making the point and I see it now and I didn’t before. Having someone to help me during retirement. I’ve already done all of this, I think, but having you guy’s help during retirement is going to be a huge help. Any last thoughts, Jeff, before we wrap up today?

Jeff:
Yes, thank you and I agree. It’s usually because when people hit that milestone of retirement they believe that what they’ve got and the income that they’re going to be able to create fits right in at age 60, 65, whatever. They’re not thinking about 25 – 35 years down the road in retirement and that doubling impact of inflation on their expenses. And is their portfolio as well as they’re trying to do in retirement going to able to account for that. It’s incredibly important. As I said last week and hear it again clearly, good retirement does not just happen whether you’re in it or before it, it has to be planned out. Again, before and during.