Only Retire Once
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|The Lange Money Hour: Where Smart Money Talks
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- Guest Introduction: Roy Williams, CEO, Prestige Wealth Management Group
- Retirement Mistake Number One: Outliving Your Savings
- Listener Questions: Apply and Suspend, Yearly Withdrawals, and Asset Allocation
- Advice for Clients Considering a Divorce
- Retirement Mistake Number Two: Underestimating Healthcare Costs
- A Brief Address on Inflation
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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
David Bear: Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks. I’m David Bear, here with James Lange, CPA/Attorney, and author of three best-selling books: Retire Secure!, The Roth Revolution and Retire Secure! For Same-Sex Couples. Each day, ten thousand members of the baby boom generation retire, a rate that will continue unabated for the next nineteen years. Unfortunately, nearly half of today’s workers seriously doubt their ability to retire comfortably. Over a quarter doubt they’ll ever achieve what recent generations would call a comfortable retirement. For insights on the problems and solutions, we welcome Roy Williams, author of the book Only Retire Once: How to Avoid the Nine Deadly Mistakes of Retirement, to this edition of The Lange Money Hour. CEO and a principle owner of Prestige Wealth Management Group, Roy has over thirty years of professional experience in financial planning and investment management. He is a CFP and a member of the Financial Planning Association and the Society of Financial Service Professionals. Recognized for his knowledge and experience, Roy’s insights have been featured on CNBC and Fox Business News, the Wall Street Journal, Dow Jones News Wires, SmartMoney and Reuters. So, stay tuned for an interesting and informative hour, but unfortunately, Roy, who is in Los Angeles, is on a cab ride and he isn’t quite connected yet. So, I’ll say hello, Jim.
Jim Lange: Hello there, David. How are you?
David Bear: Ah, I see Roy’s now on line two.
Jim Lange: Okay, good. Hi there. Welcome to the show.
Roy Williams: Thank you very much for having me.Jim Lange: Well, it is a pleasure because not only have you written a very fine book, and by the way, the name of the book, for the audience again, Only Retire Once: How to Avoid the Nine Deadly Mistakes of Retirement, and it’s available in either an eBook format or a regular book found at Amazon. Again, Only Retire Once: How to Avoid the Nine Deadly Mistakes of Retirement. And Roy is actually a real financial advisor. He has a very, very big practice. He’s a terrific advisor. I kind of get the inside scoop on a lot of advisors that I know, and I know Roy both as a professional and a friend, and he just has the highest level of service. And the book, and it’s very obviously, when you read it, is the product of a lot of thought, a lot of experience and perspective. So, Roy, what I was hoping that we could do is, you talk about nine deadly mistakes, and to kind of go through them, maybe in order. Now, we also have some listener e-mail questions that I’d like to take later on, but if we could start going through them chapter by chapter, I think our listeners will get a lot of, not only financial information, but I would actually just say financial wisdom. So, chapter one is ‘Don’t underestimate how long you will live. Deadly mistake number one: outliving your savings.”
Roy Williams: Yeah. A lot of times, we see people make their retirement decisions, and I’m sure you’ve heard it also in your practice, “Well, my parents only lived to seventy-five, so I want to use age seventy-five as mortality, and I want to have nothing left in the end.” It’s a really big mistake because there’s zero chance of them having enough money if they live longer, because if they’re planning to die at a certain age and they want to have zero at that point in time, when we run analytics, it’s almost a zero percent chance of them having enough money. So, we always tell people, you know, from a longevity standpoint, we like using age ninety or ninety-five, again, depending upon the family history. And again, with the miracle of medicine today, your father may have died of a heart attack. Today, you may not die of a heart attack because of the miracle of medicine. So, you know, you need to make the right retirement decision for you as to when you’re going to retire, how long you’re going to live, and map out a lifestyle you can afford.
You know, we’ve had clients who retire and, I’ll use an example: one was a superintendent of schools and the other was a corporate executive. Between their pensions and Social Security, they have $250,000 of income coming in. We have their friends as clients, and they retired and they didn’t have the same kind of pensions, but yet they tried living the same lifestyle, and they really can’t afford to keep us with the Joneses, as they would say. So, it’s a really important decision that you make, what’s the lifestyle you’re going to lead and can you afford it? And again, we’ve developed, which will be available as an app for the iPhone and Droids, a budget, you know, assessing retirement expenses and income. Again, it’s important that you have all the expenses listed in terms of what the true cost will be. You know, people don’t look at expenses, “Well, I’m going to buy a new car every five years.” Well, my expenses are only $70,000, but then you have to buy a new car every, you know, five years or ten years each, and that can add $3,000 or $4,000 a year to the budget, or more. So, it’s important in chapter one that you set yourself up for success by mapping out the life that you want to have, and list the things that you want to do and the lifestyle that you want to have, and then plan for it.
Jim Lange: Well, this might be a little overlap with chapter three, but you mentioned the occasional expense, like a car, or, I’ll add to that, a furnace, or a wedding, or, let’s say, the somewhat predictable but not regular expenses, and that has to be budgeted in, doesn’t it?
Roy Williams: Yes, and again, that’s why we developed the budget tool, because it encompasses a lot of expenses that people don’t think about. You know, when someone retires and they don’t have a grandson who’s nineteen months, and when someone retires and they don’t have any grandchildren, they don’t factor in the cost of having grandchildren. And you may say, “Well, there’s no cost.” Well, there is a cost. You may fly them on vacation with you. You may take them out to dinner. As the family expands, your budget goes up, and it’s important you consider it. And as to your point of everything that can go wrong with a house, I mean, we had a client recently, the kid went through a divorce. Mom and dad paid for it, you know, like parents sometimes do when the kids need to be bailed out financially. One client who lives near you, their child had a gambling problem, and they bailed them out. So, all these things in life that we don’t expect, we need to make sure that we have considerations for most of them. There’ll be things that we can never consider, but that’s why we like clients to have at least one year of savings, or one to one-and-a-half as emergency reserves for those other things that we can never think of.
Jim Lange: Well, you actually mentioned grandchildren. I suspect that one of the values that a lot of our listeners have is their high emphasis on education, and frankly, you know, it’s so hard today. It’s not like the old days where you get a job and you stay there thirty, forty years, you get a pension and Social Security and retire in relative security, which is, hopefully, what some of our listeners have. But today, where jobs don’t last as frequently, and you have the enormous cost of college and even private high school and grade school (if you’re not in a very good school district), do you like to have grandparents consider having some money for their grandchildren’s education?
Roy Williams: Well, we’ve talked about that. You know, it’s a great estate planning tool in terms of gifting to the grandchildren if you have a sizable estate, you know, to their 529 plans, and in some cases, because the parents…again, certain generations, they spend first and save what’s left, and a lot of times, there’s nothing left. So, a lot of their children won’t qualify for financial aid because they make too much money, but yet the parents don’t have enough money to pay for education, and the grandparents don’t want to burden their grandchildren with a couple hundred thousand dollars of debt. So, they do contribute. And again, that needs to be in the budget and a consideration, and it’s a great point that you bring up because most of…myself, being a grandparent, I want to see my grandchildren have a great education.
Jim Lange: Well, by the way, I didn’t know that, so I will say congratulations.
Roy Williams: Well, thank you.
Jim Lange: I suspect you’ll be a great grandparent. And the other thing that you’d mentioned, by the way, is you mentioned trips for the grandchildren. One of the things that I learned, I didn’t learn from my clients, I actually learned this from my father-in-law. Every year, he has a family gathering where he pays for everything. He pays for his kids, he pays for his grandkids, and every year, we used to go on cruises, but now, we go to kind of a, let’s call it, a B-level resort type place, and it’s kind of mandatory to attend, and he picks up everything: plane ride, the hotel fee. It’s one of these places where, you know, you can play golf or tennis or one of many different types of sports. His only requirement, and it’s unwritten, is that we have three meals together. So, the cousins are meeting each other, and not just meeting each other, but they really feel he’s kept the family together. So, to me, that, in a way, is even a better legacy than leaving the extra dollars that he would have saved had he not spent that money.
Roy Williams: Oh yeah, and to me, I get great value from those trips. I experienced that only a few weeks ago. Each year, we go to Florida, and the children and my grandson come, and it’s a great time together. You know, we eat together, we laugh together, we go boating together, we do things together, and the quality of time I get out of that is…you can’t put a price tag on it.
Jim Lange: So, are you picking up the tab, or are you laying that on your kids?
Roy Williams: No. Actually, my younger son, which was fantastic, I really liked that he left a check for $300 to say thank you. I wish my wife sent a thank you note.
Jim Lange: Okay, so you’re picking up the heavy hitting.
Roy Williams: Yeah. But no, they get there, but we pick everything up: we pay for food, we pay for restaurants, we pay for everything. Another thing that people should consider is the trips. What about taking the grandchildren to Disney? I don’t know about you, but my daughter had an eighth grade trip to Disney last year, last May, and we stayed for a couple extra days. It’s unbelievable, the cost of Disney! Or going on a Disney cruise. We did that two years ago with the whole family. If you take eight people on a Disney cruise, that can easily cost $20,000 to $25,000. And if you want to do that, that needs to be in your budget, and allocated for.
Jim Lange: Well, I think that that’s smart. By the way, you mentioned an app. Is this something that is readily available, or, better yet, freely or cheaply available for our listeners?
Roy Williams: It will be freely available. I will give you the information, then you can provide that to your listeners. They’ll be no cost.
Jim Lange: Okay.
Roy Williams: And there’s an app that they can put in their budget that will connect to QuickBooks and I invested in it really to…the impetus behind the book and the app is to help people, because, as you see as well I’m sure, there are these people making mistakes time and time again. And the problem is, they can’t overcome these mistakes ten years, fifteen years after retirement.
Jim Lange: Okay, you’ve sold me. How can people get this app, even if it’s not available yet?
Roy Williams: It’ll be downloaded from the Apple Store and from Droid. I’ll provide that to you.
Jim Lange: What will that be called, for anybody who’s listening?
Roy Williams: We haven’t named it yet.
Jim Lange: By the way, I would hope that our listeners are subscribers of my e-mail, because I have all kinds of stuff on the e-mail, all kinds of articles and excerpts from books and authors and things like that. This would be one more example. So, if you don’t have that information now, if listeners were to subscribe to the e-mail at www.paytaxeslater.com, this would be one of the things they would get information about. And by the way, on the subject of www.paytaxeslater.com, there are roughly 120 hours of very good financial information. I try to get some of the top experts in the country (tonight, obviously, Roy) and then go back and forth, and I actually read their books and have hopefully more intelligent conversations. So, anyway, back to your book…
David Bear: Well, before we go back to the book, Jim, since we’re selling stuff right now, why don’t we take this spot and have a commercial?
Jim Lange: Okay.
David Bear: All right.
David Bear: And welcome back to The Lange Money Hour. I’m David Bear, here with Roy Williams and Jim Lange.
Jim Lange: And Roy is the author of Only Retire Once: How to Avoid the Nine Deadly Mistakes of Retirement, and I would recommend that you don’t even think about this one. Go out and buy it, whether it’s the eBook or the hard copy, which I tend to prefer. That way, I can make notes in it and there’s a whole bunch of notes that I have in Roy’s. So, anyway, Roy, welcome back to the show.
David Bear: Do you want to do some questions?
Jim Lange: Yeah, why don’t we do some questions? Because I know we had some e-mail questions from our listeners.
David Bear: Yeah, we did.
Jim Lange: And I always like to be responsive to our listeners. So, I thought maybe you can do the questions, and maybe you’ll get slightly different perspectives.
David Bear: Absolutely.
Jim Lange: We didn’t discuss this in advance, so we might have a different opinion.
David Bear: Point/Counterpoint.
Jim Lange: So, why don’t we go question by question and we’ll see what Roy says and then I’ll say, “I agree,” or then I’ll tell you the superior answer. No, I’m just kidding!
David Bear: Okay, well, these were all e-mailed in advance.Jim Lange: Okay. Go ahead, David.
David Bear: These were all e-mailed in advance, and the first one is from Terry S. He says, “Please explain the ‘apply and suspend’ strategy for Social Security benefits. If I apply at age 66 (full retirement age) and then suspend receiving payments, is it correct that my wife, who will then be 61, will receive half of the amount that my payments would be at age 66? If I continue to defer receiving payments until age 70, do her payments then stay at the lower age 66 rate, or do they increase to half the rate I would receive at age 70?”
Jim Lange: Well, Roy, if you want to take a crack at that, that’s fine. That happens to be one of my special areas, so I’m also happy to take that one.
Roy Williams: You know, the big thing is, with file and suspending, you both have to be age 66 in order to qualify, and it’s a great strategy, and there’s a lot of tools out there to help you with Social Security, and we recommend seeing an expert like Jim to gather all that information. But, Jim, you can handle it.
Jim Lange: All right. Well, unfortunately, Terry and his wife are not the ideal candidates because, as Roy said, it works…ideally, the perfect situation for apply and suspend is, let’s say, for discussion’s sake, both Terry and his wife have an earnings record. Let’s be sexist for a moment and assume that the guy has the stronger earnings record. In the ideal world, what would happen when he is 66 is that Terry would apply for Social Security, but he would suspend collection. So, when you suspend collection, basically what you’re doing is you’re saying, “I’m applying for it, but don’t give me any money.” What’s the difference between that and doing nothing? If you apply and suspend, that means that your spouse qualifies for a spousal benefit. So then, Terry’s wife could apply for a spousal benefit that would be half of Terry’s. If they were both 66, what would happen is she would collect half of what he would have received. So, let’s say he would have received $30,000. She would collect half of that, or $15,000 a year, for four years until they’re both 70. Now, by the way, for him waiting until 70, he gets an 8% raise for every year he waits. So, what would happen is he would be getting the full Social Security, and then the fact that she collected against his record didn’t hurt him at all.
Then, here’s the thing that’s really cool: the fact that she was collecting on his record doesn’t hurt her record, which means if her record, with the 8% per year bonus or growth between 66 and 70, ends up being more than half of his, then she could switch to her own. Now, if he predeceases her, she will then get his benefit for the rest of her life under that scenario. So, the fact that he was waiting, and he got that 8% raise, is not only important for the rest of his life, but the rest of her life. So, that’s the ideal, like Roy said, when they’re both 66.
Unfortunately, when Terry is five years older than his wife…now, he could apply and suspend and then she could take it at 62, but then she would get 35%, not 50%, and she would suffer what’s called an actuarial reduction, and that would incur not only for the spousal benefit, it would hurt her own record, and then, ultimately, when he dies, she will get a lower benefit for the rest of her life. There are some situations where that might make sense. Off the top of my head, and without knowing all the numbers, Roy is a hundred percent right. You need to run those numbers. We have an in-house expert who does that. But off the top of my head, the idea of her collecting before 66 does not go well with me because the actuarial reduction that she will suffer by doing that will hurt her for the rest of her life, and if Terry, let’s say, dies early, in his early seventies, and she lives a long time, that actuarial reduction could end up costing her literally a hundred or two hundred dollars.
Roy Williams: And I agree with that. I agree a hundred percent with that.
Jim Lange: All right. And by the way…
David Bear: Another question, or do you want to..?
Jim Lange: Yeah. I’ll just finish this one last point.
David Bear: Sure.
Jim Lange: It is a difficult issue when people are kind of geared towards taking the Social Security at 62, but one of the things that we had said earlier was don’t plan for a short life, plan for a long life. If you die early, you’re dead. It doesn’t matter. What you should be fearing is living a long time and running out of money, and the best longevity insurance there is, at the cheapest rate there is, is basically holding off on Social Security.
Roy Williams: And I just have one thing to add in that area of Social Security. We’ve run into this a lot lately with widows. Widows, a lot of times, especially if they have their own benefit, we have them start on their spouses’ record, especially if the spouse is older, at age 60, and then wait until 70 to collect theirs. So, a lot of widows don’t even understand that they can collect if the spouse is qualified and they’re aged 60 for Social Security, and then put theirs off.
David Bear: It sounds like Cindy, who has the next question. It’s actually sort of a good follow-up question. This is from Cindy L. She says, “I’m reading that the conventional 4% withdrawal rule for the first year of retirement, then adjusted only for inflation thereafter, is being challenged as being perhaps too aggressive. If I don’t want to outlive my retirement funds, what’s your recommendation for a safe withdrawal rate that still allows one to retire comfortably?”
Jim Lange: Great question. I’ll let you take that one, Roy.
Roy Williams: Yeah. My opinion is three to three-and-a-half percent. You have to understand, when you look at the ten-year treasury, below 1.9, with a low interest rate environment, if you’re drawing out that much of the portfolio, if you’re drawing out 4% with inflation, and again, we use historical inflation going back to 1926 of 3.7%, you’re drawing out a little too much. I don’t know if any listener out there, has your health insurance gone up 1.7%, or your food bill? It seems a lot of the bills that retirees are subjected to, like travel expenses and airline costs, haven’t gone down. You know, they’ve continued to go up. So, again, to me, it’s three to three-and-a-half percent to be conservative.
Jim Lange: All right. Roy is a belt and suspenders guy. He probably would not be the kind of guy that did that climb that those two guys did…I think they finished it today.
David Bear: Yeah, up the hill. Yeah, they did.
Jim Lange: They climbed up Yosemite without ropes.
David Bear: El Capitan.
Jim Lange: Yeah. What a stupid thing to do! But anyway, they survived. That’s not Roy’s style. In fact, I’d say he’s much more of a belt and suspenders guy.
Roy Williams: Yep.
Jim Lange: Very frankly, I’m probably more comfortable with three-and-a-half, maybe four. Four is pushing it. John Bogle actually said four. And by the way, one thing that I will add, whether it’s three or three-and-a-half or four, I do think how old you are and how many years you are likely to live has an impact.
Roy Williams: Yeah, I agree with that.
Jim Lange: Yeah. Let’s take the two extremes. You’re 95 years old, and, you know, you go to the doctor and he says, “Geez, I’m sorry about that tumor. You’d better settle up your affairs.” You could certainly spend a lot more than 4%. On the other hand, if you’re 60 years old, and you meditate and you eat wheat grass and you visit your parents who are in their mid-nineties, who are in perfect health, then probably close to the 3% is probably a lot safer.
David Bear: Well, wheat grass is cheap.
Roy Williams: Yeah. But no, that’s a great point, because if someone’s retiring, and we see a lot of people retire between 55 and 60, you have to look at your point that the longer you have to live, the more variability you have and the more risk you have. So, I agree with that. Someone who’s in their seventies, I’m comfortable with 4%, or someone in their fifties or sixties, I’m not comfortable with it. I mean, that’s a very good point you’re bringing up.
Jim Lange: Okay. Do we have any more, David?
David Bear: We do. We have one more question, and this one is from Richard B. He says, “Target retirement funds gradually and automatically shift to a more conservative stock/bond ratio as one gets closer to retirement. However, if I retire at age 66, I still plan to be around for up to 30 more years.” He fits right into the line of conversation here. “I could lose a lot of potential stock market upside if I placed the majority of my retirement funds in conservative positions for several decades. What is your recommendation for the optimal stock/bond percentage split as one nears retirement?”
Jim Lange: Well, by the way, that sounds like two questions.
David Bear: Yeah.
Jim Lange: One, what about the, in effect, automatic ones that a lot more and more of the 401(k) plans are offering, and two, what is the ideal asset allocation? So, Roy, I’ll let you chime in on both of those, if that’s okay with you.
Roy Williams: Yeah, and my answer is: it depends. It depends how much pension, defined pension benefit plans, in terms of fixed income, you have coming in. It really depends. It’s really an individual situation. I really don’t give a blanket answer in terms of allocation and risk. If you have a couple like I described earlier, where they have pensions coming in of significant value, they don’t have to worry about the assets as much. They can take more risk. But I did almost a “Dear Abby” article for the Wall Street Journal during the financial crisis, and this couple was taking all the dividends and capital gains from their emerging markets and international funds, and they had about 15% of the money left over in the second quarter of ’09. My advice was: go back to work.
So, again, the allocation is key, and it really depends upon the structure of your income and where it’s coming from. If the majority of it is coming from defined benefit plans, that’s great. You can take more risk. The problem that I have with target plans is that they’re not looking at your individual goals and needs. I think they’re fine in the 401(k) marketplace, but once you’re retired, you really need to look at what your needs are and your goals are, and it also depends on how much money you have. If you don’t have a significant amount of money and can’t pay for the advice that’s needed, then I think it’s a very valuable tool. It’s better than making the mistakes that you’ll make on your own.
Jim Lange: I like that! Have them make the mistakes instead of you! I would agree with that and this is what I would add, and this is my own little bent on asset allocation and, frankly, it’s not original. It comes from my money manager, and, as listeners know, I am not a money manager. I’m more of a strategist, a guy who likes to optimize Social Security, Roth IRAs, safe withdrawal rates, taxes, Roth IRA conversions, etc. And then I work with both an active money manager and a passive money manager, who actually manage the money, and the passive money manager who I work with, his name is P.J. DiNuzzo. So, to give fair credit, this is really P.J.’s idea, and this is what he does in practice. What P.J. does is, he does what he calls the stack, or bucket, analysis. So, like Roy said, well, I always like to have a year of cash. Well, so does P.J., and P.J.’s thing is, you don’t just have one portfolio for your entire bag, or your entire portfolio. You don’t put everything in one bucket. You have different buckets.
The first bucket might be all cash, CDs, a bond ladder, etc. Money that you can count on so that no matter what happens to the market, you have some short-term money that you can go to. Then he might have still a very conservative bucket that might be some stocks, but again, mainly cash, CDs, etc. That might be, say, years two to four, two to five. Then he might have a more aggressive bucket for the longer run, theory being that if the market goes down, with that bucket you’re not touching it for a while anyway, and eventually it’ll go back up, and then maybe one or two very long-term buckets, including even, let’s call it, next generation or two generation money, which I might recommend be often put in a Roth IRA, and that money might be close to 100% stocks. So, I think you might end up looking at a well-diversified portfolio, but the bucket analysis is helpful, and, to Roy’s point, I think when he’s saying is, “Hey, if you have Social Security or a pension and, better yet, a pension that is guaranteed for husband’s and wife’s lives, then your short-term needs are,” to some extent in the example Roy gave, with the one client completely, but let’s say, to some extent, “already provided for.” So, the client could afford to have more money in the long-term buckets, which will both keep him safe because he has the short-term money available, and in the long-term, will probably enjoy greater growth due to longer periods of time in the market. And I don’t know if you ever think of it like that, Roy…
Roy Williams: Oh yeah, we use buckets all the time.
Jim Lange: Oh, you do?
Roy Williams: it does make sense. We try to get people to think of it as buckets for emergency reserves to short-term money, wedding money. Buckets is a great tool to conceptually look at what you’re trying to accomplish. So, I think it’s a great approach to use a bucket approach. And it simplifies it where most individuals can relate to it because they can see, okay, this part goes here, this part goes there. So, I think it’s a great tool that people can use.
Jim Lange: Well, to be fair, it simplifies it for the client. For the advisor, it’s actually more work, but I know you do a huge amount of internal work for your clients. You’ve told me about your procedures and what you do, and I’m kind of in awe of how much work and how you really hand hold, and it doesn’t surprise me at all that you have these, let’s call it, multiple buckets, because I know that that’s more work for the advisor.
Roy Williams: Oh, without a question, because now you’re managing different portfolios.
Jim Lange: Right, and it’s smart to have when you integrate, and I know that you do this, what’s going on in their lives to the buckets to the investments. So, for example, the Roth IRA…and I think in all the years, and I’ve been responsible for hundreds of millions, maybe billions, of dollars of Roth IRA conversions, I can only think of maybe one or two circumstances where people actually spent it. So, if the Roth is ultimately most likely going to be used for the next two generations, that can be a long-term bucket. It can be invested for long-term growth.
Roy Williams: Yeah, and I agree with you. The only reason that people…you know, we have an unfortunate situation for the client that has a lot of medical bills, and we’re going to convert a significant amount of retirement money to Roths, because it’s a great tool, and could it be that he’ll need the money? Most likely, he won’t because his longevity isn’t expected to be many, many years, but it’ll be a great tool. The legacy, which you’ve taught me a lot of things about the Roth, it’s a great legacy for the family going forward to inherit.
Jim Lange: Okay. Do we have any more questions, David, or should we go back to the book?
David Bear: Well, we have to have another commercial break here in a few minutes, but actually, there’s one other question. Maybe this is not an appropriate follow-up, but I’m wondering, in the introduction, which you didn’t hear, Roy, because you hadn’t come in yet, but we were talking about a quarter of today’s working people doubt they’ll ever achieve what other generations would call a comfortable retirement. Do you have any words for them?
Roy Williams: Keep working.
David Bear: Keep working. Yeah!
Roy Williams: Yeah, and it’s funny, you have no idea how many people I encourage to continue working, even though you may think they have enough money to retire on. In the book, I talk about putting a bucket list together of trips.
David Bear: Umm-hmm.
Roy Williams: We have a client going to the Galapagos Islands. It’s a $30,000 trip. And again, by working part-time, first off, it’s healthy, depending upon your age. We have clients that work into their eighties part-time and love it. We have a client, 83, working at Home Depot two days a week and loves it, and that pin money (anybody over 50 understands what pin money is) is extra money they can use to buy wine. They can go on trips. They can go out to dinners. They can gift it to the kids. So, it’s fantastic.David Bear: Right.
Jim Lange: Let’s talk about one of the things that I loved about your book, Roy, and by the way, the book we’re talking about is Only Retire Once: How to Avoid the Nine Deadly Mistakes of Retirement. So, you have this 30-year veteran, Roy, writing this book, and he gives some advice that people don’t necessarily even want to hear. So, let’s say that that guy is shopping for a financial advisor, and he talks to Roy and Roy says, “Ahhh, keep working.” Then he goes to the other guy and the other guy says, “Oh no! We’ll sell you an annuity! You can retire tomorrow! Everything’s going to be great!” He might be tempted to go to the annuity guy and pass up a really fine financial advisor. So, some of the advice that Roy gives, both in person in his practice and in his book, isn’t necessarily the best advice for getting clients. And Roy, my favorite piece of advice, and this is a little bit, let’s say, combining life experiences and money, is you talk about what happens when somebody is in a marriage where they’re not really thrilled, and they’re thinking about divorce, and you gave some advice for people like that, so I thought I would just let you do that because I just thought that that was so unique to find in a financial book. I love to see that kind of perspective from a 30-year veteran, who’s seen it all, in a book. So, can you tell our audience what your advice is for somebody who’s really not so thrilled with their marriage, and let’s say that there’s a medium income and asset level, not broke but not stinking rich either.
Roy Williams: Yeah. I’ve had a lot of clients say, “Okay, I want to leave my spouse. I’m not happy.” And my advice to them is that if you’re going to start dating somebody else, start dating your spouse again. Get to know each other. The famous Pina Colada song where they’re both looking for the same thing, and in a lot of cases, they are. So, our advice is to start dating each other and work on the marriage before giving up on the marriage after many, many years. We have kids, we have busy lives, and then we forget how to date each other, and we’ve had many clients reconnect and continue to have great marriages. I’ll never forget what a client said one time: “I looked at it when the kids are out of the house. I can do two things: I can start dating my wife, or I could get divorced and start dating somebody else.” And he said this in front of his wife, “I chose to start dating my wife.” And they have a great marriage, and it’s a great situation.
Jim Lange: Well, I think that that’s really good advice, and I’ll let you do the psychological part. But I’ll just go to the financial part. So, let’s just say, for discussion’s sake, there’s a million dollars involved (to pick a nice round number), and let’s say it’s a long-term marriage, and let’s assume you’re both retired. A million dollars isn’t a great retirement, but you can certainly get by, particularly if there’s a pension or Social Security, and now you get divorced. Now, let’s even assume that the…let’s keep it simple and say each spouse now gets $500,000, but now you need two residences. Vacations, basically, the costs are essentially doubling because you each need your own room. All these expenses that you are saving by being married (and being married was originally an economic arrangement) are substantial. So, this is what happens in reality: you end up in a stinky house, seeing your kids and all kinds of damage that you’re doing to your kids by getting divorced, you see your kids in your ratty apartment and you can’t take them out to a nice dinner because you don’t have enough money, and maybe you end up, you know, helping raise somebody else’s kids. So, I actually think there’s a lot of wisdom to that.
Roy Williams: And the truth of it is, you’re always married. Even if you’re divorced, you’re always married because, you bring up a great point, Jim, about having children. When you have children, when you go to family functions, you’re always married. So, you might as well stay married in a real sense versus having arguments about which set of parents are going to come this Christmas or Hanukkah or New Year’s, or when can we have the grandkids versus the other person having the grandkids.
David Bear: It’s complicated.
Roy Williams: It’s very complicated, and to live on half the money is…I’ve had single clients struggle with the cost of being a single person in retirement, and “What should I do? Do you know of a rich man?”, or “Do you know of a rich woman?” I said, “You don’t have to find somebody rich. Just find somebody your equal and you’ll have a lot better lifestyle than you do on your own.” So, yeah, that’s a great point.
David Bear: Well, let’s take a moment here and run our second commercial.
BREAK TWODavid Bear: Welcome back to the last few minutes of The Lange Money Hour with Jim Lange and Roy Williams.
Jim Lange: Who is the author of the book, Only Retire Once: How to Avoid the Nine Deadly Mistakes of Retirement, which I just think is a terrific book. It’s not terribly technical. I would say it is filled with as much wisdom as, let’s say, hard financial information. Unfortunately, we’re not going to be able to cover anywhere near all nine deadly mistakes, but Roy, one of the ones that I wanted to cover (because I think it’s really critical today) before we do end the show is chapter six, which is “Put aside enough money to cover healthcare.” And you say that the deadly mistake is underestimating healthcare costs. Can you tell us about how clients underestimate healthcare costs and what they should be thinking about in today’s environment, and also, with relatively recent legislation, with the Affordable Healthcare Act?
Roy Williams: Yeah. Healthcare is a challenging situation. I’ll give you an example: I’m in New Jersey, and Pennsylvania wouldn’t be much different in price. We have a client who, the company they worked for, a major corporation, did away with, after they retired and they’re 63, 64, they did away with retiree healthcare. The cost for them to provide healthcare, a better plan because they do have a couple of million dollars of assets, is $20,000 a year, plus co-pays and deductibles. $20,000 a year.
Jim Lange: All right, now, this isn’t long-term care. This is just plain old health…
Roy Williams: No, insurance. Now, other states, and they have another home, and where they have their other home, it was about $15,000 or $16,000. So, I don’t know about you, but that’s not really affordable healthcare. So, again, depending upon your income level, I experienced it recently with a family member, my stepmother, she took one of the lower level Medicare plans, and she was not allowed to leave the state of New Jersey for healthcare. Now, in Pennsylvania, University of Pennsylvania hospital, Jefferson and Pitt, they have some great hospitals in New York, obviously Sloan Kettering, she was not able to access those hospitals because she chose a lower-level plan. So, cheapest is not always best, but healthcare costs are significant. And when we look at healthcare costs, if someone has significant income, it’s a Medicare cost. It can be a few thousand dollars a year that you have to budget for.
So, between Medicare co-payments and not having things covered, I recently had an experience where I sprained my ankle and I needed Celebrex because I have a sensitive stomach, and the insurance company didn’t want to pay for it. So, I paid the $150, $160 out of pocket. So, when people budget for retirement, I always like to have them have a bucket of about $50,000, you know, back to your bucket strategy, for unexpected healthcare that’s not covered or premiums that can never be expected. So, I like having that bucket because that can be devastating. That client who retired five, six years ago from a major corporation, and now they have to pay $20,000 out of pocket? Talk about a budget crunch. It’s just devastating financially. Or another client that they’re not covering, and I ask this question, they have a major illness, but they can still live a good quality of life for a number of years, but they need this equipment. And luckily, the client can afford it. I ask the question, what happens to other individuals who can’t afford this piece of equipment? They go into hospice and die many years early because, again, a lot of that is not covered. So, you need to have emergency reserves and you either need to have enough assets for long-term care or have some type of insurance for long-term care.
Jim Lange: Right, so you’re self-insured. I’ll tell you what’s particularly devastating about the story you just told. When the guy retired, he said, “Okay. Part of the deal that was promised to me upon retirement is I get healthcare for the rest of my life and the rest of my wife’s life. So, therefore, I’m not going to leave any budget, other than maybe a little bit of a co-pay, for healthcare,” and then boom! He has to come up with an extra $20,000. So, let’s say if he lives twenty or thirty years, you’re talking about $400,000.
Roy Williams: Yeah, and the Medicare costs because that continues to increase. If you have significant income, it can be $3,000 or more a year for a couple, and that’s significant. That’s a nice cruise a couple can take for ten days.
Jim Lange: Yeah, and the other thing that I fear, and I don’t mean to get political here, but you see an aging population, you are seeing, with the Affordable Healthcare Act, more and more people being able to access healthcare, and I think what’s going to happen is it’s going to be harder and harder to see the doctors that you wanted to see, and I think that you’re going to see these concierge services pop up where you’re not going to just be paying regular insurance rates, but you’re actually going to be paying significant premiums to get even just reasonable healthcare. You’re not going to have to wait six months like in some of the socialized medicine companies to get your hip replacement, or whatever it might be. You want to call a doctor and you want the answer to your question. I think that that is going to be the direction of people that want good healthcare. So, even putting aside more money is probably very, very sound.
Roy Williams: And I experienced it myself, Jim, because I had major surgery, and everything’s great and I’m fine, but major surgery in June, and the doctor prescribed a certain medication that was $160 or $180 a month. The insurance company wanted me to take a lot higher risk medication because it was $20 a month, and it was a significantly higher risk to me by taking that medication. So, luckily, I’m able to afford the additional dollars, but a lot of people can’t, and their lives are compromised by it. So, it’s a struggle, and I think we may end up having where concierge medicine is becoming a bigger and bigger situation. It may be like Canada where we have a private pay system on top of what we can get on our own.
Jim Lange: Well, that’s what I suspect is going to happen. So, we only have a few more minutes, and it would not be a complete financial program, which, by the way, it certainly has not been because you can only cover so many things, and we’re talking here with Roy Williams, author of Only Retire Once: How to Avoid the Nine Deadly Mistakes of Retirement, which is a book that I recommend that you all get, and then if you subscribe to our e-mail, we will send you the link for the app on budgeting when it comes out. But again, the book is Only Retire Once: How to Avoid the Nine Deadly Mistakes of Retirement by Roy Williams, which you can get on Amazon. But I thought that we would at least mention inflation because you had alluded to some historical rates, and this is maybe particularly appropriate for people who are on a fixed pension. So, can you tell us about inflation and answer a question. This is a legitimate one. I don’t know the clear answer, but say somebody has a $30,000 a year fixed pension. Fixed, it’s never going to go up. How do you look at that if the person, say, is in their sixties, and will live into their eighties or nineties?
David Bear: Well, we have about thirty seconds.
Roy Williams: Yeah, I mean, I look at that, and twenty years from now, it’s going to be worth $12,000, $13,000, and we need to have enough assets to supplement, or they have to work part-time into retirement to supplement the inflation that’s going to happen. And inflation is real, even though we see numbers of the past two years, 1.7% with Social Security increases, but most of our clients that we see, it’s significantly higher than that, probably 3% to 4%.
David Bear: Well, on that note, we have to say thanks again to Roy Williams.
Roy Williams: Well, thank you again for having me.
David Bear: And you can reach him at his website, and this is the website, the same as the book, it is onlyretireonce.com. Thanks also to Alex Chaklose, our KQV in-studio producer, and Lange Financial Group program coordinator, Amanda Cassady-Schweinsberg. As always, you can hear an encore broadcast of the show at 9:05 this Sunday morning, here on KQV, and you can also access the audio archive of past programs, including written transcripts, on the Lange Financial Group website, www.paytaxeslater.com under ‘Radio Show.’ And finally, mark your calendar for Wednesday, February 4th at 7:05 for the next new edition of The Lange Money Hour.END
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James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.
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