Make It Last – Ep 46 – Three Ways To Run Out of Money in Retirement (and How To Avoid Them)
As you enter retirement, one of the biggest concerns is: will you have enough? Well, there are a few things that can happen that would threaten your ability to “make it last” through retirement. In this show, we’ll discuss three of them, and how to avoid the risk.
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.
For more information, visit Medina Law Group or Private Client Capital Group.
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Announcer: 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: Hey, everybody. Welcome back to Make It Last. I am your host, Victor Medina. I’m so happy that you’re joining us for this episode. I’m really excited to share this information with you. This week, we’re going to be talking about three ways that you might run out of money in retirement.
That’s right. I’m going to be teaching you three ways that you might run out of money in retirement. You might be thinking, “Well, why would I want to listen to this show?” Of course, you’re going to be listening so that you can avoid these three things that we’re talking about.
We’re going to go through that, and I’m going to share to you a quick personal story about a client that came on that I feel is really helpful for everyone else to listen to, a little bit about how that journey happened and, more importantly, what lessons you can take from it.
Now, I do want to start the show by giving a word of thanks to the number of people who have spread the news about the show. As you might know, in addition to the radio show that is broadcast on Saturday morning, we actually simulcast this as a podcast that you can subscribe to on iTunes, or on Spotify, or basically any device that does podcasts and shows like this.
We also simulcast it as a video broadcast if you go to the YouTube channel. If you go to YouTube and you search for Make It Last, you’ll find a channel with just the episodes of this show and, more recently, a video feed of the show so that you can see a little bit of my face, I suppose, while I’m recording it.
That’s grown recently, so we’ve had an opportunity really to see the listenership or the viewership of the show increase over the last couple of weeks. The numbers are coming back on that. That’s really thanks to you all. You all have put yourself in a position where you like the show and you’re sharing the show with other people.
We want to say thank you for that and, please, keep it going. I think the more people that hear about the show and hear the lessons from the show I think the better just because we’re spreading this education so far and wide.
I did say that I was going to be talking to you today about three ways that you might run out of money in retirement and really teaching you the lessons on how to avoid that. Before I get into the subject matter for that, I did want to share with you a story about a client that came on recently. In fact, it just happened this week.
It was something that I thought was good for everyone else to hear. I thought that their struggles were pretty common to people who are entering retirement, trying to review their choices about who an adviser might be and whether or not to listen to the new advice that they were getting because people are often in that struggle.
They don’t really understand how to make that decision. They’re relying on all of these external inputs to figure out whether or not the decision they’re making is the right decision or not. I want to tell you a story about a couple that I had met.
We’ve really been working with them for, jeez, we’re coming up on nine months now. I think probably a little bit more than that. They came to us initially for legal planning because they didn’t have their legal ducks in a row. They didn’t have an estate plan in place. They didn’t have any documents. If their documents were in place, they were dozens of years old.
What they wanted to do was really update their legal planning so that they could help protect their assets against the cost of long‑term care. The cost of long‑term care, as you know, could be devastating. It could be they’re, I don’t know, 10, 12 thousand dollars per month. They were a married couple. They were both in their 80s.
They were really worried that the health concerns of one of the people might, in fact, impact both of them, and both of their retirements, and how the quality of life would be if one of them would get sick. What they want to do is help protect that.
Now, as often happens, they started a conversation with me starting with the legal and then going into the financial because we could spend all of this time creating this fantastic castle to help protect their assets, but, if we didn’t fill it with the right things, it’s not really as valuable.
We started to have a conversation about their finances and the kind of investing they had done, the kind of things that they had put in place. What we learned was that they were not optimal. I guess that’s the easier way to set it up. They had somebody that put in bad things, bad investments. They had somebody that wasn’t optimizing their investment structure.
They took over some of their investing and they bought these stocks and held on to them, all within one industry, so I was in the position where I had to tell them a little bit about what was wrong with what they had and offer them a solution.
To complicate matters, the last advisor that they had worked with had sold them bad products. There’s no other way to put it. There are bad apples out there. There are a lot of bad apples out there. This particular bad apple really put in place something that we would never, ever, ever recommend.
We were talking about that, and you could see that the family, this couple, had become a little gun‑shy. As I said, they were in their mid‑80s. They were really worried about making a mistake this late in life. Not just in making a decision to come on board with us, but also in staying where they were at. They didn’t want that to be a mistake either, so it was hard.
It was hard for them to arrive at a decision that said, “We’re willing to change.” because what they essentially had to do was place their trust in the advice that I was giving, without a lot of external evidence for whether or not that’s the right thing.
As much as I could be talking about investment strategy, and I could be pulling up charts, and I could be throwing up all kinds of different numbers on there, at the end of the day, they don’t have the basis of figuring out whether or not that’s accurate.
They got to go not just with their gut, but these external inputs that might be coming along to try to figure out whether or not that’s the right thing to do. They don’t know the market with sufficient frontier or model portfolio theory, nor do they want to go and learn it. What are they’re going to rely on? We had a frank conversation this week about how somebody arrives at that.
I acknowledged that it is difficult to make that decision and know that you can be confident in that decision. One of the things that we talked about was the level of transparency that was in the interactions. Were they at point where they could feel confident that the transparency was very high? What are the fees? Where are the investments? What are the good? What is the bad?
That kind of thing so that nothing seems too good to be true, everything had just a little bit of dirt, and there was no question about what was involved in there. The level of transparency was so high that, in fact, everything had been disclosed.
We looked at that level of transparency and tried to figure out had I and had their prior people been transparent all the way through. Then they realized, “Well, jeez, you’ve told us every little thing that might possibly happen along the way so that there’s no question that went unanswered. There was no question that we asked that you avoided.”
That level of transparency both is affirmative to somebody what they’re offering, and it’s also reactive in the questions that are being asked and how they’re being answered. You look at that level of transparency.
I think the other thing really came down to how malleable was the advice of the professional…If they had put up a lot of resistance, did I switch gears on them and say, “Well, you don’t like that investment? We have another idea for you.” That would have highlighted to them, or to anybody, that the person was more interested in getting their business than doing the right thing.
If they were willing to trade their integrity so easily once they met resistance, it’s probably not somebody that’s on the up and up. They’re just looking for the business. We read, and reviewed, and compared it again how malleable was I in my advice? The truth [laughs] of the matter is, even if you ask my wife at home, I’m really not that malleable in my advice.
When it comes down to it, I have a belief. I got a take on something, and I think I know what’s best. If you are in agreement, let’s go. If you’re not, that’s great, but I’m not going to change what my belief is about what works.
I have applied my experience, skill, knowledge, all of these things, my analysis on it, my ability to think critically on it, and come up with something that I believe is the right advice. We do that generically across the board, what we believe, and then we do it specifically for a client.
When you set those things up in the transparency and the malleability, it is pretty good litmus test to try to figure out whether or not the person you’re working with is someone that you can trust in the long haul.
We look at all of these things about being a fiduciary and all of that fun staff. At the end of the day, looking at those other two items, I think it’s probably a good ninja trick to figuring that out.
Victor: I did want to share that story with you because I think it could help you in the future, especially as you’re approached with different people trying to offer you some solution on what you’re doing. There’s a sniff test and then there’s other things that you can do that help.
Anyway, when we come right back, I’m going to be talking about three ways that you can run out of money in retirement, a little fun take on it. Hopefully, not only will you learn those, but you’ll learn how to avoid them in the future. Stick with this. We’ll be right back on Make It Last.
Victor: Welcome back to Make It Last. We’re going to be talking today about three ways that you can run out of money in retirement. Every blog post out in the world, anything that you read, every article is going to tell you how you can “not run out of money in retirement.”
That’s clickbait, as they like to say. They want to get you to go ahead and click on it, and I’m going to do the opposite. I’m going to tell you three ways that you can run out of money in retirement. The idea here is not so much that you follow these things, but that you avoid them.
I think that there are three main areas to do it, as I’ve looked at. Three things, three land mines that you can step on that can really increase the risk that you will be running out of money in retirement. One of them’s very discreet, and it has to do with an event that you can’t control. That is, whether or not you will need long‑term care in the future.
Now, you don’t know that. The statistics are that one out of every four men, 25 percent of men, will need long‑term care sometime in their life. One out of every two women, 50 percent of women, will need long‑term care. 50 percent of women, they’re twice as likely.
Gentlemen, those of you listening to this show and those of you married to women, don’t celebrate. The reason why women need it twice as much as you do is, first, they’re the ones that are caring for you when you get sick. The second reason is you’re dead and they’re alone.
It’s basically the same in terms of the percentage, but more likely because women tend to outlive men, and women tend to be the caregiver of men when they need long‑term care. The question for me necessarily isn’t whether or not you’re going to need long‑term care 25 percent of a chance, or 50 percent chance, or anything like that.
I really focus on zero or 100. You are either going to need long‑term care or you’re not. The question then is how will you plan for that coin toss? Are you going to place your bet as though you are not going to need long term care?
In which case, if you do, you’ll be paying out a pocket, or are you going to place your bet on the fact that you might need long‑term care, but then not need it? There are compromises on both of those.
There are trade‑offs on both of them, but if you need long‑term care and you have not planned for it, this is a real way that you can run out of money in retirement. The cost of long‑term care brings, exponentially, the cost of your normal cash‑for‑living expenses higher.
We see that long‑term care can range…You can get a live‑in, you’re going to pay one to two thousand dollars per week on it. A thousand dollars per week, maybe somewhere between four and six thousand dollars per month on it.
You’re going to go to assisted living to have them take care of it? You’re going see somewhere about $5,500 in Central New Jersey just to walk in the door. This is not actually needing any real care. This is Tier 1 care. Basically, all it does is give you room and board and some activities.
You start to need care above that? You’re going to see numbers 8, 10, 12 thousand dollars per month. If you look at what your retirement cash‑flow needs have been to that point in time, you’re nowhere near that number. Failing to plan for long‑term care is a real way to run out of retirement.
How can you avoid that? There are a couple of different ways. You can take care of it with legal planning, or you can take care of it with financial planning, or both of them. The legal planning tends to fall into the realm of what we call pre‑crisis elder law planning or elder care planning.
What it does is help shelter your assets so that if you need long‑term care those assets are, in fact, preserved, those assets are protected. It can help supplement your care needs so that you can rely on other sources of pay for that care, like Medicate, VA, or other places.
That’s one way of doing it. It takes time, and it doesn’t really cover 100 percent of your assets. Things like IRAs and 401(k)s and 403(b)s, those are tax‑preferred assets. I just can’t go out and willy‑nilly protect them. You’re going to have to pay the taxes on them, and some people are unwilling to do that, so comes in the other end of the planning, essentially the financial planning portion.
Within the financial planning portion, you look at the traditional ways of protecting that, which include long‑term care insurance policies. Long‑term care insurance policies, they come in two different flavors of their own. Some of them have to do with premium‑based, which is a little bit like term life insurance.
What you do is you pay for the policy. If you never need it, none of the money that you put in ever comes back to you. You just sunk a cost going in there. If you do need it, you can rely on a policy. Those policies do tend to increase in cost over time. As you get older, they get more expensive, and so you want to be sure that you can budget for that.
The other flavor of it is what you call cash‑based or asset‑based long‑term care. What those are in form of a policy that has got cash value so that, if you don’t use that money, you have not sacrificed it against your retirement needs.
In other words, you can get it back over some course of time, or, if you don’t need it, either for retirement or long‑term care, you can leave it behind as a death benefit for your beneficiaries. That’s another way of covering the long‑term care with insurance. There are some other investment products that you can use along the way.
You can use an annuity. That’s an income annuity that has a doubler on it, so you get twice as much money for some limited time when you have the annuity. That’s a different way of covering your long‑term care costs with financial products, but we’re going to want to care of the long‑term care component.
Again, it’s a matter of trying to figure out where you’re going to place your bet on your need for long‑term care. I tend to think that it’s better to plan like you’re going to need it, then, by chance, not need it than the other way around. If you’ve done smart planning on that, you really haven’t sacrificed anything to what you can use in the future.
If you plan to need long‑term care and you don’t, but you’ve used an asset‑based long‑term care insurance policy or if you’ve used legal planning that helps return those assets to you if you need them, we really haven’t wasted a lot, right? We can get that money back when we need it.
We’re coming up on a commercial break in a few minutes and so I’ve got to stretch the other two ways that you can run out of retirement over the break towards the end of it. Let me start to introduce this concept. One of the ways that you can run out of retirement is by not provided a guaranteed floor for your necessary expenses.
A lot of us will rely on Social Security as one of the sources of income that’s guaranteed. Social Security will be there, and it will be there, probably with some small cost‑of‑living adjustment over the course of our life. The idea is that that money we can rely on being deposited every month from now until the rest of our lives.
For most people, that alone will not cover what their retirement necessary expenses are. It’s going to need something more than that. The question becomes, how do we fund those additional needs? Where do we get the money from?
You have a couple of different choices. We can go ahead and pull it from retirement savings, or we can create the guaranteed need.
Victor: I tend to believe that you need to create the guaranteed need on a flooring basis. When we come back from the break, I’m going to explain why. It has something to do with the concept called sequence of returns.
If you’ve never heard about it, this is an important time to hear about it because it can impact your retirement in a way that can absolutely devastate whether or not you have enough money to make it through retirement. It really puts it in risk. Stick with us. We’ll be back on Make It Last.
Victor: Welcome back to Make It Last. We’ve been talking about three ways that you might run out of money in retirement and, more importantly, how to avoid them. The first one we talked about was not planning for long‑term care. Long‑term care expenses can devastate it.
The other one that we just went into the commercial break on was this concept of sequence of returns and not creating a floor for your necessary expenses. Why is that? Why is it so important?
The concept of sequence of returns says the following, “At any point in time you may need to pull money from your retirement savings in order to make it through retirement, to augment or supplement your income needs.” If you are pulling that money at a time in which the market is on a downhill slide, all of the math suggests that it is nearly impossible to make that up in the future.”
In other words, you came out of the market at the low end. Because you came out of the market to meet your cash flow needs, it would be very difficult to come back up again and ride the rollercoaster to its height. This concept of sequence returns is a math concept that is an unpredictable element of what is happening in the future.
You really won’t know what the market’s going to be doing at any point in time. You cannot point to a period of time and say, “That, five years from now, I know that the market will be at X or will be at Y.” No way of knowing that. We cannot predict it. Because we cannot predict it, we have to plan around it.
One of the ways that we plan around it is by making sure that we have created a floor of guaranteed income for those needs. You can do it by a form of a bond ladder. The way that I like to do it is with an annuity.
The reason why we like annuities in this context is because they allow us the guarantee of having that floor where that money will be paid into the account from now until the rest of our lives, all the way through.
Annuities have different flavors. This is not the show to go into all of the different flavors of it. The ones that I prefer ‑‑ and this one’s going to dispel one of the misconceptions about them ‑‑ the ones that I recommend are the ones that have the balance of the cash value going to your beneficiaries when you die.
A misconception is that if you buy one of these annuities, you will lose the money if you die early with what you invested in there. That is a flavor of a kind of annuity, but not the one that we like. The one that we like really focuses on making sure that what you take out of the annuity in terms of cash value is deducted.
If you die early, the balance of that goes to your beneficiaries. If you outlive it, then you have shifted the risk of your longevity over to the insurance company. By the way, they’re in the business of doing that. They figure it out that some people are going to die early, some people are going to die late.
They can go ahead and manage that with what are called mortality credits, which is basically, the ability to shift the money from the people that die early to the people that keep living on.
One of the ways to create this floor of retirement income is to use this annuity to add to your Social Security so that, when you’re looking at your necessary expenses, you’re able to meet them in a way that knows exactly how much is going to be coming in.
When you do that, you avoid sequence of returns because you don’t have to pull out that money to be on a necessary basis at that time. You can be judicious about when you take money out versus when you don’t. If there’s a period of time where the market’s not doing well, your basic needs are being covered, and therefore, you don’t have to take anything out if you don’t want to.
You can close off taking out of the retirement for your discretionary expenses because your necessary expenses are being met by these guaranteed income sources. That’s very powerful. It allows you to ride the rollercoaster through the downside, and then start to take money back out when the market has turned, and that’s very important. That’s very important.
The third way that you can run out of money in retirement is to not plan for inflation. This is a very necessary cost. As you know, the cost of goods today is far more expensive than it was 10 or 20 years ago.
If you’re entering retirement in your mid‑60s, you might have a retirement that’s 20, 25 years long. Some of you can’t imagine living to 90, but you know what? It’s going to happen. Some of you will live beyond 90.
The question then becomes how do we budget for that? If all we do is create guaranteed income in a way that’s flat for those 25 years, it’s going to be difficult. It’s going to be difficult for us to make it through all the way to retirement, because just the cost of stuff is going to get too expensive.
We’re not going to be able to buy the good ramen noodles. We’re going to have to buy the generic store brand because the good ones are too expensive, even though we could have afforded them when we started our retirement.
How do you mitigate against the cost of inflation? One of the things that you have to do is take some risk by investing some money for the long haul. This is not money that you’re going to need in the short term. You’ve got to be clear about this. We’re not investing this money for the purpose of using it in the short term. We’re actually investing it for needing it in the long term.
The horizon of the need is going to drive when and how we’re going to use this money and what kind of investments we’re going to be in. This is part of a strategy in retirement called bucketing. Within the bucketing strategy, you have a short‑term, mid‑term, and a long‑term bucket, but really what you’re doing is age banding time horizons.
You’re using some strategy to say that, “I’m earmarking this for a particular purpose,” and that purpose happens to be out in the future, down the road. You’re going to need to do that for two reasons in terms of the strategy. One is, as I’ve talked about, the inflation.
The other reason is that the investments themselves are going to take some time for them to work out to your advantage. In other words, you can’t take a long‑term investing strategy and apply it to a short‑term need. You run exactly that risk of the sequence of returns and pulling it out.
If we’re segmenting or bucketing our money across our different needs, taking a percentage of it and pushing it off into the future, and knowing that that is being earmarked for a need that I might have 10, 15, 20 years down the road, allows us to now hedge against inflation because we will give that time to do what the math suggests it’s going to do.
Historically, the markets have returned money over a long haul. We just need the right period of time in order to permit it to do it. Can’t be betting on that in the short term. We’re going to need that in the long term. We’re going to need that over the course of 10 or more years.
If you don’t plan to have investments that allow you to hedge for inflation, you’ll run out of retirement money. Not because the guaranteed income will ever go away. If you did strategy two, you’ve got that in there.
It’s because that guaranteed income isn’t enough to meet what your needs are, so you’re going to have to draw more and more on your retirement. Because you’re drawing more and without it growing, you run out of money at the end. That’s really what we’re trying to avoid.
Those three strategies are the ones that we’re hoping to have you absolutely sidestep in the future. We don’t want these long‑term care costs to devastate your retirement and threaten it. We don’t want your sequence of returns risk to do that. We don’t want a failure to plan for inflation to really risk your retirement.
Anytime that you’re focusing on what your retirement needs are going to be, you need to care for those strategies if what you want to do is make it all the way through retirement and possibly leave something behind for the next generation.
I hope you’ve enjoyed the topic for today. We’d love to hear your feedback. If you want to hear more of this stuff, you can send an email to email@example.com and let us know what you’re thinking.
You can always email me at the firm, if you’d like to do that more directly. Absolutely fine. I’m excited about what’s coming up in the future. We’ve got a few guests coming on. One of them is going to be an individual that helps capture your stories, and this is an invaluable asset.
We worry about money, but who we are and capturing the essence of that by the stories that we tell is really a valuable thing to do. I’m excited to welcome that guest on. We’re also going to have a guest in the future that is running with an assisted living facility, and really innovating on the kinds of activities that they are doing, and how.
In fact, they are promoting the involvement of people with dementia, and really increasing their quality of life. I’m really excited about that as well. If you liked this show and you want to share that information, remember, we’re here every Saturday morning at 7:30 AM, but we’re also available online on iTunes and a podcast app on Android.
You just do any search on any of these. We’re on Spotify. You search for Make It Last Radio, you’ll see the blue box with our logo, and you can subscribe. Spotify’s a great way to do it. It’s a free service.
You can go ahead and get on there and see not only this episode, but all the prior 40‑some‑odd episodes, and go back. Every one of them teaching you something new about what’s going on, and have that opportunity to listen to those at any time.
Again, if you’d love to see my smiling face, you can go to our YouTube channel and watch the live broadcast of the show. Watch that on YouTube anytime you want.
Victor: I want to thank everybody for joining us today. We will be back next Saturday on Make It Last, where we help you keep your legal ducks in a row and your financial nest egg secure. Catch you next time.
Announcer: 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.
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