115. What Could Happen if You Don't Prepare for Retirement

Hey, before we get started with today's episode I want to let you know that if you're planning for retirement or aren't sure where to start we have a helpful checklist for you. We put together a guide called, "Your Pre-Retirement Checklist" and have made it available for free on our website. This detailed checklist covers things pertaining to cash flow, social security, Medicare, asset allocation, and living a purposeful retirement. The link to download the checklist is listed in the episode description or you can go to wiserinvestor.com, scroll to the bottom, enter your email address, and then you'll have access to "Your Pre-Retirement Checklist". Thanks for listening.

Welcome to A Wiser Retirement Podcast where we believe the best financial advice should always be conflict-free. I'm your host Casey Smith with me are my co-hosts today Matthews Barnett and Brad Lyons. How are you guys doing? Hi Casey! How's it going?

So, we are back in COVID conditions because the AC in the office went out and it's like 145 degrees heat index or something like that. Bad timing for it. We're back doing a zoom podcast just like the old days in the comfort of our home with AC, hopefully.

Brad, I guess we'll get started. I mean obviously today the topic is how do we fix our retirement path if we haven't saved enough or if we haven't done enough for retirement. Before we kind of dive into that, you think about where the stock market is right now. A lot of people are starting to hit the panic button because they feel like they don't have enough time to make up with what's happening with the market selling off. I'm starting to get phone calls and proactive phone calls where on the other end they're saying, "Well, let's just go to cash and wait this out." You got to be really careful in doing that because the stock market looks ahead typically, what? Six months? Well, that's exactly the point. Yes, that it looks ahead. It's a futures discount marketplace. So, as the economy should it go into a recession or when it does and if when it comes out of a recession the stock market predicts that well in advance and if you wait until you get confirmation that we're either in a recession or out of a recession to invest money this is the timing problem that people have with trying to time their investments. It just never works. The only way to make the full amount of money that you're ever going to make in the stock market is to remain invested throughout the entire period. Why is that so hard to do? I've had two conversations with people that said, "Oh, we should be able to time the top of the market. We should be able to time when to get out and when to get back in. We're professional investors." Sometimes I'm just at a loss for words. If I could do that, I'd be doing it from Hawaii. I'd be doing it from the house. I'd be doing it on my yacht. I'd be doing it elsewhere. Essentially would just be free money. It's a fool's game or something like that. It's almost impossible and then if you do it if you do it at the top, what are you doing? You're taking capital gains and people complain about that. Nobody likes to pay the capital gains. So, it's a very difficult thing to do for lots of reasons not just the market but you also have the sociology of it as well trying to get in and out of the marketplace. The time to assess your risk tolerance is when you're starting out and not in the middle of, "Oh, I don't like this. My risk is now less than it was six months ago." No, your emotions are less. Emotionally you're thinking differently about it than you were six months ago but your risk tolerance shouldn't have changed, right? Right. Go ahead, Matthews. Yeah, I was saying everybody wants to take on more risk while the market's going up but like you said nothing actually changes in that risk tolerance just the fact that now emotions start getting in the way once they see it drop. Is that something that can be fixed? Can you change your emotional thoughts about it? I've had some really intense conversations with people and ultimately I'm not trying to be rude to them, but I look at it as you pay me to tell you the truth. You don't pay me to sugarcoat things and go, "Okay, we're going to go to cash." My stance is as long as I know that person is not in financially a bad situation where their jobs are still intact or their retirement's still intact then I'm going to stand firm on doing what I think the right thing is. If you want to change it, change it near the top but no one ever wants to do that. No one ever says, "Hey, this 60 stock-40 bond portfolio is doing really well. I think I'm going to lower my risk."

That's the irony of investing. The more we have the less risk we need to take. Absolutely! That's the irony of investing whereas investors think well the more you have the more risk you can take because you have so much money you can risk it, you know.

It's a crazy thought but these are the types of things that we counsel clients on all the time is how to view your money relative to your objective. The investments are a way to get from here to there. We talk about this and creating a financial path. It's more to it and you ask if people change their risk tolerance. I don't know. I don't think they do. I don't know that they can change their risk tolerance anymore than they can change how they view other aspects of life. You know, their politics, their friendships, their biases that they all come to the table with. It's our job to try and figure that out. That's why we spend so much time with our clients up front, right Casey? We have multiple meetings not just going over the financial plan but helping them to understand how all this is interrelated and how in the end it produces an efficacy of over 80 percent probability of success if we do all the things that are in the recommendations.

It's hard to talk to irrational people at times and they take it upon themselves, emotionally. They blame themselves. They say, "Oh, well the market dropped. I had a sense that this was going to happen and I should have reacted to it and I should have sold something." That's the problem. You can't invest based on your sense. I want to invest based on numbers and what the numbers say and what does the data say. The data says, honestly, you could probably be just the S&P 500 index fund and you'd probably be just fine. The reality is how you prepare for this volatility is that you have enough cash, you have enough cash buffer. For our retirees, we do that. We have enough cash buffer that we know we can get through this because we know this is going to happen. For people who are still working, we try to monitor their savings accounts and things of that nature but even then people just don't like losing. We live in a society where we all are supposed to be winners. No one loses. We all get a participation trophy and if we feel like a loser then we go and we see someone and they give us a pill that makes us feel like a winner. The reality is that to be successful in investing you have to take the droughts with the good times and this is going to be one of those droughts. But, you look back at the last 40 years. Man, it's been a good 40, 30, 20, really good last 10 years and you're going to give up some of that. More importantly, if you're still saving for retirement this is the time to go get the pizza delivery job and throw extra money into the market. Well, when people see their account balances go down because investment levels have gone down they think it's a flaw of investments. That investments are flawed because they can go down. That's really not the case. It's a feature of an investment product that it can go down because without going down it can't go up and after every down period it's like building momentum and getting ready for that next push upwards. So really it's not a flaw of investments. What's flawed in their minds is the timing of the decline in the stock market. What's interesting is some people have told me, "My money's now back to where it was two years ago or a year and a half ago and so I need to go to cash now." They don't think of it as investing. They think that they're at the casino and they put in 200 bucks and now it's worth 400 bucks but now they've been pulling the slot machine it's back to 200. I don't want to leave the casino with less than what I came in with so I just need to walk out. The odds are not in your favor with that kind of strategy for supporting yourself in old age. That's what it comes down to.

It doesn't help that the headlines are like that as well. I've seen multiple headlines talking about that, how you're positioning your portfolios from last year now, and with the availability of that everywhere around you while you're starting to freak out a little bit is not helpful for your emotions. Right, right. Yeah, I don't know. Every pullback in the market is unique. Each one's different from the other one. The most recent one was during COVID and it pulled back so quickly but it rebounded so quickly and we were distracted by this disease over here called coronavirus that people weren't quite as focused on it as they are now because right now it's kind of a drip and drop down, down, down, down, down, and they're feeling it every day. They're watching television. They're not distracted by other things. It's the same thing as before but there's different features of this one that make it unique and then people are paying a little bit more attention to this one so they're feeling it more. It's a pullback like any other that they survived just two years ago. It'll be interesting to see the headlines, how many headlines are market-related now versus COVID-related back then. That'd be interesting to see. I'm not sure how you pull that data but we can transition into our main topic. I think ultimately we want people to see the big picture and I will add that these are unique times because all this market volatility really started in the bond market because interest rates are being raised and the stock market is reacting to that as well as inflation. So, we're getting hit on the bond side, which is supposed to be the more secure side of our portfolio and we're also getting hit on the stock side at the same time. So, people are seeing bigger losses potentially than what they would be expecting because there's really no safe place to hide. You're going to have to ride it out. That makes it feel different too. Going back to that, if we think that we're going to have a situation where let's say we're talking to a person and they haven't saved enough this is a great opportunity to put some money in. It is. Step number one to having more money in the future, saving more money today. This is a great opportunity to get more money to work. You're buying more shares per dollar, which gives you a higher rate of return in the long term. A little dollar-cost averaging. Yeah, absolutely.

Number one, we see this quite a bit is carrying debt into retirement is such a bad thing to do. Think about this, if you have three thousand dollars in debt payments maybe that includes a mortgage maybe it doesn't. If it's not there in retirement and let's say you only have six thousand dollars of income that makes a huge difference percentage-wise. You can eliminate half that money going out. Actually, six thousand dollars a month may produce a pretty good retirement if you had nothing but your utility bills. It's number one on our list, if you're delayed in getting money put away for retirement is actually probably not to start saving right away. I would start with eliminating debt and that includes your home if that's possible. Eliminate credit card debt, auto loans, student loans. We want to eliminate debt as much as possible prior to retirement. Now, you may not be able to eliminate a loan but you might be able to refinance the loan possibly and stretch that payment out for 30 years and get the smallest payment and then you'd have the ability hopefully to get rid of all the other debt. I would argue you might be able to live off social security if you made enough money and paid in enough and if you were basically debt-free. So, people can email us. You can email us at education@wiserinvestor.com. We'll send you our debt elimination spreadsheet that we hand out to people when they need it. Basically, I'd use the snowball method and eliminate the debt. Matthews, you talk to people about that all the time. Yeah, I think some of this unfortunately goes back to financial literacy. We see it and they're trying to build that in schools, but at a younger age people start to build up debt pretty quickly out of school whether it be with student loans that can get pretty significant where you're paying those off for your entire working career. You start getting some income and you start charging it to those credit cards at 20% interest rates and that starts to snowball after a while. The main thing that you got to understand is you know what you're doing financially at an earlier age to try to establish those behaviors and not getting that debt so you can start investing for the future. Then, that also frees up cash long-term as you're able to pay down these mortgages aggressively so you don't go into retirement with that.

These credit card companies may be some of the most sophisticated marketers and advertisers that you'll see. They can convince people that it's actually good for them to take on debt and carry it forever. People become so accustomed to having this debt and having these payments that they can't see beyond what life may be like if it was eliminated. They're just so accustomed to it because they've just been so inundated with it with marketing and advertising for years and years. Then you add on top of that, I hear this over and over, "I carry debt so that my credit rating stays high." This is the greatest lie ever conceived by the financial services industry. I'm hearing it more and more and more. Yeah, it doesn't make sense. I mean Dave Ramsey has all kinds of content you can search on credit rating. I think I saw a quote by him recently that credit score has nothing to do with wealth.

We talk about this a lot in episodes 106 and 107 of our podcast series. We talk about creating a cash flow strategy for retirement. Then, specifically, in episode 107, Get Rid of Debt Before You Retire. That's an important one too if someone wants to dive deeper into this topic.

But yeah you are correct. Then, what happens is they talk to their friends. We tend to hang out with people just like us and everyone has debt and statistically that's not how you make money if we become wealthy. For the younger people who are listening, if you want to be wealthy you want to be the person on the other side. You want to be the one making the loan not the one taking the loan and it's hard for people to realize that. That's what they need to do. Financial education for young people is very important to try to avoid all this before they get you know our age and realize they have to back out of it.

All right so we got to get out of debt, we know that. Another one is work longer and hopefully, there's no health issues that prevents a person from doing that. But, ultimately, you stay in the workforce longer. Age 65 for retirement's probably not as normal as it once was and that's moving to 67 to 70. I've noticed a lot of people are working longer. Also, making more money. In this job market right now it's kind of hard not to be making more money based on the shortage of workers that we have out there. Sometimes labor-intensive too. So, it's not like some jobs that used to be manual labor type jobs. It's you know sometimes where they could be at home or be behind a desk and work in their 70s making the same amount of income but working a little bit less so that's kind of the transfer of the job market as well. Then, the extension of that is social security. If you work longer, you can delay your social security longer and from every year that you delay from 67 to 70, you're getting an eight percent increase plus the six percent inflation for this last year. That's a huge increase in payout for social security. If you can delay until 70 that makes it a lot easier.

Yes, and in your portfolio in good years you're experiencing additional compounded growth that can last for years and years and years out into retirement by just deferring current consumption out of the portfolio. Yeah, yeah. We're eliminating debt, we're working longer, we're delaying social security longer, and then ultimately it comes down to you got to put money away. If you've got all the debt eliminated then it becomes how much money can you put away and you've lost compounding at this point. So, where a young person in their 20s could save a dollar you're probably going to say five dollars. It's harder to save more for some. Now, for some people they've had high incomes and they just had bigger expenses for various reasons so now all of the sudden they have all this free cash flow and they can start parking away a lot of money and be very diligent about it. In that scenario, you probably could make a dent in it but ultimately it's enjoying the lifestyle that you do have and not trying to reach for more if you're short on retirement funds. Even if you're saving a dollar and you're getting a dollars worth of value in it in retirement it's still a good deal. I mean the whole point of this is that there are things that can be done even if you haven't taken a lot of time preparing for retirement, there's always ways to improve your circumstance. You can eliminate debt, save a few dollars, you can work a little longer, and defer withdrawals from the portfolio, and deferring social security. So, there's things that can be done. Even if it's just taking that dollar from today and putting it in the bank account. Yes, Casey, you're right. We lose compounding interest on it but nonetheless that dollar is sitting there waiting for you at some point in time in the future so it's a good thing to continue to save money right up to and even through retirement if you can. Yeah, absolutely.

Matthews, are you going to say something? Yeah, I was just saying I know we talk about savings, we haven't mentioned it. You do want to make sure when you're paying off those debts that you have enough savings as well because the last thing you want to do is pay down those debts and then something else occurs whether it be you know something with your health concerns, or car, HVAC at the house, and then you have to go dip into those retirement savings or go back into credit card debt. I know that's also something that we mention to every client is paying off the debts but also have enough emergency reserves to foresee those circumstances when they come up. Then, making sure you're trying to aggressively save for retirement in those retirement accounts. That's true and that falls along the lines of our financial planning philosophy. No stupid debt. Next thing is no 28% Amex cards. After that, do we have emergency savings built up? After that, do we have a path to get the mortgage paid off? Are we on track for retirement? Do we have college funding for our kids decided on? After that, we want to focus on opportunity money, saving beyond what our needs are for something bigger than ourselves. That falls along those lines. I think, ultimately, it's just understanding the situation that you're in and then being able to come to terms with that. I think so many people just aren't even willing to address the issues. They kind of put their head in the sand. If you're in your 40s and 50s, don't do that. Start addressing your exact financial situation and put a plan in place to get yourself in a better position.

Also, we're talking about being prepared for retirement, kind of to transition into our topic for the next quarter we're going to focus more on legacy planning. It's the same way for legacy planning. It's terrible to go into retirement but not have enough resources. It's also terrible to pass millions of dollars onto the next generation and have no plan in place. You haven't talked to kids about how to manage money and all that wealth is spent in one year or statistically, over the third generation, it's all gone. Even if there's a business passed on to the next generation.

I'm looking forward to that next podcast where we will kick that off and talk about legacy planning and really focus on ultra-high net worth topics but also kind of bring it back down to everyday people as we walk through different steps, The 7 Steps of Leaving a Financial Legacy. We got some great guests scheduled as well over the next quarter. Excited to bring Jordan back, our CPA, we're bringing in a couple of guest attorneys, and we have a local city council board member coming in to talk about teaching the next generation about finances. They're doing that in Marietta city schools now. This should be a good series! Unfortunately, for us, we have a big change in our podcast where we're losing Matthews. I guess Matthews this is your last podcast and we're sad about that, but we're also happy about your future. Matthews is no longer going to be with Wiser. He's transitioning into a firm down in Macon where he can be closer to his family. Matthews, obviously you got married recently and we all thought, "Oh okay, good. He's all stabilized and we can move forward." Then, he threw us a curveball but I totally get it, man. I think it'd be hard to raise children here and not have support. I don't have support right now but I did when they were little, which is when you need it the most. Right, yeah. It's tough. I've enjoyed all these podcasts as we transitioned learning all this over the last few years and enjoyed all my opportunities at Wiser and getting to know everybody and watch the firm grow. It's been great but like you mentioned just what's best for our family right now is to be closer to my family in Macon and then her family's in Valdosta and niece and nephew in Jacksonville so it's just better for us to move on down there. Over the next month as we transition still look forward to keeping in touch and as y'all continue to grow. His last day will be July 15th and he's continuing to meet with clients up until that period.

One of the ways that we created Wiser many years ago is to be a team effort and so when we lose someone we're sad but at the same time, it's not like we're a silo and you're only assigned one person. The team can easily pick up where if we were to lose a member or even if we add a member that new member can look at notes and history and be able to kind of jump right in on the different projects that we work on. We will miss you on the podcast and certainly in the office, but we wish you the best of luck to you and your new bride as you continue life in a little more hot environment. Hot and slower environment. And to your point cost of living. Man, the case shiller index shows Atlanta is the most overpriced housing market in the country right now. Yeah, it wasn't the best time with the highest prices around and interest rates doubling on me so that wasn't ideal either.

Next quarter, we'll be launching a whole new or next podcast launching a whole new series and we're looking forward to our guests as we cycle them through 7 Steps to Build a Financial Legacy. You've got this podcast for those who are listening. You have this podcast to download, The Pre-Retirement Checklist off the website and go to wiserinvestor.com. That'll disappear in the next few days. You get a few more chances to get your pre-takeoff checklist, which we had fun creating this one as well kind of an astronaut theme. I know that I've always enjoyed watching space travel, don't know I would do it myself but it is neat to see what they're doing these days on the rocket pads down in Florida. Guys, great conversation and I will see you next time Brad. I'll be here. Hopefully with the AC on in the office with our normal equipment. See you guys! See ya! Bye!

Thanks for listening to a Wiser Retirement Podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening that way you don't miss any new episodes. We would also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today head to wiserinvestor.com and reach out. We would love to hear from you. This episode was produced and edited by Lilton Moore.