Michael Reese: Retiring Well

Transcript

[0:00:14] Charlie Hoehn: You’re listening to Author Hour, enlightening conversations about books with the authors who wrote them. I’m Charlie Hoehn. Today’s episode is with Michael Reese, author of Retiring Well. You’ve worked hard, you’ve lived within your means and you’ve invested wisely and now you’re ready for retirement. But, you’re still concerned about events beyond your control. If your portfolio gets wiped out by a downturn in the market or whittled away by healthcare expenses, all your careful planning could fall apart. The good news is that you can protect yourself. Michael is the president and founding principle of centennial wealth advisors. In his 20 plus years in the financial industry, he’s trained more than a thousand financial advisers in retirement planning strategies. As the host of the TV show, Retiring Well, he’s also become one of America’s most recognized retirement planning professionals. In this episode, you’ll learn how to achieve financial stability regardless of what the market does. The retirement you deserve is within your reach and with solid time tested advice, Michael will help you avoid common pitfalls so that you can claim a secure future. Now, here is our conversation with Michael Reese.

[0:02:01] Michael Reese: Christmas of 2002 happened to be probably the worst day of my professional life. And at the same time, it may very well have been the best day for all the families that we serve today. Christmas of 2002, that’s when I had to tell my parents how I managed to lose roughly half of their life savings over the first three years of their retirement. You see, my dad had retired back in January of 2000, this was right after the 90s, when the markets are roaring, I had started in the financial industry back in the mid-90s and when I started, you know, markets were roaring, we were trained stocks for the long run, all you need is a diversified portfolio of market securities and gosh, if you’re helping retirees, just make sure you have a lot of dividend paid stocks and everything will be fine. When my father, when my parents retired, January of 2000, following what I had been taught, I put them in a diversified portfolio but it was mostly stocks and what happened, really, shortly thereafter as the market started to go south, you might remember a plane flew in to a building in New York City, something no one expected and the economy was a mess and by the time my father – by the time we were three years in the retirement, like a lot of people, my parents, half their money was gone. I mean, my dad worked 30 years. 30 years he saved money, it only took me three years to lose half of it. I know that, you know, I don’t think my parents blamed me, in fact, I’m sure they didn’t because all their friends were experiencing the same thing but I sure blamed myself and I remember talking to my parents about reviewing their portfolios, reviewing how half their money was gone and my mom was in a state of confusion, looked at me and she said, “I don’t understand, what does that mean?” I told her, because they were living off the income from this portfolio and I told her, I said, “Mom, you know that income you’ve been getting from your portfolio there, that you’ve been using to spend to go travel and do the things you wanted to do in retirement? Well, turns out, you got to cut that money in half.” You know, shock in her eye, she looked at me, she’s like, “Well but, for how long?” I had to look my mother in the eyes and tell her. “Mom, for the rest of your life.” I got to tell you, I felt about an inch tall at that point and you know, from my parents by the way, they were very fortunate, they’re one of the very fortunate few because you know, my dad had a large pension, social security and he had just received, at that point, it turned out that his company, when he retired, made a financial mistake at paying him his severance package, turned out that they owed him money. He actually recently collected a check and he was able to pay off the house. The mortgage payment that they just erased, happened to match up pretty closely with the amount of money that they lost income wise from their portfolio. It turned out they were okay but still, I mean, I felt horrible and I went to my manager, I said, his name was John, I said, “John. You know, help me out here, what could I have done differently, what did I do wrong? How did I fail my parents? What could I have done better?” I’ll never forget the answer he gave me, he just looked me and said, “Mike, nothing. There’s nothing you could have done differently, you did everything exactly right, it’s just how things go.” I said, “Come on, there’s got to be a better answer.” He said, “No, just your parents need to focus on the long term.” I said, “Long term? What are you talking about? They need money now, they don’t need money 15 years from now, they need it now and you’re telling me they need to focus long term? Exactly, how does that work?” “Well, it’s just how it is.” That was the moment that was my lowest point that’s also the moment that I swore that this was not going to happen to the people on my watch, I am never ever going to have this happen to my clients again and that’s when I really began my search for a better way to manage money for retirement. By the time 2008 rolled around, you know, many years later at that point, we did find that better way and that stage, when people were losing 50% again, when the market was down 50%, people are losing half their money left and right again, because Wall Street never learns. My parents, my clients lost less than 5%, market’s down 50, clients losing less than five. Why? Because I found that better way and if it weren’t for that painful experience of having a conversation with my parents, I never would have changed, I never would have made that the effort to find that better way.

[0:07:30] Charlie Hoehn: That’s remarkable. Wow. What was the change that you made? How did you get it right?

[0:07:36] Michael Reese: Well that took a lot of years. You know, one of the key components and I do talk about this in the book, is that – everybody focuses in the financial industry, you know, how do you get better returns? You know, Charlie, that’s what they’re always focused on, how do you improve your rate of return? What they tend to ignore is that the volatility of returns is equally, if not more important and when I use that word volatility, that might be a word that not everyone’s familiar with, it simply means, what kind of range of returns might you experience over time. Let’s say your portfolio averages, I don’t know, call it 7% a year. Well, over a 10 or 20 year period, what is your best year, you’re not going to get 7% every year. In a really good year, how much money do you make? Well gosh, you might make 20, 30% which is great. What about a bad year? What does that look like? You might lose 20 or 30%. Not so great. What I have learned through experience over the years is that success in retirement, especially when you’re taking money out of a portfolio. Success happens in a magic 20% zone which is found between plus 15 and minus five. Meaning, if you’re averaging about 7% a year, if your best year is maybe 15% and your worst year though is minus five, odds are good that things are really going to work out well for you. And the problem with a portfolio like that quite frankly is it’s very boring, it’s not very exciting, there’s nothing for the financial press to talk about for a portfolio like that, there’s no big great story for Wall Street to sell you on in that portfolio but at the end of the day, that’s the key, I think I learned that when I saw a bit of research. Maybe you’ve seen this Charlie, where you have, all of these companies tell you, you’ve got to stay fully invested, look how much money you make if you stay fully invested, if you miss the 10 best days in the market, man, look how much your earning’s aren’t nearly as good and boy, if you miss the best 20 days or the best 30 days, boy, you are making a pittance compared to just staying invested. Well, I then saw a great study that said, well, that’s great but what if you missed the 10 worst days? Or the 20 worst days or the 30 worst days and you know what that study shows? It shows very clearly that it is far more important to miss the worst days than it is to miss the best days. In other words, the impact of missing those bad days meant that far more impactful than missing the best and I find it’s interesting in Wall Street, they really want you to focus on one side of that, not the other. When I saw that study, I really started researching and I really did a lot of, you know, I’m kind of a math nerd. I started doing a lot of research, started looking at different ways to develop portfolios and that’s what I learned, you know these low volatility, these boring portfolios win. Boring wins. Nowadays, I like to say “Gosh, you know, it’s – our job is to develop boring portfolios s that you can live an exciting life.”

[0:11:35] Charlie Hoehn: I like that, that is a great slogan. Boring wins, okay, that makes a ton of sense. Just to restate, it’s more important to miss the worst days, in other words, to minimize the downside, the heaviest downside than it is to chase after potentially the best days.

[0:11:55] Michael Reese: Yeah, losing definitely hurts you more than gains help you. You know, I heard one of my clients said this to me one time, after 2008. He only lost I think two or three percent and his friends had just got killed, I mean, they lost 50, 60%. I remember him, what he said to me, he said, “You know, I don’t have to go out there and try to earn some really big rate of return because I didn’t lose any money. It’s a lot easier to come back from two or 3% down than it is 50.” That was I thought, very insightful because if you don’t lose money, you don’t have to make some killer return to begin with.

[0:12:33] Charlie Hoehn: It’s very true. Let’s talk about how your book Retiring Well is structured? You have four sections it looks like, you have your investment plan followed by tax planning, followed by healthcare plan and then your estate/legacy planned. Let’s start with the investment plan, did we cover the big idea there or is there other stuff that you want to dig in to?

[0:13:02] Michael Reese: I think we hit the main topic. I’ve got a great story in there about going back to the future in the Delorean that you might recall that Doc Brown built. What it does is it just shows how, it illustrates how you can apply this boring philosophy and you can earn the same rate of return as an exciting stock market ride and yet, even though you get the same rate of return, the boring philosophy provides significantly more money overtime and that’s something that people do miss a lot. Charlie, people think that you know, if you average 7% a year in portfolio number one and you average 7% a year in portfolio number two, that when all is said and done, you pretty much end up at the same place, yet, what we learn is, through looking at history, and actual real returns, we learn that one portfolio can be wildly different from another, simply based upon, is it more consistent? Is it more boring? Or is it a little e bit more of a roller coaster ride? In other words, if you’re going to average 10% a year to use some simple math, it’s better to have a range of plus 30 to minus 10 versus a range of plus 60 to minus 40 or something like that. Always better to be consistent.

[0:14:41] Charlie Hoehn: Out of curiosity, which portfolio, I see you talk about Roth IRAs in your book, which portfolio do you tend to lean to right now, what’s a good example of one that you like?

[0:14:55] Michael Reese: See, that’s a really good question. There is, one of the biggest mistakes that people have made when it comes to investing is that technology has brought us so many additional opportunities, yet, I find that people, often times don’t take advantage of them. Let me give you an example of what I’m talking about. Most people, they build their portfolios through IRAs and 401(k)s and if you look at say the typical 401(k) at a typical company, they give you a menu of investment options and usually they’re mutual funds of some type and they’re typically invested in either stocks or bonds. Sometimes you get US positions, sometimes international but stocks and bonds. That’s basically what you have to pick from, in various ratios. Then you go to retire and that’s what you’re familiar with so you just keep doing the same thing. Well, we call those market based accounts because they’re priced to the market every day. What a lot of people miss out on though is that, thanks again to technology and all kinds of advances, you know, you can invest in a lot of things other than just stocks and bonds. I mean, you can invest in gold and real estate. You can invest in things like reinsurance risk, limited partnerships, you can invest at different annuities for example. There are so many places a person can put their money that if you use more than just stocks and bonds, you can create a portfolio that maintains returns but does so with much more consistency. If you’re asking me where we’re putting people’s money these days, we are taking the concept of diversification but we’re making it reality in a way that just stocks and bonds alone can never do. I hope I said that reasonably clearly.

[0:16:55] Charlie Hoehn: Yeah, you have in section one about creating your retirement income, can you elaborate on that? It’s not retirement investment or savings, it’s your retirement income.

[0:17:11] Michael Reese: That’s a great question. I like to say very frequently, in retirement, your income equals your lifestyle. Your lifestyle is 100% dependent upon the income flows that you have coming in each and every month. In fact, over lunch today, we’re talking about this, what is the number one purpose of a portfolio? What’s the number one purpose of your money once you're retired? Well the answer is, the number one job of your money once you’ve retired is to deliver consistent stable inflation protected income. That’s the job. What I find very rare is imagine the couple who just retired. Their entire lives, they save, save, save, try to build up their retirement savings to appoint where it would support them in retirement. They come to visit me because they’re looking for advice and what the first things I ask them is. “You know, can you give me a copy of your written retirement income plan?” In other words, can you share with me a copy of your written plan to deliver income year in, year out, for the rest of your lives, index to inflation, whether the market cooperates or not. In other words, I don’t want you tightening your belt because the markets aren’t cooperating, that’s not a plan, that’s hope. What is your written income plan? Charlie, guess what percentage of people have a written retirement income plan?

[0:18:46] Charlie Hoehn: Less than 1%.

[0:18:48] Michael Reese: Yeah, exactly correct. I’m still waiting on the first one, well, I take it back, I’ve had a couple of retired engineers, there are always engineers come in and they’ve developed a spreadsheet and I love spreadsheets, I’m a big spreadsheet nerd and I love these guys. You know what they’re doing is they’re assuming in their spreadsheet that the market is going to earn the exact same rate of return every year. That’s not realistic. They’re trying, right? They’re doing their best but we need to do better than that.

[0:19:22] Charlie Hoehn: Let’s put it together for the listener then. What does a good income delivering plan, whether the market cooperates or not, what does it sound like, what would it read like? What would it say?

[0:19:36] Michael Reese: Well, you’re going to need to address three primary areas. In the book, I talk about this, I talk about some different examples but here’s the big take away. Three primary areas you want to look at, number one, you need to set your base income, you need to identify what amount of income do you want for the rest of your life where it’s coming in every month where you can sit back and say, “Hey, as long as I’ve got this coming in, I’m good.” Obviously, you have to index that to inflation, part one is, what I would call your base income. Part two is going to be the extras. The fun stuff, it’s like, “Okay, I’ve got this much money coming in every month, I’m good but I really would like to travel a little bit or I’d like to go on some cruises or you know, I’d like to take my children to Disney. I want to go to that golf school.” You know, whatever it is, there’s another amount of income that would be nice to have come in every year for the luxuries of life, right? That’s kind of the second part of having a plan. Protect your base and then plan for luxuries. Then of course the third part is emergencies and when I say emergencies, the biggest what if’s in the future. You know, what’s healthcare going to cost in the future? None of us know other than we all strongly suspect it’s going to be pretty darn expensive, right? It’s going to cost a lot but we don’t know what that looks like, I have a great example of this too that’s not healthcare related. I have had a couple, some very good clients of ours for many years and in 2008, both of their sons worked for General Motors, the auto industry. Now, if you remember, 2008, general motors by the way did go bankrupt, lot of questions as to whether you’d keep your job and they told me the story of how one day, their son called them and he worked as an engineer in the General Motors tech center it was called and one by one, the managers came in and they started calling every single employee in the office, alphabetically, A, B, C, last name starts with A and so on. They would tell that employee; you have job or you don’t. Over 90% of the people the fired that day, guys with 25 years of experience, out the door, my client’s last name start with W. Their son called them like all day long, this was going on and their son told me, I’m like, “Well gee, I almost hope I get fired, I don’t know that I even want to stay here after this.” Well, you know what the parents? The parents used to go to Florida every year for winter break and you know, to avoid the snow up to Northern Michigan, what they did was they said, “Mike, we’re not going this year,” because it turned out, both of their sons lost their jobs and for them, they said, “We want to, because of the planning we had done, they were able to do this, we just want to make sure that we have money available for our sons just in case it takes them a little longer to find a job in this kind of economic environment.” In other words, they want to support their kids if needed. That was important to them, well, it turned out they didn’t have to, both their sons, very sharp young men and they found new jobs pretty quickly but still, that’s a great example of maybe needing a pot of money sitting there somewhere that you can access just in case.

[0:23:11] Charlie Hoehn: Michael, one of my questions about this is, I suppose, I’ve spoken with a few retirement advisors on, and financial planners on Author Hour, one of my questions is always, you know, it sounds so simple but in reality, people have these emotional blocks with money or they have circumstances that they just feel overwhelmed by and money’s a painful thing for them to talk about. Maybe they’re a single mother who their income is tied directly to the time they spend at their job because they get paid hourly at a job. What do you say to people who just feel like, “I’m too close to retirement, there’s nothing that can be done to get me to the level that you’re talking about”?

[0:24:08] Michael Reese: Yeah, it’s very sad Charlie, that if you – I’m a big believer that we are facing a real challenging retirement landscape for the majority of Americans. They don’t save enough money, they tend to spend, they’re good at spending, not always good at saving and I think I saw somewhere that the average person over the age of 50 has available like $2,000 or something. Obviously, not enough to retire on and the one comment I would make is this. Two fold. One, you can’t change the past but you can always change the future. What I mean by that is, okay, you haven’t really saved money in the past. Start somewhere, you got to start somewhere. What if it’s 1% of your salary and then as you get raises, you bump it up a little bit. Anything helps. The second big thing I would share and this might even be more important. Getting out of debt is a big deal, I will tell you that of the hundreds and hundreds of families we served that are retired, those that have the greatest freedom are those that have a house that’s paid for. Those that have really worked hard at paying off their debt where very month, they’re paying their credit cards off in full. I know that may sound, you might say “Wow, that sounds great but I can’t possibly do that,” well, yeah, maybe you can’t possibly do that today but what you can do is focus your energy and effort and work towards that. You know, start somewhere, start with anything and get those debts paid off as well. I mean, the debts are the killers for a lot of folks in retirement.

[0:26:16] Charlie Hoehn: Author Hour is sponsored by Book in a Box. For anyone who has a great idea for a book but doesn’t have the time or patience to sit down and type it out, Book in a Box has created a new way to help you painlessly publish your book. Instead of sitting at a computer and typing for a year, hoping everything works out, Book in a Box takes you through a structured interview process that gets your ideas out of your head and into a book in just a few months. To learn more, head over to bookinabox.com and fill out the form at the bottom of the page. Don’t let another year go by where you put off writing your book. That brings me to the next point which is, what types of clients do you really like to work with? Is it clients that have already paid off their debt, are those the right clients that are for you and your services or do you like to work with people who are close to retirement, 20 years away?

[0:27:17] Michael Reese: Yeah, how that works, our firm is, we specialize in helping people who are either in retirement or nearing retirement. And the thing that – we are a true wealth management firm. You know, a lot of financial advisors like to say they’re wealth management but they’re really – they just invest money, we’re wealth management. What does that really mean? Four our clients, you know, we help them in a number of areas, for example, we help them with their investment planning and we help them with their income planning. Well, a lot of advisers do those two things. What else do we do while I talk about this in the book, we help you with your tax planning. What does that mean? It means we’re doing our tax returns for you. Every year Charlie, we sit down with our clients in May, June, July, those months right after tax season and we help them do tax planning, true tax planning. That’s not just putting the right numbers in the right boxes. It is things like, “Hey you’ve got a lot of this money in your IRA that represents your largest tax liability.” What are we doing each year to reduce the taxes on that IRA overtime? That’s an area of wealth management.

[0:28:30] Charlie Hoehn: Yeah, could you go into that? I’m curious.

[0:28:34] Michael Reese: Oh yeah, that’s a big issue these days because a lot of people – I mean I remember this is kind of interesting. You know Charlie 10 years ago, well maybe now it’s 15 years ago, I remember when people would come into our office they had pensions, they had social security and they had these retirement plans. And they could fully live off their pensions and social security. Their retirement plans were extra money and literarally, the question was, “What do we do with this?” And those were fun days. I remember if someone would come in the office and say, “What do you mean?” If they would tell me that they would need their retirement plans for income, I would almost shake my head and wonder if I should even accept them as a client and what a difference time makes, right? Because here we are today, it’s the exact opposite. Everybody needs their IRAs for income because pensions went away and so now, we have people retiring they’re on their social security and their retirement plan. If they have pensions they are pretty small. Generally speaking, one of the biggest lies that people have been told - actually one of the previous books that I’ve written is on this sole topic but one of the biggest lies that people have been told is that, “Hey you should put money in your retirement plan today and save taxes now when you are in this high tax brackets because when you’re retired, you’d be in the lower tax bracket and so then you could pull the money out and you’re in a lower tax bracket.” So save tax today when it’s high, pay tax later when it’s low. Well, there’s one tiny little problem with that argument and that tiny little problem Charlie is I’m still waiting to meet the first couple who’s getting ready to retire that wants to retire at a lower standard of living. Nobody wants to retire at a lower standard of living. They’ll just keep working before they do that. Now think about that for a minute, if you want to retire at the same standard of living, what does that tell you about the income you’re going to need? It needs to be about the same, right? And if your income is about the same, what does it tell you about the tax rates you’re going to pay? Probably going to be about the same and when are your highest earning years? When you’re in your 30s and 40s or when you’re in your 50s or 60s? Well probably in your later years so for most people, they are not retiring to a lower tax bracket. They are retiring to the same sometimes higher tax brackets. On top of that, by putting money in this traditional plans, you have essentially saved tax on the seed only to pay tax on the harvest. If you are the IRS this is exactly what you want people to do. You want them to pay tax on the highest amount of money possible. But the problem is, as an individual you want the opposite of the IRS. They are on the opposite side of the table. You want to save tax on the big dollar amount, pay tax on the smaller dollar amount. This is why Roth IRAs are so fantastic. Roth IRAs allow you – it’s after tax money goes in you are paying tax on the seed but all that growth is tax-free. All the big numbers later on are tax free. If you are fortunate enough to accumulate a million dollars in an IRA, a traditional 401(k) or IRA or 403(b), you’re looking at a million dollar income tax liability versus if you had that million dollars in a Roth IRA it’s all tax free. So one of the challenges that people have, they’ve saved so much money in these IRAs. And when I say IRA, 401(k)s, 403(b)s they’re all the same thing, all of that money is going to come out and it’s going to be taxed at their highest rate. Whatever their highest tax rate is, it’s going to be taxed that rate and here’s the ugly thing too. Not only do IRA distributions do you pay tax on those, when you pull money out of your IRA and you’re retired now that same distribution impacts how much tax you pay on your social security. Most people, I shouldn’t say most but a huge percentage of people are double taxed when they pull money out of their IRAs during retirement because they pull that money out and they pay tax on the distribution. So here you’ve got 300,000 in an IRA, you pull 10,000 for income, your taxed on that $10,000 but what they don’t tell you is that same $10,000 you pulled out is included in the calculation to figure out, “Well how much of your social security is taxable?” And guess what because you pulled that 10,000 out, you owe more tax in your social security too. So you get to pay tax twice on that $10,000 distribution. So nobody talks about that and a number of other issues like it’s the worst asset to leave a surviving spouse but I probably don’t have time to get into that.

[0:33:38] Charlie Hoehn: Why? I mean just a quick and dirty explanation, yeah.

[0:33:43] Michael Reese: Just very quickly, think about it. I am married to Becky, let’s imagine I die first. While we’re both alive and by the way it doesn’t who dies first, but while we are both alive, we file taxes as married filing jointly. These are the best tax brackets in the tax code. The minute one of us dies and we’ll use me as the example, never politically correct to say the wife dies first, right? But with me as the example, I die first, my wife goes from married, filing jointly. Which are the best tax brackets to filing single which are the worst tax brackets. So here’s a great idea and I say this very sarcastically, how about this: I am going to take my IRA that I’ve built up over the years to be a million dollars and I feel really good about it as already complaining about the taxes I was paying as I was pulling money out while we were both alive. What do you think the tax liability is going to be on my surviving spouse who just went from the best tax brackets to the worst? Every dollar that she’s going to pull out is just going to get slammed in taxes.

[0:34:57] Charlie Hoehn: Even with Roth?

[0:34:58] Michael Reese: Oh that’s the exception. See that’s the exception, Roth IRAs are the exception not the rule. When I say IRA I am talking about the 401(k), the 403(b), traditional IRAs, simple IRA, SEP IRAs, all of those pre-taxed accounts where we grow our money but when we pull our money out it’s taxed. Roth IRA is different, in fact in the book we talk about things called Roth conversions which is going from IRA status which is bad to Roth status which is good. Heck, if I leave a Roth IRA to my wife, let’s say I leave her a $1 million Roth IRA, it’s tax-free money to someone who just went into higher tax brackets. That is the perfect thing to do, that’s the smart thing to do. On the other hand, if I leave her a $1 million, same amount of money but it’s in a traditional IRA or a 401(k) or a 403(b), I’ve just left a fully taxable asset to someone who just went into higher tax brackets.

[0:36:01] Charlie Hoehn: Ooh yeah, double whammy.

[0:36:02] Michael Reese: Which is just dumb.

[0:36:04] Charlie Hoehn: Yeah that makes sense.

[0:36:06] Michael Reese: Right, it’s the opposite. So anyway, this is a big mistake that people make all the time. We do talk about that in the book, part of wealth management is estate planning and health care planning. You know we do all of these stuff for our clients and because we do all of these things, well unfortunately we cannot serve everybody. We cannot be all things to all people. We can only be all things to certain people. And typically those are people that are retired, nearing retirement and they have saved at least half a million or more in their retirement accounts because if they don’t have less than that unfortunately we can’t afford to do all of that stuff for them if you will.

[0:36:47] Charlie Hoehn: Fair enough. So if somebody is on the fence thinking about working with you and your firm, can you give them one tip from healthcare and from estate planning each that they need to know whether it’s a common mistake or the big thing they need to keep in mind?

[0:37:09] Michael Reese: Oh sure. So one on the healthcare side, one on the estate planning side, is that what you’re asking for?

[0:37:15] Charlie Hoehn: For both. So for healthcare and for estate planning.

[0:37:19] Michael Reese: Okay, healthcare, here’s something that nobody seems to be talking about that we find a lot of our clients really like. A lot of people aren’t aware like healthcare, one of the biggest questions out there is long term care. Long term care is something that affects a lot of us, the older we get the more likely it is to affect us. The cost of long term care we all know, it’s crazy expensive yet who’s excited about buying long term care insurance? Well, I don’t know anybody that jumps up and down and waves their hands and says, “Pick me, pick me,” right? Nobody wants that now why? Why don’t we like long term care insurance? Well first, we’re first to consider, sometimes we don’t enjoy thinking about it -

[0:38:02] Charlie Hoehn: Our mortality, yeah.

[0:38:03] Michael Reese: And?

[0:38:04] Charlie Hoehn: We’re getting sick.

[0:38:05] Michael Reese: Yeah and on top of that its use it or lose it, right? Well what if I never need long term care? I paid all those premiums for nothing. You know I could self-insure, why would I waste my money on that? Well what a lot of our clients are really liking these days and this is something you may or may not be aware of but some of these insurance companies they’ve created these single premium life insurance plans and you think, “What? Life insurance?” Well the way it works is you take – I just had this happen the other day. One of our ladies, she’s a widow, she’s 61 and she took some of the life insurance proceeds she got when her husband passed away and shook a $100,000 and she put it in one of these single pay policies. Well she’s 61 now, at what age do you think she’ll be before she needs long term care if it comes up? Probably what like 80s? Well by that time, if she needs care she’ll have over $700,000 in a pot that she can use for her long term care through this plan. 700k and if she never needs care, you know her kids get back as a death benefit, you know maybe a $120,000. It’s not a big death benefit but that’s not why she put her money there. What she said to me was great, “My 100,000 is never going to grow to $700,000,” right? “But here, if I need care it’s there for me. I have care in style but if I never need the money at least my kids get all my money back. I don’t lose my money in fact, the kids get a little extra.”

[0:39:39] Charlie Hoehn: Yeah, so what is that on the monthly breakdown like $500 a month?

[0:39:44] Michael Reese: Well this particular plan it was a $100,000 deposit. So it’s a one-time deposit.

[0:39:50] Charlie Hoehn: Oh I’m sorry. I thought it spanned over the course of 20 years.

[0:39:54] Michael Reese: No, she made one deposit for a 100,000 and she had the money because of the inheritance. A lot of our clients were retired they have 100,000 laying around, they sold a house, something happened and it’s just sitting there in the bank doing nothing. It happens all the time, yet here’s a way that at least in this case this gal was able to better protect herself which is what she was trying to do and have some money. And if it turned out she never needed care, good news, the kids get all the money back and then some. So it was not a use it or lose it approach. Estate planning, oh my goodness, I could go on and on about mistakes people make there. The biggest one is probably nobody wants to talk about that either. I like to joke about how, I don’t know if you are married or not. Charlie are you married? Let me ask you that.

[0:40:47] Charlie Hoehn: Yes sir.

[0:40:48] Michael Reese: And what’s your wife’s name?

[0:40:49] Charlie Hoehn: Andrea.

[0:40:50] Michael Reese: Andrea. So I am sure there’s never been a morning when the two of you wake up in the morning, I know the sun is shining, the birds are tweeting and you look at each other first thing in the morning just as you wake up lovingly and you just look in each other’s eyes lovingly and the first words out of your mouth are, “Honey wouldn’t today be a great day to go get our estate plan updated?”

[0:41:17] Charlie Hoehn: It happened this morning.

[0:41:18] Michael Reese: Yeah, I’m sure. That never happens and it’s not just that, the biggest areas that people make are not necessarily the wills and trust because they do that. It’s all the beneficiary arrangements with the insurance, the old life insurance plans or the old IRAs or 401(k)s and people don’t always understand the rules. I’ve got a great example of that. Do I have time to tell a quick story on that one?

[0:41:46] Charlie Hoehn: Please.

[0:41:47] Michael Reese: So I had this gal, gosh I can’t use her real name of course, let’s call her Jean. She had been married in the past and they had one child, a little girl. And then they ended up getting divorced and let’s call the old husband Charlie. So we have Jean and Charlie, they got divorced and Charlie had a 401(k) plan and had about half a million in there or so and he did not want any of that money going to his ex-wife, Jean. He wanted all of the money going to their only daughter, Sophie, right? That’s pretty normal when somebody gets divorced, that’s what he wants. And so what does he do? He goes to his attorney, he has his wills updated, his trust updated, he tells everybody about how this 401(k) money is going to his daughter, Sophie, when he dies. Everybody knows including my client, Jean. Meanwhile, while this is going on Jean meets a nice guy and they end up getting married. A good successful business owner, they’ve got a great marriage. But because he’s successful, he’s making a lot of money so that’s kind of cool, well here’s what happens, Charlie dies and so he tells everybody that insurance – I’m sorry not the insurance, the 401(k) money is supposed to go to Sophie, the daughter. Everybody knows this only one tiny little mistake, he neglected to tell Fidelity, who was a custodian of that 401(k) of his thoughts. He never retitled the account, he never changed the beneficiary away from Jean to put Sophie’s name on it. What’s worse is, and this could have been saved and I am going to tell you what happened as a result but, the other thing that he never did along the way is you know a lot of times when you’re married like in my case, I think I said my wife is Becky and your wife’s name is Andrea, right? If you have a retirement plan you’re probably putting Andrea as your beneficiary, right? I would put Becky as mine. You know I don’t know about you, I don’t if you have children, I have five. So I’ve actually taken the extent where I’ve got Becky as primary and the five children are what’s contingent or secondary. Well Charlie never did that secondary line. He just had Jean’s name and that was it. So what happens? The trust says that money goes to Sophie. The will says that money goes to Sophie. He had publicly proclaimed that that money goes to Sophie. The only problem with all of that is the 401(k) company, in this case Fidelity, doesn’t really care what all those things say. By the law, they have to send the money to whoever the listed beneficiary is which happens to be Jean. Now, if Charlie would have listed Sophie as the contingent or second beneficiary, see Jean knew that money wasn’t for her. She didn’t even want the money. She wanted it to go to her daughter, Sophie. If Sophie were the contingent beneficiary, Jean could have just basically erased her name off the account and then let it go to Sophie. It’s called disclaiming your benefits. That’s what she could have done but there was no secondary beneficiary to disclaim too. So Fidelity says, “Sorry Jean, it’s your money.” So Jean has to say, “Fine. I need to cash this out because it is the only way to give to Sophie.” But it’s a 401(k). When Jean went to cash out $500,000 what do you think happened?

[0:45:38] Charlie Hoehn: You’ve got to pay taxes.

[0:45:40] Michael Reese: You’ve got to pay tax and oh, remember she got remarried to that guy who was real successful which means that he was in the 40% bracket to begin with. So when they went to pay tax plus some state income tax, half of the money went where? So instead of getting $500,000 Sophie got 250. We see these problems all the time. This happens all the time. These days, people get married, they get divorced, they get remarried or I mean I had a case recently. Where a guy had a, teacher, it was a teacher, when he first started teaching set up before a 403(b) plan, he named his parents his beneficiaries because he was single and all of that. Over the years, he got married, he had kids, guess what he never changed? That stupid beneficiary. He just assumed it would go to his wife. Thankfully, they become clients before he died and he’s still alive, thank goodness but he become clients and I was able to show him. I said, “Hey! Henry, look at this. If you die that money is going to your parents who by the way are no longer living and not to your wife like you think it is. We’ve got to change that.” Isn’t that amazing how I was about the fourth financial adviser that he’s had in his life and I am the only one that catches that, why? Because we do wealth management which focuses on all of your retirement planning not just the money.

[0:47:18] Charlie Hoehn: What would you say the average amount of money that you’re able to - or wealth you’re able to preserve is for a typical client? I know it varies so drastically I’m sure but what’s the typical kind of result that they walk in and they walk out with?

[0:47:39] Michael Reese: Well, I guess maybe I’m not super clear on the question but I think I can maybe make a statement here that might help.

[0:47:51] Charlie Hoehn: Yeah, I know which by the way I know there are certain things that financial advisers and wealth managers can and cannot say. And I know that big disclaimer, we are not promising anything. What I was curious about is really you said that – I mean with these clients you were able to prevent them from making these quarter million dollar loses, these mistakes. Is that –

[0:48:22] Michael Reese: Yeah, let me give you a simple one. This is a good example, a couple of weeks ago one of our clients referred one of their friends to us and they came in. And like a lot of times, we will analyze their current portfolio to help them better understand what they have. Charlie, very few people truly understand what they have in their portfolio. This couple had what they called a balanced portfolio. So they felt like, “Hey we’re diversified. Yay!” Well, I got to tell them I said, “Now look” in this case I’m going to round it off. They had a million dollars, say a little bit more but let’s just call the million to make the math simple. I’ve said, “You’ve got a balanced portfolio, you’ve got $1 million. You want to retire in about three months,” he said. I’m like, “Okay great. So when we put that balanced portfolio in a Morning Star, here’s what we learned”. We learned that on average, he’s going to earn in that portfolio about six to eight percent a year. Somewhere in that six to eight percent range, that’s fine. The problem is like the early 2000s or 2008, if the market loses half of its value this guy, if the market goes down like it did in ’08 or like it did in the 2000 to 2002 dot com crash period, he could lose literarally a bit more, I remember the number, 28.59% in one year. That’s $285,900 that he could lose in one year and that’s just one year. Markets, they don’t always go down just one year. They might go down two years. And I said, “So imagine this, you’re getting ready to retire on a little more than a million dollars. What if the market decides that next year they are not going to cooperate with you and you lose 250, $300,000? How well are you going to retire at that point? When you go to bed at night how do you feel? Are you going to be okay with that?” Well of course he said, “No way am I okay with that. That’s not balanced. That’s not my idea of being diversified.” And I said, “Great. Meanwhile what if we could get you the exact same type of performance, the same six to eight percent rate of return but in a bad year maybe you only lose 5% or $50,000?” to get the same average of return but lose 50,000 in a bad year versus 250 or 300 would that help?” Well duh, right? And that’s something that we do all the time. I mean earlier we were talking about beneficiary mistakes. Oh some tax mistakes people make that are crazy. But this is a simple one that so many people make so many times. They’ve got this portfolio and they are taking on the risk and they don’t know it and they won’t know it until the market crashes which it will. I mean markets crash about once every 10 years in a serious way. You know if you live 20, 30 years in retirement, you’re going to see two, three significant market declines. If your money is going to last, when you’re taking income you cannot be participating in those declines. So maybe that’s a way to answer your question.

[0:51:45] Charlie Hoehn: Totally. Well this has been great Michael and one of the ways I like to sort of wrap up these interviews is to give our listeners a challenge and I normally ask the guest, please name the challenge but I want to take a guess, an educated guess, as to what your challenge might be and tell me if I am right or wrong in this. Which is for listeners who just heard this interview, check to make sure the Roth IRA fund that you are invested in over the course of its management over the last decade, or I would say at least two decades, has had a negative five percent return in its worst year and a 15% or more in its best year. In other words, boring wins. Don’t chase after the best years but minimize the worst years.

[0:52:44] Michael Reese: I think that’s really well said and you, I think had mentioned the Roth IRA. I would also really encompass that to all of your accounts, your 401(k), your 403(b). And here’s the other thing that I would also throw out there. I would also challenge anyone listening to remember this. We’re recording this in 2018 I think it’s safe for us to say, the last time the markets crashed was 10 years ago and I hear a lot of times Charlie, people say, “Gosh when the markets crashed last time it was no big deal. I just hang on, as a result I’m good.” Well, remember 10 years ago you were still working or you had several years in front of you working. You were still adding money to the portfolio and you weren’t taking any money out. You’re 10 years older now than you were 10 years ago. At this stage in your life, is it really okay to lose 50% again? Is that really okay at this stage of your life? I think a lot of people tend to ignore that question.

[0:54:03] Charlie Hoehn: Well Michael, what is the best way for listeners to get in touch with you?

[0:54:09] Michael Reese: Easiest thing to do is, I mean gosh, you can always call our office. The number is, I can give the number I’m assuming, it’s 512-265-5000. We’re in Austin, Texas 512-265-5000 and I also have offices in Michigan if people live up that way. We also, email is always good. My email is mike@cenadvisors.com.

[0:54:41] Charlie Hoehn: And they can check out cenadvisors.com, the site as well.

[0:54:46] Michael Reese: That’s correct.

[0:54:46] Charlie Hoehn: Excellent. So Michael thank you so much. This has been great.

[0:54:50] Michael Reese: Well I appreciate you hosting, you’re fantastic.

[0:54:55] Charlie Hoehn: Many thanks to Michael Reese for being on the show. You can buy his book, Retiring Well, on amazon.com. Thanks again for listening to Author Hour, enlightening conversations about book with the authors who wrote them. We’ll see you next time.