On this episode, sponsored by First Horizon, YFP Co-Founder and CEO, Tim Ulbrich, PharmD and YFP Co-Founder and Director of Planning, Tim Baker, CFP®, RLP®, RICP®, kick off a two-part series on 10 common retirement risks you should plan for.
Episode Summary
While a lot of emphasis is placed on the accumulation phase when preparing for retirement, there is considerably less focus on simple strategies for turning assets into retirement paychecks, for example. This week, Tim Ulbrich and Tim Baker kick off a two-part series on 10 of the most common retirement risks you should be planning for. Today, Tim and Tim cover five of these risks, including longevity risk, inflation risk, excess withdrawal risk, unexpected health care risk, and long-term care risk. You’ll find out why thinking about retirement as “half-time” is a good idea, the different options for taking out annuity payments, and why it is important to think about your withdrawal strategy, as well as what a bond ladder is and why you should consider unexpected medical expenses. Whether you are nearing retirement or are still in the accumulation phase, this episode is full of valuable insights.
Key Points From the Episode
- Introducing our two-part series: 10 Common Retirement Risks to Plan For.
- Background on why this topic is so important.
- A couple of important disclaimers before we dive into the first risk: longevity risk.
- Viewing your retirement as half-time.
- Setting realistic expectations and planning as best as you can.
- Lifetime income: a careful analysis of Social Security claims and strategies.
- Options for taking out annuity payments.
- Thinking about your withdrawal strategy to mitigate longevity risk.
- The risk associated with inflation.
- Defining what a bond ladder is.
- Why social security is one of the most important things to evaluate in retirement.
- How higher rates of inflation have influenced Tim and the planning team’s models.
- Whether or not there should be a glide path from a work perspective.
- Excess withdrawal risk: depleting your portfolio before you die.
- A quick recap of the bucket strategy.
- Healthcare risk: facing an increase in unexpected medical expenses in retirement.
- Different Medicare plans: Part A, B, C, D, and Medicare Advantage plan.
- Long-term care risks, misconceptions, and potential solutions.
- The tough conversations we need to have.
Episode Highlights
“You get to the end of the rainbow and you have hundreds of thousands of dollars, millions of dollars. The question is how do you turn these buckets of assets into a sustainable paycheck for an unknown period of time?” — @TimBakerCFP [0:04:02]
“Longevity risk is the risk that a retiree will live longer than – they expect to. What this really requires is a larger stream of lifetime income.” — @TimBakerCFP [0:06:48]
“There’s a whole other race to run after your career.” — @TimBakerCFP [0:09:44]
“The more flexible you can be with your withdrawal rate, the greater the portfolio sustainability will be.” — @TimBakerCFP [0:18:15]
“Essentially, in retirement, inflation could erode your standard of living.” — @TimBakerCFP [0:21:57]
“Abrupt retirement sounds sweet, but in reality, it’s really hard.” — @TimBakerCFP [0:29:37]
“It’s less about the actual return and more about the sequence of when that return comes that can affect the sustainability of [your] portfolio.” — @TimBakerCFP [0:35:55]
“You don’t want to get to a point where you’re having to go through the courts to get the care that your loved ones need. If you can avoid that at all costs, even if it means having an uncomfortable conversation – I think it’s needed.” — @TimBakerCFP [0:48:07]
Links Mentioned in Today’s Episode
Episode Transcript
[INTRODUCTION]
[0:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, Tim Baker and I kick off a two-part episode on 10 Common Retirement Risks to Plan For.
When planning for retirement, so much attention is given to the accumulation phase, but what doesn’t get a lot of press is how to turn those assets into a retirement paycheck for an unknown period of time. When building a plan to deploy your assets during retirement, it’s important to consider various risks to either mitigate or avoid altogether. That’s what we’re discussing during this two-part series, where today we cover the first five common retirement risks, including longevity risk, inflation risk, excess withdrawal risk, unexpected health care risk, and long-term care risk.
Now, make sure to download our free guide that accompanies this series, that guide being the 10 common retirement risks to plan for, and you can get that at yourfinancialpharmacist.com/retirementrisks. This guide covers the 10 common retirement risks you should consider and 20-plus solutions on how to mitigate these risks. Again, you can download that guide at yourfinancialpharmacist.com/retirementrisks.
All right, let’s hear from today’s sponsor, First Horizon, and then we’ll jump into my conversation with YFP Co-founder and Director of Financial Planning, Tim Baker.
[SPONSOR MESSAGE]
[0:01:24] ANNOUNCER: Does saving 20% for a down payment on a home feel like an uphill battle? It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a down payment on a home may take years. We’ve been on a hunt for a solution for pharmacists that are ready to purchase a home loan with a lower down payment and are happy to have found that option with First Horizon.
First Horizon offers a professional home loan option, AKA doctor or pharmacist home loan that requires a 3% down payment for a single-family home, or townhome for first-time home buyers, has no BMI, and offers a 30-year fixed rate mortgage on home loans up to $726,200. The pharmacist home loan is available in all states, except Alaska and Hawaii, and can be used to purchase condos as well, however, rates may be higher and a condo review has to be completed.
To check out the requirements for First Horizon’s pharmacist home loan and to start the pre-approval process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.
[EPISODE]
[0:02:36] TU: Tim Baker, welcome back to the show.
[0:02:38] TB: Good to be back, Tim. How’s it going?
[0:02:39] TU: It is going. We have an exciting two-part series planned for our listeners on 10 common retirement risks to avoid. I think as we were planning for this session, just a lot of depth and great content, that we want to make sure we do it justice, so we’re going to take five of these common retirement risks here in this episode. We’ll take the other five next week. Tim, just for some quick background, one of the things we’ve talked about on the show before is so much attention is given when it comes to retirement, is given to the accumulation phase as we’re saving, especially for those that are maybe a little bit earlier in their career.
It’s save, save, save. But I even think for all pharmacists in general, that tends to be the focus, but we don’t often think about, what does that withdrawal look like, both in the strategy, which we talked about on the show previously, but also in what could be some of the risks that we’re trying to mitigate and avoid. Just give us some quick background on why this topic is so important as we get ready to jump into these 10 common mistakes.
[0:03:39] TB: Yeah, I think to your point, I think a lot of the, even the curriculum in the CFP board standards is very much focused on the accumulation phase of wealth building. I think there’s a lot of challenges and a lot of risks that you have to deal with during that phase of life and during that phase of wealth building. But I think what doesn’t get a lot of the press is like, okay, you get to the end of the rainbow and you have hundreds of thousands of dollars, millions of dollars. The question is, how do you return these buckets of assets into a sustainable paycheck for an unknown period of time?
While navigating a lot of these risks, I don’t know if it’s risk avoidance, Tim. I think it’s just planning for the risk. We’re talking about avoiding risk. Some of these, you can’t really avoid. You just have to plan for it. I think that what we’re finding is, I think the whole general rule of like, “Oh, I’ll get to the end and I’ll have a million dollars and I’ll put 4%, $40,000 a year for the rest of my life.” There are a lot of pitfalls to that. I think that hopefully, this discussion shines a light on some of that. I think it is just important because we think that the – the hard part is, hey, I just need to put assets aside, but I think equally as hard as, okay, how do I actually deploy these assets for a wealthy life for myself in retirement?
[0:05:04] TU: Yeah, good clarification, right? Some of these, as we talked through the 10. Avoidance isn’t necessarily possible. It’s the planning for, it’s the mitigation, minimizing the impact, however, we want to say it. I think, what you articulated is just spot on, right? I think when it comes to retirement planning, saving for the future, we tend to view that nest egg number, whatever that number is, 3, 4, 5 million dollars, whatever is the finish line. So many other layers to consider there.
Not only getting there, which again, we’ve talked about on the show previously, and we’ll link to some of those episodes in the show notes and the strategies to do so, but how do you maintain the integrity of that portfolio? How do you optimize the withdrawal of that portfolio? If we’re doing the hard work throughout one’s career to be saving along the way, we want to do everything we can to get as much juice out of that as possible.
That’s the background as we get ready to talk through some of these 10 common retirement risks to plan for. Just a couple of important disclaimers; We’re not going to talk about every retirement risk that’s out there, of course, Tim, so there’s certainly more than 10. You’ll notice them overlap as we go through these. This is not meant to be an all-encompassing list. Of course, this is not advice, right? We obviously advocate that our listeners work with a planner, no matter what stage of your career that you’re in to be able to customize this part of the plan to your personal situation.
For folks that are interested in learning more about our one-on-one financial planning services, our team of certified financial planners and tax professionals, you can go to yfpplanning.com and book a free discovery call to learn more about that service.
All right, Tim. Let’s jump off with number one, which is longevity risk. What is that risk? Then we’ll go from there and talk about some potential solutions.
[0:06:48] TB: Longevity risk is the risk that a retiree will live longer than what they expect to. What this really requires is a larger stream of lifetime income. We’ll talk about that in a second. The hard part about this whole calculation, Tim, is that there are lots of unknown variables. Unfortunately, or fortunately, I guess the way – depends on how you look at it, I don’t know when I’m going to pass away. Social Security obviously has a good idea of what that is. When I was preparing for this episode, Tim, I looked at, I went onto socialsecurity.gov, and put in my – basically, my gender and my birthday. It comes back with a table and it doesn’t factor in things like health, lifestyle, or family history. But it essentially says that for me at 40 – oh, man, it’s tough to look at that, Tim. 40 years old in 10 months, that my estimated total years, I’m halfway there.
[0:07:47] TU: Halfway. I was going to say. Yeah.
[0:07:49] TB: I’m 81.6. Now, once you get to age 62, then it starts to go out. At age 62, it says I’m going to live to 85. If I make it age 67, then it says, hey, I’m going to live to 86 and change. Then at age 70, which is when I think I’m going to retire, Tim. That’s my plan, at age 70, 87.1 years. I think that for a lot of people, this is an unknown. I overlay like, okay, when did my grandparents pass away and things like that.
Some general stats, one in four will live past age 90 and one in 10 will live past age 95. I think these stats fly a bit in the face of Social Security, but maybe not. I think they factor some of this in. One of the big discussions that we have in our community is like, what should we plan to? What should we plan to? Should it be age 90? Should it be to age 100? We default to 95, which is right in the middle. For me, being in my 40s, it says 87.1-years-old.
I think, this unpredictable length of time really puts a huge unknown out there in terms of like, okay, because there’s a big difference between I retire at age 70 and I pass away at 87. That’s 17 years of essentially, senior unemployment retirement. Or if I live to 100, which is another 13 years. It’s huge. I saw a visual table recently, not to go on too much of a tangent, but it was like, your youth and then your college years was – If you imagine a square, was a shade on the square and then your career and then your retirement and your career and retirement in this visual were pretty close.
[0:09:33] TU: Which we don’t think about it like that, or I don’t, at least.
[0:09:36] TB: No, I don’t either. But I saw that. I’m almost eyeballing them, like, they’re pretty close. People think of like, “Oh, rat race and things like that,” but there’s a whole other race to run after your career. I think we overlooked the time on that. I do think that people will, because especially with a lot of the economic things people may be joining the workforce later, starting families later, maybe starting to save later, we’re living longer that it could push everything to the right a little bit. I think that could be one of the things that they do with Social Security is that maybe we don’t get our for retirement age of 67, then we get the for all credits at 70. Maybe they push those back a little bit. But it’s still a long time, Tim, is what I’m saying.
[0:10:23] TU: Yeah. It really is. As you’re sharing, Tim, it reminded me of a great interview I had with a retired dean and faculty member, Dave Zgarrick on episode 291. He talked about exactly what you’re saying in terms of that timeline perception. He was really encouraging our listeners to reframe your retirement date as essentially, half-time, right? We’ve got some opportunities to reset, reframe, and figure out, but it’s not the end of the game. There’s a whole other half that needs to be played. Obviously, here, we’re talking about making sure that we’re financially prepared for it, but there’s certainly much more to be considered than just the financial side of this as well.
I think the piece here that really jumps out to me, Tim, when people think about longevity risk is there’s really a lot of fear that I sense from individuals of – and the last thing I want to do is run out of money. I don’t want to be a burden to my family members. I really want to make sure I plan for this. The challenge, I think, here is there’s a balance to be had, right? We also don’t want to get to the end of our life and we’ve been sitting on this massive amount of money that maybe it’s been at the expense of living experiences along the way. I think this is just a really hard thing to plan for. To your point, I think a general number is a good place to start. So much of this literature on longevity comes down to family history, lifestyle, and other things that are going to help inform this.
[0:11:44] TB: I don’t think that you can – oftentimes, when we work with particularly younger pharmacists, we’ll get to a point and they’re like, “Hey, I got it from here. I’m good.” It’s almost like, they chunk the next five or 10 years of their life is autopilot. I always be – if I look back at the last five or 10 years of my life, it’s been anything but that. What I would say to, even in retirement, you have to take it year by year and you have to assess this year by year. I think, hitting the easy button and saying, okay, for the next five or 10 years, it’s going to be like this, is not great for your plan, right?
I think that’s probably if we talk solutions, we’re probably going to say this on repeat with a lot of these is like, you have to plan for this as best you can. Whether it’s set in a realistic expectation. For me, I think it would be irresponsible for me to say like, okay, 87 years old. I’m going to retire at 70, have set – and again, we’ll talk about this, too, is I might not retire at 70. I might have to retire a lot sooner than that. If I say, “Hey, 70.” Then I have to plan for 17 years, I think that would be really irresponsible. I think, set in realistic expectations in terms of life expectancy. Consider personal and family health history.
I think, you do pay a price, Tim, for a longer plan horizon, to your point, because you need more resources, which means that you have to save potentially more in your accumulation phase. Then when you’re in retirement, you have to be more conservative with what you’re withdrawing. That could lead to, again, you forgoing things today for a longer future, I guess, or being all sustained. That’s definitely one thing. It’s just, how do you best plan for that longevity?
[0:13:32] TU: You know, the other thing that’s coming up for me, Tim, as you’re just sharing this solution around planning for longevity is if folks end up erring on the side of your example, right? Social Security says one number. Maybe we’re planning 10 years further than that. Then there’s an interesting – certainly, you’re mitigating one risk, but you’re also presenting another risk, which is potentially having excess cash at the end of life, which obviously, there has to be planning done for that. What does that mean for the transfer of assets? Is there philanthropic giving that’s happening?
Then there’s a whole tax layer to that as well, right? In terms of, how are the taxes treated on that if we’re planning, perhaps, to not die was zero, but we may have additional funds that are there at the end of life. Just another great example, I think, of where financial planning comes together with the tax plan, and obviously, everyone’s situation is going to be different.
[0:14:21] TB: Another solution that would bring up for this risk, Tim, would be lifetime income. This is where I think, really a careful analysis of Social Security claims and strategies is needed. Because I think a lot of people, they’re like, “Okay, I’m 62. I’m eligible for my Social Security. I think, my parents died at 80. Probably going to die right there.” There’s a lot of things that I think we just blow through. One of the biggest retirement decisions is just going to be this decision on how and when you’re going to claim. Social security is a lifetime income. If you start claiming at 62, you’ll get that until you pass away. Start claiming at 70, and you’ll get a much greater benefit until you pass away.
There are not very many sources of income like that. Pensions might be another thing, but that would be one of the things that we would want to make sure that if we need X per month, or per year, a good percentage that is lifetime income, meaning not necessarily out of your portfolio, on a 401k.
Another way to do this is to transfer the risk of longevity to an insurance company by purchasing something like an annuity, so you can provide protection from the risk of dying young by purchasing a term certain. You could say, “Hey, I want this annuity to pay me for a lifetime and I’ll get a lesser amount, or for the next 10 years and I might get a higher amount.” But a lot of people are really not crazy about that, because they could give an insurance company $100,000 and then get one or two payments and die the next month or whatever. There are refund riders and things like that, so I think looking at that is something that definitely in the lifetime income.
I think, one of the things that people don’t know of, is if you have a 401k, a lot of people, they’ll take a lump sum and they might put it into an IRA. One of the things that you could do is take annuity payments for life out of that plan. What they essentially do is go out, most of the time they go out and buy an annuity for you. That’s a way to do it, instead of taking a lump sum, you can buy, basically, annuity payments from a 401k, that type of 403b. You can get lifetime income from insurance contracts, so cash value, life insurance, death benefit, there’s an annuity option.
This can even be true for a term policy. If I pass away and shay, most times will elect a lump sum, but you can say, “Hey, I want this payment for life, or for X amount of years.” Those securities are probably going to be the biggest ones, but then an annuity or something like that would probably be a close second to provide lifetime income for you to negate some of the longevity risks that’s there in retirement.
[0:17:04] TU: Yeah, a couple of resources I want to point our listeners to episodes 294, 295, you and I covered 10 common social security mistakes to avoid, along with a primer we did back on episode 242 of Social Security 101. Really reinforces what Tim’s talking about right here. Then we covered annuities on episode 305, which was our understanding of annuities, a primer for pharmacists. Certainly, go back and check out those resources in more detail. Probably lots of avenues to consider, but any other big potential solutions as people are trying to mitigate this longevity risk?
[0:17:37] TB: I think, probably the last one, and I mean, there are others, but probably the last big one I would bring up is probably, what is your withdrawal strategy? We’ve mentioned the rule of thumb of 4%, but I think that’s limited in a lot of ways. One is a lot of those studies are based on a finite number of years, i.e. 30 years from age 65 to 95, and we know that people are living beyond that 30 years that that’s been planned. That’s one thing.
For longer periods, the sustainable withdrawal rate should be reduced, but typically, only slightly. What’s left out of that, the 4% study is flexibility. The more flexible you can be with your withdrawal rate, the greater the portfolio sustainability will be. When the portfolio is down, and you can withdraw less, that allows you to sustain the portfolio a lot longer. Then, I think, the other thing that’s often overlooked with this is that typically, and we’ll talk about sequence risk, but typically, once you get through that eye of the storm retirement risk zone, you want to start putting more equities back into your portfolio.
I think, just the proper allocation strategy, which is where you’re considering portfolio returns, inflation, what your need is, what your flexibility is. Again, I think that becomes a lot easier, or palatable if you have, say, an income floor, or if you have a higher percentage of your paycheck coming from Social Security. All of these things are kind of, just like systems of the body are intertwined, but just your withdrawal strategy and allowing for that to sustain you for a lifetime is going to be very, very important along with some of the other things that we mentioned.
[0:19:19] TU: Yeah. Tim, I think there are a couple of things there that are really important to emphasize, that I think we tend to overlook when it comes to the withdrawal strategy. One of which you mentioned was that flexibility, or the option to be flexible on what you need. When we show some of these examples, we just assume, hey, somebody’s going to take a 3%, or 4% withdrawal every year, but depending on other sources of income, you’ve mentioned several opportunities here, depending on other buckets that they have saved, right? That flexibility may, or may not be there, which ultimately, is going to allow for us to be able to maximize and optimize that even further. All right, so that’s number one, longevity risk.
Number two is inflation risk. Tim, I think this is probably something that maybe three, four, five years ago, people were asking, hey, what inflation? Obviously, we’re living this every day right now. We’ve seen some extremes, although our parents would say, we ain’t seen nothing yet from what they saw growing up. What is the risk here as it relates to inflation?
[0:20:16] TB: We’re going to talk about inflation a few times in this series. What we’re talking about with regard to this risk is this is really the risk that prices of goods and services increase over time, right? The analogy or the story I always give when I talk about investments is that the $4 latte that you might get from Starbucks in 2020, 30 years might be $10, $11, or $12. If you look back at, I would encourage a lot of people that, hey, I had a conversation like this with my parents like, “What did you buy our house back in New Jersey?” I think they said, it was $41,000.
Now, when they – because they were – we were talking about what we bought our house at and the interest rates are like, it’s unbelievable. They don’t understand. I think this is a huge thing, especially with retirees, you’re thinking, or you’re dealing with a fixed income, more or less. The larger percentage of your income that’s protected against inflation, which social security is, which is another reason that it’s also very valuable is because it’s lifetime, but then basically, it gets adjusted by the CPI.
When you work, Tim, inflation is often offset by increases in salary, right? The employer has to keep pace as best they can –
[0:21:42] TU: Hopefully. Yeah.
[0:21:43] TB: Yeah. Or they’ll lose talent. In retirement, inflation reduces your purchasing power, so you don’t have an employer to raise. Now, like I said, you can think of social security like that, because they’re going to do that adjustment every year. But essentially, in retirement, inflation could essentially erode your standard of living.
Again, the first solution here is to plan for this. I would throw taxes in here, but even inflation is often overlooked in terms of like, how do we project these numbers out? What is a realistic estimate of inflation over the long term? I would encourage you, again, I’m a financial planner, so I’m biased, but I think using software and accounting for inflation almost by category of expense. We know that things like medical expenses, and the inflation for medical expenses is going to outpace a lot of other things, whether it’s fuel, utilities, or food, that type of thing.
That would be the big thing. I think overlaying some type of inflation assumption into your projections and seeing how that affects your portfolio, your paycheck is going to be super important. Another solution to this, Tim, would be going back to longevity. We talked about lifetime income. I’m going to say, not necessarily lifetime income, but inflation and adjust in income. Social Security, again, is the best of this. That we saw last year, I think it was – someone might have to correct me. It was like, 9% year over year. That’s pretty good.
If you were to buy an annuity, a lot of insurance companies won’t offer a CPI rider. They might say, “Hey, your payment in your annuity, you can buy a rider, which is going to cost a lot of money,” that it says, it’ll go a flat 2% or 3%. The insurance companies are not going to risk saying, “Okay, it’s with whatever the CPI is, because they’re not going to be able to price that accordingly.” Inflation-adjusted income.
Some employer-sponsored plans, like a pension, could offer some type of COLA increase. This is more typical in government pensions, government plans than it is with private plans. Like I said, you can purchase a life annuity with a cost-of-living rider, but it’s typically very limited and very, very expensive. You might get, for kicks, Tim, these are just round numbers. You might say, “Hey, give me straight up $1,000 as my benefit.” But if I add a, COLA rider, or something like that, it could cut it down to $800. Again, that’s not real numbers. That could be the cost there.
Then the last thing for this is to build a bond ladder using tips. A bond ladder is essentially, and we could probably do a whole episode on this, Tim, but a bond ladder would be, hey, basically, I want to build 10 years of income, say. Let’s say, I’m retiring in 2024, or let’s say, 2025. My first bond ladder might come due at the end of 2024. Then that’s going to give me $30,000 or $40,000. At the end of 2025, going in 2026, the second run of my bond ladder is going to pay me and basically, do that for the next 10 years.
Then essentially, what you do is you try to extend that ladder out. You might go to year 11, might go to year 12 as you’re spending that down. A good way to do that is with tips, which is an inflation security, an inflation-protected security. That’s one way to inoculate yourself from the inflation risk.
[0:25:14] TU: I looked up Social Security while you were talking there, you’re spot on. 8.7% in 2023. Yeah, that’s significant, right? I think especially for many folks and hopefully, as our listeners are planning, that won’t be as big of a percentage of the bucket for retirement. The data shows that across the country, it really is.
[0:25:33] TB: Yeah. I think, again, I think, when we’ve gone back to my own, it was something like, if I claimed at 62, I have to remember the numbers. If I claimed that 62, my benefit would be $2,500. If I claim at 70, I think it’s over $4,000.
[0:25:49] TU: Something like that. Yeah.
[0:25:50] TB: But then, if you then tack on the inflation on that, it’s just huge. Again, I think, that is going to be one of the most important things that you evaluate in retirement is the social security stuff.
[0:26:01] TU: One of the other thoughts that have gone to mind, Tim, as you were talking with inflation is just rates of return. We tend to, at least on a simple high level, right? We think of rates of return and a very consistent 7% per year. We know the markets don’t obviously act like that. We have huge ups, huge downs. We’re seeing that with inflation as well, right? We tend to project 2%, 2.50%, and 3%. But we lived in a period where inflation was really low. Obviously, we’re now seeing that bump up. My question for you is, as you beat this up with the planning team like, has this period of high inflation, at least higher than what we’ve seen in our lifetime, has that changed at all? Some of the modeling, or scenarios that you guys are doing long term?
[0:26:42] TB: I think, we’ve ticked it up a bit. I definitely think it’s probably too soon to say like, hey, for the next 30 years, we got to go from 3%, which has typically been the rule of thumb, to 5%. I think as we get a little bit further from quantitative ease in and putting a lot more money in circulation and we’re seeing the result of that, that I do see some modification of models and that’s going to be needed.
One of the things that the government and the Fed try to do is keep inflation at that 3%. I just don’t know if they’re going to be able to – the new norm might be keeping it as close to 4%, or 5%, right? I would say for me, and again, I try to keep on this as best I can, but I think for me, I think it’s a little too soon to tell. To your point, the reality is that I would say, less so for inflation, because I think there is a little bit of the thumbs on the scale with the government and the Fed, but we do see fluctuations in market returns. We’re seeing now more fluctuation in inflation.
I think, a lot of what I’m reading is that we’re probably at pretty much the end of rates going up. But I’m interested to see is like, okay, when they start to potentially reverse, or normalize, what is the new normal? I think if you put as much money in circulation as we have, I think this is one of the side effects, and we’re paying for that now.
[0:28:15] TU: The thing that’s coming to mind here as you’re talking about inflation risk and even tied to longevity risk is we often assume retirement is a clean break, right? You were working full-time, you’re no longer working full-time. For many folks, either based on interest, passion, or financial reasons, there could very well be some type of part-time work, right? Whether that’s consulting, whether that’s part-time PRN work, or whatever. To me, that’s another tool you have in your tool belt, when you talk about inflationary periods, or what’s happening in the market and whether or not we need to draw from those funds. Having some additional income, if you’re able and interested, could be an important piece of this puzzle.
[0:28:57] TB: We often think of a glide path in retirement. Meaning that, the closer we get to retirement, the less stocks we have, the more bonds we have, safety, that type of thing. I think, we have to start talking more about a glide path, like a work perspective, where you go from 1 to 0.8 to 0.6 to 0.2, or whatever. Then maybe, it’s just 10.99 PRN, or something like that. This is for a variety of reasons. It’s for the reasons that you mentioned market forces, and inflationary forces, I think even more so for mental health.
[0:29:29] TU: Mental health. Yeah, absolutely.
[0:29:31] TB: IR, like we talk about our identity and role and things like that and a soft landing. I think, abrupt retirement sounds sweet, but I think in reality, I think it’s really hard for, if you’ve been in the workforce for 30 years and there might be people that are like, “Nope. You’re crazy, Tim.” I talked about this and some retirees will probably roll their eyes. When I took my sabbatical, it was just a month, right? It wasn’t a ton of time. I literally was like “All right, I’m not going to touch work.” I’m like, “What am I doing?”
I guess, my thought process was I could see how it could be where you’re directionless, right? I spent a lot of time planning for just that month and I’m like, it was an interesting test case for me to be like, all right, I just need to make sure that when I’m positioning myself, I still have availability for meaningful work and other interests and things like that. Yeah. I mean, everything that you read is that the best thing to combat a lot of these risks is actually not to retire. It’s to work or work at a reduced – If you’re working and you’re not drawing on your portfolio, then problem solved. Obviously, we know that’s not necessarily the best solution.
I think, having the ability to do that, there’s from a mental health perspective and a lot of these other reasons. I think pharmacists in particular are positioned with their clinical knowledge and things to do things with their PharmD that provide value in retirement and that are not necessarily stressful, or strenuous. So —
[0:31:04] TU: Yeah, I think that feeling of contribution is so important. I just listened to a podcast this week with Dr. Peter T on one of my favorite podcasts, The Huberman Lab Podcast, and he was talking exactly about longevity and some of the risks to longevity in that context of mental health. He was talking about the value of contribution, the value of work. I think for all of us, it’s natural in those moments and seasons of stress. That feeling of contribution can get overlooked, right? I mean, I think it’s a natural thing to feel. Really, really good discussion. I think, it highlights well. We’re obviously talking about X’s and O’s in terms of dollars. But when it comes to retirement planning, so much more than that.
Number three, Tim, we talked briefly about, but we can put a bow on this one, would be excess withdrawal risk. Tell us more here.
[0:31:52] TB: Yeah. This is really just that you’re withdrawing at a rate from the portfolio that will deplete the portfolio before you die. Which is one of the biggest fears and one of the biggest risks is like, “Hey, I just want to make sure that I have enough money to last me throughout retirement.” I think, the biggest thing again for this is to have a plan, have a strategy and be flexible with that plan.
There are ways that you can build your retirement paycheck, and we’ve talked about this before, where it’s coming from a variety of sources. At the end of the day, there is still going to be a portion of your paycheck, the retiree, you are pulling the string. You’re saying, “Okay, I’m going to get X amount from Social Security, potentially X amount from maybe a floor, an annuity, but then the 60%, or whatever it is has to come from these buckets that I’ve filled in the accumulation phase.” Like I said, the default that a lot of people use is, hey, it’s the 4% rule. There are other strategies, like [inaudible 0:32:54], guardrails that are more, look at market forces, look at inflation, and then basically, adjust your portion of your paycheck accordingly.
If you do that consistently and you stick to that plan, you’ll basically see the portfolio sustained for 30-plus years. I think that’s probably the big thing that in all the research says is that if you can adapt your spending, which is hard, right? It’s hard for us to do that in the accumulation. It’s often hard for us to do that in retirement, but if you can adapt your spending with the ride the roller coaster of market volatility inflation, it lands in sustainability. We’ve also talked in the past about the bucketing strategy. You make sure that you have the next five years, basically, in very CDs, money markets, very safe investments. Then that allows you to inoculate, at least for the next five years to do more mid-risk type of investments. Then for those 15-plus years, more risky investments with regard to the portfolio.
The bucketing strategy is just a take on the systemic withdrawal strategy but allows the retiree to understand more and compartmentalize and say, “Okay, if I have the next five years planned out, if I need 40,000 times five years, I had that in that bucket. I don’t really care what the market does. If the market goes down today, I know that in most cases, it’s going to recover in the next three and a half, four years and we’re good to go.”
Again, a lot of people, I think will say, “All right, well, this year, regardless of what’s going on in the world, I need this. Then the next year –” Then they wake up and they’re like, “Man, I had a million dollars, seven years in retirement, I have 200,000 left. This is no bueno.”
[0:34:51] TU: Yeah. Another important point you’re bringing up here and you mentioned earlier in the show, I think we tend to oversimplify, especially when we’re thinking accumulation of, “Hey, I’m going to save two, three, four million dollars. Maybe I’m going to be moderately aggressive, or aggressive. Then I retire.” We don’t think about what is the aggressive to moderate to non-aggressive strategies of investing in retirement, right? We’re not taking a portfolio of two, three, four million dollars, and also just moving it into something that’s liquid. We still have to take some calculated risks, to your point earlier, that we’ve got potentially a long horizon in front of us.
Tim, what I think about is the double whammy of potentially, when you retire, which depending on where the markets are, you may or may not have control of that. I think about people that may have retired pre-pandemic, not knowing what was coming and then the markets did their thing. The double whammy I’m referring to is if you retire and start withdrawing at a period where the market’s down significantly and you’re dependent on that draw, we’ve got a double effect of what we’re getting hit there.
[0:35:52] TB: Yeah. We’ll get into more of that in the sequence risk, in terms of, it’s less about the actual return and more about the sequence of when that return comes. That can affect, basically, the sustainability of that portfolio.
[0:36:06] TU: Since you mentioned the buckets and building retirement paycheck, as you call that, we did cover that previously, episode 275. We’ll link to that in the show notes. That was one of four episodes that we did, 272 through 275 on retirement planning. All right, so that is number three, excess withdrawal risk. Tim, number four on our list is unexpected healthcare risk. Tell us more here.
[0:36:29] TB: Yeah. This is the one we haven’t really covered much. We probably should give it a little TLC, maybe in future episodes. I think that Medicare and the decisions around Medicare is also another huge decision to make in retirement. This is the risk of facing an increase in unexpected medical expenses in retirement. One of the things that people often get wrong is that it’s like, okay, I qualified for Medicare at 65, I’m good. All my medical costs will be taken care of. That’s not true.
The decision of when to enroll and whether to choose the original Medicare or Medicare Advantage plan, choosing the right Part D plan for drug prescription is really going to be important. The figures, they’re not overly impressive, Tim. In 2019, they said, the average male at age 65 is going to spend about $79,000 to cover medical, or healthcare costs in retirement.
[0:37:25] TU: That’s lower than I would have thought, to be honest.
[0:37:26] TB: Yeah. Now, I think it goes out – I mean, again, you can see for if you look at the tables, what did it say for me at 65? I was going to live to – does it have at 62 to 67. Let’s say, it’s another 20 years. Yeah, it seems low to me. I mean, females, age 65 is a lot more, a $114,000 to cover healthcare expenses in retirement. It doesn’t seem a lot in terms of your – it is outside of housing. It’s going to be one of the bigger things, especially when you’re in the phase of older retirement.
I think, probably the default here is how – it goes back to planning and understanding what’s available to you. I think, choosing the appropriate insurance is going to be important. One of the things, and we’ll talk about this in the next for us, but a lot of people think that long-term care is covered by Medicare. It’s not. Another thing that a lot of people don’t know is that Medicare doesn’t have a cap on out-of-pocket expenses. If you have large amounts of medical expenses, you could be paying in perpetuity, that’s where a supplemental plan, or a Medigap plan will be important.
Part A, to break these down, covers a lot of hospital visits and inpatient stuff. Part B is more, I think, outpatient, like covers medical necessary services, like doctors, service and tests, outpatient care, home health services, durable medical equipment, and that type of thing. Then part C is going to be the drug. Then there’s going to be lots of variations of part D. Then what people then assess, Tim, is, should I get a supplemental plan, or a Medicare advantage, which is not to say under traditional Medicare, but it’s more of a reimbursement through a private medical, or private insurance company.
This is one that I think that is often overlooked. It’s hard because every state and area of the country is going to be different. What you can get if you’re a resident of Florida is going to be different if you’re a resident of New Jersey or Ohio. I think, going through this and probably on an annual to reassess is going to be an important part of making sure that you’re mitigating, as much as you can, the risks of those increased, or unexpected medical expenses while retired.
[0:39:44] TU: A couple of things are coming up for me, Tim, here. Obviously, one would be, if we’re factoring this into the overall portfolio nest egg. Certainly, that’s one strategy. The other thing I’m thinking about, if folks have access to an HSA and are able to save in that long term, without needing those for expenses today. Obviously, if you need them, you use them. That’s what it’s there for. If not, the opportunity is for these to grow and to invest and invest in a tax-free manner, such that it could be used for six-figure expenses right in retirement.
We’ve got an exciting – October is all going to be about healthcare insurance costs. We’re going to have several episodes all throughout the month. One of which is going to be focused on Medicare. We’re also going to be talking about healthcare insurance for those that are self-employed. Then we’ll be talking about open enrollment, other topics as well. Looking forward to that, that series that we’re going to do in October.
Tim, number five on our list, which will wrap up our part one of this two-part series is long-term care risk. Now, we did talk about long-term care insurance previously on the show. That was episode 296, five key decisions for long-term care insurance. You just mentioned not something that Medicare is going to cover. Tell us about this risk and potential solutions.
[0:40:56] TB: Yeah. This is the risk of essentially, not being able to care for oneself. It basically leaves you dependent on others to perform, or help you perform the activities of daily living. These ADLs are called activities of daily living, are bathing, showering, getting dressed, being able to get in and out of bed, or in and out of a chair, walking, using the bathroom, and eating.
Typically, if you need help with two or more of these things, this is typically where a long-term care insurance policy will actually trigger. These could be cause for a variety. It could be chronic diseases, orthopedic problems. Alzheimer’s is probably the biggest one that is the biggest threat for this particular risk. Planning for this is huge. It’s funny, Tim, because – not funny, but it’s interesting is that this is one of the risks where it’s like, it’s not me, right? It’s someone else. Most people see this as an important thing to plan for, but not necessarily for themselves.
The reality of the situation is that in most cases, family members will provide the care, which is about 80% of the time in the home, which is unpaid care, averaging about 20 hours per week. If you imagine that, Tim, if that were laid at your feet, how that could affect your health, your finances, just your career. That’s the effect that it has on the family. Like I said, most people think that Medicare covers long-term care costs. It doesn’t. Many people think that this is a risk, or a concern in retirement, but not necessarily for them, it’s for somebody else.
I think, one of the misconception is like, if you look at things like insurance, a lot of people think, “Hey, it’s too expensive.” In that, I think, that reputation is probably earned, because I think when they first priced these policies, when they first came out, there were a lot of policies that were not priced expensive, or the right way, so they got more expensive year over year. There was a study that said that less than 10% of people that were age 65 and older had long-term care.
Really, the need is not as long as you think. The average time that a male needs long-term care is about a little bit more than two years. For females, a little bit less than four years. Solutions for this is plan for this. Understand what are the risks and costs associated with it. Again, every state is going to be different in terms of what these costs and what is the cost for something like, anything from being able to age in place and have care given in your home, to a nursing home. Understand, what is that in your area? How do you want to pay for long-term care? I mean, how do you want that care delivered?
A big part of this is just getting organized with, okay, if this were to happen, where can we get this money from? Is it insurance policy that we purchased? Is it family members? Is it something like a reverse mortgage? Are there government programs, like if you’re a veteran, there’s some programs for that. Could be Medicaid. That is a program that’s probably the largest funding source of long-term care, but you have to be impoverished to do so. A lot of people will purposely spend down their estate to become impoverished, to get care, which there’s a lot of hoops and things that you have to be careful of.
But insurance is probably, and I know we did an episode on this is like, that’s another one to really look at is when to purchase a lot of people, we should really start talking about this in late 40s and purchase in your 50s. I think 55 is the average, if I’m not mistaken. If you wait longer than that, Tim, that’s when you have increased instances of the coverage being denied and it gets really expensive. You have to thread that needle a bit. What is the amount needed?
I think at a minimum, we should be pricing and we say, okay, for us to be able to age in place, so have someone come in 20 hours a week, five days a week, or whatever that looks like, is that $3,000? Is at $6,000? Find that number and be able – A lot of the study says, the longer that you can stay in your home and not in a facility, the better. What’s the amount? Is that inflation-protected? What’s the elimination period? Is it a straight-up long-term care insurance plan? Or is it linked to an annuity purchase or a life insurance purchase?
Or if you go through all that, you’re like, “You know what? I got this and we sell fund, which is probably the most popular sell fund with the family as ad hoc caregivers.” Unfortunately, I think that’s really more of a lack of planning than anything. But that is a solution as well to say, okay, if that’s the case, again, looking at funding sources and things like that. This is another thing that I think is often overlooked, because, I think, some of the misconceptions about long-term care. But if you can get a policy that pays you $3,000, $4,000, $5,000 a month for care, to be able to stay in the home, I think for a variety of reasons, that’s worth looking into.
[0:45:57] TU: Yeah, Tim. I agree. I think that this is often overlooked, perhaps from a misunderstanding, or evaluating the risk. The other thing that comes up for me often here is just the difficult conversations that need to be had to really navigate this. We just, a few episodes had back on the show, Cameron Huddleston, who is just fantastic. She wrote, Mom and Dad, We Need to Talk, how do you navigate difficult financial conversations with parents? Some listening to this are thinking about it for themselves, certainly. Others may be working with aging parents and trying to navigate these conversations.
Who wants to initiate a conversation of, “Hey, Mom and Dad, what are you doing for long-term care insurance?” Or, maybe that age window has passed, where a policy makes sense. Now, we’re back to, okay, what’s the game plan? What does this look like financially? What does this look like in terms of the ability of our time to be able to care and care well? I think, there’s just a lot to navigate here that is not just financial, but that is emotional as well. She does a great job in that book, in the episode, we just recorded as well, of how do you initiate these conversations in a loving and respectful way? But more than anything, to get out in front of the planning. Again, whether you’re planning for yourself, whether you’re planning for aging parents, so important to be thinking about this.
[0:47:14] TB: This is a little teaser into our next few risks that we’ll cover in the next episode, in terms of just tough conversations that need to be had, so we can prevent things happening in the future. It’s just a byproduct of old age and being able to care for oneself. That can be hard to broach those subjects with your children, even adult children. There’s some vulnerability. I think, just the way you approach that, and obviously, people have different relationships with parents, and some people are really close. Some people brought up in a house where you don’t talk about money, you don’t talk about some of these things. It can be really hard.
I think, one of the things that really stuck with me with Cameron’s work and her writings is like, you don’t want to get to a point where you’re having to go through the courts to get the care that your loved ones need. If you can avoid that at all costs, even it means having an uncomfortable conversation, or maybe it’s not a conversation, maybe it’s a letter to break the ice and you go from there, I think it’s needed.
[0:48:25] TU: Yeah. Whether it’s the courts, or in her instance, and we’re going through this right now with my grandmother as well. But in Cameron’s instance, she had a mom who is struggling with memory loss and Alzheimer’s that her message, and one of her main messages, hey, you want these conversations and planning that be happening before those instances are in question, where you’re now dealing with more challenges of, is someone in the right state of mind to be able to make those decisions, and what are the legal implications of that?
Great stuff, Tim. That is five of the 10 common retirement risks to plan for. We’re going to be bringing the rest of this list back on the next episode, so make sure to join us here next week. Of course, for folks that are listening to this and thinking, “Hey, it’d be really helpful to have someone in my corner that really can help me plan for retirement, as well as other parts of the financial plan,” we’d love to have a conversation with you to have you learn more about our one-on-one fee-only financial planning services, as well as to learn more about your individual plan and the goals that you have. You can book a free discovery call by going to yfpplanning.com. Again, that’s yfpplanning.com. All right, we’ll see you next week.
[END OF EPISODE]
[0:49:33] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacists Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% down payment for a single-family home, or townhome for first-time home buyers and has no BMI on a 30-year fixed-rate mortgage.
To learn more about the requirements for First Horizon’s pharmacist home loan and to get started with the pre-approval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.
[DISCLAIMER]
[0:50:18] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment, or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation, or offer to buy, or sell any investment, or related financial products.
We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archive, newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.
For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.
[END]
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