Make It Last – Ep 114 – Difference Between Retirement Planning & Financial Planning

Are retirement planning and financial planning the same thing? NO! In this episode I discuss the differences between them. I also talk a little about the rising nursing home costs and give you an update in what’s happening with the Aid in Dying for the Terminally Ill Act

For a FREE guide on some top Retirement Issues, text the word RETIREMENT to 609-554-5936.

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Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA) and Certified Financial Planner professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.

For more information, visit Medina Law Group or Palante Wealth Advisors.

Transcript below —

Announcer:  Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host Victor Medina, an estate planning and elder law attorney, and certified financial planner.

Victor J. Medina:  Everybody, welcome back to Make It Last. I’m your host, Victor Medina. This is the only show that helps you walk through the perilous world of legal and financial retirement planning.

I am so happy to be back. I feel like it’s been a long time since I recorded a new episode or been here live with you. I’ve been preempted on the live show by a number of Somerset Patriots games. I have to tell you, I don’t follow the Somerset Patriots. I guess, maybe I should.

I’m a Red Sox fan. We’re 14, 15 games out of any kind of the hunt of baseball. I’m not really sure that they’re worth following.

I’m not in a happy mood as a Red Sox fan, since the folks in San Diego did a whole trolling of our fan base by saying that they were going to play the “Sweet Caroline” song and then doing a Rick Roll. If you don’t know what a Rick Roll is, ask your grandkids. They will show you, and you’ll be delighted.

Anyway, Red Sox fan life right now, not great, but I am great. Happy to be here. There’s been so much that’s happened since the last time that I joined you. Let me jump right into some brand new news.

You may have recalled, depending on how big of a fan of the show you are, that I talked about the newest law in New Jersey, helping people be able to end their own life. It was the Aid Medical Assistance in Terminal Illness or In Dying Act.

It is basically what New Jersey had done to put in place a law that allowed people who were terminally ill to select to be able to end their own life. There were rules about that. You had to ask for medication to end your own life two different times, and one of them had to be in writing.

You need certain certifications by physicians, so and so forth, but no sooner had the law been passed and told that it was going to be existence that it was blocked by a judge. Right now, there is no terminal illness law in New Jersey. We are waiting for the resolution for that. That’s a piece of new news that’s out there.

As I mentioned before, it really didn’t change too much about what it is that we do for our planning. I know that people came in and they asked us, “Hey, now there is this new law, does it change my estate planning at all?” especially for people that had done estate planning with me.

I said to them, and I’ll say to you, the answer is no. Quite clearly, the answer is no. Here’s the reason why. When we put legal planning in place, one of the things that we do with your healthcare documents is talk about who should be able to make healthcare decisions for you if you’re not able to make them on your own.

The goal for that, essentially, is to be able to have you put out a set of decisions, wishes that you want. That way, if you were unable to make decisions on your own, at least you know that you had left behind certain guideposts for people to do, to follow whatever it is that you wanted them to follow.

What had happened, though, is that this terminal illness law is not a replacement for legal planning, because legal planning is only there when you can’t make decisions for yourself. This terminal illness law, it requires you to be able to make decisions on your own.

You can’t aid in your own death if you have lost capacity to be making legal decisions altogether, and so the two don’t conflict at all. The two don’t conflict at all. In fact, they work synergistically, because if you’re able to make your own decisions, then if this law ends up going back into being in effect, then you could choose to do that.

If you lost your ability to make decisions, then your advanced healthcare directive would take over. It would dictate the kind of care that you would have provided for you as you were terminally ill or permanently incapacitated. They work together. That’s the first piece of news.

The second piece of news has to deal with the rising cost of long‑term care. Remember, in our office, one of the things that we focus on is making sure that people are able to protect themselves from the devastating costs of long‑term care.

Specifically the cost of a nursing home, an assisted living facility, anything that’s related to, as you get older, being able to care for yourself, stay independent as much as possible, or getting the kind of medical care that you need as you get older.

It’s one of the reasons why I went out and got the certification to become a certified elder law attorney or CELA. It’s a big focus of what we do.

For people that are really concerned about the rising cost of long‑term care and how it might impact them, my law firm really focuses in on helping people protect those assets. It’s a good thing that we do.

A news piece of news ‑‑ this was published in the “Star‑Ledger” ‑‑ talks about the rising costs of nursing home care specifically in New Jersey. Now, prices in the state on average went up about six percent for a semi‑private room, but I know you out there.

You want something a little better than a semi‑private room. You want a private room if you can get one. Those rose by 11 percent. It makes New Jersey the 7th most expensive state for nursing care.

This study was by, and it was based on data from the 2018 Genworth Cost of Care Survey. You’ve got to be a little suspicious about some of this. Realize that Genworth is a company that specializes in selling you long‑term care insurance, but I do believe the numbers, and the numbers are off the basis of a survey.

The average cost of a semi‑private room in New Jersey is $10,646 per month, or, if you multiply that times 12, $127,752 per year. The study found that compares with the national average this way.

The national average for an annual cost for a semi‑private room is only $89,000. This is roughly, almost, I would say a good $40,000 or so more per year, or almost $3,200 per month more expensive. That’s for a semi‑private room and I know you. You want a private room.

Here are the averages. The average for a national private room stay is either $8,300 or $100,000 a year. That compares with $142,000 a year in New Jersey. It is $42,000 a year more expensive for a private room in a nursing home in New Jersey.

Here’s the thing, folks. Costs are going to continue to skyrocket. They predict that the national average for a private room by the year 2028 is $134,000. That means that it’s going to rise another 30 percent.

If you do that number against $142,000, that means that here in New Jersey, you’re looking at almost $180,000 a year for a nursing home. That’s astronomical. That’s way more than a college education.

Figure if you go back to school, if you go to enroll, and you’re in a dorm room, maybe get a meal plan, it’s way easier to live in the college campus, and you get to go to classes with the young kids. Maybe they’ll invite you to a party.

Even if New Jersey’s prices look bad, realize that it’s worse other places. The highest level of increases included states like Alaska and Minnesota. Alaska’s numbers are nuts. The average annual cost for a semi‑private room is more than $330,000.

Part of the reason why Alaska’s costs are so high is because it’s hard to find and maintain 24‑hour skilled caregivers. They have a smaller population, and there are the high costs of heating and electricity in remote areas. This is not me guessing. This is according to published reports.

There’s only a few places that had nursing home costs go down over the same two‑year time period. One of them was Delaware, next door. We also had Kansas, Montana, and South Carolina.

Here is the important thing to take away from this part of the segment. The cost of long‑term care is rising. It is getting more and more expensive to care for people as they get older.

The care itself is going up. People are living longer. Not only is the cost of the labor in around there, but what people receive in that form of care. There are more options to keep people alive for a longer period of time. It’s just that they’re more expensive.

When people don’t do any form of advance planning in this area, what ends up happening is that they’ve got to spend down all of their money, which has the impact of not only devastating their piggy bank, the money that they have available, if they happen to be married, concerned, or responsible for anybody else, it ends up compromising their ability to care for someone else.

In a case of a married couple, what ends up happening is that both spouses have to get poor. Not just the one that’s sick, but the one that’s healthy, too. They really have to live on less. They have to give up more security. They have to end up changing their quality of life in a way that I think was completely unexpected and probably not fair.

We can debate. I say that word gently. We can talk over a beer where we’ll debate whether or not the system ‑‑ whatever you think the system is ‑‑ that the system should not pay for people who are sick.

If that’s what you think the system should be, especially if they need to be poor first before we’ll help them. Maybe we’ll talk about that. I don’t really think that’s the way to do it, but I could see a disagreement about that.

However, this idea that poor married people, that the spouse should get poor, too, I’ve got a hard time getting there. It’s not their fault that they married somebody that ended up having to be sick.

By the way, they have a life to live beyond it. Even if we take all of the money of the people that did get sick, tell me, how is it fair that we end up taking it from the other people, too?

The nice thing is that you don’t have to do that. Working with a qualified elder law attorney will provide you the opportunity to know what assets are available to be protected, and what you need to do in order to protect those assets.

It strikes me as a good time to transition to what I wanted to talk about today, in the bulk of the show, which is the difference between retirement planning and financial planning.

This discussion around elder law, asset protection planning, and what we do to make sure that people’s assets are protected, it’s the kind of discussion that distinguishes people who focus in a particular area, and can deliver a particular skill set to the situation.

The financial planning, just as it’s generally known, is a pretty important part of every life as we go through into different phases.

Some people are really good at financial planning ahead for the future, and some people are not as good. Regardless of where you fall on that spectrum, it makes sense that we should all do a little bit of financial planning in life if we want to be successful later down the road.

But here’s the thing. At some point in time, you get to a spot where your financial planning might need to shift a little bit. I believe this is where you start to see retirement in the future.

The problem is that most people view retirement planning and financial planning as essentially the same thing. They don’t make any changes at all to their life.

If you ask the average individual the difference between retirement and financial planning, a lot of times they’re going to tell you that they are synonyms, that the titles go hand‑in‑hand. However, I don’t believe that this is the case, and I want to clear the error up today on this topic.

Now, to some of you, the difference is going to be very obvious, but I too often see a misunderstanding between the two topics. I want to explain what each of them means, and how you can prepare yourself to transition them from one phase to another in your life.

It’s part of the reason why, when I open the show, I talk about this being the best place ‑‑ a little hyperbole there ‑‑ but the place that you need to come to for the marriage of legal and financial retirement planning.

See, I make the distinction that retirement planning is the umbrella over which, that covers, the legal and financial component of your lives. The kind of legal planning that we do is specific to the area of retirement planning.

It’s estate planning. It’s drawing up wills and trusts, dealing with taxes, and basically doing everything that we need to do to help protect somebody with legal planning, but it focuses in on people who are getting close to retirement.

That’s a distinction between just everyday planning for, I don’t know, maybe if you got a will when you were 30‑years‑old, and you had your first kid.

That kind of thing doesn’t necessarily require specialization, because even though there’s a risk that if something happens to you, and you die, that you’ll have a plan that works. You need a plan that does work. If you make a mistake in that area, likelihood that it’s not really going to impact you.

Just the way the numbers work, it’s good to have some documents and some planning in place, but the chances that you are going to die catastrophically and orphan your children, they’re low.

You just have to do the right adult thing, get some insurance, get some life insurance, get a good legal plan in place. If you make a mistake, it’s likely not going to come back and bite you.

If you make a mistake in the realm of retirement planning, you will, at some point, get retired. Whether or not you voluntarily retire, you simply get to old to swing the hammer onto the anvil and do the job you were doing, at some point and time, that’s going to happen.

If you make a mistake in that area, it’s going to be difficult for you to come back from that. That’s what’s so important. What I want to do today is I want to talk to you about the difference between financial and retirement planning. I’m going to give you some new distinctions in that area.

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I’m going to help you distinguish between the skills that are necessary for retirement planning, the approach that’s necessary, and how all‑encompassing it needs to be for you in your life.

Let’s do this. Let’s take a quick break, and when we come back, we will hit this topic hard, “What is the difference between retirement and financial planning?” Stick with us, we’ll be right back after this quick break.

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Victor:  Hey everybody, welcome back to Make It Last. Today we’re going to talk about the difference between the retirement planning and financial planning. To some of you out there, you may think this seems very obvious and simple, but I believe I can open up many people’s eyes when I start to peel back some of the layers to this.

One of the most common mistakes that I see every day in my office is someone coming in who thinks that they are ready to retire. Maybe they’re already retired, and they have all or most of their money sitting in the stock market.

Or they have a legal plan that’s made up of just a will, power of attorney, and a health care directive. There’re no trusts in there, nothing like that.

If they come in looking like that, I spot that as being a mistake, that somebody really didn’t take care to understand what was necessary as part of their retirement planning, and they didn’t do anything to change. I like to figure out exactly why people invest the way they do, or do legal planning the way they do, so I’ll ask some questions.

Typically, the person is invested the same way in retirement as they were leading up to retirement. This is where I start to see the disconnect. I’m not saying you have to completely change everything, and that it doesn’t look somewhat similar to what it was like before your retirement.

I want you to understand exactly what your future looks like and how you may or may not need to make some adjustments now in the hopes for a more confident future.

Retirement planning is completely different today than it was 20 or 30 years ago. Back then, you didn’t have to do a whole lot of planning. The big reason for this is because companies offered pensions, which many people were fortunate to receive on retirement.

Pensions where that agreement that the company made with you that said, “We’re going to take care of you after you die. You gave a whole life over here working. We will set up an income stream for you so that when you’re no longer capable of working, you won’t have to worry about what your future is, that things will end up being OK.”

The difference is, today, the majority of workers are retiring without a pension. They don’t have that stable source of income coming in every month to support them. Now, they have to be more proactive.

They’ve got to build a game plan that will last throughout their lifetime. I want to not only explain to you what retirement planning really means, but I also want to give you an example of how retirement planning could go wrong if you don’t plan for it correctly.

I believe there are different phases when it comes to your financial life and your legal life. You should be aware of which phase that you’re in, so you can plan accordingly. Don’t stress out if this seems to overwhelm you. My goal is not to do that. This is just not likely where your experience is, that you’re an expert in retirement planning.

I also believe that you shouldn’t go through retirement alone, rather, you’re going to want a guide, or the right financial professional to help you with every step of the way. If you’re lucky, you can get a professional that is skilled in both legal and financial planning.

The best kind of people are going to be both lawyers that are certified elder law attorneys, as well, as well as being certified financial planners with an advanced certification in retirement planning.

A combination of that is just too strong. That’s what you’re looking for. To help you along the way, I want to give you a little paper that I wrote, a guidebook, if you would like, on that.

The way that you’re going to do that is you’re going to text the word “retirement” to 609‑554‑5936. On your cell phone, open up the text messaging software. In the message part, write the word retirement. Then in the number part, you put 609‑554‑5936. Then what you’re going to do is you’re going to get my “Top Retirement Planning Issues.”

That’ll give you an opportunity to receive that as part of what you have as your tools going up along the way. That will give us an opportunity to meet one another virtually. You’ll see a little bit about what we think about in retirement planning.

If it turns out that what we think about retirement planning is what you think you need, then there might be an opportunity for us to talk, and you can reach out to our office for that.

Let’s jump into the show for today. Retirement planning versus financial planning, or retirement planning versus basic legal planning, or retirement planning versus estate planning.

There’s something specific in retirement planning that’s important. There’s a difference between people at work and money at work. People at work refers to financial planning, whereas money at work refers to retirement planning. Let’s let that soak in for a second.

When you were younger and working, you’re busy doing your job and going through life. The financial planning that you’re doing is essentially working to build up your nest egg. However when you retire, you don’t have that job any longer. Now you need that nest egg that you have been building, building and building and building.

We need that to work for you. In the beginning, your financial planning where you were building up retirement, that’s your people. That’s you at work.

When you get to retirement, you need your money to be what works. We need that to be able to provide an income and help us manage our retirement. Let’s explain the different kinds of planning a little bit more.

Retirement planning is designed to focus in detail on the expenses after the paycheck stops and how the nest egg or assets that you have accumulated can generate an income stream that’s going to cover those costs for the rest of your life.

In other words, income planning and planning to figure out how your nest egg is going to create an income for you is very important. When you’re working, that is how you’re generating an income.

It’s not really something that you’re concerned about, but when you’re retired, now you got to figure out a way to create an income stream that’s going to last through your life.

Not only does retirement planning require you to create an income stream, but it also should focus on legacy planning, as well as planning for health care and potential long‑term care expenses.

See how that’s all jumbled in together with both financial and legal planning? It is understanding that once you enter retirement, you’re going to go tiptoeing through a landmine. Without a plan, there’s a chance that you don’t make it all the way across.

Retirement is in the later stages of your life so that when you pass away, you want your assets to be passed on in a tax‑efficient manner to your loved ones or beneficiaries, whoever they are. That’s going to require really great legal planning that understands how to leave assets behind in the most tax‑efficient fashion.

When you’re retired, you have to plan for health care costs, because you’re no longer at a job that might be providing them to you. When you get retired, you’re planning has to include your potential long‑term care costs, and we know how expensive those could be. Retirement planning has to do more.

We all know how expensive these things can be in retirement ‑‑ health care, long term care, creating an income, leaving money away not in tax‑efficient fashion. I just don’t want anybody depleting their nest egg due to a lack of preparation for this.

Financial planning, by comparison, this is designed to focus on the accumulation phase of your work lifecycle. Your goal here is to be accumulating wealth in this stage to make sure you’ve got a general but realistic target about how much you’re going to need in retirement.

You’re running down this path on this road, just understanding that you’re going in a particular direction, and that particular direction is going to generally lead you where you need to be.

One of the best pieces of advice that you can give somebody who is building a financial plan is simply, “Save as much as you can while you’re working.” That is the most salient and powerful piece of single advice that you can give somebody that’s going through this financial planning portion of their life. “Just save as much as you can, while you’re working.”

Why is it that people do that? The reason why is that if you get to a point in time where you’re saving a whole bunch of money from what you’re working, you’re doing two things at once. The first is, the account that you’re saving into, that’s your nest egg. It’s building up really quickly.

The second thing that you’re doing is your getting used to living on less. That way, whatever you have saved lasts as long as possible. Your nest egg has the best chance of giving you a comfortable retirement.

Like I mentioned when we talked about retirement planning, income is not an important part of the financial planning, because you have it coming in from work. You don’t have to worry about generating it. Yes, you may do some legacy planning, but it’s not a big deal.

You might get a term life insurance policy so that if you die in the middle of working while you’re doing your financial planning that what you have left is enough to help people live the life that they need to live.

You probably don’t have any real concern for long‑term care costs. Your health care costs probably aren’t a big deal either because most of the time that job has health insurance as part of its benefits.

You’re younger in this stage of life, so you can correct for any mistakes that you make. It’s hard to veer away off course when you have that much of a lead ramp, but when you get closer to retirement this is when the planning needs to start to shift.

We’re going to transition from accumulation to preservation, accumulation from implementation or using the money. As we all know, priorities often change as time passes. I can’t believe that this would be any more true than when transitioning from retirement from your working years in terms of your priorities.

Unfortunately though, as I was saying, I often see people with planning very similar as they reach retirement to how they were doing when they were working. For this reason, I created this topic for today to discuss the difference between the two.

Now that I’ve describe the differences to you, what retirement planning is and what financial planning is, I want to take another step and explain why it’s important to transition from wealth accumulation to wealth preservation.

Wealth accumulation. Let’s say when you’re working, when you’re in your 20s, your goal is to accumulate money. Some fashion, get the job, get some savings going. You want to accumulate the money.

As you reach your 30s and 40s, some of you even into your 50s, you’re likely investing and saving to grow your nest egg as large as possible for your retirement years. When you’re in this wealth accumulation phase, you have two things that are on your side.

Number one, you’ve got time. If the stock market goes down like it’s been going crazy recently, it might affect you for the immediate time if you are needing that money, but you know that you have time on your side, because you don’t need that money so you can make up the loses.

It’s funny, I read a tweet ‑‑ hopefully, everybody up here is knowledgeable what Twitter is and what tweets are. I read a tweet from somebody that says, “Who right now can be a long‑term investor?” It had to do with this whole craziness that’s going up and down in the market.

The answer, what I said to myself was, “Hey, me. I’m in my mid‑ 40s. I have time on my side. I have all the long‑term vision that I can accumulate. I’ve got seven percent returns on average for the long haul in my planning future. I’m going to see the Dow at 100,000 points when I get to retirement.”

If I don’t, there was something systematically so wrong. It doesn’t matter that the S&P didn’t match, whatever results were. If that doesn’t happen, there’s something so fundamentally wrong that has nothing to do about long‑term investing, about how much I had in an equity mix at that point in time. But I have time on my side, and that’s important.

The second thing that you have on your side is the earnings potential that you have coming from your job. This is the income come again, meaning that your reliance on specific planning, retirement planning, is completely irrelevant at that time, because you don’t need your assets to provide the life for you or your lifestyle for you. Your work does that.

One of the key mindsets in the wealth accumulation phase is to grow your money. Since you’ve got time in this phase on your side, you have lots of opportunities to grow the nest egg, and at this stage most people are going to grow their money by having it exclusively invested in the stock market.

That’s basically me, right? Aggressively invested with a high mix of stocks, as part of the stock market portfolio, because numerous studies have already shown that the stock market has historically outperformed over the long run fixed‑rate investment and savings accounts. For this reason it’s acceptable to invest a majority of the money in the stock market.

However, as you transition to retirement or the wealth preservation phase, this investing method is going to have to change, may have to change, unless you’ve got all of your needs met by your fixed income.

When you get to wealth preservation, this phase of life usually starts somewhere around age 60 when you see retirement on the horizon. It’s visible to you.

This age is going to be different for everybody, but when you start to see retirement on the horizon, whether that’s 5 years from now, 10 years from now, 2 years from now, whatever that is, that’s the point in time where you start to transitioning to the wealth preservation phase.

When you get to this phase, you lose the advantages of the two things that I said that were on your side. Time, no longer on your side. If you have your money invested in the stock market, and it takes a 40 percent drop, it’s got a much bigger impact than it would on somebody who’s 30 or 40 years old.

Number two, you no longer have the same earning capabilities on your side. You might be making your highest salary, but the vision, the amount of time that you have to make that salary is incredibly shrunk.

When you’re 30, you’ve got 30 years of working. When you’re 60, how many years do you really have? You may need to be on a fixed income when you’re towards retirement so this money, this earning potential, this income is not going to be as available to you as it was during the wealth accumulation phase of your life.

One of the key mindsets that you should have in the wealth preservation phase is protection, protection against lots of things. Protection against the value of the account changing too erratically. Protection against your expenses increasing wildly over the course of long‑term care. Protection against the impact of income taxes. Protection against the impact of taxes on your ability to leave a legacy.

See, when you’re retired, you cannot afford to lose a large amount of a nest egg that you’ve spent 30 or 40 years to accumulate, so protection is a key mindset.

Another key mindset is income. As I mentioned, many people today are not fortunate enough to receive a pension, so they’ve got to rely on Social Security as their income source, but Social Security alone is not going to cover it for most people. You don’t want to live on the budget that is created by having Social Security being your sole source of income.

Now you’ve got to create another income stream in retirement. One of the biggest problems that I see is people retiring and having their money invested similarly to how it was invested when they were working.

They are OK taking on risks, so they do so. Not only do they do so, but they draw from this money that’s in the market from those accounts in order to provide themselves an income. That’s how they provide the income.

They provide the income by dropping the bucket down into the well and pulling up the money that they need, not without any regard to how much water’s in that well. It could be fine, I guess, but there can also be some unwanted outcomes.

I want to explain to you what that means, except I got to take a commercial break.

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Victor:  Stick with us. When we come back, I’m going to talk to you about what it means when we’re talking about what the risks are if all you do is draw from the accounts in the market without changing your investment strategy. You’re going to want to listen to this. We’ll be right back after this quick break.

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Victor:  Hey, everybody. Welcome back to Make It Last. We’re talking today about the difference between retirement planning and financial planning. We’re talking about different mindsets that people need to have, that when you’re in retirement, you need to have the key mindset about protection and income and how you’re going to generate that.

I said to you that there are some risks involved if you end up staying invested the way that you were in retirement. Here they are. One of the risks that you are facing if you don’t change your strategy is the impact of the sequence‑of‑returns risk.

Sequence‑of‑returns risks are sometimes called the sequence risk. It can become an issue as the individual, you, takes withdrawal from funds underlying investments, dropping the bucket into the well and pulling up the water that you need, without regard to how much water is in there.

The order or the sequence of annual investment returns needs to be part of a primary concern for retirees who are living off of their income and their capital.

In other words, sequence‑of‑returns risk occurs when you, as an individual, is drawing from an account, invest it in the stock market. The risk occurs when the investor receives lower or negative returns in the early years when they start drawing from these accounts.

When you do the math on this, when you extrapolate out the impact of having a slower sequence of returns, financial outcomes can be wildly different and potentially very negative for people that are in the situation where there was a negative sequence of returns in the beginning part of their retirement.

Here’s the thing. You can’t determine where they’re going to be up and down. You don’t get to choose. I know that you’re saying, “Well, OK, Medina. I just want to make sure that I don’t have a lower sequence of returns in retirement.” Hey, I don’t want you to have one either, but I don’t control that. There’s no dial, and there’s no lever off of it.

Just think about what perilous position we’ve been in, in an economic state, in terms of balances with everything that’s crazy going on. I just had a series of tweets over the weekend, about how everybody needed to divest their investments in China, and how they were going to have retaliatory tariffs.

What ended up happening in the market? It plunged, reacted negatively. It hates inconsistency. Could you have predicted that at the beginning of the year?

The answer is no, if you were looking at historical returns. January, February, and March, man those were bang‑up months, all the way up through May. Bang‑up months, and what happened after that was a bit of a roller coaster.

If the market’s down in your first couple of years of retirement, the sequence‑of‑returns risk can potentially deplete your portfolio very quickly. If the market’s up, you’ll be much better off. Here’s the thing. How willing are you to risk your nest egg, on how the market performs in the first couple of years of retirement?

My guess is that you don’t want to take this gamble. That is very reasonable and rational. Here, I’ll let you in on a quick secret, I do this for a living.

I manage investments for people, I give them a portfolio for what we’re doing. For me, I don’t want the sequence of returns to be low in the first years of retirement. I don’t want to take any gamble with that.

Now that I’ve explained to you what a sequence‑of‑returns risk is, I want to give you a hypothetical example to show how large the impact could be.

You got to stick with me, because I’m going to be throwing some numbers at you. We’re going to be doing some math over the radio waves, over the podcast waves. Put your thinking cap on, stick with me.

Now keep in mind, this is just a hypothetical example. It’s purely for illustrative purposes. It’s not a representation of past or future results. There’s no guarantee of any future performance. This example does not represent any specific product and/or service.

If that sounded to you like a disclaimer, that’s because it was. This is only for illustration purposes.

Let’s say we’ve got two hypothetical portfolios, each one of these two hypothetical portfolios has initial value of $500,000. Two accounts, we look at the balances, they both started $500,000.

Each one of these portfolios are going to withdraw $30,000 beginning in year one and be adjusted upwards for 3 percent a year for inflation. Same setup, haven’t changed anything yet. Both buckets, $500,000 each bucket, going to take out $30,000 in year one and have that money increase by 3 percent every year.

The first portfolio has investments returns of, now watch this, ‑8.4 in year one, 4 percent in year two, 14.3 percent in year three, 19 percent in year four, ‑14.8 percent in year five, and ‑26.5 percent in year six. This equals three positive years ‑‑ year two, year three, year four, and three negative years ‑‑ year one, year five, and year six.

Obviously, the negative years aren’t ideal, but it can’t be too bad, because there’s three, and they’re equal. Wrong. Portfolio A has been depleted down to $248,000 in just six years.

With that sequence of returns and that withdrawal behavior, you took an account that was worth $500,000, and in just six years, it’s $248,000. It’s got less than half of what they owned when they first started drawing from it.

Now let’s look at the other bucket. That bucket has got an investment return of 1.3 percent in year one, 10 percent in year two, 7 percent in year three, 30 percent year four, ‑3.1 percent year five, and 31 percent year six. After only six years, the nest egg is equal to $708,917.

They actually have significantly more money than what they did when they got started six years ago while they were drawing out $30,000 plus per year.

This is obviously very appealing. The reason why people take on risk is to be rewarded for taking on that risk, but I can’t stress enough how much of an impact negative years early on can affect your portfolio.

If you have a period of market loss that occurs when you’re transitioning into retirement, that can have a major large impact on your overall nest egg. Retirement planning may be the next 25‑30 years of your life, 35 years even, so you have to plan for this long journey.

You can’t just walk out the door and be like, “You know what, I always walk this way to work. I’ll keep walking this way because even though I’m not going to work it’s where I need to be.” You could end up in the woods. You could end up fighting a bear.

As I’ve illustrated with the numbers, taking too much risk in the market would cause you, can cause you, to run out of money in retirement. This is something that most people cannot afford. Creating a well thought out retirement plan is very important. With the right guide, it may be possible for you.

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Victor:  Sorry about that, kind of knocked into the microphone there.

You need this well thought out retirement plan. It is important. With the right guide, it’s possible for you and your future to be able to survive a large portion of your nest egg being subject to a downturn in the market. I just focused on the sequence‑of‑returns risk. I just focused on one potential thing that might happen to you.

I didn’t talk about the other bears that might be out in the woods. I didn’t talk about what might happen if you had an increase in long‑term care costs. I didn’t talk about what happens if you have an increase in your healthcare costs. I didn’t talk about what would happen if there was an increase in the income tax structure.

Does everybody know that we’re in the lowest income tax rate in almost 15 years? In fact, the biggest change in the income tax laws over 30 years? Those are other risks, too, and they can be handled with a great retirement plan. If you want to learn more about this, remember that I’ve created a guide for you that helps you deal with top retirement issues.

The way that you get that is by texting the word “retirement” to 609‑554‑5936 and we’ll send out that report to you. All you’ve got to do is you’ve got to put your email address in there, and we’ll get it to you.

If you want to bypass this, if you end up just saying to yourself, “Boy, this is something that totally is for me and I need to fix what’s going on here,” you can call us directly.

You can schedule an appointment to come in, where we will help you figure out whether or not our retirement plan works on the legal and the financial side. We’ll help you. You do that by calling the office at 609‑818‑0068.

The thing is, my goal is to make sure that you are in the very best position in order to help protect assets and preserve what you’ve built, a lifetime to accumulate. The only way that we do that is by having a great plan and the opportunity to sit through that.

We want you to have the very best advice, strategy, all of that, in order to get through retirement. We can do that with you, being guides that specialize in this area, being guides that focus on this as exclusively what it is that they do.

If it’s not us, then you have to work with somebody that is able to do that, both on the legal and the financial side. You have to find somebody equally skilled in order to be able to do that. A dual fiduciary, putting your best interests above their own essentially in a position where all they do is focus on the very best strategies to be able to help people who are in or nearing retirement.

I just got back from a vacation. Took a big vacation with my family of 14 of us. All went to Disney World. It was a great vacation. It was something that my mom wanted to do, because my mom has got a health crisis, and this was a way of having everybody really spend a lot of time together and create great memories.

We had three different families in terms of my brother, my sister, and I, then my parents, my mom and my dad, who wanted to be able to travel with us. The most important thing that we did was put together a plan for how we were going to navigate the next seven days. The plan needed to be flexible because life could change. In fact, it did.

My family was supposed to join me on Wednesday and their flight got cancelled. They didn’t join me until Friday. That meant that we needed to be able to be flexible about dinner reservations and who got to see what. We had built the flexibility in at the very base level with the foundation that we had created about where to stay.

We made a decision that we were going to stay at a particular resort that would give us the flexibility to get in and out of the parks with a lot of ease. They were close in. They were close into where we needed to be.

The thing about it is, that flexibility ended up helping us, because when we needed to make changes because of unanticipated things, those changes didn’t devastate the plan, didn’t devastate the vacation. It’s not because everybody there didn’t care about having a good time. Quite the opposite, actually.

Everyone in there was very much intent on having a great time, but the plan itself was the thing that made it possible for us to have this great time even as we made changes. If we hadn’t started with a flexible plan, we would have ended up in a really harsh position.

Here’s the punchline. The plan was created by a professional. It wasn’t created by me. I had input. I was the client in there. I went to a Disney World specialist, and I let them create a plan. I let her create a plan. She stayed there with me. When something needed to change, she was available to be able to help me as a continued guide in that area.

You deserve the same thing in retirement. You deserve the flexibility that a plan could give you, and working with somebody who is a pro at this, and what this is all that they focus on. I hope you’d give us a chance to do that if you’re interested.

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Victor:  If you want to do that, you can reach us at 609‑818‑0068, to work with somebody that focuses in this area.

Hey, it’s great to be back. I’m so happy you’ve joined us today for today’s show. If you enjoyed it, please share the show with a friend. Let them know that we’re on the radio on Wednesday at 11 o’clock in the morning on WCTC 1450 AM.

Or in the alternative, you can join us on our podcast by going to any place where podcasts are available, Apple podcast, you can go to Spotify, basically anywhere you can go to get a podcast. Look for the words “Make It Last,” and subscribe to it. You will not only get this episode and future episodes, but all the prior episodes as well. And share it with your friends.

So glad you can join us. We will catch you next week on Make It Last where we help you keep your legal ducks in a row and financial nest egg secure. Catch you next time.

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