Planning for Retirement and future Passive Income are top priorities for many people we talk with on a weekly basis. Today on Wealth Talks, discover why the “4% rule” is no longer relevant and some things you can do now to start planning proactively for your future.
Tom: Welcome to WealthTalks where we talk about solutions, money, and other things that create wealth in your life. It’s good to be back, as always, John. And we’re going to be talking again today about retirement – retirement planning because that’s the number one thing that we hear back from so many people that they would like to hear us address.
John: Yes, it’s a hot topic.
Tom: In fact, it was such a hot topic that in 2015, we released the book “Retirement Curveball” that you and I wrote together exploring the options and the different scenarios about retirement. And our CPA Jack Cohen who was an auditor for the IRS for 33 years actually wrote a chapter in that book along with us to help dispel some of the common misunderstandings that are around retirement. Now, one of the things that we didn’t cover in “Retirement Curveball” is the Monte Carlo paradigm where if you – if you can only spend four percent of your savings and retirement, you’ll never run out of money. Why is that been called to question and actually proven not adequate?
John: It’s because people aren’t earning four percent anymore. They used to be able to earn more than that or near to the market then those well didn’t lose it. But overall, they could assume a fairly average four percent withdrawal on what they had saved and without having to worry about running out of money.
Tom: Let’s back up just a second, because I had a client the other day just talked to me, he says, look, I’m earning 14 percent in other investments and I’m not earning near that in my life insurance policy. Why should I even have this life insurance? So, how can you say that people aren’t earning more than four percent today?
John: Well, across the board, it’s that way. You can – all you have to do is go and Google an article CNNMoney is reporting, Forbes.com is reporting on it. The people are saying, the mainstream experts, the people that are planning for the stuff every day are saying across the board, people are not earning near what they used to be.
Tom: Well, don’t you think that has to do with what I earn this quarter versus what I’ve earned over the last 10 years?
John: Oh, yes. That has something to do with it too, because if you have a loss in the market, you have to earn a lot more than just the percentage that you lost in order to make that back up, because you’re working at the lower principle amount.
Tom: Yes. Well, let’s say that we have a market correction and I lose 10 percent. What am I going to have to make next year to make that back up?
John: Well, if you lose 10 percent, you’re going to have to earn more than that to make it back up. If we’re going to talk about percentages it’s easier to go like 50 percent, let’s say if you just lost 50 percent. You have to make 100 percent to make that back up. 10 percent, numbers are going to be a little bit different. You need to figure it out.
Tom: And so when I Google the S&P 500 calculator for the last 10 years and any of you listeners can do this, plug in the numbers, we come up with actual rate of returns of somewhere around four and a half to five and a half percent. We don’t get this 14 percent that people are seeing in the trump bump or the little glimpse in the market where everyone’s besting out, wow, I just have a 16 or 18 percent return, but they don’t tell you that they lost 35 percent the last quarter. And so when we take that all out and consideration, that’s what we’ve got to really be looking at, not only during the growth phase of retirement funds, but once we cut the life string of income, we’ve got to hope that our internal rate of returns stays very high, because if we lose, one year, now we might be delving into principle to live on and now our earnings go way down.
John: Yes. And most people are. When they retire, “retire,” they are delving into their principle at some rate or another. And that’s why – one of the reasons why the four percent rule that you mentioned earlier is not as applicable today. Some experts in the financial planning – in the financial planning circle are calling the four percent rule dead. It is no longer applicable. They’re using instead what’s called the Monte Carlo projections, where they take and say, well, if you withdraw two percent of your income, then you have this percentage – then they give you a percentage chance, maybe an 80 percent chance of not outliving your money. If you withdraw three percent, well, you can – you can do that for a while, but you have a greater – maybe you only have 50 percent of chance of not outliving your money. And so, they – there is different models to project that now and most of the time, we’re not seeing anywhere close to four percent.
Tom: And that’s where life insurance cash values come in so valuable during that period. Because if we have a down turn in the market, and you’re going to be taking, let’s say three percent from your retirement account, and that’s going to dip into your principles so that your earnings are not going to be so high next time. That’s the time to be able to augment your income with the cash values from your life insurance where you’re not penalized, where you can either borrow, or you can actually withdraw the money and keep your standard of living high. And so the new paradigm in planning for retirement is considering a whole lot more of the value of life insurance, permanent life insurance, like participating in life insurance, as a way to keep your retirement stable and not be worried about running out of money before you die.
John: Yes. Annuities have always been seen as a good guaranteed solid income tool when it comes to planning for a passive income stream. But what annuities do is they lock up your money between now and the time that you need to get to it. And so one of the ways that life insurance can be used is to – as a way to save money during your life where you can access it. You can use the Perpetual Wealth Code. You can finance things in your life that we teach about. And then you can access the money. It’s very similar – the guarantees in the life insurance are very similar to guarantees in the annuity, only you have a deathbed.
John: So like you said, you can – somebody can withdraw or take policy loans to supplements their income. And if it gets to the point where they’ve depleted their principle and other options that they have or even in their life insurance, they could take what’s left in the life insurance and even roll that into an annuity, at a later age. Now, they know that they’re going to get the money out of that annuity, most likely. And it’s a guaranteed income stream. They haven’t locked it away during the most productive years of their lives.
Tom: So, John, we can’t talk about retirement and not talk about the federal government. And Franklin Delano Roosevelt once said that in politics, nothing happens by accident. If it happens, you can bet it was planned that way. So with that, we need to talk about the income reduction act or the 401(k). A lot of people didn’t know that that’s what it was originally planned as.
John: Salary reduction plan.
Tom: Salary reduction plan. But that’s exactly what it is. And what is this plan – it didn’t happen by accident. We can take Roosevelt’s words on that. What did it actually do? What is it that it accomplished? Where did it start and why is it not panning out for most people the way they had expected it to?
John: Well, you even wrote a blog on this a couple weeks ago. How the father of the 401(k) plan, Ted Benna. He came up with the idea, I think it was in the 1970s, was it?
John: Where he had this idea, he was working on some sort of retirement plans for some banks, financial institutions and it was a way to reduce their salary and get the money put into the plan where the employer would help the employee put the money away. And they locked it away, out of the employee’s reach. And so it was reducing their salaries so they can save for later.
Tom: That was basically a forced-savings account. And they enticed the employee to participate in this by saying they were going to differ the taxes on this money. Well,
John: the taxes are deferred you don’t pay on it right away.
Tom: So, what does it defer tax rate really mean? Does it mean – and thinking what Roosevelt said, what did – what did the government have in mind when they said, well, let’s defer these taxes until you’re 59 and a half and can pull this money out without a penalty?
John: Well, the whole thing about tax deferred money, if we take a step back really quick, is that because you’re getting growth on the money that you would pay taxes with, then it’s supposed to grow faster. But think about this. You’re going to pay taxes all that growth as well. So, do you want to pay taxes on the seed when it’s small or to harvest when it’s big? And so the government knew that by allowing people to keep the money, tax deferred and make it grow, and they were going to get more in tax dollars down the road when somebody did retire starting withdrawing the money. That exactly what happens.
Tom: There’s one more covey up to that. And that when the employer matches the employee’s contribution, now the employee, when they retire, pays taxes, not only on their own growth, but they paid the taxes the employer would have paid if they got the salary at the time they earned it.
John: Yes, because that – and that’s one of the incentive for the employer to contribute to those plans. It’s the way to give the employee a bonus without paying all the taxes on it.
Tom: And so that’s one reason that there are mandatory distributions that take place at seven and a half. You cannot leave that money tax deferred forever. And if you do, after your seven and a half, what does the government do?
John: Then they start taking their share of the taxes.
Tom: Because they planned to get more taxes from you in retirement than what they got from you while you were in your work. And then – and their employment.
John: And that’s what we see happening.
Tom: It happens all the time. So, the 401(k) was never intended to replace a pension or a good retirement plan. It was a way to bring money into the government’s control so that they could get more taxes and to prop up Wall Street so that they could have that money to manage and to perpetuate wealth among the elites on Wall Street.
John: The paradigm between the 401(k) and the alternative of using life insurance like we’ve talked about and other financial vehicles, it really comes down to the way that people think about retirements. Some people think of retirement as kicking back and relaxing for the rest of their life and doing nothing. Not a stricter of work after they retire. Other people think of that as an opportunity to get passive income while they maybe switch gears in their work career and are able to go from success to significance as they help people achieve the freedom that they have in life. It’s a totally different paradigm. And we write about that a little bit in the last chapter of our book “Retirement Curveball.”
Tom: We can’t talk about these 401(k)s without adding one more point, because someone out there that’s listening that say, but I am going to be on the lower tax bracket when I retire than I am today. And we’ve asked our friend Jack Cohen, the retired IRS auditor for 33 years. He’s been in this business for a lot longer than most of us. And he says that that just doesn’t happen. Unless be the one who live or happy with living in poverty, in retirement, you are going to pay more taxes than what you’re expecting.
John: So inflation helps to make that become a reality too, because if you think in terms of today’s dollars, you’re not going to – that’s how we live at the same standard in the tomorrow’s dollars.
Tom: That’s correct.
John: You’re going to want more. And so the tax rates don’t necessarily adjust for that over a long period of time. So people in being in a higher tax bracket than they thought they might.
Tom: One thing more we need to talk about when we’re talking about retirement and not Social Security, because a lot of people believe that it is Social Security. There’s nothing secure about it. The only thing that’s true about it is it is a social program. And what it does is you pay into that all your working career. And many people think that they’re going to get that money back without paying taxes on it. But that’s not true either.
John: Not completely, because if you – if you make over a certain amount doing your retired years, then 50, 85 percent of it could face taxation.
Tom: And fact is if you make over $2,666 a month.
John: Not very much money.
Tom: You’ll pay taxes on 50 percent of your Social Security benefit. If your income should happen to rise above $3,666 a month, you’re going to pay taxes on 85 percent of your Social Security. And that is a real shocker to a lot of people, because they’re depending, they’re counting on that money and retirement. And when they get there, it’s gone. And they don’t know where it went to. So, I think it was Will Rogers that once said that it’s not so much what we know. That’s the problem. It’s what we think we know that just ain’t so. And so it’s important that we understand the facts around retirement if we’re actually planning on doing that someday.
John: Yes. And that’s one of the reasons we wrote “Retirement Curveball” because there are a lot curveballs that are throwing at people, both as they’re claiming for retirement and then even wants to get there. And so in our book “Retirement Curveball” which was released in 2015, we go through and then we identify several – at least curveballs, so you can see them coming and either plan to handle them or to even avoid them completely before you have – they ever become a problem for you. And that’s something important to do.
Tom: And, John, we wrote this book to be interactive. It’s not just a book you sit down and read. It’s a book you want to sit down and read with your smart phone or iPad or in front of a computer, because there’s a lot of interaction that you can go to the web and you can fill out your own financial calculator to find out what you need to retire on and some other things that you put in there.
John: Yes. We have some calculators on retirementcurveball.com. Also an interview that you did with an attorney who has been in financial services for several years. And I think it’s close to 30 years.
Tom: So, how can they get this book? How can they learn more? Because this is the number one thing that our listeners are asking us to talk about.
John: Yes. You can go to retirementcurveball.com and the book is available there on the store. You can also go to our Life Benefits Store. Either one of those places, you’ll be able to get the book. And the original version was a hard cover book, sold for $24.95. And now it’s in the second printing, that’s only 12.99. And you can get that on the website, retirementcurveball.com or life-benefits.com.
Tom: Well, that’s a great resource for you. And it’s available on amazon.com as well.
John: And a Kindle version. Yes, you can get it on amazon.com as well.
Tom: Perfect. So you can either get it on our store at Life-Benefits. You can go to retirementcurveball.com or you can go directly to Amazon and get a Kindle version of it. So, we’ll be back next, John, talking more about things that our listeners are emailing and calling in and asking us to discuss. And so if you have a topic that you’d like to hear us talk about, feel free to email us at [email protected]life-benefits.com or pick up the phone and give us a call, 702-660-7000. We’ll be happy to discuss your topic on one of the upcoming podcast on WealthTalks.
John: All right. Have a great week. We’ll be back next week where we talk about solutions, money, and other things that create wealth in your life.