E81: Three Astonishing Destroyers of Your Retirement Plans

Nate: In this episode, we will discuss three of the most common misconceptions people believe about their retirement that could blindside them and wreak havoc on their retirement. She’s Holly and she helps people find financial freedom.

Holly: He’s Nate. He makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: All right. Welcome back everybody to Dollars and Nonsense. It’s great to have you as always, we’d really appreciate it if you would leave a review or a share on social media or something like that, just to help get the word out. We believe this message is extremely important, especially today because retirement is such a huge point of emphasis in most people’s retirement plans and we’ve talked about it many times before. And today we’re really going to do a deep dive into three myths or misconceptions that people have about their retirement that really could cause problems if they’re not addressed, you just don’t want to get there and have your expectations be way off. So that’s really what we’re trying to do is make sure that your expectations are in line with what is real, in line with your reality. Everyone’s a bit different, but we’re going to talk about three things that most people believe, that may not pan out correctly. And I think Holly and I, you and I both have seen expectations gone awry when dealing with retirement.

Holly: When we think of retirement, we believe there is really a safe place to put our money, such as a 401(k) plan, a Roth IRA. We have bought into the belief that because we’re putting our money somewhere where everybody else is doing it, kind of our tagline, if you follow the herd, you’re going to get slaughtered. Just because everybody else is doing it doesn’t make it safe, or the belief it’s safe. But because that’s what we’ve been told, hey, this is a safe way for your money to be there longterm for you in the end. And so we just put it somewhere because we believe the myth that it’s safe. Those funds are secure. We’re going to get all our money. We’re going to be okay.

Nate: This kind of started a couple of reasons, this, myth. So the myth that my retirement fund is safe or my retirement fund is safer than what most people have. Because you’re going to sit down with a financial advisor or the 401(k) manager, whoever it is, and they get an idea for your, quote unquote, risk tolerance. They put you in a fund whether you’re crazy and you want the crazy stocks or if you want a conservative thing. And some people feel like if they choose the conservative option, the low risk, I don’t have a lot of risk tolerance, that suddenly that fund is as safe.

And to me, it’s crazy, and we talked about this, Holly and I, there was an article that got published that said every target date mutual fund, which is what a lot of people’s retirement programs are now being put into, yeah. They say if you’re going to retire in 2040 and that’s your target date, then this fund is supposed to start becoming more and more conservative as you get closer to retirement because they know that people don’t want to lose all their money or half their money in some sort of economic crisis, when they get close to retirement. But what’s amazing is that every target date fund last year lost money. Every single one of them. This was what really spawned it. I’ve talked to some clients, they say, well, yeah, my 401(k) is pretty conservative. It’s invested conservatively.

There is no such thing as a safe retirement fund. There’s things maybe that are less risky, potentially. But there is no such thing, if you’re going to be in the market, the stock market, things tend to rise and fall with the stock market. And I don’t care if you own only blue chip companies and you’re in a conservative place there. If the market drops, you’re going to lose money. So there really is no such thing as, I’m not going to go anything crazy as far as a return, but I won’t lose a lot.

Go back to 2008 there wasn’t a single place in the market where you weren’t going to lose steep double digits by having your money in there. So there is no such thing as a safe retirement mutual fund. Even if it’s a target date or whatever it is, an ETF, whatever it is that you’re in, just know going into it, this is not safe. I’m choosing to be here understanding the risks because I think it’s going to increase in value. Don’t just go there because the advisor said, oh yeah, it’s fairly conservative. That doesn’t mean anything. That’s just asking for your expectations to be not met.

Holly: Yeah, and I think what’s important is that to understand that even the advisor is trying to give you something, even if you don’t want to take risks, that doesn’t have much risk. But do you really want to be putting your money in something that is, in 2018 there’s 652 of these mutual target date mutual funds, 652 lost money. All of them, that’s all of them lost money. Not one of them didn’t lose you any money. So whether you’re being aggressive or you’re being what you considered conservative, you have to be aware of what’s going on in the world today, as well as with your money. And most of us, the other thing when you think it’s safe is you’ve just handed your money, like we said, over to somebody else and they give you, hey, well the average rate of return was okay, but the average doesn’t mean you didn’t lose any money.

Nate: Average is great until it’s time for you to retire and then that happens to be the year or the next year and the market crashes. You really don’t care what you averaged for the last 20 years, you care that 30% of your money’s gone. Averages go out the window. There’s no such thing as a truly safe retirement fund. There are some that may be safer than others and less volatile than others. I mean, if you have your entire retirement in cryptocurrency, yeah, you’re probably pretty volatile. Obviously that’s a higher risk, higher volatility, and there may be some lower, but there is still risk of losing money. That’s obvious. I think we all know that, but I think some people think that I will lose less if I’m in a conservative fund. I don’t think so. I don’t think that’s the case if you actually run the numbers, the more aggressive funds, while they do have larger down years and during the time down years, they also have larger up years.

So I think all of this is a sales tactic to try to get us to invest in whatever we’re comfortable with and regardless, they’re just trying to get you to work with them and they’re willing to say something is conservative and safe, even though everybody knows it’s going to lose a lot of money in a crisis and it’s just not going to grow that well. So I would try to avoid. So first myth, my retirement fund is safe. No, it’s not. I mean, unless you’re sitting on cash or something like that, I mean then at least it’s not going to lose any money but it’s not going to make anything either. So maybe steer a stickler from that.

But the next myth, the second myth is that everyone seems to have this idea that you’re guaranteed to pay less in taxes when you retire. Most financial advisors, accountants, that’s why they’re all promoting these 401(k)s, these IRAs, that are deferred tax, where you can defer your tax until you pull it out later. Like a 401(k) where you get a deduction for all of your contributions. But then whenever you take it out, they’re saying, yeah, it makes sense to do that because the later you’ll be in a lower tax bracket in retirement than you are today. So let’s go ahead and defer the income, defer the tax till then and we’ll claim it then when we’re paying less taxes. Everyone seems to think this is a guarantee. I don’t think it is a guarantee.

Holly: Well, I think one of the questions you should ask Nate is do you honestly believe your taxes are going to go up or down? I mean really, and ask yourself that. When was the last time you realistically believed that when you retire your taxes are going to be less than they are right now? Consistently your taxes are always going up. They’re increasing over time. And I think that that alone, we also think that we’re going to have all this money, but what we don’t realize is we have less deductibles the older we get as well. But the bottom line is taxes go up. They typically don’t go down.

Nate: There’s a lot of questions you have to ask yourself. I mean, it is true. Maybe, you’ll need less income in retirement, or you’ll be making less on paper in retirement than you are today. But does that mean you’re actually going to pay less in tax or you’ll be in a lower tax bracket? I think that’s what Holly is getting at. The fact that you no longer have a mortgage deduction, the fact that you no longer have kids at home, the fact that you’re not making as much money so you’re not contributing to 401(k)s and IRAs potentially, if you were at that time. You’re probably not, if you’re, doing charitable giving maybe that’s decreased because your incomes decreased. So your deductions have gone way down. Your income could go down correspondingly and you could still wind up in the same tax bracket because your deductions have gone down.

And then on the other side, whenever you do put these deferred tax plans in place, every time you pull money out of them, that counts as pure income. So it’s tax at the highest level and that income, if you make over, it’s not even a big number, Holly, I know I should’ve looked up for this, but I think it’s like 35 to $40,000. If that’s how much money you pull out of these plans or that’s how much income you make in retirement, then they start taxing your social security income, an income that’s supposed to be like a tax free income. They say now we need more money. So if you make, it’s not very much money from any source including 401(k)s and IRAs and they start taxing social security so that income becomes taxable. And it’s just a tax central.

So it is possible that you’ll be in a lower tax bracket. I’m not saying it’s not, I’m saying don’t take it as a guarantee. And then the one thing we even forgot to mention Holly is what do we think is going to happen to tax brackets as time goes on? I mean if you’re in your thirties today and you’re looking at 30 years down the road, the question is what environment do you think taxes will be in in 30 years? If you look at national debt, if you look at the spending problems we have. If you look at the fact that the Trump tax cuts that are in place right now are guaranteed to expire in 2026, taxes that are already on the current trajectory are supposed to go up, let alone, it’ll depend on the political climate of the time. So we have to pay attention because that’s why we are such big proponents, Holly, on getting into a tax free environment, because then you just don’t care, future tax rates and we don’t even have to worry about what that’s going to look like in the future.

Holly: And I think the other thing with the tax free environment too, Nate, is that then I’m just going to plug that with the whole life insurance product. When you take a loan out, it’s not income. When you’re taking money from 401(k)s and Roth IRAs and your retirement vehicles, it is considered income to you.

And it’s not a high number to be honest. Right now I think it’s around 35,000 Nate, it might be like 32,000, that you take more than that out, you get taxed on your social security. So now you’re getting kind of double taxed. You’re getting taxed on the money you took out of retirement as well as your social security and more or less you’ve just created more tax for yourself instead of decreasing it.

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Nate: I know a lot of people in their twenties and thirties who are being told to max out their 401(k)s and their IRAs, even though everybody knows they are not in their peak earning years in their career trajectory. Then in their 40s and 50s and 60s up until their retirement, they’re going to make a lot more money, which I think that there’s a lot of people in 20s and 30s who are deferring their assets, deferring their income in these 401(k)s and IRAs because that’s what everyone is telling them to do for this future date, when we all know that, hopefully as your career progresses and it’s due to inflation, you’ll be making a lot more money at that later time and it means you’ll probably be able to retire on a lot more money than you’re actually making today. I just think that’s going to happen for a lot of people in their 20s and 30s. The younger you are, the less it makes sense to fund a retirement fund.

I wouldn’t fund at anytime, but especially whenever you’ve got 30 or 40 years to have changes to it and especially because you’re hopefully going to be earning more money as time goes on anyway. So I find that to be completely crazy and that it’s no guarantee that you’re going to pay less tax when you retire. You need to really do some critical thinking yourself, not just taking the news slogans that you hear from everybody and the cookie-cutter advice and say, do I think that in my life, whenever I retire, I’m going to have less income and a lower tax bracket? Or you could also even make the question, do I want to have a plan where my income is actually lower in retirement than it is today? I mean, maybe you don’t even want that. I don’t think a lot of people do want that, but that’s what it’s implied, that you just will need 60% of what you’re currently making or something like that, which not everyone is interested in living on a lot less when they do retire.

Holly: Maybe you max it out in your 20s and 30s and you’ve put so much money into your 401(k) and then when you actually even say you could borrow from your 401(k), you’ve put way more money in than they even allow you to borrow out. You don’t even get to use your money. And I think that’s what’s

shocking to me, you don’t get to use it.

Nate: Then you’ve got 35 years until you retire and it’s just going to be sitting in there.

Holly: Would you take the money and put it in a freezer and leave it there and never touch it? That’s essentially what you’re doing with a 401(k).

Nate: I hate locked up money. It causes problems that people don’t even imagine, it ruins opportunities that would be available to people. If at all possible, stay in control and own the money. That’s why we’re such big believers in infinite banking as opposed to the traditional way of doing things, because it causes problems. So that’s myth number two.

The third and final myth we’re going to talk about today, and that could be a lot, but the third and final one is that $1 million is still a lot of money. I mean you may be listening to this and you’re like, well I know it’s not a lot of money anymore and this doesn’t apply to me but I don’t know what it is. But there’s still games like Who Wants to be a Millionaire? We still think that $1 million is a lot of money. But whenever you are looking, especially if you are 10, 15, 20 years away from retirement, think to yourself is $1 million 10, 15, 20 years down the road. Is that actually a lot of money?

Million sounds like a big number. And it’s a big number, but that money is not what it used to be. Being a millionaire, it doesn’t mean much. And so I guess that’s what we’re trying to say here, and our third myth, is that if I get at least a million dollars, I’ll have an okay retirement, or there’s some sort of number in our mind, this is my number. I think that’s a big myth. I think that’s concerning and it’s kind of focusing on the wrong thing.

Holly: Well, and I think we’ve talked about this before, Nate, the Monte Carlo effect and that million dollars, like we all have that imaginary number. And yet you really have to ask yourself, how long do you think $1 million will last when you retire? And just taking 4% of it, which is small, and that’s $40,000 a year. I think 20, 30 years from now, $40,000 is not going to be that much money for a year to live on. That’s just me realistically seeing how much things have changed, even in the last seven, eight years. 10 years, 15, you start adding that and the income that we think we need to live on is going to be much greater than what we actually imagine it to be and that million dollars … Let’s say you retire at 65, right? Well, you got to realize people are living longer, so if you’re going to live for 20 more years, do you think the million dollars is going to last 20 years?

Nate: Exactly. And back to that Monte Carlo, a lot of people think that $1 million can produce a lot of money, but as we know with risk simulators, even if the market’s going to average 8% or something like that during your retirement, you somehow had a crystal ball and you could figure that out and you said, this is exactly what it’s going to average. The problem is the market goes up and down, and so whenever you have $1 million, you have to make sure that million dollars lasts. If you could know that it’s going to average 8% as far as a rate of return, then you think, yeah, I could be able to pull out $80,000 a year, and I’d still have $1 million at the end of the timeframe, because 8% of a million is $80,000.

So you start pulling out $80,000 a year, and it just so happens to be that the way the market, it’s called, the sequence of return risk. So at the very beginning of your retirement, you have a 2008 bubble and you lose 40% of your retirement. Well now you have $600,000 and you just took out $80,000 to live on. Now you only have $500,000, you’ve got a 25 year retirement ahead of you, and that $500,000 is supposed to be able to pull out $80,000 a year. And that’s going to be very tough, regardless of what it would average for that to happen. So the $1 million is all I said, most financial advisors say you can only take about three and a half percent, four percent of your assets. If you want to be 90% sure, it’s not even 100%, it’s 90% sure that you can go 30 years in retirement without running out of money. That’s crazy to me, it should be a lot higher than that.

So I guess what I’m trying to say is, especially in retirement programs, $1 million doesn’t go nearly as far as you think. So you need to prepare with that. And the worst thing to happen in retirement is that you thought things were going to be a certain way and they were completely wrong and your ideas about it was completely off. And then you can’t go back in time and change everything and make it better. It’s done. What’s done is done. It’s here now and what we’re trying to say is be on the lookout for misconceptions or myths that maybe you’re thinking yourself, that if you continue to believe them you could greatly miss your expectations for what it’s going to be like and have I saved enough and so forth. And that could wreak havoc. I mean that can cause a lot of panic for people in retirement.

Holly: I think too, Nate, it’s the reality of, honestly ask yourself if you truly believe you’ll live on less once you retire. And most of us don’t really adjust to living on less. We’ve been accustomed to the lifestyle what we’ve had and it’s really hard to, I’m going to say downsize or start living on less than what you made, even if it’s half. And that $40,000 you’re like, that’s the 4% of a million let’s say, but $40,000 and let’s say you were living on even 50 or $60,000 it’s such a transition to change that mindset and that lifestyle.

Because now there’s not a set income, so you actually have to not just think about what is that number but be consistent, but you guys have to start planning. You have to have assets that produce income and grow consistently or passive income. Have created something where you can have passive income. If you haven’t created that and you go to retire, I’m going to say nine times out of 10, if not 10 times out of 10 you’re probably going to run out of money and that’s when panic arises. And we’re trying to really help you see the only way you can be financially free is you have got to start thinking outside that box and you’ve got to start taking control of your own money.

Nate: Exactly right. Well guys, that’s the three myths for today. First off, that my retirement is somehow safe because I chose the conservative fund. I do not think that’s correct and you’re probably actually worse off by choosing that if you actually look at the numbers. The next myth that I’ll pay less taxes when I retire. I think that is the most common myth that is very much incorrect for a lot of people. Not everyone, but a lot of people are mistaken on that. They’re going to live out and they’re going to be paying tax at a higher rate and wish they had gone more the tax free route as opposed to the deferred tax.

And then the hey, if I can get up to a million dollars, I’ll have an okay retirement. You got to make sure that works for you, that you’re very realistic in how much income can come from those programs and that you know what you’re doing. And that being said, this has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e81.