E2: Retirement Myths that Could Cost You

Nate: In this episode, we will discuss the top three myths most people believe that are keeping them from having a successful retirement and what you can do to avoid going back to work. She’s Holly, and she helps people find financial freedom.

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

Nate: So today’s episode is all about retirement, and there’s a lot of mumbo jumbo out there about retirement. And there are some things people believe that just aren’t true, and by believing them, it’ll actually set you up potentially for retirement failure. And that’s never fun because you’ll have worked your whole life thinking you’re doing the right thing, and then when it hits, you’ll realize you were not prepared. And that’s always scary, and I know, Holly, you’ve worked with many clients, and we’ve seen people have to go back to work after they thought they could retire. You can ask almost anybody who retired around 2008 or 2009 in that area. You’ll see them probably, they’re the ones who are a little bit older, saying, “I had to go back to work.”

Holly: Nate, or the other thing that’s happened is because of 2008/2009 and the financial crisis, they actually weren’t able to retire when they thought they were going to, so they’re having to work even longer in order to build up that retirement income again, or what they believe is that retirement nest egg. Because what they’ve been taught is build up the nest egg and then you never have to go back to work. Instead, it’s now 2016, and they’re still working because of what happened in 2008/2009.

Nate: It’s a shame. What’s funny is that the big guys in the world, the mutual funds and Wall Street and those types, who are the biggest promoters of this retirement idea; they always paint this as the golden years, but honestly in working in the financial planning business and helping people with money, I haven’t seen much more in people’s lives than retirement that brings stress. This thing that’s supposed to be really exciting and freeing and fun, I just talk to people, and they’re all stressed out about it. “Am I really going to be able to make it? Is my money really going to last? Will I have enough?” And those are the questions we want to try to answer today. Some thoughts that you may not hear elsewhere that you really ought to be thinking to yourself as you’re making plans and preparations for that day to turn—what to some people is turning into a nightmare—and turn it into something that really is golden.

Holly: And most people believe that the market is doing better than it really is. They really believe what investors are telling them and stockbrokers. That the market is doing really well. And so that as long as their money is somewhat safe in the market that it’s performing better, so they’re going to have that retirement nest egg. And yet what they’re finding out, and just in speaking with a client, that’s not always the case or that’s not even close to the truth because they do go and retire, and they don’t even have the money to go visit the grandkids because of how much the retirement nest egg doesn’t provide for their needs.

Nate: You’re exactly right. Today we’ve got three main points we want to get into. The top three myths that most believe that are keeping people from successfully retiring. And you were kind of mentioning that first point—and the first point is that most people believe that the market is going to do better than it really is. That’s just done from marketing from Wall Street. Most people believe the market is going to do better than it really is. And whenever you make a plan—you know, it’s like in the Bible they talk about building your house on sand. If the storm comes, your house could be ruined. And that’s what people saw happen to their retirement houses in 2008/2009. Regardless, that idea—and Holly this is what I wanted to get into—if somebody sees a spreadsheet … you’re sitting in front of me, and I’m a conventional financial guy, and I show you a spreadsheet. I’ve Dave Ramsey. I’ll be Dave Ramsey. [I say,] “The market is going to perform at 12% on average for the next 30 years of your life, so all you need to do is put X amount of dollars in. Say $500 a month, $300 a month. And if you put that into this mutual fund here, and in 30 years you’ll have this amount of money, and that should be enough to make it.” Now, Holly, what are some issues if that projection doesn’t come through?

Holly: If the projection doesn’t come through, you’re either going to have to work longer, you’re going to have to live on less, or you’re not going to have the money to retire, so you’re going to have to go back to work. And the key points, even in what Nate was saying, is you heard certain things in that scenario. You heard 12% average. So we think our money is earning 12%. We don’t see in that spreadsheet what happens if there’s a loss or it doesn’t produce as well as it said. Even Nate, if it drops a couple percentage points, it dramatically affects the outcome of that retirement plan and that mutual fund. And instead what you end up having is, you would think at 12% I’ve got 12% more for every year that I’ve put money in. And that isn’t true is it, Nate?

Nate: No. You’re exactly right. And that’s playing to something—everybody likes to tout average returns; they don’t like to tout actual returns. The returns after the management fees, the returns after you incorporate bad years. Everyone knows the market doesn’t do 12% every single year. They know it goes up; it goes down. It fluctuates. But have you really looked at the impact of a fluctuation? That’s like, Holly, what we’ve done many times with of our clients is let’s say you’ve got $100,000 in your program. You earn 50% the next year. And now your account is up at $150,000. You did great. Then the next year, we had another 2008, and you lost 50%. So in one year you made 50%; the other you lost 50%. Over those two years, your average return is zero. You should be right back where you started. But you’re not. You had $150,000, and you lost 50%. Now you’re back down to $75,000. A lot of people think on the average return, but it’s actual return that you want to know about. You’ve actually had a return of negative 25%. You’ve lost 25% of your money, but you’ve averaged zero. So average returns are pretty much worthless in a world where the market goes down. They don’t make sense. So we want to know the actual. Even on top of that, Holly, what we just finished reading was this article done by McKinsey and Company, a big company that does a lot of reporting on financial [concepts]. One of the things they just did was they wrote an article, “Why Investors May Need to Lower Their Expectations.” And they find that what drove the boom in the stock market, really through the 80s, 90s, and even the early 2000s after the dotcom bubble burst, those same forces are actually reversing. They’re expecting that annual returns could be lower by 3-5% percentage points or 2-4. They say if a 30-year-old today would invest, and they were expecting a 12% return, but it was actually 2% less, and they only made ten, the average 30-year-old would have to work seven years longer or double the amount they’re saving to live as well in retirement. Now that seems like a short—2% is not too much, but it can have a huge impact on your quality of life.

Holly: Nate, what they were saying is they just took that as an example because they really think it’s going to be worse than 2%. They think it’s going to be somewhere in that 3-5% point difference average. If it’s only 2% like Nate said, what if it’s 3-5? Let’s look at this. If it’s 3-5%, do you want to work another ten years? Do you want to work fourteen years longer? Do you want to have to save three times or four times what you’re saving, just to get this rate of return that’s an average, and it’s only a 2% difference or 3% difference. Really, you have to start asking yourself: have we come into a new era with the market that we’ve left this golden era, and it is going to change, and how will that affect me in the future? Because a lot of 30-year-olds out there are putting that money in the retirement program and hoping that they’re going to work hard and do better than their parents in order to get a better retirement living. And I think they’re going to be shocked, Nate.

Nate: I think so, too. I’ve talked to a lot of people, and they’ve said, “We’ve done everything right.” I talked to a client the other day: “We’ve done everything we were taught to, we were supposed to do by the financial experts. Why do we have so little?” Maybe it’s because of the way, the projections and things, that people point to us aren’t actually true. So the first myth that most people believe is that the market is going to be doing this wonderful return to us, when in actuality, especially in the economic environment we live in today, it’s probably not the case. And with that, we’re going to have a word from our sponsor.

Holly: Thank you for joining us again. The second myth we want to look at in regards to the whole retirement nonsense, is retirement programs focus more on having a nest egg, a lump sum of money, than they do on retirement income. And it’s really hard for me to switch from retirement program to—because I talk about retirement income (what do you want to have to live on) versus this lump sum of money that’s just going to grow, supposedly, and that’s what they’re going to be able to live on. What is the biggest myth with the whole fact of “Hey we need a nest egg,” versus retirement income?

Nate: That’s true. Honestly, most people even have this number in their minds that they just kind of made up. “Oh if I get a million dollars that should be able to last me. Or if I get $500,000 or 5 million.” They’re just thinking if I can get this big stockpile of money, I should be able to do fine. Whereas in life, it doesn’t matter how much money you have built up, it really matters how much income you can produce without a fear of running out of money. Because life is not about how much money you have stashed in the bank; it’s about how much income is being produced. And this is an example I use: if you had a business that had a million dollars in the bank, yet they were losing $100,000 a year, they’re probably going to want to close out the business as soon as possible. It didn’t matter how much money they had in the bank. They just weren’t making money. Their income wasn’t greater than their expenses. And we know we had a good month if our income is greater than our expenses. So retirement should be more focused on having an income than having a big sum of money. And one of the biggest issues is everyone is trying to have this nest egg mentality or this “who can build the biggest pool of money,” instead of who can build the biggest passive income. Passive income brings true financial freedom. Thoughts on that, Holly?

Holly: Yeah, what we’ve always been taught is to take our money and put it into the 401k, the Roth IRA, retirement income, invest it, mutual funds, and basically we’ve taken that money and we’ve put it somewhere and let someone else have control of that money. Instead, what we’re hoping then that when we retire is that this big nest egg that we’ve supposedly made is going to last us for the rest of our lives—five, ten, or fifteen years. But really what we haven’t done is create income to live on. Because it’s exactly what Nate said in that picture. If you had a business that was worth one million dollars, count that million dollars as your nest egg, and you’re taking $100,000 out of that nest egg or that business every year. And it’s not producing anything for you. How quickly does the money run out and how quickly do you sell the business? Really quickly. You get rid of the retirement program. Well instead, you want to have retirement income through, what I believe is a mutually funded whole life insurance policy is the best way to do that, where you can actually borrow that money out and still have money growing at a guaranteed rate, tax-free, so you have retirement income; you have passive income because that income is growing even as you use the money you borrowed out.

Nate: One of the things, as well, is people don’t understand how risky it is to produce retirement income from retirement programs. There’s been this, what’s called, a Monte Carlo simulation. It just takes the last 100 years in the market and does a probability of how much of your assets can you pull from. Say you have a million dollars built up. And you say, “I think this should be enough.” The question is how much can we pull from that, really, without having a fear of running out of money? Right now it’s suffering around 3% of your assets when they’re based in the market and mutual funds and those volatile investments. They say you can probably pull out 3%, maybe 4% if you’re a bit more of a risk-taker, out of your retirement programs if they’re based in the market in order to produce an income from it. So that means that a million dollar portfolio can produce $30,000 to $40,000 a year in income. And guess what—if it’s in a retirement program, all of that is taxable. So that’s not too exciting. In other words, your goal should not be to see how big of a pool of money you can build up, but the question you should be asking is how much income can I take from the resource that I’ve built. That’s why, Holly, as you were saying, with life insurance, you can pull a higher amount of income from the policy because it’s guaranteed to grow. And the picture that we paint is that if you have a million dollars, and you wanted to pull out $60,000 a year from it or 6% of your asset base, and you pull out $60,000 in a year, but the market has a bad year, it has another 2009, and it drops by 50%. Well now your million turned into $500,000, and you pulled out $60,000 to live on. That means you have $440,000 available. And the chances that that amount is able to produce a $60,000 a year income that you need to live is very slim. So you want to transition yourself into a place that is made to help produce an income and not just a nest egg. Retirement programs can be great at getting you this number built up, and we get all excited about that, but when you look at the income side, or when it’s time to start producing income, they’re not really built for that. And yet they’re called retirement programs, which I find rather ironic.

Holly: And most of us, even with the retirement programs, we lose control of that money. We’ve given it over to someone else. And we don’t really know how well it’s doing. We get an annual report normally, and it says: here was the average this year. Once again, not actual. Average. And here’s what happened with your money. And other than that, we don’t really think about it. We let them take it out of our paycheck or put it in there. But we aren’t as much hands on with it, just hoping that when we go to retire, there’s enough there. But even like you said, if you’ve only got $440,000 when you go to retire, how long do you think $440,000 is going to last you if you live past the age of 85, which is the average for most males. And today it’s 88 for women. If you retired at sixty-five, $440,000 isn’t going to last you through age 85 or 88, and you’re going to have to go back to work because you never thought of retirement income. You only thought of the fact that “I built up a million dollars for me to live on.”

Nate: The greatest fear for people who retire is if this money is going to last. That’s one of the keys. How many of us have really seen what we’re building today? In other words, maybe some of you are retired who are listening to this—and they can look back and say, “No, we didn’t.” But for those of us in the phase of building, are we really looking at the resource that I’m building, the asset that I’m building, is it going to produce for me an adequate income? Without me having to fear if it’s going to last? So that’s one of the biggest myths is that we’re going to focus on a retirement nest egg instead of income, when really income is the key. And you’ll know you can finally retire when the passive income is greater than your lifestyle. And without producing, buying assets and doing things that produce an income, it’s going to be really hard to figure that out, and there’s always going to be that fear. We’ve talked about the first myth: people think that the market is doing better than it’s doing or they think it will do better than it’s doing, and that’s going to cause them to have some hurt later on when they realize that it didn’t come out the way that we thought it was. The second one is that we have to change our mindset from nest egg to income and think of ways to produce an income. So, Holly, what’s the third and final myth we’re going to talk about today?

Holly: The third and final myth we’re going to talk about is the savings rate in America and how it is dangerously low. Just going back to the article and what Nate mentioned, if it drops even 2%, 2 points, and you’re a 30-year-old, you have to save twice as much as what you’re saving now. And the savings rate is only 5.4%. That’s as of April this year.

Nate: 5.4 percent? So if I make $100,000, I’m going to save $5400.

Holly: $5400. And if they say that the market is not going to do as well as it is, then basically double that. And you’ve got to save $10,800 a year, that you’re putting into some type of investment to produce for you or that’s what you’re saving. How exciting is it to know that you can’t touch $10,800 of your money from age thirty on until you retire?

Nate: Not very exciting. You’re exactly right. That third myth is really kind of rolled into the other two almost, which is that “I don’t need to save that much because the market is going to do so well.” Or whatever reason it is. Maybe life is happening, and we know a lot of different things happen in life … it’s much easier to have money flow out than have money flow in. It’s just easier. The myth is whenever you think I’m doing okay with how much I’m saving right now without seeing in the future if it’s going to be enough. We kind of go through the motions day by day, and we’re just living life. We never really check and see if it’s going to work for us. So you’re right, with only 5% of people’s income on average being saved, we’re in some trouble if the markets don’t give us the Dave Ramsey 12% rate of return. The savings rate is dangerously low. And one of the things, also Holly, was that if people save more, then they’re going to have more in the future. And if they have more, they’ll be able to produce more income, especially if they do some strategies that we like to talk about in this podcast with infinite banking and things. They’ll be able to have more end retirement income, but also they’ve learned to live on less, which means that you won’t have to replace as much income in retirement if you learn to live on less as you’re living. Because the more you get accustomed to living on, not only is it a struggle to produce that income, but you probably haven’t saved enough to do it.

Holly: Yeah, and if you’re living paycheck to paycheck, you definitely haven’t learned to live on less than what you make. So part of the key in that, in saving more, is being able to really learn how to live life without spending every dollar that comes through your hands.

Nate: That’s the first key of financial success is to set aside some money that you’re going to work with, learn to live on less so in the future you’ll have money, especially if you focus on producing an income, and if you put more towards that, then you’ll be able to produce a passive income. And you won’t even need it to be as high as whenever you lived on more, or at least you’re not going to have a sudden jolt of a lifestyle change. Eat peanut butter and jelly everyday. Or anything like that.

Holly: The second point with that is learning, when we learn to save more. Like Nate said, you don’t need as much of retirement income; you don’t need as much of that passive retirement income coming in because you’ve learned to live within your means and learned to live on less. And because you’ve learned to live on less, it means you don’t need as much retirement income. You may have more retirement income than you need, which is beautiful to think I might actually have more income than I need once I go to retire because I’ve simple learned to live on less.

Nate: Now you’re talking about truly building a wealth and legacy for the future whenever there’s money coming in that you can just put in other places and investments and other things with it because you don’t even need it to live on. It’s like if you make $100,000, and you find a way to spend $100,000, then that means in retirement you’re going to have to replace $100,000. Whereas if you make $100,000 and only spend $80,000, then in retirement, you’ll only need to replace $80,000. So that’s exactly right. We’ve had three myths, Holly. One is that most people think that the market is going to do better than it is. And we’ve shown that McKinsey article now—if you’d like to read it, it’s called “Diminishing Returns: Why Investors May Need to Lower Their Expectations.” That’s the title of the article. [It’s] about how the future is not going to look the same. The next thirty years are not going to look the same as the last thirty years. That’s myth number one. Myth number two is that retirement programs tend to focus more on having a nest egg instead of having an income, and retirement is all about income. Can I produce an income to live on? So the biggest myth is thinking that if I have a big lump sum of money, I’ll be okay. Nope. Maybe not the case. The third myth is that I don’t need to save very much to make it because the 401k is going to do great things for me or whatever it is. The savings rate is just too low to most likely afford people a successful retirement. Any closing thoughts, Holly?

Holly: My closing thought is to think how old am I today? And if the market doesn’t perform like they think it’s going to, do I want to have no money and have to go back to work, or work 7 years or 14 years longer, or do I want to try to save twice as much as what I’m saving today? And if you don’t want to do either one of those, you have to change that mindset from retirement nest egg to retirement income. And you need to find somebody who can show you how to create that retirement income.

Nate: That’s great. And here at Living Wealth, we do a very good job at that. Thanks for joining us today. This has been Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Holly: To get free resources and transcripts for this episode, visit LivingWealth.com/e2.