The following is the transcript from Episode 13 of Retire Happy with Roger Gainer, a financial and business audio podcast.
Roger: Retirement income planning is really the critical piece of the puzzle to financial security, happiness, and peace of mind in the long run. There\’s a lot of ways to approach it, but stumbling into a strategy is not gonna lead to the results you\’re looking for.
Clark: You\’re listening to \”Retire Happy\” with Roger Gainer, President of Gainer Financial & Insurance Services Inc. Just about anyone you ask about money and about retiring, they all have their own opinions, they never run out of them. But how do you know what opinions are worth listening to? How do you know what tools actually work? And what should you avoid? But rest assured because, in this episode, Roger is discussing the tools and the strategies he uses when it comes to income planning. But he also shares some of the other common strategies that are out there that are being used right now by advisers today, along with the pros and cons of each of these. Truly helpful as you\’re walking on this journey. Thank so much for joining us. I\’m your host, Clark Buckner. Let\’s jump right in.
Roger, welcome back to another episode of \”Retire Happy.\” Super excited to be back on the line with you. I always really enjoy these and we\’ve got some good things we\’re going to cover today. But first, just want to say a quick hello and check in to see how you\’re doing?
Roger: Doing great. The sun is shining. We\’re just waiting for life.
Clark: The sun is just always shining, right?
Roger: Well, it rained a couple of days ago, but it just is a beautiful day here in downtown San Rafael.
Clark: I love it.
Roger: Everybody seems to be getting ready for the holidays. The trees are in different colors. It\’s just a beautiful autumn day and we\’re very excited. It\’s a great time of the year. You can feel the…
Clark: You can feel.
Roger: …holidays starting to get into full swing and that\’s just always a wonderful time of the year as far as I\’m concerned.
Clark: Good deal. Well, I am eager to talk about the topic \”State-of-the-art Income Planning.\” Now we\’ll explain what that means. And it\’s quite the epic title and it\’s a phrase, you kinda spun together, you know, just a few moments ago and I love it. Let\’s roll with that. So, we\’re going to talk about, I know you\’ve just got a new certification from…it\’s called RICP from American College. We\’ll talk about what in the world that is, why it matters. We\’re going to talk about some of the different strategies that advisers are using today when it comes to retirement and to stay out of the weeds. But we\’ll still talk about three or four of the main different styles and strategies and then finally, maybe we can get to some of the pros and cons to be looking out for when planning to retire happy. So, let\’s just start from the top. So, what is RICP? What\’s the certification? Kinda walk me through why you\’re really pumped about this.
Roger: Okay. Well, sure, Clark. I\’m very excited. I did just earn my RICP, well, about six weeks ago. It takes the American College about a month or so to check your background, make sure you finished all the prerequisites, and experience, and work requirements to be conferred the designation. It stands for Retirement Income Certified Professional. And the American College is currently the only place you can get that designation. The American College also conferred my CHFC, my Chartered Financial Consultant. They do CFP, a Certified Financial Planner, CFA, Certified Financial Analyst, MSFS, Master of Science in Financial Services, and a whole bunch of other financially-related degrees and designations. So, they are kinda the state-of-the-art for financial education in this country.
It is a university in Bryn Mawr, Pennsylvania, solely dedicated to that area of education. I decided to get this because it\’s what I do. I\’ve been helping people plan retirement income and the transition of retirement for really more than 25 years. And for years and years and years, I kind of felt like I was sticking out like a sore thumb because I always explain to clients that we look at accumulation strategies with an eye toward consumption. A quote that used to be on my website was historically attributed to Will Rogers, said, \”The most important thing in any investment is the return of my money, not the return on my money.\” Now I found out years later after doing some research that he never said that, but it sure sounds good and the…
Clark: That\’s probably the case for a lot of people, isn\’t it?
Roger: Yes, it is. Yogi Bear gets attributed a lot of things. So, like, \”It ain\’t over till it\’s over.\” He never said that.
Clark: Okay.
Roger: But it sounds good and it sounds like him. And Will Rogers certainly was the conscience of America. And I found, over the years, that everybody gets taught and told and explained, how to get money into investments, how do you contribute to your 401k, how do you finance and purchase real estate, how do you build a stock portfolio, invest in a hedge fund or, you know, those kinds of things. But almost never are people explained how to get their money back out and how to live off that money because, after all, if we\’re saving for wealth, wealth in and of itself doesn\’t do anything. It\’s not going to keep you warm at night, it\’s not going to fill your stomach, it\’s not, like, you\’re going to tear up a bunch of greenbacks and, you know, fry them up and eat them for dinner. That\’s not what it\’s for.
Clark: Okay. Yeah. I like the visual here.
Roger: Okay. So, well, money has to be for a purpose. And for most people, that purpose is not keeping score as much as it is to create security. See, there\’s only two ways to live and that is you at work or money at work. The bottom line is to support your lifestyle, is that it requires income. Think about it. You can\’t…say you own a house and you own it outright and you want to go down to the Piggly Wiggly or a Safeway and pick up dinner, it\’s not like you can knock a couple of bricks off the porch, take it down, and hand it to the cashier and say, \”This is $50 worth of my house.\” Right? That just doesn\’t work. So you need income. And income planning for previous generations was a lot easier, frankly. We had more people covered by pensions, so you didn\’t have to really think about that income strain, it just came in, Social Security made up a larger percentage of people\’s expenses, and we had higher interest rates.
You know, if we were having this conversation, Clark, back in say…oh, I don\’t know…1980 when interest rates, you know, the prime rate was up at 18%, what would we be doing? We\’d be out buying CDs, or treasury bonds, and locking in a very high coupon for years and years to come and just live off the interest. It would be a piece of cake, really. Where today, you know, 10-year treasuries are returning 2.3%, 2.4%. That\’s not enough to live on for most people. So, this is why we\’ve seen this evolution, some would call it de-evolution, of income strategies. It\’s something Wall Street has tried to ignore for years and years and years.
I\’ve always felt that it was a priority because I could see this day coming 15, 20 years ago where baby boomers would be retiring in droves because we were reaching our mid-60s and 70s. And how would we sell our assets and create income streams? Now, Wall Street kinda paid it lip service for years. And there was a generally accepted strategy where you could have 60% stocks and 40% bonds and draw 4% a year from that portfolio and inflate it by whatever the inflation rate was each year. And you had about a 89% probability, according to financial simulations, of having your money last a lifetime. And as far as Wall Street was concerned, that was good enough. It was based on a research paper done back in the \’80s and they said, \”Okay, this is great.\”
And why was it great? Because it kept your money invested and by keeping your money invested in a portfolio of stocks and bonds, they continue to earn fees. So, you know, they didn\’t want to switch it to an income stream or move into an alternative strategy that didn\’t continuously provide those fees. So this strategy was generally accepted. I\’ll never forget, I was doing a workshop one day and I was talking about this strategy. And a guy raised his hand and I asked him, \”What was your question?\” He said, \”Why would anybody follow a strategy that had an 89% chance of succeeding? I wouldn\’t get on an airplane that had an 89% chance of getting to my destination. I\’m sure not going to trust my future to a strategy with those odds.\”
I thought that made a lot of sense to me. But now 2008 came along, 2009 and that blew up the 4% rule. Now generally accepted, it\’s a 2.8% to 3% rule, which clearly isn\’t enough for most people. So we have modifications on that. And we\’ll talk about that a little bit later. But I went and got the RICP simply because I wanted to know what the state-of-the-art was, I wanted to see if the strategies that I\’ve been pursuing for years were, in fact, valid based on, you know, the academic breakdown and analysis, and if there was any other information out there that could really help me both protect and secure happy retirement for my clients and found that there was a lot of stuff. And also that a lot of what I was doing is now coming into the so-called state-of-the-art.
Clark: Great. I think that\’s a really good transition to talk next about what\’s happening and the overall retirement business. I know you\’ve just got this particular certification, so you\’ve been kinda revisiting some of these different strategies and revisiting with just what all is happening right now. So, this next question is, in the context of what\’s happening overall in the retirement business, what strategies are different advisers using for income planning? I know you\’ve just talked about one a moment ago, but if you wanna…just to keep it high level three to four main ones…what are some of the Styles and then the why behind that? Why would that style be a good choice?
Roger: Okay. Well, first and foremost why, you know, income planning becomes the most important thing at this phase in life? For an entire lifetime, your working life, your bills are paid based on your ability to wake up, head off to work, and earn a paycheck, whether it\’s in your own business or working for somebody else. And that\’s how you pay your bills and you take, hopefully, a portion of that, you build it into savings and build some wealth and net worth. And people do a pretty decent job of focusing on that job. And the strategies we\’re taught are wealth-building strategies, things like dollar cost to averaging and, you know, avoiding losses, diversification, all those wonderful things that you\’ve learned about in building wealth. But at this transition in your life, it\’s the first time you\’re going to do something different, radically different, a 180 degrees different.
You\’re going to now stop bringing in a paycheck for your financial security and instead, you\’re going to turn to your money at work and you\’re going to want a paycheck from the money at work. And so the demand is different. It\’s a very awkward transition for many people, that\’s why I focus on it. And there\’s way more than just money involved in this transition as we\’ve talked about before, Clark. But it does in my experience require a different approach and this can be incredibly uncomfortable, not just for clients, but for advisers. People in financial services who\’ve done one thing one way because, frankly, their clients weren\’t that old. So, they didn\’t have to worry about people wanting to take money out. They just were worried about building more wealth and creating those investment strategies and that sort of thing.
I can give you a great example. I have a lady coming in later this afternoon and she\’s working with another adviser. She came to me for kinda a second opinion and I went through our process. She\’s pretty conservative, she really doesn\’t want to experience much in the way of volatility or losses. And she started with these advisers, wealth advisers, investment advisers, about a year…just about a year ago, right at the beginning of 2017. And when she came to me, she\’d been working with them about six months. She told me she really liked them. She thought they were quite intelligent. And I said, \”Well, you know, you were working at a big corporate job. You were knocking down a nice six-figure income and you\’ve just retired. Now, you\’re, kinda, doing a little consulting work on the side. Your income has dropped dramatically\” And I just said, \”What\’s the income point?\”
And the adviser said, \”Well, the portfolio is constructed. It\’s spinning off about $45,000 a year.\” Her problem was she needs $145,000 a year in income from that portfolio. So, when I sent her with that question, they said, \’Well, we\’re just gonna cash stuff in.\” I said, \”Well, why don\’t you just take the cash that\’s being generated when they make a trade or take profits?\” And they said, \”Oh, that messes up our strategy. So, we\’re gonna sell things specifically to give you income each and every month.\” And that\’s fine except…then I asked her to find out what their tax strategy was? And the adviser came back and said, \”That\’s not our problem and it\’s not our area of concern. Our concern is to make you money and your CPA is gonna take care of the taxes.\” Well, I don\’t know about you, but if you\’re paying out 35% in taxes, that\’s a drag on performance any way you look at it.
So anyway, we\’ve been going back and forth trying to get an income strategy out of the adviser. And the adviser really works with… It\’s become very apparent to me, works with a one or two portfolio strategies and then they just fit everybody into that strategy. So, their answer is, \”Well, we\’ll just cash it in.\” Now they have come back recently with one of the four state-of-the-art options, but when you really analyze that option, it\’s going to have a devastating effect on overall performance. So they said, \”Well, we\’ll just keep four or five years worth of your income sitting in cash or in short-term bonds, which we know are paying very much.\” So, if she needs a $140,000 a year and they\’re gonna leave that amount of cash five years\’ worth, well, that\’s, you know, almost 3/4 of a million dollars, five years\’ worth of that money.
That\’s a little over $700,000. And given the overall size of the portfolio and that much money sitting in non-competitively yielding investments, she\’s going to run out of money. You know, as sure as I\’m sitting here, I\’ve worked through the projections. And she\’s going have to never have a correction and earn at least 7% or 8% every year. Now the problem is, in a really great year, that manager only returned 6.5% over the last 12 months. So how in the world are they gonna give you those returns in bad years? In fact, she\’s coming in today, we\’re gonna have…that\’s the discussion. You know, how is this going to be a viable strategy for you going forward?
So, one of the more popular Wall Street strategies is the systematic withdrawal strategy and all that says is you input a percentage withdrawal from your portfolio each and every year. And in years that the portfolio is up more than 10%, you can give yourself a raise and if the portfolio is down more than 10%, you have to take a cut in pay and adjust your lifestyle down. I think the drawbacks of that strategy are pretty obvious.
Clark: Right. Yeah.
Roger: And most of my clients are now looking to tighten their belts during retirement because the market was down. You know, I think that\’s kinda goofy. Why should your financial peace of mind and lifestyle be that dependent on an outside index? But it is a valid strategy and mathematically, it makes sense. And what it does, if you\’re willing to take that cut in pay, it will extend the life of your portfolio and because down markets aren\’t gonna have as much damage by withdrawing money from your portfolio when the market is down the same amount. Does that make sense?
Clark: It is. So that\’s systematic withdrawal and basically, it sounds like you\’re taking some of the money out of the pile until the pile is gone.
Roger: Essentially that\’s it.
Clark: Essentially.
Roger: And you hope that the pile isn\’t gone before you are.
Clark: Right. Yeah. That makes… Yeah, that makes it… It\’s real life, right?
Roger: Yeah. I have a lot of clients who come to me and they say, \”A perfect strategy would be for me to spend my last dollar on my last day.\”
Clark: What do you tell them?
Roger: Well, we can do that. Our strategy is that we\’ll guarantee that that\’s exactly what happens. However, you know, for most people they need that cyanide pill because they don\’t know when it happens.
Clark: Oh, no.
Roger: And so when your account is empty, you better have that pill handy…
Clark: Yikes.
Roger: …because that\’s your last dollar. So you better have the other side of that equation in place.
Clark: It\’s just a lot of uncertainty, yeah. That\’s just, like, slim, slim chances.
Roger: A lot of uncertainty, exactly. You know, and that\’s one of the hard things is, you know, you don\’t wanna leave a whole lot that you could have used or enjoyed more, right? I mean, what\’s the point of struggling and scrimping and, you know, not enjoying your life, so you can leave a bunch of money to somebody else? I mean, I know that\’s important to a lot of folks and we can build strategies to take care of leaving a legacy to others, whether it\’s to charity, family members, dependents, etc. But what I\’m really talking about is creating that confidence to enjoy the lifestyle of your choice and not run out of money. And if you\’re worried about running out of money, that creates its own stress.
I was at a conference a couple of years back and the speaker was talking about this very thing, he said, \”My folks were both school teachers and both retired with pensions. They lived a modest life and they enjoyed the things they enjoyed, but it was just a simple life. And now they\’re retired, they have some savings, but they both have pensions.\” And his wife\’s folks owned a business, were very, very wealthy, lived an extravagant lifestyle. And the gentleman had planned out his life\’s retirement based on the numbers. Your life expectancy is gonna live to this many years, and you need this many dollars and this rate of return and, you know, everything will work out fine. He\’d set up his spreadsheets and figured out, you know, how much he could spend and he figured he\’d be dying around age 80.
The problem was he\’s still alive at 87, but he ran out of money at 80 and realized that that was going to happen at about 74. So he spent six years stressed out that he was going to run out of money and then he ran out of money and now they\’re miserable. So, they really didn\’t get to enjoy much of anything. And the difference is that reliable income stream instead of systematic withdrawal. So, that\’s one of the cons of that strategy. Now it does get a little bit better if you add what this other adviser…if you have enough money to add that big element of cash. But for most people, it means having more than a third of your portfolio at a given time in cash and today, most cash strategies aren\’t paying very much.
Maybe in a future podcast, I\’ll talk about a strategy for cash that is paying more like 4% tax-free in liquid these days, but it\’s a pretty obscure strategy and a lot of people just aren\’t using it. So, what the bank is paying is less than a 0.5% for the most part.
Clark: I can, of course, understand if some of these other questions… This might need to be a continued conversation because I know over this whole podcast, it is…you know, we have these individual conversations, but it extends to one much larger conversation. But I did want to ask before we start wrapping up today, are there any other strategies you want to talk about, whether it has to do with tax diversification or accumulation?
Roger: Okay.
Clark: Anything else, in the last couple of minutes, you want to talk about of the strategy type and kinda what that could be a tool for someone?
Roger: All right. Well, I do want to talk about tax diversification. But let\’s kinda just check off some of the other major strategies. One is called the flooring strategy. And I kinda referenced it, why it was easier in previous generations because they had pensions. So, flooring strategy says we set up guaranteed income streams that will cover all of your main bills. So, it makes sure you have a roof over your head, you know, transportation at your access, and food in the fridge. And it\’s so all of your basic necessities are taken care of with highly reliable income streams, be it Social Security, pensions, or other alternative income streams that you cannot outlive. That\’s what we\’re talking about. Sometimes annuities are used in that, sometimes long-term bonds, real estate…it can be a substitute, but it\’s not as secure as these other ones because obviously if a tenant stops paying, you lose your income.
So there\’s a little element of uncertainty when we use real estate that we try to lay in some protections to make sure that if we\’re going to depend on that real estate income for this purpose, that it\’s highly reliable and very, very conservative. So, that\’s the flooring approach. Another approach is called the bucket approach. And we have a bucket of money for what we\’re going to be spending here in the next two or three years. And so the strategy that I talked about earlier is a modified bucket approach. They didn\’t really have the other buckets designated. So then we have an intermediate bucket, if you will, that will pay our expenses in 5 to 10 years so we can earn a little higher interest rate. And then the third bucket is your rest of the life money and we can invest that a little bit more aggressively and harvest gains when they\’re available to add to the second bucket for that intermediate-term boost if you will.
And then we\’re harvesting off the intermediate term and putting it into the near-term bucket. So, a little more effort to track that, but still very, very workable and reduces the fear of market corrections and volatility in that main strategy. Now you did mention tax diversification and I\’d like to just touch on that because it\’s really been in the news a lot lately. We have the House of Representatives recently passed a plan. And it looks like next week after Thanksgiving, the Senate is going to be voting on their \”plan for tax reform,\” is what they\’re calling it. And it changes quite a number of tax features. And for most people, over the next 10 years, as written, what\’s been released, will actually increase your taxes. You\’ll get a small drop in taxes in the next couple of years and then a fairly significant increase in taxes 6, 7, 8, 9, 10 years out for most middle-income and low-income Americans.
That\’s just the way it\’s been written and I don\’t want to get into the weeds on that in this format. But the point is that Congress will never stop messing with taxes. So, if all of your money is sitting in a 401k right now and you\’re looking at them increasing ordinary income taxes, see it doesn\’t matter how good my strategy was. If I could earn an extra 2% or 3% over my lifetime, they can wipe that out by increasing taxes by a few percentage points. And all that hard work just gets wiped out with the stroke of a pen. So, that\’s why one of the things we really focused on is trying to get clients to diversify under the tax code. Wealthy people understand this because they don\’t earn income, they just have stuff that earns them income. And so when they change the tax law, they just shuffle the stuff around to a more tax advantageous posture.
And it\’s possible for middle-income people to do the same, you just have to think about it in advance. There\’s lots of different tools out there. There\’s Roth IRAs, you know, when we can get tax-free income, there\’s individual stocks and real estate, where we can do capital-gain-type taxation. So, this is the kinda stuff I\’m talking about, not just being in that ordinary income, which is how your 401ks, IRAs, TSAs, Social Security, all that stuff, pensions, is taxed as ordinary income. So, you don\’t want to be too vulnerable and just be in that one part of the tax code because then you\’re really at the mercy of Congress.
Clark: Now how in the world do you keep track of all that, everything that\’s happening with Congress, with the Senate?
Roger: I read a lot.
Clark: Well, I think it\’s a good point because I think for some people who are trying to do all this alone, you need to have someone who\’s living and breathing in in this whole world because everybody has an opinion about what you should be doing, but you\’ve got to be… I\’m sure. I mean…
Roger: It should be an informed opinion based on research. And today there\’s so much \”information.\” It\’s not all valuable information and there\’s a lot of misinformation, the so-called fake news that\’s out there. So, we have a process to parse through some of this stuff and look for confirmation from different perspectives and other resources. But, yeah. It can be daunting, but that\’s what we expect from our professionals. If somebody hires me, I\’m pretty sure they want me to be up on the state-of-the-art and understand how changes in tax codes is going to affect them personally, how changes in the investment climate or investment products is going to affect them personally. You know, when…I had a hip replacement last year and I certainly wasn\’t going to do it to myself. So, I did a bunch of research, but I sure counted on…
Mostly I researched the doctor to make sure that they were up on the state-of-the-art and knew all that stuff. I found a great doctor, and we had a great outcome, and I\’m just dancing these days. So any professional really needs to stay up on the state-of-the-art in their profession. The world\’s a lot more complicated these days than it was 50, 60, 100 years ago.
Clark: Right. Well, for someone who is at that beginning stage, who\’s trying to think through all their different options and starting to just try to get just a start with organizing their own thoughts on where all this stuff is, I\’ve got to mention the thought organizer. And I always love to do this because this is always such a great spot to not just leave someone hanging, but actually give them, the listener, an actual opportunity to use a free tool that you offer that helps them navigate just the beginning waters for all of this. So, do you want to, kinda, provide some additional insight into what the thought organizer is and why it\’s so important?
Roger: Well, sure and thank you. The thought organizer is really a first step on clarifying you\’re thinking about what you want from your life, both intellectually, emotionally, socially as well as financially. That\’s really what it\’s designed to do, is to get you thinking and creating the contexts of, \”What the heck am I doing all this for?\” Until you know why you\’re doing it, you know, understand your why, you\’ll never ever be happy with what you\’re doing. And as long as you can maintain context, it\’s much easier to create that satisfaction and to frankly select strategies that fit. You know, we were chatting before we started today and I was talking about, you know, how good you feel when you\’re buying new clothes and they fit properly, and you look in the mirror, and you look good, you feel good, and you\’re just ready for anything.
You know, if they\’re two sizes too small or too big, you\’re thinking more about how uncomfortable you are then just what\’s going on around you and enjoying being. Well, it\’s pretty much the same thing with some of the strategies I\’ve just mentioned. Those are basically, you know, fashions, different ways of approaching the same problem. So, when you use the thought organizer, and you\’ve created your context, and you understand what things make you uncomfortable and what things you\’re comfortable with and where you like to see your life in 5, 10, 15, 20 years, you start selecting those income strategies that fit, that are comfortable for you, that will lead to that peace of that mind, which is so critical in achieving happiness in your life.
And I know you\’ve got a few years to go, Clark, before you\’re really coming down that homestretch to retirement, but the sooner you start thinking about those kinds of issues, the easier it is, the more you are in sync, so that when you get here…you know, when I sit down with somebody who has never thought about these things and they\’re in their mid-to-late 60s, it\’s a lot more traumatic, it\’s a lot more difficult, and there\’s a lot fewer options available. So, yeah, the sooner you start on figuring this stuff out, the better and easier it\’s going to be.
Clark: Thanks, Roger, as always, for sharing your experiences and talking about some of your different stories that really kinda help make all of this so much more real and understandable. I really appreciate it and I\’m looking forward to talking with you again soon.
Roger: All right. I do too. Have a great holiday. Everybody, just enjoy your end of the year, all the goodies that come with it.
Clark: Thanks so much for listening to this episode of \”Retire Happy.\” Be sure to head on over to gainerfinancial.com to download your thought organizer to get started. Roger L. Gainer, CHFC, California, Insurance License #0754849, is licensed to sell insurance and annuity products in California, Illinois, Arizona, Pennsylvania, and New York. Roger L. Gainer is an investment adviser representative providing advisory services through HFIS Inc., a registered investment adviser. Gainer Financial & Insurance Services Inc. is not owned or affiliated with HFIS Inc. and operates independently. Thanks again so much. And we\’ll see you next time on \”Retire Happy.\”