Ep 16: Retirement Income Planning Series – Part 1

Ep 16: Retirement Income Planning Series – Part 1

The Smart Take:

For many people, one of the biggest fears going into retirement is where money will come from when you’re no longer receiving a paycheck. That’s one of the reasons creating a retirement income plan is so essential. Join us as we go over a framework to under the two basic strategies for building a retirement income plan. The framework will help your understanding and make a more informed decision on what is right for you.

Click here to read the corresponding blog post. Or read the full episode transcript below.

Subscribe To The “Retire Smarter” Podcast:

Click the below links to subscribe to the podcast with your favorite service. If you don’t see your podcast listed with your favorite service then let us know and we’ll add it!

The Host:

Kevin Kroskey – AboutContact

Speaker 1:           Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to retire smarter.

Walter Storholt:                Welcome to another edition of the Retire Smarter podcast. I’m Walter Storholt, alongside Kevin Kroskey, president and wealth advisor at True Wealth Design, serving you throughout north east Ohio. You can find us online by going to truewealthdesign.com. Don’t forget to listen to past episodes of the program there and subscribe on your favorite podcast app. That’s truewealthdesign.com.

Walter Storholt:                Kevin, thanks for joining us this week. I’m ready to talk money with you. How does that sound?

Kevin Kroskey:  That sounds good, Walter. As my daughter says, my five-year-old daughter not too long ago discovered that paper money was worth more than coin money, and so that was a very happy day in dad’s world. So she loves talking about paper money.

Walter Storholt:                First lesson learned. Mark that off the list. Fantastic. And at only five. She’s going to be a smart one. That’s fantastic.

Walter Storholt:                On today’s show, we’re going to talk about maybe the next concept you should teach her about; earning an income. That would be important to learn at an early age, right? But we’re going to talk about it a little bit later on in life. How it applies to our retirement and you hear it probably all the time if you’re anywhere close to retirement. Retirement income should be very primary. It should be the first thing you start thinking about when it comes to retirement. There’s a lot, a lot of emphasis, Kevin, on retirement income and income planning.

Walter Storholt:                And so we’re going to do a series on retirement income over the next couple of podcasts and before we dive into today’s particular episode, Kevin, what are we looking to accomplish with our retirement income series?

Kevin Kroskey:  Yeah so over the next four or five podcast episodes, we’re going to talk about retirement income and it’s something that most of our clients come to us a few years before retirement when they get really serious about retirement. Certainly, we would prefer they came even earlier because we can make smarter decisions all the way through and probably get them to retirement and through retirement more quickly and better. But hey, no time like the present.

Kevin Kroskey:  So, when you get into retirement, though, you often hear about income because the paycheck goes away. And so, there’s actually something in the psychological literature called paycheck syndrome and as it relates to retirees, there’s this stress about not having a paycheck. So, it’s not exactly how I like to phrase it, but it’s how people think about and honestly it’s also frankly retirement income planning is code for a lot of insurance people to sell annuities, which we kind of beat up on that.

Kevin Kroskey:  Oh Walter, that reminds me. Let me take a quick tangent here. So, remember when we were talking about variable annuities a few episodes ago?

Walter Storholt:                Oh yeah. Absolutely.

Kevin Kroskey:  And he asked me. So he said, “Kevin, well I got to play devil’s advocate. Is there ever a time that you want to buy one of these things? I mean they exist for a reason, right?” And I came up. I searched my brain long and hard over those few seconds and I responded and I did have an actual case study that it made sense. And I actually thought of another one, so [crosstalk 00:03:09]?

Walter Storholt:                Oh we have two. Two examples. All right, yes. What’s the second one?

Kevin Kroskey:  Two examples. So the second one, and anybody that hasn’t listened to it, I think it’s probably worth a listen because it’s going to feed into the whole retirement income series that we’re going to have as well, but the other reason-

Walter Storholt:                That would be episode 13, by the way. If you go … want to go back and listen to that episode, but ahead. Yes.

Kevin Kroskey:  Yeah. Thank you. So, annuities, as well as life insurance for that matter, have asset protection features. So, we have a client that I didn’t recall when we were talking about last time, but has a business and has been sued a few times and has a heightened awareness of protecting his assets. And the way that we actually have some of his assets structured, they are inside of a variable annuity. A non-commission one, for that matter. Low cost. About as low [inaudible 00:03:56] cost as you can get out there, but he his assets under the state that he resides in are fully protected under the variable annuity umbrella.

Kevin Kroskey:  So there we go. There’s reason number two.

Walter Storholt:                Very nice. All right. Very cool, but that’s not going to typically appear in the retirement income planning framework that you lay out for folks, right?

Kevin Kroskey:  No. So, you know, the thing that anybody should be thinking about when they think about preparing for retirement is, you know, I have this lifestyle. I’ve probably become pretty comfortable with it. A basic goal is I’d like to maintain my lifestyle and I want to make sure that my money lasts.

Kevin Kroskey:  Now, there’s certainly more aspects of that. Managing healthcare transitions. You know, adjusting your spending for how spending typically changes as you age, which we’ve talked about in past episodes. Maybe there’s going to be some other fun goals that, you know, now that you have retired and you have some bucket list items and maybe those are fairly substantial. Maybe there’s a second home or something like that or some other big life change that begets a spending change.

Kevin Kroskey:  But making sure that your kind of core lifestyle is able to be maintained over time and that your money lasts are kind of the two basics. If you had to distill it down to two things, I guess those would be the two things. And when you start this process, you really need to go through that planning process. It’s not, hey my paycheck is stopping, so I need to go out and buy something that is going to replace my paycheck. That is a sure fire way to make a sub-optimal or AKA bad decision.

Kevin Kroskey:  A better way is to go through that planning process, understand your current lifestyle, understand the model, how your spending’s likely to change, adjust it for some of those fun things that you may want to do. You know, mitigate some transitions for healthcare going from work to no work, recreating your paycheck, figuring out social security and pensions, and so on and so forth. But you know, it’s a process.

Kevin Kroskey:  Now, what comes out at the end of that process is really, you know, how do you want to implement some of these things? And this is really where I would say I think about the retirement income piece coming back in. And you kind of have two choices. The way that I think about it, I would divide it into more of investing-type strategy or more of an insurance-type strategy. So, the annuities that we talked about in the prior episodes are obviously an insurance-based strategy. They’re things that are attached to guaranteed income.

Kevin Kroskey:  And as we talked about in prior episodes, guaranteed income sounds great. You know, who the heck wouldn’t want guaranteed income, right? The problem is it’s really expensive. And so, is it really worth it to you? And oh by the way, we all have some guaranteed income. You may have a pension from work or you paid into social security and you’re going to have social security. Those are forms of guaranteed income. So you already have some. So the question that you should really be asking yourself is, does it make sense to buy more of it? And buying more of it through things like, you know, immediate annuities whether it’s a fixed-indexed annuity or some type of differed annuity or something along those lines. Or even the well-loved variable annuity and all its high costs that are associated with it.

Kevin Kroskey:  So those are all guaranteed insurance-based strategies. And again, everybody already has some through a pension or through social security. So do you want more of it? Does it make sense for your financial plan, from a financial and emotional standpoint, to buy more of it?

Kevin Kroskey:  Well, on the other side of the equation is not a guaranteed-based approach. It’s more of a probability-based approach. It’s more of an investing approach. It’s using combinations of cash, bonds, stocks, real estate, you know, mutual funds, and all those ingredients and combining it into your investment portfolio, which is akin to your investment recipe, and then taking income from your portfolio and replenishing your paycheck that way. For anything that the social security and pension is that you already have is not meeting.

Kevin Kroskey:  So what we call these, again, probability-based, investing-based. These are strategies that pension companies have been doing for years. So, I say a pension company. That’s, I guess, a misnomer. You know, we have companies in our neck of the woods in north-east Ohio, Goodyear is one large employer. Hospital systems like Cleveland Clinic or [inaudible 00:08:27] General or a Summa or Babcock and Wilcox, another large local employer. A Rockwell Automation. All those companies I just mention either have or have had pensions in the past. And what they do … and they could be, you know, billions of dollars in these pension plans.

Kevin Kroskey:  And what they do is go ahead and provide an income. And what they promise to pay the people that work there, invest in their pension over time is that we will pay you a monthly amount for as long as you live. And, Walter, do you have any idea how those pension plans go ahead and invest?

Walter Storholt:                Probably using this other … I’m just reading the tea leaves here. Probably using this other strategy.

Kevin Kroskey:  Yeah. They’re buying stocks. They’re buying bonds. They have some cash. They may own some real estate. They may own some other, what they call private equity or alternative investments, but if you look at pension funds on average, they have a risk level that approximates about 60% stock and about a 40% bond portfolio. And certainly that can change and I mentioned Goodyear. Goodyear’s been frozen now since about 2008 and as their pension winds down and the assets in there get smaller and they have to provide income for shorter periods of time and not into perpetuity, it’s become, I think it’s more than 90% bonds at this point in time.

Kevin Kroskey:  So, they’re investing with a purpose. Their purpose is to provide a retirement income, a pension income on a monthly basis to the people that have vested in the pension plan. So they’re using the combination of the cash, bonds, stocks, what have you and they’re taking that probability-based approach to do it. A fancy name for that is called asset liability matching. So they have the assets in the pension plan, they’re investing them, and they’re meeting the liability, which is the promise to pay the monthly payment for as long as the worker lives.

Kevin Kroskey:  And this has been going on for, I don’t know, at least 100 years and it works. And so, it works there, so rather than going out and buying guaranteed income, the other approach is to go ahead and follow [inaudible 00:10:28] investing-based approach, a probability-based approach. And then when you look at that in the context of the financial plan, at least the way that we do it at True Wealth is that, you know, we look at a client’s plan. We understand their lifestyle and their spending, how it’s likely to change over time. And then we can go ahead and stress test their plan and really measure what I would call their lifestyle risk of, “Hey, if things go bad for a while in the markets, how is that going to impact you? Are you going to have to cut back?”

Kevin Kroskey:  If you do have to cut back, is it going to be from the things that, you know, are more discretionary? Like, hey you might just have to hold onto your cars for a couple more years rather than get a new vehicle every three or four years. Most people would say, “Hey, that’s not that big of a deal.” Or are you going to have to, you know, go back to work or move in with your kids? You know, you’re not going to take a probability-based approach if you’re likely to have to move back in with your kids.

Kevin Kroskey:  So, it’s really kind of having a blended approach to this. You have some social security, you have some pension income. So do you really want to buy more guaranteed income? Or if you have a little bit less certainty, take a probability-based approach, use the same sort of strategies that these pension plans have been using for 100 years or more, and go ahead and use that to replenish your paycheck.

Kevin Kroskey:  Obviously, for most of our clients, we’re in the probability-based approach in the investing camp. Financially, mathematically, it just tends to work a lot better for many different reasons than the insurance-based approach because again, those guarantees are expensive. And what we’re going to talk about over the remaining series, the retirement income series for the podcast is just diving more into that. So, we have this framework that we set up today. There’s two basic strategies and these strategies really should only be considered after a well-constructed financial plan. It’s put in place that reflects your lifestyle, your wishes, and what you want your lifestyle to be over time in this next phase of your life.

Kevin Kroskey:  Then after you have a good plan in place and you’ve made good decisions on how you’re going to take your social security, how you’re going to take your pension benefit, then the decision comes to, “Well hey, how am I going to make up any shortfall? Am I going to follow more of an insurance-based approach with guarantees even though those guarantees are expensive? Maybe they’re worth it to me. Or am I going to follow more of an investing-based approach or probability-based approach? And if I follow that approach, what really is at risk if things don’t go well for some period of time?”

Kevin Kroskey:  And our job as advisors is to make those tradeoffs very clear, come up with a recommendation, and then tell the client and show the client why we’re recommending what we’re recommending, but give them some options and have them make a decision that they feel comfortable with, that they’re going to be able to sleep at night, and can feel confident going into that next phase of retirement and staying on path over time.

Walter Storholt:                As always, it’s about more than just looking at the numbers. Sometimes it’s about, “How do I feel about this strategy? Can I rest easy at night?” And education always I think the undercurrent of our podcasts here and you can certainly sense that when we start talking about these different frameworks under which you want to build your retirement income planning. Which direction do you want to go in? What’s going to make you feel comfortable? What makes the most sense for your particular situation? And not everybody has the exact same answer. That’s important to learn as well. You should be getting a customized financial plan in place.

Walter Storholt:                And we’re going to illustrate that over the next couple of podcasts as we continue to talk about retirement income here at the beginning of our series. On that really important subject. Because like you said, Kevin, a lot of people view retirement by another name, 20 or 30 years of unemployment that no longer of getting the paycheck and that’s scary for some people. And so we want to give you some tools and strategies and some ideas on how you can eliminate some of that fear and enter that phase of life with a lot of confidence. And that’s what we’ll try to do over the next couple of episodes as well.

Walter Storholt:                Kevin, looking forward to this series. It should be a fun one and we’ll take a break for now and we’ll come back on the next episode with another installment of the Retire Smarter podcast. Thank you so much.

Kevin Kroskey:  Thank you. Talk to you next time, Walter.

Walter Storholt:                All right. We’ll do it. We’ll continue our series on retirement income next time. Thank you so much for taking some time out to join us. If you’ve got any questions for Kevin about your financial plan, don’t forget to reach out and talk to the team. Truewealthdesign.com, your place to go. You can click on the are we right for you button and schedule a 15 minute call with and experienced advisor on the team. That’s one way to do it. Or just call directly. 855-TWD-PLAN is the number.

Walter Storholt:                Thanks for tuning in. We’ll talk to you next time on Retire Smarter.

Kevin Kroskey:  Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.