Originally Aired: November 27, 2017
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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- Introduction of Dana Anspach, Author and CEO of Sensible Money, LLC
- Certain Investments Protect Your Income over a Long Lifespan
- Some Population Groups Tend to Live Longer Than Others
- Plan for the Possibility of Retiring When the Market is Down
- Use Safe, Maturing Investments to Meet Early Cash-Flow Needs
- Plan for Inflation Rate of 3% a Year and Health-Care Costs to Rise 5%
- Retirement Phases: Go-Go, Slow-Go and No-Go Years
- Identify Big Expenses Early On That Could Derail Long-Term Plan
- Create Memories in Retirement, Don’t Focus on Accumulating Wealth
- Prepare Balance and Cash-Flow Sheets to Always Know Where You Stand
- Strategic Planning Decisions Result in Increases in Net Worth
- Delayed Retirement Credit Can Boost Social Security If You Wait Until Age 70
- Flexible Strategies Can Prevent Spikes in Tax Bracket at Age 70
Welcome to The Lange Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
Dan Weinberg: And welcome to The Lange Money Hour. I’m Dan Weinberg along with CPA and Attorney, Jim Lange, and this week, we’re going to talk investing for retirement with financial planner and author, Dana Anspach. Dana has been a financial planner since 1995, when she began working with people in their 50s and 60s and realized that a different type of planning was needed to help those people align their finances for retirement. So, she founded Sensible Money, LLC, which now serves clients across the country. Dana writes as an expert on retirement related topics for About.com. She’s also a contributor to MarketWatch and is the author of two books: Control Your Retirement Destiny and Social Security Sense. This week, Jim and Dana will be talking about a variety of investment topics facing those over 50, including four key planning challenges. Those are the longevity risk, sequence risk, inflation risk and overspending risk. So, let’s get right to it by saying hello to Jim Lange and Dana Anspach.
Jim Lange: Well, Dana, it’s a pleasure to have you on, and it was truly a pleasure to read your book Control Your Retirement Destiny, by Dana Anspach, and it might sound a little arrogant, but one of the things I really liked about the book is you and I think about a lot of things in similar ways, and so what I thought I’d like to do is to go over some of the primary points that you make in the book, and then talk a little bit about the way you actually realize this with your clients in practice. So, you talk about four risks. You talk about the longevity risk, the sequence risk, the inflation risk and the overspending. Can we go through these one at a time? What do you mean when you say that investors have to take into consideration longevity risk into effect?
Dana Anspach: Well, when I think of longevity risk, one of my pet peeves in the industry for a long time is people tend to look at everything as an investment decision, but the rate of return on an investment has to do with time. And so one of the risks you face as a retiree is the potential risk of a long life. Now, we think of that as a good thing, but in terms of how long your money lasts, it poses an additional risk. And so, there are certain types of decisions to help protect your income and help protect your assets over a long lifespan, and when people measure things only in terms of rate of return, for example, they might look at the decision as to when to collect Social Security, or whether to buy an annuity, and they just want to look at it in terms of rate of return. They’re missing a piece of the puzzle. They’re missing how that investment might play out should they live to 85 or 90 or 95. So certain investments do a better job and certain decisions do a better job of protecting your income over a long lifespan. So, when I think of longevity risk, it’s that. It’s simply that unknown of, how do I make sure I’m in the best financial situation, my income is protected, I can’t outlive it if I should live past average life expectancy?
Jim Lange: Well, I know you have some charts and graphs in the books, but one of the things that sometimes concerns me is, you know, I read some of the things that are going on in the medical research world, you know, with stem-cell research and 80 is the new 60 and all that type of thing. Do you sometimes worry that there might be some significant medical advances and some of the advice that we’ve been giving to clients like, well, we figure the average guy’s going to make it to 85 and 90, and since your parents lived a little longer, we’re going to plan out till 95. Do you sometimes worry about that type of risk also?
Dana Anspach: You know, I haven’t worried about it too much. I think it takes some time for some of those new medical technologies to really get into the mainstream. So when I think of my clients who are of retirement age today, I haven’t thought about it. For a slightly younger segment, yeah, I think you could see people living to 100 and 110. I mean, we already see that; it’s just not incredibly widespread. And the other thing you see is the difference in life expectancies between white-collar and blue-collar workers. So I know a lot of people that have had professional jobs who have been good savers, they have access to higher quality medical care, they tend to eat better, they have access to the medications they need, and so you have to think about that, too, in terms of different segments of the population are likely going to live longer that other segments.
Jim Lange: Well, it’s really interesting that you say that because, and I say this and people think I’m kidding, but I’m actually serious, that my clients actually live longer than other people.
Dana Anspach: Yep, absolutely!
Jim Lange: And there actually is a reason for it. On the estate-planning part of our business, I wanted to try to estimate — we’ve done, I think, about 2,500 wills — so we wanted to estimate to try to measure what kind of growth that we can expect in the future, how many deaths we were going to have, and you can actuarially calculate if you have the birthdates of the people that you have done wills for. You might not know which one is going to die, but you can calculate how many are going to likely die in a given year, and my daughter, who’s kind of an actuarial math whiz, calculated 7 percent, meaning that we should have roughly a 7 percent mortality, and we have closer to 3 percent or 4 percent. So, why is that? Well, our clients are living longer. Well, why is that? I mean, I’d like to say, “Oh, it’s because they feel so secure with our investments, blah, blah, blah,” but that’s not really it. It’s that we attract smart people, and they’re smart about their money and they’re also smart about their health and they live longer. So I think that that’s a good point that you actually have to take into account the person that is in front of you and what kind of life that they have led.
Dana Anspach: Yeah, and you have to build that into the projections that you’re doing. So knowing who your client is and being able to educate them and saying, “Here’s the potential that you could live to 90, 95 or 100, and what are the decisions that we can make that are going to protect your income and your lifestyle and your quality of life, the health care that you have access to,” all of those things in those later years of life.
Jim Lange: The other thing that you wrote, and you put it in a special box, which I really enjoyed, is what advice would the 92-year-old you be giving the 62-year-old you? So, let’s say that our listener is 62 years old and they are going to make it to 92, and if they were going to talk to their 92-year-old self, what kind of advice do you think the 92-year-old — and, of course, it’s going to depend on which client, et cetera — but what kind of advice do you have in mind when you think that the 92-year-old is going to give you, the current 62-year-old, advice?
Dana Anspach: Yeah, well, things like when you claim Social Security, and how you manage your spending. So, I have a client, for example, who, back in 2010, it was like pulling teeth to get him to understand why I wanted him to wait and collect his full Social Security at 70. He did, and he is so thankful now. Now, he’s not 92 yet, but still, the older him is saying, “Thank you for giving the younger me that advice! Thank you for being so adamant that this was the right thing to do. I get it now.” And so, I think of those kinds of decisions, you know, I have clients that come in and we’ll say, “We’re going to run your life expectancy to 90,” and they’ll say, “Oh gosh, I’m not going to live that long,” and I say, “Yeah, but my job is to say, ‘What if you do? What if you do? And how do we make sure that you’re still comfortable and that you have a quality life that you’re happy with?’ ” And so that’s how I think of those decisions is really thinking, you know, about what life might be like at that stage and how you can make decisions that make sure that you’re comfortable.
Jim Lange: Well, I think those are some good answers, and it’s better than one that I remember in a TV skit, which was “I think I would tell myself to floss more.”
Dana Anspach: I love that!
Jim Lange: But anyway, the second risk that you mentioned, you call it sequence risk, and at first, when I read sequence risk, I didn’t know what you meant, and then as I started reading, I thought, “Yeah, I don’t really take that into account as much as I should.” Can you tell our listeners about sequence risk and what it is, and, perhaps more importantly, what they should be doing about it?
Dana Anspach: Yeah, absolutely. So, when you look at the potential returns that you can get from, let’s say, following a standard portfolio structure. You have about 60 percent in stocks, preferably index funds, and 40 percent in bonds. Depending on the time period in history, you could’ve earned anywhere from 12 percent a year average return to 4 percent a year average return. And, so, you have no control over that. You can build your portfolio structure just right, you can be disciplined, you can rebalance, but if you happen to retire into a time period, a decade or two decades in a row with returns that are significantly below average, that’s what we think of as sequence risk, and so much of the time, the software that we use, we plug in a rate of return, and the way that the software runs those calculations and the way that an Excel spreadsheet projects things, is like it was a stair step, as if you earned 6 percent or 7 percent every single year. We all know it doesn’t work that way. There’s volatility, and you can have many years in a row with poor returns and followed by a period of time of really strong returns. And so, you have to stress test for that. I tell people, “You know, if you look at an average, that means 50 percent of the time, you’re going to get a result below average,” and I don’t want to build a plan for someone that is only going to work 50 percent of the time. I don’t want them to have to rely on really strong returns because we don’t know. It’s one of those things you can’t control. It’s outside of our control. So, that’s what we think of as sequence risk is what period of time, what particular decade, and what are the returns going to look like over the decade that you retire into.
Dana Anspach: As far as making decisions that help protect against a subpar time period, there’s a few things: one, stress testing for it in the first place. So, I’ve had people say, “Well, my financial planner or advisor told me I could earn 10 percent a year,” and I thought, “Oh, I wouldn’t want to have to count on that. You’re going to be in potentially for a big shock and have to reduce your spending.” So making sure you’re using realistic assumptions on the front end when you run your projections, and then two, there are certain ways you can construct your portfolio. We prefer a particular type of structure called asset-liability matching. So it’s something that’s been used by pension plans for a long time. If you think about a pension plan, it has to deliver paychecks to retirees, and so they have a process of matching assets, typically bonds that are going to mature. When that bond matures, it matures as a deposit of cash and then uses that cash to deliver these retirement paychecks. And so we have a similar structure where we look at perhaps the first five or 10 years of withdrawals that someone needs to take, and we want that portion of the portfolio secured by very safe investments, preferably CDs or bonds that are maturing, so that I don’t have to worry if the market’s down 30 percent the year they retire or the year after they retire. I don’t want to be forced to sell at that point in time. So, instead, we use these safe investments that are maturing to meet those cash-flow requirements, and it lets us be a little more strategic about when we harvest from the growth portfolio. When the growth portfolio’s up, we can take some of those gains off the table and replenish the safer part. And so, that’s the particular strategy that we use to help protect against sequence risk.
Jim Lange: Well, it’s interesting that you say that because we do something very similar. We call it the stack analysis. So, we might divide the portfolio into maybe five different portfolios, and the most conservative one is going to be cash and CDs and maturing bond ladders and money that, if the market did go down 30 percent, so let’s say we had somebody retiring in 2007, then we have a 2008 and we have this terrible market drop, there’s still plenty of money and plenty of liquidity for the client to spend, and then the opposite extreme, let’s call it the most aggressive bucket, might be something like small companies and emerging markets and value companies, things that tend to be more volatile, but money that we’re not going to tap into for 25 or 30 years. So even though we have different terminology for it, I think that we both basically have the same general idea, and it’s interesting, I think we’re both fans of index investments also.
Dana Anspach: Yeah, you have a process in place that is at least considering that there’s going to be volatility and how you’re going to be strategic about where you pull money from.
Jim Lange: Right. So, for example, let’s say the difference between one of your clients and somebody that went across the street, and you had two retirees in 2007, and the person across the street was using a more, let’s say, traditional or flat rate of return, and you’re talking about the possibility of the market going way down and you’re setting up the way you’re doing it, or, in my case, the buckets, and then you have a 2008, you could really have a huge difference in the long-term result for the client, and also, you have to take that into consideration when you are calculating how much money you can safely spend.
Dana Anspach: Yes, absolutely you do.
Jim Lange: Well, another risk, and this is a tough one because it’s so hard to predict, but that is the inflation risk. Jane Bryant Quinn, who comes on every year, she says it’s a little bit like Harvey the Rabbit, the risk that we just don’t see. We know he’s there, but we just don’t see him because it doesn’t pop up every day. How do you handle the inflation risk, and what do you do to protect your clients from the inflation risk?
Dana Anspach: You know, we have a little bit of a different take on that. So, I’ve studied the work of David Blanchett, who’s head of retirement research at Morningstar, and what they’ve looked at is different segments of retirees and looked at how inflation impacts people who have different income levels, and so inflation has a really big impact on lower-income retirees, people that are spending $25,000 to $40,000 a year, and that makes sense. You think about increases in the price of energy, gas, food, health care, your basics, and there’s not a lot of room to absorb those price increases. Then they look at retirees that are more in the $40,000 to $75,000 spent in a year, and then those over $100,000, and so what they’ve seen is that people that are at higher spending levels in retirement, that have the assets and the income to support higher spending levels, they actually haven’t needed their spending to keep up with inflation, and that makes sense to me because typically there’s more money being spent on discretionary items, probably more travel, more eating out, more entertainment, and those things tend to taper off as people get into their later retirement years. And so, when we run our projections, we actually customize the inflation assumptions depending on the segment that the client fits into. So there’s a certain type of stress testing that we run, and for those that are lower assets, lower income, we want to know that they can maintain at least an annual spending increase of 3 percent a year, and then we use 5 percent on health care. So we run those projections to say we need the cash flows from the portfolio to be able to support the fact that your living expenses would go up 3 percent a year and all your health care, out of pocket premiums, all of that, would go up at 5 percent a year. And then for our higher-income clients, we use a slightly lower inflation assumption. We still like the plan to work at 3 percent, but we explain to them it’s highly unlikely that you’re actually going to need your spending to increase at that rate. Research shows that, in fact, you won’t. Not only does research show it, but I have clients I’ve worked with for 15 years now and I see it in real life. You know, they’ll sit down and I’ll say, “You know, would you like your inflation raised this year? Here’s what the portfolio will support.” And they’ll say, “No, we’re fine, we’re comfortable. We don’t need any more.” And so, I think there’s that risk of using an inflation assumption that’s too high in your plan, as well as one that’s too low. It really needs to be customized to your individual situation.
Jim Lange: Well, it’s interesting that you mentioned David Blanchett because I am also a fan of David’s, and he wrote another article that was very influential for me. He was talking about the safe withdrawal rate, and I was always kind of a Bill Bengen guy, and Bill Bengen has actually been on this radio show, and I said, “Bill, you know, a lot of our, let’s say, younger clients, maybe in their early 60s or mid-60s, and they’ve just retired and they’re in good health and they want to travel and they want to do all these things, they want to spend more than the traditional classic safe withdrawal rate on the theory that when they’re much older, that they probably won’t be up for traveling physically, and could they spend a little bit more now than later?” And Bill Bengen said, “No, no, no, you have to take additional health-care costs into account.” And I never really quite got that because, other than long-term care, which is a different issue, I always thought that most of the health-care costs were usually covered, at least to some extent, or it didn’t go up that dramatically. But that’s what Bill Bengen said, and he’s the guy on safe withdrawal rates.
And then David Blanchett wrote an article that said, “No, no, no, the medical costs really don’t go up as much and you can spend more when you’re a little younger.” So I don’t know if you worked that into your calculations, but I have, and it’s kind of interesting because it kind of gives people permission to come a little bit closer to the lifestyle that they might want if they are, let’s say, in their 60s and healthy and want to run around, figuring that, in later years, they’re likely not to spend as much money.
Dana Anspach: Yeah, we do exactly the same thing. I’ve heard it phrased in terms of what they call the go-go years, the slow-go years and the no-go years, and so we will often build in some extra spending on the front end, and just like you, I came to the same conclusion is that, you know, there may be some extra health-care spending. Most of the time, people have insurance that’s picking up a lot of that, and then, you know, if they have a max out of pocket, so the health-care spending has a cap to it. Now, some people like to spend a lot on alternative health care, but that’s a discretionary item and usually what happens is that type of spending has now replaced what used to be spent on travel or entertainment or other things.
Jim Lange: Yeah. So, what you’re telling me is that it sounds like, by the way, you’re a serious number-runner, and we’ll get to that after we’re done with the four risks, but let’s forget for the moment the serious number running, because we do the same thing. So it sounds like when you say that you’re stress testing and you’re calculating different scenarios, different amounts of different strategies for Social Security, different amounts of Roth IRA conversions, et cetera. But I sometimes like to just do it simply. So, let’s keep it simple. Somebody has a million-dollar portfolio, and let’s even say that they are comfortable and I’m comfortable with a 4 percent safe withdrawal rate. So, they can take $40,000 from their portfolio, all right? And then they’re also going to be getting Social Security and a pension, but one of the problems is that the Social Security, even though there’s some cost-of-living adjustments, probably won’t really keep up with inflation, and the pension is often flat, meaning that it’s so much per month. If you work that in through spreadsheets and you’re doing it the way you probably should do it, the way we do it, have you figured out a way to do that on a, let’s say, back-of-the-envelope calculation? So, let’s say, for discussion’s sake, that you have a pension of $30,000, Social Security at $30,000, so if you didn’t have to worry about inflation, you’d have the $40,000 from your portfolio, the $30,000 from your Social Security, the $30,000 from the pension, you could go out and spend $100,000 before taxes. But you really can’t spend that much because the pension and the Social Security aren’t going to keep up with inflation. Do you have any easy way to do that, or do you just have to run the numbers?
Dana Anspach: You know, I don’t, and the easiest way, I think, is to use that 4 percent rule. If you want a back-of-the-envelope kind of approximately what do I think I could take out, I think that is a good back of the envelope way to do it. The challenge is, people have money in different types of accounts, so if your assets are all in an IRA account and you can withdraw 4 percent of that a year, a good chunk of that is going to go to taxes. If your assets are all in a non-retirement, you know, brokerage account, then your tax rate on those withdrawals is going to be a lot lower. And so those simplified rules just don’t get to the level of detail that we like to get to, to really say, “Here’s what will work for you,” and, in addition, if you’re using strategies like I know you do, of having people delay Social Security and do Roth conversions, sometimes, we’re pulling out 8 percent or 9 percent or 10 percent of the portfolio for a few years, but then later, we’ll only be pulling out 2 percent or 3 percent. And so, those rules of thumb just don’t capture the nuances and the tax savings and all of those other things that an actual customized plan can bring to the table.
Jim Lange: Well, I would agree with that. The only thing that I would add is that when I said 4 percent, I was probably talking about a 30-year retirement. One of the things that Bill Bengen does, and actually, in his book, he even has different rates depending on what your life expectancy is. So, sometimes, if I have clients and they’re in their mid-70s or 80s, that we can use a higher safe withdrawal rate on the theory that we don’t have a 30-year life expectancy. I don’t know if you use that, but frankly, we do.
Dana Anspach: Yes, actually. I do the same thing. So, we will adjust some of our assumptions. You know, if I have someone that is retiring at 55, I think, ooh, you know, I could have 40 years of retirement or if I have someone that has a spouse who’s significantly younger, then we might want to be a little more conservative in those assumptions. But yes, just like you, if I have someone who’s 70, and often, I’ll have doctors who work up until their early 80s, and so that does change the timeframe and the amount of withdrawals that we feel comfortable with.
Jim Lange: OK, well, I think we are getting pretty close to our break time, but before we break, I just do want to mention that I think that you have a wonderful book, and I’m going to recommend it to our clients. It’s called Control Your Retirement Destiny, by Dana Anspach — and is Amazon the best place to get it, or can they get it at your website?
Dana Anspach: Amazon is the best place.
Jim Lange: OK. Again, Control Your Retirement Destiny, by Dana Anspach. The book includes a discussion of four risks, and we have covered three of them, but the last one that I also wanted to cover is the overspending risk. Can you tell us about the overspending risk and how prevalent that is in your practice in your day-to-day work?
Dana Anspach: Yeah, absolutely. Overspending has to do with, I think, an error on the amount of money that you’re going to need to be comfortable in retirement. So, what happened with me in 2006 and 2007 was, I had a couple clients that had given us, you know, “Here’s what we spend,” and I don’t remember what the number was, let’s say it was $50,000 a year or $60,000 a year, and in their first phase of retirement, they ended up withdrawing $10,000, $20,000, in one case, $30,000 more than that, and that put a significant strain on their retirement plan. So when we looked at the potential that the funds might not make it to life expectancy, those extra withdrawals early on in retirement added a huge risk. And so that’s what I think of as overspending risk, is how do you accurately estimate what you’re going to need to spend to be comfortable in retirement? And a lot of people will come in and say, “Well, I don’t do a budget. I’ve never done a budget or haven’t done one in years.” And so, we make people go through a very detailed process now of itemizing health-care expenses, and we’ll ask how old their home is and what they anticipate in terms of major repairs, like a new roof or new flooring, new driveway, those kinds of things, and we build that in to the projection because we want to make sure there’s not some large expense that they’ve forgotten about that’s going to really hurt them early on in retirement. Another item I see missing a lot is dental. So, I know, me, I have eight crowns, and they’re not inexpensive, and so, you know, you have to project that into the plan. You have to account for those things or you could end up in a situation where you’re drawing out too much early on.
Jim Lange: Maybe my comment about the older you talking to the younger you and suggesting flossing might apply in your situation! Maybe save you a little bit of money and aggravation.
Dana Anspach: Yes, exactly!
Jim Lange: I like your take on this. We almost torture clients also to really get an idea. In fact, P.J., he’s actually the money manager in our business. I’m kind of the strategy guy, the Roth guy, how much you can spend, gifting, estate planning, et cera. Then we have another firm who actually manages the money, and he goes through this with a high degree of accuracy, and he likes to say, “I know what you’re spending down to the cable bill,” because he develops these stacks based on that, and a lot of times, people really don’t know how much they’re spending, and it’s really good that you’re forcing your clients to actually face up to that, and that way, you can do a much better job of calculating how much money they can spend, and then, not only that, but then how you’re going to invest appropriately.
Dana Anspach: Yeah, and we track it also, so once they are retired, we take our projection and we’ll say, “Here’s what we anticipated you’re going to withdraw from your IRA this year, and here’s what we anticipated you would withdraw from your non-retirement account,” and then at the end of the year, how close were we? So, were we within $1,000 of that number, or was there something that came up that you withdrew a lot more than we anticipated or significantly less? And so, over time, that allows us to hone in those projections and get even more accurate.
Jim Lange: I’ll tell you, Dana, after reading your book and talking with you, I think if I wasn’t an advisor, I would become a client because I love the way you’re doing things. I really do.
Dana Anspach: Well, thank you.
Jim Lange: So, let me tell you about another risk that I fear with a lot of my clients. So, I’m talking about the Baby Boomers and even older, and sometimes, a lot of my clients have a little bit of what I’ll call Depression-era mentality, so they tend to not be great spenders. So, let’s say that I calculate that they could spend $125,000 before taxes and still be well within the safe withdrawal rate limits, and, in reality, they’re spending $60,000 or $70,000, and I see this a lot, and my fear for them, and I think, though they wouldn’t like to hear it this way, if somebody said, “Well, geez, you know, you’ve been working with the Joneses. What’s the essence of the Jones plan?” And I might say something like this:
“Well, the Joneses are pretty smart and they have hired me, and we have them at a very well-diversified portfolio of index funds that will do very well for them for their purposes over time. We got the Social Security just right. We got the Roth IRA conversions just right. They’re helping their grandchildren a little bit with their education. They have the Lange’s Cascading Beneficiary Plan, so their estate plan is set up right. So all that sounds pretty good. But if they are spending $80,000 when they could be spending $140,000, sometimes even more, the essence of what they’re really doing is they’re saying, “We’re going to accumulate and accumulate and accumulate. We’re going to not spend more than the safe withdrawal rate, not even come close to it, and then, even with good estate planning, when we’re going to die, let’s even say in our 90s, our kids will inherit a lot of money when they’re in their 60s”
— well past the point that it’s terribly meaningful. In the meantime, they didn’t go on vacations that they could have. They didn’t take their kids and grandkids to Disney. They didn’t go on the cruise. They didn’t go out to dinner as often as they wanted. I’m not a big believer in buying things, but I’m a big believer in having experiences, and they didn’t have the pleasure of giving money to their favorite charities. I fear that. I don’t know if you run up against that in your practice, but I’m always encouraging people to spend closer to what the safe withdrawal rate is because I fear underspending, and I would say that probably more than half of my clients are significantly underspending compared to what they could afford.
Dana Anspach: Yes. I agree with that, and I would say probably in our practice that the percentages are about the same, and we have very similar conversations. You know, we use a process, we call it their critical path, so it’s a minimum amount of financial assets that they need to have remaining each year for us to feel confident their plan will work through life expectancy and even beyond. And so as we start to measure that and people get ahead of path, then we have these conversations exactly like you’re describing. You know, is there something that really matters to you? Could you take the whole family to Disney? I love that one because I have had many clients do it, or Alaska on an Alaska cruise. Is there a charity that really means a lot to you that you could become involved with, that you would want to contribute to, or a business that one of your grandchildren wants to start or helping with their college or just having the money to bring the family together for Christmas? Maybe they’re all remote and they’re young and the younger ones can’t afford to come in, and so we’ll have those same conversations because I learned from my own dad that family value that you’re describing of spending money on experiences and building those memories, and when you’re in that situation, having the money allows you to do those things.
Jim Lange: Well, I actually learned the same thing, but not from my dad, who was actually a cheapskate, who was really bad about spending, but actually from my father-in-law, who actually sponsors a family vacation every year. So my daughter, who’s now 22 years old, she knows all her cousins, even though none of them live in Pennsylvania, and she has a sense of clan that she would not have otherwise. So I am a big believer in family vacations. The other thing, and I actually just wrote an article on it and sent it out in my newsletter, is there was an article in the Los Angeles Times, and I think it was quoting a Harvard study, that said you really can buy happiness, and the idea was if you hire people to do things that you don’t like to do, then you have more time to do things that you like to do. So I have a client and they have a beautiful house in the country, and they have sufficient money, and they were telling me that they were thinking of selling it, and I said, “Why?” And they said, “Well, because every time that we go up there, we have to spend the whole time working and maintaining it and raking the leaves and dealing with all the things that you have to do to maintain the house.” And I said, “Well, why don’t you just pay somebody to do that so you can go up and enjoy it?” So I think that overspending is certainly a risk, but underspending is also.
Dana Anspach: Yeah, and sometimes people need you, as their planner and advisor, to give them permission to do that. They need someone to say, “Look, this is really OK. It’s not going to put your plan at risk,” and there’s that sense of relief that shows up when an outside party tells them, “Yeah, this is OK.”
Jim Lange: OK, we are with Dana Anspach, the author of a book that I would recommend called Control Your Retirement Destiny. Dana, when I was reading your book, I read that you actually prepare balance sheets for your clients as well as income or cash-flow statements, and, interestingly enough, we do the same thing, which is a lot of extra work, and I know the reasons why we do it, but I was going to ask you why do you actually go to that extra work of preparing a personal balance sheet and a personal income statement or cash-flow statement for your clients, and do you think that this is something that everybody should do, even if they are a do-it-yourselfer?
Dana Anspach:Yeah, absolutely. You know, one of my pet peeves in the industry of financial advice is that a lot of people think of a plan simply as a recommendation as to how to invest your money and asset allocation plans, and, to me, a plan is so much more than that. When I go to my local gym, they have this thing that pops up, and it says, “What gets measured gets improved,” and so when you’re creating a balance sheet, it’s essentially a net-worth statement, a list of your assets and your liabilities and what are you worth. And the same with a cash-flow statement, you’re projecting out your income and your expenses over time, and you can see what is likely to be left at age 85, at 90, and it helps you make better decisions. And so, it’s hard for me to imagine putting together a solid financial plan or projection for a client without that kind of information and having something to measure against so we can say, “Well, last year, here’s what your balance sheet looked like and your income statement, and here’s how we can compare that to this year,” or particularly when we’ve been working with someone for five or 10 or even 15 years now, we can go back to our original projection and see how close we were, so it helps improve the whole process. I mean, I just can’t imagine trying to do a financial plan without that type of process in place.
Jim Lange: Well, we are also big fans of what we call running the numbers. So if we have a client who is onboard, what we do, and we actually do it with the client there, is that we say, “OK, let’s use certain assumptions, whether you use Monte Carlo or a flat rate, and we have different action plans.” So, for example, we might say, “OK, let’s do a plan that has no Roth IRA conversions and taking Social Security at 62 or 66. Then, example Number 2, let’s have a plan where we do a series of Roth IRA conversions and take Social Security at 66. Then, scenario Number 3 might be, OK, let’s hold off on Social Security until we’re 70 and then do a series of Roth conversions.” So we call this running the numbers, and we find that to be very valuable, and it sounds like you’re doing something similar, and that the balance sheets and the income statements are an additional tool that you use. Is that right?
Dana Anspach: That’s exactly right, particularly the income statement. You can run this cash-flow projection, as I like to call it. I think of an income statement as almost a static, you know, here’s your income and expenses for this year versus a cash flow projection is saying here are your projected income and expenses, including taxes, from now through life expectancy. And so, based on this pattern, what do we think you’re going to have left in financial assets later in life, and then, exactly as you described, we can start playing with some of the variables. Well, what if you took Social Security at this age, or what if you did this series of Roth conversions, or what if we drew the money from the non-retirement account first and the Roth IRA last? And we start to play with these variables, and we can see how it impacts the outcome, and there are definitely decisions that can result in having $50,000, $100,000, in some cases even a half a million more 20 or 30 years down the road, and that’s not by choosing the right investment. That extra net worth comes from the strategic planning decisions that you can put in place.
Jim Lange: : I think that that’s so accurate, and when you have these kinds of big differences, I think, particularly in these days when, frankly, it’s not all that difficult to be a do-it-yourself guy with Vanguard, that I like to think that the value that we provide is not that we’re going to beat Vanguard by 3 percent, but all the strategies that we’re employing where people can potentially be hundreds of thousands of dollars better off, because, for example, they held off on Social Security and they did a series of Roth IRA conversions that we recommended. Well, Dana, it would not be right if I had you on the radio and we didn’t talk about Social Security at all. You wrote a dedicated book on Social Security. You’ve written many articles about it on www.about.com. And we no longer have the wonderful “apply and suspend,” so while apply and suspend was still permitted, I actually wrote a book, and I was trying to tell everybody, “Hurry up and apply and suspend before the statute of limitations cuts you off, and hurry up and get grandfathered!” And I wrote that book, and I did a lot of public workshops, and a lot of people actually did it, which I was pleased, and now, I’m rewriting or updating that book, but we can no longer do that. But there are some strategies that people can use that perhaps you could tell our listeners about. So, for example, one of the strategies that married couples can still use is a restricted application, but then there’s restrictions on that. Could you tell our listeners a little bit about that?
Dana Anspach: Yeah, so the restricted application, I believe you will have to reach the age of 64 by January 1st, 2018, to still use that, so it has to do with your date of birth. But if you meet that requirement, you can restrict your application to receive spousal benefits only. So, your spouse would have to have filed for their own benefits, and so if they have filed, now you’re going to be able to get 50 percent of what they would get at their full retirement age, and you can collect that up until you’ve reached the age of 70, and then you can flip over to your own benefit amount, assuming that you worked and that your benefit amount would be higher than that spousal benefit. So if you’re going to use that strategy, you file your restricted application when you reach your full retirement age, and then you collect the spousal benefit up until age 70, and then you switch over and get your higher benefit amount, and we still encounter a few times a year couples where that strategy actually makes sense and will add a significant amount of value for them.
Jim Lange: And the other thing about that is that while you are taking a spousal benefit, your own benefit continues to grow at 8 percent per year. So when you say switching over, so let’s say, for discussion’s sake, that you started with a benefit that’s a little bit less than half of your spouse’s. Now, you’re taking a restricted application on your spouse’s benefit, then you are getting the 8 percent raise as yourself. So when you’re 70, you might have exceeded half your spouse’s benefit so you switch over to your own. Is that what you’re talking about?
Dana Anspach: Yes, that’s exactly what I’m talking about, what we call delayed retirement credit, so that increase in Social Security that you get by waiting until age 70.
Jim Lange: Right, and the historical note is what you used to be able to do is you used to have your spouse apply for Social Security, suspend their collection of it, and then you could get a spousal benefit even though your spouse wasn’t collecting, and unfortunately, they said, “No, no, enough of that.” So, you also have a chapter on Roth IRA conversions, and you know I’m like a Roth IRA conversion nut, and I love testing them and when we were talking about what we were going to talk about today, I didn’t want to spend a lot of time on the proposed tax act, because who knows;
- A) if it’s going to pass at all
- B) if it does pass, what’s it going to look like, but one of the proposed changes actually has a pretty potentially big impact on us, regarding Roth IRA recharacterizations.
So, could we talk a little bit about Roth IRAs and Roth IRA recharacterizations, and let me ask you what your take on it is when a client comes in, and let’s assume that they have a combination of IRA or retirement money and what I’ll call after-tax dollars.
Dana Anspach: Yeah, so we project everything out, as I’m sure you do, and look at how much room is there to fill up a particular tax bracket. Usually, we’re filling up either the 15 percent or the 25 percent tax bracket. So, once they reach age 70 and they’re going to have required minimum distributions, that often spikes people into a higher marginal tax rate, and so we go, “OK, let’s just use a simple example. We know once you’re both over 70, the tax rate’s going to be 25 percent, but we have this window of time up until then where we can pull money out and you’re only going to pay 15 cents on the dollar.” And so, in those cases, we’re often recommending Roth conversions. Sure, absolutely, I’d rather pay 15 cents on the dollar today, move that money into a Roth where it’s now going to grow in a tax-free environment, and then later on in retirement, when I withdraw it, it’s going to be tax-free, or, in many cases, it’s going to be the preferred asset to pass along to heirs. And so, we project all of that out, and what you can do today with a recharacterization is I could say, “Well, I’m going to convert a little bit more to that Roth IRA, and if I converted too much, or their itemized deductions were higher than I thought, or actually lower than I thought they were going to be, and I went over the tax rate I wanted to, then I could recharacterize. I could essentially undo some of that Roth conversion.” And that is one of the provisions that might be taken off the table. Like you said, we don’t know. And so, it doesn’t mean that Roth conversions are out. You can absolutely still use the strategy. A little more finesse might be required where we have more leeway today to err on the side of converting too much and then undoing it.
Jim Lange: Right, so one of the strategies that we have sometimes used is we have separated an IRA that we wanted to convert to a Roth into several IRAs, and we have put them in separate accounts and then converted perhaps more than we even wanted to convert, and then we take a look at what the results are on October 15th of the year after you convert. Actually, you give us a couple weeks to do the paperwork. And then we take a look at which investment did the best, and then we often keep that as a Roth and we undo the other ones. It’s kind of like a free second look or kind of betting on a horse race after it’s over, and we save people a lot of money that way, but it looks like that is being threatened so we’re going to have to be a little bit more accurate and not quite as aggressive. The only other thing that I would add to the party that you brought up is that we have sometimes, let’s say somebody is going to be a 25 percent taxpayer, and let’s even say, you know, and again, not taking into account the new changes, we sometimes have found that converting up to the top of the 28 percent actually works if you have a long enough time horizon.
Dana Anspach: A long enough time frame, or actually depending on that client’s individual circumstances, yes, I agree.
Jim Lange: So, anyway, Dana, I really liked your book, and again, I’m going to recommend our clients and our listeners read it. It’s called Control Your Retirement Destiny, by Dana Anspach, that you can get at Amazon. I think we have about one minute left. Is there anything that we didn’t touch on or that you want to emphasize in the remaining minute?
Dana Anspach: You know, I call retirement a series of irrevocable decisions, and it brings so much peace of mind. I mean, I see it over and over again, and I’m sure you do. When people have a plan in place, they can relax and go out and enjoy retirement. So, that’s what that planning process brings to people is just that ability to enjoy that stage of life.
Dan Weinberg: All right, and thanks so much, as always, to Jim, and to our guest this week, Dana Anspach. And listeners, if you’d like to meet with Jim Lange in person, give the Lange Financial Group a call at (412) 521-2732 to see if you qualify for the Lange Second Opinion service. That’s (412) 521-2732, or connect with Jim’s office through his website, www.paytaxeslater.com. You can also visit www.saveourstretch.com to access your free advance reader copy of The Five Greatest Tax Saving Strategies for Protecting Your Family From the New Tax Law. That’s Jim’s upcoming book. For now, I’m Dan Weinberg. For Jim Lange, thanks so much for listening, and we’ll see you next time for another edition of The Lange Money Hour, Where Smart Money Talks.