WTM Retirement Blind Spots Part 3 of 3

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Hey everybody, welcome to We're Talking Money. It's episode three of the ten most common mistakes in retirement planning. We're talking about the last four, Dustin, of the blind spots.

Yep, wrapping up this week with the last four. These are really, really relevant ones. They're probably going to hit you home, and we're looking forward to talking to you. Stay tuned, we'll be right back.

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All right everybody, it's time for We're Talking Money live. The last four in our top 10, Dustin, the mistakes in retirement planning, blind spots. We've been kicking this off now for the last few weeks, last show. We got some pretty important ones here to round out these ten. It's gonna be an interesting set, and I think to your point, these are gonna hit home.

Yep, absolutely. And they're a lot more common than you think, and you may think that they're not actually blind spots until you really start to peel back the layers and start to illuminate them. Then you can really see that the blind spots.

And coming at number seven, we have neglecting insurance. So this is something that we really talk about pretty much with every single client we see, whether they need insurance or whether they don't need insurance, or we're stress testing the need for it, because you always want to make sure that you have that part of the plan buttoned up. Because what we call the foundation of the financial plan is, it could be some of those insurance pieces, it's having the emergency fund. And not having those pieces as your foundation, if you start to accumulate wealth and skip over some of those areas, then now all of a sudden you're accumulating wealth, something happens, you miss work, your income gets cut in half, and boom, the entire financial plan could fall apart.

To your point, it hardly seems like a blind spot. This one is so common that it doesn't necessarily feel like a weakness in planning, but you said it, it's the foundational things that tend to be missed. So I always refer to that as getting back to the basics, if you think old school, if you will. So at the beginning of our careers, we always put it in the perspective of a pyramid, and at the bottom of that pyramid was your base. That was the foundation, and that's where things like insurance would be placed. And so you needed those foundational things to know that you could build a good house on top of it, so a financial house.

So neglecting insurance doesn't seem like a blind spot, not at all, but there's a tremendous amount of risk if, for example, your health gets bad, you lose your ability to earn an income. That's a huge blind spot. Lose a home to fire, all of those things. People underestimate them, but if one of those things happens, it could derail your future. You may never recover from some of those things, particularly disability.

Absolutely. And one of the things that people don't necessarily know is how inexpensive insurance really is in the grand scheme of things. You look at disability insurance, so generally how it's going to work, if you have some disability coverage through your employer, they're going to give you 60 of your income. But keep in mind, they're deducting that on their tax returns, so when you get that, it's a taxable benefit to you. So effectively, after tax, you might be looking at closer to 35, 40 percent of what you're normally bringing home, and so that's a pretty big gap.

But what you can do is you can actually purchase supplemental disability insurance to bring you back up to 90, 95 percent, and this benefit will last all the way to age 65, just to make sure you're bringing home exactly what you're bringing home before, and your lifestyle can stay the same, number one. But number two, you can continue to save and be on track for retirement. Because even if you're disabled for one, two, three, four, five years, let's say in your early thirties, we talked about it a couple shows ago when I was here, compounding interest is so powerful. And let's say that your employer's disability coverage is enough for you to maintain your level of lifestyle. The question is, could you also save by getting that haircut on your income?

You know what's interesting, Dustin, is people, we see it all the time. Protecting yourself and your family against so many of the perils out there can best be done with insurance. It's the cheapest way to add great security to you and your family. Yet people want to save money, a few dollars. We're talking about here, this is not a large amount of money. Yet people think, oh well, I'll just save that money and I'll invest it, and then I'll be able to offset the risk. Never. It won't happen. So you have to be ready to spend a little bit of money. You've heard the old saying, to make money you have to spend money. To be wealthy, you've got to protect. Otherwise these things could just wreck your path to financial freedom or to a wealthier picture. So be cautious of that.

Let's move to number eight. Number eight is failing to take advantage of IRAs. Simple, totally simple. Everyone says, oh, I'm in my 401k, I've got that through my employer, or I'm self-employed, I've got a 401k, don't need an IRA. Well, trying to create wealth, you want to have as many layers as possible. You want to build on those layers, so every layer builds on another layer. And if you can put money into an IRA, my question would be, why would you miss that opportunity? Not, well, I'm doing something else. It's, why not do both? Because it will add to your total wealth picture.

So we see that a lot, and you love to talk about not just a traditional Roth but a, or not just a traditional IRA but a Roth IRA, so that you have multiple buckets of money, tax-free, taxable. Gives you an opportunity to better maneuver when you reach those places in your life where retirement income is very important. Talk about that a little bit.

Absolutely. And that's something that I probably bring up, I would say 99 of all the meetings I have. Maybe not that high, but almost every single meeting that I'm in, we're talking about Roth IRAs, we're talking about taxes, we're talking about diversifying your long-term retirement dollars. So now all of a sudden we can strategically pay tax instead of having to pay whatever the taxes are going to be.

Quick segue into our next series of video podcasts we're going to be putting out. It's going to be all the new tax proposals, so that's going to be coming out next week. Make sure you stay tuned, that's going to be really, really good. But the Roth is even more, it's more valuable now because of all those tax proposals, and you'll hear more about that. Taxes are going to go up, so we want to make sure that we're taking advantage of that.

The piece that I think is so important with IRAs in general is you can contribute six thousand dollars per year. That's it. Now, if you're over the age of 50, you can contribute another thousand, so now you can put seven thousand in, and that's per individual. So a household, if you're married, you could do twelve thousand or fourteen thousand. But if you don't use that contribution, you lose it. So it's money you're leaving on the table. Because remember, the Roth IRA grows tax free forever. You get to pull out everything 100 tax-free. A regular IRA, tax-deferred growth, you get a tax deduction, depending on your income level, when you put the money in. Very, very powerful.

What's really interesting, Dustin, is with these IRAs, a lot of folks say, well, I don't qualify. And you just said it, it might be tax deductible depending on your income. Well, I've got news for you: everyone can do an IRA, traditional or Roth. So don't think that you can't. Doesn't matter what your income level is. You might not get the tax deductibility, you might be phased out of that, but you can still put money in the IRA, and then you can immediately transition that using this backdoor strategy, if you will, to move it into a Roth. So it's not off the table for anyone.

It certainly has an effect on your tax return, but it's a small amount in the big scheme of things, or in the greater scheme of things. And so while yes, you lose the tax deductibility, you're growing your wealth, and likely you're positioning money so that it's going to better support you when you need it to, and you'll have greater flexibility moving that money where you need it to be when you need it. So don't forget the Roth. It may be small when you compare it to the mighty 401k. Absolutely, it's going to be not as effective, if you will, but when you put it all together, it's one more layer that you shouldn't ignore.

Absolutely. And I think what we see a lot too is it's so easy to set up. You don't need people like us to set it up. Go to Fidelity.com, set up your IRA, set up your Roth IRA, pick your investments. A really large advantage of an IRA or a Roth IRA over a 401k is, traditionally, 401ks, they're not going to give you the investment flexibility that you are really looking for, whether it's in individual stocks or maybe it's a certain sector of the market that you really want to be investing in. A lot of 401ks are just going to have more passively managed funds, whether it's a target date fund, and you don't really have as much flexibility in there.

The Roth has some nice features too. Any contributions you put in, you can actually pull out penalty-free, tax-free, because that's just a return to basis.

That's right.

So that's really helpful. Now, that doesn't occur if it's a converted Roth IRA. Then you have a five-year rule, so keep that in mind. But just those little pieces like that, the flexibility is really nice when it's outside of the 401k. So don't forget about those IRAs.

One more point there, Dustin. I think it's so important that our listeners understand, sometimes people don't participate in these useful tools because they're not familiar with all of the nuances, the things that you were just talking about. There's a lot of them. It's easy to set it up, as Dustin mentioned, but it may not necessarily be so easy to understand all of the rules, unless you're willing to spend a lot of time reading, studying these things and how they actually fit into your plan. So while you can do a lot of it on your own, we encourage you to work with an advisor or an advisory firm that can guide you in using the right things at the right time in the right way. Very important that you do that.

Now, mistakes nine and ten, we're going to combine those a little bit. We're going to talk about them, that they're almost, they're opposite one another, but they fall into the same category. Number nine is investing too conservatively, and that is problematic long term for people trying to build wealth, very problematic. And then investing too aggressively. I see that occur, but we tend to see that more along that path, or more along the path of retirement, when people are there, when they've left their place of employment or they've sold the business. Now we're retired, and maybe you're too aggressive, and all of a sudden major market turmoil or corrective selling leaves you in a position that perhaps your withdrawal rate has to be much greater than it should be, and all of a sudden the drawdown effect gets exacerbated. So you're starting to pull more and more out of your accounts, which, as we know, that could limit the life of your retirement income.

So let's talk investing too conservatively first. So many young people do that, but it doesn't have to be that way. It's a blind spot that we've got to illuminate, Dustin. So let's dig into that one a little bit and think through, share with our listeners why it's so important to not be too conservative.

Yeah, it's really important. This is something that we talk about with every single one in our 401k plan, pretty much every single time. We have a pre-built agenda that we walk through with every plan when we go to just talk to the plan and let them know what they should be taking advantage of, and one of the bullet points on there is investment selection. And we always, always, always bring up making sure that you're double checking these investments.

We talked about a couple weeks ago too, though, the 401k is so nice because it can be out of sight, out of mind. You set it up, taken out before you get it, you get the employer match, and all of a sudden the money's starting to compound on itself. But you want to make sure that your investment strategy is matching what it should be, and a lot of times what we see is it's not aggressive enough. If you're a younger person, or let's say you're 50 years old, 55 years old, but we still have 10 years to retirement, why shouldn't we still be taking risk if we're not going to

touch the money for a while. That's one thing that I see. I think a lot of younger folks generally do a pretty good job staying aggressive, but as you get into those middle years where, let's say, now you're on the down path to retirement, whether you're 45 or 50, 55, I see people getting a little bit too conservative too soon, and they're in turn leaving money on the table.

Because if you think about it, and let's say we have a market pullback and say you're 55, yeah, it hurts when you look online and you look up your accounts and everything, but at the end of the day, what does it really matter? You're not going to touch that money for, say, another 10 years, and that is plenty enough time to let the market really pull back up.

One of the great things about that, and so this is why I think this is probably one of the biggest value adds as an advisor, it's really more on the psychological part of investing. And so when you do have that pullback, an advisor can be there, we or whoever you work with, we can be there to talk you through why it's okay. Keep pumping money in. Now we're buying everything at a discount. These are going to be some of the most powerful contributions you make. Keep going.

So important. Those are great points, Dustin. I'll just follow up on a few of those. I think the biggest weakness, or maybe the blind spot, is that people don't really know what they want in retirement. They haven't really thought about or assessed what their life might look like and therefore how much money they will need and what kind of income that money can generate.

So for most people, I would say it's important to work with an advisor to do one thing before you just launch into an investment program: know what it is that you need. What is your number? What do you need for performance in terms of a interest rate or a rate of return? What do you need to reach your finish line? And if you don't know that, then you are predictably going to invest too conservatively or maybe too aggressively.

But understanding that, and only when you understand that, will you begin to take the guard rails away a little bit, and you'll say, oh, wait a minute, I have been too conservative. Let me think about how many years I have. I've got 15 years, 20 years, whatever that number is. That should play into how you think about what investment risk is appropriate for you, or for you and your spouse, or your family. So don't underestimate that.

It is so important not to get too conservative, because you only get one time at this, and if you miss some of the best years in the market during those early years, you may never get to make up those lost returns. It's not like you miss them and you'll get guaranteed those returns later. That's just not in the cards. Maybe it might happen, but no one knows.

So staying invested, investing properly, you get more performance over the long term. Therefore you have a greater chance of really building wealth. So keep that in mind, and don't get so focused on what's going to be volatile tomorrow. Yes, that feels scary, like Dustin said, but keep in mind you're not going to spend the money tomorrow. This is long-term money. This is the rest of your life money. You're not going to touch it till you're at least 59 and a half years old, maybe 65.

Invest that way now. The flip side of that, number 10 or maybe 9.5, is of investing too aggressively. And so we see this happen a lot. Dustin, how many times do we get things from our clients that are asking us about this investment, or what about this LLC, it's a private placement? We see that a lot, and sometimes those can be perfectly fine, but generally speaking those types of investments, they come with a lot more exposure to risk.

I don't think it's bad to add risk to your portfolio, but I do think it is a tremendous blind spot and a mistake when people don't understand what that risk can do to the total pie, if you will, how it can affect it both short term and long term. And I think there's a formula that we use that helps us reach that conclusion of what makes sense for you, but keeping it within a certain range so that we don't get our set, we don't get too far out over the skis, so to speak. So, but we see that a lot.

Yeah, absolutely. And like you mentioned, we see it when people are getting closer to that retirement age and they should be pulling back and they should be a little more aggressively. And what we see a lot is, as we start to peel back the layers on the investment selection and what is really inside of some of these accounts, a lot of times it's not as diversified or it's not quite as conservative as they originally thought.

So what you might have, a portfolio, let's say that it's a 60 40 or maybe it's a 65 35, 70 30, whatever it is. Now, so that's the one layer of diversification, but as you start to peel down, now all of a sudden we're looking at, okay, what stocks are overlapping? If you have mutual funds or if you have a target date fund or whatever makes up your portfolio, what stocks are overlapping? Because now we might be too heavily concentrated in one stock or one sector, so that's not going to allow you to be quite as diversified as it really looks like you're on the surface.

The other thing when we really start to dig into is P/E ratios. You talk about that all the time, if you have price to earning ratios. And so just to give you an example, the S&P 500 right now is trading in about 26 times. If your portfolio looks to be diversified but the P/E ratios are trading at, say, 30, 32 times, higher than what the S&P is, what most likely will happen if the market pulls back is your stocks are at the very top because their price to earnings is very high, so they're going to get hit much harder than if we had some value stocks in there that might be trading at 10, 12, 13, 15 P/E ratio.

Our investment manager here, Roger, often says it's not so much what you make on the upside, it's what you keep on the downside. And I think one of our proudest moments is when we review every quarter, every six months, every year, our performance internally speaking, we love to see that we're outpacing the market on the downside. I'd much rather see that than outpacing the S&P on the upside.

Dustin, one last point that I'll add. You've covered it so well, I don't know that we need a lot more, but we have a particular client that comes to mind, and he asks routinely, how am I doing compared to my peers? And he is a surgeon, that he wants to know, how am I doing compared to surgeons like me? Am I ahead? Am I behind? Am I right on track? And the question, while it makes sense, I understand why he asks, it's really an irrelevant question, because his lifestyle may be different from theirs, and it likely is.

So to try to compare yourself to them can make you feel like you have underperformed. If all of a sudden we say to him, you are a little bit, you're not nearly where you should be based on peer review, and all of a sudden he gets too aggressive, or he says, well, let's pour on the gas pedal here, let's lay on this thing, I only have a few more years, that's the wrong way to accomplish the mission.

The mission should be accomplished by understanding what your life is supposed to look like. What does your retirement want to look or need to look like? What do you want in retirement? And then how do you invest to accomplish your goal, not your peers' goal, not your break room buddy or your neighbor. You need to focus on you. It's your race. You need to be building wealth for your race, not somebody else's. And I think that gets missed a lot, particularly as we get closer and closer to retirement.

It goes back to the old saying, it's cliche, but keeping up with the Jones. We will get aggressive right there at the end, and that can be deleterious to one's portfolio and to your retirement outlook, because when that market falls, and it will, it always does, the markets are constantly ebbing and flowing, if it happens and you don't have time for recovery and you're pulling money out of that portfolio simultaneously, the drawdown effect is going to be incredible, and you most likely will never recover from that.

Dustin, that's all I've got on being too aggressive. Don't want to scare folks, but you got to get the balance right. Don't be too conservative, don't be too aggressive, and go hand in hand.

No, I think that's well said. And so, guys, that wraps up our top 10 retirement blind spots. So we just finished that. We've gotten tremendous feedback from the videos that we've been sharing over the past couple weeks, so appreciate all that, appreciate the shares, appreciate the likes.

One thing I was just thinking about as you were talking about that, we have probably the next two to three shows already outlined with the new tax proposals. We've got a lot to cover there. But if there's anything that you all want to make sure that we talk about, or something you're curious about, or something that doesn't get highlighted enough that you think is important, throw that in the comments section on some of these shares that the office will share and let us know. Make sure you like, make sure you subscribe, and keep sharing those videos so we can get this content out.

Hey, keep these retirement planning blind spots in mind. Go back and watch the other shows. Everything is online. This one will be online in short order, and it'll be there for your review. So go back and watch them. These points are great, they're relevant, you can learn a lot, and each time you listen to them, hopefully you'll get a new nugget of information.

In the meantime, as Dustin said, we'll be working hard on the tax proposals, tax reform. Lots to know there, lots coming down the pike. Only time will tell how it's going to turn out, but we're going to start reporting it to you next week, so we look forward to that. Dustin, always a pleasure, and I know that you enjoy talking to those folks as I do. So we'll see you next time on We're Talking Money.

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