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April Fool’s Day is all about jokes and pranks, but when it comes to retirement planning, getting fooled can cost you real money. Today, we’re uncovering the beliefs that fool retirees and pre-retirees into making bad financial moves.
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Disclaimer: PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.
Host:
April Fool’s Day is all about jokes and pranks, but when it comes to retirement planning, getting fooled can cost you some real money. So we’re going to talk about that. A little early for April Fool’s, maybe, but we’re going to still talk about it this week here on the podcast. So let’s get into it.
Hey, everybody, welcome to the show. Thanks for hanging out with us here on Retirement Planning Redefined, with John, and Nick, and myself, as we talk investing, finance, and retirement. And we’re taping this a couple of weeks before April Fool’s Day. It should drop right around there, but we’ll have a conversation with the guys. What’s going on, Nick, buddy, how are you?
Nick:
Good, good. Staying busy.
Host:
Yeah. Well, that’s always good. Good stuff. John, I know you and I were just chatting before we got rolling, we’re worn out. But you hanging in there?
John:
Yeah, doing all right. And don’t let Nick fool you, he’s got a lot going on.
Host:
He’s got a lot going on.
John:
You tell him the news.
Host:
He did. Yeah.
Nick:
John’s favorite topic. Got engaged a little over a month ago.
Host:
Awesome, awesome.
Nick:
Yeah, in the full throws of wedding planning, which is, of course, extremely exciting.
Host:
That you’re doing a little of, or a lot of, or zero of?
Nick:
I would say some impact. My fiance is originally from Columbia, and the way that they do things for weddings there is a lot different than here.
Host:
Okay, cool.
Nick:
So yeah, so there’s a little bit of translation from that perspective.
Host:
Nice, nice.
Nick:
Yeah, that’s interesting. But it’ll be good.
Host:
Very cool. Nice.
Nick:
It’ll be good.
Host:
Well, congratulations. Very, very cool.
Nick:
Thank you. Appreciate it.
Host:
All the best to the newlyweds. Very good stuff. We won’t pull any April Fool’s Day pranks on you then, in that regard. We’ll just take to the financial stuff here this week.
So the idea, guys, being that, look, the media is nonstop, the onslaught of social media, internet, whatever. There’s always something out there. And you just want to make sure you’re vetting some stuff before you… Fool’s gold, right? Before you just jump into something and maybe make a mistake.
So we’ll start with tax conversation. So as at this time that we’re taping the podcast, we don’t know if the TCJA will get extended or not. Odds are fairly good, we’ll see how the year plays out. But if they don’t, they expire at the end of the year, the current tax code that we’re under.
So are you taking that information and maybe thinking, hey, I don’t have to do any tax planning for the future, because maybe the taxes are going to stay really low like they have been historically? Or are you being proactive and saying, “Well, there’s a chance that taxes could still go up, because we owe a lot of money”? So whoever wants to jump in, get started on that. But what do you think about the tax situation and not fooling yourself into just thinking everything’s going to stay exactly the same?
Nick:
Yeah, I can start with this one. So one of the things that we really emphasize with clients and people that we work with is, especially when it comes to taxes, that the best thing that you can do is to expect change. So whether it’s something changing at the end of this year, a couple years from now, whatever it is, the goal is to allow yourself to be adaptable to whatever’s happening.
So the easiest way to do that is to have different types of accounts. So to have Roth accounts, pre-tax accounts, and more of a traditional brokerage account where we can factor in capital gains instead.
But even more specific, when it comes to the whole concept of potentially underestimating taxes, there’s still a lot of confusion for people on how much of their social security is going to be taxable, or include-able in their taxable income. I had a conversation with my parents about it, and I had to convince them that I was correct and knew what I was talking about after 20 years, because of a way that something that they heard on the radio or saw on TV was phrased, made it very confusing to them. So just-
Host:
Sure, I mean, there’s the conversation that they might get rid of it, but they haven’t done it yet. So you still got to be planning for stuff.
Nick:
Yeah. But even outside of that, the way… It was interesting, and I do want to bring it up now that I remember it.
Host:
Sure.
Nick:
The way that it was being marketed was that the concept of, “Hey, most people don’t know that your social security, how much you pay in taxes on your social security will go up at age 73.” And so, really, the concept of that was, “Hey, when required minimum distributions kick in, and you have more taxable income, there’s a chance that more of your social security income will be include-able in your tax and how much you pay in taxes.” So it was kind of a roundabout way to scare people. So it allowed us to have the conversation about, for a huge chunk of people, 85% of their social security is going to be include-able in their taxable income, at least how the law is now, and just how other types of income may impact that.
Host:
Oh, and that’s a great point though. That really highlights exactly the point of this conversation, is that depending on how you phrase things, it’s very easy to get misled by stuff. And so that’s a great illustration of that, Nick. So thank you for sharing that.
And it definitely walks that… And that’s what all these are going to do. John, like the next one around Medicare misunderstandings. So my mom’s forever, she’s 83, she’s forever going… And my brother’s now, he’s over 65, so she’s educating him. She’s schooling him on the stuff she’s been doing for a while with Medicare. And it’s like, it doesn’t cover everything. And people still sometimes think that, “Hey, at least I’ve got to 65. Now I’ve got this Medicare thing. I’m in good shape.” And it is a great program, in a lot of ways, but it doesn’t cover everything.
John:
Yeah, that’s accurate. And a lot of people, unfortunately, don’t realize that. And a big thing that, when you get Medicare age, age 65, Medicare has a lot of moving parts to it, and there’s a lot of different options.
Host:
Oh, yeah.
John:
So depending on whether you go, let’s say, on an Advantage Plan, if you’re on Plan F, or G, you get the supplement, it’s going to determine what is covered. And then, also, you want to look at, do your current providers even take Medicare? So you might be looking at it and think that you’re going to be all set-
Host:
Great point.
John:
… And then you come to find out that your provider who you like doesn’t even take it. So yeah, it definitely does not cover everything. So when you’re doing your planning, when we do it, we always try to make sure, “Hey, this is our set price for Medicare.” Then we adjust as we determine what plan the client’s going to go with or help them determine what’s their best option. But also, you want to plan for some out-of-pocket medical expenses for what it doesn’t cover.
Host:
Yeah, I think she’s changed her dentist a couple of times just because they don’t take it anymore. They changed or whatever. And of course, dental being one of those things that people often don’t realize is, a lot of stuff’s not covered there.
John:
And prescriptions.
Host:
Yeah, and eye. The eye stuff is really interesting. Some of the eyeglass stuff, like going to the eye doctor for just basic optometry stuff is not covered. But then the cataract stuff, some of it was. So it’s very strange. So you want to make sure you’re understanding what is and what isn’t taken care of there with Medicare. So that’s certainly a good one as well.
Nick, what about the set it and forget it retirement plan strategy. When you’re talking about things getting kind of mis-sold or kind of mislabeled out there, some people will be like, “Hey look, you got to get a plan together. You put stuff in there. You let it ride and you roll from there.” Right? Well, some things can set it and forget it, but some things can’t either.
Nick:
Yeah. So kind of a good example of maybe the set it and forget it concept, saw come up a little bit more in the last couple of years, where had some clients that were moving towards retirement, and they had done a good job of saving and building up the nest egg, and they were somewhat familiar with, maybe take 4% a year and I can live off of 4% a year.
But with rates being in that point of time where we clicked up, where they could get four to five, five and a half percent in money market CDs, et cetera, they had kind of just said, “Hey, want to shift to the sidelines, want to avoid the market. I’m just going to take my 4-5% and live off the interest.” And the conversations that we had to really have were, conceptually, that’ll be good for now, for the next year or two. But most likely, there’s going to be a point in time within the next three to five years that rates are going to change, and that 5% might turn into 3%, or two and a half percent.
And even on, let’s just use 2 million bucks. So maybe they could do 5% on 2 million is a hundred grand a year, good to go. Now if we shift to two and a half, 50 grand a year off of the portfolio, with their intention of trying to maintain principle, that starts to rewind a little bit.
And so, it’s a good example of realizing how the dynamics of a plan change, and that if you’re only factoring in what’s happening now, or in the next short term, next couple years, that not understanding updating and adjusting your plan to current circumstances, or maybe a broader sense of what could happen, could really put somebody in a difficult position.
Host:
Yeah, that’s a great point as well. So there’s so much stuff you got to think about when you’re factoring all these things in. And John, the market’s been choppy. The time we’re taping this, it’s been a little choppy out there. So some of the tariff conversations-
John:
Just a little bit.
Host:
A little bit, or whatever is kind of making the market uneasy. But chasing and obsessing, not necessarily just over the market highs, but also high dividend stocks. So sometimes people will say, “Well, a good alternative to doing X or Y is to get high dividend stocks.” What’s some thoughts there?
John:
There’s different strategies for what you’re trying to accomplish. And one of the problems with this one, especially if you’re going to retirement and you’re thinking of, “Hey, I’m just going to have high dividend paying stocks,” is that those things can change. If all of a sudden we have a recession, or the economy’s not doing well, or that particular company’s not doing well, guess what they could do? They could just change your dividend.
So if you had a plan, going back to what Nick’s example, they’re like, “Hey, I’ve got this stock. It’s giving me 4- 5%,” and you think you’re okay. And all of a sudden some news comes out and that dividend drops, and now your whole plan just slightly changed. So with dividend paying stocks, they’re not guaranteed. And depending on how high of a dividend paying stock it is, the higher sometimes could be correlated with a little bit being more aggressive and more risk.
So I’ve seen, this actually reminds me of a meeting I just had this week, where someone was in talking to a friend of theirs, and they were trying to say, “Hey, just put all your stuff in these high dividend paying rates,” and all these things. And I’m looking at it like, “Hey, this is pretty aggressive. You’re getting a good yield. But if we have some type of pullback, not only will your dividend potentially go down, but the value of this stock could also drop.”
Host:
Sure. Yeah.
John:
So it’s just important to understand what you’re in and what could change.
Nick:
I think I’d also like to jump in on that.
Host:
Sure.
Nick:
Because I’ve had this conversation with some clients quite a bit. And one of the things that I tried to emphasize is that if we look over, because a lot of times the generation that’s been drilled with dividend paying stocks is a generation now that’s kind of entered into retirement, where they were really starting to invest in coming up through the period of higher interest rates, when dividend paying stocks perform better.
And frankly, if you look over the last 10, really post recession, post ’09 and 2010 recession, in an environment with lower rates, if somebody was invested the last 15 years in only dividend paying stocks, then the returns that they have gotten are pennies compared to being involved in-
Host:
Wow.
Nick:
… growth related investments. Think of tech, think of the Magnificent Seven now, think of all the areas of the massive growth over the last 10 or 15 years, and there was significant opportunity cost. So the environment that we’re in, where those companies were really rewarded for, the cost of borrowing was low, the ability to reinvest and grow was high. Even when you factor in stock buybacks, I mean, you had companies that were making more money in stock buybacks than they were in producing their own products. So the environment of what’s happening has a significant impact on that as well.
Host:
That’s great points, guys. So it’s easy to get lulled into whatever kind of marketing, or whatever kind of news headline, or whatever the case is. So just make sure that you’re not falling for it. Or at least not without vetting some things out and talking with your financial professionals.
So if you’ve got some questions, as always, you need some help, you should always run anything you hear by on our podcast, or really any other, even the big talking head shows, talk with someone local in your area about your unique situation so that you’re getting some hands-on advice and conversation. And if you need some help, John, and Nick, and the team are available at pfgprivatewealth.com, that’s pfgprivatewealth.com. So you can subscribe to the podcast. You can find it there. Of course, you can get some time on the calendar through the website, lots of good tools, tips, and resources. And of course, you can subscribe to us on Apple, or Spotify, or whatever podcasting app you like using.
So again, pfgprivatewealth.com. That’s going to do it this week. Guys, thanks for hanging out, as always, and breaking it down. Congratulations once again, Nick, on the upcoming nuptials. And John, buddy, have a great week. We’ll see you next time here on Retirement Planning Redefined.
