"How Much Did He Leave?" "All Of It" (Day 10)

Yesterday I wrote about what I see people do most often with retirement money, and said that instead of just complaining about their mistakes, I would offer some solutions.  As I often say, this isn't insurance advice.  Without sitting down with you and discussing the specifics of your situation, I can't make an informed recommendation.  What I'm posting here is very general, something to use to open a discussion with me or another professional and figure out an action plan, not something to take action on right now. 


People often tell me something along the lines of, "I want my money to run out the day I die, and the check to the funeral home to bounce".  They understand the old saying of "You can't take it with you."  However, they almost never actually spend their retirement money that way.  Just like a business, 401 (k) and IRA plans should have an "exit strategy" from the beginning.


These are some possibilities that in many cases are better than holding on to tax-deferred money until it gets passed to beneficiaries or a nursing home.

• Start a guaranteed income stream from the retirement funds and use it to buy a life insurance policy.  Often the best option is one that also provides a benefit if you need long term care.  Advantages:  Taxes on withdrawals are spread out over multiple years, and proceeds from life insurance to designated beneficiaries are not normally taxed.  Depending on age, health, etc, life insurance benefit could be more than the value of the retirement savings, even not figuring in tax advantages.  Depending on options chosen, beneficiaries may get both the life insurance benefit and more regular income.  At least they won't get everything as taxable.
• Gradually convert to Roth IRA.  You pay taxes on that part when you convert it, but it is later passed on without the taxes hitting all at once.  With some planning, you can offset the amount you convert with other deductions so you pay little or no tax on the money.  For example, I've had customers balance the Roth Conversion with deductions like large medical bills, HSA contributions, business losses/investments, work layoffs, etc.  I haven't had anyone do it, but it would be ideal to take a year off work to travel, live off savings, and do a Roth Conversion to turn money that's never been taxed to money that will never be taxed.  All without every paying any taxes on that money.  Do this only AFTER consulting with a tax advisor.  That's better than getting a surprise at tax time, and if the tax advisor is good, he or she often has ideas on how to do it even better than you and I think of doing it.
• Give it directly to a charity each year.
• Give a portion as gifts to family each year, paying a small amount of or no tax as you go.  With both this and the charitable giving, you get to see the benefits of your gifts, which is a lot better than saving on taxes.  They might even take you out fishing or water skiing on their new boat.

Those are just a few options.  A key to any of them is to have a plan for long term care.  Notice I didn't say, "long term care insurance" or "to pay for the nursing home".  The insurance part is sometimes involved in the plan, but just having a policy isn't enough, and often is not the best way to plan for it.  Nor is a nursing home always the best option.  But they are full of people who didn't plan because they didn't need a plan because, "I'm never going to the nursing home".

"Don't Die With This" (Day 9)

"Don't die with this".  I heard that from a company employee talking about one of their insurance products.  I found it refreshing, because usually a company wants a customer to keep a policy forever.  I wrote about that a few days ago so I'm not going to rehash it now, but if you want to read it,  just click this link for last week's "Follow the Money" post.


One of the things I complain about is people complaining about something without working toward a solution.  This is part one.  I will also discuss solutions in another post.




Unfortunately, way too many people die with too much tax-deferred money.   I have seen the same thing happen over and over again.  To the point that whenever I get an email from an insurance company talking about the huge amounts of tax-deferred money that's going to be passed on in the coming years, I always think, "Damn!  I should have been a boat salesman!"  Make sense?  No?  Let me explain.




Here is the pattern I see repeatedly:  person follows "expert" advice and puts everything he or she can into an IRA and/or 401(k).   They work like crazy until they and/or their spouse is eligible for Social Security and/or Medicare.  Then they quit their job.  They don't want to withdraw any of the money they saved because they would have to pay taxes on it.   So they scrape by on Social Security, worrying about money, thinking of their retirement savings as something that they will use to cover nursing home costs and/or pass on (almost always to their kids).




Then when they hit age 70 1/2  they start taking RMD's (Required Minimum Distributions), which isn't a whole lot in the first few years, but the percentage required goes up each year.  They pay the taxes, but let everything else sit there.  Then eventually they either go to a nursing home or die.  What happens then?  Most commonly, if they go to the nursing home, they spend through their money, then go on Medicaid if the money runs out.  How much enjoyment did they get out of it?  None.  If they are lucky enough to die either without having to go in a nursing home or before the money runs out, then that's where I think, "I should have been a boat salesman!"  Because from what I've seen, if two 60ish year-old kids inherit the money, at least one of them buys a boat.




Nothing wrong with buying a boat, if done the right way, but what happens time and time again is they "get a deal", make an impulse buy, and since they don't want to have payments, pull out the money to pay off the boat.  Then the tax bill comes.  The withdrawn money is taxable, piled on top of their earned income tax liability (usually when in their peak earning years, with all their tax deductions grown up and out of the house), and they withdraw more money to pay the taxes, which adds to next year's tax bill.  They repeat until the money is gone, which doesn't take long.


Who wins in this scenario (besides the IRS)?  Not the person who saved up all this "retirement money".  They didn't use it for retirement.  The one who now owns "a hole in the water you fill with money"?  Maybe.  But the big winner is the boat salesman.  So "Don't Die With This!".  At least not until I open a boat dealership.

Spinal Tuning Center--Friday Favorite (Day 5)

Day 5 of 100 consecutive days of writing for publishing is now day/week 1 of "Friday Favorite".  I've been thinking for some time that I would like to regularly write about products or businesses that I particularly like.  I'm finally doing it.


Today's Friday Favorite is Chad Rohlfsen of The Spinal Tuning Chiropractic Center.  Ironically, this Friday Favorite isn't open on Friday, and I chose a medical practice that doesn't accept medical insurance.


I love supporting businesses who go against the norm because they believe their way is better.  That's exactly what Chad does with his membership practice.  Since (as far as I know) he's the only chiropractor in the state who uses this business model, he definitely goes against the norm.


If you're not familiar with the membership practice model, as Chad explains it on his website, he "provide[s] unlimited care for a low flat rate monthly fee".  Unlike most chiropractors, he doesn't take insurance.  The fee I pay him comes 100% out of my pocket (not literally--actually it's deducted automatically from our family bank account).


So why does an Insurance Nerd recommend someone who doesn't accept insurance?  Three main reasons are that (1) what he does is in line with why I entered the health insurance business to begin with,  (2) it fits what insurance is supposed to be, and (3) it works.


One of the biggest reasons I got into health insurance was that I saw what my mom went through battling cancer, and wanted to do what I could to make it so that people facing health issues could concentrate on their treatment instead of having to weigh treatment options against the monetary cost.  The membership practice removes that stress.  Because I pay the same no matter how much or how little I see the doctor, I simply have to consider whether or not I want to go, not how much it's going to cost.  I love that.  There have been a lot of times that I dropped in on him simply because I was driving by, thought, "Well, it won't hurt and it won't cost me anything".   And I walked out knowing it that I needed to stop.


The membership practice fits the insurance concept that insurance is supposed to be to prevent a catastrophic event from becoming a financial catastrophe.  It's not intended to cover small expenses like basic maintenance, which is exactly what I view regular chiropractic adjustments to be.


Getting regular adjustments from Dr. Chad works.  When I first started going to him, I was using a lift in one of my cycling shoes because I had been told that one leg was longer than the other.  However, his initial assessment was that it wasn't a leg length discrepancy, but rather my lower back and hips were out of alignment, I'm guessing from an old hip injury from getting hit by a drunk driver.  Now I no longer have to use the shoe insert.  I have also found that I recover much more quickly from hard workouts and races, and I'm rarely sick.  That's worth a lot more than I pay for my membership.


Bonus benefit of membership:  with no paperwork to fill out, I am in and out of the office in less than five minutes, even if I spend time talking about business,  horses, Freemasonry, or health.

"Where All The Children Are Above Average" (Day 4)

From the first time I heard Garrison Keillor say, "Where all the women are strong, all the men are good-looking, and all the children are above average", I've always smiled when I think about or hear, "all the children are above average".  How does that relate to retirement?  Generally.  But for you specifically, how much does average matter?  A lot less than most people think it does.  However, many people base their decisions on averages when it comes to retirement.  None of us want to be "average", so why make decisions on what happens with the "average" person?  You shouldn't.  It's a mistake.


The mistake with basing decisions on averages is that AVERAGES DON'T AFFECT WHAT HAPPENS TO YOU!


The best example I can think of is in regards to long term care insurance.  I can't tell you the number of times I've seen LTC (AKA, "nursing home") insurance that was bought and sold based on "the AVERAGE stay in the nursing home is 4 years".  That's an interesting statistic.  But it's a statistic.  The average doesn't matter if you are the one who needs help with bathing, toileting, eating, etc.  You might need help for 30 days or for 30 years.  The average is irrelevant.  The right way to plan is to be prepared both for never needing that help and for needing that help for 20 years or more.  If you plan only for a 4 year stay in a nursing home,  anything over that will blow your plan up and you are likely to be no better off than anyone who didn't plan at all.  Think about the large number of people who go into the nursing home for only a couple of days and how they affect the average.  If you plan only thinking about the average and then need care for 10 years, which is very common, you're screwed because the average is skewed.


Planning retirement income based on averages is another huge mistake.  Time and time again I see people basing all their planning on what an investment averaged over the last 10, 20, or 100 years.  It's smart to know those numbers, but a smart person also considers that "past performance is not a guarantee of future results".  It doesn't matter what happened on average for the last 100 years.  What matters is what happens to you in your time.  You need to have a plan for the best and worst possibilities.


The same principle applies to things like longevity, cost of living changes, tax rates, etc.  It's good to know the average, but to be successful you also need to be prepared for when "all the ___________ are above (or below) average.

"Follow the Money" (Day 3)

I attribute much of my success in losing weight to a great movie called Fathead.  I highly recommend it.  It used to be on Netflix, but you can now watch it on youtube or buy it here.    One of the lines repeated in it is, "Follow the money", as in, "There is a financial incentive for what 'they' do and say".  I like to think that the vast majority of people putting out the misinformation about the food pyramid and low fat diets don't do it with malice, but rather are passing on what they have been told and taught over many years.  I think most of them believe that they are doing a great job of helping people.  That may be more dangerous than intentional lies and misinformation.  Take a look at rates of obesity and the related health problems, and it's obvious that it's not working.  I see the same type of thing with how retirement money is handled.


Since 401(k) plans have become more popular with employers than pension plans, I have seen the same patterns repeated over and over in the years I've been in the business.  Here are the ways I see people handle their 401(k) money.  Most people I talk to fall into one of these categories.

• Tax avoider:  Big incentive for him or her is to reduce tax burden while working.  When no longer working, doesn't take anything out of qualified funds until has to take RMD's (Required Minimum Distributions) at age 70 1/2, and then only withdraws the minimum.
• Chicken Little:  Looks at the money as protection from the sky falling.  Again, only withdraws from this when 70 1/2 or has exhausted all other resources
• Rule follower--Follows the standard rule of many "experts" and takes out 5% per year so that the money will last through retirement (according to "the experts")
• Live fast, die young, leave a beautiful corpse:  Either believes will die young or "the nursing home will take everything anyway", so spends a lot early in retirement, often buying new vehicles, paying off home, buying "toys" (motorcycle, boat, vacation home, etc.) and/or taking expensive vacations, often also paying for other family members.

Why do most people fall into these categories?  Follow the money.  Who makes the most money from these four categories?  The Tax Avoider?  Chicken Little?  Rule Follower?  Live Fast?  Buzz, wrong answer!  The correct answer is "E.  Whoever is holding the money for all of them."


Ever think about why 401(k) plans are sold, how they are marketed, and so on?  It's to make money for the companies.  Follow the money.  That doesn't mean they are evil, or good, or anything in between.  It means they are smart about money.  Which means that they will do nothing that benefits you unless it also benefits them.  It's not personal, it's business.  And they will do things that will benefit them even if it doesn't help you, and maybe even if it costs you.  How can they maximize their profits?  BY HOLDING ON TO AS MUCH MONEY AS THEY CAN FOR AS LONG AS THEY CAN.  Read that again.  And again.  And as many times more as it takes for it to really sink in.  Follow the money.


Think about the four categories of retirees above.  Three of them are maximizing the profits of the company holding the money.  The one who isn't is probably also the one with the least amount in the 401(k) because of not saving as much as the other three and/or having taken money out along the way for things other than retirement.  Follow the money.  They have excellent marketing and sales departments.  Paid for by the income gained by holding on to money for 20 or 30 or more years.  Paid for by having 100% of the contributions, not the smaller amount that remains after all the taxes are taken out.  Is it any wonder that they have entire departments devoted to getting people to keep their money where it is instead of moving it elsewhere when they leave a company?  That their employees are trained to point out the tax consequences of withdrawing money?  That across the board the company employees point to how much a person has in the account, not to how much income they can receive from the account?  It's no surprise at all.   If they encouraged you to take money out, they would be encouraging you to cut their pay.   Follow the money.

I Don't Know Why They Call It "Common Sense"

For day two of 100 days of writing for publication I am publishing this list of common mistakes I see people make regarding retirement.  I have been thinking about doing this for years, but have never decided if I want to make it a series of blog posts, a brochure, a speech, a magazine article, a book, or all or none of those things.  I still haven't decided, but I know I won't get any of them done without getting started, so I'm going to make it a chunk of this 100 days, for a start.


I often tell new customers, "I like to think I'm smarter than everyone else, but my wife and kids will tell you otherwise.  It's not that I'm smarter, it's that I work with this stuff every day, while you are dealing with it for the first time".  One huge advantage I have right now is that I have been working with another agent for several years who is in his 80's.  Supposedly I'll take over his customers when/if he ever retires.  He has customers he has worked with for 30+ years, so I often tap in to their 20/20 hindsight.




I don't want to make it a "Top Ten" type of list because sometimes on those the focus turns to whether #3 should really be # 5 instead of how to solve both #3 and #5, regardless of where they are in the hierarchy.  However, there is a clear #1, so this post will focus on it, and it will be the theme I consistently refer back to when discussing the others.  Speaking of the others, here are the main others, in no particular order.  (I keep thinking of more, but I need to sleep some time.)

• All or almost all of savings tax-deferred
• Unrealistic picture of what will/won't happen when one spouse outlives the other
• Basing decisions on averages
• Lack of communication with children and others
• Lumping everything together instead of separating out "paychecks" and "playchecks"
• Basing decisions on how long they think they will live
•  Basing decisions on how good or poor they think their health will be in retirement
• Spending too much or too little (much more common with people I see) early in retirement
• Doing the same thing that their friends, relatives and/or parents do or did, ignoring how those people's situations vary from their own
• Having only a saving plan, not a spending plan
• No plan for how to take Social Security and/or pension
•  Having way too much or way too little insurance
• Focus on how much money they have (or don't have) rather than how much they can or can't spend after the bills are paid
• Worrying too much about how long they will live instead of how well they will live

The biggest problem by far, however (which could be argued to be the main cause of all the other mistakes), is not having a basic understanding of general principles of finances.  I am constantly amazed how little most people know and understand regarding taxes, interest, dividends, cash flow, insurance, and general accounting.  You don't have to be a genius or an expert, but you do need to at least have a rudimentary grasp of the language so you can converse with the experts you hire.    Without that, you can't even ask the most basic questions to make sure you are doing the right things.  You'll be like the people I often work with who say things like, "I don't really understand this, but I trust you, so I'll just do what you think is best".  Lucky for them, I am honest and do what is best for them, but it is just luck on their part.  Make your own luck.  Educate yourself.


Here are a couple of places to start.  I don't agree with everything these guys say (could be a whole other series of blogs there), but they are fairly easy to read, and you can join groups to learn that way if you aren't a reader.  The nice thing about them is that they've both sold enough books that you can find them at Goodwill for a buck or less.


http://www.daveramsey.com/home/


http://www.amazon.com/Ed-Slott/e/B001IGOQNC


 http://www.amazon.com/Rich-Dad-Poor-Teach-Middle/dp/1612680011 

100 Days of "Success"

My friend Calvin Johannsen issued this challenge a few days ago.  I'm taking him up on it.  I missed the first few days, but no time like the present.  I am challenging myself to publish every day for 100 days, or at least write content with the intent to publish.  I'm giving myself that "out" only for the times that I may be working on a longer piece that takes 2 or 3 days.


I journal fairly regularly.  I constantly come up with ideas of things to write about.  However, most of the time I'm the only one who reads what I write, and often I don't even read it after I write it.  A large part of that is that I am reluctant to publish anything that isn't polished.  So I'll write down an outline or rough draft of something, but then I get busy with something else and don't ever finish and publish it.  I will use this 100 days to break that habit.


Here is my first unpolished piece.  I wrote this a few days ago in a book I have called A Father's Legacy, a book I've had for several years and have been writing in sporadically.  Each page poses a question that I'm supposed to answer, the idea being that when I'm dead and gone then my kids or grandkids or other interested  parties will be privy to my vast wisdom.  I see no reason to wait.  It is also an appropriate topic to start this challenge since a lot of what I wrote about are things I've discussed with Calvin.  Here it is, unpolished but published.


How do you describe "success"?
Living your life on your own terms, doing what you want to do rather than what you have to do.  Or what others tell you to do.  Freedom.  I'm not there yet, but I'm gaining.  When people aren't "free", most often it's because of shackles that they have put on themselves.  For many, it's "stuff".  They put themselves in debt buying cars and houses and education that they could get for much less or don't need at all.   They trade their freedom for those things.  The successful person is one who can make sufficient money doing things he enjoys in order to have time to enjoy friends, family, adventure.  Success is owning one's own time, the most valuable thing in the world.