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January 17, 2025 • 26 mins
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Speaker 1 (00:00):
Good morning to all. Craig Shillig here and this is
Safe Money. I'm here every Saturday to talk with our
listeners about financial strategies we use to manage and protect
assets safely. I've been an insurance agent for over twenty
four years. During that time, I've learned a few insurance strategies,

(00:20):
like using annuities as safe money harbors, or using cash
value life insurance to supplement retirement income. Just a reminder,
you can call our office at five six three three
three two two two zero zero if you'd like to

(00:40):
enroll into one of my virtual Medicare community meetings that
I do via zoom. I give two every month, or
you can email me at craigat Craigshillig dot com. That's
cr Aig cr Aig scch I lllig dot com and

(01:10):
I'd be happy to send you the zoom meeting zoom
meeting codes. Today, I want to discuss retirement and I'm
going to talk about a topic called the sequence of
returns now. This is one of those lessons that's better
to understand now rather than later. A lot of my

(01:30):
clients that are over the age of sixty three, sixty
five ish and older don't like being told certain things,
especially when I have to tell them no, I can't
do that, And many of them, as they progress in age,
get very resistant to change. They don't like it when

(01:52):
things change. So just keep this in mind. I know
we're on a radio here, I have audio to work with,
and I can't visually show you some of these concepts
like I would on a power point or a zoom
presentation meeting. But just imagine with me that we're inside
a classroom or my office and we're discussing some of

(02:15):
these ideas. You want to zoom in on your retirement picture.
It's important to take a close look. It's your situation
to determine if you're on track for retirement or if
you need to make some improvements now will I outlive
my retirement savings. That's the biggest fear that I get

(02:38):
from all age brackets. When is the right time to retire?
That's a difficult question for many people. It depends if
you're a W two employee, if you're self employed, if
you're a contract employee. And again sometimes that comes up
at all different age categories. Can my portfolio handle a

(03:02):
market downturn? And how does uncertainty impact my nest a growth?
How does social Security impact my retirement income? When should
I start taking my Social Security check? These are all
kinds of questions that come up from everybody, and I

(03:24):
hear these all the time. Are you saving enough? Thirty percent?
That's the number, that's the average baby boomers have saved
for retirement, And I'm going to tell you why that's
not enough. Have you considered the impact of inflation? Are
you prepared for the cost of health care and long

(03:47):
term care? Those can really have a ripple effect on
your overall retirement portfolio. Will your retirement income last your
entire lifetime? For Americans age sixty five and over, social
Security only provides thirty percent of the total income. Baby

(04:12):
boomers have saved on average of two hundred and twenty
four thousand dollars. That's not nearly enough to fund a
twenty or thirty year retirement time horizon. On average, a
healthy sixty five year old couple is projected to spend
three hundred and fifteen thousand dollars on healthcare costs throughout

(04:37):
their lifetime. The national average rates for a private room
and a nursing home today are three hundred and thirty
per day, or that's one hundred and twenty thousand, three
hundred and four per year. For the equivalent of fifty
thousand dollars a year in retirement income today, in twenty years,

(05:01):
you're going to need one hundred and one thousand. Let's
call it one hundred and two. It's one hundred and one,
six hundred and forty because of inflation. So again i'll
do that. If you have fifty thousand retirement today, in
twenty years, that's going to become one hundred and two
At historical inflation rates, one hundred dollars today will be

(05:24):
worth forty eight in thirty years. About half of today's
households won't have enough retirement income to maintain their standard
living even if they worked age sixty five and annuitize
all and that's all of their financial assets. More than

(05:46):
eight and ten workers expect their workplace retirement savings plan
to be a major source of income in retirement, whereas
just half of retire's report it is. You need to
work with your financial professional to review these important questions
and bring your retirement picture into focus. It's twenty twenty five,

(06:09):
we're in a new year. Put this on your New
year's to do list. Let's talk about inflation. A timely
look at how inflation can impact your retirement. You've probably
heard this saving the saying a dollar doesn't go as
far as you used to. That's because the cost of
goods and services has consistently increased over time, leading to

(06:32):
what we know as that word inflation. Prices over the
past twenty years have continued to increase while the purchasing
power of the dollar has continued to decline. Let's talk
about how the price of goods and the value of
a dollar have changed over time. In two thousand and three,

(06:54):
eight dollars would have been worth less than five dollars
by twenty twenty two. That's a thirty nine percent decrease
in value over time. Okay, it was eight, now it's
only worth five. If you don't believe that, go to
a restaurant. Can you get a burger today for less

(07:14):
than fifteen bucks? The dollar value against Let's talk about
the staples, gas, milk, coffee, and bacon, eggs. Egg prices
have hurt both consumers and restaurant bakery owners. We're talking
about the price has changed almost triple. It doesn't matter

(07:35):
if they're small eggs, medium eggs, or large eggs. Something
else every homeowner can relate to. Homeowners insurance premiums has
anyone's homeowners or P and C car insurance policy has
gone down recently. I know some clients that now they're
escro costs are bigger than their actual mortgage payment. They've

(08:01):
got a great mortgage interest rate, some still have below
three maybe two and a half, or maybe they're in
a three and a half to four percent range. They
can't move, but their homeowners insurance premiums and more than doubled,
even with a higher deductible. They can't move because they
don't want to sell our house at three percent and

(08:24):
then go about get a six and a half or
a seven and a half percent mortgage rate, plus added
to it your homeowners and property taxes, and that just
makes that payment balloon. How is inflation measured? The CPI
Consumer Price Index for all urban consumers, which is widely

(08:47):
used to measure the average price of goods and services
purchased by consumers. When inflation goes up, so does the
need for more retirement income. When your work wage increases,
can help you keep pace with inflation and you don't
notice that as much because you're still getting a monthly paycheck.

(09:10):
When you're in retirement, though, those increases stop and more
income is needed to support your lifestyle. Let's talk about
a year change in the CPI. So in two thousand
and three, if you earned fifty thousand dollars adjusted for inflation,
and in two thousand and three, the interest rate was

(09:32):
running at about one point nine percent. If we fast
forward just ten years to twenty twelve, the inflation rate
then was only one point seven percent. But because of inflation,
and how that erodes your money, fifty thousand dollars in
two thousand and three cost sixty three thousand, four hundred

(09:54):
and seventy dollars in twenty twelve. Okay, you see how
that's Steve roads that number. So let's talk about the
next ten year period. And I know that I'm doing
this on audio and you can't see these charts, so
you just have to trust me what I'm reading. But
the change in CPI for fifty thousand adjusted for inflation,

(10:17):
if it's twenty thirteen in rates of running, then about
one and a half percent. You would need sixty four thousand,
four hundred and twenty two dollars to buy fifty thousand
of goods and services going back ten years, if we
fast forward another ten years to twenty twenty two, and

(10:38):
remember inflation then went from one point five percent to
in twenty twenty two was as high as six and
a half percent, sixty four thousand, four twenty two and
twenty thirteen would require you to spend eighty two thousand,
one hundred and ten dollars. Okay, Now, from twenty thirteen

(11:02):
to twenty twenty two, we didn't notice much inflation increase
until twenty nineteen that it went to two three. In
twenty twenty, the CPI was at one four, but then
in twenty twenty one it went up to its high
as seven percent. So twenty twenty two was at six
and a half. But again that sixty four, four hundred

(11:24):
and twenty two number becomes eighty two thousand, one hundred
and ten. Okay. Let's talk about the sequence of returns.
How a sequence of returns can affect your retirement savings.
And I'm bringing this up to you guys because uh,

(11:45):
and I'll get to some of that in a minute.
But people believe you just accumulate a big pile of
money and you start taking withdrawals from a Let me
talk to you how sequence of returns can really change
that dynamic. If you diligently investing for retirement or beginning
to envision that glorious event on the horizon, now might

(12:08):
be a good time to familiarize yourself with this concept,
which is called sequence of returns, and this can have
a significant impact on your portfolio. Sequence of returns risk
is the chance of experiencing poor investment returns at the
wrong time, such as just before you're about to retire

(12:33):
or in the early years of your retirement Nest egg.
Why does sequence of returns on earnings matter? Because the
order in which you earn negative and positive returns can
significantly affect how long your portfolio lasts. When you begin

(12:54):
taking income from a portfolio, the subsequent sequence of returns
can have a critical impact on its value over time.
While early positive returns can help grow a portfolio to
a point where it could withstand a downturn, early negative
returns can cause a portfolio to lose value at a

(13:15):
faster rate, jeopardizing your plans for future income. Another way
to kind of illustrate defining sequence of returns is using
the analogy of climbing Mount Everest. Everyone works to achieve
climbing to the top of this mountain by accumulating assets

(13:35):
and making this giant pile of money in your four
to one K or in your IRA portfolio. No one
wants to talk about how you start taking the income
from the pile. Everyone just believes you just start hitting withdrawal.
The dangerous part about climbing Mount Everest isn't the ascent

(13:57):
to the top. It's during the decent or climbed down
from the top of the mountain. Sequence of returns is
kind of the same thing. Let's look at an example.
Over a ten year period, two five hundred thousand dollars
portfolios earned identical annual returns, but in the exact opposite order.

(14:19):
So investor a portfolio earned negative returns in the first
three years in positive returns for the remaining seven. Investor
B's portfolio earned positive returns in the first seven years,
and then he had three negative returns the last three
years of that ten year period. Both investors with drew

(14:41):
thirty five thousand dollars a year for retirement income. These
witdrawals were not adjusted for inflation. At the end of
the decade, Investor A ended up with three hundred and
thirty seven thousand, seven hundred and thirty four while Investor
B had four hundred and eighty five thousand, five hundred
and thirty two dollars is left over. Although they both

(15:02):
achieve the same six percent average yearly return over the
ten year timeframe, Investor B wound up with nearly one
hundred and fifty thousand dollars more. Why the results are
all due to the order in which the returns are earned,
in other words, the sequence of those returns. Fortunately for you, guys,

(15:25):
there's several different strategies that can help you pursue your
retirement income goals while managing sequence a return risk. A
financial professional can help you evaluate which strategies might be
appropriate for your needs. And if they don't call me,
I'll show you don't let it down. Market change your

(15:47):
retirement plans. You work hard to accumulate assets to meet
your retirement income needs, and you want to make sure
they are protected from market voluntility. However, most people people
don't consider how the timing of market volatility can impact
them as they're saving for retirement, as well as once
they start to take income in retirement market volatility while

(16:13):
you're accumulating assets. Here's a hypothetical one hundred thousand dollars example,
which would grow to after over a twenty five year period.
I have two charts here that use the same set
of annual returns. The only difference is the order of
returns has been reversed between the two to show the
effect of strong earlier returns compared to a negative early

(16:36):
return factor. So favorable sequence of returns, so they have
strong returns in the early years, where the unfavorable column
means the returns are weak in the early years. So
this is basically on someone starting at age forty and

(16:56):
the good side they have a two percent return, where
the unfavorable side they have as much as a thirty
eight percent loss. Fast forward several years, going all the
way to age sixty four and showing both positive and
negative returns. Both of them have any have a general

(17:20):
return of eight percent, which isn't bad, and both of
them end up with six hundred and ninety three and
twenty four. However, the year prior, in one sequence, they're
already at a million one, while the other ones barely
at six hundred and eighty thousand, and that's just because

(17:41):
of the sequence of returns. The timing of negative market
returns can have short term impacts as you are saving
for retirement, but the timing's less impactful over the long term.
Plus the fact that you're not taking any withdrawals, so
the equities are untouched and can and come back from

(18:02):
those market losses market volatility as you're taking income. This
example shows a totally different story once you begin taking income.
I have a chart here that shows hypothetical account a
balance of six hundred and ninety three and twenty four
at retirement with a fifty thousand dollars an income being

(18:24):
withdrawn each year. Similar to the first scenario, we reverse
the order of the market returns, so during the favorable
sequence of returns, they have strong returns in the early years.
The unfavorable sequence column means they have return week return
years in the early years. And then we're going to

(18:46):
talk about what the return balance is. So approximately at
age sixty five, the good column they have a two
percent return, where the unfavorable column, because we switched them,
they start out with a negative thirty eight percent radar return.
That really crushes their overall RATEAR return. At age sixty

(19:10):
six or year two, the good column has a twenty
six percent RATAR return. They're sitting on seven hundred and
sixty four thousand dollars of total asset, where the column
that only had a negative thirty eight percent return in
year sixty five. At aids sixty six, they have a

(19:30):
four percent RATAR return, which is great, but they're because
they're taking fifty thousand dollars. They now have gone from
three ninety nine to three sixty three of total asset value.
Fast forward a few years. Let's go five years to
age seventy one. The plus column has a seventeen percent
RATAR return. They're tipping over a million dollars of growth asset,

(19:56):
where the unfavorable column there's sending a negative twenty three percent.
They're down to one hundred and ninety and eighty six. Okay,
the point on this is this, both of these columns
had to rate a return of eight percent over fifteen years,

(20:17):
which isn't bad, but they have a drastically different balance,
and the one on the right side actually runs out
of money. So make sure your long term retirement and
strategy includes solutions designed to help protect you from the
impact of negative market returns. When you start taking income,

(20:38):
don't let a down market put a damper on your retirement.
You already know how important it is to save for
retirement and make sure your income lasts as long as
you needed to. But do you know that one of
the keys to making that happen maybe to diversify your
sources of retirement income. In retirement, you're going to see
a lot of ups and downs in the market. When

(20:59):
the markets up, it's a great time to take income
from your investment accounts because they're commonly allocated to stock
spawns of mutual funds and tie directly to market performance.
But when the market is down, it may be who
of you not to take money from that retirement account
and get it somewhere else. A ten percent remember here's

(21:24):
some percentages for you to think about. A ten percent
loss requires you to get an eleven percent gain just
to recover that ten percent loss. A loss of twenty
five percent means you need thirty three percent gain to
recover that twenty five percent loss. If you have a

(21:45):
down year where you lose thirty percent, you're gonna need
forty three percent to return just to break even. And
so on. This is why I'm trying to emphasize to
you guys, it's so important to have other sources bean
to rely on when the market is down. Let's work
together to help maximize your income in retirement. In addition

(22:08):
to death benefit protection, permanent cash value life insurance can
provide cash value that grows tax deferred, a source of
income tax reretirement income. Meaning instead of taking the money
from that asset that's way down, take it from the
life insurance bucket. You also have protection in that account

(22:33):
from market fluctuations, or use principal protection of a fixed indextinuity,
which will establish a foundation that you can build off of,
saving yourself the time and capital it takes to recoup
market losses so your money can work for longer and

(22:53):
harder for you. All of this is coupled with the
growth potential and guaranteed lifetime income payout options that helps
ensure a reliable lifelong income generator. Taking income from cash
value life insurance policy during a down market instead of
taking it from ther investments allows them to recover much

(23:14):
more quickly. It's essentially like putting a bandage on your
investments and giving them time to heal. You want to
diversify your income sources. Cash value life insurance is a
great one. Annuities such as fixed index annuities or deferred
annuity bucket. You can use an immediate innuity bucket to

(23:36):
take care of primary or fixed expenses. And we can
set this up to cover routine costs for you know,
as short as a three year period to me as
long as a six year period, you're going to need
another bucket of money besides your Social Security check and
your pile of money and your four to one KRA

(23:57):
Future scenarios that I can discuss later about advantages of
having permanent cash value life insurance as an additional income
source or retirement as opposed to only having an investment
account to rely on. There's an investment only scenario which
I can illustrate withdrawals from your investment account without having

(24:17):
any cash value life insurance or an annuity bucket, and
I can show you what that looks like. I can
show you a life insurance scenario which illustrates taking withdrawals
from the investment account regardless of market performance, and then
prior to accessing the cash values from your life insurance policy.
I can also show you taking withdrawals from your investment account,

(24:43):
except in the year that you would follow a negative
market return. During those years, the after tax withdrawal amount
is taken from life insurance instead of that retirement account.
And again, this allows your retirement account to heal. You're
putting a bandage on it, you're letting it recover, and

(25:07):
you're pulling your money from another income source. Don't forget.
I give monthly virtual meetings regarding Medicare for two different
companies every month. In one meeting, I will cover the
Medicare Supplement plan with a standalone drug plan. That meeting
is usually sponsored by well Mark United Healthcare as a sponsor.

(25:28):
For my other virtual meeting, I focus on Medicare Advantage
plans known as Medicare Parts C and I cover the
benefits of that platform and cover the four parts of Medicare.
You can call our office at five six three three
three two two two zero zero for the zoom meeting
codes and additional dates and times. You're also welcome to

(25:51):
email me at Craig at Craigshilig dot com and that's
cr Aig at c R A I G S c
H I L L I G dot com and I
can send you the virtual zoom link meeting codes. This

(26:11):
is Craig Chillig with safe money
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