Retirement Income Strategies: Maximizing Returns for Financial Freedom

Episode Transcript
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(00:00):
SA.

(00:50):
Aloha Inspired Money Maker welcome to another episode of
Inspired Money. Whether it's your first time here or you're a long
term listener, we're so glad to be together. If you're
tuning in live, your comments at YouTube, LinkedIn, Facebook
or Instagram can guide our conversation today,
so I encourage you to do so. I just got back from a couple of

(01:13):
days at the Exchange Conference in Las Vegas, so
coming back has been a little bit crazy between time zones
and getting back on track, catching up on work. But it was
really great to meet several Inspired Money guests who have
been on the show more than once and I had never met them in real
life. And Lester was a speaker manager of the

(01:35):
Pink Healthcare etf. My friend Mike Taylor was there
and Michael Guyet of the Lead Lag Report. A big thank you
to Michael Guyed and Columbia Threadneedle for encouraging me to
attend and Mike Taylor and I, along with Mike
Green who is the founder of Simplify Asset Management, we had
a fellow fabulous dinner. So it was a really good time. Lots of great

(01:57):
sessions with other financial advisors and industry leaders
talking about trends and the economy and best
practices. But it's also great to be
back. So today we're tackling a question that looms large
for anyone planning for retirement. How do you turn
your savings into reliable income that lasts?

(02:19):
In my experience, the shift from earning to spending
can be a tough balancing act. There's market volatility,
inflation and unexpected expenses that can
make the process feel overwhelming. But don't worry, we
have you covered. To help you navigate the complexities of retirement
income planning, I've gathered some of the brightest minds in the

(02:41):
space. They're here to share proven strategies, practical
insights, and maybe even challenge some conventional
wisdom along the way. Today, I hope that we're going to cover building your
income plan Tailor a retirement strategy to fit your goals
and lifestyle Diversifying your income streams. We're going to
explore how combining investments, pensions, Social

(03:03):
Security and more can provide stability and
tax smart withdrawals. Learning how to minimize
taxes and keep more of your hard earned money. Plus,
we'll touch on inflation, proofing your income and managing healthcare
expenses. Everything you need to feel more confident about
your financial future. But before we dive in, a quick thank you to our

(03:25):
sponsor. Today's episode is brought to you by Seeking
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(03:47):
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(04:10):
the show and I appreciate it. Let's bring in our
guest to help you navigate the complexities of retirement
income. I'm thrilled to introduce four
incredible experts. Let me start with Wade Pfau.
Welcome back to the show, Wade. He is one of the foremost thought leaders in
retirement income planning. He's a professor at the American College

(04:32):
of Financial Services, a partner at McLean Asset
Management and the author of the widely acclaimed Retirement planning
Guidebook. He has a PhD in economics from Princeton
University and his research has shaped how retirees and
financial professionals approach sustainable income strategies.
Wade, welcome back. Thanks, Andy. It's great to be here. Yeah,

(04:55):
we're going to have a retirement income party today.
My understanding is that you guys have all crossed paths
many times over the years. That's
right. Correct. Lots of conferences, lots of books.
Yeah. So next we have Mary Beth Franklin,
CFP®. She's a leading authority on Social Security and

(05:17):
Medicare. A veteran financial journalist, she spent over
40 years educating both consumers and financial
advisors. She's also the author of Maximizing your Social
Security retirement Benefits. And if you want to
get every dollar you're entitled to, Mary Beth's insights are
invaluable. Welcome. Thanks, Andy.

(05:39):
We have Bill Bengen here. He's
revolutionized the way that we think about retirement withdrawals
and is the author of "A Richer Retirement." Best known for creating
the 4% rule. His research has guided countless retirees
toward sustainable spending strategies. With
an MIT background in aerospace engineering and a second

(06:01):
career in financial planning, Bill brings both precision and
practicality to the table. Bill, I'm so glad that you could make
it. Thanks for the invite, Andy. It's wonderful
to be included in this August group of experts on this field..
And rounding out our panel today we have Dana
Anspach, also a CFP® and a retirement management

(06:24):
advisor. She's founder and CEO of Sensible Money.
She's dedicated her career to helping people create sustainable
retirement income plans. She's the author of Control youl
Retirement Destiny and Social Security Sense.
Dana's hands on experience makes her a wealth of practical
knowledge. Welcome, Dana. Thanks,

(06:45):
Andy. I'm looking forward to the conversation. And
I'm still admiring your blazer. And glasses.
Well, our brand colors are orange, so you know, I have to look
the part. Branding is so important. We're all
learning, so this is quite the lineup. Get ready for an
actionable session of great advice.

(07:08):
Financial Fascinating insights and maybe a
few surprises. Let's jump straight into segment one. A
successful retirement income plan starts with clear goals, diversified
income sources, and risk management. Start by defining
retirement objectives, including lifestyle preferences and spending
needs. Identify reliable income streams like Social

(07:30):
Security, pensions and investments, ensuring a mix of growth
and stability. Managing risks like market downturns,
inflation and longevity is crucial. Asset allocation
strategies such as blending stocks, bonds and annuities, balance
returns and protection. Sustainable withdrawal rates such as the
4% rule or dynamic strategies help preserve savings.

(07:53):
Tax efficient withdrawals optimize income while annuities and
passive income sources provide stability. Factor in healthcare
costs, including insurance and long term care. Regular
financial reviews ensure adaptability to economic shifts.
A well structured plan builds confidence, offering financial security
and flexibility throughout retirement.

(08:19):
Let's start with Bill. The 4% rule has become a household
concept in retirement planning. When you first published your
research, did you anticipate that it would have such lasting impact?
Andy, I had no clue. I am as surprised as anybody that
this thing has grown to what it has
become. Originally, I designed it basically to

(08:42):
help my clients plan for their retirement withdrawals and it was
focused on their needs. And then I guess I
made a presentation to a conference and all of a
sudden it got out there and
ran like a horse. And you have a new book coming out
soon? Yeah, it's called A Rich Retirement.

(09:05):
Basically supercharging the 4% rule. Basically, it's a
distillation of all I've learned over the last 30 years of my research,
puts everything together in a very comprehensive and scientific
fashion. How you can determine how much you can withdraw from your
portfolio based upon a number of factors which you
can customize and two other factors which you have no control over but

(09:29):
are very important. Okay, well, I hope that you'll share
some of those with us today. Wade, I know that
you've extensively researched retirement income strategies.
What's the biggest misconception retirees have when they start
planning their income? Well, I'd say
that the biggest misconception may just be that people don't know they have

(09:51):
different options out there. There are different viable approaches to building a
retirement income plan, and it's really important to find an approach that
you're comfortable with when you start looking online. There's a lot of disagreement
about which approach is best, but ultimately whether it is
more of a purely investment based approach, taking distributions from a
portfolio. Whether somebody prefers the bucketing idea

(10:13):
where you invest differently based on the time horizon, or whether someone
prefers to have a floor of reliable lifetime income. There's different
options and it's important to find something you're comfortable with and one's not clearly
better than the other. I think that's probably the biggest misconception. In
conversations that you may have with clients. How
Frequently does the 4% rule come up?

(10:35):
For myself, yeah.
Well, I think ultimately the 4% rule, it's a research
simplification to get an idea about what's sustainable.
But most clients are using some sort of
software that will simulate a financial plan with cash flows that
vary over time, taxes that vary over time.

(10:56):
And so you can't really talk about a specific
withdrawal rate just because it doesn't really fit into the framework of
spending from the portfolio will fluctuate over time. And in that
regard, I don't think it really comes up that much in practice. Bill, I think
you agree with that. Correct? Because I've heard you reference the 4% rule
as a worst case scenario.

(11:18):
Yes, exactly is. And I agree with Wade that it is a
simplifying tool because
most people's situations are complex and require
detailed planning. And basically it
establishes a certain level of withdrawals that
you can reasonably expect to be in the neighborhood of,

(11:41):
particularly if you're a very conservative person. You know, I upgraded the 4%
rule to 4.7% and it's important to realize, as you mentioned, Andy,
that it is a worst case scenario representing
basically the experience of the retiree who retired in October
of 68 and ran into a buzz of bear
markets and high inflation. I think one

(12:04):
of the great values of the 4% rule, and we know Bill is
extremely precise in his research and it goes far
beyond that simple rule of thumb. But for people
approaching retirement who may be one, two, three
decades away, it's a great rule of thumb of gee, if I have
a million dollar portfolio, I can take out roughly 40,000

(12:25):
the first year and increase that amount for inflation. So I think
it' real value is to give future retirees
a rough idea of what they might be able to expect in
retirement. It's a fantastic starting point. Mary Beth, I want to
ask you, you've helped countless retirees navigate
Social Security decisions. Talk about

(12:47):
how Social Security, how we should be looking at it
as the powerful foundation for a retirement income
plan. And I should add before you answer, more
and more people that I talked to today they're not
that confident about having the future of collecting
the Social Security that they will be owed. Those are

(13:10):
two absolute facts. One, Social Security is
the bedrock of retirement income for
the majority of Americans, and therefore it's critical.
And the faith in the program is critical. And
secondly, because of all these advertising
of what the new administration is suggesting to be done at Social

(13:31):
Security, Elon Musk has called it a Ponzi scheme. I would
disagree with that. It is a pay as you go system. He has
said there is enormous fraud, waste and abuse. Well, in
any program that spends a trillion dollars a year, I'm sure there is a certain
level of waste. But no, we don't see millions of
people, 150 year olds plus, collecting Social Security

(13:53):
benefits that's absolutely spent. And in trying to go
after that broad concerns
about abuse, they're using a sledgehammer and not a scalpel.
The result is they're cutting staff, they're cutting phone services.
The website is crashing from demand. We
have so many people who are receiving Social Security

(14:16):
checks. Social Security is 90 years old. This office, August, has
never missed a payment. But people are now afraid. And
that's what makes me angry. Our lawmakers, our
politicians, our leaders should be reassuring
people that Social Security is safe and that
includes the bureaucracy that delivers those checks and

(14:38):
information about it.
Dana, your thoughts? I know that at your
firm, Sensible Money, you do
comprehensive planning for retirees. Maybe you
can share a story about how that planning
process is really critical for a clear

(14:59):
and personalized plan for someone's
retirement. Yeah, there was a particular case that was going through
my mind. You know, I agree with what Mary Best said about the 4%
rule can be useful. I say when you're, you know, 20 years away from
retirement to get a general sense of how much you can withdraw. But
we had an executive, he was actually an executive at a major

(15:21):
financial services custodial firm that hired us to do a
plan. This was probably about eight years ago. And he had used
the 4% rule to do all of his planning. The majority of he
and his, his wife's assets were in tax deferred accounts. And
he was, you know, almost embarrassed to admit that he had
forgotten about taxes. And so when you look at the

(15:43):
intersection of taxes on withdrawals,
he was going to have significant required minimum distributions.
This was before the required minimum distribution age was
increased. That was going to cause 85% of his Social
Security to be taxed. It was also going to cause he and his wife to
be in an increased, what's called IRMAA (income-related monthly adjustment amount) or an increased Medicare

(16:04):
Part B premium. And so this was someone
that was educated. They were well versed in basic financial concepts.
He actually had his CFP®, but he wasn't practicing in
and out. And so I say all of the time, there's these nuances
that we deal with every single day.

(16:24):
And you only retire once. And so
that's a point where I think expert advice can be
so valuable. One small nuance or piece of advice
can make a significant difference in your future
retirement lifestyle. It can make a difference in how long your money lasts.
And so that, that executive always comes to mind when I think of the

(16:47):
4% rule and just some very simple things that, that can
easily get overlooked. In the case of that client. Did he
have time to make adjustments?
He didn't necessarily have time. He was at the cusp of
retirement, but he and his wife had significant
assets. So when we were planning

(17:08):
and showed them what their after tax cash flow could be,
we were able to adjust. And it simply meant they were going to spend down
a little bit more principal over their lifetime, but not spend it
down fast enough to be concerned about running
out. So, you know, you can maximize for current income or you
could maximize for the amount of wealth you want to transfer to

(17:30):
heirs. And that's a fine balance. We always have to leave enough
to be comfortable later in life. But oftentimes we'll see people who
are so conservative that, as Michael Kitzy's research has
shown, they often pass away with more wealth than
they had at retirement. Yeah, that's a fascinating,
that's a fascinating statistic because most

(17:52):
people were all worried going from
accumulation to decumulation. We're not thinking about the potential
of ending with more money than we started with.
Exactly. And I think Dana was so right in
pointing out the big shock, I think, for new retirees is
their taxes in retirement. I think in the back of their mind was

(18:14):
the promise that was made decades ago that the reason you save
in tax deferred accounts like traditional IRAs and
401ks is you get an upfront tax deduction, and when your
money comes out in retirement, you'll be taxed at that rate. And we
all believe this myth that we would be in a lower tax bracket
in retirement, which is seldom the

(18:36):
case, particularly with so few people itemizing deductions
anymore. The standard deduction is so high that
people can be surprised of how much they pay in taxes in
retirement and also how much of their retirement income
budget is consumed by health care costs.
So it pays to plan, let's go to segment two. We're going to talk

(18:58):
about creating a diversified income portfolio.
A diversified income portfolio is key to financial security
in retirement. Relying on a single source is risky.
Diversification balances income stability and growth.
Annuities can provide guaranteed income with fixed annuities offering
security and variable annuities allowing market

(19:20):
participation. Dividend paying stocks generate income while
retaining some growth potential. Bonds including treasury,
corporate and municipal options provide stable returns with varying
risk levels. Real estate through rental properties or real estate
investment trusts generates income that can rise with inflation.
CDs, high yield savings accounts and income focused

(19:43):
mutual funds or ETFs offer low risk options while keeping
cash liquid and accessible if needed. A well structured
portfolio blends these assets, aligning with your risk tolerance
and income needs. Proper diversification supports steady
cash flow, reduces volatility and sustains long
term financial independence.

(20:12):
Wade, you've explored the trade offs between protected
income and market based income. How can retirees
determine how much of their portfolio should be in guaranteed income
products like annuities? Well, it's ultimately
going to depend on their style. But the way I like to approach that
is first assess how much reliable income you already have.

(20:35):
And so Social Security is going to be a big part of that for many
people. And delaying Social Security can really enhance the reliable
income available to the household, whether there's other pensions and so
forth, and then compare that to what is the
fixed basic essential budget you'd like to be able to meet over your
lifetime. Now, if there's a gap where your

(20:56):
reliable income doesn't meet your essential spending in
retirement, then that's where the conversation begins about how would
you like to fill that gap and how much would you like to allocate to
reliable income sources. Now if you take more the total return
investing perspective that you're going to draw from a diversified
portfolio and you're comfortable relying on the idea of market

(21:17):
growth, you may not really look to annuities or other kinds of
reliable income resources beyond what you just already have by
default. On the other hand though, if you have more of a time
segmentation style, you might look at creating a bucket for short term
funds to cover upcoming expenses and fully meet all your essential
spending need. And then if your your style is more what I call income

(21:38):
protection or risk wrap, that's where you might look to an
annuity with lifetime income provisions to help fill that gap.
And if it takes what you feel is a reasonable percentage of your asset
base to fill that gap, you might be able to feel more Comfortable and sleep
better at night knowing that you, you have a sufficient floor of reliable
income. I like thinking about it in terms of

(22:00):
style. Bill, you've emphasized the importance of equities
and stocks in maintaining long term purchasing power. What's your
perspective on how retirees can stay invested without
overexposing themselves to, to market risk? Well,
that's really an interesting question and I could probably
speak on it for a very long time, which I'm not going to here,

(22:22):
but my research indicated that if you're using
a withdrawal method which basically increases withdrawals
with inflation, that your
optimum allocation of stocks should be somewhere between
45% and about 75% stocks. If you
stay within that range, it really doesn't affect the withdrawal rate at all, which is

(22:44):
kind of amazing. It was one of the first results that came out
of my retirement research way back in the early
90s. So you need to keep
that healthy allocation to stocks because if you
get too much, you overexpose yourself to stocks and in a major bear
market, your portfolio can be devastated. That'll reduce your withdrawal rate.

(23:06):
If you have too much in bonds, not enough stocks, your portfolio won't have
enough oomph, won't generate enough return, and will fall
short at the other end of the spectrum for that
reason. So somewhere in the middle, about 55,
60% is probably ideal. Has there been some
talk more recently about adjusting the

(23:28):
glide path so starting retirement with a
lower percentage to stocks than what was
previously, you know, conventional?
Yeah, in my book, I've studied that in detail
and I found out that that idea,
which was developed by two other advisors,

(23:51):
Wade, I think one of them, and Michael Kitces, was a
very successful concept. If you started, let's say, with a lower
equity allocation, you might Otherwise, let's say 35%, increase it by
1% a year. In almost every single case, for every retiree
I've studied, they benefited with a
higher withdrawal rate significantly using

(24:14):
what's called a increasing equity glide path. I know it's a very
counterintuitive result, but it
works. And my job is not to
decide what I like and what I don't like. It's what works and what doesn't.
Follow the data, Wade. How would one do that? Do you make the
adjustment in your tax deferred

(24:36):
account? Well, there's a lot of
potential ways to do it for when it resonates with an individual,
but yeah, it was really so. So Bill Bengen's research gave us the idea of
sequence of returns risk in retirement, and that's why market
volatility really matters. The rising equity glide path
idea was meant to provide one way to manage that sequence of

(24:58):
returns. Risk that you have a lower stock allocation early on in
retirement when you're the most vulnerable to volatility. But then over time,
volatility will have less impact on the sustainability of your
spending. And so increasing the allocation over time,
maybe in the first 10 to 15 years of retirement to get up to
what you view, like Bill Bengan was saying, that maybe 50,

(25:21):
60% stocks for that later part of retirement
afterward. One simple way to do it is you just build a front end bond
ladder. Say the first 10 years of retirement, I'll have bonds maturing
every year and I'll spend those and I won't replenish them. And so
as that bond ladder gets sent down, that's a feasible,
practical way and probably the easiest way to think about starting

(25:43):
that bond ladder fully. At the beginning, you have a lower stock allocation. And
then as you spend on that bond ladder, your stock allocation goes up to the,
the level you'd ultimately like to see it at. It's a really interesting
idea because I think most retirees, they're worried that as soon
as you retire, what if it's a
year 2000 and that's going to

(26:05):
impact how your retirement plan is
going to be functioning right at the start. Dana, maybe you can talk a
little bit about. I know that you advocate for balancing
income certainty with flexibility. How do you tailor
portfolios differently for clients in their early retirement years
versus later years? Yeah, it's

(26:27):
interesting. We do exactly what Wade said. We build
front end bond ladder. As a matter of fact, I have a paper on it
illustrating that particular scenario over
two different retirees in different historical periods. It's called the
Wind Down Managing Risk in the Retirement Red Zone. It's available on
the Investments and Wealth Institute's website. But it can be great

(26:49):
for people who want to see an example of what it looks like to build
a bond ladder and how that looks in action. But we do that
for every single client. We've been doing it since
2012. Now. It does get customized to their
situation. And so what typically happens
now we have, you know, 13 years later, we have clients to

(27:11):
see how their allocation has evolved since they first
retired. And we had many who retired not in 2000, but
in 2007, right before the Great Recession.
And so we can see, see exactly what Wade is saying. As
we've spent some of those bonds that have matured,
we've also been able to Continue to add bonds to make sure at

(27:32):
least five or six years of their future income is is covered by
maturing investments. But they're at the equities have grown enough that
they have experienced an a rising equity glide path. Maybe
they retired with about 60% equities and right
now they're sitting at about 60, 70 to 72% equities.
And we have a process for monitoring that. So when the equity allocation gets

(27:55):
over specified threshold amounts, then we sell some of those equities
and again add onto their bond ladder. But it works really well
when the market goes down for the clients that really understand the
process. We have actually gotten thank you emails saying thank you
so much. I understand that my income right now isn't
impacted by this current market volatility. I understand how the bond

(28:17):
ladder works. It helps bring peace of mind. That's how I
look at it. It's a strategy that people understand and it really helps
bring peace of mind. Are you keeping
the the stock allocation as is at the
start of retirement? Are you dialing that lower going
into retirement? We are measuring by

(28:40):
the number of years of cash flow covered. So it's not a
traditional rebalancing model of looking at stocks
versus bonds. It's really looking at where is the most risk, which
is that retirement red zone period, the five years before and first five
years of retirement. And it's not quite to the
extreme. Kitces has an article on building a bond tent where you

(29:01):
would bring your equity allocation down to perhaps 30 or 40%. We're
not that extreme, but it is saying I do want a longer
bond ladder. Maybe it's to cover the bridge between when Social Security
starts, but really to cover those riskiest years as you
get later in retirement. We have more data. You know, we
have five or 10 years of retirement in the rearview mirror to say, okay,

(29:23):
we didn't get a worst case scenario. You are ahead of the path where we
thought you would be. So maintaining such a lengthy bond ladder
isn't as critical anymore. And so again, it's not a
strict rebalancing to an allocation model. It's conversations with
the client and making sure we're maintaining a specific income ladder.
And as people get into their 80s, we actually like shorter what we

(29:45):
call thicker bond ladders because life expectancy
is not as known at that point. And we want flexibility
for heirs. So there's all kinds of factors that come into account when
we're applying it. It's a general concept. Build a bond ladder and then it
gets very personalized at the household level.
If I could jump in there for a second. I know Wade always talks

(30:07):
about the retirement income investing styles
and I went through his style box which I think is brilliant
and figured out that I like the idea of a
risk wrap some sort of guaranteed around my
investments and I consider
myself semi retired now and the way it worked for my husband and

(30:29):
I. He is a retired federal employee, he has a pension but he
paid in Social Security the whole time. So he and I both have Social Security
and rather than having a bond ladder, we had some variable
annuities that we bought many years ago that
had guaranteed minimum income benefits that are very generous.
So we use that for additional cash flow and essentially

(30:51):
we have not yet touched our diversified investment
portfolio. So much like Dana's clients find
during market volatility issues, I don't even think about that
because those investments are for the long term
and my immediate and near term income needs are covered.
So I sleep pretty well at night. So thanks to all the brilliant

(31:13):
researchers and practitioners here that
have made all these strategies possible. If it wasn't for each of
you, retirement could be a scary place for some people.
Appreciate your sharing your personal real
life example. Mary Beth what do we need to know about

(31:34):
Social Security? Are there fewer creative
strategies available to us today? Yes. So many of
the creative climbing strategies have disappeared after
the last group of eligible retirees had turned
70 a couple of years ago. So right now, basically your
decision is when do I want to claim benefits?

(31:55):
I can claim them early as early as 62, but if they're
permanently reduced by as much as 30% and if
I continue to work while claiming benefits before my full retirement
age, I'm also subject to earnings restrictions. This year is
about $23,000 a year. Earn more than that and you could
temporarily lose some or all of your Social Security

(32:17):
benefits. Earnings restrictions go away at full
retirement age. If you claim at full retirement age, you get 100% of
those benefits that you have worked so hard for and paid so much for
in the form of FICA taxes. But for those who are
healthy enough and wealthy enough frankly to be able to
delay claiming Social Security up until age 70, there is this

(32:39):
huge payoff of an extra 8% per year
for every year you delay between full retirement age and
70. We know there are long term financing
challenges to Social Security when the trust fund
reserves are expected to be exhausted sometime around
2033, that does not mean Social Security is

(33:00):
bankrupt. There would be enough ongoing FICA tax
revenue to pay about 80% of promised benefits
at that point. But frankly, no one is going to be satisfied with
80% of promised benefits. There are many things Congress can do
in terms of tweaking benefits or raising tax rates
or raising the amount of wages subject to FICA taxes

(33:22):
to put the system on a sustainable future.
My bigger concern more immediately is concerns
about the delivery of customer service where the Social Security
Administration is understaffed and under financed.
Is it true I heard you mention the
statistic that Social Security claims

(33:44):
reps did not give the best advice something like
82% of the time? That was several years ago. A report
from the Social Security Administration's
internal watchdog had found that when it
came to survivor benefits, many people are entitled
to their own retirement benefit if they've an earnings history. And if

(34:06):
their spouse dies, they may also be entitled to a survivor
benefit. Those are two different benefits. In many cases
you can choose one first and switch to the larger benefit
later. And often the benefit is to wait for
the survivor benefit because for many couples that's the bigger
benefit. And in 83% of the cases, the Social

(34:28):
Security rep at the time did not offer those two
options to the beneficiary. They suggested they take one or the other
and many people didn't realize they had a choice. Okay, so
a little bit less applicable today, but it still pays to do your
homework. Well also it is true today that the one
in most cases when people file for Social Security and if they're entitled to

(34:50):
more than one benefit, they have to take the higher of the two. They don't
get a choice. Except when it comes to survivor
benefits. Survivor benefits and retirement benefits
remain two separate pots of money. And depending on your age
and circumstances, you may be able to change claim one first
and then switch to the larger benefit later. And that's still a viable

(35:11):
strategy. Okay, so it depends on your health, wealth and your
marital status. We're going to move on to segment three and talk
about tax efficient withdrawal strategies. A tax
efficient withdrawal strategy helps retirees manage income
while minimizing tax liability. The order of withdrawals
matters. Start with taxable accounts, then move to tax deferred

(35:34):
accounts like traditional IRAs, leaving Roth IRAs
for later. To maximize tax free growth, Roth
conversions allow pre tax retirement funds to be moved into Roth
IRAs, offering tax free withdrawals in the future.
Timing conversions during lower income years can reduce the tax
impact. Managing capital gains helps keep taxes low

(35:57):
while tax efficient withdrawals prevent unnecessary bracket jumps.
Required minimum distributions must be planned for and qualified
charitable distributions allow tax free IRA donations for
those 70 and a half and older Social Security timing also
affects tax exposure. Structuring withdrawals strategically
balances tax impact, investment growth and spending

(36:19):
needs. Extending the life of retirement savings while keeping more
money in your pocket.
Bill, have you seen specific tax strategies that can
allow retirees to withdraw, withdraw even
more than the 4% in certain scenarios? You

(36:41):
know, my expertise in this area
is very, very limited because I concern only myself in
my research, only what happens in the portfolio
and not after the money leaves the portfolio. So
taxation only enters my research
when I'm considering, you know, the effects on the withdrawal rate of whether

(37:03):
you're in a taxable account or a tax deferred account, if your taxable
account, what percentage your overall
tax rate is. So I don't think I have much wisdom. I apologize to all
from this area. I defer to the others. Do you look at the order
depending on the account? No, I don't look at the order
either. You know, my research is to make an

(37:24):
analogy is so narrowly
focused perhaps compared to all the other folks in this panel.
I like to think of your retirement account as a cow and you want to
get as much milk as you can during retirement. My job is
to find out the rules for care, feeding and maintenance of your
cow to maximize what you get, the amount of milk

(37:47):
you get retirement. And you may have other animals in your barnyard. You
may have a pension chicken and you may have an annuity horse and you
know, you may have something else, but kind of like Tommy Lee Jones
in the Fugitive. I don't care about those
other animals. I'm all focusing just on the cow. So I
apologize, I can't give you a better answer. But if you want to

(38:09):
talk about the cow, I'm happy to. E-I-E-I-O! I like
your farm. All right, let's, let's
turn to Wade. Then
maybe Wade, you can talk about tax efficient withdrawal
strategies. How can, how, how can that
significantly extend the life of a retirement

(38:30):
portfolio? Yeah, this is actually one of the areas
I've been most interested the last few years. It's the longest chapter in my
retirement planning guidebook. Chapter 10 is all about tax efficient
retirement distributions. I've run case studies in the past that
could extend portfolio longevity by six years or more
on a after tax basis just by being more efficient

(38:52):
with the tax distribution strategy. The introductory video
to this segment mentioned the conventional wisdom strategy which
is spend taxable, then tax deferred, then tax
exempt. And directionally that's correct. But if you
really want to supercharge that it's more cover
spending and taxes to your taxable account and do Roth conversions

(39:14):
potentially in the early years and especially if you haven't claimed Social
Security yet. This can help set you up to not have as much of your
Social Security benefit taxed. And then eventually when the taxable account is
for the most part depleted, then it becomes a matter of blending
distributions from the tax deferred and tax exempt account to
manage the effective marginal tax rate that you have to pay. Which

(39:36):
considers not just federal income tax brackets or state income tax
brackets, but also the really complicated and odd
way that Social Security benefits get taxed. The idea that
your long term capital gains and qualified dividends stack on top of
your ordinary income. And you have to be careful about. If I take a
distribution from my IRA, I may be in the 12 or 10%

(39:58):
federal income bracket, but that might also uniquely cause me to push a
dollar of long term gains from the 0 to 15% preferential
bracket. Suddenly I have an effective marginal tax rate of 25 or
27%. Then there's the Irma surcharges where at
higher income levels you may be forced to pay two years later
higher Medicare Part B or Part D premiums. And then the

(40:21):
net investment income tax as well where you might start to trigger that
3.8% additional tax on your investment
income. And so with monitoring all those things,
managing an effective marginal tax rate in a strategic manner can
have a huge impact on the sustainability of funds
in retirement and increase the after tax sustainable withdrawal

(40:43):
rate from your investments as well. Thank you for that,
Dana. For clients with significant non qualified assets, how
do you manage capital gains efficiently?
Very carefully. It is, it's
complicated as Wade said. You know one of the cases that just
crossed my mind is sometimes we have people come in, they may have a concentrated

(41:06):
stock position. And so we know that
almost 100% of every dollar we sell
is going to be taxable. And we do have to fit that
in with other things going on. For example, if we have
someone retire pre age 65, they may
be eligible for the Affordable Care act health care tax

(41:28):
credit. And if realize too much gains or they have too much
income, we will void their ability to use that credit. And that
credit we had a case where it benefited our client to the tune
of 24,000 a year for about four years in a
row. And so we had to be very, very careful about
realizing gains during that time period. Now we have another

(41:50):
case right now that's rather interesting. We've been able to successfully build
out their income Ladder, this person is still working,
but he has a concentrated stock position. But we've, we've been able
to whittle it down, but we still have a good chunk left. However, his wife
is very, very ill and so they live in a community
property state. And some of the conversations we've had are, you know,

(42:13):
if she has a shortened life expectancy, should we hang on to that
stock because it will be eligible for a step up in cost basis.
And so these are very tricky situations. We have to weigh out
the risk of holding the concentrated stock with the potential that
all of those gains could be tax free considering her health
situation. And so it's not always

(42:35):
easy. It does require the ability to project the
situation out and then to look at the outcomes under
each course of action and as Wade said, to be able to look at
what the effective tax rate is and see, okay, which course of
action is most likely. It's all probability based, which
course of action is most likely to put them in a better

(42:57):
situation. Juggling a lot of variables, I
think. One of the things retirees, higher income retirees are
very concerned about is the Medicare premium
surcharge this year for individuals. People who
have incomes of 106,000 or more,
married couples, double that to 12 or more, are

(43:19):
subject to these higher income related
monthly surcharge amounts. And
there are five brackets. And when I do my
personal income taxes, I think I'm less concerned about the
income tax brackets as I am about these IRMAA (income-related monthly adjustment amount) surcharge
brackets. Because literally you could be $2,000

(43:40):
on either side of the next bracket. And if
there's two of you who are Medicare age, it's times two. So
that's why I always encourage retirees to have some
pot of tax free money. Whether it's Roth IRA
money, it could be cash value life insurance, it could be
proceeds from a reverse mortgage that if they know

(44:03):
they're close, if say they were taking out an extra $5,000,
that they did it from that tax free account rather
than their tax deferred IRA or 401k,
it can make a huge difference
in how much they're spending on Medicare. And as Andy pointed
out, it's tricky because

(44:24):
your Medicare premiums are based on the last available
tax returns, which are by definition two years in
arrear. So the thing is, Medicare premium
surcharges are increased each year for inflation. So if you
just use the existing year as a safeguard
and try to stay below that in a particular bracket, you

(44:46):
should be okay for the next year. Amazing. We're covering a
lot. We're giving listeners and viewers information through a
fire hose. Let's go to segment 4.
Inflation erodes purchasing power, making it essential to build a
resilient retirement income plan. Stocks provide long term
growth while treasury inflation protected securities or tips

(45:08):
adjust with inflation preserving value. Real estate, whether through
rental properties or REITs, offers income that can rise with
costs. Social Security benefits include cost of living adjustments.
But not all pensions keep pace with inflation. A flexible
withdrawal strategy helps adapt to rising costs and can impact how
long savings last. Static withdrawal rates may fall short while

(45:30):
dynamic approaches adjust based on inflation and market performance.
Budget flexibility is key. Prioritizing essential
expenses while adjusting discretionary spending helps protect
savings. Regularly reviewing income sources and
projected costs ensures financial security and
provides peace of mind. By incorporating inflation resistant

(45:52):
assets and adaptive spending, retirees can maintain
long term stability and protect their lifestyle.
All right, Bill, I think inflation definitely impacts
your cow and for a while, kind of

(46:14):
a missing link like you were trying to figure out
exactly how does inflation impact? And you did get
a breakthrough. So can you share? Yeah. For
years I knew based on work Michael Kitces used to down back
in early 2000s, that stock market valuation
was very important to determine withdrawal rates. And the reason is that

(46:36):
the more expensive the stock market is, the closer you probably are to a big
bear market. And big bear markets during retirement can really
reduce your withdrawal rates. But I also knew that inflation was very
important. And the reason is, for
example, the biggest decline we've had in the last hundred years in
stocks was 90% back in the 1920s or the

(46:58):
early 30s. And yet the withdrawal rate for back
Then was around 5¼ percent, not even close to the
4.7% worst case scenario. And the difference was
that the worst case scenario I had inflation double digit, which forced
withdrawal rates up throughout the
retirement. Once your withdrawal rate goes up with inflation, it's

(47:20):
fixed, you're not likely to have a deflationary event helping you.
So the problem I had for years,
decades in fact, was how to quantify
how to bring inflation into the equation in
a rational scientific way. And
summer morning In July of 2021, I was sitting there and I

(47:42):
said, well, what if I put inflation first? I've been trying to put the stock
market valuation first. What if I put inflation first
and made that the most important factor and that turned everything around. I
sorted within the inflation, let's say,
regimes, stock market valuation, and I was able
to derive a whole bunch of nice charts and equations

(48:04):
that actually reflected very accurately
what happens to withdrawal Rates historically, as
inflation and stock market valuations vary.
Mary Beth, Social Security benefits are inflation
adjusted. It seemed like COLA didn't get adjusted all that
much. We've seen some of that change more recently.

(48:27):
Are those adjustments enough to offset retirees rising
costs? Well, it's a mathematical calculation based on
the Consumer Price Index. The average of the third quarter of one year over
the third quarter of the previous year. If there's an increase, that's what the COLA
is. Ask anyone on Social Security and they'll tell you that it's not
enough. But statistically it does keep pace with

(48:49):
inflation. The problem is the way inflation is measured is for
the average urban worker and they spend money differently
than the typical retiree who tends to spend less on
housing because they often own their home, but more on medical costs.
So it's a matter of what is it you're measuring and is it the right
measure, but the fact that it is. Cost of living adjustment

(49:11):
is a huge asset of Social Security.
Dana, what's your experience in building
inflation resistant portfolios and combining that with
flexible spending strategies? It's interesting
because we feel like the best hedge against inflation is having a
sufficient equity allocation. And so we don't necessarily tweak

(49:34):
the portfolios to do something special about inflation,
but we build in inflation assumptions into the future
cash flows that we're going to need. Typically we use 3% on basic
living expenses and 5% on healthcare related
expenses. And when you look at the data, I was just at a group
in New York City, we were reviewing the JP Morgan data on spending

(49:56):
and there's other companies that have done longitudinal data on
how spending changes throughout retirement. And it's usually at its
peak during what we call the go go years. And then spending
does decline and it shifts. And so when they look
at different segments, it certainly impacts different
demographic sectors differently. Your higher net worth

(50:18):
households in the later part of retirement, their charitable
gifting and then just family gifting may go up, which shows
they have the assets to spend, but they're not spending it on travel
and entertainment and clothing. You know, the
spending shifts over time. So we've found we need to bake it
into the plan. And we had a decade where we would offer

(50:40):
clients, you know, we've built an inflation raise into your plan. Do you need it?
And they would say, no, you know, I'm, I'm perfectly comfortable on what you're
sending. And then of course, in the last few years we've found they
have been more accommodative or more willing to Take those
inflation raises and over time it has still
averaged out to what we had projected in the beginning.

(51:02):
So I think it's just important to make sure you have built it into the
plan in some fashion. Wade
inflation is one of the most significant risks to
retirement income. Beyond treasury inflation
protected securities, what other strategies can retirees
use? Yeah, well TIPS are Treasury inflation

(51:23):
protected securities. That is the hallmark asset that
provides the inflation adjustment. And real interest rates right now
are around 2.2%. That's plus inflation on top
of that. So if you wanted 30 years of inflation adjusted spending
today, you could build a 30 year tips ladder that would fund about a
4.6% distribution rate. So that's an

(51:46):
obvious candidate. Social Security is very important, as
Mary Beth was indicating, just because it's inflation
adjusted. Looking for at least the high earner in a couple to
potentially delay towards age 70 is another great way to get more
inflation adjusted spending and then just relying on equities
over the long term to provide an inflation hedge. Those are

(52:07):
really the three main approaches to consider for inflation protection.
So good diversification and offers you
protection. Let's go, let's
bring it home. We're going to go to our final segment.
Healthcare costs pose a risk to retirees, particularly in
light of rising expenses, longer lifespans and the

(52:29):
increasing prevalence of chronic conditions, all of which make
proactive planning essential. Medicare provides foundational
coverage, but gaps exist for expenses like dental,
vision and long term care. Supplemental
insurance such as Medigap or Medicare Advantage
can help reduce out of pocket costs. Long term care

(52:51):
insurance or hybrid policies combining life insurance with care
benefits can provide financial protection against extended
care needs. Health savings accounts offer tax advantaged
savings for medical expenses. With funds growing tax free
and remaining available throughout retirement. Estimating
healthcare costs, factoring in premiums and potential long term

(53:13):
care expenses ensures realistic financial planning.
Reviewing insurance options and maximizing available tax
benefits can help mitigate unexpected medical costs. A
structured approach to healthcare planning supports financial stability,
protecting retirement savings from being depleted by medical
expenses.

(53:39):
Mary Beth Navigating Medicare can be
overwhelming. What are common mistakes
retirees make when choosing coverage? What do we need to
know? The first is when you need to sign up.
The majority of Americans need to sign up for
Medicare within either three months before their 65th

(54:00):
birthday, their 65th birthday month, or three months afterwards.
If they delay, they could face lifelong
delayed enrollment penalties that they would pay every month for the rest of their
lives and may have limited choices regarding their
supplemental Medicare. So signing up on time is important.
The one exception to the rule is if you

(54:21):
continue to work and have group health insurance through your
employer or through your spouse's employer, you can
delay enrolling in Medicare penalty free. Aside
from signing up on time, the other thing people have to decide is
how do I get my Medicare coverage? Either
traditional Medicare with a supplemental plan,

(54:43):
which can be a little more expensive but gives you a much more broader
range of healthcare providers, or something like a
Medicare Advantage plan, which is all inclusive,
often less expensive, and throws in extras things like vision
and dental and hearing aids. But you usually have to
use a prescribed network of providers. So it comes down

(55:05):
to choice and cost. But most importantly, signing up on
time. Bill, do you recommend adjusting
withdrawal rates if a retiree lives into their
90s and beyond? Oh, yes.
In fact, I've got a table in the book which shows what the
withdrawal rate should be for any particular planning

(55:27):
horizon. And for very short planning
Horizons, you know, two, three years, you can take tremendous amounts,
30% a year. As you planning
horizon gets longer and longer. You know, you get to
4.7% at 30 years and then at 40 years, maybe
a little bit less than that. But you find out for very, very

(55:49):
long planning horizon, which may apply to some of the fire folks, you
know, financial independence, retire early, it kind
of reaches an acid product level. It doesn't go below a certain level,
about 4.1% for, you know, what I call the
standard conditions. So yes, you have to very
definitely take planning horizon into account and you should probably build in

(56:11):
a nice safety margin to your planning horizon since we really don't know
how long we're going to live. Yep,
have room for error for sure. You ain't kidding.
You don't want to run out. Wade, how
should retirees estimate their health care expenses,
especially beyond Medicare, they'll want.

(56:35):
To consider out of pocket expenses. And I think, you know,
in terms of potential mistakes people might make, they should just
think carefully that the Medicare Advantage plans are doing tons of
marketing. I think we've now surpassed a point where more than half of
Americans are using Medicare Advantage.
And that might lower costs in the short term, but not necessarily in the

(56:57):
long term. If you have medical conditions that the most risk averse
individuals might want to take a careful look at original Medicare with
a comprehensive supplement like the Plan G supplement, and then
that controls for any Medicare covered care,
what your costs are going to look like. And then just planning, looking at
your past expenses, your past healthcare needs, what kind of out of pocket expenses

(57:19):
you'd want to add to those premium numbers and then
beyond that as well Just the now we have
the $2,000 out of pocket, a cap on the part three prescription drug
coverage as long as the prescriptions are covered through Medicare,
which may be a challenge or a question, at least you know
what the maximum out of pocket expense is at this point and that's a new

(57:41):
innovation. A few years back there are very expensive
prescriptions that could even at a 5% catastrophic payment
rate could lead to hundreds of thousands of dollars potentially. So that's
more under control. But there's still the question of if
the prescription's not covered through Medicare, I may need to pay
out of pocket. And trying to just get the best estimate you can of what

(58:02):
your out of pocket expenses may look like in addition to
any sort of deductibles or co pays with your choices with Medicare as
well as the Medicare premiums, whether it's Advantage or original Medicare
and any supplements. Great points Dana.
We have yet to talk about long term
care planning. Maybe you could share your experience

(58:25):
and maybe a client that had a
financial a healthcare related financial shock but careful
planning really made a difference for them.
We've had many clients that needed care in some
form or another. We have been lucky in that we
haven't seen it turn into what you might deem a

(58:47):
shock. In many cases it is
later in life and they still have
substantial assets. So being able to cover that
care out of pocket worked. I think
sometimes we forget that it's a substitution.
You know, someone who is traveling and eating out and

(59:08):
shopping is no longer doing those things and still
has a substantial nest egg. And so in many cases they are able to
cover that. Where we've seen some of the shocks come in are really
with the parents of our clients. They may be in their
80s or 90s whereas our clients might be in their early
60s. And so they in some cases

(59:30):
are working to come up with a plan on how to spend down the parents
assets to cover this care. In some cases we've seen siblings
chip in to help cover the parents care
and so planning ahead for it is key. It's either making
sure you have enough reserves. For example, if someone
is going to use a reverse mortgage as part of their plan

(59:53):
oftentimes then we want to make sure there's extra reserve assets or insurance
in place to cover the long term care. If they are not
going to use a reverse mortgage and they have a paid off home, then maybe
we can set that asset aside as something that could be used to tap
into care. It's one of those cases again you have to Take it on a
personalized basis. But you do need to have a plan.

(01:00:15):
Bill, anything from your upcoming book that we have not
covered today that you wanted to share?
A tremendous amount of material in that book. It's very densely
packed. Maybe I could just briefly speak about two case
studies I did because I took a look at managing
your withdrawal plan, not just creating one, which I think is a very important

(01:00:39):
topic. Let's say an individual runs into a big bear market,
early retirement, well, garden variety, 30 to
35%, and they're going to see their withdrawal rate shoot up and they may
be concerned that they have to do something drastic in their spending.
The best tactic I found out is probably to
do nothing, is that these usually typical strong recovery in the stock market

(01:01:01):
will take care of your withdrawal rate. It'll return to pretty much where it should
be. However, if you run into unexpected high and sustained
inflation early in retirement that might last five, seven
years, like the 1970s, it is time to
panic. You should cut your expenses as
soon and as drastically as you feel comfortable with because

(01:01:23):
inflation is the greatest enemy of retirees living
off investment income. And if you don't do that, you really
risk destroying your withdrawal plan.
Important insights. Andy, there is your headline, inflation
is the greatest risk to retirees. That's right.
Said like a reporter. You heard it here first.

(01:01:47):
Well, if I don't know if anyone has anything else to add, I
think we're just about at time. So I want to
thank all of our panelists for joining today. This has been an
incredibly informative conversation. A huge thanks to
Wade, to Bill, to Mary Beth, and to Dana for sharing their
wisdom and their experience. There's just so much to take away from

(01:02:10):
today's panel. I think if it's. If I can just pick one
thing just for the moment. The key is it's
important to remain flexible. You need flexibility. So whether it's
adjusting your spending, refining your withdrawal strategy,
or making the most of Social Security, you have to have
the ability to adapt. And I guess maybe

(01:02:32):
even maybe I should say planning. Planning is critical.
So there are so many uncertainties when it comes to
retirement. There's inflation, taxes, longevity. Planning and
adaptability remain at the forefront.
So I'd love for you to put today's insights into
action. Here's an assignment for the week. Take a look

(01:02:55):
at your retirement income plan. If you have not put together
a financial retirement plan, today's the day to start.
It pays to start thinking about it to start planning. That
way you can identify where your income will come from. And you can
consider things like do you have a diversified mix
of income sources? Have you factored in how inflation,

(01:03:18):
the biggest enemy of your of your retirement, could impact your spending
over time? And are there opportunities to make your withdrawals more
tax efficient? If any of today's topics sparked
questions for you, now's the perfect time to explore further.
Maybe it's understanding your Social Security options, considering a Roth
conversion, or thinking through health expenses. I'd love

(01:03:41):
to hear from you. Feel free to reach out to our panelists
today and leave a comment or send a message with your biggest
takeaways for today's discussion. I'd love to hear them.
Thank you to the Inspired Money production team. Excellent segment edits
by our producer Bradley John, Eagle Feather and graphic
animations by Chad Lawrence. Let's thank our

(01:04:03):
amazing panelists once more. Be sure to follow them.
Wade Pfau. You can read his books, many
books, but "Retirement Planning Guidebook." You can find him at McLean Asset
Management and Retire Retirement Researcher.
Wade, the URLs are risaprofile.com
and retirementresearcher.com Any

(01:04:25):
other links you want to share? The main
one would be for people listening to retirementresearcher.com, thank
you. Okay, that one's easy to type in. Dana
Anspach, CFP®, RMA®. You
can find her books she has control your retirement destiny. I
I think that's in a second edition Social Security Sense.

(01:04:47):
You can find her in sensiblemoney.com Mary Beth
Franklin, CFP®. Find her book "Maximizing Your
Social Security Retirement Benefits." You can find her at marybethfranklin.com
and Bill Bengan, retired financial
planner. Bill, I
think we can find you on LinkedIn and keep an eye

(01:05:10):
out for the book. Yes, and I'll also be developing
a website that should be available soon that'll supplement a lot of the
charts that are in the book. Oh, that's fantastic. There will
be much demand for the data and information that you can share your
website. Anything else to share from anyone?
No, it's been a great experience. Likewise. Well, I

(01:05:33):
thank all of our panelists. I thank the viewers and the
listeners. We are actually off next week. Inspired Money is
off the week of March 31st because it
is Spring break. My kids are off and we will
the following week. "The

Art of Wine (01:05:51):
Elevating Retirement Gastronomy
with Fine Wines." It'll definitely be a fun episode.
That's Wednesday, April 9th at 1pm Eastern.
Thanks. Thank you everyone for joining us today. Until next
time, do something that scares you because that's where the magic happens.
Thanks, everyone.

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