Category Archives: Podcast

Posted on

Episode 004: The Retirement Mastery Pyramid

by

In this week’s podcast episode, I review my Retirement Mastery Pyramid and how each building block is key to your financial success. I modeled the pyramid after the success pyramid developed by legendary UCLA basketball coach John Wooden. His Pyramid of Success has had a big impact on my life so it just seems natural to adapt his concept to retirement success.

You can download a copy of my Retirement Mastery Pyramid here. To learn more about John Wooden’s Pyramid of Success, I recommend reading Coach Wooden’s Pyramid of Success.

Schedule your 30-minute Clarity Call below. Get your burning questions answered about your retirement planning situation and see what real financial coaching is all about.

Posted on

Episode 003: The Six Steps to Changing Financial Behavior

by

In this week’s episode, I discuss how to change your financial behavior. I reference the book Facilitating Financial Health by Dr. Brad Klontz and Rick Kaylor. Their book has become a handbook for financial advisors and coaches to use to help them understand how consumer behavior affects their financial decisions. It also discusses how advisors and coaches can help clients overcome their behavioral roadblocks and achieve financial success.

In the podcast, I also reference the Retirement Mastery Pyramid that I developed and use in my coaching. Feel free to download a copy here.

Get a FREE copy of my e-book My Guide to Risk Tolerance here!

Mark Hoaglin: This is episode three of the My Retirement Playbook Podcast.

Mark Hoaglin: Hello, everyone. Welcome to the My Retirement Playbook Podcast. I'm Mark Hoaglin, CERTIFIED FINANCIAL PLANNER®, and your host of this weekly podcast, where we dig into all things related to retiring and planning for retirement, specifically around retirement planning, financial planning, and we try to cover all the bases in that regard. And this week is no exception. We're going to talk a little bit about behavior. That's a big, broad topic, but specifically, as it relates to how your behavior, how your life experiences impact how you interact with money, how you view money. And again, this is all part of my belief that if you desire true peace of mind in your financial life, then getting consistent financial education and coaching is a must.

Mark Hoaglin: And a big part of financial coaching is talking about your relationship with money, and that involves things somewhat behavioral science-oriented if you will. We're going to try not to get too geeky this week as it relates to the psychology or psychological aspects of money and financial planning. But it's very important that we do get a grasp of that because it is in my opinion, part of the foundation of a successful retirement plan, a successful financial plan. So we're going to talk about the six stages of behavior change as it relates to finances. And we'll talk a bit about what you've experienced in the past as it relates to finances and how that relates to your current view of money.

Mark Hoaglin: So why is behavior such a big deal as it relates to retirement income planning? Well, I've included in the show notes my retirement mastery pyramid. I developed this a while ago as a foundation for my financial coaching because it really shows the relationship of things like behavior and... well, actually it shows it's a process. What it does is it demonstrates that developing a successful retirement plan is a process. And as with all processes, you can't skip around and go from step one to step five without going to step two, three, and four. And if you do, you're going to miss out on a lot and you're probably not going to have a successful experience.

Mark Hoaglin: So in my retirement mastery pyramid, and I've included a copy or a link to a copy in the show notes. At the very bottom of the pyramid, I have these behavioral things, things like your life experiences. The old saying that we're a product of our life experiences, well, it's certainly no exception when it comes to how we interact with money. What money lessons did you learn from your parents, or did you? Again, that can impact how you currently view money and interact with money. What are your spending habits, your financial habits? Are they good, bad, otherwise? Those kinds of things can... Well, certainly the bad habits can hinder you on this journey.

Mark Hoaglin: Lifestyle, that's another behavioral component. Do you live within your means? What lifestyle can you, or do you want to maintain when you get to retirement? And of course, beliefs about money. Do you see money as a friend? Is it a foe, an enabler, or a liberator? Those are all things that have to be dealt with at that foundation level of the pyramid. Now, of course, at the very top of the pyramid is what I call retirement mastery. That's where you've successfully navigated each step of the process, which includes among other things, establishing goals, developing your risk tolerance, developing a financial plan, your investment selection, executing the plan, making adjustments, and maintaining.

Mark Hoaglin: And then finally, that retirement mastery step, the final step. Which is really not such so much a step as it is an experience. When you finally feel free from, well, I call it the chains of your financial past, in many cases, and you're living the retirement of your dreams or at least retiring on your own terms.

Mark Hoaglin: All right. So let's dig into this idea of how do we change behavior or what are the behaviors we actually have to change and how do we change our behaviors as it relates to money if they're getting in the way of our achieving retiring on our own terms, or at least, the financial planning goals that we've established. A lot of you probably have interacted with a financial advisor in your past, and it may have been a good experience, and it may have been a bad experience. And as I talk to people, sometimes those bad experiences involve a financial advisor who really didn't get to know the individual. They sat down and it was almost like an interrogation.

Mark Hoaglin: They started firing off a lot of questions about their finances and recurrent investments. And people sat there feeling like they weren't being heard or they weren't being respected. And a lot of times people come out of those kinds of situations very frustrated. So the successful, what I call the successful financial advisors, they really understand what I call the psychology of the buying decision, or the decision to agree to move forward even if you're not actually buying something. It's that decision to say, "Yes, let's move forward." So this whole concept of uncovering problems, first of all, you have to admit that there's a problem in the first place. And that's where we get into these six stages, if you will, of changing your behavior.

Mark Hoaglin: So what I'm going to talk about are the results of some research that took place back in the 1990s. And a group of psychologists, scientists, they studied people who had made some significant changes in their lives and looking for those common factors. In other words, think about your own life. When you've made a significant change on your own, you probably don't realize it, but you went through a process. So we want to talk about, well, what is that process and what are the different stages in this process? So, first of all, you have to understand or acknowledge that there is a problem in the first place. And that's what step one is all about. It's called the pre-contemplation stage.

Mark Hoaglin: So again, I told you we're going to get a little nerdy with some of our terminology here when it comes to discussing the whole psychology of behavior around making financial decisions. For lack of a better term, call it the denial phase. It's that phase where you might be where you don't know what you don't know. So you might be in a situation where you're spending down your retirement savings, or you're maxing out your credit cards, you're giving money to your adult children, or some other financial chaos might be going on in your life. And at the same time, you might be thinking that well, yeah, I'm doing okay. My financial house is in pretty good order.

Mark Hoaglin: So what you're doing is you're really denying that there's a problem here, and you don't really know what to do because you haven't been exposed to some possible solutions. Or in some cases, you might be blaming your parents or you might be blaming somebody else. So that's this denial phase. So for example, let's just say we have an individual, let's call her Sally. So Sally's been saving for her future. And she decides, you know what? I probably should go talk to a financial advisor or a financial coach. So she goes and sits with her planner. And the planner says, "Well, Sally, you've got all of your money in certificates of deposit, CDs."

Mark Hoaglin: And after talking to Sally, the planner says, "That's probably not going to get you where you want to go in terms of your retirement goals." Well, Sally thought she was investing. She didn't know that just putting her money in CDs was probably not the best way to get to her retirement in 10, 15 years, or whenever she decides to retire. So again, nobody taught her about diversification, and as a result, she wasn't quite ready to consider any new investment strategies because it just seemed so intimidating at that point. So she was probably somewhat reluctant to turn her funds over to this planner because she was still in that kind of a denial phase, if you will, or that stage of, I don't know what I don't know, which can be very intimidating. So that's stage one, which is, let's just call it the denial stage.

Mark Hoaglin: So stage two, okay, we've gone through this denial stage. We've been exposed to some other options that could help us, but we're still not quite convinced at that point. But maybe we're ready to acknowledge that, yeah, we've got a problem. I've got a problem. I've got a spending problem. I have a problem where I'm investing my money in the wrong investment vehicles. My 401(k), maybe it's not invested properly, or I'm not putting enough money into my 401(k) or whatever the situation is. That light bulb went on and you realized there may be a problem. That's the second stage that we call contemplation. So this is where you start believing that the problem might not be somebody else's fault.

Mark Hoaglin: So you start thinking a little bit more seriously about how your financial situation is going to impact your future. And now maybe you start thinking a little bit more about that financial planner's recommendations and what he or she recommended to you even though you weren't quite ready to jump into those recommendations in stage one. So you're open to gathering a little bit more information to learn about the causes of those problems that you currently face with your finances. But in spite all of that, you're still not quite ready to make a change. You're thinking about it. So we call it contemplation. You can call it examination where you're thinking about your situation and what the options are, what you might take as a next step.

Mark Hoaglin: So there's a little crack in your doubt, so to speak, but you're not 100% there yet. So putting this in real terms, going back to Sally. So at this stage, Sally starts looking more into this whole idea of diversified investments, for example, that her planner made reference to in their first meeting. And she says at this point, "Well, maybe that's a good idea for some other people, but I'm not sure that that's quite what I would need to do at this stage." However, Sally's willing to at least consider it. So that's this second stage, is the examination stage. So as I describe these stages, you'll see why you have to go through each one. You can't just jump from step one to step three or step one to step four. It's like most things in life that you learn and you change and develop. It's a process.

Mark Hoaglin: So the third stage is what we call preparation. So this is where, again, you've gone through the denial, you've gone through the examination, you've listened and you've thought about recommendations that I have made to you. And here's where you're going to make a commitment to change. This is the preparation change. So dealing with maybe not everything, but at least one aspect of your financial situation all of a sudden, well, not all of a sudden, but it becomes a priority at this stage. So you go from gathering information about the problem to gathering information about ways to solve the problem. So that's the big breakthrough in this stage is that you're actually considering solutions.

Mark Hoaglin: So you're thinking about an action plan and maybe getting back together with that financial planner and actually putting a plan together. So you kind of lift your head up and now you're looking more towards the future instead of just looking down right now at the present. And what does that do for you? Well, it gives you a picture of what life could look like if I solve this financial problem. So it's another way to describe determination. So at this stage, Sally would have decided, let's just say that again, "That diversification idea probably is a good idea, and I want to carry that out," she says. So she'd go back to visit with that planner, collecting information, maybe getting some information from some other sources and thinking more about how can I put this plan into action? How can I actually make this change?

Mark Hoaglin: And that leads into step four, which is the action stage. So this is where the real change takes place. So this is where Sally implements and carries through with that plan that the financial planner, the financial coach put together. Now, it's the shortest of all the stages because this is when you're going to cut up your credit cards, start paying down your debt, put together a will, and create a spending plan to solve some of those long-term financial difficulties. This is the stage where Sally listens to and acts on the advice from her planner that she met with back in stage one. So in our example, this is where Sally would actually her money out of those CDs that she talked about in that initial meeting with her financial planner.

Mark Hoaglin: And she would actually invest it in that diversified portfolio that the planner recommended based on when Sally told her she wanted to retire. But see, Sally had to go through those first three stages in order to get to this point. She couldn't go from denial to this. She had to actually go through those intermediate two steps or three steps in order to get to that action phase.

Mark Hoaglin: Now step five, her stage five, this is the maintenance stage. So this is where you're learning how to implement and live with those behaviors that you've learned so far. And so you're working in a partnership with your planner in this space and you're reacting to market turmoil like we're experiencing now during this COVID-19 lockdown environment and your planner is making recommendations and explaining, do I need to do anything? Do I need to adjust my portfolio? Whatever it is. Maybe Sally lost her job during this COVID-19 environment and had to make some changes to her spending plan. So it's a maintenance mode. It's not that time where you're questioning or being suspicious. It's really an opportunity to work your plan and maintain your plan in step five.

Mark Hoaglin: It's also a time where there may be some doubt that creeps in. So for example, Sally being used to those CDs that are government-insured and have a fixed return on them, she's seen a little volatility in the market, so there might be a little bit of buyer's remorse going on. But again, as she works with her financial advisor or partner, the advisors, or excuse me, the financial planner is able to explain what is going on. Do I need to make any adjustments? Yes, no. So the buyer's remorse may come about, but it's overcome due to this partnership and due to the fact that Sally has gone through these first four stages.

Mark Hoaglin: And then step six is what we'll call the integration phase. So this is where your financial plan is a part of your life. You've integrated a healthier feeling about yourself, and you've made some good financial habits through this process. And your planner becomes your kind of a longterm partner in this financial arrangement that you've made or this financial planning arrangement that you've made. And at this stage, Sally is completely educated and she understands, and she wouldn't consider putting all her money in a CD as she did before because she knows better and she has a belief that this diversified portfolio is the right thing to do and is going to help her get to her longterm goals.

Mark Hoaglin: So those are the six stages that one has to go through to change behavior when it comes to your finances. And I mentioned earlier, my retirement mastery pyramid. So what I thought I would do is just relate each of these steps to the levels in the retirement mastery pyramid. And again, you can download a copy of that in the show notes at myretirementplaybook.com. In episode number three, there's a link there for the retirement mastery pyramid. And what you'll see is essentially there are six tiers in the retirement mastery pyramid. So we talked about this pre-contemplation stage or this stage of denial and the resources that help you overcome that are in the first level of the pyramid. So I mentioned your life experiences.

Mark Hoaglin: So getting a grasp on how you were raised with money, your parents, what was the influence you had from your family as it relates to money, talking about your habits, your spending habits, those are going to facilitate if you will, this denial that you might have in that first stage of the behavior change. Understanding that, understanding your lifestyle. Do you have a spending plan? Are you living within your means? And your beliefs in general about money. I mentioned, is money your friend or foe? How do you feel about money? And you really have to understand those things in order to get beyond this stage one, if you will, of the behavior change, this denial stage.

Mark Hoaglin: In stage two, once you get beyond that, and now we're into stage two, which is that preparation stage. So here's where we talk about financial goals in more detail. We look into your risk tolerance. We talk about, what's your attitude? What's your overall feeling at this point about your financial future, about your retirement? I talk about aptitude, everyone's good at something. And is there something that you can enjoy in your retirement to bring enthusiasm to this journey? It doesn't have to be all just dollars and cents and financial plans. It's about what you really want to do in retirement and how you want to enjoy retirement. So that's all part of that preparation stage, if you will.

Mark Hoaglin: And then the action stage, where we actually start putting a plan together, that's the third level of the pyramid. You get advice, put a financial plan together, develop some degree of certainty around, or what is the probability that you'll achieve your retirement goal if we follow this plan? And then what are some of the resources that you can trust? And you can use your planner, use your financial coach, financial advisor as a filter for that information. Reminds me years ago when I had a serious illness and I took it upon myself to really educate myself around my illness so that I could use my doctor as a filter. So when I went to see my doctor, I would tell him about the latest article I read in the New England Journal of Medicine and had he read it, what does he think?

Mark Hoaglin: And so it really helped us form this partnership where he wasn't just patting me on the knee telling me he was going to take care of everything. I obviously had trusted him, but at the same time, I was part of that partnership by educating myself and then using him as a filter. It's the same way with you and your advisor or your financial advisor or coach is bounce information that you've read or that you heard on MSNBC, whatever, because that's the way you're going to become educated. And that's again, how you develop that peace of mind in your financial life.

Mark Hoaglin: And then that maintenance stage, that's level five of the pyramid. This is where the plan, which is a dynamic document essentially, it's going to adjust to the economy. It's going to adjust to any life changes that you have. And that's all part of the process. Just because you put a financial plan together, it doesn't mean it sits on the shelf and you never change it. No, it's a very dynamic document, a very dynamic process. Just like right now in this environment we're in with the uncertain stock market and the economy and unemployment rising, that impacts and will impact your financial plan some more than others. But now is the time to have those kinds of discussions with your coach, with your financial planner.

Mark Hoaglin: And then the integration phase, which is the top. I call it retirement mastery. This is again, where, it doesn't mean you know everything you need to know, but you know enough to have that peace of mind. That is the top of the pyramid, that is the final stage in changing behavior when it comes to your financial behavior. And that's how I integrated it into my retirement mastery pyramid. So I hope that was helpful. I hope I didn't get a little too geeky when it comes to the psychology. The important thing to take away is that making change in your financial life, if you're not happy where you are right now with your financial life, there are changes that you can make, and it is a process. So don't worry.

Mark Hoaglin: Don't put too much pressure on yourself to think that it's going to happen overnight. Work with a financial coach. Work with someone who understands this approach to the business. There are a lot of people out there that'll take your money and invest it without really doing a lot of research into your relationship with money. And that's not good business in my opinion. So it's important that you develop this understanding around why you make the decisions you do when it comes to money and are they good decisions? Are they bad decisions? Going through this process, the six stage process will help you develop more confidence in your financial plan and it'll get you to where you want to be.

Mark Hoaglin: And that's the most important thing when it comes to your money and your retirement planning. So once again, feel free to go to the show notes. You can download a copy of that retirement mastery pyramid. You can get more information on this concept of the six stages to successfully change your financial behavior.

Mark Hoaglin: And then finally, let me touch on the financial coach's role or the financial planner's role in this process. First of all, it's achieving clarity and understanding for you around your financial behavior. It's holding up a mirror in a sense so that you can see and understand good behavior, bad behavior, how it all impacts the financial decisions that you make and have made in the past. A good financial coach, a good financial planner will provide that education and direction for you when it comes to your financial life. He or she will develop a plan. They'll help you execute that plan and they'll guide the maintenance of that plan to keep you from falling back into old behaviors. So those are the six things that a good financial planner or financial coach can do for you in this process.

Mark Hoaglin: And if you'd like more information about my financial coaching, feel free to go to the myretirementplaybook.comwebsite/coaching. And you'll get a little bit more information about how I approach this whole concept of financial change.

Mark Hoaglin: All right, it's time for our question of the week. If you'd like to ask me a question, there's a couple of ways you can do that. One is go to myretirementplaybook.com and you'll click on the voicemail box there on the right hand side of the page. And you can leave a voice question if you would rather do that. You can also go to the podcast page, just go to the top of the page, click on podcasts. And there's a box there where you can leave me a question. So a couple of ways that you can ask a question about finances in general, or some specific question about your financial life. And I'll be happy to answer it, whether I answer it on the show, or just send it to you directly. Either way, I'll be sure to get all questions answered that are submitted to me.

Mark Hoaglin: So this week's question comes from Joan in Seattle, Washington. And she writes, "You discuss the importance of risk tolerance a lot. Why is it so important to my financial decisions?" Yes, I do talk a lot about risk tolerance because I think... well, for a couple of reasons. One is I think it's a very commonly overlooked part of the financial planning process. Depending on who you're dealing with, as I've said before, if your planner or financial advisor doesn't talk about risk tolerance very early in the conversation, you're probably not working with the right person. Risk tolerance is, in my retirement mastery pyramid, it's part of the foundation.

Mark Hoaglin: When I talk about financial goals, when we talk about your plans for your future, risk tolerance is a big part of that because risk tolerance is, think about it as the GPS of the financial decisions that are made when it comes to your money. If you want to get a 20% return on your money without taking a lot of risk, it's not going to happen. You're going to have to take risks. And then the question is, can you sleep at night knowing that you could sustain some pretty significant losses in addition to the opportunity to experience some pretty significant gains? So there's a lot of volatility in a very aggressive portfolio for example. Some people are very comfortable with that. You might not be.

Mark Hoaglin: So again, it's not a one size fits all when it comes to risk tolerance. On the other end of the spectrum, if you're risk averse and you're comfortable with CDs and you can't accept any volatility, then you're going to get a lower return on your investments and it's going to take you longer in most cases to get to your retirement goal. That's not a bad thing, but it's just a matter of matching expectations. If you meet with somebody that says, "Oh, I can get you a 10% return on this investment, and it'll only take you 10 years to get to your goal." And you say, "Well, that sounds great." Well, then you think about, well, what's the downside? What's the volatility I can expect in that kind of a portfolio?

Mark Hoaglin: And all of a sudden you realize, oh gosh, no, I don't want to be off the prospect of losing $10,000. I just couldn't sleep at night. Well, okay, that's the wrong portfolio. That's not a good match with your risk tolerance. I'll put it in the show notes a link to a free ebook that I wrote about how to determine your risk tolerance, why risk tolerance is important. So I encourage you to take a look at that. There's an assessment in that ebook that you can take to get a better idea of what your unique risk tolerance is. And that's something that I would encourage you to do and take with you when you meet with a financial advisor or a financial coach so he or she can get a better of where you are when it comes to comfort and investing your money.

Mark Hoaglin: Don't let anyone shortchange you on that or minimize that in any way, because again, your risk tolerance is as unique as your fingerprints. And what uncle Charlie's comfortable investing in, you may not be. How your coworker has their 401(k) allocated hopefully works for them, but it might not work for you. So you have to avoid those, "Hey, I found this great investment," or now of course, with social media, you get all kinds of advice. If you go to my blog a couple of weeks ago, I wrote a blog post on Bitcoin. A retirement planning page that I frequent on Facebook, a young man was talking about investing in Bitcoin. He said he was in his 20s and he wanted to retire in his 30s. He didn't believe in a 401(k). And he was going to put all of his money into Bitcoin.

Mark Hoaglin: Well, without going into a whole lot of details, but feel free to read my blog post on that, that's a very volatile investment strategy. So for somebody in their 20s who has a long way before they get to retirement, even though he says he's going to retire when he's 30, he could afford to probably lose more than say somebody that's in their 40s, 50s, and 60s. So getting social media or getting investment advice from social media is not something that I recommend. Because again, people tend to say, take a one size fits all approach when they make these kinds of recommendations. And that's just not good investment advice. It's not a good investment strategy. So be careful of that.

Mark Hoaglin: So thank you for the question, Joan, around risk tolerance. If you'd like more information, again, go to the show notes and click on a link for a copy of the ebook, My Risk Tolerance, and you can take your own risk tolerance assessment as part of that ebook.

Mark Hoaglin: So that will wrap it up today for episode three of the myretirementplaybook.com podcast. And I hope this has been helpful for you as it comes to developing change in your financial life and helping you get beyond those limiting beliefs or the limiting behaviors that you have when it comes to developing a successful retirement income plan. I'm Mark Hoaglin, CERTIFIED FINANCIAL PLANNER®, and I look forward to catching up with you again next week on My Retirement Playbook Podcast. Have a great week, everybody.

Posted on

Episode 002: Make the Most From Your 401k

by

As we have shifted away from company pensions to more of a do-it-yourself retirement planning mode, it has placed the burden of planning for retirement income on us. The problem is, most people are not equipped to make the investment decisions necessary to truly make our 401k work for us as it should.

In this week’s podcast episode, Mark describes the elements of a good 401k plan and what goes into and how to make the best decisions for your unique retirement plans.

You can learn more about how to make the most of your 401k plan and how to avoid costly rollover mistakes by enrolling in my course. Get more information here.

You can also get a FREE copy of the Retirement Ready Checklist here.

I offer a FREE 30-minute Clarity Coaching Call. If you are interested in learning more and have a burning question about retirement planning, feel free to schedule your call today!

Mark Hoaglin: This is the MyRetirementPlaybook.com Podcast episode number two. Hello, everyone. I'm Mark Hoaglin, Certified Financial Planner, founder of MyRetirementPlaybook.com and Retirement Mastery Now, and your host of the MyRetirementPlaybook.com Podcast. I'm also your financial coach leading you through this journey we call retirement, because you see, I believe that if you desire true peace of mind in your financial life, then getting consistent financial education and coaching is a must. And that's what this podcast is all about, is providing you with the education that you need to empower you so that you can retire on your own terms.

Mark Hoaglin: Today, we're going to focus on the 401(k) plan. It is the most popular defined contribution plan. If you're in a 457 plan, for example, if you're in the education field, that's typically the plan that educators have available, or a 403(b), you could still take away some information, but what I'm going to talk about today really pertains to getting the most from your 401(k) plan.

Mark Hoaglin: So as we begin our discussion today around the 401(k) plan, I think it's important to have some perspective. How did we get to this point where it's up to us as employees to take care of our retirement? Well, if we look at the last part of the 20th century, we saw a lot of change in the financial services industry. I started my career in the savings and loan industry, and among other things, savings and loans got the ability to compete with banks. If you go back to the late '70s and early 1980s, savings and loans started offering checking accounts. I know it's hard to believe that up until that point, they didn't have the power to offer checking accounts. And I can remember the first ATM that was installed right outside the branch that I was managing, and that was a revolution for the savings and loan industry, because now they could compete with banks.

Mark Hoaglin: Well, the growth was short-lived as we know what happened to savings and loans. They really, in my opinion, squandered their opportunities to be part of what was then very much an evolving financial services world. (singing) You might recognize that voice as the voice of Lorne Greene, the famous actor from the show Bonanza. Ben Cartwright was the character he played. Like me, you probably didn't realize that he could sing as well, but he sings that famous songs 16 Tons, and that well-known line, "I owe my soul to the company store."

Mark Hoaglin: Among the many changes as we approached Y2K was the death of the company pension. My grandfather retired in 1959 from the Goodyear Tire and Rubber Company. He worked 40 years for Goodyear, and he expected the company to take care of him. So he got a pension and they gave him a car in his retirement, and that was the way the world looked at, at least in this country, the way we looked at retirement. A company would take care of us.

Mark Hoaglin: Well, it all started changing in 1978. Congress passed what was known as the Revenue Act, which included a section, 401(k), hence we get the term 401(k) plan. That section of the Revenue Act gave employees a tax-free way to defer compensation from bonuses and stock options. So by 1983, almost half of the large companies in this country started thinking about offering a 401(k) to their employees, and they soon discovered that, well, the 401(k) was a less expensive way to provide for employees' retirement, because it shifted the responsibility largely to the employee versus what was up to that point traditionally the company's responsibility.

Mark Hoaglin: Well, then as we got into the 21st century, there were laws passed that started improving the attractiveness of the 401(k) plan, but unfortunately it was oversold as an alternative to pensions. Well, companies saw that because it was a less expensive way to offer a retirement plan and it shifted the burden to the employees. So as a result, over the years, most companies stopped offering a pension and they switched to what we call defined contribution plans, 401(k), 403(b), Thrift Savings Plans, versus defined benefit plans, which is what pensions were known as. There was a defined benefit. You worked for the company for X number of years, and you were this old, and you were earning this much, and so you could define what your retirement was going to be even before you retired.

Mark Hoaglin: Defined contribution? No, it's up to us. We, as employees, have to determine what our retirement is going to be. So, as I mentioned, companies have not done a very good job of helping employees maximize their 401(k) plans. So as a result, that's why today we see what I would say are severely underfunded plans as employees start approaching those traditional retirement years, 65, 60. So what I want to focus on today are two things. What if you're still planning on saving in your 401(k) plan for the foreseeable future? And then secondly, well, what if you're getting ready to look at leaving your company, maybe retiring, or even if it's just changing jobs? What can you do?

Mark Hoaglin: Before we get into what do I do with my 401(k) if I'm ready to retire, let's talk about, well, what if I'm still investing in my 401(k)? What are some of the things that I should be concerned about? Because as I mentioned earlier, most of our companies have not done a very good job of educating us. They tell us that we have to fund our own retirement plan and we have a plan sponsor. And from my experience, they rarely show up to help the employees with their investing because it's a monumental task.

Mark Hoaglin: You can imagine if you have a company of 100 or 200 or 500 employees, every one of you has your own unique risk tolerance and your own vision of what retirement is. So they typically address this in a blanket way. That, "Well, if you're conservative, you should invest this way. If you feel more confident about the market and you have a higher risk tolerance, you can invest this way." Well, the blanket approach just doesn't work. So what I'm going to talk about are some things that you should consider, and hopefully will take this information and work with a financial advisor who can really drill down more on your unique situation, your risk tolerance, to help you come up with a plan for the money that's in your 401(k).

Mark Hoaglin: There was a study done by the Mintel organization, which does a lot of financial surveys, and they focused on retirement and they found that 42% of the people that they surveyed indicated that they have a 401(k) plan. 55% of those people stated that they've done no retirement planning whatsoever, so to say the least, there's a need for better understanding of how your 401(k) fits into your overall retirement plan. So again, we've moved to this defined contribution retirement environment, no more pensions for the most part. So we have to take care of our own retirement, fund our own retirement basically, in conjunction with social security and other sources of income that we might have available to us.

Mark Hoaglin: So every year, the IRS sets what's known as contribution limits. So this year, in 2020, if you have a 401(k), you can contribute up to $18,000 on a pretax basis. In other words, it comes out of your account before it's taxed. So it gives you that advantage from a tax standpoint. It actually reduces your taxable income. Now, they've also added a little extra bonus. If you happen to be 50 years old or older, then they have this thing called a catch-up provision. So you can contribute an additional $5,000 on top of that 18,000. So you can contribute $23,000 on a pretax basis. Why the catch-up provision? Well, because Congress and the IRS figured out that, in particular, the Baby Boom generation hasn't done a very good job of saving for retirement. I think the last statistic I saw was the average 401(k) balance for the Baby Boom generation was about $70,000, and we all know that that is not going to last in what could be a 25- or 30-year retirement. So the major problem with longevity of course, is that you're going to run out of money in retirement.

Mark Hoaglin: So what do we do if we feel like we're going to run out of money in retirement? Well, the episode of my podcast from last week, I talked about that. So what I want to do is talk a little bit about what I call the magic of compounded interest. So whether or not you started saving 20 or 30 years ago, or whether you started saving 5 years ago, the magic still works. So I want to give you a little example here, just to show you the power of starting where you are and not worrying about what I could have done or what I should have done.

Mark Hoaglin: So let's just use an example. Let's just say that you put $3,000 a year into an investment. It could be your 401(k), it could be a taxable investment, but let's just assume, we're not going to worry about taxes right now, you put $3,000 a year into an account, investment account, and it grows at an average rate of 6% per year. And we're going to assume that you're going to reinvest all of your earnings. You're not going to take anything out of it, you're just going to leave it in there to compound. So if you'd started that $3,000 investment at age 20 and you left it in there, and every year you put in another 3,000, left it in there, another 3,000 and so on, and you retire at age 65. So again, you started with $3,000, it's now 45 years later, 6% compounded interest. How much money do you think you'd have. Well, if you have an HP12 calculator, you probably figured it out. You'd have $679,500 for that 45 year investment of just $3,000.

Mark Hoaglin: All right, now let's just say you weren't as proactive, and you started at age 35. So 15 years later, you started. $3,000 annual investment, 6% a year, reinvest all the earnings. So in those 30 years from age 35 to 65, you would have earned $254,400. So again, if you'd started at age 20, 15 years earlier, you would have had $679,500, but you waited, for whatever reason, and you have $254,400. Okay, let's just say you were more of a procrastinator and you didn't start until age 45, so 10 years after the previous example. Same $3,000 investment, same 6% return. At age 65, so in 20 years, you would have 120,000. So you can see the example of 679,500 to $120,000. The value of time in the market, time compounding, the impact that it can have on your 401(k) plan or your taxable investments, for that matter.

Mark Hoaglin: So a lot of you might be thinking, "Well, thanks, Mark. You're really making me feel bad that I waited so long." Well, that's not the reason why I'm giving you this example. It's really about a favorite saying of mine. "The best time to plant a tree was 20 years ago. The second best time is today." And that's really the point of this, is wherever you are in this process, if you haven't started saving or you feel like you've done a poor job of saving, just start today. Start where you are, because time is moving on and you can't keep beating yourself up for, in some cases, what you think might be a poor job of saving in your 401(k). Start where you are now. Put as much as you can into your 401(k), because the other advantage of the 401(k) is tax deferral. With tax deferral, the compounding effect increases even more dramatically, because the example that I just went through assumes there are no taxes, so that would be more like your 401(k) plan.

Mark Hoaglin: In a taxable account, it's a little different because every year Uncle Sam is reaching his hand in there to take out taxes from our investment, our taxable investment accounts, but with tax deferral, the compounding effect continues because you're not getting taxed every year. You're only getting taxed when you start taking money out of your retirement plan in the future years when you're 65 or older. So that's another reason why I always recommend that people max out your 401(k) before any other type of an investment account, because you have that tax deferral built in.

Mark Hoaglin: Now of course, I use the 6% guaranteed return example, which we know is not necessarily real world. The assumption that you've invested wisely in your 401(k) is one that I can't make, that's up to each one of you. But this is where asset allocation, the concept of asset allocation helps. It's one of the keys to successfully investing in a 401(k). It's the old, "Don't put all your eggs in one basket," approach, spread the risk among different asset classes, which is why mutual funds have become so popular, is because they have an automatic diversification because they invest in a number of different companies and sectors in the market. So there's somewhat of an automatic asset allocation, although it may not be specific to your risk tolerance. So you can't just assume that putting money into a mutual fund is going to take care of everything. It has to be the right mutual fund based on your risk tolerance.

Mark Hoaglin: So another way, if you're not familiar with asset allocation, the way I like to describe it is if you have a single pencil in your hand, and that represents a stock that you've invested in, if you take that pencil and you try to break it with two hands, it's pretty easy, right? It didn't take you much to break, didn't take much energy to break that pencil. So that's kind of the concept of investing in one stock. Doesn't take much to bring it down, right? Well, let's assume you have a group of different stocks or in this case, pencils. Let's just say you have 10 pencils now and you put a rubber band around them, and now you try to break those pencils with your hands. It may not be impossible, but it's a lot more difficult than that single pencil. Well, this is what asset allocation is all about. So the next question is, "Well, how I decide which pencils or investments to have in my 401(k)?" And that's where this concept of risk tolerance comes into play.

Mark Hoaglin: Knowing your risk tolerance is another important factor for successful investing. We all have our own unique risk profiling, so I strongly encourage you not to let anyone try to lump you in with Uncle Johnny or your coworker at the office. Just because they feel comfortable investing in the latest hot stock tip doesn't mean it's okay for you. Make sure you know your risk tolerance, and you can do that by working with a financial advisor or a financial coach who is experienced in providing a risk tolerance assessment. If you work with a financial advisor and in the first 20 minutes they don't talk about risk tolerance, you're probably working with the wrong person, in my opinion.

Mark Hoaglin: If you are looking at a risk graph right now, and let's just say the horizontal axis is risk and the vertical axis, excuse me, is performance, investment performance, a return on our investment or the potential return on that investment, and we list on the, let's just say we have a line going at a 45 degree angle from the lowest risk and the lowest potential return all the way up to the highest risk and the highest potential return. Well, on this graph or on this line, this 45 degree angle, we would have a number of investments that in some cases we can invest in through a 401(k), but just in general, they're typically going to be through mutual funds.

Mark Hoaglin: So for example, at the very low end, you have things like treasury bills and CDs, right? Government-insured, low risk, and the return is commensurate. It's relatively low for that type of an investment. And then as we work our way up that line, we have government bonds and then we have corporate bonds, we have preferred stock, common stock, and at the very top, we have things like options and futures, very high risk with a very high potential for return. So this idea of our risk tolerance is we have to figure out well, where on that continuum, that line, do we feel the most comfortable that I can sleep at night if the market goes down and my government bonds or my corporate bonds have a drop in value, or my stocks have a drop in value. How comfortable do I feel?

Mark Hoaglin: So the goal of our 401(k) is that we create a mix. A mix of maybe lower potential return with higher potential return, so that way if the market goes down, my entire portfolio doesn't necessarily decrease. And there's really no perfect mix, because this idea of risk is a combination of stability, income and growth. There's a trade off between those three factors when we look at risk. If I have too much stability, I minimize the potential for growth, and if I'm looking for income, also the potential for income. So if I have too much growth, then I reduce the potential for stability. And so that's the trade off that each one of us has to consider. And that's why I say it's a personal decision. You can't expect 20% returns and say that you want low risk. And anyone who tells you that you can, please run the other way as fast as you can.

Mark Hoaglin: So as we're bringing it back to the 401(k), that's the reason mutual funds are a great way to spread risk and stay ahead of inflation. And if you're confused by the selection that you have in your company's 401(k), first of all, speak to the plan sponsor, because again, that is their responsibility. And if you're not getting the satisfaction there, then I would speak with a financial advisor if I were you. By law, your plan sponsor has to provide education regarding the various funds that you can choose from, and they typically do this online with kind of a self-serve approach, which is okay, because again, they're serving thousands and thousands of employees so it's more challenging for them to give you that personal service. But with something as important as your retirement, I would work with a financial advisor, a certified financial planner, or a financial coach.

Mark Hoaglin: You remember the magic of compounding interest that I just discussed takes advantage of time? So a great strategy to use is dollar cost averaging. It will help you become a much more disciplined investor, and you probably don't, or you might not be aware of it, but if you're having money come out of your paycheck on a regular basis to invest in your 401(k), then you're already dollar cost averaging. So let me explain exactly what that is and how it works. So let's just say you have $60,000 taken out of your 401(k) plan over the course of a year. So how would it work if you invested all that at once versus the way you're currently doing it, which is having it taken out of your paycheck every week or every other week, or in some cases every month?

Mark Hoaglin: So in our example, let's just say you have $6,000 that you're going to invest, and you can either invest that over the course of six months or you can invest it all at once. So let's say we decide we're going to take it and we're going to invest it all at once, and we buy 600 shares at $10 a share in month one. So we own 600 shares at a value of $10 a share. Well, what if we took that $6,000 and we spread it out over six months? So let's just say month one, we invest one sixth, or $1,000, at $10 a share. So we now own 100 shares at $10 a share. Month two, the price has gone up a little bit, so we can only buy 77 shares with our thousand dollars. In month three, it goes down. So now we can buy 167 shares with our $1,000. In month four, it goes up a little bit. I can buy 91 shares, and in month five I buy 143 shares, and in month six, it's back up to where I can buy 100 shares at $10 a share.

Mark Hoaglin: So let's look at what's happened over the course of that six months. In option one, where I invested all $6,000 at one time, I was able to buy 600 shares at $10 a share. That was the price in month one. Well, by spreading it out over the six months, I've actually bought more shares at a lower average price. So I bought 678 shares at an average price of $8.85 So for the same investment amount, I potentially have more shares, because it lowers your market risk by averaging the prices out. And again, that is similar to what you're doing in a 401(k).

Mark Hoaglin: Okay, so that's a very high level overview of basic investing. So how you can approach investing in your 401(k). I'll talk a little bit more about mutual funds, just because that is the most popular type of investment in a 401(k) plan. And as I mentioned before, mutual funds offer you this, what I'll call instant allocation, right? Because they're spreading the investments over a number of different companies within that mutual fund, and you have your choice typically of a variety of sectors, investment classes. You can tailor them to your risk profile, and they're typically managed to an objective. So the objective could be growth, it could be growth in income, it could be capital preservation. So again, once you know your risk tolerance, you can tailor the type of mutual fund that you select in your 401(k) plan to your risk tolerance.

Mark Hoaglin: The other option are what we call exchange traded funds. These have become much more popular, and they're typically based on an index, the S&P 500, for example, the Russell 1000, and mutual funds are what we call actively managed. That means that they have a fund manager whose day-to-day, he or she is talking to the companies that they're investing in and getting all the latest information and looking at suppliers and all the different nuances with that particular investment. And so because of that, there's a fee that's typically charged in that mutual fund, a management fee, if you will. Exchange Traded Funds, or ETFs, they are what we call passively managed. So there's no fund manager. They're like a stock. They're traded throughout the day, you can buy them on margin, you can short them just like stocks, and there are some tax efficiencies with ETFs. So if your plan, your 401(k) plan, offers ETFs, that's another option that you can consider when you're looking at how to invest your money in your 401(k).

Mark Hoaglin: Now, there are a number of investment options within the mutual funds. As I mentioned, there are money market funds, bond funds, stock funds, and just like that risk continuum that I described earlier, the same thing with mutual funds. They fall along that same risk/potential return continuum. So your money market funds and your bond funds are going to be lower risk, and as you move up the risk/return scale, things like balanced funds and growth funds and international funds, they tend to be at the higher level of risk, but they offer you also a potential for higher return. So that's where you have to think about exactly how comfortable you are with the risk and the potential return.

Mark Hoaglin: So again, that's why I recommend that you work with a financial advisor that can really dig more into the specific investment options that you have available or talk again to your plan sponsor who can and should be able to provide you with educational material around which funds are the best investment based on your risk tolerance, your time horizon that you have until you might retire. There are things like target rate funds that try to take all of the thinking more or less out of the decision in that if you have 20 years or 30 years to retire, you can buy a target fund that is targeted for a retirement in 20 years. And so they base the investments within that particular fund on a 20-year horizon, or in some cases a 30 year time horizon. So target date funds have also become very popular in 401(k) platforms. So that might be something that you're comfortable with as well.

Mark Hoaglin: Okay, so I hope that was helpful in terms of the types of investments, and investing considerations that you should take into account when you are putting money and still putting money into your 401(k) plan. Let me get back to the options of if you are getting ready to retire or leaving your company, if you're still planning to work, but maybe you're going to leave your company. What are your options? And I talked about the three options. You can leave it, you can roll it, you can take it with you.

Mark Hoaglin: So let's look at that first option. You can leave your 401(k) with your current employer, and in many cases, this is allowed. So you need to check with your human resources representative just to make sure. And in some cases, you might be in a plan that offers some very unique advantages, and maybe it's better than, if you're going to another company, the plan that you're going to. So it's at least worth considering if you're not going to roll it into a 401(k) plan, or excuse me, into an IRA, an individual retirement account. Your second option is taking a distribution in the form of a cash, and then reinvesting the remainder in an individual retirement account, and that may be your best option. I always recommend against taking a cash distribution just because of the penalties and tax consequences, but that's something, again, that you should decide or discuss with your financial advisor.

Mark Hoaglin: The third option is to take what's called a lump sum distribution. And again, that's not always the best option. Sometimes the temptation is too great. I've seen clients take their hard, earned retirement savings and go buy an RV or a boat or vacation home, and essentially deplete their retirement savings. So they have their kind of quick fix or their toys, but now they don't have enough money to live on. So a lot of problems with that, for that option. First of all, you could lose up to 50% of your savings if you take a lump sum distribution, depending on your income tax bracket. So let me give you an example of what that could look like. So if you take a distribution, you're going to pay a 10% penalty if you're under the age of 59 and a half. Then you're going to pay federal and state income taxes on the amount of the distribution. So let's assume in some cases, I know you don't have state income taxes, but let's just assume a 5% state tax and a 28% federal tax. So now you can see almost 50% of your money could go to taxes and penalties.

Mark Hoaglin: The fourth option is to roll the balance of your retirement account to an IRA account at a bank or credit union or another financial institution. And there are a number of advantages to this option, again, if you decide to move your 401(k) out of your current plan. First, you can transfer the money without incurring penalties and taxes. You'll have flexible investment options in an individual retirement account, and you can designate your own beneficiary. So rolling over your funds, it may be the best option if, for example, you're a middle aged to older job changer, you're a pre-retiree who's thinking about or close to retirement age, or you're close to one of the key milestones. For example, you're 59 and a half, which is when you can take withdrawals from retirement plans without penalty or you're age 70 and a half, when you can start taking minimum distributions from qualified plans. That's actually being increased to age 72 with the passing of the CARES Act, which I'll talk about in just a minute. Or you're a current retiree who might be interested in some legacy planing, for example. So those are your four options when it comes time to taking money out of your retirement plan.

Mark Hoaglin: All right. It's time for our question of the week, and this week it's about the CARES Act. I mentioned I was going to touch on that, and it comes in the form of our question of the week from Nancy, from Austin, Texas. And she writes, "I understand there are some significant changes that involve distributions from 401(k) plans as a result of the CARES Act. Can you please go into that in a little more detail?" Yes. Nancy, happy to. Just as a reminder, March 27th of this year, the Coronavirus Aid Relief and Economic Security Act, I don't know why those bills always have to be a mouthful, but nonetheless, so fortunately it's shortened to the CARES, C-A-R-E-S Act, CARES Act, and it does bring some significant changes, and in some cases relief, to 401(k) plans.

Mark Hoaglin: So let me just touch on what some of those changes are. First of all, you have a distribution right of $100,000 from the plan as long as that does not exceed the amount that you have in your plan, so obviously you can't take out 100,000 if you only have 60,000. So up to 100,000 from the plan through the end of this year, so through December 30th, and that's subject to a special tax relief. So work with your CPA or accountant on that, if that is something that you're considering. There's also a loan limit increase. So there's an increase in the loan limit that, you can take a loan against your 401(k) plan. So there's an increase now, which used to be 50,000 and they increased that to 100,000, or 100% of the participant's account balance, if it's less. So if you had 60,000, you could take a loan of 60,000 if that's all you have in your plan. And that's for loans made from March 27th of this year through September 22nd, so you still have time to look into that if that's something that you're interested in.

Mark Hoaglin: They've also implemented a loan suspension program. So if any loan payment that was due from March 27th through the end of this year, they've suspended the payment on that for up to one year. So if you have a loan against your 401(k) and you've been making payments, then if you have a payment due after March 27th through December 31st, they are suspending the loan payments. So check with your plan sponsor on any outstanding loans or any loans that you would plan to make.

Mark Hoaglin: And the final point is that the CARES Act essentially suspended required minimum distributions for 2020 across the board. However, if you took a required minimum distribution in 2019, there have been some questions about the impact on taxes and inherited accounts, for example. So my recommendation is talk with your tax advisor about the implications and what is essentially waived and what is not waived if you took a distribution in 2019. But essentially for 2020, the CARES Act suspended required minimum distributions. And I've included a couple of links in the show notes if you'd like more details on the impact of the CARES Act on required minimum distributions and 401(k) plans specifically. So thank you, Nancy, for your question about the CARES Act and its impact on 401(k) plans.

Mark Hoaglin: Well, that'll wrap up this week's edition of the MyRetirementPlaybook.com Podcast. I hope you found the information today about 401(k) plans beneficial, and if you'd like more information, feel free to visit the MyRetirementPlaybook.com website, and you can click on the Retirement Mastery University. I have a number of courses. I have one specifically around 401(k) plans if you'd really like to dig into this topic in more detail, more information there, as well as in the show notes as always. Well, thanks again, everybody, for investing a little bit of time with me this week to learn about how you can retire on your own terms. Have a great week, everybody.

Posted on

Episode 001: Avoid Running Out of Money in Retirement

by

In this week’s episode, I review the 5 things you can do if you feel that you will run out of money in retirement. In addition, I review the 6 questions you should answer before you work with a financial coach or advisor to put a retirement income plan together.

You can get a FREE copy of my Guide to Getting Started When You Are Starting Late here. I also offer an in-depth course on this topic and you can learn about that here.

Mark Hoaglin: This is episode one of the myretirementplaybook.com podcast. Hello everyone. I'm Mark Hoaglin, certified financial planner, your host and financial coach on this journey we call retirement, whatever you perceive that to be. And yes, we're going to explore that concept of what is retirement. What does it mean to you, because at the end of the day, that's all that matters. What I do know is that a successful retirement journey includes financial education. You see, I believe that if you desire true peace of mind in your financial life, then getting consistent financial education and coaching is a bust. And that is what I've done for a good part of my career, which is helping people like you retire on their own terms. I've also coached hundreds of financial advisors on how to do just the same.

Mark Hoaglin: Thank you for sharing about 30 minutes of your week with me. I will do my best to make sure it's a great investment of your time. Now, this week's episode, we're going to tackle what I think is the greatest fear that most baby boomers have, which is running out of money in retirement. And quite frankly, it's probably not just confined to baby boomers anymore. We're going to cover five things that you can do if you think you're going to run out of money in retirement or if you're concerned about running out of money in retirement. But first, we need to tackle those six questions that baby boomers need to answer before planning for retirement. So let's jump right into that.

Mark Hoaglin: Question number one, can I continue my current standard of living into my retirement years? Well, the answer to this question really takes some careful introspection because it's not so much as do I want to, but what can I. This is where we need to do some number crunching and put, yes, a budget together. For starters, I know just the thought of putting a budget together causes some people to run out of the room screaming. It's not a lot of fun, but in this case it's absolutely necessary.

Mark Hoaglin: In fact if you go to my blog, myretirementplaybook.com, I have some great budgeting tools there for free that you can use to start putting your budget together, because let's face it. At the end of the day, you don't know if you can continue your current standard of living unless you understand what that standard of living is. And that means figuring out what are your expenses, what are your income sources. Are they going to be different in retirement? Do you plan to inherit some money? All these things have to be taken into account.

Mark Hoaglin: I'm a big believer in financial planning and using financial planning tools. I use that with my clients to analyze, what are your sources of income? What are your expenses? How will those change in retirement? A lot of people are surprised to find that there are some expenses that actually increase in retirement, at least temporarily. For example, people tend to travel earlier in retirement. And as a result, they spend more money on traveling. Now, that will die down typically as they go on into their retirement years. Other expenses such as gasoline if you're not driving to work any longer or dry cleaning bills, those kinds of things. That's why I say it really takes some number crunching to be able to answer this question.

Mark Hoaglin: And then what we do is we do some projections and we determine whether your standard of living can continue or if there are some adjustments that need to be made. And truthfully, most people will live on somewhere between 70 and 80% of their pre-retirement income when they get into their retirement years. So, that's question number one. Can I continue my current standard of living? Yes and no, it depends. It takes some analysis. I recommend that you work with a financial planner, a certified financial planner or a financial advisor who uses a financial planning tool to make that determination.

Mark Hoaglin: Question number two, when can I retire without running out of money? Well, now that we've figured out our expenses, again, this takes some number crunching, some financial projections. Again, a financial planning professional can do this for you using a software. I've used MoneyGuidePro, Retirement Analyzer. There are some really good tools that financial advisors, financial planners can use. This is not a do it yourself proposition. So this isn't something you go on the internet and try to do yourself. Probably get a pretty good idea by doing that. But at the end of the day, it's not going to be as accurate as it needs to be.

Mark Hoaglin: So we'll look at things like your pensions, social security. How long will your money last if you take social security at age 66, which might be your full retirement age, or if we extend that out to age 70 and maybe get a little bit more social security for you. Regardless of what financial tool your financial advisor, your financial coach uses, there's going to be an end date or projected end date. I call that the red line. In other words, that's the date when you're projected to run out of money. I use age 100. That's very conservative. A lot of people say, "Well, Mark, my parents lived into their 70s, maybe their 80s, I don't think I'm going to live until age 100."

Mark Hoaglin: My answer is, well, what if you do? What if you live beyond your conservative projection date? Let's just say you use age 80 because your family, your parents passed away in their 70s. Well, what if you live beyond age 80, 85, whatever that date is. That brings up a whole set of new problems that we have to consider. So, to be conservative, I use age 100. That's the target I use when I work with clients to determine when they're going to run out of money. The good news is with some help, we can answer that question; when you can retire without running out of money. I like to use the analogy of a number of levers. There's a number of levers that come into play when you take social security, for example. This is not the time to guess. We'll look at some of the solutions for this question when we get into the five things you can do if you will run out of money.

Mark Hoaglin: Let's take a look at question number three. How could my situation change during turbulent economic times? Well, again, we don't have that crystal ball so we have to use the best tools that are available. There are a number of mathematic models that we're able to use to give our best estimate. Monte Carlo simulation is one that you might've heard. It's where we put in your particular financial plan projections and it analyzes those projections against historical market conditions and it assigns probabilities of worst case scenario happening or best case scenario happening. We're able to build that into the financial plan to get a pretty good idea of the likelihood of success of your plans.

Mark Hoaglin: There are a lot of contingencies that we try to account for. We're only as good as the information that we have available to us. A good planner will help you do some contingency planning. And at the end of the day, you have to put a stake in the ground, make a decision as to where to start, what the rates of return you're going to use pre and post retirement, and what adjustments will you make based on various scenarios.

Mark Hoaglin: Question number four, how would it affect my family if I die prematurely? Yes, this is the life insurance question and one that a lot of people just don't like to think about. When we're younger, we think we're invincible, right? Life insurance seems like a waste of money. I remember one of my college friends after we graduated, he introduced me to his father who was a life insurance salesman. He talked me into buying a very inexpensive term policy, which I think back then was maybe $25 a month. A very good investment had I been a little bit more in tune with the need for life insurance.

Mark Hoaglin: Well, I kept the policy for about six months and then I canceled it thinking that, "I don't need this. I'm going to live forever," as a lot of young people do. I wish I had kept that policy because it was a goodbye back then. But nonetheless, as life goes on, we hear about tragic deaths or illnesses and stories of people who died without life insurance. The reality is about 30% of US households today have no life insurance. If you don't like the answer to this question, then you really need to talk to your financial advisor, financial planner about life insurance, because it's about replacing income. Should you pass away, will your spouse, your significant other be able to sustain a standard of living on into retirement? If you have children. There's just a lot of factors, grandchildren, that you need to consider.

Mark Hoaglin: All right. Question number five. How would it affect my family if I enter a nursing facility? All right. Very similar to question number four. Brings up a couple of issues. Do you have sufficient disability insurance? Yes, it's more common than you think for so-called younger people to have to go to a nursing facility. I'm talking about people in their 40s and 50s, not just people in their 70s and 80s. Things like strokes, Parkinson's disease or some other malady that quite frankly can strike at any age. So longterm care insurance, it's not just for the elderly, although most people don't buy it until they're in their 50s and unfortunately it costs more the older you get.

Mark Hoaglin: But why do people buy it in their 50s? That's typically an age when our parents start going into nursing homes, either because they fell and broke their hip or some other type of a longterm illness. It really brings it home when it's happening to your family, right? That's why a lot of people say, "Gosh, I better get longterm care insurance." I know it affected me. My grandfather lived in a Medicaid facility because he did not have the financial means to go into a better type of a facility. So, I learned at a very early age the importance of having and preparing for longterm care.

Mark Hoaglin: How would it affect your family? Well, it could be a financial disaster. I could tell you a lot of stories about people who had to blow up their retirement savings to pay for a nursing facility or other longterm care because they didn't set aside money or they didn't have longterm care insurance and so they had to dig into their savings, which meant they didn't have as much to live on in retirement. A very important question to answer and to have the right answer to.

Mark Hoaglin: All right. And finally, question number six. What are the possible solutions if my situation changes? The answer to that question takes us right into the five things you can do if you will run out of money in retirement. Let's just talk a little bit about the current state of affairs in our country. Right now in this country, half of our households have no financial plan. So it's probably no surprise that a lot of people feel somewhat resigned to a retirement that's just out of their control. You hear a lot of people say, "I'm going to have to work until I drop dead," or, "I'm just going to have to keep working," not necessarily by choice, but because they feel they have to.

Mark Hoaglin: There was a study done by Northwestern Mutual, the big insurance company, and they were looking at the state of financial planning in America. What they found is that 63% of Americans say their financial planning needs improvement. And the number one reason that they haven't taken steps to improve it is because they feel they don't have enough time. 70% of the households say that the pace of society makes it harder for them to stick with their longterm goals. Life is just too hectic to even think about it, in other words.

Mark Hoaglin: So again, what do those numbers tell us? You need a financial plan and you need to work with a financial advisor who uses financial planning software, financial planning tools to come up with the answers to those six questions we just discussed as well as to analyze these five things that you can do if after all is said and done, it looks like you're going to run out of money before that age 100 red line that we talked about.

Mark Hoaglin: So, what are these five solutions? Well, number one, it's work longer or retire at a later date. Again, if that red line shows that you're going to run out of money at age 78 and you're currently 62, you want to retire at age 66. Let's just say that your financial advisor pointed out that you're going to run out of money at age 78. Okay? So what can you do? You can work longer. You can extend that. Instead of retiring at age 62, you can retire at age 66 or age 68, whatever makes the most sense because don't forget that each year you continue to work, it increases not only your social security benefit, but if you have a pension, it could increase that benefit as well.

Mark Hoaglin: It also allows your retirement investments to continue to grow such as your 401k, your IRA accounts and your taxable investments. So you can put the compounding effect and the gift of time to work for you and perhaps push out that red line from age 78 to perhaps age 82, but just by working a few more years. So, working longer, retiring at a later date can make a big difference.

Mark Hoaglin: Number two, you can work a second job part-time after retirement. Now, a lot of people already plan to do this, they don't really know what they're basing it on. My suggestion is find out, first of all, what your shortfall is before you run out and get a part-time job or think that you're going to have to have a part-time job, then you can start considering what type of work you'll need to supplement your other sources of income in retirement. So, depending on your job, that could be doing some part time consulting work, starting an online business. There are a number of things to do other than having to work at Home Depot part-time in your retirement. So, work with your financial advisor to come up with a plan if this is something that makes sense to you and/or appeals to you.

Mark Hoaglin: Number three, probably one of the most common ones, which is, reducing your monthly expenses. Now, this can be a painful process, but in many cases it can be... well, it is necessary but it also can be very impactful. And again, this goes back to why budgeting is a very crucial step. You won't know what you need to reduce if you don't know what you're spending. Most retirees don't need to live on their pre-retirement income. It's going to probably be somewhere between 70 and 80% of what you're spending now. So once you have your budget, you can figure out what can be reduced or eliminated.

Mark Hoaglin: Going through this process with clients, I found that again they are always, I will say always, surprised at what they can cut back on and how much of an impact that makes. So now we push that red line out to age 82, we've made a few more cuts. We push it out perhaps another three to five years just by making a few cuts in the monthly expenses.

Mark Hoaglin: Number four, increasing the contribution to retirement accounts. Again, using the power of compounding and time to work in your favor. So even a small increase of say $50 to $100 a month can have a dramatic effect on your retirement savings depending on how long you have until retirement. So again, you could push that red line out another three, five or more years depending on how much you can contribute to your retirement accounts. And that goes hand in hand with reducing monthly expenses because typically when we find reductions in monthly expenses, we can add that to the retirement savings account.

Mark Hoaglin: And then number five, it's selling an asset of some type. Now, again, like all of these, this may not apply to you. But if it does, again, it's not an easy decision. Maybe there's a vacation home that you had when your kids were younger. Now it's no longer being used because you have grandkids and the kids are busy raising the grandkids and they don't have time to go to the vacation home. So, that could be an asset you might sell. Or you may want to downsize your current home. Buy a smaller home and put the difference in the sales between the sales price of your current home and the sales price of your smaller home, put that to work in your retirement savings account.

Mark Hoaglin: So, these are the five things that you can do if you feel you're going to run out of money. Now, perhaps none of these solutions appeal to you, and I certainly understand that. But I find that once people realize that it doesn't have to be such a daunting task to cut expenses or increase your retirement plan contributions, most people find at that point, they're willing to make somewhat of a sacrifice.

Mark Hoaglin: Now, a lot of people look forward to working longer at their current job or maybe taking on a part-time job. But whatever your situation is, it needs to start with a plan. Once you have the results of that plan, then you can determine if any of these red line solutions make sense. But the plan gives you an anchor. It gives you a foundation on which to build your retirement income plan, but also on which to make intelligent, informed decisions, because your plan is based on reality. It's based on your projections. It's based on recommendations by your financial professional. Those are the results that will dictate the decisions that you make about your retirement. So I just can't emphasize that enough to make sure that you work with a professional that can put a financial plan together for you.

Mark Hoaglin: All right. It's time for our question of the week. Every week I will cover a question submitted through my weekly podcast or my weekly blog. If you would like to submit a question for my consideration and hopefully to answer on one of our future episodes, please go to myretirementplaybook.com/podcast, or myrp.me/podcast. There's a form for you to fill out, or you can use the voicemail to submit a question electronically, and I will do my best to cover one question on a future episode of myretirementplaybook.com podcast.

Mark Hoaglin: All right. So our question today comes from Don in San Diego. Don says, like a lot of people, I am concerned about my retirement savings during this pandemic environment. I lived through the 2008 crisis and I don't want to lose my savings. What do you suggest? Well, thank you Don for your question. That is a multidimensional question, but a good one, so thank you. I want to answer that I think in the context of a recent blog post called the Stockdale Paradox in your financial decisions. You can find that on the myretirementplaybook.com website.

Mark Hoaglin: You might be familiar with Admiral James Stockdale. He was a Vietnam prisoner of war. He served eight years in the infamous Hanoi Hilton after being shot down as a fighter pilot in 1965. He had studied the Greek philosopher, Epictetus. I think I said that right, Epictetus. Basically what he learned was that there's no such thing as being a victim of another. You can only be a victim of yourself. So whenever Stockdale came home, he met Jim Collins, the author of Good to Great. He told Jim Collins, he said, "You must never confuse faith that you will prevail in the end, which you can never afford to lose, with the discipline to confront the most brutal facts of your current reality, whatever that might be."

Mark Hoaglin: So Jim Collins coined the phrase the Stockdale Paradox as a way to describe the battle that we face between optimism and pessimism when we're confronted with adverse circumstances, not unlike we are right now in this pandemic environment. In the beginning we kept hearing it's going to be another 30 days, it will be back to normal. Then three days come and go and another timeframe is thrown out. What if it's another three months or six months? So, according to the Stockdale Paradox, we have to confront the brutal reality that we face while never losing hope that we'll come out of this in the end in a good fashion.

Mark Hoaglin: So with that, I think there's some ways that we can make financial decisions in the framework of the Stockdale Paradox, balancing this optimism with realism, and as he says, the brutality of our current situation. The first thing is realize that stock market's volatile. Time in the market is a proven strategy. So if you're thinking of running to the sidelines, I'm not saying don't do it because I don't know your particular situation. But what I do know is that time in the market has proven to be a good strategy in unpredictable times versus running to the sidelines.

Mark Hoaglin: I just heard today that the S&P has regained the losses from March, the pre-pandemic timeframe. You talk about volatility, who would have known, right? Who would have thought that could have happened? Had people pulled their money out of the market, they could have missed some very good days of investing. So, that's a decision you have to make, but do realize that the market is volatile. But time in the market is a proven strategy.

Mark Hoaglin: Number two is revisit your risk tolerance. Has anything changed? Has your experience in this current market made you more or less risk averse and does that require changes to your investment strategy or investment portfolio? Which leads into number three, which is to work with a financial advisor or a financial coach to reallocate your investments if necessary. If your risk tolerance has changed, good chance your allocation has changed so you need to make that change, working with an advisor.

Mark Hoaglin: Number four, anchor your investment decisions with a financial plan. I've talked a lot about financial planning in this week's episode. If you don't have a plan, get one completed because that will be your anchor for any decisions that you make. Number five, balance your optimism or pessimism with the reality of the current economic state. There's the paradox, the Stockdale Paradox. Learn what you can from trusted sources, whether it's listening to this blog or other blogs, working with a financial advisor. I don't recommend watching TV or getting all of your education from TV, just my opinion. I think you can do better than that.

Mark Hoaglin: And number six, don't be a victim. This is not happening to you. We can participate in our overcoming the current situation. We can only control ourselves in how we respond and if we respond by educating ourselves and working with a trusted advisor. Respond with knowledge and having a financial plan, then you are giving yourself the best chance Don of not having to lose your savings as perhaps you did in 2008. Can we predict that that will never happen again? No, we can't, but we've learned from those market crises and I think we're better prepared, have better tools today that we did 12 years ago or even longer before that. So, I would recommend that you embrace the Stockdale Paradox, Don, and take note of these six things. And if I can be of assistance in any way, please don't hesitate to reach out to me via my website.

Mark Hoaglin: All right. So that wraps up this week's episode of myretirementplaybook.com podcast. I hope there were some information here that will help you put your successful retirement plan together so that you can retire on your own terms. This is Mark Hoaglin, a certified financial planner. I look forward to connecting with you again next week on the myretirementplaybook.com podcast. Have a great week everybody.