[Travis] We've talked a lot in this series about the state of retirement preparation in America. So are we in a retirement crisis? My guest today says we are. And it's not just that Americans aren't saving enough for retirement, it's the confusing and often conflicting financial advice they have to try to make sense of. Welcome again to Rebuilding Retirement: Navigating a new reality with your clients. A podcast series from Allianz Life Insurance Company of North America. I'm Travis. Joining me today is Robert. He's an award-winning financial journalist who's made it his mission to help people get the information and education they need to successfully plan for retirement. Bob's writing appears regularly in "USA Today," "The Wall Street Journal," and "Market Watch." And he's the editor and publisher of "The Street's Retirement Daily." You're gonna hear a lot of thoughtful, practical ideas from Bob about how to better serve your clients. He explains what an elder plan is and how it differs from a retirement plan. He also focuses on income planning and what he calls the junk science behind the 4% rule. But we'll begin by finding out how Bob got into what he says is the most depressing job in America. Thank you for joining us. Welcome Bob.
[Robert] Travis, it's a pleasure to be here with you. Thank you for inviting me.
[Travis] All right, let's go in feet first here. You've been writing about money since 1986, the last year that Larry Bird and the Celtics were dominant. And how did you come to focus on retirement?
[Robert] Well, Travis, if you're ready for the long story, I'm happy to give it to you. So it begins like this, begins like this. In 1984, I was actually working as a stockbroker for what was then called Dean Witter Reynolds, which was owned by Sears. And at the time, Sears had a financial services network, the old Coldwell Banker, and Allstate, and Dean Witter. And once a week as a stockbroker, I would have to go into the Sears store and next to the Coldwell Banker rep, and next to the Allstate rep, and next to the tires and batteries, and sewing machines, and clothing, I would have to try and sell people stocks and bonds, and mutual funds, and Ginnie Mae funds. And what happened along the way was I developed a great love for personal finance, for investing, for the markets. But along the way, what would happened was, I would work as a broker by day, and then I was really interested in writing by night. And ultimately, after two years of being a stockbroker... Some might say I failed miserably at it. Partly because it was largely a sales job at the time, and you had quotas, and you had orders from your branch manager to sell things. And after two years, my branch manager came up to me and said, it's really been fun watching you try to do this, but it seems to me you are a better educator than you are a salesman. And that's partly true. I was always telling people both sides of the story. People would ask if there's a buy rating in IBM, will the stock go up? And I would say, it beats the heck outta me, sir. It's a stock, it's risky. It could easily go down tomorrow. We don't know. And I think the worst thing that ever happened to me, Travis, was this: I was in the Sears store one night and an elderly gentleman had come in, he had just sold his house and he'd come into the most money that he'd ever earned his entire life. And so I began explaining to him the investment pyramid, right? Low-risk investments at the bottom, CDs, money markets. And then we went all the way to the top of the pyramid, which at the time, maybe the riskiest thing was gold, or platinum, or something like that. And then at one point the lights in the Sears store went out and the only light on was my green banker's lamp. And there I was stuck in the Sears store and we actually had to call the Stamford Police, I was in Connecticut at the time, who then called the general manager of the Sears store, who had to come down from wherever he lived and open the door so that we could get out. And then my branch manager the following day said, let me get this straight. You were locked in a building with a prospect, and what happened? And I said, well, he ultimately decided to take his money and put it in a CD at his local bank. And he thought, that's insane. You couldn't have closed this gentleman? You were locked in the building. How bad a salesman are you? So anyway, so in 1986, I left the world of stock brokering. I went to grad school, I got a master's degree in journalism. I worked at the "Berkshire Eagle" as a business reporter. I went to the "Boston Business Journal" as an investment reporter. I went to the "Boston Herald" as a personal finance reporter. I spent a couple years at DALBAR and I ran their trade publications. They covered the mutual fund industry, the variable annuity industry, the fund accounting and back office industry of the mutual fund industry. When I was at DALBAR, I used to attend the Investment Company Institute general membership meetings in May. Ken Dychtwald was a frequent speaker, and Ken used to say... If you're familiar with Ken Dychtwald and his work, he's a futurist of sorts. And he would say ... this is 1990 or so. He would say, "70 million plus baby boomers are marching toward retirement, and they have no one to help them figure out what to do." And so that was the sort of inspiration for starting to focus in almost exclusively and entirely on retirement. It was the goal was to help these 70-million-plus baby boomers marching toward retirement, get the information, and an education, and knowledge, and wisdom that they need to plan for retirement. Along the way, I earned my Certified Financial Planner designation. I earned my Retirement Management Advisor certification. And so for over the past 20 years, I feel like, with hope, I've helped some people plan for or live a little bit better in retirement than they had in the past.
[Travis] You once called your job the most depressing job in America. I think you might have some competition with that, but why is that? You said that back in 2017 and has your view changed since then?
[Robert] It hasn't, but I'll tell you about the genesis of it. So when I first started writing about retirement, I would get day after day, press release after press release after press release from this or that company or organization, and they described in essence what was a retirement crisis. We weren't saving enough money. We were going outlive our savings. Very few people were very confident about being able to maintain their pre-retirement standard of living in retirement. And after my workday ended, my wife and I, we we'd sit down for dinner and we'd ask each other how our respective days were, and she would tell me about hers and I would tell her about all the bad news I had received that day. Well, it didn't take long for her to stop asking me how my day was, and I had no one to share my depression with. I thought, how are we gonna help all these people who haven't saved enough, who are gonna outlive their savings, who aren't going to enjoy the same standard of living? And so that's part of it is just getting this constant stream of press releases. The other is this endless amount of what I might call conflicting, contradictory, confusing news that we have to make sense of. So I'll give you a couple three examples. Professor emeritus at Boston University, Zvi Bodie, is fond of saying that stocks are always risky, and you should be mindful of how much you invest in stocks for the long run, because there's a possibility that you may not have enough money saved for retirement because of the risk involved in investing in stocks. Jeremy Siegel, professor at Wharton University, has the exact opposite opinion. In fact, he's written a book called "Stocks for the Long Run." So you've got these two professors who have completely contradictory points of view about how to save for retirement. Then throw in things like Alicia Munnell who wrote a book some years ago that says 401(k) plans are coming up short. And you contrast that with someone like Andrew Biggs over at the American Enterprise Institute who says things like, "There is no retirement crises here. Everything is fine." So who are you to believe? Then factor in a couple other things that sort of make my job one of ... How would I describe it? Job security, right? We have a constant stream of new products, right? Several years ago, we didn't have reverse mortgages, we didn't have RILAs, we have new laws and regulations coming into play. Today we don't know if the fiduciary rule that's being espoused by the Labor Department is going to be in effect or not. We have new research that says the 4% rule is dead or not, then we have ... So what's an average person to do? It's overwhelming and depressing when you think about how informed people need to be just to plan for and live in retirement and to avoid mistakes or to correct them if they happen. And then the last thing I'll say about my depression has to do with the financial services profession, Travis. So I always think that if you had to build the financial services profession from scratch today, it would look nothing like it looks like today. It would look probably more like the CPA, legal, or medical profession where you might have one regulator, one set of rules, and today what we have is a mishmash of regulators and laws that just make it difficult for consumers to assess whether they're working with someone who is acting in their best interest or not. So all that leads to depression.
[Travis] No, I get it. Your wife kind of unwittingly became a therapist for you. But hearing you talk about that, I understand how that could weigh heavy. I guess if there's any silver lining, I don't look at it as though there's necessarily disinformation or even misinformation as much as there is just differences of opinions and strategies. But it is a lot to work through.
[Robert] Right. And I think, so therein lies part of the problem for me when I think about it, I think ... And again, what's suitable is perfectly fine, right? To me what matters is, what you might learn from one financial professional might be different, a different opinion, but not because it's opinion. It might be because there's a different regulator, there's different trainings, there's different compliance rules. And so I think for a consumer to sort of sort through what's in their best interest is the bar becomes a little bit higher because of that, right? And so what happens too is, in the world of med ... let's say in the world of medicine, for instance, a doctor might say you have a headache, best practice is an aspirin. In the world of financial services, I'm not sure what the best practice is if you have a headache. If you talk to one person, it might be X, and another person it might be Y, and another person it might be Z. So anyway, if I could go back in time, I would create a different model.
[Travis] No, I totally understand it. But now having done this, speaking of going back in time, for nearly 40 years, you're now hearing from readers, clients, or financial professionals all the time. What are some of the topics that they like to ask you about most often?
[Robert] Yeah, so I think part of it is a function of what's going on in the world today. And so today, because of tax law, potential for tax law changes coming down the pike, a lot of people are asking about Roth IRA conversions. Should I do one? When should I do it? How much should I do? What's the difference between doing a full or partial Roth IRA? What are the potential pitfalls of doing a Roth IRA conversion? What's the payback period? Right? A lot of questions about a very simple, but often described piece of advice that consumers are now reading about in the paper or their advisors are talking to them about. And it matters, right? It matters because it could generate a potential tax bill in the current year or current years, but also create a stream of tax-free income in future years to come. And so people want to know, is this something I should do?
[Travis] So then how can a financial professional get ahead with these topics and how can they handle the questions better?
[Robert] Yeah. So I think a couple things. One is, I think you have to ... if you have a team, for instance, someone on that team has to become the retirement specialist. Someone has to eat, breathe, sleep, all things retirement, right? And that may mean be getting a designation. I mentioned the RMA, that's one, the RICP is another, there are several designations out there that you can get, all of which sort of at least speak to the knowledge, skill, and ability that you might need to help the client in the world of retirement planning and retirement income planning. The other is to ... And when I say eat, breathe, and sleep it, I mean that literally, right? I think when I think about retirement, I wake up thinking about it and I go to sleep thinking about it. And partly 'cause I have to, right? I need to sort of make sure that what I'm doing is helping people, and I think that's how advisors need to approach it, is, they need to read the latest research. Maybe they need to go to kitces.com and read a 5,000-word article on the SECURE 2.0 and how it affects spouse-inherited IRAs for spouses. So you just can't leave any of it to chance, and you can't sort of adopt a position of hubris where you think you know it all, right? Because what we know today might not be true tomorrow about things, right? For many years we've sort of relied on the 4% rule as if it was gospel. But today we know through research by Wade Pfau and others that maybe it's not gospel, right? Maybe it's a good starting place, but to follow it precisely might lead to ruin for someone. So I think again, steeping yourself in the topic. The other is sort of like getting an understanding of what it is that people really need to know about and care about. So I'll give you an example. Social Security and Medicare, is something where, on the one hand with Social Security, three to five million people every year turn 65 ... now, not all of them. That's not full retirement age for people now. It's gonna be 67 in not too distant future. But still three to five million people will want to know whether and when to claim Social Security. So I think for advisors to become experts in what literally is one leg of the retirement stool is really important. And they need to understand when to claim, the benefits of spousal benefits for the higher income earner, and why it's important that maybe sometimes it's worth claiming later than earlier depending on whether you're married or not. And then Medicare is a whole other topic right now. Maybe you don't need to become an expert in Medicare, but you certainly need some working knowledge around it because each and every year your clients are going to be asked to review their Medicare plan and determine whether they should keep it or change it, right? And they need to know sort of just the basic ins and outs of things like, well, if you sign up for Medicare Advantage now and then you develop a pre ... and develop a condition, and you wanna go on Medigap, there's a possibility that you may not be able to go on Medigap because of a preexisting condition. So little things like that matter, right? And they matter a lot. So I think that's where people need some working knowledge and just to sort of stay informed.
[Travis] No, that's almost all of it. But before we move on ...
[Robert] Well, and I mean, I could go on, right? We know that many people are trying to figure out where to live in retirement and they might be evaluating assisted living, continuing care retirement communities, nursing homes, et cetera. Do advisors know how to evaluate a continuing care retirement community contract?
[Travis] So to that point then, what part of retirement planning do you think is not getting enough attention?
[Robert] So a couple things. People need to understand what they're saving for. So we're always presented with, oh, you need a nest egg of a million, or two, or $5 million. But how do I turn that asset into income and how will it be coordinated with other sources of income? How do I evaluate my planning horizon, right? There was a time when the Social Security Administration used to have a break-even calculator on their website that would allow people to say whether they should claim now or later, right? And they took it down because people didn't understand that the planning horizon, that the break-even point that they were being given really meant that half the people will die sooner and half the people will die later. But people were using that right as their benchmark, as their planning horizon, which was like 80 years old, right? But we know that most planners are using 95, or in some cases a hundred as the planning horizon. So people really need to understand the possibility that they could live to 95 and that their money needs to last that long. Then I think they really need an understanding of expenses and how expenses work in retirement. So for instance ... and how those expenses change over time. So I'll just refer to the Bureau of Labor Statistics. They produced a consumer expenditure survey and they say that, on average, housing expenses might represent 33% of your expenses in retirement. And that healthcare expenses might represent 5% in the go-go years, but 15% in the slow-go years. So people need to sort of understand the asset, the income that needs to be derived from that asset. And that it could include Social Security, pension, equity in your house, or earned income, for instance. And then how those assets will, or that income will be deployed against the expenses that you have. And we can talk about the four-box strategy, which is a really simple strategy that was espoused by Farrell Dolan many years ago that in essence said, people need to think about maybe having guaranteed sources of income to pay for their essential expenses in retirement and use their discretionary assets, their risky assets, to pay for discretionary expenses. And then the last thing I'll mention, Travis, when I think about the big problem here, is, people don't understand the how to manage and mitigate the risks that they'll face in retirement, and that there may be different tools needed to manage and mitigate these different risks. So I'm fond of quoting the Society of Actuaries, which publishes a paper that suggests there are at least 15 retirement risks that you'll face in retirement. And I'll just mention two, but there are others that we should talk about. One is inflation, right? A big risk that you'll face in inflation. And the tool that you might use to manage inflation might be equities, it might be a treasury inflation-protected security it might be some other investment. But the tool that you'll manage use to manage longevity, the possibility of outliving your assets will be entirely different. That could be a single-premium immediate annuity, for instance, or some other ... or a QLAC, or a deferred income annuity. So people need to understand that different risks need different tools. Then there are some other risks that are completely different. But we all need to plan, if you're married, for the death of a spouse, what happens then? Are you familiar with the tax bomb that could occur? What happens if there's a divorce? What happens if there's a healthcare shock? What happens if there's a financial ... a shock in your family that where you might all of a sudden need to adopt a grandchild, or et cetera, et cetera? So I always think about retirement planning is reward-focused. I'm saving up a pile of money and at the end of it, I'm going to have $5 million. I think about retirement income planning as risk-focused that people just need to say, yep, I looked at that risk and this is how we're gonna manage it. I looked at this risk, this is how we're gonna manage it. And if I'm an advisor listening to this podcast, I would create a spreadsheet that looks at the risk that you might have, your client's exposure to that risk, how you can plan to manage that risk. Do you plan to retain the risk, do you plan to transfer the risk, et cetera? And then, what are the products or tactics that you'll use to manage that risk? And then you can say to the client, this is comprehensive. We looked at the 15 risks that you're gonna face in retirement, and we came up with a plan to address them. To me that's like, that's the holy grail is that in and of itself.
[Travis] Oh, sure. Yeah, and hearing all this, I am grateful that you do in fact eat, breathe, and sleep this stuff because we want you on that wall. We need you on that wall. Let's talk quickly about elder planning. I want to transition that. I know that you're a part of a program that helps finpros learn how to create a, quote, "elder plan." Tell us more about that and why there's a need for this.
[Robert] Yeah, so I'm really excited about this. So pre-Covid, Bob Warnock and Annalee Kruger knew that I had some experience creating online courses for financial advisors. And they came to me and said, can you help us? So we joined forces and we launched an online Elder Planning Course, a certificate course at Salem State University, initially during Covid. And then ultimately we brought it over to the Financial Planning Association. It's a 10-week course. And what we do is we cover all the elements that would be included in an elder plan. And I like to think of an elder plan somewhat similar to, if you're an advisor and you're creating an investment policy statement for a client, well, this would be the near equivalent, but it would be focused on the things that need to be included in an elder plan. So, for instance, I'll go through the sort of the laundry list of the things that we cover in the course. Did you understand the aging process? Do you understand the caregiver's role? Do you understand the issues associated with diversity and in aging? Do you understand the issues associated with solo ages and agers who might be 85 and older? What about the legal issues that you need to know about as your clients age? And we're not talking necessarily about durable powers of attorney for financial matters, or even durable powers of attorney for healthcare. I'm talking about, do you know whether your client has a HIPAA release in place? Do you know whether or not they have a living will? Do they have a DNR? Do they have a POSLT in place? All these documents, right? And then you say, well, why do I need to know this as a financial advisor, whether my client has these documents in place? Well, it matters because you hold yourself out to be, in some cases, a comprehensive financial planner. That doesn't mean like I cover this, but not that. That means comprehensive, right? So anything having to do with your client's finances are important to know. Then we talk about, like we just mentioned a second ago, long-term care. So again, do you understand long-term care insurance? Do you know the difference between an indemnity policy and a reimbursement policy? We mentioned Social Security and Medicare planning. Do you understand diminished capacity, elder abuse, and end of life planning? And this is really important because increasingly as people age, yes, some people will develop Alzheimer's and dementia, but some people just may experience sort of what might be described as ordinary diminished capacity, right? There's a famous study that I like to quote from Michael Finke, who years ago suggested that as we age, unrelated to dementia, unrelated to Alzheimer's, our financial numeracy declines yet our confidence level in our decisions rise ... well, in essence stays the same, but I like to say it rises. So to me, what it means is, as we age, we begin to start making ... we start to become increasingly more confident about the bad financial decisions we make.
[Travis] I think when people hear anything about elder plans, their mind kind of goes to scams against seniors. Can you touch on that briefly?
[Robert] Yeah. So this is incredible. So the FBI produces a report that looks at elder abuse every year. In 2023, $12 billion, nearly a million cases reported. A third of the cases, $1.3 billion worth, age 65 and older, if memory serves. And what's interesting is most of the scams, a lot of the scams have to do with tech support and government impersonation scams. So that's a case where you might get a popup on your computer that says, your computer has been infected by a virus, click here so we can fix it. And next thing you know, all heck breaks loose. Likewise, government impersonation, you might get a call from someone saying that they're with the Social Security office, or the IRS, or the Medicare office, and they're gonna tell you that we're gonna cancel your benefit, or we're gonna cancel your Medicare, or some odd thing like that. And next thing you know, you're turning over your bank routing number and account numbers. And that, and unfortunately in many of these cases, the money's never recovered. And then the other two scams that I should mention very quickly would be the grandparent/relative in distress scam, which is getting worse and worse by the day because of AI, Travis. So in the old days, someone might get a call, "Hey grandpa, do you know who this is?" And the grandfather would be like, Ah, Johnny, is that you? "Yeah, Johnny, I'm in Laramie, Wyoming, I just got pulled over for speeding and I need some bail money to get outta jail, blah, blah, blah." Now, because of AI, they have Johnny's voice already, right? And so now the call goes like this, "Grandpa, it's Johnny," And for all intents and purposes, it's Johnny because they clipped his voice from TikTok, Instagram Reel, YouTube, who knows where. But they have his voice now, and now there's no doubt about whether you're gonna fall for this. In fact, Warren Buffett at his most recent Berkshire Hathaway meeting played a video of an AI generated version of him talking about an investment. And he says, "It looked so real I would've believed it myself if I didn't know that it wasn't me."
[Travis] So I want to ask, how would an elder plan created today differ from one 10 or even 20 years ago?
[Robert] Yeah, so I think a couple things. One is there's all these elements that we talked about, diminished capacity, elder abuse, end of life planning, ethical wills, which I didn't mention, but I think that's an increasingly important part of a elder plan. Now an ethical will, you might say, "What's that?" And you say, "Well, I already have a will." And you say, "Yes, that's for the disposition of my assets." But an ethical will really is a love letter to your loved ones about who you were, and what you stood for, and what you valued, and why you did what you did, right? So that they have a memory of not just the money part of you, but the human part of you. So an ethical will becomes a really important part. The other thing I would mention too is in the old days you might say, "I need to do this alone." Not today. Today you might need an elder planning team. So today what you might need is a geriatric care manager. You might need an elder law attorney, you might need a CPA, right? You're gonna need a whole host of people who understand the elder planning issues. And that could be housing, it could be medical stuff, it could be estate planning stuff, et cetera. So I think today the difference is it's just harder and it becomes even increasingly more difficult today. The other thing I think I should mention too is when I mentioned elder fraud, we talked about it, there's a service that advisors should take advantage of if they haven't already. It's called olderadultnestegg.com. And what it does is it allows you as a financial professional to give your clients an assessment of how vulnerable they might be to scams. And the assessment will tell you, nothing to worry about, some worries, major concerns. And so what you wanna do is, if there are no concerns, you might say to your client, "Hey, great, we're free and clear at the moment, but we're gonna do this assessment every year so I can track whether or not you are becoming susceptible over time. And some of the susceptibility, there are four factors that Wayne State University ... Wayne State University is the entity that offers this assessment test. And there are factors like, do you have social isolation? Are you a widow or widower? Do you have low financial literacy? Do you have low social fulfillment needs? So there's some factors that you as an advisor can look at sort of independent from the assessment and say, "I think you we need to keep an eye on this." And so that's part of an elder plan too, is to say, "We're gonna sort of protect you against elder fraud." Now the one thing I'll mention, Travis, which I think sometimes get overlooked when we think about grandparent scams, and romance scams, and cryptocurrency scams, is that most times the perpetrators are family and friends.
[Travis] Pum, pum, pum, spoiler.
[Robert] Spoiler alert. So I think advisors need to be on guard for the possibility. Now it's rare that people go into conservatorship or guardianship, but they still need to be aware of the conflicts of interest that exist on the part of family and friends when it comes to their client's assets.
[Travis] Yeah. Yeah, no. I said sometimes the call's coming from inside the house. So if I have to bundle all this up, and by the way, that sounds like a phenomenal tool that you mentioned there. You wanna repeat that? You said it was...
[Robert] Yeah, it's olderadultnestegg.com, and they have several assessment tools. They have a tool that financial professionals can use. They have a tool that like psychologists and psychiatrists can use. They have a tool that caregivers can use. They have one that where a consumer can just go on their own and take the assessment test. And then the last thing that they offer is something called The Safe Program, which provides one-on-one counseling if you've been scammed and will help you try to retrieve the money that you've lost. Now, probably nine times out of 10, you're not going to retrieve the money if you've been scammed.
[Travis] Just to button this thing up, I want to talk about the conversation, right? We know the tools, they can be effective. How can a financial professional help clients talk about that and have that tough conversation? What advice can you give there?
[Robert] Yeah, so I think the important thing is to have a family meeting. And in some cases, if you're not, sort of have the knowledge, skills, and abilities to conduct a family meeting, you may need to work on your elder planning team with a mediator, someone who's skilled at holding a family meeting, right? And these family meetings are designed to sort of avoid what most people never avoid, which is the crises, right? So for you as a financial advisor, the sooner you can persuade your client to have a family meeting so they can talk about their wishes, right? How they want their assets to be disposed, where they want to live, how much care they want to have, who will be their healthcare proxy, et cetera, et cetera, et cetera, the better it is. You'll be able, I think, to have a much more fulfilling and enriching relationship with your client. The people that I always talk to, who are sort of most satisfied in retirement with their advisors are the ones who used to say, "You know, before I retired I used to worry about money 90% of the time. But now that I'm retired, and thanks to my advisor, I only worry about it 10% of the time, if at all, because we work through all of this. And I now have the peace of mind to go do what he said or she said I could go do and not worry about the money." And I think that's ultimately what you need to do when you have these family meetings, is you want people not to worry. Like, "Who's gonna care for mom and dad if they have an incident that requires caregiving? Is it going to be unpaid care caregiving or do you have the assets to pay for a paid caregiver?" It's better to sort of address this before the crisis happens, 'cause you can't do it in the middle of a crisis.
[Travis] No, absolutely. I think if you can transform the question, from what keeps you up at night, to what gets you outta bed in the morning, I think you're on the right track. So I wanna pivot then to income planning. I know we touched on it a bit already, but I do wanna go back to that 4% rule, which you've compared retirement rules like that withdrawal rate as, quote, "junk science." How do you think about income planning for retirement and what strategies or approaches do you think are effective?
[Robert] Yeah, so let me start by saying, I think what we need to do is reevaluate how we assess retirement readiness, Travis. So right now, a good many financial advisors will rely on Monte Carlo. And I'm not entirely sure that that's the best way to do it or the only way to do it, right? Because people are all over the board about, "Oh, we need a 70% probability of success, or 80% or 90% or whatever it might be." Derek Tharp at kitces.com once wrote a piece that said you could use 50% as your probability of success and still likely achieve your goals. Which is to me, insane a little bit, right? So I think we've placed too much emphasis on Monte Carlo. What I would suggest is that we need three measures of retirement readiness, Monte Carlo for sure, because it's forward looking. Then I think we need two other measures that, one, are current-looking, and one that's backward-looking. So the current-looking one is something that might be described as asset-over-liability matching. And this would be a case where you might take the net present value of your stream of income and your assets, and then see, and then look at the present value of your liabilities in retirement. And then if you're over a hundred percent in terms of assets over liabilities, one green light there. If you're at 70 or 80% on Monte Carlo, one green light there. And then the last thing is something that was developed by Jim Otar out of Canada, which he called AF casting, which is really a backward-looking measure of whether you're assets would've sort of been in existence over the course of the retirement plan. So if you were to use these three measures and all three measures came up green, then I'd say, "Yes, you're ready to retire financially. We have to talk about the emotional aspects of retirement, but at least from a money perspective and from a perspective of looking forward, backwards, and in the present, you're safe to retire." And that to me would be those three measures. So then, now let's go to income planning. I mentioned earlier that the four-box strategy is one where you might say, "Let's take our guaranteed sources of income, whether it's Social Security, a pension, or some other rental income, maybe, whatever it might be. And do we have enough income to match our essential expenses with those guaranteed sources?" And if not, according to the four-box strategy, what you might do is to say, "Well, we're gonna take some of our risky assets and then fill the gap somehow some way with those assets." And that could be a mix of things, an annuity, a withdrawal plan, or some other method. And then that way you could say to the client, "Hey, we've now created an income plan where at least if nothing else, your essential expenses are covered." As for your discretionary expenses, whether that might be a trip to Disney World with the grandkids, or you wanna go visit all 400-plus national parks, which is what I wanna do someday, but I'll drive in a whatever, a camper van, something, to Yosemite, or the Grand Teton, or whatever it might be, and work a little bit by day, write a column or two, do a podcast or two, and then go hike and whatnot the rest of the time.
[Travis] We talked about the 4% rule, and you wrote about it and clients needing the freedom to spend, I would love you to say that louder for the folks in back more early in retirement because that aligns with my philosophy, I wanna spend more.
[Robert] Yeah. So I think it comes from a couple things. So first of all, when we think about the 4% rule, it's kind of static, right? What Bill Bengen had said way back when was, "Withdraw 4% of your portfolio and then adjust it for inflation over the course of 30 years and you won't run outta money." But that's not how people spend money in retirement. How they spend money in retirement is actually lumpy, in part. You've got a roof to replace, a new car to buy, a grandkid's college education or wedding to pay for, whatever it might be, right? So whatever your plan is, it's likely to go off the rails because that's not how people spend money in retirement. So it's not a straight line upwards in terms of income. It's also not a straight line in terms of real expenses. So David Blanchett and other entities, the Rand Corporation among them, have suggested that, "Well, what really happens in retirement is on a real basis it declines almost 2% per year. Call it 1.8% per year. So that means that when you're planning for retirement, you might think that your expenses are gonna rise over time, but they're actually declining because you're spending less. You're spending less on a trip to Disney World. You're not gonna spend that money on travel that you used to. Yes, you might spend a little bit more on healthcare, but all the other expenses are declining, including food and dining out, and things of that sort. So what people need to realize is that, as they project what their expenses will be over the course of retirement and how much money they'll have at the end of this or that year, it could be completely wrong. And so what people are saying is, "Well, I don't wanna die broke, right? I don't wanna outlive my assets. But the truth of matter is, especially if you're working with an advisor who's monitoring your plan, who's monitoring your withdrawal rate, monitoring your account values, monitoring your spending, what's gonna happen is you have more than enough money during the go-go years to spend than you might otherwise think. And that to me is ... So to me, one of the things that people need to do, I always think about retirement income or expense planning as a row-and-column exercise. And if you're able to show a client not like some PDF-generated software-produced report, but actually show them a spreadsheet where you've done the crunching of the numbers to calculate how expenses decline on a real basis over time, you've now given them the freedom to spend earlier in retirement, right? And then I think that's ... Again, we talked about holy grails, this is a holy grail. Like people wanna have ... The advisor has to give the client permission to spend the money early on knowing full well, "Yes, we can't predict the future, we can't predict when you'll die. We can't predict what market returns will be, but given the information that we have today, you can spend it, and if we have to adjust it later, we can." And that's the other interesting thing, Travis. Research has shown that regardless of your income, people in retirement are generally satisfied if three things occurred. They retired in good health, they're retired on their own terms from their employer, and that they're still married.
[Travis] I'll end with this because it's something we kind of glanced over, but I want you to kind of take us home on this one. We talked about the monetary, but I want you to drill down on the mental shifts that financial professionals need to help their clients with.
[Robert] Yeah. So if this falls outside the traditional knowledge that they might need, I'll give you one example. I listened to a speech by Surya Kolluri from another institute. And what he talked about was, financial advisors really need to think outside the box in terms of how they can help their clients. So he gave two examples that I think were interesting. One is, have you ever asked your clients how much sleep they're getting at night, right? How much of their sleep they're getting per night matters to their cognitive health, to their financial health, right? So it's not a question that advisors typically ask, but you might wanna sort of get familiar with your clients' sleep patterns. The other is, how many friend groups do you have? The fewer friend groups you have, the more likely it is that you're going to suffer from cognitive decline and then worsen your financial health. So if you have four friend groups, all the better. If you have zero friend groups, maybe it's time to ask your client to get involved in the senior center, or the men's club, or the this, that, whatever it might be, because you need friends. You can't be socially isolated as you age. And I think the other thing is really important, as I think about how to help people is this notion of the ill, adverse effects of unpaid caregiving on a family member. So the advisor has a client, they haven't prepared for what's gonna happen from a healthcare perspective, and all of a sudden there's a stroke, or a heart attack, or some event where now typically the oldest daughter has to caregive and at great risk to that person's sort of finances, right? They lose out on, if they have to leave the workforce, they're gonna lose out on contributed Social Security, contributing to their 401(k). They've now have lost wages, they may have trouble reentering the workforce. So I think it's really important to sort of not just talk to their client about their money, but talk to their client about their family, and especially this possibility of unpaid caregiving and how it might impact them. Again, leave nothing to chance there. The other thing I'll mention too, I know this is sort of not the question that you asked, Travis, but I should mention it. We began writing a series called "Man versus Machine." And I mentioned AI a little bit ago, becoming very prevalent in the world. Advisors and their clients need to make sure that they're not trusting AI for technical knowledge. So in this series that we run, Travis, we call it "Man versus Machine," we ask it a personal finance question and then we give the answer that chat, or Perplexity, or Gemini has given to us. We give it to a subject matter expert to ask them to critique it. What did the AI get right? What did it get wrong? And what are the material omissions? And what I've discovered over the course of doing this series is, don't trust it for personal finance questions. It will steer you wrong and there are bad mistakes that could happen because of it. And then finally, finally, finally, finally, maybe it's not finally you may have other the questions, is I think advisors really need to understand biases, the cognitive biases that affect us all. Is your client an ant or a grasshopper? Do they have present bias? Do they have recency bias? Do they have overconfidence bias? Becoming familiar with biases can go a long way toward helping clients avoid financial decision mistakes.
[Travis] So Bob, I have a couple of final questions we ask for all of our guests, and this is kind of where we get to see your human side. And so the first one is this. What's something you wish you would've known about retirement when you first started working?
[Robert] Yeah, so I mentioned a second ago on having an understanding of our biases. And I think for me that's the biggest one. When I think back to when I entered the workforce. Now this was in the early 1980s and I like to describe it as a time when the social contract with workers was being ripped up and thrown away. And that social contract at the time, previous to the 1980s might have been that you went to work and your employer was going to give you a defined benefit plan. When I went to work, there was no such thing. So the social contract of having a defined benefit plan went away, but I don't think I quite understood the ramifications of it at the time. And I remember having a boss who used to say, and at the time we didn't have a 401(k) at the company, the only thing that we could save for and invest in was an IRA. And he used to tell me, I'm all of 22, 23 years old, "You better start saving for retirement in your IRA." And I didn't understand that I had present bias, right? That I sort of thought the dollar that I had in my pocket today was more valuable than the dollar that I might've had tomorrow or the a hundred dollars I might've had in 30 years, hence. And so I think for me, if I had to go back in time, I would be much more appreciative of the fact of some things that we're gonna talk about in a second. But this notion of sort of setting aside today, right? Being the ant instead of the grasshopper, being the person that set aside a little bit at a time in the hopes that over the course of 30 or 40 years you would have a pile of money. And so for people who start late, they have to catch up, right? And so for me, if I had started earlier, I probably wouldn't have had to catch up as much as I did.
[Travis] Gotcha. It's a beautiful answer. Plus we know you're never gonna stop working, so you're gonna be just fine. Okay, final question. What have you learned through your work that you wish everyone knew about preparing for retirement?
[Robert] Yeah, so it sort of speaks a little bit to what I just said. I'm fond of the work that Annamaria Lusardi and Olivia Mitchell have done on financial literacy. And if folks who are listening have not paid attention to their work, they should. They have these three questions that they devise that help people understand how financially literate they are. And the questions get to very basic concepts. Do you understand interest? Do you understand inflation? Do you understand risk? And do you understand diversification? Those things, right? The basic sort of blocking and tackling things that I once explained to a man way back when in a Sears store are trapped in a Sears store, unable to close him are the things that I wish everyone knew, right? I think if that gentleman had come in with an understanding of how interest works, how inflation works, how risk works, how diversification works, I might not have gotten trapped in that Sears store because we would've been talking about his investment plan instead of me educating him about the things, these basic economic investment concepts. And these basic financial literacy concepts will never leave you. Right? Once you learn them, whether it's in high school or college, or your first job at work, they'll never leave you and you'll have a much better appreciation for what you need to do to prepare yourself better for retirement.
[Travis] Good, good. Well, you may not have been able to close all those years ago in Sears, we're gonna let you close out this one. For listeners who have enjoyed today's conversation, where can they find you online?
[Robert] Marketwatch.com. I read about retirement there. We've just launched a weekly podcast for Yahoo Finance. We call it "Decoding Retirement." And so that you can find me there, you can find me occasionally on "Investors Business Daily" and then you can also go to FinStream.TV where we've launched a new series of personal finance videos designed to help people become financially literate. So that's another place you can find me. Oh, oh wait. And one last place, I forgot all about "Retirement Daily" on TheStreet. So retirementdaily.net you can find us there. We're publishing daily about retirement news and education there.
[Travis] Alright, well I was gonna say, we could not have asked for a better conversation. This was remarkable. I thank you so much for your time today.
[Robert] Thank you, Travis.
[Travis] That was a fantastic conversation with Bob Powell. I hope you got something out of it. There is a lot of discussion about the crisis facing tomorrow's retirees, but that puts more of the burden on financial professionals to really dig into all the aspects of retirement and income planning, because if you aren't doing it, someone else will. Thanks for listening to "Rebuilding Retirement." Remember, all our past episodes are still available, and the more you listen, the more you'll get a wide-angle view of the issues surrounding retirement readiness and most importantly, how you as a financial professional can respond. If you're enjoying these conversations, please subscribe and consider giving us a review on Apple Podcasts or Spotify. See you back here next time. I'm Travis.
