2020 EP 0829 FINANCIAL FOCUS - 7 Financial Myths
Peter Richon:Welcome in to the program. This is Financial Focus, brought to you by the team at Gulf Coast Financial Services and our resource providing the common sense approach to planning. Here with us as always is founder and CEO of Gulf Coast Financial Services and sister company Gulf Coast Tax Advantage, John Kuykendall with us. John, welcome back in.
John Kuykendall:Thank you, Peter. It’s great to be here. I’m really excited about this week’s show. I think we’ve got a great topic this week.
Peter Richon:Always a pleasure, John, always. You bring important information to the airways each and every week. We’ve been sort of going on this series of reports that you’ve made available that count down to retirement, and each one of these pieces, the components of that compilation, I think are important. You did the “Are You Ready?” It was like 12 questions to know if you’re prepared to retire; “Five Planning Mistakes to Avoid”; “Four Approaches to Long-Term Care,” and you counted down the list – “The Three Biggest Expenses in Retirement.” Kind of backtracking on this one is “Seven Financial Myths.” These are planning assumptions that can be mistakes or maybe misconceptions in the planning process. John, a plan is only as good as the assumptions that it’s based on, and, unfortunately, the American public may be lead to making a lot of assumptions that are not necessarily dependable.
John Kuykendall:Well, I think that’s right, Peter. You know, back in the old days – and I’m talking about 10 or 15 years ago – when we would prepare a financial plan, we would end up with four or five million dollars left over as a legacy, and that was true for just about every financial plan that we put together because we were using assumptions that really weren’t truthful. We thought they were, and we believed in our hearts they were, but as we lived out that retirement we found out that you’re not really concerned about the legacy as much as you are about the income and how much income am I going to have each and every month to last me until I pass away.
If we leave a legacy, that’s great; but if we don’t, it’s not the end of the world. I think that’s really hard for a lot of people, especially the early Boomers that have retired. They want to leave something to their kids because our kids have always had it better than any other generation. I mean, our kids have been more affluent. We’ve been able to give them more, been able to do more trips and educational things, and so we always want to do more. While our parents didn’t really leave us that much, we would like to leave more to our kids.
As you know, with income and taxes and everything that we’re going to be facing during retirement, and this longer retirement that goes as much as 30, 35 years, there’s not going to be that much left over, unfortunately. Assumptions that we made were wrong, and, if you don’t, you have to have a conservative plan. The one thing I’ve said every week on this show is you can’t do the plan and then put it in the drawer and say, okay, I’m okay, and then forget about it. We’ve got to review it every year, we’ve got to make updates to it every year, and we’ve got to make some changes, maybe, in how we take things out of it or how much we’re spending or when we buy that car or whatever based upon the plan.
Peter Richon:John, is the planning of the past and the assumptions that were made, was that a result of those plans being put together in such a prosperous economic time? I mean, if you go from like the mid-80s to the late 1990s, we’ve never seen a bull run like that in stock market history. Interest rates were double-digits, and, yes, they declined a little bit over that time. By the late 90s, maybe you couldn’t get a 10% CD at the bank, but you were still getting 5 or 6%. Because of those reasons, safe money still earning a great rate of return, the stock market booming. When plans were designed during that period, or at least using that period as the backtesting, it was thought that we could project out that kind of scenario into the future.
John Kuykendall:That’s true, Peter. I always talk back and remember the ING annuity that paid 10% a year for 10 years, and we couldn’t get anybody to put any money it because they wanted to put their money in the market.
Peter Richon:Wow, people would be knocking your door down for that these days.
John Kuykendall:If I could get that now, I’d love it. I mean, I could put everybody in it. That was how we were back in, you know, 2000 and ‘98 and on. We believed that the stock market – we kept saying the stock market makes 10% historically – and I think that’s one of our myths here that we’re talking about.
Peter Richon:Right, yep.
John Kuykendall:The stock market doesn’t make 10%. It averages over a long period of time to nine-something, but depending upon when you take your money out of your account is going to determine how fast your money is going to go down. We’ve learned that sequence of return, which I’m telling you we didn’t talk about back then.
Peter Richon:Yeah. That actually, I guess, hits on three of the first myths of this list of seven financial myths. Let’s start with number one, that the market always goes up. There’s a fine line of distinction here with the verbiage, but the market always goes up over time versus the market always goes up. The market has gone up over time, but a lot of financial plans, still to this day, project out as though the market is always going to go up, and neither one of these can be universally said to be true; they’re kind of assumptions. There are periods of time where the market does not go up, and 2000 through 2011 or ‘12, they call it the lost decade, where the market was flat or sideways, a lot of volatility along the way, but the market certainly does not always go up. John, how dangerous is it for us to make a plan that sort of assumes a linear flat progression and always tracking upwards?
John Kuykendall:I mean, if we’re planning, we’re planning to fail because, first of all, the market doesn’t always go up. We have bad years. We have years that we’re not going to make money. As we’re taking income, taking money out of our accounts during those times, we are going to crash our plan quicker because it’s been proven that the way we take money out – in an up market we have a better chance of taking it out over a longer period of time than if we start in a down market. With this sequence of return, we know that we can’t just say that I’m going to make 10% a year for every year and I’m going to have a lot of money left over. I mean, if you look, like you said, from 2000 to 2012, the market ended up at the same place it started at, but we had blips in there of where we were making money. Also, I honestly believe there was one of those back in the 90s, where we had the same thing for eight or nine years and we ended up where we started.
While the market – if you look at the graph over a long period of time, the market is straight up. If we look at it in little sequences, the market doesn’t go up and we have gyrations. Depending upon when you’re taking money out, that determines when your account is going to crash. You can’t just use that 10%. I’d rather use another conservative number. That’s one reason that we try to do income planning with a growth bucket and then an income bucket, so that we know how much income we’ve got coming in and I’m not relying on my growth bucket for all of my income. If my growth bucket goes up, that’s fine; but I’m not hurting my plan if it doesn’t.
Peter Richon:Relying on a plan that projects out or assumes that the market always goes up, or even that it goes up consistently over time, is going to be detrimental and put in jeopardy the reality of you achieving that plan or the possibility of you achieving that reality. That’s why you need to carefully examine all of these myths and common misconceptions and common assumptions that many plans are based on. You need to identify where your plan may be reliant on these assumptions well ahead of time, and then have a conversation and analyze whether or not you’re comfortable with those assumptions being made in your planning. Would you rather give it kind of a Murphy’s Law type of plan, where the bad things happen on paper, you’re assuming the worse-case scenario and, if things are any better, you come out in a better situation, or would you plan for blue skies and rose-colored glasses, but, if anything goes wrong, you’re not where you’re expected to be? That’s the approach there at Gulf Coast Financial, is to have that conversation with you, help you analyze, help you identify where those assumptions may be made in your plan, and then have that discussion of whether or not that’s dependable or realistic. If you’d like to go through that process, give them a call, 386-755-9018. You can visit online at gulfcoastfinancial.net; lots of great resources available there as well. In the blog post for this edition of the podcast, you can find this report of the seven financial myths.
John, moving on to number two, kind of closely related and you’ve already touched on it, the assumption that the market always averages 10%. Number one was we had the assumption or the myth that the market always goes up or always goes up over time. Number two is that we have a dependable rate of return and those are the results that we should expect. Even if the market does have an average 10% rate of return, it doesn’t mean that we’ve got a consistent 10% rate of growth on our money.
John Kuykendall:No. No, it doesn’t, Peter. You know, during the year, while we’re looking at an annual 10% return, you may have a month that the market’s off and we didn’t make any money, but I’m pulling money out of my retirement account to live on, therefore my account is going down. It’s ridiculous to assume that the market is going to average 10%. It’s not going to average it. Over time – and I’m talking about a long time – the stock market’s to average about nine percent, according to the last numbers I saw. We can assume that, but the thing is I’m taking 100 years and condensing it down to now and saying, okay, because it’s done that, I’m going to do that for the next ten years.
The thing is that you can’t put all of your money in the stock market. When you’re retiring, you need to be diversified. Your money has to work for you. You can’t just have lazy money and set it aside and say, you know, if the bank pays me one percent, I’m okay on that. You can’t do that. We need to make as much as we can, but we can’t assume that it’s going to average 10%. It’s just not going to do it.
Peter Richon:Because of market volatility and because interest rates are significantly lower than they have been historically and in previous times, there’s another assumption, John, and that is regarding the amount of income that our portfolio can generate. In 1994, a financial analyst advisor by the name of William Bengen incepted this rule backtesting. He said that if you have a portfolio, you should be able to take a four percent cash flow from it. Since that time, that’s sort of been used as the golden rule for retirement planning projections, but a lot of data has come out saying that that’s actually not that reliable and leaves a lot of probability for failure. I think, again, part of the reason why is because during the time when he came up with that rule, we were in such a prosperous economy and a different time with the market and with interest rates.
John Kuykendall:That’s true. There’s a third thing, and that’s the internet. In 1994, we were certainly still having eight percent mortgage loans, whereas now we’re in the threes and fours. You’ve got to understand that over the period of time, rates have gone down.
Peter Richon:Things have changed on both sides, for savers and for borrowers, yeah.
John Kuykendall:Yeah. Right. Rates aren’t going up because of all the money we owe, which is, what, $27 trillion or something. If the average debt is 1.82 – that’s what we pay the interest on our debt. If we raise interest rates, then we have to raise the amount we’re paying our debt, which means we have to fund more money and, I mean, we’re in the hole even bigger than we are. Interest rates, I think, historically are going to stay low forever, for a long time, because we can’t afford to have them rise too much.
The other thing, too, you’ve got to remember was in 1994 we didn’t have 24-hour news on CNN and all these news shows. We didn’t have the internet. I mean, in 1994, in Lake City, Florida, we were dial-up, and it was all just in Gainesville, and we couldn’t afford to be on very long.
Things have historically changed during that period of time that have made that four percent rule, I think, very outdated and something that we shouldn’t use because I can’t consistently guarantee you that I’m going to make four percent in your account or six percent and you can take four out. The thing was, was back when he made this rule, you could because, as I said, in 2000 we were at 10% a year or a 10-year ING annuity. That would’ve been a no-brainer. I could invest all my money in that and take four percent out.
Peter Richon:It wouldn’t have been a problem, but that just isn’t the reality of the situation that we are in today because the world around us changes and our situation changes. Again, identifying these assumptions or these financial myths in our planning is important, but so is continuing to update the plan on an ongoing basis. It’s a critical step in your continued financial success. The team from Gulf Coast Financial Services and John Kuykendall can help run that review, that analysis, the initial plan design, implementation, or a review or your current plan. Ongoing, the continued monitoring and update of the plan will be important as well, and they certainly provide that as a service. If you’d like to get started in that process, no matter where you are on that spectrum, pick up the phone and give them a call, 386-755-9018, that’s 386-755-9018, 386-755-9018.
Another financial myth, John, is, hey, I’ve got the kids up and out; they’re independent financially. I’ve got the mortgage paid off. I am walking away from my working career. I’ve no longer got a paycheck or an income that I am looking to replace, so I no longer need life insurance. Why would I need it at this point in time? We might want to rethink that, though.
John Kuykendall:We might want to rethink that for a lot of reasons, Peter. Number one is that the life insurance that we’re having these days is also used for terminal illness, chronic illness, long-term care protection, and also it’s a tax-free way to get money out the account without paying taxes on the money that you’re getting out of it, so, if you have cash value, we can get that money out tax-free, as long as we keep the policy enforced. There are a lot of reasons to have life insurance.
I laugh when you say the kids are gone because the kids are never gone. They’re never gone. I was talking to a buddy of mine the other day, and I said, “How are you doing?” and he said, “Well, we’re doing fine. My daughter’s moved back home. My son’s moved back home,” and they’re in their late 20s and early 30s, and so the kids never totally go away. While they’re building homes, they’re living with mama and daddy, so you can’t say that.
Secondly, you never know when you’re going to have some kind of major expense on the house that you’re going to need to fund. Life insurance, you need to make sure that you’re leaving a legacy so that all the bills can be paid and everything can be handled. Certainly, we need life insurance. The life insurance we have today is so much better than what we offered when I was in college selling life insurance. I’ve got to tell you, it’s just tremendous the things that life insurance today will do for you. It’s not just or dying, it’s also for living.
Peter Richon:How do you mean, when you say that, John?
John Kuykendall:Because, like I said, I can put money aside in a life insurance policy and I can come up with a tax-free income at some point in time. I can also get that chronic illness, I can get the other illness. If I pass away, that money goes to my spouse tax-free, or to my beneficiary, so there’s no taxes on that. If I’ve got an estate where we’re going to have a little bit of taxes, it’s a great way to take care of those taxes so that as you have to take your IRA out and, as you know, to the subsequent beneficiaries over 10 years, it’s a great way for them to have the money to pay the taxes on that money and not create a hardship on them.
Peter Richon:I feel like, obviously, there’s benefits for protecting your family after your passing with life insurance, but these are policies that actually allow you some comfort and confidence during your lifetime for the potential of tax-free income, for the potential of long-term care protection. John, looking at my wife, I just feel like we’re going to enjoy retirement together that much more if we’ve got the confidence to spend some money knowing that, when one of us does go, we’re going to replenish the other one’s ability to continue to spend and live a fulfilled lifetime.
John Kuykendall:That’s true because, you know, in retirement, when one of you passes away, you’re going to lose one Social Security check, so you’re going to be short on income right there. A lot of people lose a pension check, or you’re not going to get a full pension check, so life insurance is a way that we can pass on money tax-free to them to keep their lifestyle going. We have one couple that we put life insurance on both of the individuals because that way it covered the long-term care protection and the chronic illness, but also, if one passed away, that money from that life insurance will fund what the shortfall was going to be on their lifestyle with one Social Security check and one pension.
Peter Richon:You said that the kids don’t go away. I know that in my family dynamic, even though I am away, the grandkids took the place and now my mom, grandma, wants to make sure she’s doing things for the grandkids as much as possible, too. There’s always some reason, always something there.
We are talking with John Kuykendall, founder and CEO at Gulf Coast Financial Services. We’re talking about this report, The Seven Financial Myths, Common Planning Mistakes or Misconceptions. Another one, John, is the Baby Boomer generation has been pretty reliant on the paradigm, on the thought process, that taxes will be lower in retirement. You mentioned the $27 trillion in debt that we’ve got. There’s a lot of money yet to be taxed, tax-deferred retirement accounts, that really could, I think, become a bullseye target for where to generate some additional revenue and the assumption that taxes are going to be lower in the future may inherently put us in a little bit of financial jeopardy.
John Kuykendall:Peter, I know I laugh because we were taught that taxes were going to be cheaper when we retired, and that was what –
Peter Richon:Not written in stone nor the tax code.
John Kuykendall:No, but it was just thought that when you retired you weren’t going to be making as much money and you were going to be paying less in taxes. I honestly believe that’s so far from being truthful that it’s almost absurd. Eventually, taxes have to go up. We’re at the lowest point in history for taxes. You don’t realize that during World War II, the highest tax bracket was 94%, so we’ve come down a long way. The problem is, is with the $27 trillion in taxes, the shortfall in Social Security in 12 years, all the things that we’ve got going, we have to raise taxes. You’ve already seen a major change this year in retirement accounts because, if you’re married, you can pass your IRA to your spouse and they can take it out over their actuarial lives. After that, it goes to the subsequent spouses, and they have 10 years to take it out, which is going to create, in some cases –
Peter Richon:To the children, the next generation, the children or grandchildren.
John Kuykendall:To the children, next generation, yeah. It’s going to create 10 years that they have to take it out. They can take it out in the beginning, during the 10 years, or all at the end of the 10 years, but that money, all the taxes on that money, is going to be paid in 10 years. That’s a major change that we’ve seen, the first major change that we’ve seen in that legislation, where we’ve eliminated, as they call it, the stretch IRAs. The first thing was the elimination of the Social Security, where there were several ways that you could file that would actually give you a lot more Social Security; they’ve eliminated that. Now they’re eliminating the subsequent inherent route.
Taxes are going to go up. This pandemic that we’ve been in, we haven’t seen the shortfall from that yet. Every state is under-funded now. I mean, our budgets next year – where is the money coming from? Taxes have to go up. I believe that taxes are the lowest they’ve ever been. We need to do things now, like Roth conversions and things like that, to take advantage of that. This yea is certainly a great year to do that because since we don’t have to take our RMD this year. If you’ve got an RMD, you can go ahead and take it – it’ll be the same as the taxes for last year – and move that into a Roth IRA and at least get some of your money tax-free.
Peter Richon:We’re talking with John Kuykendall, President and CEO of Gulf Coast Financial Services. If you’ve got questions, concerns, if you want to examine your plan to make sure that you are not reliant on any of these planning myths, mistakes or misconceptions, pick up the phone and give a call, 386-755-9018, 386-755-9018.
John, you’ve talked about this along the way, I think a piece in each one of these myths, but another one is that we cannot rely reliably on an investment plan to generate consistent retirement income. It’s a separate facet, it’s a separate type of planning.
John Kuykendall:Mm-hmm. We talked about it, Peter, over and over on this show. We believe in income planning. We believe in getting sustainable, predictable income coming in so that we have the money to make our payments each month. The investment plan is taking my assets and trying to make as much of a return as I can, but if I don’t make a return that month or that year, then I’m still taking money out of my plan of retirement and that just doesn’t work. We need to make sure that we have, as I said, a growth bucket that we invest in the market and try to make it grow as fast as we can. It’s our reserve fund, our emergency fund, but it’s not our income plan.
Peter Richon:Finally, John, it’s too late to plan or I don’t have enough. I’ve particularly appreciated your approach to these questions. I know that you’re willing to help anyone who’s serious about planning for their financial future. You don’t have account minimums for somebody to walk through the door there at Gulf Coast Financial Services, and you firmly don’t believe that it’s ever too late to plan or that somebody doesn’t have enough. Maybe we don’t have a retirement of opulence, but we still have a plan in place that will give us some amount of stability. I would add to this, John, also the myth or misconception that I am done planning. Even if you’ve got a plan in place, it’s never a finished process. It continues to need to evolve and be updated.
John Kuykendall:Yeah, I mean, we can’t do the plan and then expect it to last 30 years and just never redo it. We’ve got to redo that plan every year because we can make changes. We can make changes to our spending habits, we can make changes to our investments every year that we’re in retirement, and that’s what we should be doing. That’s what we want to do. We want to help our clients and people that we deal with with tax planning. You have to do some tax planning. If you’re going to make a major investment, do I make it this year, or do I make part of this year and part of it next year? Those are all things that need to be thought out every year that we do the plan. It’s never too late.
As you said, we don’t have account minimums; we’ll help anybody. There’s always something that we can do. We may not be able to, as I like to say, get all the red out of your plan – and red means that I’m going to have an income shortfall – but we want to get as much of the red out as we possibly can with what we have to work with. We just did that this morning. We met with a client over the phone, doing a meeting like this. We helped her get the red out by making some tweaks to her plan, taking what she had and rearranging it, changing some spending habits, allocating some money for travel and purchases, but doing them systematically, and it was a great feeling when we got through with it because I was very happy that we could help her.
Peter Richon:Financial Visine: getting the red out. The old commercials for the Visine, “We’ll get the red out.”
John Kuykendall:Visine – I like that! That may be a commercial.
Peter Richon:We’ll have to work on that. Maybe we can run on that.
Again, this report is Seven Financial Myths and will be available on the blog when this edition of the podcast is posted, so go to gulfcoastfinancial.net. It’s vitally important, ladies and gentlemen, that you examine your plan carefully for the assumptions that are being made and that you question and discuss whether or not you are comfortable with those assumptions. Each one of these that we discussed today, John, I think you’ve positioned them and phrased them – and most plans are designed around them – in such a way that if we are wrong about these assumptions, we end up in a worse financial condition than we thought or intended.
I believe in the planning process we should maybe flip that around and make planning assumptions based on Murphy’s Law that what can go wrong will and make the bad things happen on paper, that if we are wrong about the assumptions that we’ve made, we end up in a better situation than we thought. Like the assumption that taxes are going to be lower – let’s flip that around and assume that taxes are going to go higher. If we’re wrong, hey, we get more money than we thought we were going to get.
John Kuykendall:Peter, the thing is that we can give you a 250-page report showing how your plan is going to work, and we can make assumptions that say you’re going to earn 12% a year – we can do different things to the plan to make it look really good – but, to me, I’d rather have a simple plan that I can understand, that I can explain the criteria that was handled in making the assumptions, use conservative assumptions, and then, if I can get, as I said earlier, the red out, that’s great. If I can’t, then let’s work what we have to do to get it out, but at least we’re working towards something and I don’t feel comfortable that – I mean, I don’t go away sleeping at night thinking I’ve got something that works when it doesn't. You want a conservative plan; you don’t want to over-assume anything.
Peter Richon:That’s part of the process there at Gulf Coast Financial Services. It that’s the approach that you want in your planning, pick up the phone and give them a call 386-755-9018, that’s 386-755-9018. Visit online at gulfcoastfinancial.net, gulfcoastfinancial.net.
John, we always appreciate your time. Great conversation and food for thought here with another great report, the Seven Financial Myths.
John Kuykendall:Thank you, Peter. It’s great being here.
Peter Richon:Always a pleasure speaking with John Kuykendall, and he’s looking forward to hearing from you and helping in any way he can, assisting in achieving your financial goals and what you envision for your financial future. Give Gulf Coast Financial Services a call, 386-755-9018. We’ll talk to you next time on Financial Focus.