You’ve worked hard, you’ve lived within your means and you’ve invested wisely. But, if your portfolio gets wiped out by a downturn in the market or whittled away by healthcare expenses, all your careful planning could fall apart. The good news is that you can protect yourself.

Michael Reese, author of Retiring Well, is the president and founding principle of Centennial Wealth Advisory. In his 20-plus years in the financial industry, he’s trained more than a thousand financial advisers in retirement planning strategies.

As the host of the TV show Retiring Well, he’s also become one of America’s most recognized retirement planning professionals. In this episode, you’ll learn how to achieve financial stability regardless of what the market does. The retirement you deserve is within your reach and with solid time tested advice, Michael will help you avoid common pitfalls so that you can claim a secure future.

Michael Reese: Christmas of 2002, that’s when I had to tell my parents how I managed to lose roughly half of their life savings over the first three years of their retirement.

You see, my dad had retired back in January of 2000. This was right after the 90s, when the markets are roaring. We were trained stocks for the long run. All you need is a diversified portfolio of market securities and gosh, if you’re helping retirees, just make sure you have a lot of dividend-paid stocks and everything will be fine.

When my parents retired, following what I had been taught, I put them in a diversified portfolio, but it was mostly stocks.

Shortly thereafter, as the market started to go south, you might remember a plane flew into a building in New York City, something no one expected. The economy was a mess, and by the time we were three years in the retirement, like a lot of people, half their money was gone.

Never Again

Michael Reese: Thirty years he saved money. It only took me three years to lose half of it. I don’t think my parents blamed me, in fact, I’m sure they didn’t because all their friends were experiencing the same thing. But I sure blamed myself.

I remember talking to my parents about reviewing their portfolios, reviewing how half their money was gone. My mom was in a state of confusion, looked at me and she said, “I don’t understand, what does that mean?”

They were living off the income from this portfolio and I told her, I said, “Mom, you know that income you’ve been getting from your portfolio there, that you’ve been using to spend to go travel and do the things you wanted to do in retirement? Well, turns out, you’ve got to cut that money in half.”

She’s like, “Well, but for how long?”

“I had to look my mother in the eyes and tell her, “Mom, for the rest of your life.””

I got to tell you, I felt about an inch tall at that point.

They’re one of the very fortunate few because my dad had a large pension, social security, and when he retired, his company made a financial mistake at paying him his severance package.  Turned out that they owed him money.

He actually recently collected a check and was able to pay off the house. The mortgage payment that they just erased happened to match up pretty closely with the amount of money that they lost, income wise, from their portfolio. It turned out they were okay.

But still, I mean, I felt horrible. I went to my manager, I said, “John. Help me out here. What could I have done differently? What did I do wrong? How did I fail my parents? What could I have done better?”

“I’ll never forget the answer he gave me.”

He just looked me and said, “Mike, nothing. There’s nothing you could have done differently, you did everything exactly right. It’s just how things go.”

I said, “Come on, there’s got to be a better answer.”

He said, “No, just your parents need to focus on the long term.”

I said, “Long term? What are you talking about? They need money now, they don’t need money 15 years from now, they need it now and you’re telling me they need to focus long term? Exactly how does that work?”

“Well, it’s just how it is.”

That was the moment that I swore that this was not going to happen to the people on my watch, I am never ever going to have this happen to my clients again.

That’s when I really began my search for a better way to manage money for retirement.

By the time 2008 rolled around, many years later, we did find that better way. When the market was down 50%, people were losing half their money left and right again, because Wall Street never learns.

“My clients lost less than 5%.”

Market’s down 50, clients losing less than five. Why? Because I found that better way. If it weren’t for that painful experience of having a conversation with my parents, I never would have changed, I never would have made that the effort to find that better way.

Boring Portfolios

Charlie Hoehn: What was the change that you made? How did you get it right?

Michael Reese: One of the key components, and I do talk about this in the book, is that everybody focuses in the financial industry. How do you get better returns? How do you improve your rate of return?

What they tend to ignore is that the volatility of returns is equally, if not more important.

When I use that word volatility, that might be a word that not everyone’s familiar with. It simply means, what kind of range of returns might you experience over time.

Let’s say your portfolio averages, I don’t know, call it 7% a year. Well, over a 10 or 20 year period, what is your best year?

“You’re not going to get 7% every year.”

In a really good year, how much money do you make? Well gosh, you might make 20, 30% which is great.

What about a bad year? What does that look like? You might lose 20 or 30%. Not so great.

What I have learned through experience over the years is that success in retirement happens in a magic 20% zone, which is found between plus 15 and minus five.

Meaning, if you’re averaging about 7% a year, if your best year is maybe 15% and your worst year is minus five, odds are good that things are really going to work out well for you.

“The problem with a portfolio like that, quite frankly, is it’s very boring.”

It’s not very exciting, there’s nothing for the financial press to talk about for a portfolio like that, there’s no big great story for Wall Street to sell you on in that portfolio. But at the end of the day, that’s the key. I learned that when I saw a bit of research.

I’m kind of a math nerd. I started doing a lot of research, started looking at different ways to develop portfolios. That’s what I learned, you know these low volatility, these boring portfolios win.

Boring wins.

Nowadays, I like to say “Our job is to develop boring portfolios so that you can live an exciting life.”

Truly Varied Investments

Charlie Hoehn: I see you talk about Roth IRAs in your book. Which portfolio do you tend to lean to right now, what’s a good example of one that you like?

Michael Reese: See, that’s a really good question. One of the biggest mistakes that people have made when it comes to investing is that technology has brought us so many additional opportunities. Yet, I find that people often times don’t take advantage of them.

Let me give you an example of what I’m talking about.

Most people build their portfolios through IRAs and 401(k)s, and if you look at the typical 401(k) at a typical company, they give you a menu of investment options, and usually they’re mutual funds of some type. They’re typically invested in either stocks or bonds.

Sometimes you get US positions, sometimes international, but stocks and bonds. That’s basically what you have to pick from in various ratios.

Then you go to retire and that’s what you’re familiar with so you just keep doing the same thing. We call those market-based accounts because they’re priced to the market every day.

“But you can invest in a lot of things other than just stocks and bonds.”

You can invest in gold and real estate. You can invest in things like reinsurance risk, limited partnerships, you can invest at different annuities, for example. There are so many places a person can put their money that if you use more than just stocks and bonds, you can create a portfolio that maintains returns but does so with much more consistency.

If you’re asking me where we’re putting people’s money these days, we are taking the concept of diversification but we’re making it reality in a way that just stocks and bonds alone can never do.

Planning vs. Hoping

Charlie Hoehn: Yeah, you have in section one about creating your retirement income, can you elaborate on that? It’s not retirement investment or savings, it’s your retirement income.

Michael Reese: I like to say very frequently, in retirement, your income equals your lifestyle. Your lifestyle is 100% dependent upon the income flows that you have coming in each and every month.

In fact, over lunch today, we’re talking about this, what is the number one purpose of a portfolio? What’s the number one purpose of your money once you’re retired?

Well the answer is, the number one job of your money once you’ve retired is to deliver consistent, stable inflation protected income. That’s the job.

Imagine the couple who just retired. Their entire lives, they save, save, save, try to build up their retirement savings to a point where it would support them in retirement.

They come to visit me because they’re looking for advice and what the first things I ask them is. “Can you give me a copy of your written retirement income plan?”

In other words, can you share with me a copy of your written plan to deliver income year in, year out, for the rest of your lives, index to inflation, whether the market cooperates or not?

I don’t want you tightening your belt because the markets aren’t cooperating. That’s not a plan, that’s hope.

Covering Your Retirement Finances

Charlie Hoehn: Let’s put it together for the listener then. What does a good income delivering plan, whether the market cooperates or not, what does it sound like, what would it read like? What would it say?

Michael Reese: Well, you’re going to need to address three primary areas. In the book, I talk about some different examples, but here’s the big takeaway. Three primary areas you want to look at.

Number one, you need to set your base income, you need to identify what amount of income do you want for the rest of your life where it’s coming in every month where you can sit back and say, “Hey, as long as I’ve got this coming in, I’m good.”

Obviously, you have to index that to inflation. Part one is what I would call your base income. Part two is going to be the extras. The fun stuff.

It’s like, “Okay, I’ve got this much money coming in every month. I’m good but I really would like to travel a little bit or I’d like to go on some cruises, or I’d like to take my children to Disney. I want to go to that golf school.”

You know, whatever it is, there’s another amount of income that would be nice to have come in every year for the luxuries of life, right? That’s kind of the second part of having a plan.

“Protect your base and then plan for luxuries.”

Then of course the third part is emergencies, and when I say emergencies, the biggest what ifs in the future.

Unforeseen Financial Needs

Michael Reese:You know, what’s healthcare going to cost in the future? None of us know other than we all strongly suspect it’s going to be pretty darn expensive, right?

It’s going to cost a lot, but we don’t know what that looks like.

I have a great example of this too that’s not healthcare related. I have had a couple, some very good clients of ours for many years, and in 2008, both of their sons worked for General Motors, the auto industry.

Now, if you remember, 2008, GM did go bankrupt, lot of questions as to whether you’d keep your job. They told me the story of how one day, their son called them and one by one, the managers came in and they started calling every single employee in the office, alphabetically,

A, B, C, last name starts with A and so on.

They would tell that employee; you have job or you don’t. Over 90% of the people were fired that day. Guys with 25 years of experience, out the door. My client’s last name start with W. Their son called them all day long, this was going on. Their son told me. ”I almost hope I get fired, I don’t know that I even want to stay here after this.”

The parents used to go to Florida every year for winter break to avoid the snow up to Northern Michigan. They said, “Mike, we’re not going this year,” because it turned out, both of their sons lost their jobs.

They said, “We just want to make sure that we have money available for our sons just in case it takes them a little longer to find a job in this kind of economic environment.” In other words, they want to support their kids if needed.

That was important to them.

It turned out they didn’t have to. Both their sons, very sharp young men, found new jobs pretty quickly. But still, that’s a great example of maybe needing a pot of money sitting there somewhere that you can access just in case.

What You Can Do Today for Better Retirement

Charlie Hoehn: What do you say to people who just feel like, “I’m too close to retirement, there’s nothing that can be done to get me to the level that you’re talking about”?

Michael Reese: I’m a big believer that we are facing a real challenging retirement landscape for the majority of Americans. They don’t save enough money, they tend to spend, they’re good at spending, not always good at saving.

I think I saw somewhere that the average person over the age of 50 has available like $2,000 or something.

Obviously, not enough to retire on. The one comment I would make is two-fold. One, you can’t change the past, but you can always change the future.

What I mean by that is, okay, you haven’t really saved money in the past. You’ve got to start somewhere. What if it’s 1% of your salary, and then as you get raises, you bump it up a little bit? Anything helps.

The second big thing I would share, and this might even be more important:

“Getting out of debt is a big deal.”

I will tell you that of the hundreds and hundreds of families we served that are retired, those that have the greatest freedom are those that have a house that’s paid for. Those that have really worked hard at paying off their debt, where every month, they’re paying their credit cards off in full.

I know you might say “Wow, that sounds great but I can’t possibly do that.”

Well, yeah, maybe you can’t possibly do that today. But what you can do is focus your energy and effort and work towards that. Start somewhere. Start with anything. Get those debts paid off as well.

True Wealth Management

Charlie Hoehn: What types of clients do you really like to work with?

Michael Reese: Our firm specializes in helping people who are either in retirement or nearing retirement. We are a true wealth management firm.

You know, a lot of financial advisors like to say they’re wealth management but they just invest money. We’re wealth management. What does that really mean?

For our clients, we help them in a number of areas. For example, we help them with their investment planning and income planning. A lot of advisers do those two things. We’re also doing our tax returns for you.

Every year, we sit down with our clients in May, June, July, right after tax season and help them do tax planning, true tax planning.

That’s not just putting the right numbers in the right boxes. It is things like, “Hey you’ve got a lot of this money in your IRA that represents your largest tax liability. What are we doing each year to reduce the taxes on that IRA overtime?” That’s an area of wealth management.

Managing Taxes in Retirement

Charlie Hoehn: Yeah, could you go into that? I’m curious.

Michael Reese: Ten years ago, well maybe now it’s 15 years ago, I remember when people would come into our office they had pensions, they had social security and they had these retirement plans. And they could fully live off their pensions and social security. Their retirement plans were extra money. The question was, “What do we do with this?”

Those were fun days.

If they would tell me that they would need their retirement plans for income, I would almost shake my head and wonder if I should even accept them as a client.

“What a difference time makes.”

Because here we are today, it’s the exact opposite.

Everybody needs their IRAs for income because pensions went away, so now, we have people retiring on their social security and their retirement plan.

If they have pensions they are pretty small. Generally speaking, one of the biggest lies that people have been told – one of the previous books that I’ve written is on this sole topic.

It’s that, “Hey you should put money in your retirement plan today and save taxes now when you are in this high tax bracket because when you’re retired, you’d be in the lower tax bracket.”

So save tax today when it’s high, pay tax later when it’s low.

Well, there’s one tiny little problem with that argument and that tiny little problem is I’m still waiting to meet the first couple who’s getting ready to retire that wants to retire at a lower standard of living.

“Nobody wants to retire at a lower standard of living.”

They’ll just keep working before they do that. Now think about that for a minute. If you want to retire at the same standard of living, what does that tell you about the income you’re going to need?

It needs to be about the same, right? And if your income is about the same, what does it tell you about the tax rates you’re going to pay? Probably going to be about the same.

When are your highest earning years? When you’re in your 30s and 40s or when you’re in your 50s or 60s? Probably in your later years.

So for most people, they are not retiring to a lower tax bracket. They are retiring to the same sometimes higher tax brackets.

On top of that, by putting money in this traditional plans, you have essentially saved tax on the seed only to pay tax on the harvest. If you are the IRS this is exactly what you want people to do. You want them to pay tax on the highest amount of money possible. But the problem is, as an individual you want the opposite of the IRS. They are on the opposite side of the table.

“You want to save tax on the big dollar amount, pay tax on the smaller dollar amount.”

This is why Roth IRAs are so fantastic. It’s after tax money goes in you are paying tax on the seed, but all that growth is tax-free. All the big numbers later on are tax free. If you are fortunate enough to accumulate a million dollars in an IRA, a traditional 401(k) or IRA or 403(b), you’re looking at a million dollar income tax liability versus if you had that million dollars in a Roth IRA, it’s all tax free.

So one of the challenges that people have, they’ve saved so much money in these IRAs. And when I say IRA, 401(k)s, 403(b)s they’re all the same thing, all of that money is going to come out and it’s going to be taxed at their highest rate.

Whatever their highest tax rate is, it’s going to be taxed that rate.

Here’s the ugly thing too. Not only do IRA distributions do you pay tax on those when you pull money out of your IRA and you’re retired now, that same distribution impacts how much tax you pay on your social security.

I shouldn’t say most, but a huge percentage of people are double taxed when they pull money out of their IRAs during retirement because they pull that money out and they pay tax on the distribution.

Working with Michael Reese

Charlie Hoehn: So if somebody is on the fence thinking about working with you and your firm, can you give them one tip from healthcare and from estate planning each that they need to know whether it’s a common mistake or the big thing they need to keep in mind?

Michael Reese: Here’s something that nobody seems to be talking about that we find a lot of our clients really like. One of the biggest questions out there is long term care. Long term care is something that affects a lot of us.

The older we get, the more likely it is to affect us. The cost of long term care, we all know, it’s crazy expensive. Yet who’s excited about buying long term care insurance?

Well, I don’t know anybody that jumps up and down and waves their hands and says, “Pick me, pick me,” right? Nobody wants that. Why don’t we like long term care insurance?

“Sometimes we don’t enjoy thinking about it.”

On top of that, its use it or lose it, right? Well what if I never need long term care? I paid all those premiums for nothing. You know, I could self-insure, why would I waste my money on that?

Some of these insurance companies have created these single premium life insurance plans. I just had this happen the other day. One of our ladies, she’s a widow, she’s 61 and she took some of the life insurance proceeds she got when her husband passed away. She took $100,000 and put it in one of these single pay policies.

Well she’s 61 now, at what age do you think she’ll be before she needs long term care if it comes up? Probably what, like 80s? Well by that time, if she needs care she’ll have over $700,000 in a pot that she can use for her long term care through this plan.

If she never needs care, you know her kids get back as a death benefit, you know maybe $120,000.

A lot of our clients are retired and have $100,000 laying around. They sold a house, something happened and it’s just sitting there in the bank doing nothing. It happens all the time, yet here’s a way that at least in this case this gal was able to better protect herself.

And if it turned out she never needed care, good news, the kids get all the money back and then some. So it was not a use it or lose it approach.

Simple Oversights Make Big Losses

Michael Reese: Estate planning, oh my goodness, I could go on and on about mistakes people make there. The biggest one is probably nobody wants to talk about that either. I like to joke about how, I don’t know if you are married or not. Charlie are you married? Let me ask you that.

Charlie Hoehn: Yes sir.

Michael Reese: So I am sure there’s never been a morning when the two of you wake up in the morning, the sun is shining, the birds are tweeting and you look in each other’s eyes lovingly and the first words out of your mouth are, “Honey wouldn’t today be a great day to go get our estate plan updated?”

It’s not just that, the biggest areas that people make are not necessarily the wills and trusts. It’s all the beneficiary arrangements with the insurance, the old life insurance plans or the old IRAs or 401(k)s.

“People don’t always understand the rules.”

I’ve got a great example of that. So this gal, let’s call her Jean. She had been married in the past and they had one child, a little girl. And then they ended up getting divorced. Let’s call the old husband Charlie. So we have Jean and Charlie, they got divorced and Charlie had a 401(k) plan and had about half a million in there or so.

He did not want any of that money going to his ex-wife, Jean. He wanted all of the money going to their only daughter, Sophie, right?

That’s pretty normal when somebody gets divorced, that’s what he wants. And so what does he do? He goes to his attorney, he has his wills updated, his trust updated, he tells everybody about how this 401(k) money is going to his daughter, Sophie, when he dies.

Only one tiny little mistake: he neglected to tell Fidelity, who was a custodian of that 401(k). He never retitled the account, he never changed the beneficiary away from Jean to put Sophie’s name on it.

Jean knew that money wasn’t for her. She didn’t even want the money. She wanted it to go to her daughter, Sophie. If Sophie were the contingent beneficiary, Jean could have just basically erased her name off the account and then let it go to Sophie.

It’s called disclaiming your benefits.

But there was no secondary beneficiary to disclaim too. So Fidelity says, “Sorry Jean, it’s your money.” So Jean has to say, “Fine. I need to cash this out because it is the only way to give to Sophie.” But it’s a 401(k). When Jean went to cash out $500,000, you’ve got to pay tax.

And oh, remember she got remarried to that guy who was real successful? Which means that he was in the 40% bracket to begin with. So when they went to pay tax plus some state income tax, half of the money went where?

So instead of getting $500,000 Sophie got $250,000.

“We see these problems all the time.”

This happens all the time. These days, people get married, they get divorced, they get remarried or I mean I had a case recently. Where a guy had a, teacher, it was a teacher, when he first started teaching set up before a 403(b) plan, he named his parents his beneficiaries because he was single and all of that.

Over the years, he got married, he had kids, guess what he never changed? That stupid beneficiary.

He just assumed it would go to his wife. Thankfully, they become clients before he died. He’s still alive, thank goodness. I was able to show him, “Hey! Henry, look at this. If you die that money is going to your parents who, by the way, are no longer living and not to your wife like you think it is. We’ve got to change that.”

I was about the fourth financial adviser that he’s had in his life, and I am the only one that catches that. Why? Because we do wealth management, which focuses on all of your retirement planning, not just the money.

How to Preserve Your Portfolio

Charlie Hoehn: What would you say the average amount of money that you’re able to – or wealth you’re able to preserve is for a typical client? I know it varies so drastically I’m sure but what’s the typical kind of result that they walk in and they walk out with?

Michael Reese: Yeah, let me give you a simple one. This is a good example, a couple of weeks ago one of our clients referred one of their friends to us and they came in.

We will analyze their current portfolio to help them better understand what they have. Very few people truly understand what they have in their portfolio. This couple had what they called a balanced portfolio. So they felt like, “Hey we’re diversified. Yay!”

Well, I’ve got to tell them, “You’ve got a balanced portfolio, you’ve got $1 million. You want to retire in about three months.” I’m like, “Okay great. So when we put that balanced portfolio in a Morning Star, here’s what we learned.”

We learned that on average, he’s going to earn about six to eight percent a year.

Somewhere in that six to eight percent range, that’s fine. The problem is like the early 2000s or 2008, if the market loses half of its value this guy, if the market goes down like it did in ’08 or like it did in the 2000 to 2002 dot com crash period, he could lose a bit more.

I remember the number, 28.59% in one year. That’s $285,900 that he could lose in one year, and that’s just one year.

“Markets don’t always go down just one year.”

They might go down two years.

And I said, “So imagine this, you’re getting ready to retire on a little more than a million dollars. What if the market decides that next year they are not going to cooperate with you and you lose $250, $300,000? How well are you going to retire at that point? When you go to bed at night, how do you feel? Are you going to be okay with that?”

Well of course he said, “No way am I okay with that. That’s not balanced. That’s not my idea of being diversified.”

And I said, “Great. Meanwhile what if we could get you the exact same type of performance, the same six to eight percent rate of return, but in a bad year maybe you only lose 5% or $50,000?”

To get the same average of return but lose 50,000 in a bad year versus $250 or $300, would that help?” Well duh, right? And that’s something that we do all the time.

They’ve got this portfolio, and they are taking on the risk. They don’t know it, and they won’t know it until the market crashes, which it will.

I mean, markets crash about once every ten years in a serious way. You know, if you live 20, 30 years in retirement, you’re going to see two, three significant market declines.

If your money is going to last when you’re taking income, you cannot be participating in those declines.

Connect with Michael Reese

Charlie Hoehn: In other words, boring wins. Don’t chase after the best years but minimize the worst years.

Michael Reese: And here’s the other thing that I would also throw out there. I would also challenge anyone listening to remember this. We’re recording this in 2018, I think it’s safe for us to say, the last time the markets crashed was 10 years ago.

I hear a lot of times people say, “Gosh when the markets crashed last time it was no big deal. I just hang on, as a result, I’m good.”

Well, remember 10 years ago, you were still working or you had several years in front of you working. You were still adding money to the portfolio and you weren’t taking any money out.

You’re 10 years older now than you were 10 years ago. At this stage in your life, is it really okay to lose 50% again? Is that really okay at this stage of your life?

I think a lot of people tend to ignore that question.

Charlie Hoehn: Well Michael, what is the best way for listeners to get in touch with you?

Michael Reese: I mean gosh, you can always call our office. The number is 512-265-5000. We’re in Austin, Texas. I also have offices in Michigan if people live up that way.

Email is always good. My email is [email protected]. And they can check out as well.