Paul Winkler: Welcome to the “Investor Coaching Show.” We’re talking about the world of money and investing.
I have Chad Henson hanging out here with me in the studio, a certified financial planner. Chad, you’ve just come back from traveling.
CH: Yeah, you get so wrapped up in life day-to-day that when you get away and you disconnect and you don’t look at your phone every five minutes and you’re not checking your emails all the time and everything, you really get a sense of coming back to who you are.
We are so enthralled in our day-to-day lives. When you get away from that, it lets you discover who you really are again.
PW: Oh, that’s an interesting insight, and that’s part of the reason I thought, “Hey, I would love to bring you on and talk about this stuff,” because right now, it just seems like there’s this sense of anxiety in the world.
CH: Oh, yeah. Lots of it.
The Forgotten Benefits of Getting Away
The one thing that I guess I gathered from getting away is that there are two Chads. There’s everyday Chad who has a job, and I love what I do, but that’s not who I am.
Then there’s the real Chad, and that’s who I rediscover when I disconnect and get away from everything.
PW: That’s cool. Every once in a while, going back and forth between the two.
CH: Absolutely. It’s a balance.
PW: It’s a refresh. It’s funny, because I was talking recently about the three-day effect, where people just get out and they get away from everything, and the first couple of days are great, but the third day is magical.
The reason it’s magical is because what we tend to do is with the everyday anxiety and day-to-day stress of life, the brain is not able to actually do as much.
People aren’t able to recall information as well. It’s not on the tip of your tongue, a lot of things. It can be frustrating when you don’t remember.
PW: Certain things that you know you need to remember. Then also what happens is our ability to create new things and be creative goes away as time goes by. I had a friend who always told me, “Two weeks per quarter.”
He said, “Paul, go take two weeks per quarter.” The reason he would do that is because he says people will hire you for your ideas, your creativity, your enthusiasm, and they don’t get any of that if you don’t take some time away.
Getting Into Retirement
I think a lot of people get into retirement and aren’t sure what to think, and that’s what I want to talk about. How have you been dealing with people getting into retirement?
Typically, what do you find when people are looking at retiring? Do you find that they’re typically looking forward to it, or that they have some kind of a dread or concern about what it’s going to be like?
CH: Occasionally, I run across somebody who may have a little dread about it, a little anxiety about what it’s going to be like and everything. I’ve had some people that can’t wait for that day.
They’ve got it planned out, and they’ve done all the work. Then they finally get to do it.
PW: Do you typically find that once they do it, once they cut ties, they find any regret or worry about their decision?
CH: Those people, no.
PW: The ones that have done some planning?
CH: The ones that have planned and prepared.
PW: That’s a really interesting observation.
CH: Not only have they planned financially, but they’ve planned for what their life’s going to be like after retirement. They have a focus and a purpose and things that they want to do and all.
Then there’s a third group of people, and the third group of people are the people who are not really anxious about retirement. They may have prepared financially and everything, but they’re, I guess, anxious about pulling the trigger because what they’ve always done is worked.
It’s not that they’re worried about their financial future. It’s just that, I think, they’re worried about what they are going to do. So, there’s two types of planning.
The Two Types of Planning for Retirement
The two types of planning are, number one, you have to prepare financially. You can’t just quit and not have anything and just go out on a whim and hope that it works out.
Number two, you also have to prepare yourself and plan mentally. Ask yourself what your day is going to look like. What do you want to accomplish?
Much like you start a job as an entry level worker forty years ago, well, forty years later you don’t want to be doing the same thing that you were doing.
You had a plan and you progressed through that plan throughout your life. When you stop working in retirement, you need to have a plan for what day-to-day life will look like.
You need to prepare for retirement both financially and mentally.
What do you want to accomplish? What are your goals?
PW: So, you actually find that people do engage you in that conversation?
CH: Some people do, yes. I would say it’s probably close to 50%.
PW: Wow.
CH: Some have an idea of what they want retirement to look like. Then there’s probably a fair amount, 25% or 30% that just want to retire, but they haven’t planned what it’s going to look like when that day comes.
Then there’s the remainder of people who just aren’t sure they’re ready to retire, probably because they don’t have a plan for the future, not necessarily financially, but mentally and physically.
Is Social Security Affected?
PW: Do a lot of people actually get into consulting after work?
CH: Yeah. People who have an expertise in a field or a skill set that is in high demand will do consulting. We have several clients that do that.
It keeps them engaged in the workforce and keeps them social with people that they may have worked with before. It keeps them striving to stay up to date on what they spent their lives doing up to that point.
So, it basically eases them into retirement.
PW: Right, right, right. What I find, Chad, is that people worry that they’re really going to affect their Social Security negatively if they ease in, if they don’t take their Social Security right away.
CH: Right. Yeah. Social Security really isn’t a factor in that. I mean, as far as, “Do I keep working to boost my Social Security?”
The way Social Security’s structured, working another year or two, unless you have zeros in your work history, really is not going to help increase your benefit that much. The main factor in your Social Security is when you actually file for it.
PW: Exactly. Now, I think that people equate that with pensions, because if you have a pension, you might actually find that it might be based on a highest three years of income formula, or a highest five years or something like that.
Potential Social Security Issues
If you have a few years where your income goes way down and you’re working for the same company, then you have a problem on your hands.
Social Security is actually based on 35 years of data, and they look back to see if you have a bunch of zeros. Let’s say, if you look back at your last 35 years or 35 highest years, and if you only have 30 years of work history then you’ll have five zeros in that particular case.
If you move forward a little further, when you have some income, then those zeros will be replaced. They’re not looking at your highest five years, so anything would be better.
You can actually go on Social Security. If you’ve never done this, set up an account, ssa.gov, and then once you get in there, it will tell you they assume that your income is going to continue as it has been the past few years.
In this particular instance, what you’re doing is you’re saying, “Hey, I can actually play around with this and I can take the income history and I can replace the zeros. I can actually do something a little bit different and see how it’s actually going to affect Social Security.”
CH: Right. Positively or negatively, you know?
Quitting work and taking Social Security don’t have to go hand in hand.
CH: You may have a situation where a client has prepared financially to retire and everything, but they’re concerned about retiring early because they think it’s going to substantially negatively affect their Social Security.
You can also look at it in the reverse situation. Just going back a little bit to what you were saying a few seconds ago, I think a lot of people that haven’t been through the planning process and Social Security planning just assume that the day you retire is the day you take social security.
They have the thought that, “Well, if I quit work now, I will take Social Security now.” Well, those two things don’t have to go hand in hand.
The First Steps in Planning
PW: Right. How do you like planning for this in general? Typically, the first step of the planning process is what?
CH: Well, basically, my first step with anybody is to set the groundwork, the framework of what we do, how we do things, and the logic behind that. But then the next step is to gather the information.
I mean, if you don’t know all of their information, you can’t really put a plan together. But I think another important factor, just as important as that, is knowing what their goals are.
What do they want the future to look like? When do they want to retire?
You may have a situation where a person would like to retire here, but realistically, they’re going to retire here.
Sometimes one situation works out. Sometimes the earlier situation works out.
PW: I was just going to say, a lot of people don’t know what’s possible. Because they don’t know what they don’t know.
CH: Yeah. If I don’t know what your goals are and I don’t know what you have, there’s no way I can put a plan together for you. So, anybody that is trying to sell you something that’s going to guarantee your future without knowing any of these other details is just trying to sell you something.
You can’t plan if you don’t know what your goals are.
They’re not putting together a plan. Planning is the key.
The clients that I work with—I won’t say that are most successful in retirement, but are most satisfied and happy in retirement—are the ones that have planned both financially and mentally and physically for what retirement’s going to look like.
So, I think it’s a two-part thing. You can’t do one without the other and have the optimum success.
PW: So exactly what do you expect and what does it look like? What things do you look at and why? Tell me how that looks.
I remember when I was younger, we would ask, “Well, how much debt do you have? How old are your kids? How much do you want to have for college education?” We would go through that.
And then we would figure out, “Okay, well you need …” and it always came out to literally 8 to 10 times income.
Planning and Income
PW: Yeah. It’s where it comes from. I mean, literally we would go through that process with people with young kids, and people are pretty similar in the size of house they tend to buy as a percentage of their income that they make in mortgage payments.
I saw something yesterday. I’m curious about what you’ll say to this.
Somebody sent me a pie chart and said, “Do you agree with this?” It was 20 … no, 35% of your income is what’s acceptable for housing mortgage payments.
CH: That’s awfully high for a mortgage payment. Now, if you’re talking about housing, which would be mortgage payments, property taxes, insurance utilities, okay, I can go with that.
But if your house payment is 35% of your income, you’re going to have a tough time.
PW: Yeah. That’s where I was as well. It was something like 10% of your income could be for debt servicing.
I thought that was interesting. I was like, granted, if you’re just out of college and you basically have a student loan, maybe, but for most people, you try to get that to next to nothing.
So, that was one thing. Then they had savings for the future of just 10%, and I typically try to go … yeah, you start at 10% and you try to inch it up from there.
CH: Sure. But if you’re paying 35% in a mortgage, it’s going to be tough to save 10%.
PW: Well, sure, sure. So, if you were to look at the things that you have people put together to do a financial plan, what would be those items? What would be on a checklist of things that need to be brought in right away?
CH: Sure. We do holistic planning, so we look at everything, not just your investments. But things that you would bring in would be, of course, any financial statements you have from workplace retirement plans, bank accounts.
PW: Okay. So, 401(k)s, 403(b)s, statements that you have, old and new, IRAs.
CH: Savings accounts, IRAs, Roth IRAs, CDs, just anything that has a value as far as that you could turn into cash and pay for things, you know?
So, those types of things, those types of statements. Life insurance, if you have life insurance policies, disability insurance.
Beware of Permanent Insurance Policies
PW: And usually term insurance is preferable, but people, they’re back just trying to sell permanent policies again.
CH: I see the big push on that again lately too.
PW: Yeah. It is. It’s really becoming a big thing again. If somebody’s trying to sell you permanent life insurance policies, there are very few situations where whole life or universal life or anything like that actually makes a lot of sense.
Simply because they use it as a savings vehicle, but it’s a very inefficient savings vehicle. Because the cost of insurance keeps going up inside the policy as you get older, and when is the cost of insurance highest?
When you are in your retirement years, when you’re supposed to be using it supposedly as a savings vehicle. If you pull all that money out and it goes away, the policy lapses, you could have some terrible tax circumstances that befall you for doing that.
So, really, that’d be something I would avoid like the plague.
CH: That’s what I was going to say. Much like any product that’s out there—I won’t say any product—most products that are out there, have a place where they can be useful.
But you can’t blanket statement that, “Hey, this is useful for everyone,” because it’s not.
Holistic Planning
PW: Right, right. One of the things that I do is I split things up. You’ve talked about the things to bring in, and you brought up life insurance.
Well, what would fall in that category for me? Auto insurance, homeowner’s insurance, and one of the things that I like is having somebody give some guidance on that who doesn’t sell the product.
PW: But for the most part, I find that most P&C agents (property and casualty agents), as well as auto insurance agents, tend to be pretty decent at setting these things up. Sometimes they’re not because they’re competing on price.
PW: And you have to be really, really careful, because they may be competing on price to keep the price low, but you may be actually missing coverages that would be tremendously important to you and would cost a little bit more.
What would be some examples of those things that would be important coverages for auto insurance and homeowners insurance?
CH: Your liability coverage, if you’ve got a newer car.
PW: Maybe umbrella coverage.
CH: That’s where I was going originally, was that if your payout limits aren’t high enough, then you’ve got a bridge gap between that and the umbrella that you’re responsible for. Most umbrellas, the liability starts at about $350,000.
And if your auto insurance only goes up to $250,000 and you’re in a severe wreck and someone-
PW: Have you ever seen that, where they didn’t automatically coordinate it?
CH: I’ve not seen it where… I’ll put it this way, a responsible agent would.
PW: Yeah. I didn’t even think they would issue it, but I’d never even thought about that. That never crossed my mind.
That’s typically what happens. They’ll have a limit of liability under your auto insurance of $250,000, and then the umbrella picks up at that point where that leaves off and it brings you up to a million, and that’s the umbrella.
Another thing that … okay, so you said auto insurance, but homeowner’s insurance.
Homeowners Insurance Precautions
One thing I like to point out is that if you have a gun collection or if you have a music instrument collection, anything you have that might be the slightest bit unusual, make sure that your homeowners insurance actually covers those things.
CH: Right, yeah. Yeah, because most people don’t realize that. They think, “Well, because it’s in the house, it’s going to be insured.”
But there’s all these clauses in your insurance policy, and you’ll have limits on stuff. It varies from policy to policy, but your wife or your spouse may have some expensive jewelry, but your policy only covers up to $2,000.
CH: So, if you have expensive items, whether it be jewelry, music equipment, photography equipment, woodworking equipment, or some type of expensive hobby where you’ve accumulated a lot of stuff that has a lot of value, you want to check with your agent and make sure that those items would be covered.
If not, you want to make sure that you do get them covered.
PW: I remember when I got licensed to do profit and casualty insurance, they were talking about the contents of the house. How do you define that?
Well, if you were ever to pick up the house and turn it upside down, whatever would go to the ceiling. That was the way one guy actually described it. But, yeah, I thought it was funny.
Yeah, so those are types of coverages, and you’re ensuring those things against loss, and typically replacement value is pretty normal with those types of things. So, you look at maybe your musical equipment.
Maybe I bought a guitar for $1,000. Well, sometimes guitars go up in value.
Let’s say you had a cymbal. If it’s a brand new cymbal, it might be $500. If it’s used, you might be able to get it for $150. That’s a big difference.
If you actually lose that cymbal on your drum set, and then you want to be able to replace that, you’re going to have to cough up $500 if you want the same thing that you had, otherwise they’ll basically give you a used price for it.
Those are the types of things you must be really conscious of.
More Insurance Considerations
So, what’s the value, the replacement value? You’ve got two different deductibles to be conscious of—collision and comprehensive.
Collision I think of in terms of you caused the accident and you’re at fault.
A comprehensive would be a deer decides to see if they can leap over your car and doesn’t quite make it.
Or a hailstorm or something like that, or you have a tree limb that falls on your car.
Those are things that are not in your control. Having a higher collision deductible, remember the thing that you are at fault for, has more of an impact on your premium than the comprehensive, typically.
One of those things that you can do is play around with those deductibles, because if you start to think, “I can’t afford more insurance,” remember, it’s a premium game.
I mean, these people are competing to have the lowest premium: “Call up this number and you can save whatever percent on your auto insurance.” Well, you might get cheaper coverage, but the reality of it is you may have a lot of things that aren’t covered that really ought to be covered.
CH: Yeah. You may have less coverage for a lesser price. That’s kind of the key to it and everything.
PW: Typically, I tell people to go around their house with a camera. Then save the video because if something ever happened, if your house burns down, you want to be able to prove what you owned.
Medical insurance is another thing. Social Security has a disability feature. It’s very, very limited for most people.
Other types of risk management, wills, making sure that you have wills and trusts.
CH: Powers of attorneys, medical directives, all of those things.
PW: Yeah. In the planning process, you want to look at all of those things, because if something happens to you, it’s really good to have a planner that knows where everything is.
In the financial planning process, it is very important to know what you have and where things are.
Then they know where everything is, so when somebody comes in distraught, number one, they’re grieving. They’re going through something terribly, terribly difficult, and to not know what they’ve got, where it is, what all of these things mean, can be tremendously challenging.
So, that’s another reason that having somebody that really knows this stuff, and having it in one place that you can find is very, very important.
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