Many retirement plans are geared toward the specific date a person retires — but clients will hopefully live long beyond that, and there are a lot of issues they'll need to consider, says John Napolitano, an Accounting Today columnist and founder of Napier Financial.
Transcription:
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Dan Hood (00:03):
Welcome to On the Air with Accounting. Today, I'm editor-in-chief Dan Hood. Most people's thinking about retirement doesn't go much further than the day that they actually retire, but with any luck, they're going to be around for a lot longer than that, and that requires a whole extra level of planning and preparation and thinking. Here to talk about all that is John Napolitano. He's the founder and CEO of Napier Financial, and he's a columnist for Accounting Today and an all around expert in this area. John, thanks for joining us.
John Napolitano (00:26):
My pleasure, Dan.
Dan Hood (00:28):
Let's dive and sort of say why do so many financial plans stop on a client's retirement date?
John Napolitano (00:33):
Well, that's a good question. I guess that is one measurable day for sure. It's a day that most people can put a line in the sand and say it's going to be July 1st, 2025. So it's one of the few certainties, I guess, that you can plan for. And also a lot of the planning for retirement is about accumulation and savings and the innate fear of, am I going to run out of money and doing absolutely everything possible to make sure that that never happens. So I think that's why that's kind of the first line in the sand, if you will,
Dan Hood (01:07):
But you make a good point, right? That is the only date we have any certainty of if we had any certainty about any other dates involving retirement, that would be very scary. If we do the actual final retirement date the day you don't wake up for work the next morning, then we could really plan efficiently. But it would also be kind of, we'd spend 20 years thinking, oh, it's coming up. But yeah, no, that makes perfect sense. But there is, as we say, hopefully a lot of days after that date and they can have significant, significant impact and require very different kinds of planning than the accumulation phase of the retirement. So anyway, let's talk about what are some of the things that clients and their planners aren't thinking about when it comes to the financial aspects of the post-retirement life?
John Napolitano (01:48):
Well, I mean, what they're not thinking about is the kind of sudden shock of not having an income stream every day and the fact that you're drawing down on money. And I suppose one of the first decisions to make is social security to take it or not. And that of course is an issue that can come up at age 62, but you don't have to take it till you're like 72. And in most cases, we start to, we recommend if people have longevity in their family and they're in generally good health, that they consider waiting as long as possible because of that annual increase every year is hard to beat. That's a guaranteed return. That is kind of pretty good, Frank, the only good return you're ever going to get from Uncle Sam. So that's first thing to think about is social security or not.
(02:37):
The next thing to think about is maybe you've lost some benefits that you used to have that you used to count on. So for example, like group life insurance, most people in retirement don't or shouldn't need life insurance, I should say, if they planned properly, excluding the estate taxes or business succession or any other reasons why you might have it, but take a good look at those benefits and what you lost and how you're going to replace it. And Medicare is not as simple as it seems. It's not like you just, oh, let's see, I'm 65, let's sign up and start collecting benefits. Not the case, man, there are so many options and you're going to start to get email and letters and direct mail from hundreds of different companies trying to steer you through the maze of Medicare and what you should choose and what you shouldn't choose.
(03:28):
It's not going to be as good as what you had at work. So as long as you go into it thinking that you'll bell be okay, another thing to think about might be how you own your property. So a lot of times during the work accumulation phase, people have retirement plans, whether it's a profit sharing of 401k or something like that. And most don't think too deep about the beneficiaries. They say, well, to the spouse and then to the kids equally if they have kids. But at retirement age, your children are a little bit more mature, generally speaking, and what's going on with them. And it gives you reason to think once again about your beneficiary elections and how you might change those, should they be changed at all, and then integrated with your estate plan. The estate plan is something that, frankly, that's a big focus of ours throughout the financial planning process.
(04:20):
Most of our clients have more than enough money to retire, so we're not really spending a lot of time on, are you getting out of money? It's more about the other stuff like the estate plan. God forbid you get sick, where's all the cashflow going to come from to pay for your healthcare expenses? Issues like mortgages, you hear many retired people say, well, I'm retired now. I want to pay off my mortgage. And I say, well, I kind of understand. I can relate to the fact that you want to be debt free. However, if you're paying, call it 5% for a mortgage, some of us are lucky to still have a two and a half percent mortgage, but if you're paying, let's say 5% for the mortgage, the question to ask yourself isn't, do I want to be debt free? Are you going to earn more than 5% on your money?
(05:05):
And if you can earn more than the cost of capital, well then don't pay off that mortgage. Then it's about managing expectations because if the first year you make that decision, the client's portfolio was off by 12%, they're going to say, well, see you were wrong. It's like, well, dude, I may have been wrong for that eight or 12 month period. Remember, we're talking about a full market cycle, which is several years long, and in the case of interest rates, that market cycle lasted 40 years. So that's another consideration is what to do with debt. Any personal debt, any non-deductible debt, god forbid, is any credit card debt that you want to get rid of because that just does no advantage. And generally the cost of those funds are pretty high with the exception of certain car loans. And that's another thing on the debt side, we get that a lot. Hey, I'm retired. I want to get a good car. Should I buy it, lease it, finance it, stroke a check, and the retiree's initial inclination is to just stroke a check for that. I don't want a car loan. But again, look to date, near the end of the model year, you're finding 0% financing, 1.99% financing. And frankly, I think that's a good use of capital. Do not write a check for that car and think about financing it at the low rates that they may be offering.
Dan Hood (06:27):
It's fascinating. You should go through all of those things. Those are all things that pre-retirement, you would be like, of course I should be thinking about all these things. These are all things that go with having good, well-managed finances, but there's this tendency, I think you described for afterwards to be like, oh, that's out the window. Now I'm retired. I can do, I don't need to pay as much attention or any attention to my money. It's just like you said, write a check, write a check, figure out, I don't want to worry about these things. I'm retired now. But you still have to think about all these aspects of your life. And I'm curious about one in particular, because you talked about the benefits going away with when you retire, when you leave your workplace, right, you're not getting your insurance anymore and so on, but you're also not getting a steady flow of cash that somebody else writes a check and money just shows up in your account and you get to spend it.
(07:12):
You have to think about, or your planner or has to think about how the money comes to you every month that you're going to spend, because you're still spending money every month, your expenses in most cases. Tell me about, we talked about this a little bit too, how much do expenses really go down in retirement or do they go down at all? And then in the same case, how do you get the cash? You need cash on a regular basis, just as much as you did beforehand, right? That's got to come out somehow. And obviously hopefully your planner is helping you a lot with that, but how do you have to think about that?
John Napolitano (07:43):
Well, good question. You just asked a lot of questions. The first one is, there was
Dan Hood (07:48):
Like 16 questions in there. I'm going to go away from an hour. You answer all those questions and I'll come back.
John Napolitano (07:52):
The first one is, how much do you need? Will I spend more? Will I spend less? Well, think of it this way. If you go back through your checkbook and credit card statements for the last 12, 24 months, I'm willing to bet you'll see the most damage done. IE the most spending is probably from Friday night to Sunday night, weekends when you're not working. So when you're not working seven days a week, oops. The tendency is to spend a lot more. So I'd say the first mistake a lot of people make is they spend a lot more in the early years. Now, again, if you have $10 million and you need two 50 a year, no big deal. Spend 300, spend three 50. But if you have $2 million and you start spending two 50 a year, you're going to be in the hull pretty damn quickly. So spending still has to be managed.
(08:41):
In fact, that is probably one of the most common mistakes for the millionaire next door, is they start spending too quickly. And unfortunately, one of the areas we see it in, my God, their heart's in the right place, but they want help their kids. They want to help their kids buy a house. They want to help their kids pay off their college loans. They want to help their kids put a payment on whatever they want to take 'em on a trip. They want to do things with their family and their grandchildren. And we have had a few of those millionaire next doors that, in my opinion, have done that to their major detriment. And they just don't see it that way. And some will say, well, look, it's going to go to them anyway. Well, dude, it's going to go to them anyway if there's something left.
(09:23):
So you need to make sure you take care of yourself first. So the biggest misnomer is that retirement, nothing changes except the income stream. You're still the same guy. You just have more time off. You're going to spend more money during that time off. So again, not to kill this point, but managing spending is really, really important. Yeah, yeah. Makes now how you, that makes spending was another one of your questions within, there's a few ways that people can do this. I'm not a big fan of income products, if you will. Things like annuities, not a fan. You're locking in a poultry return for the rest of your life, guaranteed. I don't think that's a good idea. And I also have another contention, and that is, okay, so let's say you're 65, 68, whatever, and everyone all of a sudden says, Hey, I'm retired. I need to be really conservative with my money.
(10:14):
Do you think you're going to die in a year or two? I mean, I think life expectancy at 65 is still 20 years, and anything more than seven to 10 years is considered. So I disagree with that premise that you have to be super conservative during retirement. No, you don't. You still need to deliver a balanced portfolio to exceed the rate of inflation, and hopefully that rate of inflation will come down sustainably so that we're not shooting for aggressive returns. So that's misnomer number two there. And then the third is Vanessa, how do you develop that income stream? As I said, there's a few ways to do it. I think a balanced portfolio is the best way to do it. If you feel like you want income assets, not a fan of annuities, I would look at things like fixed income, even real estate. A lot of the people we work with have real estate, whether it's the rental property that they once lived in or the business that they owned, lived in their building, and they still own the building, but they may have sold the business.
(11:15):
So that's another good way. And another way, if it's coming down from your portfolio is kind of the bucket strategy, and that is decide how much you need per year. So let's say it's a hundred thousand dollars a year, just making up a number, you might consider $500,000 in laddered investments. So one in a one cd, which I think you can still get in the fours on a one year cd, maybe two year treasuries, three year treasuries, so that you always have five years worth of spending money there. Now, there's no guarantee that a market downturn for your risk-based assets is going to be less than five years. But I think if you look at history, you'll see that in many cases they have been turnarounds have happened within the five plus or minus year basis. So you pick your number client that's based on their risk tolerance.
(12:08):
Some want seven years, some want 10 years, and I have some that have enough cash that you'll never run out of money, even at a 0% interest rate. So it's going to be client by client, but I kind of like that bucket strategy. And then systematic withdrawals, just like on the accumulation stage, we advise dollar cost averaging, not worry about swings in markets, don't try to time it, et cetera. Could be the same thing on retirement. Systematically withdraw money every single month from your overall portfolio. And this is where the bucket strategy helps on top of that. And that is if so you have a really bad year or two or three, well stop the systematic withdrawal and just start draining the buckets and draining the cash buckets. So those are probably the most common ways that we see.
Dan Hood (13:00):
Makes sense. Makes sense. Lemme, you talked about circumstances may change, the economy may tank or take off. Let's hope it always takes off, but sometimes it tanks or something may go wrong with some part of your investments or something like that. How often do you find clients having to change their financial plans post-retirement for things like that or for other factors?
John Napolitano (13:22):
Very frequently, frankly. And we call it episodic wealth management. I think gone are the days where a financial planner can meet with their client every quarter or twice a year or once a year and know that everything's all set. And that's my commitment to you, Mr. Client. No, that's not true. We call it episodic wealth management. And as stuff happens, you need to be there available and ready to amend and change and alter those plans and that episodic wealth management. In the winter months, we frequently get calls. I recall one came in on a Sunday night, Hey, we're looking at this house in Florida. We've been here for a month, we're renting. We want to buy. Can we afford this? We're like, well, let's go back in and dive through and take a look at it. And then if the answer is yes, well now how should we pay for it?
(14:13):
Do we cash? Is it a mortgage? What balance of debt and cash do we use? How about renting it? Do we need to rent it? What are the consequences of renting it? So I believe that episodic wealth management lasts for life and people change their minds. They want to change residences. They want to help their kids. They don't want to help their kids. They want to give to charity. They don't want to give to charity. They want to invest aggressively. They want to cash out of some things. So it really doesn't end. And it does change frequently. Not for one. But I'd say the odds are every client has an episodic change at least once a year.
Dan Hood (14:54):
Wow, okay. Yeah, that's a lot. I can see. I hadn't thought it would be quite that frequent, but I guess grandkids and children and then the market and all those other things. Yeah, we put it that way.
John Napolitano (15:02):
I'll give you a simple one. A simple one right now is I personally got a non-renewal notice for my flooded insurance on a Florida property. And that's not because I'm a deadbeat or I didn't pay, it's because they want the hell out of Florida. And they're like, we're not going to ensure flood for you. Are you crazy? Boy, you can set four feet of water in that house. So now the question is, okay, what do you do? Do you go butt naked? Do you join the FEMA program? What do you do for that? So those kinds of things happen all the time.
Dan Hood (15:33):
Yeah, I was going to say, there's a lot of people in Florida getting those notices now. So question at the very extent, but said the same thing can happen. Well, not exactly the same thing, but similar sorts of unexpected sort of things can pop up everywhere. So that makes a lot of sense. We talked a lot about the financial aspects of retirement. I want to talk a little bit about some of the non-financial aspects, but we're going to take a quick break. Alright, and we're back with John Napolitano of Napier Financial. Like I said, we've been talking about the financial aspects of post-retirement or everything that happens after your retirement day, which is hopefully going to last a long, long, long time. You have written about this in the past and talked about this, the fact that apart from financial issues, there are a whole lot of other changes that happen when you retire that people aren't necessarily prepared for. Financial planner may have prepared them for the money aspects of things. There's a lot of personal and emotional and time-based, certain things that go on with retirement. Maybe we talk about that a little bit more. Talk about what are the things people need to be thinking about the issues that retirees should be thinking about beyond the financial issues.
John Napolitano (16:41):
So the biggest one is time. And that is we've got 168 hours a week to fill, and formerly 40 to 60 of it was made up of work. Either you're working hard or you're commuting or something. You've got 40 to 60 hours to fill and it's probably not going to be long after retirement where one spouse looks at the and says, Hey, I married you for better or worse since sickness and in health, but not for breakfast, lunch and dinner every day.
(17:13):
So you really need to think about what are you going to do with that time? And you've seen a lot of people, whether they're turned into a starter at a golf course or they're bagging groceries or just due doing something fun because they get bored. I call that they failed retirement, not financially, but they plan for how they're going to use their 168 hours. If you can play golf every day, God bless you if you go to the beach, your boat every day, but most people can't and they get bored with that activity. So you might start a few years before that dreaded retirement date and start thinking about just how you're going to spend your time. And we do that through the life planning process where we ask people to kind of role play a little bit about make believe the doctor tells you have 10 years to live now that you've got a finite end date, let's say, how are you going to spend your time?
(18:08):
What are the things you really want to do? And you keep playing that game to where you get down to, okay, you got one year left, buddy, now what are you going to do? And all of a sudden all the really important stuff comes out, whether it's I need to see my daughter on the west coast more than once a year, or I would like to attend more of the grandkids little league games, or I want to go to all the dance recitals next year. And when they start spewing all these qualitative and family and charitable and other activities that they want to do, that's when the financial planner starts to begin to quantify to see what's feasible, what's possible, what can you do. So I'd say the time element is probably the biggest non-financial issue for sure.
Dan Hood (18:51):
But it's interesting because I think you talked about recitals and stuff like that, and those are little league games and those are relatively low cost items, but some of the things people are thinking about if it's seeing your daughter on the west coast more often, right? That's flights and time away and possibly hotel rooms. If it's see the world, it's expensive, right? Golf is not cheap if you're doing it. So I mean, a lot of those things can involve a financial aspect as well that they may not be expecting. You talked earlier about people suddenly spend their spending explodes because they're like, I can do anything I want. I'm retired. But as they start thinking about some of those goals that they may not have thought about beforehand, some of the money things come in there too.
John Napolitano (19:31):
Yeah, I mean you may be in Florida, but that little league games in Ohio. So in order to watch those games, you are definitely hopping on a plane and you're spending a couple $3,000 just to go watch a couple games. It makes major league baseball look pretty
Dan Hood (19:45):
Cheap, doesn't it? Suddenly you're like those $40 beers not so bad if it's only there in parking, but if it's a $3,000 flight, and how does that play out to you? Five days? You said there's that sudden, it's almost a shock, right? You've been spending eight hours a day or 10 hours a day in many cases for a lot, particularly for the people who hell have financial planners, they may all have been working a lot more or a lot harder than some other people, part of than me, for instance, who's seven hours and 59 minutes and then I'm out of here. They spend a lot of their time working and then suddenly they don't have anything, right? They feel a little empty. Obviously there's a period of adjustment. There are other short-term issues that go along with that transition. And then maybe are there longer term ones that they should also be paying attention to?
John Napolitano (20:34):
I would say the issues are everyone always has a pretty robust to-do list. So I would literally make a to-do list and write this stuff down that you want to get done. It's your hobbies or a portion of your yard or friends that you want to visit or things you want to do, make a list. My wife and I did that about 20 years ago. Kids were getting into their teen pre-college years. We had home repairs we wanted to do. We had a bunch of stuff we wanted to do. It felt overwhelming. So we made a list and sure enough, every year we'd pull out that list and say, son of a gun, look at this. We got four of those things done, but we added three more. So you still keep a running tally. So I would do that. Second thing is I would coordinate with the spouse to the extent that there is one, and find out what's important there. It's not just about either breadwinner. And today it's very common where both retirees are former breadwinners and both are struggling with the same issues. So I would make sure that conversation is regular and current with the spouse about, and how do we want to spend our time? What are some of the non-financial issues we want to do? And think about your legacy, how do you want be remembered? And that's something people don't think of too often, but now they've
Dan Hood (21:54):
Got eight hours a day to start thinking about it.
John Napolitano (21:56):
Amen. Yeah, exactly. And it's preoccupied with it. Well, then we're going to have to send 'em to a therapist.
Dan Hood (22:02):
I know their expense that they probably didn't plan for,
John Napolitano (22:05):
They probably didn't plan for. And longer term, I think it might be kind of qualitative issues about family that really builds down to, even for our wealthiest clients, the conversation always comes back to family. And it's not just visiting and it's not just doing things with them. It eventually turns to the money side. And that is how are you going to get it to 'em when a string's attached could there or should there be? And everyone thinks about child getting divorced and how might you protect that money from a future? And I'm kind of surprised how many people haven't really thought about that. And I suppose on the other side, I understand that divorce is over age 65 or now a real popular thing as well. Really?
Dan Hood (22:56):
Wow.
John Napolitano (22:56):
So yeah. Yeah. It's a very fast rising demographic.
Dan Hood (23:02):
I wonder, well, that's a whole other topic. I want to dive into that for another hour or something. That's interesting.
John Napolitano (23:08):
Yeah, exactly. So I would say a lot of it's going to come back to the estate plan and the dispositive provisions within the estate plan, and how do you do what, and think about the people that are going to succeed you in the management of that money, whether it's for a surviving spouse or a child or a grandchild, and how that's going to happen and what kind of wishes would you have for them and making sure that that stuff's taken care of and that estate plan, while we all want to say it's long term, unfortunately last year we lost a handful of clients and some of them out the blue, most of them, their estates were buttoned up and really well done. But one in particular had been procrastinating for two years and he didn't survive last year. So well, he is only got one child and a spouse, so it's not like the end of the world. But on the other hand, there were things we'd have liked to seen him do that he never got around to because he couldn't get out of his own way. Right. Right.
Dan Hood (24:10):
Well, what's really sad, right? Like I said, we were saying all through, you got eight extra hours a day to take care of that sort of stuff. Do you ever find, I'm just curious, do you ever find people like you come back to, you got 80 hours a day, you got to fill it somehow. Do you ever find people filling it by just messing with their estate plan or just saying, just overly focusing on that kind of stuff, changing their will every three months and rearranging their finances? Does that ever happen?
John Napolitano (24:36):
It has happened, but fortunately not tough. And we would tend to part services, part company with a client that is that anxious. But what does sometimes happen is clients all of a sudden become financial experts and they're watching Bloomberg and CNBC and Fox Business News every day, and they want to know, well, what's the election going to do to my portfolio? And all of a sudden things they never thought about before entered the conversation and it was okay, but I'd suggest keep the TV off during the daytime. Go weed your garden or plant tomatoes or visit the grandkids or play golf or go to the beach or go drown a worm and try and catch some fish ing. Go to the library, do something other than that. But yeah, no, that does happen now. And sadly, it's the same answer as she got before. What's the election going to do to my portfolio if I knew that I would've retired eight elections ago? And
Dan Hood (25:34):
We already planned for that. Right? We already took care of that. We were way ahead of you on that because what we do for a living.
John Napolitano (25:41):
Exactly. Thanks.
Dan Hood (25:42):
Fun. Very cool. Well, but all the advice you give 'em as opposed to doing that is all good stuff, right? So your grandkids get out and play golf. Wei Gardens are all good things for people to do and to start thinking about how they're going to be spending their time doing it in the years post retirement. So for all that, that's great advice, John. Thank you very much.
John Napolitano (25:58):
My pleasure, Dan. Thanks for having me.
Dan Hood (26:01):
And thank you all for listening. This episode of On the Air was produced by Accounting Today with audio production by Adnan Khan. Ready to review us on your favorite podcast platform and see the rest of our content on accounting today.com. Thanks again to our guest, and thank you for listening.