Episode 4: Frequently Asked Financial Questions

In this episode, Roger and Jake talk about 3 of the most popular financial questions that they get asked and the way they address these key topics.

Find out about Doing The Math, Stress Tests, and Medical Armageddon.

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In this episode of the Life and Finances Together Podcast our financial professionals, Roger David and Jake Rinvelt, will be sharing answers to some of their most frequently asked financial questions. 

So let's jump right in with probably the most common question that you hear on a regular basis, the big one that everyone wants to know, WHEN CAN I RETIRE? And along with that, how do I avoid outliving my retirement money?  

Yeah, it's always going to be a big question with anybody that comes into the office.

That’s one of the biggest goals that people are trying to plan for and succeed in achieving -  that retirement, that financial independence. One of the things that we always say, though, is you've got to do the math. A lot of the information out there today just shows the general “rule of thumb.” And there are free calculators, perhaps on your 401(k) portal, or just on the Internet. But, that calculation doesn't do any kind of justice to proper planning for retirement.  

You really have to sit down and do what we call doing the math. And there's a lot involved with that. And probably one of the biggest things in doing the math is putting together the list or report or spreadsheet of where you're spending your money. And it sounds kind of simple, but really it gets more complex when you start thinking about how those different costs or different expenses are going to change over time. Like the time you’re living in retirement. What are the inflation rates for different types of expenses? For example, medical costs have most definitely inflated at a much faster rate than our regular living expenses, especially in the last 20 to 30 years.

So we sit down and do the math. And first and foremost, we're going to take a look at where you are spending your money. And when you think about it, when we get an idea of what that list of things is, it really reflects where your value set is. It really tells us what's important to you. 

Some people say the vacation budget is going to be through the roof. “We're going to travel. We're going to go and do all these different exciting things. We want to have some fun.” And there are others who are going to say, “We're going to stay home and I'm going to get my kayak and I'm going to circle around the lake every single morning. And that's what I'm going to enjoy with maybe a cup of coffee while I'm kayaking around the lake.” After accounting for those retirement hobbies and plans when we’re putting together what your cash flow is going to look like, there are also the other things to plan for. What are the one-off situations? What are the major expenses? Where's that anniversary trip coming into play? Where's that big family trip coming to play? Maybe to Disney on land or on sea!

With all of these questions answered, we start doing the math. Sitting down and getting an understanding of where you're spending your money, what's important to you, and then also establishing a timetable that relates to the different expenditures or the changes in your lifestyle as you get older. A lot of people are going to do more things when they're younger compared to when they're older. But, medical expenses are probably going to be higher when you're older than when you're younger. So we take the time to think about and plan for all of these different things as we prepare to create those ultimate projections. And we're looking at not just one or two or three or five years. We're looking at a lot of times 20 to 30 years out to make sure that we're taking into account as much as we can forecast and prepare for.  

And what's even more important in doing that math is making sure that our assumptions are realistic. To sit down and say, “Well, I've got a million dollars, I can make 10 percent of the money and I'm all set. I'm going to have $100,000 a year.” That used to be the model. That's what everybody used to talk about. But that's just not realistic. It's not going to happen now.  

The other main thing that we look at in doing the math is what's your withdrawal rate? How much are you taking out? Is it excessive? Well, you can't just say, “Hey, I'm going to spend more money in my early years of retirement because I'm younger and I want to do more things.” Well, if you overspend in those early years, you may not have enough to compensate for an unexpected health event or life event later on in your retirement years. So you have to balance those things out. And that's where doing the math and looking at the retirement projections comes into play.  

One major thing that gets neglected is that nobody goes back and looks at the plan and makes sure that things are still going well! We're going back and we're looking at that financial plan. We're checking our work. We're looking at the math. Are we still on track? Did the major expense that we had six months ago derail us? What impact did the market fluctuation that we had a year and a half ago have?

So we're always going to go back and take a look at these things to make sure that we’re still on track and make adjustments if they’re needed. Looking at retirement projections, working with clients and making sure that they're going to be okay, it's just sitting down and continually doing that math.  

We love doing the math. When clients are sitting down and they’re reassured from actually looking at the numbers and not using a rule of thumb... When we’re interacting with the client and they're running that show for us, they're telling us what they want, what their objectives are, where their value set is, and what’s important to them, we put that down in dollars and cents. We put that into the financial plan and keep on reviewing what those unique conditions are. It's the key to success.  

You think about it over time when you have a job, if you get a bonus and it’s bigger than expected, you consider it a great year. You take a great vacation. You do some things that you didn't think you'd get to do. But when the bonus isn't that big or maybe they cut your pay and cut back hours, whatever that case may be, what did you do? You adapt. You changed what you were doing. You change it up. You do the math internally. And you figure that you’re not going to be able to do all the things you did when you had more pay and the bonus. The same applies to retirement. When you're doing the math and doing financial planning, you've got to adapt. You've got to be willing to look at it objectively and you've got to be willing to make those changes to make sure that you're not going to outlive this retirement nest egg that you've worked so hard to save for. 

Another major question that comes up often involves medical long term care. WHAT HAPPENS TO THE FINANCIAL PLAN IF WE NEED LONG-TERM CARE? Will the money last? This is becoming more common as our retirees are living longer lives. And when folks ask about this, they're also asking about the tough question… What happens if one of them passes away prematurely? Will their spouse be taken care of and how might their plans change?  

The way in which we solve for these types of scenarios, these unexpected things that we try to plan for in a financial plan is through stress tests. Now, we don’t put you on a treadmill and hook up any nodules to your chest and make you run in the office. We call them stress tests of your financial plan. So we take this base plan that we've created by doing the math. God willing, you both live peacefully. Nothing bad happens. And you live until you're 90 or 95 years old. We take a look at that base plan. And then we add a number of types of stress test scenarios on top of the base plan.  

We're looking to see, if one of you does prematurely pass, what type of impact does that have on the plan. And there are so many factors to it. You lose one of the social securities. The surviving spouse now has to pay taxes as a single tax filer. We call it the widow tax.  

These are two things that immediately impact the results of a plan. People anticipate that expenses may cut in half. Well, that's just not going to happen. Some expenses may fall. But expenses will pick up in other areas. So we put all of that into the planning analysis. And when we run these stress tests, whether it be for premature death or even going into a long-term care facility, we will also check to see if there are any insurance deficiencies that we need to solve for as well. This tells us if you need some additional life insurance while you're still working. And then we ask if you can get it through your workplace plan or if you have to go out and buy a personal policy. These are just some of the different things that we solve for when we're running these stress tests. Those are primarily the ones that we work on with every single client because they're so prevalent. The scenario that we will typically put together is the worst-case scenario of one spouse needs to go into a facility. Meanwhile, the other spouse still needs to maintain the home and still maintain all those other living expenses. If you're not looking at the bad things that can happen, you're not being realistic and you're really not planning.  

Nobody likes to talk about these things. We don't like to talk about these things as advisors. We'd love to just be able to say, “Hey, you've saved enough, and everything looks like you're going to live into your nineties, and there's never going to be a bad health event, or a long term care event, or an unexpected major expense, or the roof blows off the house.” Well, that's an unrealistic expectation. So the stress tests that we put together, the two main ones, premature death and long term care, those are the things that you need to have as part of your plan. Those need to be the major stress tests that you are looking at every single time you have your review meeting.  

And then also we can build in other tests for things like if something goes wrong with the house, or you have an unexpected medical expense with a joint replacement or emergency procedure. We put those stress tests in and make sure that we've looked at it. That doesn't mean it's going to happen, but it does mean that we've thought about it. 

So, these stress tests are critical to the overall success of a financial plan and especially to determining retirement longevity. Nobody wants to outlive that money. And we understand that these are things that nobody likes to think about. Nobody likes to do a stress test. If you have to go on the treadmill for a health issue, nobody likes doing that because it means something could be wrong. Well, the same thing is true here. Something could happen. And we want to make sure that we're prepared for it and that we've discussed it and that we reviewed what the plan of action is going to be. That's really what comes out of the stress test. We see the numbers; we see the result. And then what do we do? We create a strategy or a plan of action.  

Well, speaking of those scenarios and stress tests, folks often ask you about general medical costs in retirement, right? Prescriptions and surgeries and insurance even. They want to know HOW WILL RISING MEDICAL COSTS IMPACT RETIREMENT?  

It’s a major topic. The inflation rate is so much different for medical expenses than for normal everyday lifestyle expenses. And there's uncertainty with Medicare. Health insurance premiums have risen like crazy.  

Roger remembers when his twin daughters were born, they had family coverage for health insurance and the premium was right around $380 a month. Low deductible, hardly any co-pays. It was great. That was 24 years ago. Fast forward to today and the premium that they pay now for health insurance for their family of 5 is right around $2,400 a month.  

So what we affectionately call this rising medical cost situation that we help clients plan for is Medical Armageddon. And we ask the questions: What does the cost increase look like? What could be the condition of Medicare? What's the inflation rate on medical costs and on our premiums and even out-of-pocket costs? It is a reality that everybody's going to have to face. And if you're not preparing for that properly, there's going to be a shortfall in your retirement. A lot of mistakes that have been made in planning for retirement have been because of underestimated medical costs. And this is why you see people working part-time, even in their retirement years, even into their seventies. This is the reason why, because they just failed to plan properly.

Not a lot of people understand what that's going to encompass once they enter retirement, because in these working years, you have a couple of options to choose from through your workplace benefits. You can pick a high deductible HSA plan, a PPO, or an HMO plan. There are a few additional choices, and your employer pays for a good chunk of that coverage. It's pretty much “plug and play.” You don't really have to think about anything other than your out-of-pocket maximum, what your deductible is. It's pretty simple… while you're working. If you work for an employer that provides insurance. But as soon as you're done working, if you retire before age 65 and you're not eligible to enroll in Medicare yet, you've got to go out into the marketplace and get some coverage that needs to be adequate so it can cover whatever happens to you and your family. And you're going to see how expensive that is. And even once you get enrolled in Medicare, the Medicare Trust Fund is going to be running out in 2028. So what does that mean? What implications will that have on these costs?  

These are all things that we're proactively planning for in every single client meeting. We're adjusting the, the indexed inflation rate for these medical expenses. We're anticipating what we think Medicare is going to cost once the Trust Fund runs out. So we're trying to be very proactive and build this into every client plan so that you will understand what it's going to be like in retirement.  

When you look at projected medical costs going out 20 or 30 years, you think, there's just no way that these costs are going to get that high. Well, in the example of Roger’s twin daughters showing coverage 24 years ago and now, it’s true. And the current coverage isn't as good. Higher deductible, more out-of-pocket costs. So there's a lot of uncertainty that comes with this.  

So what we’re doing and what we do here, at Rinvelt and David, is plan with each client for Medical Armageddon. We can use our assumptions and use these numbers and say, “Hey, we think this is what it's going to be.” We don’t know definitively that's what it's going to be, but we are planning for the absolute worst case scenario, so your plan and you will be prepared.  

So when we're doing the math and we're doing the stress tests and we're planning for Medical Armageddon, we may seem like a pair of “Mr. Negatives.” Everything that you see is going to be the worst case scenario. That’s because we want you to be able to plan for that. The worst thing that we can do is be overly optimistic. So part of our job is to be the pessimistic guys that are going to show you the worst case and know that when you lay your head down the pillow at night, we have planned for that worst case scenario. And when we do the math and the projections look good and we're not running out of money and we're able to maintain this lifestyle that you've worked so hard to achieve, ideally you're going to feel pretty darn good about where are.  

And since we've planned for the worst things, it can really only be better from here. At least, that's what we're trying to achieve.  

Thanks so much for learning more about Rinvelt and David's answers to some of the top frequently asked financial questions today. If you have any questions about our team, our services, or finances in general, please check out our website. Send us an email, give us a call. And of course, please like and subscribe to our podcast and stay tuned for our next episode.