Retirement Income Strategies and Social Security Planning with Chris Hensley
Chris Hensley:
So you can have been successfully saving and investing and watching the market go up and down for your entire life. And then when you turn it from an accumulation portfolio into a decumulation portfolio, where you're actually spending down or pulling some of the assets out of there, this can be a thing that can really, really affect you, right?
Ryan Kolden: Welcome to Retirement Simplified, where we focus on making complex retirement concepts simple. I'm your host, Ryan Colden. Join us as we talk about the strategies and tactics that can help you achieve your retirement goals.
Disclosure: Ryan Colden is an investment advisor representative of RPG Family Wealth Advisory. Colden Wealth is a DBA of RPG Family Wealth Advisory. The opinions expressed by the host and or guests in this podcast do not necessarily reflect the opinions of Colden Wealth or RPG Family Wealth Advisory. No information on this podcast should be construed as investment, legal, tax, or financial advice.
Ryan Kolden: Today on the show, we have Chris Hensley. Chris has over two decades of experience in the financial services industry. Chris is an expert when it comes to retirement and social security planning. Chris is a retirement income certified professional and a certified estate and trust specialist. Beyond his professional certifications, Chris is a radio and podcast host of the show Money Matters. Chris, welcome to the show and great to have you on.
Chris Hensley: Ryan, thank you so much. I'm excited to be here.
Ryan Kolden: I'm excited to have you here. So let's just get right into it today. We're going to do a deep dive into high level retirement topics as well as social security. So let's just start from a high level view. Given today's economic and retirement landscape, what are the key steps that people should be taking to secure their retirement?
Chris Hensley: Yeah, you know, it's scary. It's a scary time for people if you've worked your entire life and you build up this bucket, right, this retirement nest egg, and you're making that choice of turning off your paycheck from your employer and starting retirement, right? So I always tell people, you know, you want to look at this Really changing from the accumulation to the decumulation phase. Three months, you know, if we're lucky, if we can get three months ahead of it. But I would say start looking a year or two ahead. And I'm not talking about what's worked for you in the past to get you to where you're at. I'm talking about changing your focus and getting a second set of eyes where we're focused on Social Security. where we're focused on drawdown, where we're focused on Medicare and Irma and trying to avoid what I really call the second act, right? It's not how much you take home at the end of the day, it's how much you take home after taxes, right? So, you know, what you actually put in your pocket. And so a lot of people, they kind of give themselves a high five and take a lap when they've when they're there. Right. When they when it's time to retire, they think, hey, we've done all the work. We're great. And then they get to this other side of retirement where it really matters where you start pulling from, because it can really affect you on the taxes side of it. And then you'll you'll get things like being, you know, paying taxes on social security or having your Medicare premiums in the highest band possible, right? So it's really, you know, changing your perspective on the way that you're looking at your retirement. You know, even before we started recording, I was beating up a little bit on the buy and hold strategy. So not Not to be that way. Buy and hold works. People have used that their entire life, right? If you put it in the market, if the market goes down, it'll eventually come back, right? But it's a different story when you are right there and you're about to start pilling income off of those buckets and then you have something like 2008, 2009 happen. It's not that great of a story for your financial advisor to come back and say, well, it'll eventually come back, right? You know, sequence of return risk, if you get a major drawdown right there as you retire, this can have an amplified effect on your income for the rest of your life. It can shave years off of how long that money will actually last. My biggest thing I would say is get ahead of it and change the way you're looking at it. It's not just about the investment piece. It's how can we draw down or spin down the money with saving on taxes and getting some of these things that weren't on our radar to begin with onto our radar.
Ryan Kolden: Absolutely. One of the biggest things that you said was having a plan and when I deal with clients, they specifically, one of the biggest fears is just the fear of the unknown and not having any clue about what is the difference between retirement versus pre-retirement, the risks. So kind of talking about that, Chris, what are some of the main risks in retirement that someone has to watch out for?
Chris Hensley: Yeah, you know, the biggie is a market drawdown, right? So that's the biggie. That's the one when we talk about sequence of return risk. And if you start taking income off of that portfolio, that portfolio gets blown up within the first 12 months. That can mess up your math, right? It's a really big math problem. We sit down and, you know, Here's the amount of money that we have. Can this last for the next 20 to 30 years, right? So that's one of them. Inflation, the erosion of the dollar, the idea that the math problem that we solved, that makes sense now. But five, ten years out, if we go to the grocery store and we're paying $10 for a carton of eggs or $5 for a loaf of bread, the math that we did is not going to work, right? So those are very real things. Social security, maximizing your social security. There is an efficient way, and I'm going to say a best way to do it, rather than just go in there and, oh, I can intuitively figure out how social security works. If you're planning for couples, being able to make sure that it's not just about the social security benefit being really, really high when they retire, it's also about making sure that you have the survivor benefit maximized in case one of them passes away, right? That's something that happens. Planning for estate planning and leaving behind a legacy, if that's something that the client wants to do as you retire, the stuff that we've talked about in theory for many, many years, you're going to find that more and more clients start passing away and this stuff comes online. And so you have this window of being able to make some decisions for them that will help them with their taxes and help them go into retirement. Yeah.
Ryan Kolden: Beautiful. I want to hammer down on sequence of returns and inflation. So just to kind of recap, the sequence of returns can be kind of a hard concept for people to grasp, you know, when they're initially hearing about it for the first time. But in a very simplified way, it's not present our whole lives during the accumulation phase, but it starts to become present as soon as we start pulling money from our portfolio. And if you have a down market, in combination with pulling income from that portfolio, it's almost like a double negative. If the market goes down 10% and you pull 5%, that's a 15% loss. The more we lose, the harder it is to get back to where we started. Now, what are some strategies, Chris, that people can use to mitigate the effects of sequence of returns?
Chris Hensley: Yeah, so this is so as a sequence of return, it's really not a thing right until it's a thing. So you can have been successfully saving and investing and watching the market go up and down for your entire life. And then when you turn it from an accumulation portfolio into a decumulation portfolio, where you're actually spending down or pulling some of the assets out of there, this can be a thing that can really, really affect you, right? So, you know, there's a couple of different ways to come at this. One is the bucket strategy. This is where advisors or financial advisors will recommend putting together a bucket of about one to five years of liquidity, right? So it's really just a cash bucket, a cash reserve. How much are we going to spend within the first year, two, three, four, five years out? And then breaking that off into something that looks like either cash, cash, stable value, fixed, cash equivalents, so that there is not a lot of risk there, not a lot of volatility there. You're seeing some return. The interest rates aren't moving mountains, right? But as you start spending down your income, this is where you will pull from, right? And so this is the idea that if a market event comes along that's going to pull you down like we see every 10 years or so, right? If that event comes along and you have a year where the market is down 30 or 4%, you're pulling from this bucket that you've already put aside that's not, it's not part of that volatility, right? It's already been assigned for that. So your income floor or where you're creating your new paycheck when you turn off your paycheck from your employer, it's going to look like this. It's going to be any pension money that you have coming in that's just coming in, right? It's going to be Social Security, if you're at an age where you've turned Social Security on. And it's going to be distributions from those portfolios. So that bucket that you have that's one through five, you can actually use this to fill out those holes in whatever your new paycheck is, right? And the reason we're doing this is we're not exposing this money to the market volatility. And then you may have one that's maybe five to 10 years out, and then 10 to ultimately sunsetting in retirement. And for each of those, you have different Risk levels, right? So, you know, if you're a five and 10 year bucket, you can take a little bit more risk there. And then the ones that have longer, you can keep an almost all equity portfolio if you want, because it has time to rebuild. That's just one way to come at it. I don't use that. I use total return and absolute return. So we are literally, We're in, I would say, in the market. We're almost in the market all the time, but we're in different sectors. And there's times we're literally sitting in cash if the market's down. I would say that's an advanced approach. But that is a way to come at it, right? There's different ways to do it. But both of those have the idea that you can't be agnostic to what's actually going on in the market, right? That you can't just start spending down the portfolio, whether the market's up or down, without putting some thought in front of it, right? So the one thing they have in common is going into the drawdown phase with intention and knowing where and why you're pulling from that.
Ryan Kolden: Right. And on one polar side, extreme side of what you said. If someone is so risk adverse, so afraid of the market losing money, that they're all inside of a safe investment, let's just call it cash. We also talked about the risk of inflation. Can you explain what the risk is for those retirees or pre-retirees who are So either maybe they got burnt by 2008 or they're so deathly afraid of another 2008 that they're all in cash. What is the risk that is posed by that and inflation?
Chris Hensley: Yeah, 100%. So let me tell you what this person looks like. So this is somebody who has experienced a downturn in the market before. They had this feeling that, oh, I don't like the market going down. I'm going to go to all cash, because at least cash goes up. It doesn't go down, right? And they feel a safety there, and they feel a comfort there. So they might have got the first part right. It's the idea that we have to be conscious of what's going on in the market, and that we can get drawn down. you know, 38-40% like we did in 2008-2009. Typically, this person doesn't know when to get back into the market. They had that like gut feeling like, all right, I don't like risk, I'm going to go to the sidelines. But you'll find them two or three years after the event that's happened and they still have money that's making, you know, like 1% in cash or savings accounts or what have you. So the reason you can't put everything in cash, right? You can, you literally can't. You can go to the bank, you can go get a CD for like 5.35% as of today, sounds really good. Here's the problem, inflation. Just as we're seeing competitive interest rates at banks for CDs, you're seeing inflation going up with that. And so that's the risk. It sounds good to say we can go get a CD for 5 point whatever percent, but if inflation is somewhere between 3 to 4 percent most of the time, and then last year we saw around 7 or 9 percent, you're literally backpedaling. You're not keeping up with inflation. So the idea of having something in excess Equities are in stock in the stock market where we know we can get you know normally over that three to four percent Right no guarantees here. We're talking you know big picture right, but normal. That's the whole idea is that If we could just put it all in cash, and we know that that goes up we would But inflation is literally eroding the value of the dollar. So then when you're in your 60s and 70s and you're going grocery shopping and groceries have tripled or quadrupled, it's a different math problem altogether. So this is an argument that you either should have some part of your portfolio in equities at all times because you're trying to beat inflation. Or maybe a bucket approach where you've got some in cash and then some in equity. So different way to look at it. But the idea of just the sky's falling, we need to go to cash all the time. That usually doesn't work. It doesn't work out too good for the client because they come back to you and the market's up in the 20% and you're looking and they're making less than inflation right now. this is a good reason to have a, you know, a tap the shoulder of a professional, uh, get a second set of eyes on, on what you're doing. Sometimes that first feeling that gut feeling that, you know, the sky's falling, the market's down, we should go to cash. Isn't necessarily the right thing for you.
Ryan Kolden: Yeah. You know, what's interesting about what you said is, um, if you kind of study the three big kind of drivers for things that you can do to, For investment returns it, you know, I'm sure there's a bunch of different ways depending on how you think about investments You can do it, but it's really asset allocation security selection and market timing and what you just alluded to There was market timing and the majority of people Can't get market timing right and they most the time they get it wrong and it's costly to them now With regards to inflation you said being inside of the market can help us keep our purchasing power high over time. Now, we kind of talked about on one spectrum sequence of returns, having some kind of predictable income or predictable asset to weather the storms during downturns. We also talked about having an equity bias to keep our purchasing power high through our lifetime. I wanna hammer down now into the importance of social security So, things like social security and pensions kind of fall on that first side of the predictable income that we can count on. So, something like a social security or a pension, what's the importance of having that, or excuse me, of maximizing something like social security? Why not, you know, why take social security at 62? Why not take it at 70? What's kind of the importance of social security in a retirement portfolio?
Chris Hensley: Yeah, so if you think about it, Social Security can be one of the biggest buckets that you have set aside for retirement, right? If you just see what your monthly Social Security is, people don't tend to think of it that way. But if you look at what that number is extrapolated over the next 30 years, it's a huge number. And it could be bigger than what you currently have saved for your retirement savings right now. Often I see that. In fact, when my clients that have pensions, the pension makes up a good portion of it. And then Social Security combined with that totally offsets what they would do as a as a. spin down on their investments, right? So you can't really go into your social security thinking, you know, I can just turn it on. You know, when I look at it, if you turn it on at 62, you're getting about 70% of what your full retirement age is. So there's very few things I can recommend generally to people about You know, in abroad, what can we do that's good? But most of the time, I would tell people, don't take Social Security early. Push as long as you possibly can. That's either going to be 65, 66, 67, depending on the year that you were born. 62 is going to be early retirement. And if you turn it on, then you're going to get about 70% of what you could get. Right. And if you push past full retirement age all the way out to 70, you get an 8% delayed retirement credit for every year that you push past full retirement age. So, you know, you and me as financial advisors, when we make recommendations, if somebody came back to you and said, what can I get an 8% rate of return, that's guaranteed. Right. And that's a word we can't use. But about as close as you can get to guaranteed is going to be Social Security. Social Security is considered about as safe as you can get, right? So getting an 8% delayed retirement credit from the U.S. government and your Social Security is a pretty good thing to do to push and wait, right? And it compounds so that it can go 108% all the way up to 124%. of what your full retirement age payout in Social Security is. So that's an area that we should take, you know, as very serious when we turn on Social Security. A lot of times I'll see people get really happy because they're right there at retirement and they're, you know, taking Social Security is their solution for income at that point. And it's not that it's wrong, right? Some people may take it early. If they take it early, you have to work that back into your plan, right? So if they take it early and they do something like continuing to work, they need to know how deeming works, where they're still not going to get their full retirement because they're still working. And so they're going to get a percentage of Social Security. And for everything over the annual limit, they'll only get a certain percentage of what they think they're going to get. So explaining that to them is a big thing if we have somebody who's doing phased retirement where they're semi-retired, they're continuing to still work part-time or something like that. being, you know, not letting them off of the hook here, right? This is something that it's not easy, it's not intuitive, it's something that they have to get educated on. So if their gut feeling is like, you know, I'm gonna turn it on early, this is the kind of thing that if they walk into like a Merrill office or a wire house office, the guy's eyes are gonna gloss over, right? Especially if you bring in a pension, if they ask you like, how's the pension work with all of this? Here in Texas, I work with teacher retirement system or Texas retirement system. Whether the employer pays into the Social Security system or not, they may be subject to windfall elimination provision and government pension offset. So if they have a pension, optimizing the pension and optimizing the Social Security is crucial for them really knowing what their income is going to look like. if they trigger windfall elimination provision or government pension offset because they have a pension, their social security may only be 40%. It could be drawn down all the way 90% of what you think you're going to get when you see that social security statement could be wrong. So if you pull up your social security statement and you look at page two and you go down to the bottom and it's going to be in italics and it's going to say, if you work for a city, state, or local government that has a pension, This number that's at the top of page two may be wrong. So it's the fine print on your social security statement. A lot of people don't pay attention to it, but it's a huge area. So one, starting with good information, knowing what your social security is actually going to be. That's where you would want to start. And then the pension optimization part of it, that can get complex too, making sure that they've got their beneficiary designation set up, making sure they know how this works.
Ryan Kolden: Okay, Chris, you said a lot of stuff in there that I want to double back on. So let's start with the pension offset and windfall elimination program. So one of the common questions that I get, and I'm sure you get it, is if I am subject to windfall elimination, can I claim spousal benefits rather than collect on my own social security? How does how does spousal benefits and windfall or the pension offset work with one another?
Chris Hensley: Yeah, so there's two, right? So there's windfall elimination provision and government pension offset. One of them has to do with you individually as your retirement benefit. The other has to do with spousal benefits, right? So it totally comes into play, right? You can't just say, well, I'm going to take my, I'm going to, do my social security off of my spouse's. There's really not a way to get out of it if it applies to you. There are several exemptions to it though, right? So there's rules around if you've worked at least the last, don't quote me on this, right? So if you've worked for a specific amount of years in the last, I want to say five years, and they've paid into Social Security, then that might be an exemption. There are certain things like that, right? But there's two questions here. One, do I qualify for Social Security, right? So that one you might get an exception to if you paid into Social Security for X number of years. The second one is, how much is my Social Security? That's the rub. You can get Social Security, but it can be offset by these two different rules that are out there. It is not easy to do. We use planning software for this. There is a calculator on ssa.gov for figuring out windfall elimination provision and government pension offset. You literally have to go back and plug in all of your earnings from the past One thing that I use as a red flag, right, when I have clients that come in and ask me about this, is I'll look at their social security statement, I'll go to page three, and I'm gonna look at their every years that they have earnings coming in, and then I'm gonna look at their Medicare earnings years, right? If I see a zero in the earned income column, but I see a payment into Medicare, because even if your employer isn't social security certified, employer, like if they're not paying into the social security system, they still have to pay into Medicare, right? So that if I see a zero in the earned income section, but I see like a high number, like 100,000 or 70,000, or you could tell that they, they actually did get a lot of income that year. It just wasn't on the earned income column. This is a red flag. Doesn't mean that there's not other exemptions along the way, but this is the first red flag where I have to go back and now look at the calculations and see. So the question you initially ask is, is it going to mess up my spouse? Yes, it can. That's why when we When we solve for Social Security, if it's a married couple or a couple, we're solving for two. And so it's really important to look at both of theirs. Here's some of the decision points that can come in there. Who is the oldest? Who is the high-income earner? Were there gaps in employment? Were people, you know, stayed home to take care of kids or they went to school or any something like that? Where you're not paying into Social Security for a certain amount of time and then you might look at the spousal options. So I think instead of answering it, what I've done is giving you a lot of of decision points where it makes it very difficult, where I would say, you know, a lot of times people look at social security and they think it's just something intuitive. I would say tap an expert like Ryan or like myself to get a second set of eyes on this to make sure you're doing the right thing.
Ryan Kolden: Yeah, absolutely. Now, the other common thing that I want to go back to is you talked about maximizing social security, weighing as long as possible. What if you had someone tell you and I'm sure you've had someone say this to you, I want to collect at 62, I'm not going to live to be 90 years old. I'm not going to live to be, I'm not going to live that long. How would you respond to that? Assuming, let's assume that they're a healthy individual.
Chris Hensley: OK, if they're healthy, I would have a discussion with them about how this is the break-even point argument most of the time. So let me come back to the break-even point. I'm going to put it right here first. Let's say they're not healthy. So the only exceptions that I've had in the past where I've said, hey, go ahead and take it early, right? It's like if I have somebody that comes to me and says, hey, I've, you know, I've been diagnosed with terminal illness or I have longevity issues where I know typically I'm predisposed, I'm not going to live that long. That might make sense for you to go ahead and take it early, right? There are some situations when I'm working with teachers who have What I just explained to you, that windfall elimination provision or government pension offset, there are some situations where I will recommend taking it early because they can turn on the pension as an option. Those are where I see the exceptions that make sense to me, right? The second case where it's a person that's healthy, then I'll have this conversation that it's basically the break-even point conversation where they say, well, you know, in order for me to get my money back from, they look at Social Security as an investment, right? What the rate of return for me to get it, and if I take it now, it's gonna make sense. So that argument's really kind of a fear-based argument, and what I would do is I would point them to a couple different things here. Don't look at Social Security as a, investment that should have a rate of return on what social security is, is its longevity insurance. It's the idea that we're never going to outlive our income source, right? So we're not trying to maximize the amount of return on it. We're literally trying to get an an income source that's going to last for a very long time. And so the math makes sense to push as long as you can to get a multiplier on it. Typically that is coming from, I don't think social security is going to be around, right? I think social security is going to run out of money and I'm scared. So these are kind of like fear-based arguments. So what I would do is I would point them to the Social Security website. I'd have them look at what the trust funds are made up. If Social Security blows up, there's going to be a bigger problem. People are going to run down the street. There's going to be a lot of other stuff going on. So I'm going to make the prediction here that we will have some Social Security reform before we get to that point. But if you go to the website and you look at the explanation of what they do when people ask about it, the disability trust fund is going to go belly up before the one that actually pays the retirement one, right, if things like that happen. Most likely, what will happen is we'll see some reform. Social Security will get more watered down. And for younger generations, this will be a real thing. For you and me, as we retire and we see this, our retirement benefits from Social Security will most likely be watered down. They're going to move the date that you can turn on Social Security out later, which is kind of a money grab. from the government, they literally, but it's kind of an answer for the fact that people are living longer. I mean, this is a real thing. Our life expectancy is going out longer. So, but all of this being said, these are the kinds of conversations that we're having with clients. If you go back and you run the numbers and you look at it, most of the time, it makes sense for them to push. Now you could still, at the end of the day, you could tell a client that, and they're gonna say, that's great, Chris, I'm still turning it on at 62, right? So the- The software that we have available for both of us to use to do social security illustrations is really cool because what it does is it shows them every decision point that they can make. So if you have somebody and I'm showing them maximizing their social security, the most efficient way to turn it on where it gives you the highest retirement benefit, but also the highest survivor benefit if it's a couple, right? And they say, nope, I still want to do 62. Well, now they can see what it looks like at 62. And they literally have the data there to make the decision, right? But they can't tell you you didn't tell them, right? So the reports that we can provide for them, it literally will show them every decision point at every age and what that looks like. There is a one that is, we say, the most efficient and where you're maximizing both the retirement benefit and the survivor benefit. That's the one I'm going to point them to, right? But if they have a situation where they're saying, doesn't matter Chris, we're still taking it at 62 because that's part of our income. We don't really have these other assets. That's the only thing we have available. Then they now have, we both have really good information. They have it in writing. And then we, when we go back and we put together a spreadsheet and show them what their new paychecks going to look like when they retire, we've got good information or good data to base it on.
Ryan Kolden: Yep. Right, right. Now I want to, go back to talking about social security going away. And that's one of the most common misconceptions that I think people get wrong with regards to social security. There's a lot of fear mongering that goes on of, hey, social security is going to disappear, which if you actually go to the Trust Fund's website, Social Security Administration, they literally say on the website, in absence of action, you know, assuming that the budget doesn't get, you know, reformed, assuming that we don't reform ages, we can fund social security for another 75 years doing nothing other than reducing benefits by about, I think it's 23%, but somewhere on the order of 20 to 30%. So there's a lot of other levers that they can pull in order to keep social security functioning. And even in a worst case scenario, it'll function for another 75 years. Now, the other thing that you tapped into was longevity. So going back to that person that says, you know, I'm healthy, I am going to take Social Security at 62. Have you ever had the conversation with that client of, you know, longevity is really something that you have to pay attention to. People are living longer than ever and taking that Social Security at age 62, you know, it might sound good right now, but, you know, what happens when you're, you live to be 85? What happens when you live to be 90, 95 years old?
Chris Hensley: Yeah, absolutely. So this is this is a way of talking about, you know, my grandmother is 96 and she's still on Facebook. So so she's, you know, actually on there, like, like commenting on stuff that I'm posting and stuff. I'm like, good for you, Grandma. And so the idea that we can live longer, 100% for sure. I'm right down the street from the medical center here in Houston. We have one of the best medical facilities and medical sector in the country, really, right? But each and every day, they're discovering cures that are making people live longer, cures to diseases. And as a financial advisor, all of that's good, but it makes for a bigger math problem. We have to make that money stretch longer and longer. So, you know, somebody might be encouraged to take it early because they're trying to put, they're trying to come up with a source of income really, right? And they're at this point in their life where they've either done it and they have an extra bucket of money, right? Or they haven't. They have a portfolio that they can supplement with it, but Social Security, we know, only represents a small portion of probably what their current income is, right? So if they take a reduced Social Security on that, it draws it down to about 70% for the rest of their life, right? So you're going to get cost of living adjustments in there, but it's not going to bump it up to what it would be if they waited to take it later there. So if you live long, if you live longer, there's an argument that you're going to want more income to keep up with inflation, right? So the longer that you live, the harder it's going to be for you to keep up with inflation. If you pass away, having that survivor benefit for your spouse, when you push on Social Security and not take it, it's increasing that benefit, right? So it's making the offer to turn it on later more attractive, even if you're saying, hey, I want to turn it on right away. What's your option? Your other options are to start spending down your retirement, your 401k, all of your qualified accounts or any buckets that you have that are non-qualified, right? So people are like, I don't want to do that. I've been saving this money for a long time, but they still have that approach as though I can't touch this because it's my retirement dollars. Well, guess what? You're retired now. You're working with us to retire. You're asking us, can I retire now? So it's a mindset shift where you're giving yourself permission to start taking distributions from these qualified accounts, these retirement accounts. Chris, are you telling me that I should take money from my 401k or 403b rather than take it from Social Security? Yes. Most of the time, it's better to take distributions from those assets now and push on Social Security for a future date on that. Because what we're getting rid of is the question mark. We can be great investment managers, but we can't use that word guaranteed, right? So knowing that we can get an 8% kick for every year that they're waiting past full retirement, that's one of those things that is, it makes sense if you do the math to push on it. We may have years where we're managing their money and they're getting 20% or we're beating the market, the S&P's up X number and we're ahead of it, right? But that's always gonna be a to be determined or a question mark because we don't know, we don't have a crystal ball, right? But we do know that if they push out, you know, every year that they push past full retirement age, they get that 8% and that's, you know, that's how it works. So it's generally a good idea to push as long as you can and have that conversation with them. It's uncomfortable. A lot of them, they just get it from all sides, right? So having that conversation with them is super important.
Ryan Kolden: Right. Chris, one of the things that you said, I believe in your first statement, you talked about Irma. Now, a lot of people don't understand that there's a surcharge associated with Medicare called Irma. Can you explain a little bit what Irma is and then how you think about it with regards to someone's retirement income plan and who Irma is even applicable to?
Chris Hensley: Yes. Okay, so ARMA could be applicable to everybody. Most of the time it's not, but it can be, right? So there is this thing out there, and Medicare is one of those things that people think about just like they think about Social Security. Like, I'll be able to figure it out myself, right? Guess what? Medicare is super complicated. CPAs, attorneys, people who shouldn't make mistakes do. IRMA is one of those. IRMA is this rule that's out there that there's a fiscal cliff that if you go over a certain income threshold, then they're going to charge you the maximum amount for your Medicare premium, right? There's different tiers as to how much your Medicare is actually going to cost. And you don't find that out until after you retire. And then they base it on your income tax, your reported income from two years ago, right? So that sounds kind of crazy because if I'm retiring, I'm literally changing the income level that I have coming in. Most of the time, people are gonna make about 70% of what they made or it's gonna, you know, could be all over the place. But the idea that their income this year that they retire when they turn off their paycheck is gonna be, they're probably one of their highest incomes from two years back. different deal altogether, right? So they will charge you this surcharge on your Medicare and a lot of times if it's over by a dollar, that's why I say fiscal cliff because it only has to go over the threshold by a dollar, right? And then they get charged this highest premium on Medicare that they didn't know about or think about, right? And so then This is something that we have a control lever over. There is a way to appeal it. So one, you have to raise your hand and say, hey, my situation's changed. I'm retired. The number that you based my income level on two years ago is not what I'm making right now. And that'll get them to take a look at it, right? And you can do this on an annual basis. But a lot of the clients that I work with, they literally have to raise their hand and bring it to the attention of the Social Security office. They're not going to proactively do it, right? So this is important. This is the idea of holistic tax planning. You know, clients who use CPA, so I'm gonna do my disclaimer here so compliance won't get, I'm not a CPA, so I always have to say, you know, consult a tax professional for tax advice, right? But on the other hand, when you work with financial advisors, if they're doing tax, proactive tax planning, that's one of the things that we can do. We can take a look at, you know, where they're at now, do some projections, and kind of do it before they get to just the, tax preparation side, right, where they're just sitting down with their CPA or their tax guy and he's putting the taxes together. If they get to that point, usually it's after the fact, right, and it's kind of too late. So working with somebody who's taking a look at what their tax situation is before you get to that point is good. When we're talking about IRMA, there's a software out there called Holista Plan that a lot of advisors are using, and it actually will capture the information off of their latest tax return to give them an estimate of what those IRMA bans are going to look like going into retirement. Things like the widow's penalty, Roth conversion, these are all planning opportunities that we have as people get to this age group and they start thinking about retirement.
Ryan Kolden: Yep, yep. So the other thing that you mentioned was, you know, planning that people should start proactively planning. And one of the areas, there's a lot of things you can do, you know, as as an advisor, to help people with retirement income planning, you know, been different buckets of money or create a retirement income strategy, a tax efficient withdrawal strategy, but one of the areas where you really sometimes need a lot of time, to work on something is reducing that Irma via something like a Roth conversion. And so, yeah, Irma is one of the most challenging, I think, things that we run into, and it's very unfortunate. But now, I don't want to We were talking about this prior to hopping on the call, and it really piqued my interest when you brought it up. And I didn't ask you a whole lot because I want to talk about it now. You mentioned the idea of, I believe, an all-weather portfolio or a permanent portfolio. Can you explain a little bit about how you view that portfolio or the investments and how it fits in the context of a retiree? And in full disclaimer, Everything that Chris and I are talking about is for educational purposes only. Investment always has risks associated with it. So please consult your personal financial advisor. But with that said, Chris, can you explain a little bit about how you think about the all-weather portfolio or permanent portfolio?
Chris Hensley: Yes, absolutely. And past performance is not indicative of future results. And I just picture my compliance guy having a heart attack. But no, okay, so let's, yeah, let's talk about that. So the idea, I did mention that, so I use what's called total return or absolute return, right? And so this is the idea that So when we talked about market timing earlier, some of this is gonna sound like market timing. I don't consider it market timing because it's rules-based. This came off of Mabon Faber. There's a book called The Ivy Portfolio. And this is, let me tell you how I got turned on to total return or absolute return. I looked back to 2008, 2009, and I said, you know, if the market's going to go down and you're hiring somebody to invest your money for you, who actually made money in a down year? And that pointed me to the endowment funds, the foundations, the Ivy League schools, right? Because pension funds, right? Because if you think about it, if you have a pension and the market's down like it was in 2008, 2009, they can't come back to you and say, well, the market was down. pay your pension out, right? So what are they doing differently, right? So they're literally using total return or absolute return active management. And that's the idea that you're rotating in and out of asset classes, right? And I'm gonna say big scale here, right? This is gonna be rules-based and they're gonna use a couple of different economic indicators that are typically when the market's down, they go off preceding that. So what I just described to you, if you're a fiscally conservative investor, your red flag's going off and you're saying, OK, this sounds like too much, too many moving parts here. But it's actually literally, it's really, really conservative. In fact, most of the time when there's not volatility in the market, it's boring. We'll do an asset allocation. It'll stay there. It won't move. Good. That's what we want it to happen. As there's more volatility in the market, these red flags or these indicators go off and we'll either dial on or dial off whether we should be in cash, stable values, something that is very safe, something that goes up but doesn't go down, right? So this is not Chris just crazy making this up. This is how most pension fund managers work. This is how the endowment funds work. And you know, the name of the show with the alternatives piece on there, a lot of the things that people think about alternatives like hard assets, like real estate, art even, art collectibles and stuff like that, right? These are things that have been in the portfolios of endowment funds, foundations, right? They have access to timber, commodities, things like that, right? All that sounds scary when you're talking to the individual investor, but there are ways to get access to it and everything has its time. So for instance, commodities, when the market's down, those have a negative correlation to the market. They'll actually go up, right? So there's always going to be, when the market's down, there's always going to be something that goes up. Commodities works like that. People always have to put food on the table. They have to put gas in the car. They have to have utilities, you know, keep the lights on. Right. So it's the idea that, you know, your investments based around what's actually happening in real time, but it's rules based. So it's, you know, if these indicators go off, then dial that one off, that sector, right? So I do a lot of sector rotation within there. Very boring. A big S&P 500 bucket. Bonds when bonds are working, right? And we can do some stuff with duration on bonds, right? That's how we can figure out what's, you know, how to get a little bit more alpha in there. But so without that, I feel like I just gave a really long… Explanation on that. What I tend to do is point people to the book by Mabon Favre, The Ivy League Portfolio, and that actually talks about the different investment strategies and rules when you set up a rules-based portfolio. What you'll tend to find is a lot of third-party money managers or Mutual fund managers or people that we're using to outsource investment management are actually using a lot of these rules already, right? So it's nothing new, nothing crazy. And the big, the idea that we started with was an all weather portfolio. And why this sounds good to somebody who's retiring is that they want as much in the up years as they possibly can get. But in the down years, they just don't want to lose money. You know, we just don't want the volatility. We don't want to see the market go down. So the investment philosophy or the style in that sounds really attractive. It almost sounds like some of these alt products that we would look at that have, you know, not guarantees, but they have like a target rate that they're going for. So it sounds like that, but we can't use the word guaranteed, right? Because it's in the market that money's invested. So that's super important. You know, we can do the rules-based. Here's the negative side of that. Sometimes when the market's on a tier but it's hit some of these triggers, we'll go to cash and we'll miss some of the upside, right? and we'll get drawn down, we'll have a whipsaw, right? So we'll get triggered out and we'll go into cash, but then we'll end up in cash when the market ends up going down. So that's the negative side of it, is that if you're following a rules-based investment philosophy like this, you may not catch all of the upside. But historically, most of the time when we've had an event like 2008, 2009, these indicators that we're using, which is the VIX, the 10 month simple moving average, right? Looking at correlation in the market as far as doing some sector rotation, those things go off. And I don't like to call, it's not timing, I call it active management, right? It's rules-based active management. It's not Chris speculating on what the market's doing. It's like, if this happens, here's what we're doing, right? So. don't know if I hit that, but that's a lot, a lot of stuff to cover just in there.
Ryan Kolden: That was, that was fantastic. It actually made me think of a couple of things. So the first thing is, um, a lot of people would say something along the lines of like, why don't I just put all my money in S and P 500 and, um, you know, Let it let it ride so to speak and the first thing that comes to my mind is people are you know? We've been in the greatest bull market in you know kind of the history the last 10-15 years and people all of a sudden candy are a little bit short-sighted and they don't even realize like from if you would have been 100% S&P 500 you know from the time of 2000 all the way through 2013 and you would have broke even. From 2000, 2013, that's where the S&P 500 was $1,500 at about 2020, and then get back to $1,500 until you had 2013. That's the perfect idea of the concept of returns where from you know, 2000 to 2003 you had about a 50% drawdown and then from 2007-2008 you also had another 53% drawdown. So that was the first thing which is like what you're talking about, you're describing is having some kind of return in all markets and really preventing that drawdown. Is that correct?
Chris Hensley: Yes, if you had to boil it down to one or two sentences, the focus of a total return or absolute, thank you for making me reiterate on that because that is the easiest way to explain it. It's the idea that you're focused on getting a return no matter what the market's doing, right? So that investment philosophy is focused on when we have a market drawdown, we're still trying to focus on number one, capital preservation, but number two, trying to generate some type of return in that portfolio, even in a down year, right? Yep. Yep.
Ryan Kolden: Yep. And the other thing too, is that preservation of capital is directly tied to tied to income, you know, and it's like, if I'm pulling, 5% off of a million dollar portfolio, but I have a 50% drawdown that I'm pulling 5% off of a $500,000 portfolio. That's a huge impact on your retirement income. So I 100% agree with what you're talking about with regards to portfolio management and the idea of endowments and building a portfolio that thrives in all economic environments. Now, Chris, We've been talking for about an hour and this has been fantastic. So before we, I'll leave a link in the description for everyone if they want to connect with you where they can find you, I'll put your website and how they can contact you. But before we kind of log off, do you have any last comments, any closing thoughts that you want to leave with people?
Chris Hensley: Yeah, you know, I just I always like to leave the idea with ask for help if you need it. It's one of those things, money, when you talk about money and finances, as human beings, we have a hard time asking for help, right? Whether it's a privacy issue or just like ego saying, oh, we can do it ourselves, right? Money is not forgiving. It is one of those things that if you make mistakes on it, this can last you the next 20, 30 years. You end up taking, Irma, that's a good example, right? You take it into your retirement with you, you take it into the rest of your life with you. So raise your hand, tap an expert, get somebody like Ryan or myself, or if you're in a different city, find a CFP or somebody who is certified to do this, right? Retirement planning, financial planning, and ask for help. Getting a second set of eyes, it's crucial.
Ryan Kolden: Absolutely. Now, Chris, what is the best way that people can get in touch with you if they want to learn more about you?
Chris Hensley: Yeah, so for my for-profit business, for Houston First Financial Group, I would point people to www.houstonfirstfinancialgroup.com. You can do a complimentary consultation on demand through Calendly. We always do a complimentary consultation there. But if you just need information, when I had my podcaster hat on, MoneyMattersPodcast.com. We've been doing this for the last 10 years. We hit a decade here. And so a lot of the topics that we touched upon today, there are many different shows that we've done on that. So like I mentioned earlier, I don't let people off the hook. They have to do some of their own work there. I would say go back, look at some of these episodes that affect you, and then reach out to somebody.
Ryan Kolden: Awesome. Well, I'll put all the information in the description. Chris, it's been fantastic speaking with you today. I really appreciate having you on the show. And that's going to be a wrap for today. Take care.
Ryan Kolden: Hey, real quick before you go, thanks for listening. And please remember to hit follow on your podcast player. You won't miss any episodes and it helps support us bring you the show. Today's show notes and resources are available to you by clicking the link in the description. The opinions and views expressed here are for informational purposes only and is not tax, legal, financial, investment, or accounting advice. This material is educational in nature and should not be deemed as solicitation of any specific product or service. All investments involve risk and a potential for a loss of principal. Should you need such advice, please consult with a licensed financial, tax, or legal professional. Neither host nor guest can be held responsible for any direct or incidental loss incurred by applying any of the information offered.
