Putting My Hero on the Spot: 4 Tough Questions for Wade Pfau - Ep 54

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You can do everything “right” and still feel unsure about spending in retirement. That’s why we brought on Dr. Wade Pfau, one of the most influential voices in retirement income planning, to talk through what actually works when the paycheck stops and real life takes over. We start with the assumptions many retirees bring to the table, especially the belief that expenses naturally fall, then unpack what the spending smile really means once inflation and health care enter the picture.

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 My Name is Christian Cyr.  I am the president of Cyr Financial Wealth Advisors. Since 1999 we’ve specialized in comprehensive retirement planning.  We are registered with the SEC and are fiduciaries. To learn more about us, visit our website at https://CyrWealth.com  

My enthusiasm for retirement planning extends beyond client interactions. I very much enjoy sharing my passion for retirement planning with audiences nationwide, including educational videos like this one and my podcast, Retirement For Life https://rflshow.com.  I have been featured on platforms such as Strategic Investor Radio, MSN, Yahoo News, CBS News, and U.S. News and World Report. 

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Investment advisory s...

Transcript

Meet Dr. Wade Pfau

SPEAKER_01 0:24

Registered advisor specialized in a retirement.

SPEAKER_00 0:31

Welcome back to the Retirement for Life podcast. Today I am honored to have one of my heroes, Dr. Wadefow. He is one of the most respected voices in the retirement planning community. He is a professor of retirement income at the American College of Financial Services, founder of Retirement Researcher, Director of Retirement Research at McLean Asset Management. He has published many books. This one included my favorite book, Retirement Planning Guidebook. We're going to be talking to Dr. Wade Fow today, his work, his books, his research. And Dr. Wade, I just want to say thank you for coming on to the podcast. I can tell you how excited I am. Thanks for being with me today.

SPEAKER_03 1:11

Absolutely. Thank you, Chris. It's a pleasure to be here.

SPEAKER_00 1:14

Yeah. I just want to share with everybody how I first met Dr. Wade Fowl. It was actually in a research paper that you did with Michael Kitsis in 2014. We came across the equity glide path work that you did. And I want to say that that absolutely changed the way we look and view at retirement planning. And since that uh paper came out, uh you have been a guide for us. And uh it's just so great to have you here on the show today. So tell me, maybe your breakthrough was in 2010. Do you write this research or you have this article published? And it's called The International Perspective on the Safe Withdrawal Rates, the demise of the 4% rule, which if we could say it nicely, it enlightened retirement planners around the world. I think that's safe to say. I'm curious, though, about that work. Just quickly tell me a little bit about that work, um, the perspective of different countries. The 4% rule may or may not be as um effective. But was before you talk about the paper, tell me, did that would you say that was the part of your career where everyone knew who you were? Is that your your launching pad point, or was that not your launching pad point at all?

SPEAKER_03 2:37

No, that would have been the the launching pad of followed up six months later with the real one-two-punch launching pad, the safe savings rate article from from May 2011 was my real launch

How Research Challenged The 4% Rule

SPEAKER_03 2:50

pad, I'd say. But yeah, that December 2010 international perspective on the 4% rule. That that really helped solidify the change in focus, where in Japan I was more of a traditional economist, and no one's really interested in research from traditional economists. But I wrote that article and people were actually reading it and like they were commenting about it on discussion boards on the internet and things, and I never had any experience like that. So I thought, wow, this is actually a much more useful line to do research in. But made that full switch over to like US-based retirement planning and never really looked back. And yeah, that article is pivotal in the process for sure.

SPEAKER_00 3:34

I always think about uh I was always a big Michael Jordan fan, and I always use the Beatles also in this type of analogy, um, Bon Jovi. There are certain people who can't just go anywhere. They can't even go to the grocery store uh without being mobbed. And uh you I would say you're not obviously at that level, but at the recent planning conference you and I attended, the Horizons Planning Conference, which was a great conference, by the way, put on by the American Business Financial Services. It was interesting to watch you from afar. You are being mobbed by advisors left and right. People like me. Here's a picture. I took a picture of us. Does that get old? I mean, after a financial planning conference, are you just ready to just get the heck out of there and never talk to an advisor for like three weeks? Or how what's that like? Uh, you're you're very gracious with your time. Uh how what's that like when you're at a conference like that?

SPEAKER_03 4:32

Oh, it it's fun because I don't have to worry about like having to initiate conversations and people just come up to me. So it makes it a lot easier than at events where where nobody knows who I am. But right with the American College, there are more than 10,000 RICPs, the retirement income certified professional. And so all those individuals are familiar with me because there's so many videos in that program for the it's a it's not live classes, it's watch at your own pace video recordings. So, yeah, there's a lot of people who know who I am and feel like they know me. And so it's it's great to meet people that way at those conferences. But right, as soon as I leave the conference, I'm back to nobody knows who I am.

SPEAKER_00 5:11

So I said, You can still go to the grocery store. For advisors listening, I think it's such a great organization that they they really help promote a full breadth of retirement planning topics and designations, credentials. It is interesting a lot of times when we're going as advisors to these conferences. Um, there are some larger conferences that for the most part tend to focus on, I would say maybe not in-depth retirement planning. Whereas this conference, the Horizons conference, is

The Spending Smile And Inflation

SPEAKER_00 5:45

specifically for retirement planning. It was great. Uh okay, let's get down to business. I want to speak to you about expenses first. Uh retirees, when I first speak to them, Wade, they just think that they're not going to spend as much once they get older at retirement. It is uh difficult to explain to them that they will need to spend more money if they in fact are going to spend less. That may be true. Uh, but we have things like inflation and healthcare and things like this. Is there just the s simple math uh expenses maybe go down one, one and a half percent per year, and inflation maybe goes up three percent a year? So therefore your expenses are going up, excluding healthcare going up maybe one and a half, two percent a year. Is that a fair simple math approach, or is that too simple for you, probably?

SPEAKER_03 6:36

Your expenses still may grow in nominal terms, but when you adjust for inflation, kind of lagging behind inflation by about 1% a year or something along those lines is a reasonable rule of thumb.

SPEAKER_00 6:46

Bottom line, expenses in retirement go up. Can we agree on that?

SPEAKER_03 6:50

In nominal terms, yeah, yes.

SPEAKER_00 6:52

In nominal terms, yes.

SPEAKER_03 6:53

Yeah, most like the the spending smile is all in terms of after removing the impact of inflation.

SPEAKER_00 6:59

Okay. So once

Three Ways To Spend In Retirement

SPEAKER_00 7:00

we get a retiree to understand what their true need and expenses are, now we turn to how are we going to use your assets to wisely spend down? And this is a fantastic topic for me. I'm always very pointed on my opinions, and that's what they are, opinions. And I'm gonna try and nail you down to uh being less political today, and I'm really gonna try and get Dr. Wade Fow to really tell me what he really thinks. You know, this retirement planning guidebook here, uh this is the second edition, by the way, uh, because I don't want to buy the third edition because of all these tabs I've put in over the years. But you know, you're very good about writing in a way that I think people can understand. It's not written like a research paper, it's written for retirement planners and retirees alike. So when you're tackling these issues, I'm gonna try and take make you take a hard stance on some of these things. To me, again, I'm always trying to simplify things. I feel like there's three basic ways to spend down assets. In other words, how are we going to wisely cover our expenses? One is limit spending based on the amount you have, like the 4% rule, right? Whatever's in your account will dictate how much you can spend. Um, the second way is more of a dynamic approach. Some people will use like a guard whales approach, um, income floor, basically limiting your spending on how the market performs. And then the third way that I view this is perhaps adding more guaranteed income. Okay. I don't like the first two of those because they use the word limit. Is it possible for you to talk about these different ways to spend down? What do you like? What do you not like? Is there I know you're not going to tell me there's a perfect way, but what's your favorite way of those three basic categories?

SPEAKER_03 8:47

Well, on the math side and research side, the idea is generally the flooring approach that you build a floor of reliable lifetime income to cover basics. And then you have a lot more discretion on top of that for this is surplus wealth that you can use for more discretionary things. You can invest aggressively, spend aggressively from the rest because you have that basic floor covered. And that's the the income protection style. But I've been around at this point long enough to know that there's so much disagreement in the retirement income world. So the other, yeah, the other approach is you're mentioning the total return investing style is you don't really worry about reliable income because you're not necessarily differentiating between essential expenses and discretionary expenses. You just want to meet everything, do everything. Uh, you want to meet that lifestyle. And so using a flexible spending strategy from your investments can work fine for those folks. And then there's also the more time-segmented or bucketed crowd, which is moving away from a total return investing approach and thinking more about I'm gonna have short-term buckets and long-term buckets, and I'll use bonds to cover upcoming expenses in the short-term bucket. And then my stocks would be more earmarked to longer-term buckets to focus on greater long-term growth. And at the end of the day, any of those approaches are viable and can be made to work, and it really depends on what people are comfortable with. So it's the I'd say any

When Annuities Replace Bonds

SPEAKER_03 10:15

approach is fine if that's what you're comfortable with. But if you really want to drill into the math of what works best, research I've done going back to 2013 always points to the idea that the efficient frontier for retirement income, it's like stocks and annuities instead of stocks and bonds, that annuities that provide lifetime income protections and include pooling risk through insurance companies are more powerful for meeting a retirement spending goal than bonds are. So annuities are not a stock replacement, but they're a bond replacement. And so when you have that floor of reliable income, then your stocks are, again, they're more for discretionary types of goals that you can take more risk and if markets do well, enjoy a lot of additional lifestyle beyond that core floor that you've built.

SPEAKER_00 11:01

Well, we're not going to go on record and say Dr. Wadefow has a favorite way to spend on assets. Maybe we could say that generally speaking, in your work, uh the inclusion of some sort of insurance guarantee may mathematically most of the time be the best option, not always. Is that fair?

SPEAKER_03 12:23

Yeah, because risk changes in retirement. People are they're no longer living off the paycheck from work. They have to live off their accumulated assets. And a big problem in retirement is you don't know how long you're gonna live. So therefore, you don't know how aggressively you can spend down your assets. And I think this can paralyze people into not spending because they just feel like they need to keep everything for they don't know how long they're gonna live. They don't want to outlive their assets. And that's where risk pooling through insurance can help people to feel more comfortable spending because they know that there's contractual guarantees that that income will continue no matter how long they live. They don't have the risk of outliving that asset because it's contractually protected. And people can't do that on their own. Either have to assume you're gonna live a long time or not, but the insurance company can account for, they don't know who's gonna not live long, who's gonna live a long time. But on average, their average customer will live to their mid to late 80s and they can pay people like they're gonna live to those ages because they know that some of the folks who don't live as long, their premiums help support payments to those who do end up living into their 90s or beyond.

SPEAKER_00 13:32

I just know that when I'm talking to a 65-year-old couple who are about to entrust a financial planner with all the assets they've accumulated over their life. And you're going through options like the 4% rule, and you can you can effectively say this will work, but uh I just want you to understand that most of the time you're going to die with an unusually large balance, perhaps more money at the end than what you started with, um, just in the spirit of being safe and not running out of money. Uh it can potentially fail under poor market uh sequences or high inflation. And are we really accounting for your personal goals here? Well, if we're going on to the dynamic spending, guardrails, whatever you want to call it, essentially I'm telling people you can spend your money if you can go on vacation if the market does well. Or how about a strategy where you don't have to worry about it? It's it's an easier emotional discussion. And I think emotions and practice for me are a huge part of it. Um let's talk about taxes, can we?

SPEAKER_03 14:47

Sure.

SPEAKER_00 14:48

All right. I'm gonna try and put you on the spot again. How much are taxes going to go up, Dr. Waifow?

SPEAKER_03 14:54

It's hard to say. Uh, but yeah, I mean, we now last year we went in the direction of permanently putting the tax rates at these lower like 10%, 12%, 22%. At the very least, just going back up, making that 12% bracket back to 15%, the 22% bracket back to 25%. Seems like at the very least, we should expect something like that at some point in the future. Whether the rates go even higher, it's really hard to say.

SPEAKER_00 15:22

The Congressional Budget Office, Penn Wharton, these models are saying that taxes have to go up immediately and permanently by 30 some percent. Uh that's a big number. I think. Uh is it true, though, that when you think about taxes, tax rates going up 30 percent. So that's not 22 percent tax bracket to 52 percent tax bracket. It's 22 percent tax bracket

Why Future Taxes Likely Rise

SPEAKER_00 15:48

going up to you know 26, 27, whatever. What do you think is going to happen here when uh these retirees who are traditionally being told avoid taxes at all costs? They're going to their CPA's office, and the CPA is saying you have two buckets of money, you have your taxable bucket of money, you can take it out of there if you need income. It's not gonna hurt your 1040 tax return, or you have this 401k IRA sitting out there. Don't touch that IRA 401k, because then the 1040 I do for you is going to look bad. Um I think we're being conditionally trained to just kind of kick our personal uh 401ks down the road as well. What's it going to be like if the taxes do go up for these retirees? If you're planning, if your basic assumption is that tax rates now are the same now and forever, uh should we be doing something more than just making the assumption that taxes are going to be this low forever? Or how how do you account for that in planning when you're trying to forecast what taxes might look like for these people?

SPEAKER_03 16:53

Well, I you know, there can be value in accelerating taxes even without even with the assumption that tax rates don't go up in the future. I just I use that assumption. It would the case would become just even stronger if you even higher tax rates in the future. But yeah, a lot of accountants focus on minimizing the tax bill for the current year, whereas the the lifetime tax planning problem that I focus on and that more and more like financial advisors and so forth are considering is recognizing we have to pay taxes someday, but looking at opportunities to pay at the lowest possible rates. And for folks who have primarily focused on saving in their tax-deferred accounts, the 401ks, IRAs, it's called the RMD tax cliff. This idea that when required minimum distributions start, which is depending on your year of birth now, either age 73 or 75, uh, you might be surprised at how much taxable income you suddenly have because you're forced to take these distributions from your IRA 401ks. You're not forced to spend them. It might be a lot more than you actually want to spend. You can reinvest the difference

Lifetime Tax Planning Beats Annual Minimizing

SPEAKER_03 18:02

in a taxable brokerage account. But the problem is you have to pay the taxes on that income. And that can push you in not only into higher tax brackets. Kind of the idea is like right now, if I have capacity in my 12% bracket, maybe I want to do a Roth conversion so that later an RB doesn't push me into the 22% bracket, that sort of thing. But then also there's the way Social Security is taxed, the idea that when your income exceeds certain thresholds, that can lead to higher Medicare premiums. Right now we have these tax deductions that phase out with income, like this new age 65 plus bonus deduction. The way your long-term capital gains and qualified dividends stack on top of ordinary income, which can then, when you have ordinary income, push your long-term gains from the 0% bracket into the 15% bracket, that sort of thing.

SPEAKER_00 18:55

Widow's tax traps.

SPEAKER_03 18:57

Yeah, the single filers, widows being impacted. If you use the Affordable Care Act for Health Insurance, that's a huge issue as well. That you want to be very strategic about paying taxes when you can do so at lower overall rates to avoid having to pay at even higher rates in the future.

SPEAKER_00 19:17

Just makes sense, doesn't it? And the notion I love to think about when it comes to this is there's a lot of debate about Roth conversions. I think there's a lot of misinformation about Roth conversions. The obvious thing that people are talking about is it will save me taxes. But as you alluded to, there's all these side benefits, IRMA charges, widows tax trap, not having to take a huge RMD out if the market's down 50%, right? Um there's just all these hidden benefits of a Roth conversion. And I like your notion that it can be beneficial even if tax rates don't go up. That's very true. Uh but if the writing is on the wall of taxes and you have some of the the the biggest think tanks out there saying they're going to go up, you have to at least consider it. So I want to now talk about this concept that bothers me about the break-even of a Roth conversion. There's a lot of discussion, calculators, what is your Roth break-even? I feel like for many retirees, it's a misnomer. I feel like a million dollars in an IRA account is not yours, right? There's a good portion of it there that belongs to the government. I feel like when we're looking at when should I do a Roth conversion doesn't make sense for me. Too many people are thinking about themselves and not really the mindset of, you know, 85% of the people I work with are married and have children. Uh the majority of people I work with are not going are reasonable spenders. Translation, they're going to not die with zero. They're going to have significant assets when they die and pass away, and they're going to leave those to their children. And I think the mindset should be

Roth Conversions Without Break-Even Myths

SPEAKER_00 21:13

when I do pass away, not what does my account balance look like. It should be more of a mindset to who do I want to get more of this money? My loved ones or Uncle Sam. So for many of the clients that I work with, I don't like that break-even concept. I sometimes I say, and again, I'm going to try and pin you down here, for a couple that is married, that is leaving their qualified assets to their children, that are reasonable spenders, that are going to die, most likely with significant untaxed balance. Is the break-even on a Roth conversion for them yesterday? In other words, they started they should have started doing it last year, or is that too big of a statement?

SPEAKER_03 21:59

Aaron Powell Yeah. I mean, I don't think the breakeven concept even works for Roth conversions because it really is just a matter of when can you pay at lower rates? And right, in terms of an inheritance, so any money that would go to a charity, you never would really Roth convert because the charity can pay a 0% income tax rate on it anyway. But any money intended for like your adult child beneficiaries, taxable brokerage accounts get the step up in basis. So those assuming you're under the estate tax limits, there's no taxes that you're unless you're or unless you're in a state where there's like an inheritance tax, like I think Iowa. But otherwise, you don't have to worry about the taxable brokerage account. The Roth, you got a 10-year window to take it out. You don't have to worry about taxes on that, though. But there's a specific embedded income tax liability in an IRA. Your beneficiaries now are likely, if they're your adult children and don't have some other qualification, they'll have a 10 year window. To distribute from an inherited IRA. And if they're inheriting those accounts in their 50s or early 60s, that might be their peak earnings years. And so then it becomes what income tax brackets or rates are they going to face when they distribute versus what would you face? And if you could Roth convert at 12 or 22% versus leaving that to an adult child beneficiary who's a doctor and who's going to end up having to take that out in a 10-year window in the 37% tax bracket, yeah, that's you're you're creating immediate after-tax legacy growth by paying the taxes for them, so to speak, by doing that Roth conversion. And there isn't a break-even age on that. It's the after-tax legacy value of your assets goes up immediately whenever you can pay those taxes at a lower rate.

SPEAKER_00 23:48

I think that's a great answer. And I appreciate you saying that. I think that notion should be uh shadowed across the retirement planning industry. So I'm happy for your work. It occurs to me, I'm a CPA. I've done taxes since 1999. I don't do a lot of them anymore, but in the firm, we certainly are big on taxes. It's in our DNA. When I start out as just a pure CPA, I can tell you what my motivations were to get as many tax returns done as possible by April 15th to do them professionally, to do them right within the guides of the Internal Revenue Code. And as much as I could, working 70, 80 hours a week, there was no time if someone would ask me, what should I do for the next 20 or 30 years for my long-term tax savings plan? What should I be doing? And frankly, in 1999, I was good at doing taxes, but I had no retirement planning experience. And when we're talking about advanced tax plan, some of the concepts we just talked about, Dr. Wade, uh Roth conversions impact non-tax things, don't they? We've mentioned some of them. Irma, estate planning, maybe your investment allocations. There's a lot in the CPA's vision right here that is just taxes, but outside of that are all these other things. And so not only did I not have time to give long-term proactive tax plan advice, I also didn't have a comfort level because I didn't know what Irma was in 1999. I'm a CPA. I don't really know the ideas, but I don't know how that long-term plan is going to impact you. On the other side, we have our financial advisors who most of them wouldn't call themselves tax experts. I'm finding a lot of people are in the middle of that. Um, I think the American College of Business is helping advisors bridge that gap. Um is that a real thing? Do you see that gap where there's a knowledge gap between maybe the tax side and the financial side?

SPEAKER_03 26:00

Well, on the the lifetime tax planning question, that's an area where it requires detailed software. And there's a few good programs out there. I I've learned the concepts from COVIDSum, which is based out of Nebraska. I I know HolistaPlan has added some of these features, but but that's kind of getting to the end of the list. Even there's so many, there's direct-to-consumer software or even advisor-focused software that does Roth conversions in a really poor manner. They just fill tax brackets, which is a huge mistake. Uh we've got to get into all the details and specifics about why it quickly gets quite technical. But there's not a lot of great options out there. And it's really the way I focus on what kind of target should

The Software Gap And Bad Defaults

SPEAKER_03 26:48

I have? How much taxes should I be willing to pay? I basically have to simulate well, what if I used every possible tax percentage as a target and then see which of those comes out with the best outcome? Because it's all there's so many interrelated connections between how things work out, reducing RBs, reducing exposure to Medicare surcharges and so on and so forth, that you really need pretty sophisticated software. And the answer is never to just fill a tax bracket because that's gonna trigger their IRMA surcharges, or that's gonna it's gonna do all these other things. It's gonna cause the phase out of your tax deductions and things that you gotta you need good software to do that. And there's not many options. And there's a lot of marketing around Roth conversion software that's just very bad software. So it is, it's an ongoing problem that we experience in the industry right now for sure.

SPEAKER_00 27:40

So much, you know, I'm not gonna name names, but one of these tax softwares out there for financial advisors who have never done a tax return for a client in their life, their slogan is go from a tax zero to a tax hero in seconds. And they have effectively what you are alluding to, I call it the Roth conversion easy button. And it's dangerous to just hit a button and automatically fill up a bracket and say, This is what you should do. You know, then that report that's being uh basically a recommendation to a retiree on the bottom of report was it say, This is not tax advice, speak to your tax expert or CPA. You know, so there's a gap. That's all I'm saying.

SPEAKER_03 28:25

Um's even bigger because Roth conversions is when you have excess capacity, but it also works in the other direction where you might not want to voluntarily be generating income. And so the most of that software overlays Roth conversions on the conventional wisdom, which is spend on the taxable account first, then the tax-deferred account, then the Roth accounts last. But even without Roth conversions, you don't want to be doing that. You want to blend. I will, especially after the taxable account is gone. I don't want to just be spending from the tax-deferred account. I want to voluntarily take to that, take from that until I hit my target of where I want to be, and then fill the rest from the Roth account. And the softwares that ignore that aspect, they do Roth conversions, which just accelerates the time where you're gonna have these huge tax bills as you spend on the tax-deferred account. And then you get to this long phase at the end of retirement where all you have is the Roth, and you may not even be filling your standard deduction at that point. It's just very tax inefficient.

SPEAKER_00 29:27

Uh, can we just go to long-term care really fast? Your book and the retirement planning guidebook, I mentioned this to you at the conference. Uh the notion is just so obvious, but I think often missed that yes, long-term care is expensive. We may want to protect ourselves from long-term care. But let's not forget that when one of the spouses goes into a nursing home, our expenses go down a little bit. And if, God forbid, one spouse is gone and the second one goes into a nursing home or they're both in a nursing home, our expenses don't go to down to zero, but they effectively go down 95% or something like that. Can you talk about the notion of expenses going down in long-term care when you use the nursing home? And what's your overall thoughts about long-term care? What's the best way to approach possible protection if we think it's needed?

SPEAKER_03 30:16

Well, right, you're alluding to a very important point, which is when you develop your contingency scenario around like how much long-term care do I want to be able to fund to feel comfortable with my plan? And if you decide it's like five years in a nursing home based on

Long-Term Care Planning With Realistic Budgets

SPEAKER_03 30:32

the current average national nursing home prices, with a and then adding a 5% inflation rate to that, it's gonna end up being a huge number. Now that can be partly offset though, because you wouldn't uniquely add that to the your other spending. And like you're saying, if if this is now the second person, the first person's passed away, the second person's now in a nursing home. You don't need to still assume the rest of that budget is gonna be there. They're not gonna be spending much outside of the nursing home at that point. So that does help offset the cost. I did uh I talk about in the retirement planning guidebook. I made a spreadsheet that lets you uh in assumptions around.

SPEAKER_00 31:13

I've used a spreadsheet. I know it. Yeah, it's great. Sorry, go ahead.

SPEAKER_03 31:17

Yeah, but it it still is hard to avoid the answer of looking at, you know, to feel comfortable about long-term care. I might want to have like a couple hundred thousand dollars of reserve assets, which may be insurmountable for a lot of folks. So it's a real challenge. At the end of the day, there's several options to fund long-term care. It's self-pay through accumulated assets, it's qualifying for Medicaid as the last resort when other resources aren't available. And then also potentially including some sort of long-term care insurance to help uh, as any insurance does, you pay the premiums, which can then help to dramatically reduce the out-of-pocket spending needed when there is a significant long-term care event.

SPEAKER_00 32:02

All right. I'm going to put you on the spot again. Last time, uh the bald advisor uh full of opinions. Uh first and foremost, I call it the donut hole, which is uh I stole the name from the uh Part D farmer donut hole, but there's long-term care donut hole. There's people who don't have enough money that uh plant protecting themselves from long-term care just isn't feasible. There's people with too much money or plenty of money that they don't need to, they can just self-insure. And then there's these people in the middle. Uh so I call that the long-term care donut hole, but that's topic number one. Uh, then if you are in the middle and we do determine that perhaps a little bit of a protection plan for long-term care uh might be a good idea. Uh traditional long-term care insurance, terrible. Don't do it. Used to be 200 companies doing it, now there's five, and uh people who got themselves into long-term care contracts years and years ago are getting huge notices from the insurance carrier saying your premiums are going up 30%. So that is a bad way. Number two, annuities, okay. Income doublers. There's a bunch of reasons why those aren't great. The only real way, the best way to protect yourself with long-term care if you decide that you do want long-term care protection is a hybrid life insurance product. Putting you on the spot. Everything I said completely wrong, everything I said completely right, or somewhere in the middle?

SPEAKER_03 33:31

I I think, yeah, mostly right, maybe a little bit extreme. I usually speak a little more in general terms. Like there could be a good traditional long-term care insurance policy out there. But yeah, in general, it's really phased away from traditional long-term care insurance towards hybrid policies that uh are often connected with life insurance. Uh, on the annuity side, too, yeah, there could be a long-term care annuity that will maybe double the payments if you qualify for a long-term care need. But also things like QLAX, where inside your IRA, you have an annuity that just starts turns on at 85. It's not precise, but the idea is if you think you might be around age 85 when you need long-term care, approximately speaking, and especially if it has a little bit of flexibility around the start date, that could be another way to think about helping to fund long-term care. But in general, if you are thinking about insurance, it will be more on the life insurance side, where it's a policy that combines life insurance and long-term care, either accelerating payment of the death benefit to cover long-term care or including beyond the death benefit, additional continuation of care for the for long-term care.

SPEAKER_00 34:43

The insurance industry is interesting. We've mentioned more than once today that involving or incorporating some or more, two or more insurance type of vehicles into planning can potentially be beneficial. Uh but the insurance industry, in my opinion, again, my opinion,

Hybrid Coverage And The ADL Dilemma

SPEAKER_00 35:03

is behind the curve in a lot of things uh compared to the investment side. With regards to these income doubler annuities, the majority of them are using these activities of daily life, right? So if you can't get out of bed, you can't feed yourself, if you don't meet two out of six of the ADLs, as they're called, then you can qualify for this income doubler, which provides additional income if you need nursing care, which is a great concept. One flaw is that the ADLs don't incorporate dementia into their terminology. So theoretically, you could have a person who is capable of all six of those activities of daily life, and they have Alzheimer's, and the income doubler for most of these contracts won't turn on. They're getting better with that and incorporating dementia language into it. The other bigger problem with the most of these annuities with the income doubling feature is that typically we have purchased this annuity for income purposes. We have turned on the income already, maybe at 65, maybe at 70. And now when we're 85 and we need long-term care, the underlying account value of that annuity is zero. It's still paying out guaranteed income. But if you actually look at what's that, if I cash this annuity out right now, the answer is you're going to get nothing. And once the account value goes down to zero, these doublers won't pay out. Yeah. Are you have you run into that? Have you looked at some of these doubler contracts and seen what they do to these annuities? Um Right.

SPEAKER_03 36:30

They're still pretty rare. But but yeah, it's it may only double if there's still a contract value. But if you were otherwise using it for lifetime income, that's definitely the point is you don't want there to be a contract value because you want the insurance company to be the one paying you rather than you paying yourself. So you may not get any doubling. And yeah, it's still unfortunate that there's no standardized terminology around activities of daily living, even if it says like you have to be able to bathe yourself. But does that mean climbing in and out of a bathtub, which is a lot more difficult than giving yourself a sponge bath? And how is it defined in the contract? I wish there could be more standardization with that. But the point you're making as well about dementia and not including something specific related to dementia can be quite problematic as well, because maybe you can give yourself a sponge bath so you don't qualify for the benefit. And uh it's a big problem for sure.

SPEAKER_00 37:22

It's a real thing. So uh I have talked your ear off too much, and I just want to say again how much I truly respect your work on these podcasts that I've I've done in the past. I just I've uh I've brought you up in a positive light on on so many different occasions. So to be able to have the opportunity to speak to you is a pleasure. Thank you. Is there anything before I let you go, is there anything you want to ask me? What what would you like? Is there anything?

SPEAKER_03 37:54

No, it's just been a pleasure getting to know you, and it's great to meet you at the conference in Orlando back in May. So yeah, looking forward to to following you in the future as well.

SPEAKER_00 38:03

Uh thank you so much for your time, Dr. Waifow. Always a pleasure. Uh I call him the another opinion, the godfather of modern retirement planning. Have you ever heard that one?

SPEAKER_03 38:14

No, not not for me.

SPEAKER_00 38:15

I've heard Bill Binckin. You are the the godfather of modern retirement planning.

SPEAKER_03 38:21

Oh, thank you.

SPEAKER_00 38:22

I I dare anyone to t tell me otherwise. Anyway, thank you for your time, Dr.

Closing Thanks And Final Reflections

SPEAKER_00 38:28

Wade. It was great, and uh, we'll see you uh soon.

SPEAKER_02 38:32

Investment advisory services provide advice to your financial inc, SEC registered investment advisor. All content on this podcast is for information purposes only and should not be considered investment, legal, or tax advice. Material presented is believed to be from reliable sources, and no representations are made by our firm as to another party's informational accuracy or completeness.