After reading Rick Rodgers’ book, The New Three-Legged Stool: A Tax Efficient Approach To Retirement, I was left with a great understanding of retirement accounts, but I also had a few questions for Rick about his thoughts on retirement in the future as well as a thirst for interesting stories.
Rick was nice enough to take the time to answer a few questions for us and offer another book to give away to one of our lucky readers. Giveaway details are below.
What is your approach to retirement planning? What are the benefits of this?
My approach to financial planning is to look for ways to establish efficiencies in all aspects of a person’s finances – debt management, investing, insurance, estate planning, risk management, etc. Retirement planning is just one part of financial planning. In order to establish effective efficiencies you need to view all the elements of your finance affairs together. My book focuses on tax efficiencies for retirement planning. Taxes are important but so are costs and risks. I believe a person should establish a goal for retirement and then develop a strategy to reach the goal taking the least amount of risk and paying the least amount of taxes.
A good analogy would be to envision driving a car from New York to Los Angeles. You would want to have a map before you begin the trip. That is your financial plan. You would probably want to take the most direct route in order to minimize time and fuel expenses. Choosing a car that is fuel efficient and has been well maintained will minimize expenses. You will also need to be prepared to make adjustments as needed to avoid weather problems, detours that you weren’t expecting, etc. Retirement planning works the same way.
The original three-legged stool for retirement planning believed that a solid retirement was based on having three legs to generate retirement income – a pension, Social Security, and personal savings. This approach doesn’t work anymore. Private pensions cover less than 20% of the working class. Those pensions that are still in existence are under funded and will most likely be discontinued. Social Security is expected to run out of money soon. And personal savings will need to be invested differently to finance 30+ years of retirement. The New Three-Legged Stool builds a solid retirement income using three different legs to generate income – after-tax savings, tax-deferred savings (IRAs, and 401(k)s), and tax-free savings (Roth IRAs). By properly building a retirement based on the new three legs, you can craft your income to minimize or eliminate income taxes. Having tax-free income in retirement means you don’t have to save as much to fund it.
Creating efficiencies in your finances will provide you with more consistent investment returns reduce your income taxes and save you money. That’s my approach in a nutshell.
What do you think the state of Social Security will be 30-40 years from now?
I will begin my quoting from The 2009 OASDI Trustees Report, officially called “The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,”
Conclusion – Under the long-range intermediate assumptions, annual cost will begin to exceed tax income in 2016 for the combined OASDI Trust Funds. The com bined funds are then projected to become exhausted and thus unable to pay scheduled benefits in full on a timely basis in 2037. The projected trust fund deficits should be addressed in a timely way so that necessary changes can be phased in gradually and workers can be given time to plan for them. Implementing changes sooner will allow their effects to be spread over more generations. Social Security plays a critical role in the lives of 52 million beneficiaries and 160 million covered workers and their fami lies in 2009.
The Trustees are warning you to make other plans. What you see in Social Security benefits today is not what it is going to look like down the road. The program will ultimately be means tested in my opinion. Social Security will be there only for those that have no other leg to stand on.
What is the most common mistake you see people make when planning (or not planning) for retirement?
The most common mistake is not planning. For those that do plan, the most common mistake is not saving tax efficiently. I wrote The New Three-Legged Stool to address this issue specifically. We have been told for years to tax defer your income because you will be in a lower tax bracket when you retire. This has worked well for a lot of people up to now because income tax rates have steadily declined. I do not believe that will be the case going forward. The Bush tax cuts are scheduled to expire in seven months. President Obama says he will only raise taxes on families making more than $250,000. I doubt he will be able to keep that promise. If you want to be in a lower tax bracket in retirement you will need to plan for it. You will need to build a new three-legged stool.
Think of it this way. If you save $1 million for retirement and it is all in your 401(k) the day you leave work, every penny you try to spend will be taxable. You will lose at least 20% to income taxes depending on what state and local taxes you may incur. Saving the same amount tax efficiently will either give you 20% more income or you won’t need to save as much to have the same income. You could net the same income with $800,000 in savings giving you the option to possibly retire sooner.
The most interest parts of the book are the way you illustrate your point with examples, some of which are pretty extreme and frightening. What’s a good story that makes people wake up and realize that we should be active in our retirement planning?
I open the book with the story of Frank Richardson which has to be the most compelling reason to be actively planning. Frank was a great businessman and an exceptional visionary when it came to the lumber business. I’m sure in his mind he believed that he had plenty of money saved that he didn’t need to worry about planning. That was partially true. He died without running out of money. Unfortunately his lack of planning allowed the IRS to take 80% of what he tucked away in his retirement account.
An overlooked benefit of retirement planning is the experience and discipline that you develop by doing it. I had a client that passed away a couple years ago that accumulated a $2 million estate. They left everything to their two sons equally. Both sons were in their 50s, educated and had good careers. Neither of them had been working with a financial planner when they received their inheritance and they both hired my firm to manage their finances. One son had already accumulated over $500,000 on his own. The other had no savings. The son that had money before the inheritance has continued to save and is planning to retire at the end of this year. The other son has spent principal time and again. He panicked in the 2008 market drop and sold some of his stock positions causing him to lock in losses that may never be recovered. He has less than $250,000 left and will probably never be able to retire. You can’t handle a lot of money until you’ve learned how to manage small amounts of money well.
Thanks Rick for your insight!
We’re giving away one copy of the book. There are three ways to earn entries:
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Entries close June 6th and a winner will be randomly chosen by random.org.