Ep #123 - Signs Someone Might Be On The Path To Broke
In its simplest form, financial success stems from having adequate income to cover expenses. The trouble is that even if income exceeds expenses now, that doesn’t mean it’ll always be that way. Retirement, job change, health event, premature death - life often throws us curveballs, many of them emotionally and financially stressful. As planners, we can often see the writing on the wall because certain situations or financial decisions have a high probability of leading to financial ruin. Listen to Adam and Ben share experiences and highlight the importance of education and planning along life’s journey.
Chapters
- 01:22 Signs You're on the Path to Broke
- 01:46 The Role of Financial Planners
- 03:57 Retiring Too Early: Risks and Consequences
- 06:47 The Impact of Early Withdrawals
- 09:43 Emotional Investing: A Costly Mistake
- 13:47 The Pitfalls of Found Money
- 17:28 Unexpected Healthcare Expenses
- 21:34 Final Thoughts and Advice
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Full Transcript
00:00:00 Ben Haas: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts…now.
00:00:28 Ben Haas: Hey Adam, welcome back to podcast time. How are you today?
00:00:31 Adam Werner: Hey, fantastic. Thanks for having me back. It feels like it's been forever since we've actually recorded one.
00:00:38 Ben Haas: We need to act like we know what we're doing. So with that said let's jump into it.
00:00:43 Adam Werner: All right.
00:00:44 Ben Haas: I think we have a great topic today, or we wouldn't be recording this but the reality is I know we often talk about planning ahead for things.
That's the nature of our work, but certainly people understand that life can throw us curve balls. The theme today that we want to focus on, it's not being judgmental. People sometimes make tough decisions and you can look back and say it was the wrong decision. But what we want to highlight is when we see certain signs there usually is a pivot point.
And if you go down one path, we could tell you this may be a path that's going to lead to a lot of negative financial dominoes. And that's what we want to kind of bring to light today. So let's go through, as the title says, some signs that may be putting people on the path to broke.
And that can be not just you, the listener, but coworkers, family, friends, things that we could point out for you that if you see this, maybe that should give you pause to, to stop and say, Hey, have you ever talked to a planner about this kind of stuff?
00:01:44 Adam Werner: Yeah. Yeah. And from our standpoint, we really don't want to be the person to, or the people who tell people what to do or what not to do.
Like, we don't want to say, here's exactly what you need to do. And if that differs from their viewpoint, then that's never going to be implemented. Our role, I think, as, as planners and as a sounding board for our clients is just to educate people on the impacts of certain decisions.
The trade offs that are associated with certain decisions and give that person As much information as they need to feel confident about whatever decision they're going to make or at least have all of the details and facts in front of them, These decisions don't happen in a vacuum, whatever that decision is, whether it's to retire at a certain age, whether it's to change employment, somebody passes away, how am I going to financially move on?
None of that happens in a vacuum. Those big decisions have little decisions associated with them.
00:02:39 Ben Haas: Yeah. I think at the root of all of this for us, financial planning really could be dumbed down to income and expenses. What is going out?
What is coming in? When life throws us a curveball when we're going through a difficult transition, these are moments of stress where people feel like they have to make an adjustment to something or, maybe said differently. There's a panic button, there's a fire to put out. And if you aren't able to step back from that situation, which may be very difficult, depending on what that trauma is, or if you haven't planned ahead, then there are quick levers that could be pulled that us as planners would go, gosh, that may not be the best one to pull.
And just being able to insert ourselves in a conversation may be helpful to your point to just give that education.
00:03:23 Adam Werner: Yeah. And I think, sometimes it's more important to know what not to do than it is what to do. I'll use the phrase you can sometimes to win by not losing.
So just avoiding a very negative outcome from a decision may be in and of itself a success, right? Even if it's the best decision or the best situation. It may not, hopefully, it's not the worst outcome and that can still be a positive outcome. So I guess let's just dive into maybe some of those examples of where things can can start to maybe go haywire?
And one of those that we've certainly seen over time in working with retirees is retiring too early or changing your job at maybe a younger age because of burnout, where we see people, especially when it comes to retirement, it's, I think historically speaking, retirement for a lot of people was I'm going to get to a certain age. I'm going to circle that date on the calendar, and once I'm there come hell or high water, I'm retiring because, cause that's what, that's what I want to do. And for, I think for a, for a lot of people, the planning that we would hope goes into, am I actually ready to retire?
Not only financially, which of course is a huge component, but then we often like to talk about, there's more to retirement than just the financial side of things.
What am I going to do with my time? But let's just talk about the financial cause that's what we're talking about today. Are, am I on the path to potential financial ruin based on my decisions. But yeah, I think you, you touched on it already. As long as somebody lives within their means, can control their expenses and has enough income to cover those more often than not people are going to be okay, but that is the situation where maybe retiring too early has a domino effect on so many different aspects of your financial life that you start to stack up what could be relatively minor hindrances, but you put enough of those things together and it can become a much bigger problem very quickly.
00:05:25 Ben Haas: Yeah, and some people naturally have that fear going into retirement do I have enough am I going to run out of money?
But there's the other side of this that is very human. I think it's really hard for people to maybe, scale back lifestyle. Even if you live within your means, let's imagine that you would say in retirement planning well, I just want to continue my lifestyle, but if the income from a portfolio combined with social security, maybe there is no pension.
If that's not going to support that, it's hard to scale back. There's the reality that every day feels like a Saturday, right? When you spend your most money, when you have your freedom of time. Even if expenses are known, that may already be a difficult thing if you can't recreate that same paycheck when you were working. So much of our planning is planning for the unexpected.
It's health event. It's family needed help. God forbid it's premature death. These are some of the bigger picture things that we see being a very quick negative to that pool of money that you've retired with that now needs to support you your whole life, not knowing when that end point is for you. Withdrawal rate being too high, too early.
That is absolutely a quick path to financial broke.
00:06:37 Adam Werner: So on that note, I think that certainly comes into play. Exceeding maybe that four or five percent kind of withdrawal rule doesn't set somebody up for long term success in retirement. We've seen it with clients that are not yet retirement age, and wanting to make a shift from one job to another, have done a decent job of saving in a retirement account but maybe don't have the flexibility of either savings or a non retirement investment account that can be tapped into, where we see this really can go negative is if somebody is earlier than age 59 and a half and needing to take withdrawals from a retirement account just to sustain that lifestyle or just to continue to get by. Okay, so not only are you potentially taking withdrawals out of a retirement account early, again, just to be able to continue your lifestyle. If you're taking withdrawals prior to 59 and a half, not only are you fully paying taxes on that, now you're getting hit with a 10 percent penalty, which certainly hurts.
But now you're also jeopardizing at what point you may be able to retire in the future because that retirement account is going to be smaller if you're taking withdrawals sooner. It's those dominoes. Those trade offs in a vacuum. That may be the best decision for that person at that time, but then fully understanding that if this decision to change employment means I'm going to need to rely on my savings sooner than I would have liked, that may mean I'm going to have to work longer.
I'm not going to be able to maybe retire when I had hoped, or maybe that retirement becomes indefinite. Those are the really tough spots where we see people back themselves into a corner. And that's not a fun spot to be in where you lose that flexibility. You lack certain options and the taxes will be the taxes.
Retirement will be retirement. For a lot of people, that's where we see the future impact of today's decisions isn't always a good one.
00:08:29 Ben Haas: Yeah, that's definitely a path to a more difficult spot. While you were saying that, I wanted you to almost quantify that. When we say, going to a retirement account early, let's put numbers to it.
You've got a 10 percent tax penalty for a premature withdrawal on top of income taxes at that time.
00:08:49 Adam Werner: Correct.
00:08:50 Ben Haas: Just think about the snowball effect. You have X amount of dollars, but now you're losing 25%, 30 percent on every dollar you take out of that. That pool of money can dwindle really quickly. I want to be clear. This is not to pass judgment. There are times where people need to pull a parachute cord.
I did it, right? I did it Adam. I took money out of a retirement account when I started this business. I had nowhere else to go for money.
I know that that wasn't wise. I didn't have another option. I'm here admitting that and I would hope that if you were advising me at that time you wouldn't have been judging me. But I know if I didn't know what I knew at that time and you were educating me. It is to just look at all my options?
What are the alternatives? I just want people to be able to think about those and consider those before doing something that like you said, we just know going to that account doing it in this way, more often than not, you're not going to recover from that.
00:09:43 Adam Werner: So then, another example, which I think is in that same vein of, you'll have a difficult time recovering is when it comes to investments, and unfortunately we've seen this a few times over the last, I don't know, five years or so where, clients have not been able to weather the volatility in the stock market and ended up essentially cashing out, selling out of their investments at essentially the bottom, of the markets right before things turned a corner. That is one of those things that I think a lot of people, well, everyone's heard the saying, right?
You buy low and sell high and that's all well and good. But in practice, when you're feeling very emotional about, or the visceral reaction to seeing your, your account values drop, that emotional and psychological impact is real. For us, where we would want to help people plan for that is to not put yourself in a spot where you feel you need to take a drastic action in the short term. We know that once someone locks in those gains and goes to maybe something that is quote unquote safe, right, you think CDs, fixed annuities, things like that, that have a fixed rate of return.
That feels good. But now when you zoom out into the future a few years and if you were able to ride out that storm, that is a hugely impactful mistake that some people make. It's so natural, it's so human to want to get out of the way when things feel ugly, but more often than not, that's a very costly decision.
00:11:20 Ben Haas: Yeah, very rational, but incredibly expensive. I'll use mathematical modeling again to highlight the impact of this. If somebody's invested a hundred percent in equity, right, a hundred percent in stock that you know goes up and goes down, certainly to higher and lower levels than something like a bond. It wouldn't be fair to use this example for you if you were more diversified, but again, just follow the principle.
If you had half a million dollars and you go through COVID time, the market drops 30% in a very short period of time, you're $500k is now at $350k, right? $350k and that individual says, “I can't do this anymore. I'm out. I'm going to move to safety. I'm going to go to the bank. I can get 3 percent in this fixed annuity or in the CD for the next five years.” That $350k has recovered in part to $405k five years later. And maybe that feels good that you are knowing you have the certainty of some growth there.
00:12:17 Adam Werner: Yeah.
00:12:17 Ben Haas: And I realized that hindsight is 20/20, but follow the math. If that $350k now, and the math I'm using is where was the S&P500 at the bottom of the market in March of 2020. And where is it today? It is almost grown by 2.5 times. So, $350k is now closer to $800k-$850k right? Versus the $400k.
You have less than half of that balance by making a very rational decision to get out of the way, but incredibly expensive. If that same individual, now in retirement, was expecting or needing that portfolio to give them $30,000- $40,000 a year. Let's not even talk about time value of money. $40,000 on $400,000, you're broke in 10 years.
Where double that balance, $800-$850k, now you're getting closer to that 4 or 5 percent withdrawal rate. That mathematically is sustainable. So it's hard. It's very hard in those moments of frustration, of fear to stick to the plan, but selling out and we never know when the bottom of the market is, but more often than not, you've used this analogy a hundred times on this podcast, I bet. If you're on the lifeboat, the last thing that you should do is jump out of the lifeboat. It's easier said than done. Yeah. Well, with all of this, but just wanted to give a mathematical example of how this can put somebody on the path to broke.
00:13:46 Adam Werner: I appreciate you sharing all that.
I think another one to kind of throw out there and we have a specific example in mind, but I think it's potentially broader. It's when, the transition from kind of working and saving. Which for a lot of people, you just set that on autopilot, right? A lot of people with employer plans, whether it's a 401k or a pension or whatever, you're saving into that.
It's kind of out of sight, out of mind. You're just dealing with your paycheck and then people are comfortable with that. But then when you get to retirement and now you have this pool that needs to support you seeing those dollars, it feels different. You have a different interaction with your savings at that point, because now it's not, I'm not putting into it and just set it and forget it.
It's going to grow over time and that's great, but now I'm relying on it. And I see this pool of assets. And the example I'll throw out there is we had a client who didn't even know he had a pension from his company, he had a 401k, but he had a pension available to him and he was able to take a lump sum.
And at the time that made a lot of sense. You take that lump sum, invest it, grow it over time. He was a little bit on the younger side. So that made a lot of sense. But now that was viewed as, Oh, well, we have this money.
00:14:55 Ben Haas: Found money.
00:14:56 Adam Werner: Yes. Found money. So whether in this situation, it's, it was money that was his, sometimes it could just be an inheritance or a windfall.
You hear the horror. There's a TV show called The Lottery Ruined my Life. Because that sudden influx of money and now seeing the balance, a lot of people struggle with discipline around making sure that lasts or really putting that in places that are meaningful to them and not just, well, now I have, you know, a blank checkbook to just start to check boxes on things that are going to feel good temporarily.
The situation I'm thinking of is now we're at a spot where that lump sum has now been spent and they're still in retirement and now it's the, Oh crap, now those tough decisions are going to have to be made because of some decisions leading up to where we're at today.
00:15:50 Ben Haas: That's so tough, right? The relationship with money and I think back to that specific example that, I know we don't always plan on this, but I believe I know who you're talking about and it's so hard. It's so hard to save. It's so hard to get ahead.
There are things that happen in life that make that difficult. We all got choices to make. And some of it is just, again, we got to live our lives. Kids, jobs, houses need to be fixed. Like sometimes it's just hard to get ahead. So it's kind of this sad irony that this found money can be this euphoric like, okay, now I don't have to feel that pressure.
Now I can do some of the things I want to do. But I know the stats like you do somebody inherits money. I don't know what the specific statistics are, so I'm not even gonna try it, but I know the vast majority, a high percentage of those inheritances are exhausted in a short period of time, because it is that found money concept. I think, there's work to be done at moments like that, where planners can come in and give some perspective, like you said at the very beginning of this, just to understand the trade offs.
Money is the tool to live the life we want to live, but there absolutely are limits to that if you don't want to be on this path to maybe seeing it completely exhausted in a period of time. Found money is a good example because we see it happen more and more of our clients are inheriting money from their parents and oftentimes that money doesn't stick around.
00:17:19 Adam Werner: Right. It has the potential to be both a blessing and a curse, all at the same time. So yes, that's a good one. So maybe, maybe I'll tee this one up and then throw it to you. I think that one of the last ones here is, unexpected healthcare expenses or, long term care is always a big one.
That's floating out there. But, you know, the idea of just going through something tough in life, losing a loved one or losing a spouse, at a younger age.
I'll just leave it at that and I'll kind of throw it to you, a recent situation that I think was a great example where some prior planning avoided potential financial headache or heartbreak at that point because there was some forethought and if this happens, what would we want to see happen? So I'll shut up and, and let you take it.
00:18:09 Ben Haas: Well, I'm sure going to toss it back to you in some point in the middle here. I feel pretty strongly that maybe it was two years ago.
We did some podcasts and we might've even titled it like for God's sake, just buy insurance. I think sometimes that hits home for us much harder when we have people we know that are now our age. I realize you're turning 40 in like two weeks, you're journeying to 40 club. Like we're not super young anymore, but we certainly still feel like, we've got a lot of life ahead of us.
And when we've got people our age that pass away, whether it's something incredibly sudden and tragic or it's illness, it's cancer. We just talked about an old colleague this morning. It's just so easy to pinpoint as planners that, if that family of four, the client that spoke to yesterday, now is a family of three with only one parent.
And that family was operating going back to income expenses on a certain amount of income to support the mortgage and these children and the dreams to get them educated. And now one of those incomes goes away an emotional travesty can quickly become a financial one.
Right.? And if there was no insurance there, and I'm not going to go into the details of this, but now, this client really shouldn't be in the environment that she's in at work, right?
It is a triggering environment for her, for the trauma that she's gone through. And to be able to say, “great, take a step back. You've got this life insurance money that was here for this purpose. Give yourself some time, figure out what your next step is to do something that hopefully is going to be rewarding again and bring in some income,” but not to feel like she had to stay in that job.
That was all the option is there because there was some life insurance, the responsibility. And we didn't know her and him at that time. That wasn't us that said, go get life insurance. They did that. Somebody gave them that advice or they came to that on their own. But my gosh, I can't imagine how difficult that conversation would have been for me yesterday.
Yeah. I'm sure in my heart of hearts, I would have said, you've got to do what's best for you and your family. But it was easy for me to say, don't worry about the finances. Don't give a second thought to taking a more of a withdrawal from this account to buy yourself some time because you can afford it.
00:20:24 Adam Werner: Yeah. And I think, I think ultimately in our role, we just want to educate people on their options. That options part is the important piece. I think is that you don't ever want to put, well, we wouldn't, it's, it's hard to see people put themselves in a position where they lose that flexibility, or they don't have other options.
So in your example, if there was not the life insurance, and now this person is in a job that her trauma is triggered on a regular basis. What's the alternative? You either have to deal with it, which was not going to work in this situation.
There are going to be so many other negative dominoes from that, or, or it's, I'm going to avoid this and I'm going to go do something else. But then there are financial impacts beyond that, which again, there's dominoes, there's trade offs that would not be an ideal situation either. So, yeah, just setting things up from a planning perspective if and when things go awry you at least have some flexibility or at least some parachute cords to pull in the case of an emergency. And it doesn't necessarily need to be the perfect solution, just some flexibility is obviously going to be better than none.
00:21:34 Ben Haas: I think that's a perfect way to wrap this up. So I know we gave a couple scenarios. If you, somebody you know, it's a co worker, it's a friend, it's a family member, loved one, whomever, you see some of these situations or you're fearful of some of these situations, either for yourself or somebody else, just ask questions.
It's good to ask questions and plan ahead and we're certainly happy to be a part of that.
00:21:56 Adam Werner: Yep, absolutely.
00:21:58 Ben Haas: Thanks, pal. And, uh, I know I alluded to it by the, by the time we do this next time.
00:22:04 Adam Werner: I'm gonna be older.
00:22:07 Ben Haas: Lordy, lordy, look who's 40.
00:22:11 Adam Werner: Alright man, I'll see you then.
00:22:13 Ben Haas: Thank you for your help.
00:22:13 Adam Werner: You got it.
00:22:14 Ben Haas: Bye. Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening.
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Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.
