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- [00:00]
Jerome McDonnell
This episode of the Rotary Voices podcast is brought to you by History Explorer. Learn more@historyexplorer.com.
- [00:11]
Derek Kinney
You know, so many people think the visual is, I'm going to sit on the back porch on a rocking chair and watch the grass grow. People now sell the rocking chair on ebay. They want to go, they want to see, they want to do. And it costs them money to do that. And so when you can take some time to figure out, I don't want to just retire. The goal is, I want to retire to something.
- [00:39]
Jerome McDonnell
From Rotary magazine. This is the Rotary Voices podcast. I'm your host, Jerome McDonnell. In recent months, the global stock markets may have steadied from the previous shocks of trade wars and rising inflation. But if you're retired and live on a fixed income, or if you're planning to retire, you might not think things are too steady. Economists are using phrases like possible recession and stagflation. But even in turbulent times, there are best practices that can help smooth things out for people planning for or in the early stages of retirement. With me to show you the guardrails is your fellow Rotarian, Derek Kinney, author of Good Money Revolution. Derek is seen on cable news frequently. He ran a financial planning firm for 25 years, and he's a member of the Rotary Club of Arlington. Derek, good to be with you.
- [01:37]
Derek Kinney
Thank you, Jerome. Great to be with you.
- [01:39]
Jerome McDonnell
One of the things that you say is a good way to prepare for retirement is to live on a practice retirement budget. What is a practice retirement budget?
- [01:49]
Derek Kinney
There's so many rules of thumb that say you need 70% of your income or you can live on 80%. And what I discovered was the only way to test how much money people actually needed for retirement was to practice living on what they thought they needed. So a quick story. I had a couple come in the office and they both wanted to leave their full time jobs. They were highly motivated to retire. They said, derek, how much money will it take to do that? Well, they agreed on they would need about $10,000 a month. And I said, here's what we're going to let's take your paychecks and let's deposit those paychecks into a separate checking account and we will then direct deposit back to you what you say you need to live on per month. That way it's though you're living on a true retirement budget. We did this for three months and we had a couple amazing discoveries. One is they actually could live on less than they thought. Number two, they found ways to Cut things they didn't need, and it gave them a glide path for to smoothly go from working full time to retirement. The bottom line is they retired earlier than they thought, and they realized this is the exact dollar amount they could live on. And so we began to use that strategy with every one of our other clients. When you test it, it gives you confidence and the courage to make that bold decision to actually retire.
- [03:16]
Jerome McDonnell
So it's just a way to come up with an accurate number that you can live on and not an imaginary one.
- [03:22]
Derek Kinney
That's exactly right. You know, I like to think of retirement as really the ultimate custom tailored plan for each person's life. You work so hard many times at a job you may not like every day. And when you retire, you want to choose your own adventure story. You want to create exactly what it is you want to go and see and do. And when you have a worry about, am I going to run out of money that can keep you awake at night, it can take the joy out of retirement. So the best way to custom tailor that for each person is live on the practice retirement budget, ideally about three to six months before you retire. Well, now you've tested it and not made the shock decision to retire. Now. You could work longer if you need to. It just gives you control over your financial future.
- [04:08]
Jerome McDonnell
What about portfolios? I imagine a lot of retirees think they have to make big changes in their portfolios or if they don't have enough money, maybe they want to be more aggressive than they should be. How do you handle mistakes people are prone to make with portfolios?
- [04:24]
Derek Kinney
Well, and they make lots of mistakes, and here's why. They're often told, when you retire, you should automatically become more conservative. And there's a big problem with that. Number one, people are living longer and people are spending more oftentimes than they thought they would in retirement. And so they need to have part of their portfolio in growth funds to keep up with inflation and keep generating the income they need. So, for example, people would say, 100 minus your age is what you should have in the stock market. What we found is it was causing people to run out of money. And so typically, most all of our clients would have about half of their portfolio in something like the S&P 500 index. These large big blue chip companies tend to fluctuate, but over time, they tend to grow. And then complimenting that portfolio would be some bond areas or some real estate or some things that would provide some fixed, fixed, predictable income. And going back to that practice retirement budget, Once you know how much income you need, ideally you don't want to withdraw more than about 3 to 3.5% of the total portfolio. So let's say that you have a million dollars. Well, that's going to generate, you know, maybe a couple thousand dollars per month. And so you want to realize a million dollars sounds like a lot of. But the goal is not run out of money. It's like gardening. Once you put the seeds in the ground and you get impatient and you pull those plants out before they bloom, it's going to be hard to put those seeds back in the ground again.
- [06:02]
Jerome McDonnell
One of the things you talk about is to not just retire from something, but to something. Explain what you mean there.
- [06:10]
Derek Kinney
I had a couple come in the office, and they were telling me, derek, we both hate our jobs, okay? Which is more common than you think. How can we retire? And so their mindset at the time was just get us retired. And what I told them was, look, before we do that, we need to have a discussion about what does your ideal retirement look like. And so I actually brought in a couple of blank canvases like you would paint on. I said, hey, here's some pens. And what I want you to do is I want you to write on this canvas what your ideal retirement looks like. And we went through, what hobbies would you like to have, what interaction with people would you like to have, what activities would you like to be involved in so that when you lay your head on the pillow at night, you feel like you've lived a day of purpose and meaning in retirement? You know, so many people think the visual is, I'm going to sit on the back porch in a rocking chair and watch the grass grow. People now sell the rocking chair on ebay. They want to go, they want to see, they want to do. And it costs them money to that. And so when you can take some time to figure out, I don't want to just retire. The goal is, I want to retire to something. I want this to bring out a better version of me and my spouse. If you're married, what is that marital communication? Like? For example, if one spouse has traveled all the time and the other spouse has been home all the time, typically their desires reverse when they retire. The person who traveled, they want to sit home and watch TV and binge watch Netflix all the time. And the that was at home, they want to go and see and do. So having open communication, as well as designing what it is that you really want for yourself, it gives you this anticipation of, I'M not just retiring from something. I want retirement to be even better and sweeter than my full time working years.
- [08:08]
Jerome McDonnell
What about people's egos? I mean, a lot of people have lots of responsibilities in their job. They have status and then they are going to lose that when they move into retirement. And then that can infect your portfolio, that can affect your income. How do you manage those kind of nuances?
- [08:27]
Derek Kinney
This is something that most people don't talk about. But for many, many people who derive a lot of status and a lot of just pleasure from the work they do, retirement can have some unintended consequences that people aren't expecting. For example, most people have a business card or a title and they've got status at their company from their peers, from competitors even. And once they retire, they begin to feel this sense of invisibility. And for men and women who have really worked hard to build a career and a reputation, that can be really hard to let go of. You know, we're often asked the question, what do you do for a living? And we typically say our title. Here's what we do. There's a sense of pride with that. And when you're retired, it's like somebody took the business card and wiped the title off and you kind of feel like, well, what am I doing? People begin to question, what is the purpose of your retirement? And so it goes back to, you know, what is it that you're retiring to? And not just from. So one of the things that I would ask people to think about is don't feel the pressure to have to fully retire. There's so much in culture that says, okay, you're 55, you're 60, you're 65, whatever that age is. Now you just stop working. What we're finding is, and emotional studies back this up, even psychologists have chimed in. They've said, look, if you want to live a more meaningful, lasting, fruitful life, maybe you do some part time work, maybe you convert from the full time job to being a consultant, back to that company or in the industry or you teach part time because ultimately the spouse or the person that you're with, they want the best version of you. And often the board version of you doesn't bring out the best version of you.
- [10:13]
Jerome McDonnell
A lot of people think that in their retirement they're going to help other people and use their lifetime of earnings to help out organizations. But the financial planner may have a more limited idea about that. And how do you negotiate generosity and philanthropy in retirement? And bear in mind the future of Rotary rides on your answer.
- [10:39]
Derek Kinney
No pressure here at all. You know, it's interesting. One of the key components of my book, Good Money Revolution, is about a gentleman that I talked to named Dave. And he was a longtime client. And Dave came in the office and I could tell something was bothering him. He was carrying the weight of the world on his shoulders. And I said, dave, what's wrong? And he began to tell me that, Derek, I don't feel as motivated to go to the office anymore. He was a successful consultant, had his own business, respected in the community, but he felt like he was just sort of going through the motions. And I said, dave, is there a cause that you care about? And he begins to tell me a story. Many years ago, on a trip overseas, he remembered the guide telling them that this village just has abject poverty. But all of that could change if there was a dedicated school building to provide education for the kids. It would transform the whole area. And he remembered exchanging a glance with his wife as if to say, wouldn't it be cool to fund that school as he gets back? Life gets busy. But my question brought this all back and I said, dave, let me give you a crazy proposal. What if you set a sales goal to increase your sales, let's say 20% over the next year, and you took half of that increase and used it to fund that school? Well, his eyes got as big as saucers. Now, this was a guy that suddenly had purpose in his life. He comes back three months later, he looks invigorated. This guy's back in the game. I said, dave, it's night and you look different. What happened? He said, well, we put a picture of what the school building could look like on our website. And we let our clients know that when you work with us, a portion of our profits are going to build this school. And it actually resulted in referrals for the business. And most importantly, I now feel a sense of purpose, like the work I'm doing has meaning because as I help people and consult with them, we're actually helping this village get better. And so what we realized was that story is so many other people's stor story. They feel like they're going through the motions. They feel like they've set a goal of I just need to have X amount of money and then I'll be happy. And what we find is they're not, is they may pursue that seven figure business or the bulging bank account, but until they combine meaning with their money and a cause, with their cash and purpose to their profits, they feel like they're just walking along all by themselves. And so this generosity, purpose, whether you own a business, you work for someone else, or you're retired, can be very, very powerful. And what I tell people is pick out a cause that you care about. It might be water, it might be homelessness, it might be the ocean, it might be hunger. Whatever this is for you. Pick out a cause that motivates you to go make more money and then do more good. Now, I'll tell you one more story, Jerome. One of my clients was having some health issues, and he said, derek, I want you to put your hand on my chest. Well, I've never put my hand on another man's chest in a client visit. He said, derek, I want you to feel the pacemaker in my chest, because if this pacemaker ever goes out, I want you to make sure that my wife has taken care of. Will you do that? Talk about pressure and the stakes being raised, I said, yes. These were longtime clients. On a Saturday morning a couple years later, I got a call that Ted had passed, and his wife, as we found out, was a huge Texas Rangers baseball fan. And Ted, one of his passions was the food pantry at his local Greek Orthodox church. And so one of the things that we talked with Mary about was she wanted to find meaning. So we literally go online, we got her signed up as an usher to usher Texas Rangers games, which she loved. She loved baseball and loved building the camaraderie with the same people each game. And she then used a portion of her money that she didn't really need to make donations to the food pantry that Ted cared deeply about. So here's a moment where we identified something she was passionate about and then a cause she was passionate about. And so it was this win, win, win, win scenario. And so for the Rotarians listening, that may be thinking, how can I grow my business? How can I motivate my team? How can I get reinvigorated? Tie a cause to your cash and purpose to your profits and meaning to your money, and it can completely revolutionize why you do what you do. While you're helping other people solve their problems, you're helping make more money to do more good all around the world.
- [15:24]
Jerome McDonnell
I think Rotarians are well placed to do that and find a purpose in their retirement. A lot of people have found their purpose through the Rotary Foundation. Is there some way that foundational giving has a role?
- [15:37]
Derek Kinney
I think it's a huge role, especially for our audience that are passionate Rotarians, and they recognize the power of doing good in the world. And I like to make things practical. And so if there is a cause in your local Rotary Club or you see Rotary doing globally, find a way to participate. And I would just tell you, no dollar amount is too small. So many people think, well, I need to wait till I've got millions of dollars to make an impact. The problem is there's a cost of impact that gets missed. So whatever you have available today, give that. And even better, enroll your family. Imagine talking to your kids or your grandkids about, here's a cause that we care about and brainstorm ways they can be a part of it, too. So you're raising up this generation of giving and this culture, philanthropy. But I can't think of a better, more organized, impactful organization than Rotary. I've been a member since 1999, and it is the room I go to every Thursday for lunch. And these are the people who are not just my friends, but they are difference makers.
- [16:54]
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- [17:29]
Jerome McDonnell
You were a financial planner for a long time. For 25 years, you followed clients through the entirety of their financial scene. Were there any characteristics of folks who were really prepared? What seemed a best prepared person look like?
- [17:45]
Derek Kinney
Well, I would answer that two ways, and one part of the answer might be surprising. So there was a couple that I'd worked with for a long time, and they came in the office and said, derek, okay, we're getting ready to retire. And one of the things that set the work I did apart was I wanted to pull back the curtain of just the account statement balances. I wanted to go behind the curtain to see how they're feeling, what are their emotions, how their relationship is. Because you can't live any closer with a person than when you're retired together. And this may shock people when I share this, but as we began to go down this line of questioning, what we realized was they had been living together, but they only stayed together because of the kids. They had no common interests. They had no things they did together. And surprisingly, what happened? A few months later, they decided to divorce. And I had never had that happen before they actually separately thanked me and they said, derek, thank you for asking us such key targeted, pointed questions. Because it allowed them, not that I'm a big fan of divorce, but it allowed them to figure out separately how could they both find joy in what they wanted to do. So don't be afraid to ask those hard questions because people are inside, they may be feeling frustrated, they may want the life they want, but when you ask them those questions, it can pull that out. And so the other piece I would share with you is people who are prepared obviously have more money saved or they get motivated to start saving more. So I call this the sweet spot. Typically, right before you retire, there's about a five to 15 year window. I call it the do over time in life. Your house is just about paid off, you're about done paying for kids college, you begin to have this thing called discretionary income, okay, which is money left over. And so when people have a plan and they get motivated, they can catch back up on things very, very quickly. But please don't think that retirement is either all retired or not retired. There's a concept called a phased in retirement. And what that means is let's say at 55, you're just tired, but you want to keep working. In some cases, because employers value wisdom, experience and the impact you can have on these younger generations, they might say, hey, let's have you work part time. Well, now you have a couple days off a week to live this phased in retirement. That can be a glide path to fully retire. But what I would tell you if you were to say, Derek, what is the number one success factor in retirement? Really getting clear on what you want. There was a couple that said, derek, our daughter just had a daughter in Georgia. So this was their first grandchild and they wanted to be by their grandchild. And he said, derek, I know this is gonna sound crazy, but I'm going to quit my job with the belief that I will find a new job in Georgia because we want to be by that granddaughter. It was one of the biggest acts of retirement courage I've ever heard. Not only did he find a job, but he's now been almost next door to his granddaughter growing up. So if you can get close on what it is that you want, because ultimately we hate to have you have worked so long and put up with all the frustrations of working for many years and then not have the retirement that you deserve. I just think that is just not right. And some planning can really help that and help solve that problem for Many, many people.
- [21:24]
Jerome McDonnell
One of the things that comes up sometimes for people who are about to retire is with aging parents, you go from working hard in your job to a retirement of caregiving. And things that you hoped and dreamed would happen in your retirement are kind of put on hold indefinitely. How have you navigated that with clients?
- [21:47]
Derek Kinney
One of the things I tell clients is you want to expect the unexpected. Life doesn't always get that email and things get thrown at you. And so when you expect that, hey, things may not work out exactly how I want them to, then you're less likely to have not just a financial wreck, but also wreck your retirement. So I call these critical conversations.
- [22:11]
Jerome McDonnell
And caregiving is startlingly expensive these days. I think a lot of people might think they can afford caregivers and then get to that point and say, whoa. And depending upon the kind of caregiving you're getting on the spectrum, it can be a whopper.
- [22:28]
Derek Kinney
This might sound cold and callous, and it's not intended to be that way. We want to do all that we can. What I would just tell you though, is protect your financial assets. Because if you spend all your money on caregiving, then suddenly you're putting yourself in a position to need caregiving down the road financially. And so it's very important to pull back and look at strategically using the resources that people have. Are there services in the local community that could benefit an aging parent? Can you share and divide those responsibilities? So if we were to back this conversation up earlier, say maybe five or 10 years, having the unpopular candid discussion with mom or dad, hey, you may hate me for asking this, but in the situation where you needed some care down the road, what does your ideal scenario look like? Ideally, long term care insurance is something that I heavily recommended for every single client. It's basically transferring the risk from your bank account to the insurance companies. And you pay a monthly premium for that. Whether it's your parent paying that, or sometimes we would have the kids pay that because it was their protection mechanism to protect their own investment assets by paying for that type of policy. I did that for many years from my own parents. I like to practice what I preach.
- [23:56]
Jerome McDonnell
What about the risk to our portfolios from the times we're living in? The stock market is floating along. Okay, but I was reading Paul Krugman the other day and he was saying, well, the stock market's like Wile E. Coyote in the cartoon. It's always just chugging along and then all of a sudden it looks at the camera and realizes there's no more ground underneath him and it falls. Do you think the stock market is in a Wile E. Coyote kind of mood?
- [24:21]
Derek Kinney
I think that's a really good description. I was doing an early morning radio interview yesterday and one of the questions was, hey, what impact does the Fed have on the economy? And I would broaden that to say, what impact does the Fed or the market have on retirees and their portfolios? We are in some unprecedented times. What we do find is that the stock market craves certainty and when there's moments of uncertainty, it leads to heightened volatility. Even if you have a certain amount in something like the S&P 500 or something other that's growth oriented, you're going to feel the ups and the downs. But over the long term, that's one of the best ways to fight inflation and help you not run out of money. And so retirees should realize that when you retire, you no longer typically have new money coming in in the form of a paycheck. Now you've got management of your money and the goal is how can you recreate that paycheck in retirement? You know, having worked as a financial advisor for 25 years and consulted just thousands of people to help them successfully navigate pre retirement and retirement, it's ideal to have you find someone you trust that can walk alongside you to help you make some of these non emotional decisions. And also if you like to do this yourself, I encourage you to say each month I'm going to review this and make sure that I'm on track. Because one of the biggest problems that retirees often find is let's say a son or daughter or a grandson or granddaughter needs financial help. In your heart you want to do all that you can to help them. The problem is if you help them too much financially, is it hurting you and your future financial independence? And so I always want people to look at and say you need to have some objective, non emotional financial voice in your ear. If you're compelled to make a big donation or you're questioning can the person handle this money I'm giving them, run it by someone you trust and just make sure. They may say, yeah, that's fine, but too many big bad financial decisions in retirement can really create the retirement that you didn't want to have.
- [26:43]
Jerome McDonnell
Economists are using words like recession and stagflation to warn us about what's coming down the road. Most of us have never seen a stagflation economy where joblessness rises and inflation rises at the same time. How do you make money in these.
- [27:00]
Derek Kinney
Situations, it's very, very hard. But keep in mind those types of cycles, historically, they may last two years to generally five years from a historical perspective. And one thing that we do know is typically this news doesn't just shock people and happen the next day. There's typically leading indicators that tend to point that things aren't looking good. For example, if you begin to see, well, housing numbers seem lower than expected, we're seeing higher jobless claims, we're seeing the cost of eggs and bacon and milk and bread soar at the grocery stor you know that there's certain pieces, there's clues to the puzzle that we can begin to look at and say this could be a sign of the economy not doing well. And so in that case, you've got a couple choices. As a retiree, and this is one thing I would do with my clients is we would often take pockets of money out of the market, out of any investment they had, and we might park six to 18 months of their cash monthly needs in a cash account. So what that did is taking the money out allowed them to ride out times of economic uncertainty and volatility without worrying about can I still have the lifestyle that I want. Now again, talking with your financial advisor, understanding how much you need is a key to that. What we do know is historically markets tend to bounce back. And so on the other side of that is when those types of cycles end, they typically don't just end overnight. There's also leading indicators that say housing numbers are improving, interest rates are dropping, prices at the grocery store appear to be heading a little bit south. And so that's an indication then because the market tends to bounce back up historically about about three to four months before the true defined end of an economic cycle. I've made money like that myself and our clients have as well. The key is not just timing the market, but it's time in the market that ultimately pays the best dividends. Most portfolios are going to be very diversified. But even in my book, I talk about the four lanes of investing. Lane one is you're checking the savings account. Lane two may be that five to seven year period. Maybe you're saving for a house or a car, you want to start a business. Lane three is your longer term retirement savings, 401 IRAs, 403s, if you're in a nonprofit, then lane four is that fast lane. Typically on the highway, that furthest left lane is the fast lane where the people get the most tickets, they get in accidents and I call that the investing fast lane. And that is pick something that intrigues you, put a little bit of money in Bitcoin if that intrigues you, or a stock that you're like, this seems too crazy, but I hear people talking about this. I want to have money in it. So if it does well, great, you have a story to tell at the cocktail party. But if it doesn't do well, it doesn't impact the rest of your portfolio at all. The key is as an advisor. I just wanted my clients to have something that they were interested in and it was fun to make money as well.
- [30:22]
Jerome McDonnell
Well, Derek Kinney is the author of Good Money Revolution. Derek's seen on cable news frequently. He ran a financial planning firm for 25 years, and most importantly, he's a member of the Rotary Club of Arlington. Thanks a lot for joining us on the Rotary Voices Podcast, Jerome.
- [30:39]
Derek Kinney
Thank you so much. I have really enjoyed this conversation.
- [30:45]
Jerome McDonnell
This episode of the Rotary Voices Podcast was Hosted by Jerome McDonald, produced by JP Swenson and edited by Wen Huang. Production by Joe Desaux. If you enjoyed the show, please rate us five stars on Apple Podcasts and Spotify and share it with your friends. The Rotary Voices Podcast is produced by Rotary Magazine, the official monthly publication of Rotary International. Thanks for listening.