Financial Secrets to a Happy Retirement
MARTHA SHEDDEN
Tell me about your background. How did you start your professional life centered around retirement issues?
TOM HEGNA
I grew up in a small town in Minnesota. I went to college at North Dakota State University on an Army ROTC scholarship. I was commissioned in the military. I spent six years in active duty and 16 and a half years in the army reserve. I retired as Lieutenant Colonel in 2004. I spent eight years with MetLife. I was an agent, a manager, and a national marketing manager for variable life. Then I spent 15 years at New York Life. I started out as an annuity wholesaler and worked my way up to senior executive officer in the company. I retired from New York Life in 2011 and went out on my own. I've written five books on retirement. I have a PBS TV special, Don't Worry, Retire Happy that's played in 80 million homes in the U.S. and Canada. Now, I'm 75% retired.
I'm doing the things I've told people they need to do. I'm living it, and I'm having a lot of fun. We have a place here in Phoenix, Arizona for the winters. We have a place up in Flagstaff for the summers. I joined a country club up there in 2020. I won the club championship. I was their oldest club champion ever. Last week I won the Senior Club Championship. I'm having the time of my life because I put into practice everything I’ve written and spoken about on retiring the optimal way. I’m living the optimal way in retirement.
MARTHA SHEDDEN
What is it about planning for retirement that requires a fundamentally different viewpoint of finances and why can't it be addressed like other financial issues?
TOM HEGNA
There are a number of risks in retirement. You might need long-term care, we might see inflation, they're going to raise your taxes someday, you might take out too much money, there's market risk, longevity risk, and there's a big one called sequence of returns risk that most baby boomers don't understand and yet it can wipe out the retirements of tens of millions of them. It all comes down to this. Your entire life as a saver and an investor, the average returns are what mattered. If you get 8%, it's better than six. If you get 10% it's better than eight. If you get 12% it's better than 10.
For 45 years you're investing, and saving is all about average returns. Yet the day you retire, average returns mean nothing. You can average 12% a year for 22 years, only take out 5% a year and go dead broke because of the sequence of returns risk. Once you retire and start taking money out of a portfolio, average returns mean nothing. What matters is the order or sequence of those returns. To put that simply, if you retire and you're taking money out of your portfolio, and during the first two or three years of your retirement the market goes up, math and science says you're highly likely to be successful. Conversely, if you retire and you're taking money out of a portfolio, and the first two or three years the market goes down, math and science says you're highly likely to run out of money.
The problem is none of us know when the market's going to go up or when it's going to go down. When we've had eight or 10 years of a bull market, however, and the Federal Reserve's going to start raising rates and pulling money out of the market, it's a very risky time for baby boomers to have a big chunk of their money in the market, especially if they're pulling money out. You never want to pull money out of a portfolio that's going down in value. If you are going to be in the market with a portion of your savings, that should be money you don’t touch. You let that go up and down and over time it should be fine, but if you're pulling money out of an account that's going down, it can quickly enter a death spiral and you could be wiped out. That's one risk that I don't think many baby boomers fully understand.
MARTHA SHEDDEN
What changes do you foresee happening in retirement landscape for the remainder of 2022?
TOM HEGNA
We haven’t seen inflation in 40 years and now inflation is raging due to many different things. We're not energy independent anymore, so gas prices are going up. The war in Ukraine contributes to the inflation, as does the supply crisis. Car makers can't get chips to build cars, so car prices have been going up. Everything's been going up. Some of this is short term. Some of it could be longer term. When you raise somebody's wages, it's not like you can go in there six months later and say, "Hey, I'm taking that pay raise back." That doesn't work out well. Inflation is a big risk we hadn't seen a lot of for the last 40 years.
Retirees must figure out how they're going to have increasing income for the rest of their lives. That is a big change we haven't seen in the past, because we've been fighting deflation for the last 10 or 15 years. Interest rates have stayed very low. There have been negative interest rates. There was $18 trillion of government bonds around the world paying negative interest rates. You had to pay them to hold your money. These are things we'd never seen before. Some of that's going to fade away. The inflation is something to worry about. That could also hurt Social Security because they're going to have to raise payments to help the seniors keep up with inflation, and that's going to put even more pressure on the Social Security system.
MARTHA SHEDDEN
You mentioned your PBS special, Don't Worry, Retire Happy. If you could impart one thing to people that would help them retire happy, what would that be?
TOM HEGNA
All the research shows that the happiest people are the ones with the most amount of guaranteed lifetime income. It's not whether you have $3 million or $5 million or $10 million, those are miserable people because they're typically losing money in some of their investments. People with assets are typically not as happy as people who have guaranteed income, pensions, Social Security, and lifetime income annuities. All are sources of guaranteed lifetime income, and the research of the PhDs shows that you're likely to be happier and to live longer. Many people don't realize the people with guaranteed income tend to live longer. They have less stress. They don't worry as much. The market's down 40% and they still go play 18 holes of golf with their buddies.
Because they're being paid to live, many of them choose to live differently. They watch what they eat, they exercise, and they call the doctor when they're not feeling well. All these things allow them to live longer. At a minimum, you want to cover your basic living expenses in retirement with guaranteed lifetime income. Whatever you need for your normal retirement living – food, housing, internet, cellphone – should be covered with guaranteed income. That's not where stocks fit. That's not where real estate fits. That's not where bonds fit. That's not where crypto fits.
People should cover those basic living expenses with Social Security because it's a lifetime income annuity, it's a guaranteed paycheck for life. A pension, because it's a lifetime income annuity, it's a guaranteed paycheck for life. The research shows whatever you're short from Social Security and pension, you're supposed to find an insurance company and buy some form of lifetime income annuity. At least enough to cover those basic living expenses. If we learned anything from COVID we learned it’s important to know how you’re going to cover the basics. Things can happen when you aren’t anticipating them, and that income comes every single month no matter what.
For years people have said, "I don't need an annuity. I have real estate." How does that work when renters don't have to pay rent and landlords can't evict them? I'm not against real estate, but it's not guaranteed lifetime income. People say, "I like dividend-paying stocks." I like them too, but they're not part of my guaranteed income portfolio because during COVID 600 companies slashed or eliminated their dividends. People say, "I want tax-free bonds." Tax-free bonds have been on the cover of Barron's magazine three times in the last two years, because after COVID, revenues went down, expenses went up and Barron's says some of these Type three bonds aren't going to be able to make their payments. It's not guaranteed lifetime income. People have ideas in their minds of other investments that can fit, but not to cover basic living. It's not the paycheck. They can fit for the “playcheck.” The “playcheck” could be in stocks and real estate, but the paycheck needs to be with guaranteed lifetime income.
MARTHA SHEDDEN
What financial planning help is most needed in the years approaching retirement? Has this changed while you've been working in this space?
TOM HEGNA
We have more tools now. There are more strategies we can use. Don't Worry, Retire Happy has seven simple steps and step number one is you must have a plan. You can’t get anywhere without a plan or a roadmap to guide you. You should work with a financial professional. Retirement is not a do-it-yourself project. People aren't out there doing their own dental work in their garage with their drill sets, and I don't think they ought to be doing their own retirement planning either. Step two is to understand and maximize your Social Security benefits. Step three is to consider hybrid retirement. Instead of going cold turkey, maybe do some part-time work or do something you really like so you can have a little more revenue coming in.
Step four, you must plan for inflation. You must have ways you can increase income. Step number five is the importance of having guaranteed lifetime income, at least enough to cover basic living expenses. The Wall Street Journal says the secret to a happy retirement is friends, neighbors, and a fixed annuity. They found that the happiest people were people surrounded by their friends and families and who had guaranteed paychecks for life. Step six, they must have a plan for long- term care. That's the one thing most people forget about, and it can wipe out their entire life's work. Step number seven, use your home equity wisely. For many people, their house is one of the largest assets they have. Then I wrap up by explaining the most efficient way to pass wealth to children and grandchildren is through life insurance.
I tell people all the time, "Don't leave your kids any money. You're not supposed to leave your kids any money, you're supposed to spend your money. Leave them life insurance because you can do that for pennies on the dollar." For example, I have four kids and one day we were contemplating how much money to leave them. I said, "If we bought a $1 million second-to-die life insurance policy, and name the four kids beneficiaries, when we're both gone, they're going to get a million dollars tax-free. That's $250,000 apiece tax-free plus whatever's left over. Let's start there."
So, we did that. That policy's completely paid up. The total cost of that policy was $150,000. For 15 cents on a dollar, we get to transfer a million dollars tax-free to our kids. The best part is we get to spend the other $850,000. If you leave your kids life insurance, it allows you to spend the rest of your money. It's one of the ways you can get the most for the least out of retirement.
That's what reverse mortgages and annuities have in common. There are people who hate those products, but the people who hate them don't understand them, because if you understood annuities, you couldn't hate them. I tell people, "If you really hate annuities, then be honest with yourself and call up the Social Security Administration and say, ‘Stop those checks.’ If you're not going to believe in annuities, you can't believe in Social Security, because it's a lifetime income annuity. Call up your HR department and cancel your pension because that's an annuity too." They love Social Security, they love their pension, they love their annuities. It's the same with reverse mortgages. I can't change somebody's mind. I say a man convinced against his will is of the same opinion still.
I use Dr. David Babbel, Dr. Moshe Milevsky, Dr. Wade Pfau, and Dr. Michael Finke, because when you can prove to them mathematically and scientifically these are superior products, people use them. Reverse mortgage has been written about positively by the American College, Dr. Wade Pfau, Mary Beth Franklin, and Don Graves. These are all resources that show how to use annuities in the right way. Any product could be abused if it's used the wrong way. I've seen annuities be abusive, I've seen reverse mortgages be abusive, but that doesn't mean those products are bad. Those products are great products when they're used the right way.
MARTHA SHEDDEN
Do people say not to buy an annuity across the board?
TOM HEGNA
The uneducated person might. That's good for me though. I get to go around and educate them. You cannot find a PhD who studied retirement who will say annuities are bad. They all say you have to put them in because it takes away longevity risk, it takes away market risk, it takes away sequence of returns risk, and it takes away withdrawal rate risk. It takes a lot of risks off the table. It should never be annuities or investments. It should always be annuities and investments. They work together. The paycheck is the annuity. The “playcheck” is your investments. If people followed that, they would be a lot more successful in retirement.
MARTHA SHEDDEN
What does the average pre-retiree not understand about Social Security and what problems are created by the lack of not understanding? How can we address it?
TOM HEGNA
Picking the right Social Security start date is the biggest retirement decision of your life. There are certain people who should take it early. If both husband and wife are in terrible health, they might want to take it early. If they have minor children in the house, they must start their benefits to get those benefits. But in general, the breadwinner should delay until 66 or 70 if they can. If the husband made more money in his career than his wife, the wife could take out her Social Security early. The lower-earning spouse can claim early. The higher- earning spouse should wait until 66 or 70 because that check covers both people. When he dies, she gets his check. If he took his early, he locked her into a lower survivor check.
There are so many good claiming strategies and there's good Social Security software out there where you can plug in your details, and it will tell you the optimal time to start your benefit. I tell people not to listen to those who say they should take their Social Security at 62 because it’s running out of money. That’s the Waffle House answer, not the right answer. The right answer is that the bread winner should delay. I want people to use a Social Security calculator and work with a financial professional. After all that, if they decide to take it early because they want to spend it, I’m okay with that. People shouldn’t reactively take out their Social Security at 62, that’s a mistake.
MARTHA SHEDDEN
Let's talk more about those insurance products and annuities. Why must one use the products to remove retirement risks?
TOM HEGNA
You can remove longevity risk because it's a guaranteed paycheck if you're breathing. There's no market risk with that product. There's no order sequence of returns with that product. You help with withdrawal rate risk. You're taking key risks off the table simply by covering those basic living expenses with guaranteed lifetime income. The research shows that by doing this you're going to be happier. The research shows people with guaranteed income live longer too. Freakonomics pushed a study out on social media conducted by the University of Chicago, which looked at people who bought lifetime annuities versus people who didn’t. The study found the people who bought the annuities lived longer than those who didn’t.
Then attorney Patrick Tricker wrote an article a few years ago in the Journal of Financial Service Professionals where he found that a 65-year-old male who purchases a life annuity can expect to live about 20% longer than a 65-year-old male who does not. That article explained why people who have annuities live longer. They don't have as much stress. They don't worry. They're being paid to live. Many of them watch what they eat, they exercise, and they see the doctor when they aren’t feeling right. When you put all of that together, plus all the research of hundreds of PhDs around the world, Nobel Prize winners like William Sharpe and Robert C. Merton, it's clear you must have an annuity in that portfolio.
20% to 40% of a person's retirement portfolio should be in an annuity, and then the rest can be in dividend-paying stocks or real estate. I own all those other products too, but I own eleven annuities. I want to be clear. I don't sell any annuities. I don't sell any financial products. I don't work for any one company. All I do is the research. I speak, I study, and I write. I'm showing people how to do it the right way.
MARTHA SHEDDEN
Why is there a negative attitude about annuities? Are there certain annuities like reverse mortgages that used to not be federally insured? What is it about annuities that gets everyone up in arms?
TOM HEGNA
There are guys like Ken Fisher on TV saying, "I hate annuities and you should too." He wouldn't know an annuity if hit him in the head. There were some bad annuities 20 years ago. There were 20-year surrender charges. They were selling to grandmas who are 85 years old with a 20-year surrender charge. There were some abusive sales practices, but the annuities, especially a single premium immediate annuity, is not a fee product. Most annuities are not fee products. A single premium immediate annuity is not a fee product. If you're guaranteed $2,000 a month for rest of your life, that's what you're going to get. There's no front load and no fee. Deferred income annuity is not a fee product, it’s a fixed annuity. A base fixed index annuity is not a fee product. The only annuities that even have fees are variable annuities or optional riders on Fixed Index Annuities.
MARTHA SHEDDEN
Are you talking about an annual fee?
TOM HEGNA
I'm talking about any type of fee. Those fixed and income annuities are not fee products. They're called spread products. Certainly, an annuity is priced so that the insurance company can make money but no fees are taken out of the account and you can shop among the thousands of annuities out there to find the most competitive one for you.
MARTHA SHEDDEN
Can you explain how a basic annuity works?
TOM HEGNA
There are different types of annuities. Annuities have two purposes. Some people use them to grow their money tax - deferred and they could use a variable annuity or a fixed annuity. They put money in there and it grows, like it would in a bank account or in an investment account. It grows, but you don't pay tax until you take money out. The real primary purpose of an annuity is for income. It's to give you income for the rest of your life, no matter how long you live. You could live to be 180. They could cure cancer, diabetes, and heart disease, and you know that check is going to keep coming. A single premium immediate annuity and a deferred income annuity don't provide any growth. Their only purpose is income.
Some of these other annuities like variable annuities or fixed index annuities can either be growth or income. They can be turned into income, or you can let them grow. The income annuities are so important in retirement. Those are not fee products. They're called spread products. For example, if you go down to the bank and you buy a CD there is no fee to buy it, but the bank isn’t working for free. They're paying you 2%. They're lending it out the back door to somebody who just bought a car for 7% and they make the spread. It's the same in these products, they're not fee products, but the insurance company must make more on the money than what they pay you. If they don't, they lose money. You get to shop among all the other companies to find the payout that you like, but most annuities are not fee products. Most Americans don’t know that. Many financial advisors don’t know that either.
There is a lot of ignorance around the product. There's a lot of misinformation around the product. A good website is protectedincome.org run by the Alliance for Lifetime Income. I'm a senior education advisor for them. They're a firm that's trying to educate the public on the importance of guaranteed lifetime income. I don't care if people buy an annuity or not, I don't sell them, but all the research of the top PhDs in the world say that people need to have one. That's what I teach people. If they were bad products, I wouldn't own any of them, but I own eleven. Dr. David Babbel had 14 of them and he talked about it in the movie The Baby Boomer Dilemma.
MARTHA SHEDDEN
What dilemmas do baby boomers face when it comes to retirement that other generations haven’t faced in the past?
TOM HEGNA
Your parents had pensions. They worked for a company for 30 or 40 years. The first chapter in Paychecks and Playchecks is titled “Whatever Happened to Happily Ever After?” When you read stories to your kids and grandkids every story ends with happily ever after. Retirement in America used to be like that. You'd work for a company for 30 or 40 years and then they'd hold a retirement party for you. Then they would give you a guaranteed paycheck every single month for the rest of your life in the form of a pension to live happily ever after on. We don't have that anymore. That's why you must go in and get your own personal pension, which is Social Security and annuities.
MARTHA SHEDDEN
Social Security is an annuity, and for many retirees it is their largest asset. People don't realize they're looking at $300,000 to $500,000 over their lifetime because of life expectancy. That's for a single person. It's a lot of money to not consider carefully what you're doing with it when you retire.
TOM HEGNA
For a couple it can be over $1 million. For some younger people it'll be $2 million.
MARTHA SHEDDEN
Are there any tactics you find yourself suggesting to people concerning their Social Security claiming decision besides the major breadwinner waiting to claim?
TOM HEGNA
If they've had a second or third marriage, that needs to be considered. If you were married to somebody for 10 years and they were hugely successful, but they were a jerk, so you got a divorce to marry someone nicer who doesn’t have as much money, you can claim off your previous spouse. A lot of people don’t know some of the things you can do. Some people worked for the government and didn't pay into Social Security, so then there's that windfall elimination provision.
It can get complicated and that's why it's important to work with a financial professional who knows Social Security and retirement income. Don't just go with the investment guy. If the investment professional served you well for 40 years, that doesn't mean he's going to serve you well in retirement. They may not know a thing about retirement. They know about building portfolios, but that's not going to help you in retirement. Risk management and having increasing income for the rest of your life will help you in retirement.
I would be careful with a fiduciary to this respect because, unfortunately, there are a lot of fiduciaries out there who are not doing what's in their client's best interest, because they're not using annuities, life insurance, or long-term care. If you find a fiduciary who says, "I don't like annuities. I don't like life insurance. I don't like long-term care," that is not a true fiduciary. I call them a fake fiduciary. Anybody can say they're a fiduciary, but if they're not working in the client's best interest, there's nobody policing them. The only way that the fiduciary standard is enforced is through a lawsuit. People should be very careful. They should hire a retirement income specialist for retirement, not a portfolio builder or a wealth manager. You want somebody who knows retirement, retirement risk management, and retirement income.
MARTHA SHEDDEN
What do you believe are the most common questions regarding retirement planning people don't know to ask?
TOM HEGNA
I would want to deal with somebody who will take my information and give me a printout saying here's what your current situation is and here's what it would look like in 10, 15, and 20 years if you keep going on this path. Then they give their recommendation and explain how they will reduce those risks. They’re going to increase your income. They’re going to build this to leave a legacy to your children. If it doesn’t make sense to you, don’t do it. You must work with somebody you trust, believe in, and get along with. There are the seven simple steps that I went over earlier in Don’t Worry, Retire Happy and four simpler steps in Paychecks to Playchecks. If you follow these basic steps, you’re going to have a much better retirement and leave more to your kids and have more to spend.
Most seniors are not overspending, they're underspending. They're living by what I call a just in case retirement. I used to say to them, "Wait a minute, you told me when you retired, you were going to join the country club, you were going to buy a new boat, and you were going to go see the world. Have you done that yet?" Many of them haven’t because the market’s so volatile and interest rates are so low. They don't touch their money. Then they die. The money goes to the kids, and they join the country club and buy a new boat. They go and see the world. I tell people, "I want you to join the country club. I want you to see the world. Don't live that just in case retirement." Guaranteed lifetime income frees you from living the just in case retirement.
The worst thing you can do is get with the wrong financial professional, because if you put your trust in someone who's not working in your best interest, that's terrible. You want to find somebody you trust and believe in. There are some good ways to find the right financial professional. Find other successful people in your community and see who they are working with. Ask yourself, why do they like that person? What is that person doing for their retirement? Do they get these guaranteed paychecks that they get to spend every month? People don't realize spending the money in retirement allows you to enjoy your retirement.
It's the dinners out and the bottle of wine with your friends. It's the travel. That's how you enjoy your retirement. I don't care how many millions of dollars you have stashed in some account somewhere, if you're living this just in case retirement, it will do nothing for you. Spend your money. An annuity allows you to spend your money and never run out. Social Security and pensions never run out. They will be there every single month for the rest of your life.
MARTHA SHEDDEN
Good advice. Thank you for sharing that and all the information you provided.