A couple of weeks ago, we talked about Retirement Planning with Uncle Jed. And we promised that we’d turn our attention to some other TV characters in future weeks and see what kind of financial planning lessons we can learn from them...
Sometimes, you’re surprised when you find out what TV characters were like in real life. Like Aunt Bee, for example. If you only knew her from Andy Griffith episodes, you’d assume that Frances Bavier was exactly the same person in real life.
Not even close. In reality, she was incredibly unpleasant to be around. She felt that her New York City acting pedigree wasn’t being fully utilized and that her dramatic talents were being overlooked on the show. She was easily offended during filming and everybody on the production staff always walked on eggshells around her. In her later years, she moved to Siler City where she died as a recluse with 14 cats.
So that’s always surprising for people who only knew her as Aunt Bee. But on the other hand, some actors in real life are actually pretty close to their character on screen. William Frawley, known by most as Fred Mertz on I Love Lucy, fits that bill.
He was a crotchety curmudgeon on the show, and apparently even more cantankerous in real life. His career was filled with spats with producers, and he was once fired for punching another actor in the nose. When Desi Arnaz called him to offer him the job of playing Fred, he told him that he’d be on a short a leash. He behaved well enough to avoid being written out of the show, but didn’t exactly make a lot of friends during the show’s six seasons. (And apparently Fred and Ethel despised each other in real life).
But it’s the character of Fred Mertz, not the actor William Frawley, that we want to focus on today.
Fred was a tightwad. A cheapskate. Parsimonious. Niggardly. Miserly. Penurious. Use whatever vocabulary word you want, but he wouldn’t spend money on anything. Always taking the cheapest way out. Complaining about every penny he had to spend on anything. It was probably the most defining element of his character.
And while a lot of people don’t realize it, they actually become Fred Mertz once they retire.
That happens because they don’t have an income plan. See, when you’re working, you don’t have any trouble spending money. You spend money with confidence because you’re confident that you’ll get a paycheck next month to replenish the money that you just spent. But that mental paradigm changes when you shift from earning a paycheck to now living off your savings.
If you don’t have an income plan in retirement, it’s hard to spend with confidence. Without an income plan, you just have a big pile of money sitting there. And you’re hoping that you can take a small enough chunk of money out of that pile each month so that you don’t have to worry about running out.
I’ve seen a lot of people who actually have plenty of retirement savings—more than enough to give them the lifestyle that they want for the rest of their lives. But because they’re worried about outliving their money, they don’t pay themselves as much as they could. Which means not taking the trips that they want to take, or not giving as much to the church as they want to, or not taking the whole family out to eat, even though they really want to.
Or maybe they actually do all of those things, but they don’t fully enjoy it because they’re worried about the price tag. There's a little voice in the back of their head that's telling them that they’re spending too much.
An income plan tells you where the paychecks are going to come from, not just next month, but for the rest of your life. And once you see it on paper, and see how you need to invest in order to make the income plan work, you wouldn’t believe the confidence that you’ll have.
Get an income plan. Spend with confidence. Don’t be Fred. Nobody really liked him.
Dirty Little Secrets
John Churton Collins, a British literary critic, once said “If we knew each other’s secrets, what comforts we should find.”
Frank Ocean, an American hip hop artist (who may or may not know anything about British literature) says, “I don’t have any secrets I need kept anymore.”
Well, the financial industry has a few secrets that probably shouldn’t be secrets anymore. Here’s a start on peeling back the curtain…
1) A lot of the time, nobody really knows what’s going on while it’s happening.
You already knew that nobody can predict the future. Perhaps you’ve even heard about the time when world famous psychic June Field had to cancel a show in Lancashire, England “due to unforeseen circumstances.”
Obviously the financial world is no different. There might be a guy who’s figured out some algorithm that predicts exactly what’s going to happen in the market every day, but if that guy exists, he’s quietly amassing enough money to buy his own island, not shooting his mouth off on CNBC every night.
There are some people who can very eloquently explain why things happened in the market after they’ve occurred. Although even in those cases, you might hear a couple of very compelling, but also very contrary narratives, with an explanation of what happened in the past. The truth is that it’s really hard to pinpoint the real causes and effects.
And there’s almost nobody who can tell you why things are happening while we’re in the throes of it.
If you’ve seen The Big Short, it actually depicts this concept pretty well in its chronicling of the 2008 housing crash. In retrospect, we all have a pretty clear picture of why and how that whole debacle was as bad as it was. But at the time, as you saw in the movie, only a select few really understood. In a town filled with skyscrapers full of hedge fund managers, you could count on one hand how many people actually knew what was happening while it was unfolding.
Lesson: If too much of your money is exposed to vehicles that move around in wild swings without logical or predictable explanation, you could be in trouble.
2) A lot of the arguments you hear in the financial world aren’t actually all that important.
Just what is the right percentage of international exposure to have in your portfolio?
Term life or permanent life insurance?
Should you buy front load, back load, or no load mutual funds?
Should you avoid mutual funds altogether and buy ETFs instead?
Pay off the house early or not?
And sure, to really refine your financial plan, you need to find the right answer to these questions for your situation. But those questions are comparing the merits of an apple and an orange, which may seem like two totally different things. Until you learn that you don’t need an apple or an orange, but instead you need a coffee table. Suddenly the differences between the apple and the orange don’t seem so vast.
Lesson: Don’t get caught up in the minutiae until you’ve really explored the big picture and you know exactly what you’re trying to accomplish. Once you do that, a lot of the details will either take care of themselves, or won’t matter nearly as much. But if you start with the minutiae, it’s possible you might never graduate from it so that you can move on to the big picture.
3) With a small sample size, it’s hard to differentiate between skill and luck.
In most cases, it’s virtually impossible to tell if someone was exceedingly wise in the investment that they picked, or if they just got lucky. Did that particular investor get lucky by having money in the right asset at the right time, or were they very skillful and took advantage of an opportunity? Or maybe some of both?
The problem is that I’ve seen some advisors build an entire career based on one or two risky decisions where they made the right call.
There’s one particular fund manager who famously moved almost all of his fund’s assets to cash in October of 2007, right at the absolute peak of the market before the bottom fell out. His fund’s performance prior to that had been underwhelming, and the performance since has been underwhelming, but if you look at the last 15 years as a whole, the average return is really good because he avoided the huge drop.
Is he incredibly skillful or incredibly lucky? Who knows? But he’s built quite an empire for himself, now charging well-above-average management fees, thanks to what was essentially one really good decision, surrounded by a bunch of average-at-best decisions. We’ll see if he gets it right again before the next crash. But “wait and see” is the only way to find out.
Lesson: Don’t base the foundation of your retirement on someone who hangs their hat on one or two good decisions. Body of work is important.
4) The bolder the opinion, the more people pay attention to it.
In the cable news era that we’re living in, the more confidence and false-bravado you have, the more people are attracted to your opinions. “I don’t know” is one of the least used phrases in the financial industry, but many times it’s the correct one.
Lesson: Just because someone seems to see everything in very clear black and white terms, that doesn’t mean that their advice is better than someone who sees the gray area. You need an advisor who can help you understand all sides of an issue.
Retirement Planning with Uncle Jed
Everybody knows the story of Jed Clampett. Poor mountaineer, barely kept his family fed. But then he struck oil in his backyard in the Ozarks, became an overnight millionaire and moved to Beverly Hills.
Obviously, in Uncle Jed’s case, he didn’t quite know how to handle those riches. He ended up with a nice mansion and a cement pond in the backyard, but he struggled to navigate the puzzling social morays of Beverly Hills. Neighbors always seemed annoyed when he pulled out his shotgun to eliminate any vermin who might be patrolling the neighborhood.
While I haven’t encountered any sitcom-worthy situations like this, I’ve often seen lump sums of money lead to uncomfortable situations when people aren’t getting the proper guidance.
It could be an inheritance that you didn’t necessarily anticipate. Maybe you’re expecting to get something from your parents (like maybe the house and whatever happens to be in the checking account). But then you’re completely taken by surprise when you find out there’s also a $450,000 IRA and a $100,000 life insurance payout that’s now headed your way.
For other people, it’s a pension buyout. Maybe you’ve never done a great job of saving over the years, knowing that you’d have a sizeable pension to help carry you through retirement. But then one day you find out that instead of $2500/month for the rest of your life, you’ll instead be getting a $385,000 lump sum buyout, which you now have to figure out how to invest in such a way that it makes up for the fact that you no longer have that pension check hitting the bank account every month.
Or maybe you actually did strike oil in the backyard. I guess that could happen.
Whatever the case may be, anytime you end up with a lump sum (expected or unexpected), you need to be sure you’re getting proper guidance. Here’s one example of a time when I saw someone get bad advice:
A BCBSNC employee was given the option of keeping her pension or receiving a pension buyout. She could retire at 62 and have a monthly pension income of just over $3,000/month, or she could take a lump sum of $550,000.
She ended up talking to an “advisor” whose only real interest was selling her an annuity, so he convinced her to take the lump sum (a decision she had to make on a short deadline) while he went to look for an annuity that would give her a lifetime income that would “blow away” her pension. So she makes the irreversible decision of electing the lump sum. Now the annuity salesman tells her that there’s actually not an annuity that will take her lump sum and give her an income that’s bigger than what her pension would have been. But if she’ll just plop the $550,000 into the annuity and wait for six years, well then it will give her an income that will blow away her pension.
Of course, she wasn’t happy with this option and ended up in my office looking for a better solution. We found a better solution than what he was offering (which did involve an annuity, but only used about $175,000 of that $550,000…with the rest of the money invested in the market). But the fact of the matter is that she would have ultimately been better off to have just taken the pension. Unfortunately, it was too late to make that decision by the time she made it to my office, so we just had to make the best of the situation at that point.
So a lump sum is nothing to be scared of, but if you make a few wrong turns, you could easily end up as a hillbilly in a fancy neighborhood trying to figure out why you don’t fit in. (Metaphorically, of course).
While we’re on the subject, here’s some Uncle Jed trivia. Most people know that Buddy Ebsen was originally supposed to play the Tin Man in the Wizard of Oz, but he had an allergic reaction to the aluminum dust from the costume and ended up in the hospital. Jack Haley came in and took over the role, and he’s the one we know as the Tin Man today.
However, most people aren’t aware that Buddy Ebsen still contributed to the film. They’d already filmed some scenes with him as the Tin Man, and while they had to reshoot all of those scenes with Jack Haley, they didn’t want to scrap the soundtrack. So when you hear Dorothy, the Scarecrow and the Tin Man harmonizing in “We’re Off to See the Wizard,” that’s actually Uncle Jed’s voice as the Tin Man.
This has very little to do with your retirement planning, but interesting nonetheless.
There are plenty of other TV characters from years past that can teach us some retirement planning lessons—Gilligan, Fred Mertz, Mr. Spock…even real people like Walter Cronkite.
But that’s another project for another day. So y’all come back now, ya hear?
Balderdash: The Second Opinion
Thankfully, they’re both smart. He’s a microbiologist; she’s an attorney.
They liked their advisor and said he’d put together a comprehensive financial plan for them. They just wanted to do their due diligence and get a second opinion before implementing it.
So we dove right in and I started flipping through the 43-page document. I tried to maintain my composure as long as I could, but I couldn’t hold my tongue for very long.
“This is BALDERDASH!”
I’m pretty sure it’s the only time I’ve ever used the word “balderdash” in regular conversation. I immediately wondered if I’d been a little too brash, but then they both smirked.
“We wondered if that might be the case. It seemed a little too good to be true.”
Thankfully, they were astute enough to come get a second opinion. After all, you don’t get jobs in microbiologizing and lawyering without a relatively high level of intelligence.
But a lot of people don’t bother with the second opinion, which concerns me.
The truth was that their “advisor” wasn’t even someone they’d met in person. The company that administers his 401(k) had said, “Hey, were you aware that we provide free financial advice to highly compensated employees like you?” Which is code for, “Hey, we’d like to get our hands on all of your money, instead of just the money that’s in your 401(k), so if we have this guy give you a call and then overwhelm you with a 43-page document that makes it look like we know what we’re doing, maybe you’ll move all of your life savings over to us, yes?”
The problems with this plan included, but were not limited to:
- Of the 43 pages, 35 of them were boiler plate filler that had nothing to do with their specific case.
- The plan assumed a rate of inflation of 1%. Nope, that should be more like 3%. So their income needs later in life were going to be much higher than the plan projected.
- The plan assumed a cost of living raise on their Social Security of 2.5% per year. Nope, that should be more like 1.25%. So their Social Security income later in life was projected to be much higher than it actually will be.
- In the first five years of retirement, he projected that they’d withdraw 15% of their portfolio each year! But that actually worked out fine in his fantasy world, because he also projected that they’d earn 17% on their investments each year, so all is well. (I think this was the part where I felt the “balderdash” word roll off my tongue).
After combing through this dumpster fire of a “plan,” I felt compelled to find out more about the advisor who had constructed it. I looked him up and discovered the least surprising news of the day—the fact that he’d filed personal bankruptcy a few years ago. Of course he had. Because he doesn’t understand how math works.
Now, if they’d implemented this plan, it’s not as if this advisor would have disappeared to Belize with their money. But they would have been operating under the assumption that they were in much better shape than they actually are. After some real analysis, we determined that, in order to have the retirement lifestyle that they want, they need to work about two years longer than this plan indicated that they should. And they were fine with working the extra two years, they just wanted to know what they needed to do.
Here's the point. Most of these “plans” that get handed out by big brokerage firms don’t involve any actual planning. It’s all based on formulaic, cookie-cutter assumptions that have nothing to do with the specifics of your life. And, as we saw in this particular case, they’re often riddled with ridiculous assumptions.
When you’re looking for a financial advisor, you want someone who can apply wisdom to your situation, not just somebody who can allegedly punch a few numbers into a software program.
If the financial advice you’ve gotten isn’t tailored to the specific details of your life, get a second opinion. That’s what smart people do.