MARK RIEPE: What do you do when you've worked hard to achieve a goal, but as time passes, you realize that the goal is either slipping out of your grasp, or it's actually moving away from you, receding into the distance, and you'll never catch it? It's not a great feeling, and sometimes desperate times call for desperate measures.
We see this in sports all the time. The clock is running down, and the team that's behind starts to take risks that they normally wouldn't.
In especially desperate situations, they might even run what are known as "Hail Mary" plays. The first time I saw something that was explicitly referred to as a Hail Mary play was a football game.
It was December 1975. The Dallas Cowboys were playing the Minnesota Vikings at Metropolitan Stadium in Bloomington, Minnesota, in the divisional round of the National Football League playoffs.
If you want to look for the stadium, you won't find it. It was torn down seven years later, and the Mall of America occupies the site now. There were 24 seconds left in the game. The Cowboys had the ball at midfield but were trailing 14-10.
They needed a miracle to keep their season alive. The quarterback of the Cowboys, future Hall of Famer Roger Staubach, threw the ball about 50 yards downfield where it was caught by wide receiver Drew Pearson at about the five-yard line.
The defender fell down, or was illegally pushed down according to Vikings fans, and Pearson strolled into the end zone untouched for the game-winning score. I remember that play being immediately christened as the "Hail Mary pass."
That was the first time I heard that term, but it turns out it had been used for at least 50 years.
In college football, the term "Hail Mary" has been around since 1922, when the Fighting Irish of the University of Notre Dame literally said the prayer that Roman Catholics refer to as the Hail Mary. They said that prayer in the huddle and then scored a six-yard touchdown. Since it worked once, they did again later in the game and scored another touchdown.
In 1935, Notre Dame had 32 seconds left and needed a touchdown to beat Ohio State. The quarterback threw a 19-yard touchdown pass. Fighting Irish Coach Elmer Layden, who had played in that 1922 game, referred to the winning pass as a "Hail Mary play."
Here's the most interesting part of this story.
The tiny but intrepid staff of Financial Decoder claims that the ESPN Stats and Information department has estimated that a Hail Mary pass succeeds in creating a game-winning touchdown about 9.7% of the time.2
I'm Mark Riepe, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decisions and the cognitive and emotional biases that can cloud our judgment.
This episode is about retirement savings. What do you do if you haven't put enough money into your retirement account over the course of your working life, and you know you don't have enough money or time to fund the retirement you want?
You might be tempted to act like a losing football team and be willing to throw caution to the wind. But your financial life isn't a football game. It's actually more important, and what you don't want to do is to make a bad situation even worse.
Instead, you want to adopt strategies that get you back on track, or at least headed in the right direction, and you might even be able to reframe the problem entirely and make lemonade out of lemons.
Before I bring in my guest, I wanted to share an example of how some creative thinking turned what looked to be a failure into a success. In 1943, General Electric had a government contract to help the United States in the war effort.
The mission was to invent a cheaper version of synthetic rubber. GE assigned the task to James Wright, an engineer. Wright combined boric acid with silicone oil and created a substance he thought was an improvement over synthetic rubber because it stretched farther and bounced higher, even in extreme temperatures.
He patented his invention in 1944, but unfortunately for Wright and GE, it turned out that his substance, when evaluated against all the features of synthetic rubber, frankly, wasn't any better than the synthetic rubber that already existed. Wright failed, but his substance had another property that didn't matter to war fighters but was nonetheless pretty cool.
It would copy any newsprint or comic book paper it touched. In other words, you would take this stuff, stick it on a newspaper, and when you pulled it off, an exact copy of the newsprint was on the substance. In the late 1940s, an unemployed advertising copywriter named Peter Hodgson saw Wright's invention in a store, marketed as a novelty gift.
He bought the production rights from GE and put the stretchy, bouncy stuff in plastic eggs because Easter was around the corner. He called it Silly Putty and the rest is history.
In 1950, The New Yorker magazine wrote an article about the new toy, and sales skyrocketed. While it appealed to adults at first, by 1955 it was most popular with kids ages 6 to 12. Eventually, it was introduced in Europe and the Soviet Union.
It even went into space. In 1968, astronauts on the Apollo 8 mission used it to secure tools so they wouldn't float away in zero gravity. And it made Peter Hodgson a multi-millionaire by the time he died in 1976.
Silly Putty is still on sale today. Binney & Smith, makers of Crayola crayons, bought Silly Putty in 1977. It's now available in many colors, scents, and there are even glow-in-the-dark versions. The point of this story is sometimes plans fail. James Wright didn't invent a cheaper synthetic rubber for the government. But he did invent a new toy that turned out to be a big hit.
Saving for retirement doesn't always go according to plan. Maybe you didn't start early enough, which is a common problem, because let's face it: Starting salaries are often low. Maybe you lost your job. Or got into debt.
Maybe you loaned money, and you never got paid back. Whatever the reason, plans—even retirement plans—don't always succeed. But there are ways to change the trajectory and get your retirement back on track. And, importantly, there are ways that don't involve excessive risk taking.
One of the earliest studies in what is now called behavioral economics discovered that people when they were ahead were less inclined to take risks, but when they were behind, they got more aggressive.
It's one thing to practice that kind of behavior in the laboratory or as part of a study, but when real money is at stake, it's better to take a more measured approach.
My guest today is Cindy Scott. Cindy is a CERTIFIED FINANCIAL PLANNER™ with Schwab in Westlake, Texas, and has helped hundreds of people fund their retirement, even if they got off track.
Cindy, thanks for being back on the show.
CINDY SCOTT: Oh, you're welcome, Mark. It's great to be back.
MARK: Cindy, we're talking about retirements that are off track. And one way of thinking about that is, many people who retire, they believe they've got a good idea as to how much they will need to spend each year, but when they're living that retirement reality, they … you know, they often have to adjust things, and they find they don't have enough. So for people who haven't retired just yet, but are planning to, and saving toward that goal, how can they best estimate their expenses so that they're able to get to that income stream and withdraw them out and get that set at the right level?
CINDY: Mark, this is a really great question. One of the things I stress when creating a retirement plan is this: We can only trust the results of the plan if the data we have is thorough and accurate. So instead of using rules of thumb for spending or guessing at expenses, I encourage people to catalog their actual expenses. And there are two primary ways you can do that. One, it can be done electronically, or two, you can simply do it manually. And electronically, there are a variety of different apps and software programs out there that people use that just automatically tracks their spending from their debit card or their credit card, and it categorizes them in different categories. And so that's an easy way to automate the creation of a thorough and accurate budget. Other people just use the spending reports that are available through their banks for free that automatically do this. It's not an additional app they have to use. So it could be done electronically. And then the other way is just the manual way. Think about the good old-fashioned Excel spreadsheet. I work with a number of people who come to our meetings, and they have everything documented in that Excel spreadsheet. So my recommendation to people is use whatever method you prefer. The goal is to have an accurate assessment of your needs.
MARK: Yeah, I think as you just laid out, this is a pretty important decision, and it's pretty important to get this number right. And the good news is, you don't have to guess. As you just laid out, there are a lot of different techniques that are going to be much more accurate than just guessing.
CINDY: That's right.
MARK: So, Cindy, what causes people to get off track in the first place? For example, is it that they haven't saved enough? Is it that they're spending too much given the resources that they have? Or they aren't earning as much on their investments as they planned? Or, you know, who knows, maybe they planned on working part-time in retirement, and that just didn't pan out.
CINDY: So any of those can be reasons for a plan to be off track. I'll tell you, though, that the two primary reasons I see most often are, one, they haven't saved enough, and two, they want to spend at a level that their savings simply can't sustain.
I worked with a client recently who wanted to retire at 60. He owned his own business. He had like one employee. He loved what he was doing. He had saved a million dollars for retirement, so he did a good job saving and investing, and he figured, "Hey, that should sustain me for the rest of my life." The problem is he wanted to spend $100,000 a year, and when we did the plan, he was projected to run out of money in his 70s. Remember, he wanted to retire at 60; he was going to run out of money in his 70s. So he saved what was considered to be a lot of money, but it just wasn't enough to support the lifestyle he wanted to maintain. So, of course, he had to make some tradeoffs. He decided, "I love my job. I'll just keep working. I'll keep investing, so that when I ultimately retire, I can have the lifestyle that I want."
MARK: That's a great example. And it leads to an interesting question. When do people find out that they're off track? By that, I mean, is this a problem that they see coming well ahead of time, or does it tend to creep up on people, and then suddenly they thought they were on track, and then they find out right away that they're not even close to being on track, and it's a big surprise?
CINDY: Well, it really depends on when they create a financial plan or retirement plan, because it's usually during the process of creating the plan that they learn they're off track. So for people who start planning earlier in their working lives, they learn early on that, "Hey, my ideal plan is not going to work unless I make some adjustments." For these people, it's less of a shock, because they have ample time to make those adjustments.
The people who are shocked to discover their plan is off track have usually waited until just a few years before their retirement date to create a plan, and now they're more shocked because they feel like, "I just don't have as much time to make adjustments to get this thing on track." And this is really why we stress the importance of starting a plan now. You don't have to wonder if you're on track with your retirement goals. A plan will give you the clarity you need so you know if you're on or off track. And if you're on track, that's great, keep doing what you're doing—we'll monitor it as we go. But if you're off track, the plan will reveal your options for getting on track. So, again, start a plan and start it now. That's my recommendation.
MARK: Cindy, I agree with you 100%. We did an episode earlier this season where we were trying to convey that problems are easier to solve if you have a long lead time to solve them. And the longer you wait, the longer you just kind of avoid the issue, the fewer options you have.
Once people have an idea of their living expenses, they usually try to determine how much they can withdraw from their portfolio each year. But if they start withdrawing more than what they had planned on, are there any ways to get back on track? I think in the past, you've mentioned that there are four kind of key levers to this situation, and I think the first one you had mentioned was just generating more income. So I was wondering if you could start there and tell us what you mean by that.
CINDY: Sure. And, Mark, any time a retirement plan or any plan is off track, these levers will help you get back on track. So the very first one is generating additional income. This can be achieved by working longer if investors haven't retired yet or taking on a part-time job to bring in additional income if they have retired. Generating more income reduces what needs to be withdrawn from the portfolio, thereby extending the life of the portfolio. And our goal here is to be able to fund all of your needs for life, without running out of money. And if the current portfolio cannot sustain your needs for life, then generating additional income will help it do that.
And then just another note on this first lever of generating income is for people who want to retire early. If you're able to work longer, or if you're able to take on a part-time job that provides health insurance benefits, this will reduce the number of years you'll have to pay for the full cost of health insurance out of pocket until you qualify for Medicare. I often encounter clients who want to retire early, but once they see just how much they're going to have to pay out of pocket for healthcare for all of those years, they sometimes change their mind. They'll work a little bit longer, or they will take a part-time job that provides for healthcare benefits. So that's our lever number one, generating additional income.
MARK: Cindy, lever number two is reducing spending. I mean, that's pretty obvious to most people. So how do you get people to think about that? Is there kind of a framework that you use to help people kind of organize their thoughts on that topic?
CINDY: Absolutely. What I encourage people to do is to divide their expenses into three priority categories—needs, wants, and wishes. So needs are your basic necessities, things like food, housing, healthcare, insurance, and taxes. Wants are the nice-to-haves, things like eating out or a gym membership or travel. And then wishes are things that you do if you have unlimited time and money. So cutting back on wants and wishes is the place to start if you need to get back on track. So, for example, can you limit how often you eat out in restaurants, or can you eat at less expensive restaurants? Are you able to delay big purchases, such as buying a new car or taking a big trip, especially if we're in a down market? So, lever number two, reduce expenses by dividing your expenses into needs, wants, and wishes.
MARK: All right, Cindy, what is lever number three?
CINDY: Number three is save more money. So this is relevant for people who haven't retired, who have discretionary income to save. If they're able to save 5 or even 10% more of their income per year, this can sometimes dramatically improve the probability that their money will last for their lifetime. So save more.
MARK: All right. And then what's your final lever?
CINDY: The fourth lever is invest more aggressively. Now, while this is a viable option, I caution people to use this lever as a last resort, especially if they are already invested in a growth-oriented portfolio that they're comfortable with. Where this really comes into play is for people who are invested so conservatively that their investments won't even keep up with inflation. In most of those cases, when we add a little bit more exposure to equities, it can dramatically improve the chances of that portfolio meeting their needs for life. So one or a combination of these levers can help people get back on track.
MARK: Cindy, one thing we haven't talked about, which is relevant for probably pretty much everyone listening to this, is Social Security. How does that factor into the retirement on track/off track discussion?
CINDY: So the way Social Security factors in is by looking at filing for that benefit at different ages. For example, I worked with a woman here recently who wanted to take her Social Security benefit at the earliest possible age, which is 62. So we built that into her plan, and, OK, it had a certain result in her plan. We wanted the result of the plan to have a higher probability of meeting her needs for life. So one of the things we looked at was, OK, can we file for Social Security at a later age and get a higher benefit that would then help extend the life of the portfolio? And when we looked at her waiting to her full retirement age, which for her was 67, she was going to get a higher benefit that was going to allow her plan to last a whole lot longer.
And so this is often something we do with all clients, is we go through this Social Security optimizer exercise where we say, "OK, at what age should you claim Social so that it gives your portfolio the greatest chance of being able to fund all of your needs?" If you take it at 62, you're going to have a permanently reduced benefit. If you wait until your full retirement age, you're going to get your full benefit. Or if you wait until 70, you get these delayed retirement credits, which really maximizes what you can get from Social Security—again, extending the life of your portfolio.
MARK: And, Cindy, I know we want to move on, but I wanted to drill down on a couple of the levers and, you know, reveal a little bit more detail about those. Your fourth lever about investing more aggressively—I think that works best for people who are far away from retirement. It's kind of an option for those, let's call them early planners, as opposed to someone who maybe is in their 60s and now realizes they have a problem. Do you agree with that?
CINDY: I do. In fact, I work with a young professional who fit that description exactly. She didn't know much about investing, but she was earning in excess of $200,000. She was single, not married, and she wanted to save in order to retire before 65. So she wanted an early retirement. Well, because she didn't understand volatility, she didn't really understand the stock market, her portfolio consisted of very little stocks. After educating her about the need to outpace inflation and how stocks help with that and how volatility can work for her as she's saving and investing for these longer-term goals, she decided to adjust her allocation to a more moderate growth portfolio, instead of an allocation that was more suited for someone trying to preserve what they already have. So hers was a situation where, "Listen, I need to invest more aggressively because my current portfolio is misaligned with my longer-term goals."
MARK: Cindy, I also wanted to go back to lever number two, you know, reduce spending or watch your expenditures. I love that framework, the needs, wants, wishes framework. I think it's very practical. It's very intuitive, I think, to people. Can you give me an example of how that works in the real world?
CINDY: Yes. So another client I worked with here recently. She worked for a professional sports team, so they traveled a lot. Now, her financial plan was off track, but she felt that she made enough money, she should be able to invest more, save more each month toward her long-term goals. She wanted to find more money in her budget to invest. So she tracked her expenses for a month. And when I talked to her after that, she was absolutely astounded by how much she was spending on Uber Eats each month. She couldn't believe it. What she found to be even more unbelievable was that she was spending all of that money on Uber Eats, and the team provided a professional chef to prepare meals for everyone for free. So here's one of those wants, one of those wishes, that she was just spending on without really giving much thought to it. And when she wanted to save more money, she decided to cut her Uber Eats line item way back in her budget, and she took that money and started saving more of it toward her goals. And that put her plan on track.
MARK: Cindy, you mentioned the need for cash, and I think that's one of the things that distinguishes somebody who is retired—their liquidity needs are higher than most people. So do you have any other kind of creative solutions for people who are looking for cash in the short term?
CINDY: Sure. So a few things come to mind. One, use your rainy-day funds when you need cash in the short term. That's what it's there for. I talk to a lot of clients who are sometime hesitant to spend their emergency reserve or their savings money when the time comes, but give yourself permission to spend that money. That's what you saved it up for.
Number two is, find old, neglected accounts that you may have forgotten about. You probably would be surprised to know the number of people who have old bank accounts or investment accounts or even old retirement plans at companies they haven't worked for in years, and they forgot about them. Now is the time to find all of that money, and that can provide some cash you can use in the short term.
A third option would be if you have an annuity that you've accumulated money in, but you haven't turned on the income stream yet. Talk to one of our annuity specialists about whether starting this income now makes sense. In fact, I was just talking to a colleague of mine about this. He actually has an annuity from an old employer. It was something they provided as an employee benefit, but he doesn't know anything about it. He doesn't know how it works. He knows he's somewhat limited in how he can access that money. At least he thinks he is. And so I recommended to him, "Listen, talk to one of our annuity specialists. They will educate you on what you have, how it works, how you can access it and leverage it to meet some of your immediate needs."
And then the last thing I'll throw out is, consider if you have things around the house that you can sell. There may be some things around the house you're no longer using that you can sell. These things tend to be harder to spot in your budget, but perhaps it's collectibles that you've been holding onto or mementos that had emotional attachment for you that's just not there anymore. We can sell those things and use that income to fund some of your immediate needs.
MARK: Cindy, we've talked on past episodes about bucketing your money and making sure it aligns with when you'll need to be spending it. And I think that's especially important when it comes to cash and short-term investments. So talk to me about that. What are your thoughts on how that works in practice?
CINDY: Sure. So the goal here is to plan in advance for your income needs to avoid having to sell investments in a down market. So for those who are looking to retire in relative short order, start now creating what we call your retirement-cash-reserve buckets. The idea here is to hold at least one year's worth of cash you're going to need from your portfolio in cash investments. Things like a checking and savings account, or money market funds, or certificates of deposits. One year's worth of your need. It's liquid. It's available. It will not be volatile. It will be there for you. And then another two to four years' worth of your needs should be invested in relatively liquid conservative investments, like short-term Treasuries or other high-quality bonds or short-term bond funds. This way, if the market declines, you're not too worried about generating cash for your expenses, because you have this four-year cushion. This is true, Mark, for any short-term expense. The goal is to plan ahead to have the cash you'll need so you're not forced to sell investments at a loss.
MARK: So, Cindy, another way to get things back on track is just to make sure that your portfolio is working harder for you. And can you talk a little bit about some of the best practices for tapping into your retirement portfolio so that you can sort of be strategic about it and make it be more efficient?
CINDY: Sure. So, Mark, I have seven quick tips I want to cover here.
One is start with interest and dividends from taxable accounts. So instead of continuing to reinvest your dividends and interest, take them as distributions to meet your expenses. This way, you'll leave your original investment untouched, allowing it to continue to grow and potentially yield even more dividends and interest in the future. So that's the first thing.
The second thing is consider tapping the principle from maturing bonds or CDs. You won't owe any taxes when you pull out your original investment.
Number three, consider selling lower volatility investments, such as bonds or bond funds that may not have been battered by recent market volatility.
Number four, rebalance your portfolio. If asset sales and the recent market turbulence have left your portfolio out of alignment with your longer-term allocation, consider looking for opportunities to raise cash by rebalancing.
Number five, prune unattractive investments. So if you still need cash, focus on shedding assets whose prospects no longer match your goals. This kind of portfolio maintenance is a good idea in any market, but it can be particularly useful when you're looking for items to sell. Now, rule of thumb here is that if you wouldn't buy more of a particular investment today, then you should consider selling it.
Number six, use investment losses to reduce your tax bill. If you have assets in taxable, non-retirement accounts that have fallen in value, you can use those losses to offset gains you may have realized in your taxable accounts over the course of the year, which can help reduce your tax liability. This is a strategy known as tax loss harvesting.
And then, finally, number seven, just make more tax-efficient choices. Sell investments you've held for more than a year, because gains on these sales are taxed at the maximum federal long-term capital gains rate of 20%.
MARK: Cindy, at the end of the day, not every problem can be fixed. We all have limited resources, and, ultimately, we need to make tradeoffs. And in the case of retirement, sometimes people planned on leaving a certain amount of money to others. Where does that kind of fit into the hierarchy? Where does that fit into these tradeoffs? Is that kind of often the first thing to go when times are tough, or is it the last thing to go?
CINDY: It is one of the first things to go, Mark. So leaving a bequest usually falls in the category of a wish. And remember we said earlier that a wish is something you would do if you had unlimited time and resources. And so, usually, people would like to be able to leave something to others if there's enough money left over after all of their needs have been met. So, naturally, if you need that money to fund your own expenses, that may mean being able to pass less to others. And most people are fine with making that tradeoff, because, again, it falls under the category of a wish, which has the lowest priority in the plan.
MARK: All right, Cindy, last topic. And, really, we've kind of talked about it already, this issue of when you're behind then you start taking on a lot more risk. And I want to revisit that, because that's one of these things we've learned from behavioral economics and behavioral finance, is that people, often, they are risk-averse when they're sort of ahead of the game and they're making gains. But when they get behind, they start to prefer taking risks, risks that they normally would never think of, but they feel they're behind and they've got to catch up. So have you seen that tendency in investors?
CINDY: Yes, I have, and it's something I caution them on.
MARK: And so how does that conversation go? Because I think that's probably counterintuitive to a lot of people. How do you explain to them that they really need to think hard about that choice?
CINDY: Sure. So if the allocation, the more risky allocation, is one that they would never have invested in under normal circumstances, when we hit a period of volatility, let's say, a correction or an extended downturn in the market, it is going to be almost impossible for them to remain fully invested when this higher exposure to stocks are being clobbered. And if they're not able to remain fully invested, they're going to cash out or sell stocks at a loss to try to stop the bleeding. This can do extensive damage to a portfolio and a plan that was already off track. Mark, I've been in this business 25 years, and I've seen this happen over and over and over again. So I caution people against it. And instead, I try to focus on what are some of the other levers we can pull to get the plan on track? And this one should be used cautiously and as a last resort.
MARK: Cindy Scott is a CERTIFIED FINANCIAL PLANNER with Schwab in Westlake, Texas. Cindy, this has been wonderful. Thanks for being here today.
CINDY: Mark, it's a pleasure, as always.
MARK: We started this episode by talking about the Hail Mary pass. But investing and retirement are usually much slower and careful processes.
For people who think they have exhausted all other options, I hope that the examples Cindy gave us provide you with some new ideas for how to get your retirement plan back on track.
If you navigate to Schwab.com/Advice, you can see that there are options for people who are looking for automated solutions for keeping their portfolios on track, solutions for people who want a dedicated financial consultant to help them, and solutions that offer a blend of both. That URL is Schwab.com/Advice.
Regardless of how you choose to manage your portfolio, we hope you have the resources you need if your retirement gets off track. You can always call us and talk to a professional. We're at 1-877-279-4476.
Thanks for listening. If you've enjoyed the show, please leave us a review on Apple Podcasts.
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And if you want more of the kinds of insights we bring you on Financial Decoder about how to improve your financial decisions, you can also follow me on Twitter @MarkRiepe. M-A-R-K-R-I-E-P-E.
For important disclosures, see the show notes and Schwab.com/FinancialDecoder.
1 Sheridan, Paul, "How Roger Staubach and Drew Pearson Made the 'Hail Mary' Pass Famous," history.com, August 6, 2021, https://www.history.com/news/hail-mary-pass-roger-staubach-drew-pearson-1975
2 Ortiz, Nicholas, "What percentage of Hail Mary passes are successful?," sportsmanist.com, accessed August 17, 2022, sportsmanist.com/what-percentage-of-hail-mary-passes-are-successful.
There's 140 million reasons why Silly Putty was a good idea | Pontotoc Progress | djournal.co