NEW Suze Orman and Dave Ramsey
Financial gurus like Dave Ramsey and Suze Orman have helped many Americans eliminate debt and take their first steps toward financial freedom. But according to David McKnight, the author and financial planning expert, that doesn’t mean that their paint-by-numbers approach to retirement income planning holds water.
Disciplined investors who have saved well and played by the rules, McKnight maintains, risk losing a substantial portion of their nest egg by heeding such “outdated, one-size-fits-all advice.”
In McKnight's latest book, “The Guru Gap,” he seeks to close the gap between what mainstream media personalities advise and the sophisticated, math-based approach that effective retirement planning requires. McKnight offered a summary of the work during a presentation at the American College of Financial Services’ recent Horizons conference in San Diego.
Over the course of an hour, McKnight critiqued the simplistic (and at times pugilistic) retirement income advice espoused by media-savvy gurus and discussed what a superior approach to income planning looks like. He backs carefully considered Roth conversions, as well as building retirement income guardrails and aggressively managing sequence of returns risk.
“As the professional financial planning community, we really need to be inoculating clients against the inaccurate information and biases they are going to be hearing online and on television,” McKnight said. “We need to empower them with the answers to the critiques that these gurus are pushing, whether that’s about the safe withdrawal rate in retirement or about the use of annuities.”
In addition to decrying Ramsey’s and Orman’s frameworks, McKnight also highlighted Ken Fisher’s hyperbolic distaste for annuities, as well as the increasing proclivity of online personalities to push unproven cryptocurrencies or speculative meme stocks.
“If you recommend an annuity to a client, you need to understand that they are going to go home and google whether annuities are any good,” McKnight observed. “The first thing they’ll see is Ken Fisher saying that annuities are a complete scam — that he’d rather die before selling an annuity. My principal message is that we have to be proactively countering these voices on behalf of savers and retirees.”
Advisors, then, need to help clients understand the intricacies of income planning — a complexity that can be overcome only through mathematics, behavioral discipline and flexibility. No rule of thumb, whether it's 4% annual withdrawals or 10%, can be trusted to help retirees navigate a retirement period that could last 20, 30 or even 40 years.
What Effective Planning Looks Like
For many clients who have the resources to engage a financial planner, McKnight said, an effective and efficient retirement plan starts with helping them recognize that they may have too much money in taxable or tax-deferred buckets.
“Once they do, they’ll feel the urgency to systematically shift any surplus assets to tax-free buckets,” McKnight said. “This is especially relevant today given that we have historically low tax rates and a very high and rapidly growing federal deficit.”
Optimal positioning of assets can result in clients’ money lasting “literally five to seven years longer,” McKnight suggested, allowing them to spend more confidently along the way.
When taxes are considered, it also makes sense to confront both sequence of returns risk and longevity risk. Assuming that clients have amassed substantial resources, a bucket approach can make a lot of sense, particularly for clients who are in the “retirement red zone” that stretches five years before and after retirement.
As McKnight has covered in previous books, longevity risk presents an issue with a variety of potential, if imperfect, solutions. One alternative, which tends to give people the most heartburn, is traditional long-term care insurance.
“With this approach, you pay for something that you hope you never have to use and, should you die peacefully in your sleep 30 years from now never having needed it,” McKnight said. “I generally advocate for an approach known as the life insurance retirement plan, or LIRP.”
This strategy provides a death benefit that doubles as long-term care coverage. Should the client die without having needed it, someone still receives that death benefit — likely children or grandchildren.
Pictured: Suze Orman and Dave Ramsey. Photo credits: Marc Royce and David McKnight
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