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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Four one k companies are realizing that they're losing a lot of money because when people retire, they roll their money out of the four one k. And the younger generations haven't saved nearly as much, so they're losing money. Welcome to the Retire On Time podcast. I'm Mac Decker here with David Fransen. This show is all about getting into the nitty gritty.
Mike:We don't need more oversimplified advice. We want the details, hence the show. Text your questions to (913) 363-1234, and we will feature them on the show. But remember, this is not financial advice. This is for educational purposes.
Mike:David, what do we got?
David:Hey, Mike. My four zero one k is now offering lifetime income as a payout option. Isn't that basically an annuity? Yes. And so how are they doing that?
David:Who's is there an insurance company behind this scheme or what?
Mike:So the reason why I shrug my shoulders is because what is an annuity? Everyone thinks annuity is an insurance contraption mechanism, whatever. It's not. The word annuity, which is the four letter, like, swear word in the world of finance Yeah. For whatever reason, thank you certain group, I won't say, but their name kind of rhymes with something you would do as a leisure activity in the water with a rod and.
Mike:Yeah.
David:Well, some Internet suits figuring that out.
Mike:They may not be fishers of men, but we won't name them by no. All jokes aside, I I think their marketing actually does a good service in raising people's awareness towards some of the detriments of the annuity space, but the annuity space is not an insurance space. Annuity, by definition, is structured payout.
David:Is it some kind of, like, Greek or Latin root or something?
Mike:Yeah. I mean, we're a dramatic Latin mix. So but you it is structured payout. That is it. You know what also is an annuity?
David:I don't know.
Mike:Your salary. Oh. That is a structured payout. So there is a contract between your structured payments twice a month and the company. And as long as that contract is intact, you're getting paid.
Mike:Right? What's another annuity? Rent. If you're paying rent, that's that's basically annuity. The renter is paying in the structured payout to the landlord.
Mike:By definition, that would qualify by an annuity structure or structured payout. Now, for what it's worth, like, get people are all fine. Mhmm. Annuity today, and its common use of the word, is an insurance product. You know what's not?
Mike:Pensions. But they function the same way as an annuity, but in common tongue. I feel like a middle evil medieval when I say that common tongue. Right. But in in our common language, you've got a pension, which they still exist, but it's not an annuity.
Mike:It is a structured payout, which is the literal definition of an annuity, for the rest of your life. And many times, there's no cost of living adjustment. It just is. And if you die in the second year or the fifth year or the twentieth year, there's no leftover money. That's usually what the pension's structured as.
Mike:What's interesting because people hate insurance companies, and I get why they hate insurance companies. They do it to themselves. Yeah. But that's another conversation for another time. Is that many pension funds are structures as follows.
Mike:Their fund the fund's job is to generate and grow the fund's balance so that it can afford to continue to make payments for everyone else.
David:Okay.
Mike:Okay. Well, pension funds have insurance on them.
David:Oh. Okay.
Mike:Kinda works its way back to the insurance companies. Why do you think they're so good at this? They they they've been around this for a while. Now I'm not saying that people should go out and buy lifetime income. In fact, if you've read my book, I argue against it.
Mike:I understand it. There is a reason for some people to have it in some parts of their plan as a certain part of an overall picture. Fine. I get that. K?
Mike:But this right here, it's not a pension because they're not calling it a pension. Mhmm. It's an alternative, and I've heard about these. The the marketing about this is coming out as I understand it. And again, as I understand it is not promissory.
Mike:I'm not saying this is factual. I'm saying the rumors that have gotten back to
David:me K.
Mike:Is that four zero one k companies are realizing that they're losing a lot of money because when people retire, they roll their money out of the four zero one k. And the younger generations haven't saved nearly as much, so they're losing money. So they wanna keep your money in there. What do people want? A lot of people want lifetime income because they wish the pensions were available, which I found is kind of interesting.
Mike:Because people say, well, I wish I had a pension. Well, here's an annuity. It gives you the same payouts. Well, I don't want an annuity. Mhmm.
Mike:But you want the pension. I bet you people are gonna say, well, this isn't a pension. It's not annuity, but it's a nice lifetime income stream. It's the same thing. It's structured payout.
David:Mhmm.
Mike:You give up control for structured payout.
David:And so, yeah, you have to decide if you want that or not or if it makes sense for you.
Mike:Or Mhmm. Yeah. So if you if you go into mental models for a second, just indulge me. Alright. You're an engineer.
David:Mhmm. K.
Mike:You like structure. You like predictability. You want you want to know what you're gonna get.
David:Yeah.
Mike:You've lived mostly off of a structured payout or salary. You might gravitate more towards the appreciation of Social Security or a pension or a lifetime bucket or lifetime lifetime income account from a four zero one k or maybe even an annuity. You might like that. If you're a teacher, you're used to a salary, you might like the structure, the predictability. Yeah.
Mike:If you're in sales, your income is not an annuity.
David:Right.
Mike:Your income is not structured. It's based on commissions.
David:It's feast or famine.
Mike:You might appreciate that in the years the markets grow that you've got more income you could take, maybe. And in the years that it's bad, you have to kind of pull back because that's what you're used to. Notice how your your income, your profession is kind of mirroring how are you structuring your your retirement income. Mhmm. So if you're used to structured income, I can see why people would gravitate more towards this and or more towards annuity lifetime income.
Mike:Just remember, inflation is the risk for any structured payment.
David:Because it might be a flat income stream for your whole life?
Mike:Or Yeah. If you ladder out your income for fifteen, twenty years at fixed rates, inflation can erode that. Uh-huh. If you have structured payments, whether it's from a pension that doesn't increase with with inflation or a lifetime bucket, whatever this thing is gonna be called, or with with an annuity that's flat income, inflation's what erodes it. But you don't have the market risk.
David:What's this?
Mike:Yeah. And so really, people have to humble themselves, look in the mirror, say, well, what is it that you really, really want? And don't go all in on one thing or the other. Find the right balance, Either no structured payments and all kind of commission payments or you're you're enjoying the growth, knowing that if things go down, you should have a backup plan we call a reservoir or a bear market reserve. So it's your income plan from a protected source when markets are down.
Mike:I like that strategy personally.
David:Mhmm.
Mike:Versus maybe fifty fifty, half of it's from structured income, half of it's from your portfolio growth. Maybe it's all or most all. You just you need to be very weary of the the balance. If you're getting something, what are you giving up? That's how it always works in finance.
Mike:Alright. So, yeah, it's an annuity. People love to hate annuities, but at the same time, they want the pension, which is very confusing to me. They want to have all their control. They want to have all the protection.
Mike:They want all the growth. That's not financially possible. So you have to ask yourself, how do you, if you want structured payments, how do you want to transfer your longevity risk to a company, and which company do you want to transfer it to? Whether it's your four one k company or an insurance company. Alright.
Mike:These are these are can't have your cake into the eat of two. These are very important questions to ask. Which one's gonna allow you to sleep more at night?
David:So the answer to the question is that, yes, this is basically an annuity, this new kind
Mike:of Social Security is basically an annuity. Pensions are basically annuities. Annuities are basically annuities. Now there's a lot of nuance in the annuity space, and that's why I think people have learned to hate them is because an annuity was misrepresented and sold with improper expectations. So when those expectations didn't meet reality, people were upset.
Mike:Yeah. Fixed annuities is basically a CD from an insurance company. Fixed index is basically a buffered ETF from an insurance company. It's not gonna beat the market. It's just gonna help you grow in the good years while preserving your assets in the down years.
Mike:Variable annuity. That's just an expensive way to say I want lifetime income eventually. I don't really love that. I agree with Fisher Investments and their criticisms of annuities, highlights the variable annuity in that sense. Yeah.
Mike:We won't get into the variable annuity space really that for today's discussion, but, yeah, it's it's not good or bad. It is. Mhmm. And if we can remove emotion from the definitions of the different investments and products, these tools, then we can learn to use them correctly.
David:Mhmm. You watch HDTV ever? I have been known to.
Mike:Yeah. If if you're in the dental office, you've seen at least an episode or two of something. Right. It's fascinating how they can renovate these houses. Yeah.
Mike:They're not doing it with one tool. No. They have many tools, they have many techniques, and they're doing different things for different people because they want different looks and different feels and different they have different goals.
David:Yeah. Different guys are coming in. There's my tile guy. There's my floor guy. There's my plumber.
David:There's my electrician.
Mike:Yeah. It's very normal for someone to walk in, at least to our offices, and say or usually it's on Zoom because mostly virtual,
David:but Mhmm.
Mike:They'll say, look, I read your book. I get that you hate lifetime income, but I need to have at least 70,000 guaranteed. And Social Security is only gonna cover 50,000 between the two of them. Okay. So we'll shop different annuities and the different products, the different investments.
Mike:We wanna find a good deal to bridge that 20,000 gap in that example. And then the rest of their income, the extra $30.40, 50,000 can come from the market. And that's what's right for them. Yeah. Everyone's different.
Mike:The more money you have, the less likely you might need an annuity. I say less likely because, well, you have to also consider how much do you have and how much do you want as income. If it's around four or 5% or 6%, then, yeah, you're you're pushing the risk limits. But anyway, that's just to find things as they are. Marketing is just putting lipstick on the pig.
Mike:That's for all marketing. That's not a criticism of marketing. That's just saying in the financial services space, they try to make things look really, really good, and they will disclose in the small writing they hope that you don't read all the bad. Everything has risk. There's always a detriment.
Mike:Be mindful. Now, that's all the time we've got for today's show. If you enjoyed the show, don't forget to like, subscribe, especially on YouTube, as we continue to develop, and we'll wanna answer your questions, give you case studies, and also offer tools to help you prepare to retire on time. As always, text your questions at (913) 363-1234. And if you want help working with one of our advisers, you can always go to retireontime.com and get started.
Mike:From all of us here at the Kedric Wealth Studios, we wanna thank you for spending your time, your most precious asset with us today. We'll see you in the next show.