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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to how to retire on time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, how to retire on time, which you can grab today for free by going to www.howtoretireontime.com, or you can buy a physical copy on Amazon. My name is Mike Decker. I'm the author of the book, how to retire on time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to money, dollars, cents, finance, investments, all of it, we can cover it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, you can request a wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thanks for being here.
David:Yes. Glad to be here.
Mike:David's gonna
Mike:read your questions, and I am going to do my best to answer them. You can submit your questions in at any time during the week by texting (913) 363-1234. Just save that number in your phone when you think about it. (913) 363-1234, or you can email us at heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. I know you don't like lifetime income.
Mike:What an introduction to a Yeah.
David:Hey. Well, at at least they know you. I know you don't like lifetime income, but if you were to recommend a product, which one would it be?
Mike:K. Yeah.
Mike:First off, not gonna recommend a product over the air because I need to understand your situation specifically.
David:Okay.
Mike:Are we pairing this up with another pension? Does the pension have a cost of living adjustment? Does the there's there's too much nuance, but I can answer the question from a high level.
David:Okay? Okay.
Mike:And for all those listening, by the way, I know radio and podcasts, it's it seems like everyone wants to sell you an annuity Mhmm. And give you this guaranteed lifetime income. There is a place for it. I understand it is a it's a tool. Right?
Mike:Your wife's a dentist. What's one tool she uses? A drill. A drill. Yeah.
Mike:So she uses the drill once in a while Yeah. But maybe not every time.
David:Not every time. No. K.
Mike:You had to go to the drill first.
David:Alright. Yes. Everyone's worst nightmare.
Mike:Yeah.
David:Yes.
Mike:So the annuity promise you guaranteed income for life. It doesn't promise you comfortable income for life. It doesn't promise you that you're gonna keep up with inflation because no one knows the future of inflation. It doesn't promise you that your taxes in the future, which could go up or down, will be favorable to you. So there are risks associated with lifetime income.
Mike:The reason why I have heartburn against it and why I wrote the book, how to retire on time, to argue against this easy way out Mhmm. That a lot of people are taking Mhmm. Is because the odds and the financial numbers are in the insurance company's favor. Insurance is not a scam. Yeah.
Mike:Yeah. People love to hate insurance.
David:Right.
Mike:Right. Okay. We need to stop that. And the reason why is, it's like saying, oh, I hate apples. Why?
Mike:Because they're not oranges. That's a stupid reason to hate apples.
David:Yeah. Yeah.
Mike:You could just not like apples because you don't like apples. But if you want an apple to be an orange, you've got things mixed up. Insurance, the whole purpose of insurance is pooling a bunch of people together with the odds in the insurance company's favor, so that the few people that are the exception to the rule, yeah, maybe it was in their favor. Maybe financially it made sense for them. Mhmm.
Mike:But everyone transferred a specific risk. Look, I bought term life insurance. Okay? Yeah. Like a responsible adult, I have term life Alright.
Mike:I don't want to die.
David:No. But there is some small risk that you might.
Mike:Right? There is so I bought term life insurance in case I did die. Yeah. Okay. Look, I've given out the extreme sports.
Mike:So the Oh, okay.
David:Yeah. You've you've lessened your risk.
Mike:I've lessened the risk. I don't do mountain biking like I used to. But the point is, I didn't buy term life insurance with the hope of dying. I bought term life insurance just in case. Yeah.
Mike:Knowing that the insurance company will probably take my monthly payment every single month, and I'll never see a dime of it. Yeah. But I'm okay with that. When you buy an annuity, you turn on lifetime income, you're transferring longevity risk to an insurance company, knowing that you will likely die before it's financially prudent for you. Now before people get all up in a huff and a tiff or whatever the expression is, I get the manipulated illustrations.
Mike:Mhmm. I get the cherry picked data. Anyone, including us, we can sell you an annuity. You wanna buy an annuity? Happy to sell you an annuity.
Mike:It's marketing material intended to sell you something. You walk into a BMW dealership, guess what everything is trying to do? It's trying to sell you a BMW. Right. Does that make BMW a good or bad car?
Mike:No. Right. K? You walk into a Toyota dealership. What are they gonna try and do?
Mike:So let's understand that all the annuity illustrations, all of this stuff is intended to sell you a product. We need to take a step back and ask ourselves, what do we really need?
David:Mhmm.
Mike:K? And the reality again, I wanna preface this to the umth degree. People that maybe have less money can't afford that possible risk, and maybe a lifetime income stream to cover their basis, maybe that's appropriate. You've got 500,000 or less saved, and you can't mess this up. I can see the argument for that.
David:Mhmm.
Mike:Like, I had someone that came in this week, has $3,000,000, all their income's taken care of by pensions, and he says, I walk into these offices. Everyone's still me an annuity. I said, why do you need annuity? He says, thank you.
David:Breath of fresh air.
Mike:Why do need annuity? Another guy comes in with $15,000,000. Everyone wants to tell me this annuity. They say these are the best things, and they why do you need an annuity? So let's stop.
Mike:You know, it's like walking to every dentist office saying, I drill? Yeah. No. Thank you. Right.
Mike:How about you use your mirror and you do the little rubby twister thing? Don't know what the the polisher?
David:Oh, yeah. Yeah. Yeah. So, yeah, you
Mike:get your I'm okay with that.
David:Polisher at end. More comfortable. It's nice and it's minty usually. Very good. Love that part.
Mike:But let's stop with this cookie cutter product sales crap, and have a more holistic conversation. Okay? So in the situation that from an emotional standpoint, you would rather have the financial stability of lifetime income, knowing that the odds are not in your favor from a financial standpoint, and you're okay with the idea that maybe you give less to the estate or to the beneficiaries, knowing that you've got less control over your cash flow in the future, but that peace of mind is more important to you. I get it. No problem.
Mike:Yeah. But do you see how I I specifically qualified that specific situation? Yes. Could I be more clear about that?
David:I think we got it. Yeah.
Mike:Okay. So in that situation, you need to understand the different ways you can buy a an income. There are the simpler versions. So you've got a SPIA, a single premium indexed annuity.
David:Okay.
Mike:Those are typically for a period of certain time. So you buy it and it'll pay out for five years. Yes. Not lifetime income, but that's an option for the annuities. Right.
Mike:Okay. The next option is going to be the variable annuity.
David:Okay.
Mike:The variable annuity, you put income in, it's gonna go up or down. There's there's extensive amounts of fees. Okay? But you can turn in lifetime income. So if the markets do go up, then maybe you'll have more of a benefit, but that's not guaranteed.
Mike:So you've got more growth potential
David:Mhmm.
Mike:But it's not guaranteed growth potential with it, and you have the additional fees. The only reason why I see someone using a variable annuity is you have a significant amount of non qualified money, so not retirement money. Think of like your brokerage account or whatever's at the bank.
David:Okay.
Mike:And you wanna put it into something that has the growth potential without capital gains issues. Okay. Annuities defer capital gains tax, tax in general a later date. But again, if you have a lot of money, why would you need an annuity? So that's a very specific situation in my ten years of doing this, my decade of working with people.
Mike:I've never seen a situation where I recommended a variable annuity, but they exist. Let's define it as a lifetime income option. Then you have the most popular today, the fixed indexed annuity option.
David:Okay. Yeah. Tell us what that is, fixed indexed.
Mike:So before you turn on income, it has upside potential, but it can't lose money.
David:Okay.
Mike:Assuming you don't add on these riders and fees and extra stuff. Right. So keeping things simple. Let's talk about the lifetime income part of this. Many of these have a lifetime income rider.
Mike:What that means is you're paying a premium for transferring longevity risk to the insurance company, and they're gonna give you your money back at a specific rate.
David:Okay.
Mike:K? Actuaries are quantifying this, so you know it's in their best interest, which is fine because we've we've properly defined insurance. Yep. There are three ways you can take income. There is one way which I see is the most common based on my anecdotal experiences, and that's flat income.
Mike:So these offerings are gonna change from time to time, but let me just kind of use this as an example. Okay. You put money in there, and you're gonna get 6% from today's dollars for life. So you put in a million dollars into an annuity, you get 60,000 for life.
David:Okay.
Mike:That's pretty good considering the securities business is gonna say you could take out 4%. Oh. You got an extra 2%, David. You got a deal. You cheated I'm going to the laws of economics.
David:Cheat code.
Mike:Yeah. Here's what you're forgetting is inflation's a real big problem. That 60 k doesn't increase over time. It stays flat. Right.
Mike:So it might give you a boost of income at the beginning, but you might feel the pain later on.
David:Yes.
Mike:That's one of the risks of it, but it is a flat guaranteed income stream. Then you've got a COLA or cost of living adjustment, a guaranteed increase. So instead of 6%, maybe you get 4%, but it's guaranteed to grow at a 3% rate. So you put a million dollars in there, you get 40,000. Maybe it's maybe they're generous, 45,000, 4 point 5 percent or something like that.
Mike:Okay. Again, these are not product specific. I'm just trying to give an example for clarity sake. Sure. 4.5%, so you get 45,000, but each year it's gonna grow at 3%, that helps you keep up with inflation.
Mike:Okay? And then let me go down a rabbit hole on that real Okay. This is something that people often miss. They'll say, oh, I've got the annuity. I've got the guaranteed income.
Mike:I've got the guaranteed growth. I'm set. There's a clause in many of these annuity contracts that says the million dollars, once that cash value is gone Uh-huh. That 3% growth stops, and you're now flat. Oh.
Mike:So many times it's not actually guaranteed growth for life. Right. It's not a guaranteed cost of living adjustment for life. I can't say that for every product that's ever existed. It's just something you check because most that I see have that clause in there that at some point, it will go away.
David:Yeah. K. So you have those little 3% bumps until your original Until like the fifteenth year Yeah. Typically. And then kind of flat lines.
Mike:Yep. That's The risk. Then you have the indexed option. Now the indexed option, if you're gonna go down one or the other, this might be a more competitive option because you give less risk to the insurance company.
David:Mhmm.
Mike:Here's how it works. You have, let's say, the 45,000. So 4.55%, whatever it is, is the the amount that you're gonna get from the assets, so the money you put into the annuity. K? And every year, your income will grow based on an index.
Mike:So it's indexed increased. Okay. These are proprietary index, which is a fancy way of saying a black box.
David:Okay.
Mike:So you might not actually understand how they work, and it might be manipulated to the insurance company's favor. So be very careful about any index that is not commonly known. So if it's based on the S and P 500, okay, that's easy. Mhmm. But if it's based on this, I don't know, x y z incredible, the best ever, blah blah blah index, you know, some proprietary number, Okay.
Mike:Be skeptical about it.
David:Okay.
Mike:Some of them are good, some of them are bad, and we don't wanna use absolutes here, but be skeptical.
David:Mhmm.
Mike:If that index goes up, then your income bumps, and it can't go backwards.
David:Okay.
Mike:If the index goes down, then you just have the same income as last year. So you've aligned yourself with how inflation actually works, and with how the insurance company takes risk, and it's just it's less risky, I think for the insurance company, and you might not have consistent growth overall, but you've kind of hedged your bet to have a higher probability of having an inflation hedge for maybe a little bit longer term period of time. K?
David:Okay.
Mike:That's a very simple explanation of a very complicated underlining set of instruments that make that possible. Right. But that might be a better bet. Yeah. K?
Mike:Because if it's increasing, then the cash value would be increasing because it's the same clause. The cash value hits zero. This goes away. Sure. So you've got to understand the different ways that you could offset inflation.
Mike:You've got to understand how these instruments work. Okay. Let me tell you a quick story.
David:Alright.
Mike:My wife and I recently had a baby. Baby's healthy. Mama's healthy. Right. And we're getting enough sleep that I can still do the show in a somewhat coherent way.
Mike:Uh-huh. While we were at the hospital, k, my wife needed a particular cream or medication. K? And we said, what do you recommend? Or what can we get?
Mike:And they said, well, we can get you this. Mhmm. And we said, no, we want this. They said, no. No, we can't.
Mike:They just said no. And they didn't really give an explanation. And so then we call our doctor, and we said, hey, can you prescribe this? We had a relationship with them. They understood our situation.
Mike:They say, oh, we had no problem. Then I had to leave the hospital, walk across the street to another pharmacy, and then get that medication, and then walk back.
David:Okay.
Mike:When we came back, the nurse said, how'd you get that? Yeah. As if there was a problem. And said, oh, I just went across the street. We got it prescribed for the doctor, and this seems pretty kosher.
Mike:Yeah. I said, did any nurse recommend that product? No. Did anyone mention the product? No.
Mike:Okay, good. And then they relaxed. Uh-huh. They said, isn't this the best out there? They said, yeah, it is the best.
Mike:We can't make it, and we can't offer it for legal reasons.
David:And why not? I I said,
Mike:don't you have a Hippocratic oath to do no harm? Like, aren't you supposed to be open and honest about everything? Yeah. I said, yes. But we don't have the licensing needed to create it, so we can't talk about it.
Mike:But yeah, that's the best product out there. The reason why I say this is if you're going down the annuity route, you don't just work with an independent agent. There are many independent agents that got comfortable with one or two income streams or annuities that are out there, and that's all they sell. There are constantly new products and new competitive offers that there are changing. When you buy it matters.
Mike:So if you can work with an insurance agent, and we offer this, it's kind of funny. We preach against it, but we offer it. Mhmm. We have an entire internal checks and balance system to basically vet the insurance companies of, is the product sustainable? Is the information you're giving us cherry picked, is it real?
Mike:How does the index actually work? Can we explain it? Can we understand it? We're vetting the products because we don't trust insurance companies. We're not saying they're scams.
Mike:We're just saying their job is to sell a product, and we accept that, but we're gonna check things ourselves. Yeah. Okay? And the reason why is these products are very complicated, and if you just get comfortable, that might not be the best product. Yeah.
Mike:And we talk about a difference of a couple extra thousand dollars a year, that can be significant.
David:Right.
Mike:When we talk about inflation and how you prepare for inflation, that could be significant. When we talk about locking up your assets for life with an income stream, you've got to dot your i's and cross your t's. You've got to do this due diligence. I've lost count at how many insurance companies we're licensed with, because we keep vetting products. We do our own internal research.
Mike:True story, actually, I asked a company to do some research for us. I said, hey, we're looking for this specific situation, what do you recommend? We paid this company. Uh-huh. They came back with research, and then I called another company and said, hey, I think your product's better.
Mike:And then I just double checked it, they had a better product. The company did not give us full information. Look, it's the Wild West out there, so if you're making a decision for lifetime income, you better be right.
David:Yeah.
Mike:If you've purchased an annuity and you plan to turn on that income at some point, you better be right. Do not turn on that income unless you are sure you are right. I'm not trying to scare the living bejesus out of people. I'm saying, look. It's a big decision.
Mike:Inflation can come back. Look at the seventies. It came back three times. And when you look at taxes, tax codes written in pencil, you've got to get this right. Look at your expenses in the eighties and nineties, now they've changed for today.
David:Right.
Mike:Look at the different expenses you're now paying for. You didn't buy an iPhone in the eighties or nineties. So again, I understand why people want it, because it's the easy way to take care of retirement planning. Yeah. We have sold lifetime income streams to people that just wanted that vote of confidence.
Mike:I get why people want it, but you better make sure you're doing your due diligence and talking with someone that's got a chip on their shoulder and also doesn't trust insurance companies.
David:I think one of your attractions to it is that it's easy to understand, and you you can see a number right there on the paper, like, oh, this is what I'll get, And you can understand that number and sort of know going forward where if you just had all like stocks you were waiting to take in income on that Yeah. It's harder to understand.
Mike:Ignorance is bliss. Yeah. There's a stupid expression in this industry that says, it doesn't matter until it matters. Yeah. Well, it might not matter now, but in ten years, it might matter.
Mike:Mhmm. And you've got very few things you can do once you've turned on that income stream.
David:Right. You kinda get locked in. Right?
Mike:Yeah. You could liquidate the policy, but you're not gonna get much money on it. It's not worth it for you at that point.
David:Right.
Mike:So it's not technically irrevocable, but think of it as an irrevocable decision, something you've gotta stick with.
David:Okay.
Mike:So proceed with caution. If you want the lifetime income, if you wanna go through this process, that's okay. Yeah. But I would invite you to everyone listening right now to call us, so we can show you the risks you may not know exist. Yeah.
Mike:And then show you product after product, and explain the benefits and the detriments associated with each product and each strategy. And then you don't buy just one of them. You diversify just like you diversify stocks or bonds or whatever. Diversify the income streams. Yeah.
Mike:That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
Mike:This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.