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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.
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 on Amazon or by going to www.how to retire on time.com. 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 financial topics, we can pretty much talk about it all. So that said, please remember, this is just a show.
Mike:Alright? Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request your wealth analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thanks for joining me.
David:Hey. Thanks for having me.
Mike:Now David's gonna be reading your questions, and I'm gonna do my best to answer them. Please send in your questions right now or anytime during the week. Just save this number, 913-363-1234. That's 913-363-1234. Or you can email questions to hey mike at how to retire on time.com.
Mike:Let's begin.
David:Hey, Mike. Can you break down the differences between Social Security, a pension, and an annuity?
Mike:Okay. So essentially on surface level, they're all the same. But what I think is so interesting about the analysis of this is the the misunderstanding of how people think about pensions versus annuities. Okay. Now let me say this first off.
Mike:Okay? Most people that have a pension pick the pension. Okay. Florida did a a a interesting experiment. The state of Florida, they they asked all of their employees.
Mike:They said, hey. We're thinking about doing this 4 zero one k thing. What do you think? Should we do it? I think it was, like, 90 to 95% said, no.
Mike:We're good with the pension option. We like the pension option.
David:Right.
Mike:Okay. So what I'm about to say may surprise you, but you need to understand the definitions associated with social security pension and annuities. Because most people choose the pension when they're offered a pension, but when they're offered annuity to say, why would I do that? Let me playfully kind of articulate the differences. Social Security is a government sponsored obligatory pension.
Mike:You pay into it and then around 67 years old you get your money back that you paid into. Now you might not get it all back. Depends on when you die. But it's a government plan basically that you're kind of forced into paying into. And people love Social Security.
David:Mhmm.
Mike:They're excited. I mean, there's we have entire courses on how to optimize your Social Security. It's a wonderful thing. You know, how do you get the most out of your benefit? Right?
Mike:People get upset when they hear these news headlines about how Social Security could be going away or it's in trouble because we want our money back. Then you've got the pension. The pension is interesting because you can get your own money back guaranteed for life or you can get a lump sum. But because, and this is my opinion, from a psychological level, people are expecting the pension during their entire working career. That's what they're familiar with.
Mike:It's what they're expecting. They have no issue with it. Yep. I'm gonna retire. I'm gonna get the pension.
Mike:They're not giving up money. They're paying into the pension and that's how it's felt. Well, in annuities where you basically take a lump sum of money, put it with the company, and you get guaranteed life income. It's kind of the same thing when you think about it, but people hate annuities. Mhmm.
Mike:It's a swear word in this industry, which I think is so funny because it's not good or bad. It's just a tool. Yeah. But because you have to give a lump sum of money to an insurance company and people seem to love to hate insurance companies
David:Right.
Mike:To give you your own money back, they think, oh, well, that's a rip off because what if I die soon? That means if I if I die soon, I'm not getting much to to the kids. I I just lose out all that money. Well, on the pension, why'd you take the pension option? You could have taken the lump sum, and if you died soon, you gave more to the kids.
Mike:It's the same thing. Uh-huh. It's where the money starts. Pensions, that money starts with the company, and then you can choose to take it out and give up the life income. An annuity company, the money starts with you, and it goes to an insurance company for the lifetime income.
Mike:It's essentially the same thing. So when I hear people say, I love my pension. I'll say, okay. Is your pension enough? They say, no.
Mike:I actually need more. And let's say, okay. Do you want an annuity? They say, no. I hate annuities, and you should too.
Mike:Just repeating verbatim the marketing material of a company that wants to sell you a stock bond fund portfolio and that conflict of interest. There's there's a a very stark illogical conclusion that's made between the 2. Now, personally, would I take a pension or a lifetime income stream from an annuity? No. I personally would not.
Mike:My entire book, how to retire on time, talks about how you might not. But I have people that read the book and they say, you know, I read the book, but look, I need x amount guaranteed. No problem. But let's call it for what it is. If you're gonna guarantee your income for life, whether it's from a business, through a pension, or it's through an insurance company, it's fixed income.
Mike:It may struggle to keep up with inflation. It may struggle to also keep up with taxes. If tax rates go up, your pension income goes down. If tax rates go up and you funded an annuity with pretax dollars, your income goes down. It's very, very similar.
Mike:So why am I trying to define it this way? Simple. We need to live within our emotional and economic limits. Emotional limits. If it's gonna keep you up at night, that if you died soon, that you'd be kind of giving away a lot of your money, then it may not be right for you.
Mike:If you need to guarantee a certain amount of money from an income stream, whether it's through a pension or through pension Social Security, maybe through a small annuity, then maybe that's right for you. You've got to build a plan that will allow you to sleep well at night. That's just the simple truth. And then you can maybe take additional risk and build a growth portfolio that can add additional income for fun, but you wouldn't really need it. Or maybe it's just for fun, but you can adjust the budget and maybe take less if things were better or whatever might be.
Mike:I don't really recommend keeping all of your assets at risk and drawing income from risk assets. That's why the reservoir strategy exists, which I talk about my book. That's why you dive deep into deliberate planning. The strategies on what to do when the markets are up or down. What to do with your tax situations when taxes go up or down.
Mike:What to do with life expenses if inflation gets out of control. Right? You need to be proactive with these planning. So I I have hesitancy in diving into a fixed income strategy that's solely based on fixed income. But the point still remains.
Mike:Do you want fixed income or not? Do you like that? Does it help you? Or does it not? Everyone's different.
David:Right.
Mike:So as a whole, I just I hope more and more people can call it for what it is, understand it is a vehicle that provides a service to you, and it's okay either way.
David:Yeah. I mean, all 3 of these are vehicles. All 3 of these are tools, and you could probably use all 3 of them as part of an overall plan. Is that right?
Mike:Yeah. Well, let's talk about the tax side of each one. So Social Security, you can do tax planning with Social Security. If your total taxable amount of income in each year in retirement is below a certain threshold, less Social Security is taxed. Less of your Social Security income would be taxed.
Mike:If it's above a certain level, it's all tax. But you can kind of strategically manipulate your situation so that you're paying less tax in Social Security income and other income. With the pension, there's no tax planning. It's either you take a pension and you're paying the taxes or you're not taking the pension. And you're doing the lump sum, and then you can do tax planning with that.
David:Okay.
Mike:Some military pensions. There are some pensions out there that are tax free. You know, like the disability, if you're in the military, that's tax free. So there are some exceptions.
David:Alright.
Mike:But for the most part of pension's taxed. You can't do tax planning with the pension if you take that option. And that's a risk that many people are willing to take. It's not wrong by any means. It's just, let's call it for what it is.
Mike:And then you've got the annuity, which the annuity, you can actually do tax planning. So it's not uncommon for someone that says, I need guaranteed income for life. And we say, great. Let's fund the amount of annuities that you need to get the income that you want so you can sleep well at night because that's what you want. Mhmm.
Mike:Remember, everyone listening in, I wrote a book to say why you don't need guaranteed for life income. So I'm kind of talking against my own philosophy here, but I'm trying to be fair.
David:Right.
Mike:But you can decide. Okay. Well, how much goes into the pretax income category? How much goes into the Roth or after tax category, the tax free category. And then maybe a couple years down the line, you do some conversions on income streams.
Mike:So some annuities, you can turn on the income and still convert it tax free later on. So there are options out there. There are strategies out there that you may not realize, but it's all connected and it all matters. There's no such thing as a perfect investment, product, or strategy. If you want guarantees, you pay for it.
Mike:If you're okay paying for it, then it might be right for you. If you don't wanna do that, if you're like me and you think, you know, I want growth. I want flexibility in the future. I don't know what my life is gonna be like in 10 years. It may cost a lot more to be me in 10 years.
Mike:I might have a health care situation in 10 years. I wanna be flexible enough. Then you might think of having some of your assets focused on growth and some of your assets focused on growth with protection, And you gotta ladder that out. But and that that's why people call us is to dive into those details and and put that together. But if you're like me, I I like the flexibility and the growth.
Mike:I'm okay taking on the risk of not having guaranteed for life income. Some people don't like that. That's okay. Have I kicked this dead horse enough? Yeah.
Mike:I I am painfully trying to be neutral about the topic, but let's let's not say pensions are great and annuities are terrible. They're very similar in how it works in the retirement plan. So we don't wanna villainize things. And by the way, I'm talking about specifically fixed indexed annuities that don't have fees associated with it. I'm well aware of.
Mike:And if you're not aware, variable annuities have a ton of fees and may not be appropriate for you. In my mind, the only reason why it would be appropriate is if you put nonqualified assets into a variable annuity because you wanna shelter the taxes on the growth. But you're paying a lot of fees for that shelter. And so it doesn't make sense. I've never sold a variable annuity because I haven't come across the situation where it would make sense.
Mike:But at least I can understand and articulate when it could make sense.
David:Yeah. You're open to that. Yeah.
Mike:A fixed annuity grows at a fixed rate. So there's less growth potential, but it still can turn into an income stream. There are immediate annuities. You just put it in and boom the annuity turns on. There are fixed index annuity.
Mike:So it has more growth potential. But notice the keyword there potential. And there's some nuance in there. But it it just goes back to when you're putting together your plan, get rid of the bias that you have and learn to define investments and products as they are. And then put together your plan first.
Mike:Explore the strategies that are gonna help you get more out of your hard earned money, and then pick the investments and products that support the ability to implement those strategies and the plan that you're trying to put together. Because the plan's really your quality of life. That's really what matters. Your money serves you. You don't serve your money.
Mike:You don't build your life around a portfolio. Your portfolio builds its life around you. That's how it's supposed to be done. 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 podcast.
Mike: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. 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.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.