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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.
Alright. Welcome everyone to the How to Retire On Time. My name is Michael Decker here with David France, and as always, my associate, we're gonna be diving the details, answering your questions one by one. As always, this show is all about the nitty gritty. We wanna dive into the details.
Mike:This all shows all about the nitty gritty. It's live. It's fun. We see your chats. We see your your results here.
Mike:We're gonna we're gonna dive in that. When I say the nitty gritty, we get tired of the oversimplified advice that you read over and over online. This show is about context. When you might wanna do something versus when you might not want to do something and so on. So join us.
Mike:We got the next hour to answer your questions, and we're just gonna take it one step at a time. Remember, this is not financial advice. We don't know your situation. We can't talk to your situation unless we're having a one on one conversation. These are just generalities with context.
Mike:It's details. Mhmm. Because the details do matter. For those joining us live, you can always put your questions in the chat. We've got got questions throughout the week.
Mike:And for this group, I always like to take a little poll before we... We're gonna talk about Medicare and what's happening there. The number one fear for this group is inflation and running out of money. Yeah. Well...
Mike:Actually, healthcare cost is now tied. So these are those are very real fears. Yeah. And I feel bad for those that it's almost like you have this dream that once you retire, you're done and it gets easy. Oh, yeah.
Mike:No. It's the same hard. It's just a different hard.
David:Mhmm.
Mike:Because you can work and you get a paycheck. The work is hard, but the paycheck comes in, it's dependable. And then you go to retirement and you have to kind of figure out, okay, how am I gonna structure the paycheck? How am I gonna handle healthcare costs on my own now because work isn't paying for them? Like, just a lot of questions.
Mike:I have this idea that when you retire, you kind of become a mini CEO. You're running your household. Yeah. And you might be the CFO too and and so on. So these are things just to consider.
David:Yeah. That's a good way to look at it too because it's it's a... You step into this new life, but you still have a lot of the same things you have to worry about. Your Netflix subscription doesn't stop at retirement. Right?
David:So you still have to... Your your your light bill, your energy bills, your property taxes. I mean, those things are still happening even though you retired. So Yeah. Still gotta worry about that stuff.
Mike:That's right. Yeah. So let's talk about what's going on with health care. That's the, I think, the number one thing or reason why people are are on today. So if you didn't know, didn't catch the news, here's what's going on.
Mike:Health care has gone up.
David:It seems like we've had that same... You you could insert that headline into any year and it would be relevant or true. Right?
Mike:Yeah. But there's like some subsidies that are gonna sub... That are gonna sunset. There are some that just laws changed. Some things just went away.
Mike:Some things were added. And that's the confusing part because all things considered, you... You've got to kind of understand, okay, what am I getting and what am I leaving? Now, you know, you see my little vote thing, you know, everyone. Yes.
Mike:Yes. Happy voting day.
David:Good work.
Mike:This is why you need to vote. You need to understand what the politician is is going to try and do, and you could take the individual sense of what's right for me, what do I want. You could say what is right for the collective.
David:You
Mike:know, you're allowed to vote, you're allowed to have different opinions, but voting matters, and this is one of those ways that it manifests. I don't see much influence when it comes to the stock market in voting, but I do see a lot of influence on tax planning, on health care planning, and all those other major expenses that happen throughout retirement. So... And David, please chime in on any of these things.
David:Okay.
Mike:The one that really bugs me is... So part d?
David:Mhmm. Drugs. Yeah. Your prescriptions.
Mike:Drugs. Yeah. It's... If you do nothing, that that drug free plan where you get your drugs for free is gone. Oh, yes.
Mike:It's going away.
David:Okay.
Mike:And if you do nothing, you will automatically be enrolled into something or the same plan if you can do the same plan or you'll just be opt into some other plan or you'll just be not in on Part D anymore or something could happen.
David:Okay.
Mike:And your costs could go up and you're gonna get bills that might surprise you. And the bills might surprise you or you might think, oh, I thought like, you know, maybe your Medicare comes from Social Security. Oh, I thought I was gonna get a bigger raise than that. Like, we got a bump in social security. Oh yeah.
Mike:That's nice. Yeah. But then healthcare costs went up, it's now going down. Then you got food prices that have gone up. I think I I read somewhere that like that retiree is expected or needs like five to 8% of an increase to handle a lot of these costs.
David:An increase in their in their monthly Yeah. Yeah, benefit.
Mike:And this is why you can't go all in on one plan or the other. When I say all on one plan, the cliche plan is, I'm just gonna buy this one product or this one strategy and hope it all works out.
David:Uh-huh.
Mike:This is one of those you've gotta balance dependability, rigidity, structurally something versus the dynamic flexibility, the liquidity, the more growth potential, and they have to offset themselves. I don't know the background of the yin yang symbol, but I understand they're like opposites. They're supposed to balance each other. It's like a symbol of balance.
David:Yeah. That's my understanding.
Mike:I mean, I like drawing them as a kid. Yeah. Right. But but this is one of those moments where, yeah, you're you're probably glad that you have some extra money in the market for growth. Yeah.
Mike:To offset these these risks, and so on. I mean, David, you're our director of healthcare. Do you have just high level, any thoughts or conversations or questions have been happening? People have been, I don't know, asking you as you've been helping people?
David:Yeah. I mean, yeah. Everybody wants to know like, oh, are there changes? What what are the changes? You know, when do I have to enroll for this or do I have to have that?
David:I mean, you alluded to a little bit about part d there. We we know that the the annual out of pocket cap is is increasing from $2,100 to $2,400 in 2027. So you have to pay more. That's an increase of $300. The maximum deductible in these Part D plans will now go.
David:And and not all of them have this kind of a deductible. If you wanna pay a higher premium, you can get the deductible lowered. Like, sort of the standard one is going from $615 up to 700. So an $85 increase. So I think that's Those the
Mike:are questions that are gonna be relevant to your plan. Yeah. Do you want a higher deductible and keep your cash flow less burdened or not? Yeah. Here's what gets my go though.
Mike:We're gonna go on a little bit of a tangent.
David:Okay. Alright. Those are always fun.
Mike:How is it that we're expected to do all this ourselves when we have, you know, our Medicare agent over here or senior health care benefits agent, whatever the... Their titles. Whatever the title they wanna put on themselves. Yep. And then you've got your CPA over here, and your CPA is saying, here's what happened over here.
Mike:Then you've got your adviser over here who's trading and trying to, you know, grow your assets, and none of them are talking. I mean, someone once asked me, hey. Can you do our tax planning that... But I will keep my same adviser. I I have no problem with you keeping your same adviser, but I can't do your tax planning.
Mike:They said, why? Because I can do your tax planning, but if he places one wrong trade, it's gonna affect over here. Yeah. And we see that with healthcare subsidies too, and it's with the modified adjusted gross income most of the time. Yeah.
Mike:So bringing it all up to be more comprehensive, more cohesive is kind of a big deal.
David:Mhmm. Yeah. There's IRMAA considerations. Right? Yeah.
David:So maybe that's that's related to what you just said. Like Mhmm. You make a trade that and you have this big capital gain increase or something where something gets sold. Oh, and now suddenly your income's higher and Yeah. Now you pay more for your, you know, your part b.
David:Now I
Mike:wanna ask you a question.
David:Okay.
Mike:Just your opinion.
David:Alright.
Mike:It's not right for everyone. There there's there's innovation happening in the medical community. Mhmm. Where you can go to a dentist and just pay cash for it. You can go to like a holistic doctor or even a medical doctor, and you now have a membership.
Mike:You can see the doctor as much as you need. You have your annual check-in, but there's now these cash pays. Right. That's kind of neat. Are you seeing people more go to cash pay Then you've got like these other insurers.
Mike:They're not really insurance companies actually. They're just their own thing. Mhmm. Was it ministries, healthcare ministries, which is not insurance, but it's kind of like collective. A cost sharing.
Mike:A cost sharing plan. Yeah. Have you noticed any trends patterns of, you know, people tend to like this if they are like that?
David:I mean... I I think people still... They they wish and they hope that they could just... The insurance would like cover more. I think they they wanna pay their premium and they wanna get a lot for that.
David:And they're noticing they're kind of like... They're disappointed when... No. They they just see their deductibles going up, the coinsurance amounts going up, these prices of drugs going up. So I think everyone's a little bit sort of disappointed in all these things going up.
Mike:Well, insurance is not an investment. It's the transference of risk to an insurance company where the odds are against you.
David:And more people need to sort of look at it that way, guess.
Mike:That's the correct definition.
David:Yeah. Well, yeah. Why don't why don't more people have that definition?
Mike:Because it's not fun. I mean, how if you're if you're in the business of selling insurance, which technically we are. Mhmm.
David:Yeah. We can say that.
Mike:Yeah. We're we're technically licensed insurance agents. I'm a financial adviser. I can prepare your taxes. Right?
Mike:But this is why I think people appreciate the honesty is if I use that definition, you're less excited. Yeah. If I say, hey, the average person pays this much or the whatever statistic is this much, I can get you right for this much. The odds are in your favor. That's not honest.
David:Right.
Mike:And so because we choose honesty, but... And that's why I'm apparently terrible at selling long term care insurance. I have nothing against long term care insurance, but when you define it correctly, it's rather underwhelming. I mean, take any part of of life. You know?
Mike:If you wanna sell a car, you wanna, sell groceries, you know, dive into the details. It gets kinda boring at the end of the day. Yeah. But I think it kinda should be this way. Yeah.
Mike:Because there's risk involved. Right. So whether you're someone that wants more coverage, just know you're paying for more coverage and it... The odds aren't in your favor. Yeah.
Mike:Statistically speaking, that's how insurance companies work. But if an anomaly happens, see, we all have that one story about the friend or the cousin or whoever where a spouse passed and thank goodness they had term life insurance. Yeah. We all have that that example of so and so that thank goodness they had good healthcare coverage and they had disability insurance or workers' comp, whatever type of insurance that so and so had the stroke early on or got hit by the car early on or something tragic happened. Like, we all hear those stories and they're true.
Mike:And that's why you buy insurance. We don't buy insurance to make money. Yeah. You don't buy insurance to game the system.
David:Right.
Mike:And that needs to be more a part of our conversations we're having, and they're just not. Yeah. So, yeah. We need to plan that healthcare costs are going up. I'm not excited about both sides of the aisle Mhmm.
Mike:And how the politics have happened about healthcare and how they're handling that.
David:Mhmm.
Mike:And here's here's just my unfiltered opinion. Okay. Okay? David, if you said you wanted to to lose weight, now you don't need to... You're you're in great shape.
Mike:Oh. Thank you.
David:You're You're kind. Yeah. I would like to lose weight though.
Mike:Yes. And I told you it's gonna be very difficult. It's gonna be painful. K. You're gonna feel hungry a lot.
Mike:Not in like an inappropriate way, but like you're... It's gonna be a rough go. Uh-huh. But eventually when you get there, it's gonna be really nice. How excited would you be to handle that?
David:No. That that's not... Doesn't make me excited because because you've given me sort of the detriments upfront, like, this is where you wanna be, but it's gonna... You're gonna have to climb this mountain here.
Mike:Now what if I were to say, you know, ice cream makes people happy. So I think you should have a pint of ice cream often. And the happiness is just gonna naturally help yourself be healthier. This... Yes.
Mike:I just twisted one study to make a talking point. That's politics in my mind. It's... We're not looking to become healthy. And this is both sides of the aisle.
Mike:A lot of times the conversation is, what can I give now? And this isn't the healthcare side. I'm not talking anything else.
David:Okay.
Mike:How do we give someone something that they might want earlier on in healthcare, especially to seniors, the largest voting block, which then can make things worse later? Mhmm. And I know I'm over generalizing. Yeah. We could talk about specific policies.
Mike:We could talk about specific rules. That would be an interesting conversation. Yeah. But the reason why I'm a bit pessimistic about the healthcare side of our political realm, the ones who are basically dictating all of this. Quick wins have long term consequences.
Mike:And I don't see us getting to a healthier position long term. I see us putting band aids on festering wounds. Right. That's all I'm gonna say on it. Yeah.
Mike:And go vote if you haven't voted yet. Yeah. Whatever side of the aisle on, whatever your opinion's on, it's just... It's a nice right to exercise. But this goes into the plan.
Mike:How do you hedge against rising cost of inflation or other things? How do you hedge against that? How do you prepare for the good, the bad, the ugly? These are things that come up. I would not be surprised if we continue to see increases on healthcare.
Mike:Yeah. Because more and more people are retiring. I think it's like 12,000 a day now. It used to be 10,000 a day. Now it's 12,000 a day are retiring on average.
David:That's a big wave, a tsunami of people, isn't it? Yeah. So It's more stress on on on a on an... You know, that's already very stressed. Right?
Mike:Do do you know our number one expenses?
David:So this is like a US economy, like I'll give you a hint.
Mike:It's our theme today.
David:Yeah. Yeah. Isn't it like Medicare, Medicaid, health care, just in general? Yep. Gosh.
David:Even more than all the wars and all the interest, debt payments, etcetera. It's Yeah. It's the biggest cost.
Mike:So that's my concern. Mhmm. I believe that we need to be prepared for rising costs of healthcare. Mhmm. I think we need to have more honest conversations about benefits and detriments of the different options.
Mike:This is the benefit and detriment of traditional healthcare, senior healthcare, Medicare. Yeah. This is the benefit and detriment of if you wanna add a Medigap plan or a supplemental plan on top
David:of Right.
Mike:And this is the benefit detriment of the advantage plans.
David:Yeah.
Mike:Now, let's talk about your health. Let's talk about what your needs are. Are you traveling? Are you not traveling? Are you a homebody?
Mike:Do you wanna stay in network? Do you wanna have some some Mhmm. That's what needs to be had.
David:Mhmm.
Mike:It's not being had.
David:Yeah. Yeah. Those are all... That... That's a good way to approach it because all of those three different main avenues you can go do have some benefit for one person as a detriment for another.
David:And so, you know, what is right for the particular person?
Mike:Now of all the political comments that we've gotten in today, and I appreciate the variety. Okay. There is one I wanna say. Uh-huh. And the government cannot advise you on Medicare or Social Security, etcetera.
Mike:You have to figure that out on your own. That is true. Yeah. Now I do wanna point this out. Too many people cross a line when they seek for help.
Mike:And there's two sides of these lines. And then we'll get to your questions, so submit them in the chat. One line is if you call up Social Security Administration, you're gonna get someone. They're supposed to explain what could happen. They're not supposed to tell what to do.
Mike:Mhmm. That happens a lot. Mhmm. And what I have found is when people enter into that position where they're saying, well, what should I do? And they kind of give this casual answer because they're trying their best.
Mike:They're they're they they care. Yeah. I've never heard about someone on the Social Security Administration that just didn't care. Like they're nice people. They're they're very kind people.
David:Mhmm.
Mike:But they're gonna say, well, based on what I know, like maybe you wanna do this. And they don't have your tax planning context. They don't have your longevity. They might not realize that there's a spousal benefit and or a survivorship benefit. They might not see the full picture.
Mike:And so they're well intended. It's kinda like putting your head in the sand and then giving an answer with the very small view that you have as opposed to not just lifting your head out of the sand, but climbing the tree and getting the vista. Mhmm. The view. Right?
Mike:Yeah. It's my Spanish for the day.
David:Yeah. Yeah. Yeah. That's a good one.
Mike:So now the other line that I see gets crossed. Sometimes people... I don't think people want full honesty.
David:Yeah. Because the full honesty might sting a little bit. Right? But we're gonna give it. Yeah.
David:We gotta give
Mike:it The other side that I see and I don't like is that people specialize in just advantage plans or gap plans or supplemental plans.
David:Right.
Mike:And it's like what everyone should be doing, and they came to that conclusion. And though there's there's good intentions with it. Mhmm. Everyone should solve it this way. It lacks context.
Mike:Yes. So who who is an agent who specializes in an oversimplified opinion that kinda tells everyone they should be doing that? That's... I see that, and that concerns me. I see people that will say, you're at a good plan, but hey, we should do a different plan.
Mike:And I hear these stories. You know, I got this one plan. Hey, let's switch you over because the current plan makes them not get a commission anymore because the commissions are gone. Yeah. So they switch you to a plan that might be the same, might be a little bit less to get the commission.
Mike:Like, those are things that concern me.
David:Mhmm. Yeah. The the the the health care companies, the the carriers, they they do every year, especially when we're talking about Advantage, they they do annually change. They might tweak a plan just a little bit, and now the previous one is now noncommissionable, and this new one is. And what what little...
David:What things did they tweak? You know, you have to dive into those details, but you don't wanna be swayed to one just because of the agent, you know, because of their own personal incentives.
Mike:Yeah.
David:So... Just to be aware of that. Not everybody's, you know.
Mike:I'm of the opinion. Get a second opinion on this. Do your research. Ask maybe AI. Put stuff in there like, you've got until...
Mike:Was it December 7? Yes. You've got until December 7. We're in open enrollment season. Whether you need affordable care act insurance, whether you're on senior benefits, start now.
Mike:Yeah. Start doing that research. Understand how things have changed because they have changed. A lot of people like that vitamin o. Mhmm.
Mike:Ozempic or GLP ones and all that. Yeah. Is that still gonna be on your plan? Is it not on your plan? And also, should you be taking that or not?
Mike:I'm not a doctor. I'm just saying, you know, they're...
David:Right.
Mike:These are things to be... Like to consider. Yeah. Lot of evolution here. Lot of things are changing.
Mike:Those are just some thoughts that I wanted to share, David, I appreciate. I mean, if you want in the chat, you know, put it in here. We can even get you a call scheduled. But David's our director of healthcare, and you don't get a commission. Like, you have no say over it.
Mike:You're you're salary here. That's correct. But you... Any conversation, client or not, people can get on your calendar and ask these questions.
David:Absolutely. Happy to go through it, walk through, ask questions.
Mike:Would you just put that your calendar... Not about your calendar link. I'm gonna put it here in the chat for anyone who wants. You've got questions. You don't need to be a client, and doesn't cost you an appointment
David:Right.
Mike:Or a cost to to visit with you. Yeah. If you decide to sign up with us, you may or may not get a commission. But here's a little secret. We click a button that says show all of them, commission or not.
Mike:I don't think you even look at the commission if there's a commission.
David:I just wanna find the... Yeah. Show me all the plans that are available, and then we'll decide which one's the best.
Mike:So we'll put that in the chat here for anyone that wants to meet with David, you can do so. Here's the link. Hey. If you're just joining this and going, gosh, this makes a lot of sense, then I want to invite you to one of our Retire On Time classes happening all throughout September. We got seven classes, and you can RSVP for free today by going to retireontime.com/ask.
Mike:Alright. Let's get to some questions. Dave, would you read the first question?
David:Yeah. Yeah. Let me get... Let me navigate over to that. Okay.
David:Let's go here. Here's here's a question that came in. I always plan to take Social Security at 62, which would be about $2,400 a month. If I wait until 70, it's $4,400 a month. Is waiting actually worth it?
Mike:It depends. So first off, we don't know the date of death, but the big factors are, are you willing to take Social Security that early at an accelerated reduction of benefits? So before 64 years old, if you take it, there is an accelerated reduction of benefits.
David:Yeah. So what does that mean? Accelerated reduction.
Mike:So let's say that it's... The benefits are decreasing at a certain rate
David:Okay.
Mike:Then they decrease faster Oh. If you take it before 64.
David:Oh.
Mike:So you're basically getting less money. And what the way it works when it comes to, like, just general inflation is... I mean, it's just it's just like even your assets in the market. If you're... If the number is smaller, that 3% inflation is gonna grow at a slower rate.
Mike:And I don't think people fully appreciate the consequences of the cost of that later on. Mhmm. So there is a compounding effect if you take Social Security early and you have longevity. There is a compounding effect if you take Social Security early and you're still trying to do IRA to Roth conversions. There is a compounding effect if you were to take Social Security early and, you know, fill in the blank.
Mike:Now there's also truth of if you wanted to delay Social Security, it might create some opportunities, but it might put more pressure on your portfolio. Yeah. So there's complexity to it. So when someone says, when should I file for Social Security? My immediate response is, I don't know.
Mike:Let's let's look at the whole plan. What do you want your money to do for you? What's your tax planning look like? What's your healthcare planning look like? What does all these different things?
Mike:And then we can kind of figure out... So I mean, people people do social security as if it's like the first thing to solve. I think it's one of the last things to solve.
David:And so does that differ with like sort of the prevailing wisdom in the industry then? Or
Mike:If I'm to be a bit snarky, the prevailing wisdom in the industry is to do a dinner seminar or have some sort of events. Uh-huh. Tele televents or, you know, webinars are more popular. And then you offer a free social security analysis, and you say, hey, David, you're gonna get $40,000 from social security. Congratulations.
Mike:But you said you needed $60,000. Well, here's a product that's gonna bridge that gap.
David:And that's a pitch over It's it's it's other considerations?
Mike:It's a gateway to pitch an annuity. Because Social Security is an annuity. So if you're concerned about your one annuity, you might be open to another annuity.
David:Mhmm.
Mike:And that doesn't make annuities bad. Doesn't make them good. All I'm suggesting here is, do you need that? So for example, well, what if you've got very little money and you can't risk it? That might be actually a good solution.
Mike:What if you've got $5.07, $10,000,000? I call them accidental dividends. The accidental dividends might give you more money than you need. So you're not really concerned about that lifetime income. So you might even like...
Mike:Everyone's different. So the answer is, I don't know. And it's okay that we... I don't know, you don't know, and whoever you're working with doesn't really know. But don't take social security out of spite for the government to try and get the most money out of it.
David:Alright.
Mike:Sometimes we jump over dimes to pick up pennies. We hurt ourselves for what we tell ourselves is the greater good when we don't realize the full price of the the date that we want to file for Social Security benefits. So just proceed with some caution. That's all I'm suggesting. Yes.
Mike:Generally speaking, I've seen people who wanna file earlier are around 64 years old. And if you do 62 and 64 years old, there is a pretty big difference that you can discover. And then 64, 65, it's usually somewhere around there or, like, 69, 70 years old. And then you got some that are 67. Well, that's...
Mike:Yeah. It's usually a 64, 65, or around 70 that I'm seeing.
David:Okay.
Mike:Bar... You know, forget about the other versions where a spousal benefit or, like, some more complex strategy that you're trying to coordinate.
David:So so those numbers that you gave there, 64, 65, and and then 67, closer to 70, that... That's generally what... That that people fall into those two camps because it makes the most sense. Is that
Mike:Well, it's... Here's when I think I'm gonna die. Here's when I wanna retire. How do I get the most money from the government? And completely ignores everything else.
David:Uh-huh. Okay.
Mike:In retirement, you might have a Social Security strategy, but you wanna check-in with the other variables to try and get the most out of your money. And too often, we don't do that. We optimize in isolation, and there's a cost to that.
David:Yes. Okay. I see.
Mike:Alright. What's the next question?
David:Hey. Next one. My pension gives me the choice of a lump sum or an annuity. Every adviser I've talked to says the lump sum because, quote, you can do better in the market. But if I take the annuity and die, what does my wife get?
David:How do I actually make this decision?
Mike:K. First, let's address the inherent conflict of interest. Alright. If you take the lump sum, the adviser's gonna get paid one to one and a half percent in fees, or make a 7% or so commission on the annuity.
David:Mhmm.
Mike:That's the inherent conflict of interest. It doesn't make the recommendation wrong. So this is where you have to then be more objective about it. Do you want a structured payment because the pension is an annuity, or do you wanna shop the open market of payments or not? That is the first question and is a preferential question.
Mike:When when you say, well, how do I get the most out of my money from this? No one can tell you that. No one knows the future market conditions. Right now, I personally think the market's gonna be flat for the next ten years. Yeah.
Mike:I said that. I have historical data and research to back up that claim, but I think that the total return dividends reinvested if you were all in the S and P 500 would be around 3%.
David:Okay.
Mike:That's a... So... Yeah. Getting a pension or a pension alternative doesn't sound that bad when you when you look at that that way. Now let's say I'm wrong, and the markets just tear 9% dividends reinvested every year for the next ten years.
Mike:Yeah. That annuity probably sucked. The pension probably wasn't that good. So you can't base your decisions on hope. That's the first first part of the personal question.
Mike:It's which system do you prefer? Then if you prefer the structured payments, which there's nothing wrong with that. I mean, Florida did a a study. They asked their employees. They said, hey, do you want do you want us to keep the pension or do you want the four zero one k?
Mike:It was like 98% said, no, keep the pension. Mhmm. Because people like that simplicity.
David:Yeah. They like they know what they're gonna get. Like, this is my payment every year for, you know, till I'm dead or this this number of years. I'll I'll take that stability is what they like.
Mike:Yeah. So that's then when you wanna say, okay. You want structured payments. Where is the best? And so let's just say it's a million dollars for easy math.
Mike:Million dollars rollover, or you get a pension for $60,000 a year. 6%. K? Well, first off, the pension, if you died the day after, you lose all everything. Mhmm.
Mike:Right? Unless it's survivability. But if you and your spouse pass, then you're gone. So the annuity is gonna have that advantage of that. Many annuities have a death benefit associated with it, that if you die before you spent all of your money, that there'd something left for the kids.
Mike:So if if you're looking at 6% versus 6%, okay. Like, that's kind of a similar comparison, but one gives you a death benefit. But what if it's 7%? That is an objective analysis even though the adviser or the agent is going to get a commission. It's not a commission from your money, but that would be more objective.
Mike:Or you could just break it up. You see where I'm going with it? We don't know what future returns are gonna be. We don't know what market conditions are, so you gotta pick the strategy that you're more comfortable with. Mhmm.
Mike:And then do a simple adjustment. So the question was like, all the advisers are telling me to take the lump sum. That's... I've seen many pensions where the pension payout was just terrible. There are many pensions hiring attorneys to get out of their pension responsibilities.
Mike:So that doesn't surprise me. But I have seen pensions that beat out every annuity in the market.
David:Uh-huh.
Mike:And they should take the pension and not the lump sum.
David:Alright.
Mike:So if they can hand you illustrations, if they can hand you data, and that that makes things a lot easier.
David:Right. Right. Right. Some people might prefer, like, yeah, the... I like the data here.
David:I like this illustration, and I'm comfortable. I'm more comfortable with knowing what I'll get, and others might look at that and say, no. Actually, let's let's take the lump sum, and I think I can do better investing. And I'm okay with, like, maybe some bumps or potential flat market or roll... Rolling the, you know, rolling the dice, riding the roller coaster.
David:Mhmm. If they're more comfortable with that, then they should do that.
Mike:I mean, it's either the pension's gonna take the responsibility, and because you are lumped together with a bunch of other people, the pension can afford that because some people will die sooner than others.
David:Uh-huh.
Mike:Or you can move into an... And that's pension or annuity. It's the pooling of money together Mhmm. And the pooling of people together that make it possible. Or you can just say, hey, I'm willing to take the risk.
Mike:I I accept if I'm wrong. Uh-huh. You know, I can be wrong, but this is how I wanna proceed. Whose business is it to tell you what you should or shouldn't do? These are your decisions.
Mike:An adviser should just give the benefits, judgments of the different options, and maybe split the difference, maybe do one, maybe do the other. Up to
David:you. Mhmm.
Mike:Sequence of returns risk, which is what it's often refers to, is the... You know, if the markets go down, you could you could lose your money. Right? And if markets go down, if markets go down and you take income out, you're accentuating those losses. You're locking in the losses, making it more difficult to recover.
Mike:That's sequence of returns risk. But there's more ways to solve sequence of returns risk than just buy an annuity or take a pension. Because if you have assets that are protected and you can take income from there, you kinda just solve sequence of returns risk. Oh, yeah. This is why plan first, strategy second, and then you can find the right investments or products, the tools for your portfolio.
David:Yes. The... Those products or investments will support your strategy. Right? Is that...
David:But you gotta know what your strategy is.
Mike:You have to decide the path you wanna take. Yeah. I mean, I'm trying to think of my favorite boy scouting adventure. You know, it's... If we're here and we wanna go there, there's probably an easier path or a harder path.
Mike:Mhmm. The harder path might have a better view, but you're gonna work harder for it. The easy path might be easier, but you won't get the view. Which path do you want? They both have a reason to do it.
Mike:So that's that's the idea. So for all those who are tuning right now going, hey. This is this is great. What's the next step? I'd say come to our workshop.
Mike:It's this Tuesday night at 06:30 central time. We're hosting it on Zoom, so you can attend the comfort of your home. Just go to retireontime.com/workshop to RSVP. That's retireontime.com/workshop. We'll see you there.
Mike:Alright. What's the next question?
David:Okay. Let's move right along here, and these are good ones. Hey. Everyone talks about the tax savings from Roth conversions, but paying the tax now means less money stays invested. Oh,
Mike:I love it so far.
David:Yeah. This this person's been listening. So does the math account for that lost growth or is there a hidden cost to getting the, you know, quote unquote savings?
Mike:It's harder to grow less money.
David:Alright. So had... Given us an illustration of that then. So
Mike:Let's let's be facetious for a second. Let's say you do a million dollar conversion
David:K.
Mike:And you're hitting that thirty second and thirty fifth bra... Or percentile bracket. Right? Not percentile bracket. The thirty second percent, you know, bracket Okay.
Mike:35% bracket.
David:Alright.
Mike:That's really expensive. But in the next year, you're tax free.
David:Mhmm.
Mike:K? But, like, let's say that's like 30 of your money gone.
David:Okay.
Mike:So I know that's not an exact calculation. There's state calculations in there as well. There's a lot of things to consider here. But but if your million dollars is now worth 700,000, are you gonna grow that to a million dollars quickly? Probably not.
Mike:Are you gonna take income from it? Probably. Are you ever gonna break even? Maybe not. But it's tax free, and you get other tax savings.
Mike:Well, you also have the standard deduction every year that you've now forfeited. You also have the 10% bracket at least next year for the next couple of years, maybe. You forfeited that. So for me, it's the balance of how fast and how slow, and what do you want your money to do for you. IRA to Roth conversions are a strategy.
Mike:No. It's not the end all be all. And I think the problem is too many people write online thinking it's the end all be all when really they're just trying to attract higher net worth clients, and they don't care if a lower net worth individual... When I say that, I mean like a million dollars or less. It's like, oh, well, whatever.
Mike:Mhmm. Oh, it it is it is a big deal.
David:Mhmm.
Mike:But context is king. Yes. So would say about half my plans that I'm doing right now, because we just... It's a flat fee for our planning. Doesn't matter how much how low you have, it's a flat fee.
Mike:Yeah. Around half, it feels like I'm saying don't do any higher Roth conversions.
David:Oh yeah, half of the people that you meet with? Yeah. That's probably flies like in the face of about, wait, I've heard all these people talking about it. Right? And I wanna I wanna be tax free.
David:It's a it's a talking point.
Mike:Mhmm. That's it. Alright. So, alright. What's the next question?
David:Okay. Yeah. Next question. How does Irma work every year? And that's I r m a a.
David:Right? How does Irma work every year... Work year to year? Does it automatically readjust based on my income from two years back? Or once you get bumped into a higher bracket, are you stuck there unless you file the appeal form?
Mike:There's a two year lag with Irma, which is the difficult part. The way I'd go about it is you wanna look at what's called your modified adjusted gross income.
David:Mhmm.
Mike:Modified adjusted gross income isn't just what shows up in your tax return, your ten forty, a little bit more when it comes to that. Like your municipal bonds are tax free Right. But they still count for your modified adjusted gross income. So with Irma, you just need to understand that if you cross a certain threshold, it's $1 over and you're paying. Yeah.
Mike:It's not progressive. It is a cliff. Now, you can get out of the cliff or kinda overcome it a little bit sooner. But if you go over the Irma limit, let's say this year, I think you have until December 5 or January 15 or so, but you could file form s s a dash four four and say that there was a life event. The reason why that transaction was so high or why your spending crossed a threshold happened for a reason.
Mike:It's a life event, whether you stopped working, whether you're now reducing your work, or something. There's like six things that we qualify. Okay. Write them a letter, and you might be able to not have to sit and wait for two years that you're gonna get higher IRMA penalties. Uh-huh.
Mike:Was it Medicare surcharges?
David:Yeah. Yeah.
Mike:Yeah. Instead you're saying, hey, I know that happened. Look, it won't happen again. Here's my taxes moving forward. And as long as you're honest, you can actually roll back the Irma costs.
David:And this is this is not guaranteed, but it's a it's a good fairly reliable strategy. Is that what we're saying?
Mike:Yeah. Yeah. I mean, I've written many of those letters myself.
David:Oh, okay. Clients.
Mike:So Yes. But yeah, Irma is a pain. One dollar over. And just for what it's worth, $1 over could literally come from having too much money in your high yield savings account. Mhmm.
Mike:Because that's taxed as ordinary income. Mhmm. And it just kind of shows up and you kind of forget about it. Right. It's not avoiding trading your stocks.
Mike:It's anything that shows up in your tax return.
David:Yes. One of those lines, those many lines where it shows, you know, this is... These are my dividends, my interest earning, whatever. It's all counts as income. And then $1 of income over that threshold, and then suddenly those Medicare surcharges are there.
David:Mhmm. And so that that could be unintentional. Mhmm. Yeah. Things to be mindful of.
Mike:Whether you meant it or not, the bill could be on its way. Yeah. This is why tax planning is so important. Tax planning affects healthcare planning and income planning. And income planning affects tax planning and health care planning, etcetera, etcetera, etcetera.
David:Mhmm.
Mike:It all works together. Mhmm. Alright. Let's get some more questions.
David:More questions. Let's move on. Should a tax deferred annuity go in a tax deferred account like an IRA, or does it make more sense to hold it inside the Roth?
Mike:So let's just explain the taxes of an annuity first.
David:Okay. Yeah. Start there.
Mike:So a tax deferred annuity is saying if you put money into an annuity, it's gonna grow, it's gonna defer taxes or capital gains tax. But it's not capital gains tax. It's actually income tax. So the growth... Let's say you put a $100,000 into an annuity and it grows to a $110,000.
David:Okay.
Mike:$10,000 is gonna get taxed as ordinary income.
David:So this this original 100,000 was was like nonqualified money. It's it's after tax money Yep. To start with. Okay.
Mike:Yeah. So if you put it into an annuity and you turn income, yeah, most of it's gonna be tax free, but there is gonna be part of it that is taxed as as income. So just be aware of that. Mhmm. So why would you put...
Mike:And and the benefit is you can defer defer defer, and then when you take income, you're gonna pay the taxes.
David:Oh, I see. So so the that initial growth that gets credited once a year, we're deferring deferring until we start taking income.
Mike:Yeah. So there's benefit to that, especially if you use like MYGAs, but if if you don't, then there's a cost. Mhmm. So so now that we understand that, and that was the pitch for variable annuities is invest in the market, but defer defer your taxes. Well, there was high fees with variable annuities, so people got upset.
David:Mhmm.
Mike:And so... But the argument is why would you put a tax deferral product in a tax deferred account like an IRA or a Roth? I would argue that's not in my mind the primary objective of the product. Mhmm. And if if the growth is gonna be taxed as income anyway, why not keep it in something that is gonna get taxed as income anyway?
Mike:Right? It doesn't cancel itself out. It just... It's one less headache you have to deal with. If you fund an annuity with non qualified assets, like your brokerage account, your taxable account, your checking account, whatever it might be
David:Yeah.
Mike:And you die and you don't pay the taxes, there's no step up. The taxes are passed or the tax bill is passed to your kids. Ugh. So be aware of that too. Now whether it should be from your Roth or your IRA, that's a great question.
Mike:I've I've seen plans where it should be in the IRA. I've seen plans where it may make sense to put it in the Roth. It depends on the objectives. It depends on what's the mission of your money. What are you trying to accomplish?
Mike:Usually, I've seen more people put in their IRA than their Roth. But there is an individual that I spent time with yesterday putting together a strategy.
David:Yeah. Also, I don't know if we answered it. Should a tax deferred annuity
Mike:Yeah. So annuities, I think, should be in retirement accounts, period. Oh, right. Right. Because why would you take something that can grow as capital gains and pay less in taxes when it's gonna go as ordinary income?
Mike:There are situations where it would make sense, but it's few and far between.
David:Oh, okay.
Mike:So And they just said I can share it.
David:So Oh, okay.
Mike:So buckle up for this one.
David:Okay? So to put a bow on this one then, so we're we're we're talking about, make sure I'm understanding this right, When you initially fund the the annuity with, like, the initial premium, use, like, qualified IRA dollars Yeah. Most of the time.
Mike:It's a retirement product. Yeah. Put it into a retirement account.
David:And... But there might be some situations where nonqualified money could work.
Mike:Oh, yeah. There are. I mean, there's two people on here I know. I've built their plans, and we use non qualified for that. So it's...
Mike:That's the individuality.
David:Okay.
Mike:But this one we were working on last night, was a lot of fun. We're trying to do something about... Basically, 300,000 needs to move from the IRA to something.
David:Okay.
Mike:And and the way annuities work, just so you're all aware, we were gonna... We were looking for lifetime income, not to pay income, but to pay the taxes. Because if markets are down, we wanna make sure we're paying the taxes and just moving assets that are down, put them to the Roth, and have them recover. That's a more advanced tax strategy. But we need to make sure we don't accentuate the losses by the tax bill.
Mike:So we're actually doing lifetime guaranteed income for the tax bill. And this is... These are strategies I've worked with many people. You're typically 5 to 20,000,000 of assets saved is where you start thinking about these kinds of things. Okay?
Mike:The problem is you can't just like do a partial conversion and turn on part of the income and so on and so forth, but we didn't wanna put too much into an annuity and like have one big painful year. So we were looking at five, six years or so of basically a 100,000 of each annuity. So we buy the same thing or a couple of them, similar ones, and do one, and then another 100,000 for another one, and another one, and another one, and we were stacking. And then each year, we were gonna do a IRA to Roth conversion, and then we would turn on the income as it was a Roth. Okay.
Mike:Paying the taxes elsewhere. And so we were accomplishing the main goal, which is get money out of the IRA. Yeah. And then we were stacking Roth income for the surviving spouse because of the widow benefit, and that we were able to take... Pay the tax bill from tax free income.
Mike:And that then softens the blow of the IRA Roth conversions, ends up over the long term period of time, getting more money into the Roth on the conversions, and we have more control over future tax bills. I mean, is a multi layered strategy. This is why you pay for a plan. Yeah. This is why you go through the planning processes because this isn't something you're gonna just...
Mike:I I could write a whole book on just this one strategy. Now imagine all the other strategies that we could be doing. But yeah, we we had to buy different annuities. We had to find their general accounts, the ratings of them, their growth potential, and so on. But here's the secret.
Mike:See, a lot of people don't know this when it comes to how these these go. You have two values. You have your cash value and you have your benefit value. Most people think they're the same thing. They're not.
David:Oh, and this is for, like, income annuities?
Mike:For... Yeah. Okay. Indexed annuity. Oh, index.
Mike:Well, I'm focused on income.
David:Okay. Right. Right.
Mike:Right. The cash value is gonna grow at a slower rate than the benefit value. Mhmm. The conversion, the the amount that you have to pay the taxes on is based on the cash value, not the benefit value. Mhmm.
Mike:So this is not quoting a product because I can't quote a product to the the masses and states there's variability. But let's just arbitrarily do this in a simple math form. You put a 100,000 in something, and you're not gonna turn the income on for five years.
David:Okay.
Mike:K? The cash value grows at, let's say, 4%, but the benefit value grows by 8%.
David:Then the benefit value is is like the payment.
Mike:The income you're gonna get.
David:Okay.
Mike:Yeah. So you are almost doubling the benefit value. The cash value is slower, and so we need to do the conversion five years. You're actually paying less taxes and you're getting a higher benefit value Mhmm. Because you coordinated tax law as it currently stands.
Mike:You've grown your benefit value and taken advantage of the slower cash growth.
David:Mhmm.
Mike:Multilayered strategies. And, yeah, this was also in coordination with Social Security and a bunch of other things. That's real planning. Yeah. And by the way, that only happens at the end of the process.
Mike:You have to start with what do you want your money to do for you. Then you explore strategies. How do you get more out of your money? How do you want that to look? What are different thresholds, timelines, goals we need to meet?
Mike:And then you can start doing this kind of stuff. So we do have a question. Are all of your associates as knowledgeable as Mike? Yeah. I'd say so.
Mike:Yeah. They're very smart.
David:I agree. I'm not just saying that.
Mike:I do also look at every plan. Yeah. We have weekly meetings so we can collaborate. I've learned many things from my associates. They've learned things from me.
Mike:So it's... It is fun. Yeah. But I... Yeah.
Mike:There's... There is no... Like, yeah. It's... It takes forever for us to hire someone because we have a high standard.
David:Yeah. But... And... Yeah. And and your fingerprints, even if you're not in all the planning meetings, your sort of
Mike:hand is. Well, I'm in compliance too. I have to look at every plan before it goes out.
David:Yes. So there's that backstop there.
Mike:Yeah. Alright. This other one is what happens, the insurance costs holding the annuity just fail in the event of a crash. So if I understand your question, it's what happens to the insurance company if the annuities just fail in event of crash if, like, a reinsurance and so on and so forth. So there's different layers to annuities.
Mike:And today's conversation happened to go to annuities. Look. There's real estate. There's a bunch of things you can consider, but we're we're here, so we're talking about it. Mhmm.
Mike:First off, I like to look at the general accounts of the annuities or the insurance companies. I get concerned when I see an insurance company going very deep into private credit
David:Mhmm.
Mike:Which is basically shadow lending to AI companies right now. Mhmm. But if I see a general account and there's 70 plus percent of it is in treasuries, I'm more comfortable with something like that or real estate.
David:Right? Define what the general account is.
Mike:Yeah. So when you when you invest with an insurance company, you've got... When you invest with any insurance company, they put the money into the general account, and that account is what's supposed to honor all of the promises they have made. So you have to make sure that the general account is healthy. Most people I've met don't even look at this stuff.
Mike:They need to make sure like they've got a rating, they've got good history, they've been around long enough, like these are the details that are there. And then... So first off, you wanna go with the company that you feel like is gonna be around. Then the second one is that they do cross insure. So if a company goes down, then another insurance company should make up the difference after assets are sold and so on.
David:Okay.
Mike:And then the third one is that there's a state guarantor or a trust that's supposed to help alleviate up to a certain point. You do not buy because a state guarantees something. Like, don't even go there. It's something that you could research if you wanted to. Every state has different thresholds and metrics.
Mike:But just don't... Just go with a good company.
David:Yeah. And can we trust those ratings? Like, oh, this is an a minus or an a plus rating. Like
Mike:You can trust it as much as like, okay, like, hey, who are the top five teams of the NFL? Okay. They're probably good teams.
David:Oh, yeah.
Mike:Right. And not have a clue what the NFL is. Right? Like, it gets you in the ballpark. But like I have found, me personally, I have found b plus plus companies I would trust more than in certain a minus companies.
David:Because...
Mike:Technically, they're an a rated company. Yeah. But how they've handled the general account, how they've gotten through... There's there's some politics with rating agencies. They wouldn't admit to that.
Mike:My opinion is it might be true. Mhmm. I just don't understand how one would be b plus plus and one is, but they're allowed to have an opinion. They're rating agency there. I'm not saying they're dishonest.
Mike:I'm just saying that
David:Yeah.
Mike:There's some things some things.
David:Okay. Yeah. Sound like Larry David there. There's just some things.
Mike:Some things. But if it were me Uh-huh. Seeing what I've seen... You know, I grew up in Washington. I saw Washington Mutual go under.
Mike:I've read the terms of what FDIC really means. It's not very comforting. Most people I don't think actually know what happens if a bank goes under and how FDIC could pay you out and how long they could drag it out.
David:Oh, right.
Mike:With, you know, assets at Schwab or Vanguard, okay. You just have to get your holdings, your position. It's really the company that's at risk. Like, the stock shares. Like, it's...
Mike:Anyway, banks, insurance, securities businesses, the investment banks, and so on. Mhmm. I would choose an insurance company overall three knowing what I know today. Mhmm. Because I think they've got more regulations and more crap they have to deal with.
David:Oh, right.
Mike:That doesn't mean I'd put it with any insurance company. It just means I I think they've got it harder.
David:That's interesting.
Mike:And who... I mean, a run on the bank? We've all heard that before. Uh-huh. You ever heard of a run on an insurance company?
David:I don't think I've seen that in the news anytime recently.
Mike:So I don't know if that... Hopefully, that answers everyone's... The the follow-up questions in the chats. Yeah. But...
Mike:Alright. We got seven minutes. Let's do one more.
David:Yeah. Okay. How about this? So would it make sense to live off my $40.01 k for one more year so I can delay Social Security and get about $380 more a month for the rest of my life, or is that a bad trade?
Mike:How much is a year of your life worth? What was that number?
David:Deep question. Oh, it was 3. 3. They'll get $380 more per month if they delay, like, one year. So I'm gonna I'm gonna take income from my $4.01 k for a year to get $3.80 more a month.
Mike:So is a year of your life worth $4,680 a year for the rest of your life?
David:Gosh. It doesn't seem like very much. $4?
Mike:Yeah. Let's say, let's round up. $5. Okay. $5 with a two or 3% cost of living adjustment, is that worth more?
Mike:Oh, yeah. Than a year of your life of doing the things in your probably healthiest year you've got left. See, oftentimes we are taught to solve based on numbers, and we omit the quality of life or time. Mhmm.
David:Yeah, or a year of reducing your four zero
Mike:one k. Some people, they need that extra couple $100, so they should. Yeah. For other people, it's a it's a rounding error on their plan.
David:So everybody has to answer that question for themselves. Mhmm. Yeah.
Mike:We got time for one more. Let's do... Let's sneak one more in here.
David:Alright. Well, we're on the topic of Social Security. This person's not convinced that it will be around in its current form. If I might end up getting less anyway, why wait? So alluding to that they might have to cut benefits.
Mike:Yeah. Like a 15, 20% reduction of benefits.
David:Yeah. So taking it early and breaking even around 80 seems safer than hoping for more money later.
Mike:Yeah. So in 2025, everyone and their dog was doing heavy IRA to Roth conversions. I say that sarcastically.
David:Okay.
Mike:But many people were doing heavy IRA to Roth conversions because taxes were gonna go up.
David:Alright.
Mike:And then middle of twenty twenty five, this guy, you may have heard of him.
David:Alright.
Mike:Trump. Oh, yeah. Passes this one big beautiful bill. Uh-huh. And taxes don't go up.
David:But they did their conversions.
Mike:So the thing is we don't know. Uh-huh. We know it can be solved. We don't know if it will be solved. So at that point, you just need to pick whatever you think is right for you.
Mike:If you wanna make a decision based on your prediction, you have every right to do that. For me, don't wanna count the chickens before they hatch. I'd rather hedge and be ready for either option, but take it for as it is today. Yeah. But there are people that just say, nope.
Mike:I don't even wanna go there. I want it this time. I say, no problem. And we just move on. Yeah.
Mike:You're allowed to have an opinion. Yes. Including you, David. Oh, even me. So for those who haven't already started this planning process, and and you've gotten the book, you've...
Mike:Maybe you're attending the workshop tonight, whatever it might be, you're always welcome to go to retireontime.com/call to schedule your first planning session. You can either schedule the first planning session or you can schedule a thirty minute call and just ask us a bunch of questions. Mhmm. That's how you get started. You get three appointments at no cost to explore and see what planning looks like before, before anything happens.
Mike:You only pay at the end if you're happy with your plan. Very casual, but very impactful. If you notice the depth of the different strategies we'd be able to implement is great. It's stuff that you're... Unless you prompt your AI correctly, would never be told.
Mike:It's not about having the answers, it's about having the right questions. And that's a big reason why we start with the plan first, because we're asking questions. What do you want your money to do for you? Then we explore strategies. How do you wanna get more out of your money based on this?
Mike:And we were saying, we could do this. We could do this. Which one feels right? Here's when this one works. Here's when that one is better.
Mike:And we explore that. And then eventually, we figure out what the right portfolio is for you. Appreciate you all being here. Retireontime.com/call is how you schedule that call. We'll see you all next week.
Mike:Same time, same place.