Subscribe
Share
Share
Embed
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 retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is all about the nitty gritty. Now that said, remember, this is just a show. It's for educational purposes.
Mike:This is not financial advice. If you want financial advice, find a financial adviser like us here at Kedric Wealth. Now that said, let's remember that you can always text your questions to (913) 363-1234, and we will feature them on the show. That's (913) 363-1234. David, what do we got today?
David:Hey, Mike. What's the difference between a pension and an annuity, and which is better? Who's funding the pension?
Mike:Yeah. So yeah. Good question. Yeah. So the people will pay into a pension fund.
David:Like employees? Yep.
Mike:Then that fund is managed, so it's invested in the market and so on different ways that are appropriate. I mean, they're not going all in on, like, Nvidia. Uh-huh. It's they're managed professionally, but they're not guaranteed. They have risk.
Mike:Markets could go down. The pension's stressed. Maybe they put more into bonds. They have some predictability there, but maybe inflation gets out of hand, and then the bonds don't do as well. Yeah.
Mike:Pensions are managed, and they have to keep the money going.
David:They have to use some judgment to keep it from losing everything. Right?
Mike:Yeah. I mean, it's it's like basic finance. If you spend more than you make. You're in a tight spot. If the pension pays out more than it's able to grow, it's in a tight spot.
David:And there have been some like that in the past. Right?
Mike:Well, yeah. Pan Am is the the poster child of pension
David:Oh, the old airline. Is that right?
Mike:Yeah. And Pan America.
David:Uh-huh. So May they rest in peace.
Mike:Yeah. But the point being is, if you get rid of just names or titles, people love to love pensions and love to hate annuities. Uh-huh. It's the same thing. It's a structured payout.
Mike:People love to get their Social Security, but complain every year along the way that they're funding it. That's fine. But they're very passionate about getting the most out of their benefit. So let's not have this is called a cognitive distortion. Okay?
Mike:So a cognitive distortion is when you don't see things as they are. You see things as the way you want them to be Okay. To rationalize your position that you need to be in. So another way of saying that is this is prediction error, and it's saying, well, I'm really smart. I'm a really sophisticated investor.
Mike:Therefore, all annuities are bad.
David:Mhmm.
Mike:But I love my pension. Yeah. Well, that's contradictory. I'm fine if you're smart. I'm fine if you're a sophisticated investor.
Mike:I'm even fine if you don't want a pension or an annuity. But don't contradict yourself.
David:Mhmm.
Mike:Right? Would I do a lifetime income stream for an annuity? Personally, not a chance. Yeah. That has nothing to do with the insurance companies.
Mike:That has nothing to do with any of the things we've talked about. It's that I want more flexibility, and I want a dynamic relationship with my assets. And I'm willing to accept that there's no such thing as a perfect investment product or strategy. But my opinion doesn't mean that's what you should do.
David:Right.
Mike:Because I have many friends, that's exactly what they would do. And are they right or are they wrong? Neither. It's what's right for them.
David:Yeah.
Mike:But which one's better? Who has a better payout that's financially solvent, so they're not at risk of running out? And then does one offer growth, like to hedge against inflation? Are they both flat? Just things to consider.
David:Okay. There's a lot of similarities in pensions and annuities, and we can't fully answer which one is better until we answer some other questions about maybe what the person wants. Yeah. What it offers.
Mike:So that's something else to consider too in this calculation. What if you took some pension, you did some lump sum if they allow it, or maybe you're concerned about tax risks. So you take the lump sum, you'd spend three years doing IRA to Roth conversions for some of it, so you spread out the tax burdens, and then you buy the annuity at a, let's say, a reasonable rate. You can buy the annuity, by the way, and then do IRA to Roth conversions within the annuity so you get a better rate because you bought it today while interest rates are still higher. You slowly do the conversions so that when you turn on the income, it's now Roth.
David:Ah, so no tax no federal tax anyway.
Mike:Yeah. And you can't really do that with most pensions.
David:So it's I don't know. We covered all the issues today.
Mike:Yeah. The gist is though, look at the income planning, the tax planning, and the longevity planning, and your estate planning when you're considering your pension options. A lot of variability in there. 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.
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, go to www.yourwealthanalysis.com today to learn more and get started.