Let’s Talk About Your Retirement Comments and Questions

Your Questions, Our Answers:

Troy Sharpe: We really appreciative of all the comments that we get on the YouTube channel. I want to take a minute to go through and respond to some of the comments that we’ve received over the past few weeks.

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The first one we have has to do with Social Security. The gentleman says, “There is one question you need to answer that has the biggest effect when it comes to deciding when it’s best to start collecting Social Security. It’s how long will you live.” That is absolutely correct but there are other factors. Now, he goes on to say that, “My father put into the Social Security system over a million dollars,” and his mom put in about a million as well.

I’m not sure where we’ve come up with those numbers but that is probably much, much, much higher than what anyone has ever put into the Social Security System. A certain portion of your paycheck is deducted to go towards paying Social Security. If we look at the history of old age and survivor disability insurance program tax rates, this is Social Security. In the ’60s, it was about 3% of your salary up to a certain limit. In the ’70s and ’80s, it got up to 5%, 5.5%. Since 1990, it’s been 6.2%. Let’s just say you made $100,000 per year for 40 years, 6.2% of that, or $6,200 would go into Social Security. That’s 6,200 per year for 10 years is 62,000 times 4 is about 248,000.

That’s how it works if you have a paycheck from an employer. Now, if you’re self-employed, we have this column over here and the rates are a bit higher if we go back to the ’60s to ’70s compared to over here, and they have been a bit higher over here. Now, there’s a catch though, even though the rates are higher, if you’re self-employed, you get an income tax deduction for one-half of that. The formula is designed to work out the same. You just pay for all upfront if you’re self-employed. Whereas if you work for a company, you pay 6.2%, and that company pays 6.2% as well. I don’t know how anyone would have come close to ever paying a million dollars.

Most people up to this point have received a good amount out of Social Security if you have lived a very long time but you bring up an extra point or an excellent point. If you don’t live a long time, you will probably not get out what you put into Social Security. It is not designed to be a sole source of retirement income. It’s designed to be a supplemental source of retirement income. We need to do the right things with our money leading up to retirement and look at Social Security as nothing more than a supplement. We need savings, we need dividends, we need interest, we need other sources, we want to see multiple streams of income.

Social Security is a supplemental source. The longer you live, the more you will benefit but there’s a lot more to it when it comes to making the decision about when to take Social Security. That’s a big part of our retirement success plan process. When we look at when to take Social Security for many people, it does make sense to take it at 62, others at 67, and others at age 70. A lot of times we’ll find out that it makes sense for one spouse to take it maybe early and the other spouse to defer later. There are so many factors that go into that decision but it is part of our process and that’s what we help people figure out the best course of action given all that information.

The next one we have comes from Randy and he says, “I enjoy your videos, this one especially. I hope you could also include expenses in your calculation.” Randy is talking about how to manage your money in the accumulation phase video where I had mentioned about investments or mutual funds. Then he goes on to say, “Some funds are very high in expenses, and often simple target date funds have the lowest fees.”

Randy, I just did a video on this where we break down not just the expense ratio, but the hidden fees inside mutual funds. These are the ones that are very difficult to identify. A quick summary here. You have the expense ratio. If you’re looking up your target date funds, that’s what you’re going to find but then what you won’t find in an easy, quantifiable, calculable manner is the fund’s transaction costs. Whenever something inside that target date fund gets bought or sold, it generates a commission. That commission is passed through to you.

You want to look for a funds turnover percentage, a low turnover percentage of 2% or 3% means very, very little transaction costs. A high turnover percentage of 20% or 50%, or even 150% or 200% means the expense ratio is probably the smallest fee inside that fund. In addition to that, you also have 12b-1 fees, which are fund distribution costs. Sometimes those are in the expense ratio, sometimes they are not, but be aware of all these hidden costs and check out the video I just did on the hidden fees inside mutual funds.

The next comment comes from JC and he makes a comment on one of the retirement income shows, the radio show that I’ve done for 10 years. We started putting these on YouTube in 15-minute segments. He says, “If you pull from a Roth, you also avoid the health care tax.” There are actually two health care taxes in retirement. The first one has to do with the net investment income tax. If you’re married filing jointly, and you have income modified adjusted gross income over 250,000, there’s an additional 3.8% surcharge on your investment income. Making distributions from a Roth does avoid that 3.8% calculation.

There’s a second one, so I’m not sure which one you’re talking about here, but you’re right, pulling from the Roth, this is one of the big benefits of doing these Roth conversions that we’re such a big proponent of. It’s the IRMAA cert tax, I-R-M-M-A, which stands for Income-Related Monthly Adjustment Amount. This IRMAA tax impacts your Medicare Part B and Part D premiums. There’s a two-year look back, so it’s based on the income that you receive two years ago on your tax return, but it will impact your Medicare Part B and Part D premiums, and it could potentially increase by 1000s per year your Medicare costs just in health insurance premiums through Medicare. You’re absolutely right, JC.

Our next question comes from Barbie C, and it’s from one of the videos that Jessica did. Jessica has started to do her own videos here on the YouTube channel, very happy that she started to put these out. It’s been in the works for some time now. Barbie says, “I have a variable annuity from an old job. What is the difference between fixed and variable?” Barbie, variable simply means your principal can lose money typically if those investments inside the fund go down. Your fixed annuities, they have 100% principal protection from market losses, so if the market goes down by 25%, your variable annuity is likely to decrease in value because of that market loss.

The fixed annuity will never go down because the market goes down. Now, in addition to that, historically speaking, variable annuities are also very high in fees because they have a lot of additional riders that are typically attached to them but you also have the normal mutual fund costs inside them. I’ve seen workplace plans with variable annuities that aren’t too expensive but generally speaking, variable annuities can run anywhere from 2% to 4% per year. This is where the notion that annuities have high fees have really come from. Because variable annuities are the ones that historically have had very, very high fees.

Your fixed annuities, on the other hand, typically have zero annual fees. Now, there are other things to understand as far as pros and cons, et cetera. The general basic distinction is variable annuities have risk and fees are typically higher, and your fixed annuities have no market risk, and your fees are much, much, much lower. The next comment here is from again, from The Retirement Income Show, and maybe I misspoke here on The Retirement Income Show, but the comment is, “I agree with dynamic spending approach in retirement, but to call the 4% rule random is a disservice to the work that went into those studies.”

The fact that it was done in the ’70s doesn’t make the results of the study any less valid. Yes, there is a lot more complexity to retirement planning, but to take 4% plus inflation determines your spending level, but it is a useful benchmark to strive for when accumulating assets in retirement. Now, if I did say random, I misspoke, so I apologize for that. What I always say when I talk about the 4% rule, though, is it is antiquated, and that is not doing a disservice to those people who did the study, because even the people who did the study now call it outdated.

When we look at why is the 4% rule, in my opinion, and also those of the original authors of the study outdated, it’s because the economic environment is completely different.
Back then, we had very high-interest rates, which meant bonds were paying very, very high interest, but also interest rates were expected to go down. Those bonds were expected to have capital appreciation.

We’re in the exact opposite environment now, bonds are paying much less when it comes to interest rate payments. When rates rise, bonds lose value. If you’re counting on 40%, let’s say of your portfolio to produce returns of 7% or 8% like they did back then at least 5% to 7%, it is a wildly off estimate. If you’re planning on that type of growth with the lower-risk portion of your portfolio, there’s a very good chance you’re going to be extremely disappointed for lack of a better word.

Now, the dynamic spending approach, this is something that we preach to clients, we’re big proponents of spending in retirement, but we have to have a plan in place, what we call The Retirement Success Plan, in order to identify how much can we spend. Can we spend more in the beginning and then bring it down? What are we doing for taxes? All of these different pieces that we take care of. A dynamic spending plan is one that we adjust our spending levels based on many, many factors. One of them is market growth, the investment tolerance, our life expectancy, many factors that I’ve went into before.

Most people in the world of economics today are telling you that anywhere from 2% to 3%, if you really want to push it, maybe 3.5%. I don’t necessarily believe with that unless you were just managing the money by yourself and you had no really good professional help by your side to help guide you over time. The main takeaway here is please don’t take general rules of thumb and apply them to your particular situation.

The comment you make here about it can be a decent benchmark to strive for when accumulating. Okay. I can agree with that. That is a decent benchmark, but please, please, please don’t just take it as a rule that once you get to retirement, that you should just continue and take 4% out and increase for inflation because that rule, as I’ve said, it is antiquated.

Senior couple analyzing their savings while going through home finances

Okay. The next question comes from Rick. Rick says, “Can I take from my 401k and fund a Fixed Indexed Annuity in my wife’s name with me as beneficiary? Since she is older, she would get a higher payout.” Unfortunately, Rick, no, you cannot do that. An individual retirement account or a workplace 401k, those are individual accounts that have to stay in your name. If you choose to buy a Fixed Indexed Annuity, it would have to go into your name.

Now, since your wife is older, you want to be able to base the payout off of her life expectancy, which you’re right would be higher because she’s older, but you could choose to, if you want do a single life payout on your life, as opposed to a joint payout, which you wouldn’t get no benefit from. Our next comment is from CG. CG says, “Nothing was said in this video. Absolutely nothing.” [laughs]

This video was, I’m 65 years old with $1.4 million in IRAs. Should I do a Roth conversion? I haven’t watched this video in some time. I’m pretty sure this one has tens of thousands, if not hundreds of thousands of views. It’s a popular video with someone, but what we did is we went through the video and we simply show if you do a Roth conversion versus not doing a Roth conversion. If I remember correctly, there were hundreds of thousands of dollars, some potential taxes saved. CG, I’m sorry you did not like the video, but I stand by it and I feel there’s a lot of valuable information in there.

Now, the next comment is more of a series of comments that are of the same type for multiple different people, taking multiple different sides of the issue. A lot of the videos that I’ve done, I’m 62 with $1 million. Can I retire? I’m 65 with $800,000. Can I retire? A lot of people just simply say yes or no. We’ll look at spending levels, $5,500 per month or $8,000 per month or $3,500 per month and then people say, “I can’t live on that.” Or, “You’re crazy if you can’t live on $1,500 a month.”

What I want to get across to all of these comments is that everyone’s situation is different. This is a free country. We have the right to spend our money however we want to spend it. If you want to travel in luxury and you want to do things that you’ve never got a chance to do in your 40, 45 years of retirement, you want to go to nice restaurants, you want to go on two, three-week vacations. There’s absolutely nothing wrong with that. It’s your money. You’ve earned it. If you want to spend $5,000 or $10,000 or $20,000 a month, that’s your prerogative.

Now, could you get by in a lot less? Yes. The question is, do you want to get by on the bare minimum once you’ve spent 45 years working for your entire life, and now you have 10, 15, 20, 30 left, I think you should spend as much money as you can, where you can still sleep at night without the fear of running out of money, but also do so in a way that optimizes everything that you’ve saved your entire life.

All right, Dave says, “I am flat a broke and I want to retire soon after watching this. Thanks for the help.” Dave, hopefully, I inspired you to make some positive decisions, start saving, start doing something with the money. This is, I’m 59 with 1.1 million. Can I retire in three years? Dave, I hope I inspired you to start taking some steps in that direction and you don’t need a million dollars to retire. Keep in mind that the money that you need, it’s a function of the lifestyle that you lead.

Okay. The last question we have– Actually, I’m going to do two more, but they’re of the same line of thought. Bob says, “Looking forward to seeing your video presentation at the end of September 2022. I’m sure the 8.5% inflation rate is going to have a big impact on everyone’s portfolio in retirement plans.” Bob, the simple answer is no, it won’t. Because as retirement planners, we’re looking out over long periods of time

Too often, individuals, human beings, we have the shortsighted vision. We want to make decisions. We want to take action. If the market’s down 2% or 3% in a single day, many of us are panicking, “Is the world coming to an end?” As retirement planners, we’re looking out over a 20 and 30-year timeframe. If we have inflation of 8.5% in one year, no, it doesn’t change the plan whatsoever.

Now, if that continued for nine years, yes, that is going to alter the retirement and lifestyle of many, many, many people. We do expect inflation to come back down at some point. It has lasted longer than we originally anticipated, but the federal reserve is going to continue to raise interest rates just like they did in the ’70s. We don’t believe as severe, but in the 1970s, they raised interest rates significantly, and eventually brought down inflation, but that did take many, many years.

We’re not in that same boat. We believe many, many differences, but ultimately the federal reserve will continue to act to raise interest rates which tighten the supply of money, which desensitizes growth and inflation ultimately will come down. Now, the flip side of that is we still have Congress printing a lot of money. We still have some supply chain issues. We still have many things that are working against that. The answer to your question is, no. We do not believe we’re going to have 8.5% inflation for the next 10 years. If we do a lot of retirement plans are in significant trouble.

Now the second part of this question was asked by someone else and they say, “Are you using nominal returns or real returns when running these analyses and these projections?” What really matters in retirement is the real return, which is essentially the nominal return. How much that you earn before inflation minus inflation? Essentially that’s what it is. If inflation isn’t 8.5% for the next 10 years, it truly wouldn’t matter if market returns were 10.5% or 12% somewhere in that range. Now it wouldn’t matter if you had a proper investment plan.

If you were sitting in cash because you were afraid, yes, your retirement would probably be destroyed. We’re using real interest rates, and historically, whenever we have high inflation, the market does go down at first, but then it tends to do pretty well in periods of increasing inflation. If you’re properly invested, this is why investment plan or risk management is so important and it’s the first step in our retirement success plan process. If you have the proper risk management and investment strategy over time, over many, many years, the inflation rate won’t matter nearly as much as if you were all in bonds or sitting in cash, or really were just too scared to make any investment decisions.

Conclusion:

All right, thanks for getting these comments in. I’m going to do another response video in a couple of weeks. It won’t be as long between videos as it was last time, but we really do appreciate the comments, it gives us great ideas for content. We encourage you to continue to support the channel. You can do that by subscribing down below, and we look forward to seeing you on the next video.

Summary
Let’s Talk About Your Retirement Comments and Questions
Title
Let’s Talk About Your Retirement Comments and Questions
Description

"Your retirement comments and questions are appreciated, so, let's talk about them! Whether it's Social Security, Mutual Fund Fees, IRMAA Tax, let's get into the comments you've left, and We'll try and answer them for you. "