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Welcome to personal finance for long-term investors, where we believe Benjamin Franklin's advice that an
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investment in knowledge pays the best interest both in finances [music] and in your life. Every episode teaches you
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personal finance and long-term investing in simple terms. Now, here's your host,
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Jesse Kramer. Welcome to Personal Finance for Long-Term Investors, episode 127. My name is Jesse Kramer. By day, I
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work at a fiduciary wealth management firm helping clients nationwide. You can learn more at
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bestinterinterest.blog/work. [music] The link is in the show notes. And by night, I write the bestinest blog and I
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host this [music] podcast. I also put out a weekly email newsletter, which as of now uh just crossed 4,000 active
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weekly readers did the newsletter and and all those projects, the blog, the podcast, and the newsletter, help busy
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professionals and help retirees avoid financial mistakes and grow their wealth by simplifying their investing, their
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taxes, and their retirement planning. And today I'm going to focus this episode on the act of retirement itself
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in part today helped by the author of the book Retire today and that author is Jeremy Kyle. But first we'll do a quick
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review of the week. This one comes from CJ from NorCal Northern California. CJ says, "Must read for financial
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education." Maybe CJ means must listen, but you know what? I write a blog, too.
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So anyway, CJ says, "Jesse Kramer talks personal finance in an easy to understand, entertaining, and empathetic
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way that will get you thinking the right way about your money choices. From the teenager to the retiree, this should be
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near the top of everyone's podcast library." Well, thank you CJ very much
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and I would be happy to send you a Supersoft podcast t-shirt. Simply uh email me jessebinest.blog
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and we will get you hooked up with that. And before Jeremy Kyle joins us today to
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dive into some of his favorite retirement topics, I have a little monologue where I'm going to dive into
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some of my recent, you know, the little corners of the retirement planning world
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that I've been diving into. And the first one is from an article I recently wrote. And the article is called about
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that free steak dinner. We will include a link in the show notes. It was inspired by a a reader named C. And and
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the short version of C's story is that she went to a lovely free dinner uh sponsored by a financial investment
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company who would like to take her traditional IRA and convert it to a Roth IRA via something called a fixed indexed
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annuity. They would pay uh C a 17% bonus on her roughly $600,000 in traditional IRA and SE IRA and 401k and then over
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the course of 10 years they would convert that amount to Roth dollars keeping her income low enough to not
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trigger any sort of Irma increase and that's again their language to her and
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then as she understands it her only risk and this is again is her quoting the financial institution here her only risk
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is the opportunity cost of not maximizing market gains and so see thank me in advance for any insights she was
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willing to provide. Well, when I read what she had outlined, my my radar detector rapidly kind of wore to life,
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and I was getting ready to sound a loud red alert like they do on uh Star Trek: The Next Generation.
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>> Red alert. All hands stand battle stations. >> So, first, let's define this lackluster
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tool. What exactly is a fixed indexed annuity? A fixed index annuity, FIA, I I'll just call it a fixed index annuity.
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It's easier than probably saying FIA is an insurance product that promises two
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things. First, it promises you principal protection that your initial investment
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can't lose value due to market declines, but then [snorts] it also promises you
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some upside potential because the returns of the annuity are tied to a market index, say like the S&P 500, uh,
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but only partially tied. So, here's how it typically works. The insurance company, they take your premium, your
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initial investment if you will, and they invest it conservatively, mostly in bonds. Then they use some of the
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interest earned from the bonds to buy options, option products on a a market index like the S&P 500. If the index
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goes up, you get a portion of that gain through something that's called a cap or
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a participation rate. If the index goes down though, you earn zero. You don't
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lose money either, but you earn zero. So, it kind of sounds nice, at least the way I've described it so far. There's no
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real downside. There is some upside, but as you might guess and as you might know
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from my previous episodes and previous blog posts and everything I really do, I think there are way more reasons to
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dislike fixed index annuities. The first one, the very high opaque costs. The commissions paid to salespeople of these
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products are often in the 6 to 10% range upfront, hidden from the investor. those
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costs are just baked into the product's kind of internal mechanics, resulting
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in, of course, a lower crediting rate and slower growth for the client. So, for this fixed index annuity that the
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original reader C was considering, the $600,000 in principle that she would have put into the product upfront
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probably would have resulted in a $35 to $60,000 commission for the salesperson.
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And that fact alone ought to give us some pause. It makes me think of that famous Charlie Munger quote, "Show me
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the incentives and I will show you the outcome." If you're going to pay someone
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$50,000 to sell a product, they're really going to push that product probably whether it's a good fit for you
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or not. The second reason to dislike these products is just the complexity and the confusion. I think the jargon
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behind annuities is complicated, right? I've already used some of these words,
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cap rates, participation rates, spreads, reset periods, surrender charges, and and here's a quote from the annuity
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industry itself. One reason annuities can be confusing is that the language used is often complex and technical. The
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Alliance for Lifetime Income, that's a industry organization, learned that the
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current jargon makes most consumers feel confused and disengaged. In response, the Alliance for Lifetime Income,
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created a plain language annuities language glossery to help you better understand the beneficial retirement
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income option. In other words, everybody's confused by the language, including many professionals. the
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numbers and then the way those numbers interact. It's usually much more complicated than the jargon. And that's
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a problem, too. Every annuity uses its own verbiage in unique ways and then combines confusing semantics with
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actuarial math. It's nearly impossible for a lay person to fully understand what they're getting. It's often
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impossible for financial professionals to understand what some other person's
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annuity was. I think that complexity, it hides the fees and it hides the the limits, the upper limits of what these
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products can do. I've had to work with people looking to unwind these annuities
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and I I just simply detest how complex they are. I'd like to think that I can
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understand complex things and even I oftentimes struggle unless I really really really dive into the details to
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understand what is going on under the hood of these products. My third reason for disliking them, limited upside. The
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fact that a fixed index annuity is market linked is a misleading promise. If the market grows by 15% and your
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fixed index annuity has a 6% cap, well, you only see 6% of the 15% growth. Now, they're sold as market linked to make
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you think you're getting a real shake at the market growth. But over time, these
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products really lag behind market growth by a significant margin. The fourth reason to dislike them, liquidity traps.
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Most of them lock up your money for 7 to 10 years before you can annuitize them and start to live off of an income
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stream. And if you want out early, you'll face some sort of heavy surrender penalty in addition to that 6 to 10%
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commission you paid up front. This inflexibility just it runs counter to sound investor centered financial
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planning. Fifth, I already referred to this one, the misaligned incentives, annuities are often sold, not bought nor
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advised. And because of those big commissions, many non-fiduciary salespeople pitch them aggressively to
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retirees seeking safety, sometimes overstating the returns of the product or understating the downsides. So, one
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thing I haven't even talked about yet, and now we're going to pivot back to C's
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specific question. What about that whole annuity plus Roth conversion thing she was mentioning, if you recall, she said
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she was sold the idea of a fixed index annuity in particular for using it as a vehicle for a Roth conversion. And there
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are some other sales language in there, too, which I'll address first. She was
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promised a 17% bonus. The bonus isn't free money. It's not even real money. It
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sounds amazing, of course, but that's the headline they use to hook people. A
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real 17% bonus would result in actual money sitting somewhere in an account. But this bonus that is often tied to
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annuity products, it is not a cash bonus. It's a contract value credit that only applies to income calculations
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after the 10-year holding period, not to the actual account value that you could
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walk away with today. That 17% bonus is therefore offset by lower caps on your returns over the next 10 years. Right?
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Your index growth gets throttled down. It's offset by longer surrender periods
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like the 10 plus year uh surrender periods that are very common or it's offset by reduced liquidity, right? You
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can't easily access your money without penalties over this long 7 8 10 year period. You've got really high annual
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fees going on at the same time too. That 17% bonus pretty quickly gets eaten away. And like I said, besides, it's not
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a lump sum bonus. It's it's a uh a crediting bonus on the income that you'll collect a decade from now. My
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second issue that the 10-year Roth conversion plan certainly sounds smart, but it's also structured to benefit the
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annuity company, not the client, not the investor. A a gradual Roth conversion over time certainly can be a smart thing
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to do by spreading your tax payments out over time to avoid jumping into higher tax brackets or sure to avoid triggering
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Irma, but a fixed index annuity isn't needed to do that, right? You can hold
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investments in a simple lowcost IRA and still control the pace of your Roth conversions every year. They don't care
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about the Roth conversion. They care about locking your money into their product. That's why they suggest the
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10-year timeline, right? It's a trap, just like in Star Wars. It's a trap. It
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It's a trap that pays the agent a large commission and keeps you from easily
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changing course once you realize how limiting the contract is. Point number three, and this is one thing that C
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wrote to me where she said, "I think the only thing going on here, Jesse, the
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only risk is opportunity cost, and that is the sales line, but it's misleading
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because the real risks include liquidity risk, complexity risk, right? You may not understand how the product works
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until it's too late, return risk, of course, right? These fixed index annuities just lag simple 60/40
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portfolios by a lot every year. And then inflation risk, the returns might not even keep up with the cost of living."
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And the fourth issue is the the Roth angle. Again, it's a smoke screen. The sales pitch uses Roth conversions to
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sound like they're doing careful tax planning, but the fixed index annuity company isn't optimizing your taxes.
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They're selling a contract. A real tax planner could help you do the same Roth
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conversions without all the added costs or restrictions. So, the bottom line is that you can absolutely do a multi-year
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Roth conversion strategy. You just don't need a fixed index annuity to do it.
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Adding one into your retirement often makes things worse, not better. Again, annuities are sold. They're not bought.
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And so for some people, see, that steak dinner you attended might have been the most expensive free steak dinner of your
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lives. I know this might sound like scary fear-mongering, and yeah, I apologize for that, but I think it would
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be scarier if you said yes to buying one of these products. And last, uh, before
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Jeremy joins us, I'm going to read from another article, and the the the title
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of this article is pretty straightforward as to what the topic will be about. It's, "Are dividends and
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income part of my retirement withdrawal rate or my safe withdrawal rate?" And
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again, this comes from a question from Barry. Barry said, "Jesse, I'll need
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about $100,000 per year for my portfolio in retirement. I currently have $3 million in my retirement portfolio. It's
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producing about $60,000 in income and dividends per year for me, meaning I only need to sell about $40,000 net of
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taxes of the principal value to fund the rest of my need." And again, listeners,
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that's $60,000 in income and dividends and then $40,000 in actual sales of the
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investments. And uh Barry says, "By my math, the $40,000 that I'll need to sell
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divided by the $3 million portfolio value, that's about 1.3%." In other
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words, his withdrawal rate is way less than the four 4% rule, right? It's 1.3%,
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not 4%. Barry says, "Am I thinking about this correctly?" So, we we are going to
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answer this question. We are going to let Barry know if he's thinking about this correctly. I won't bury the lead.
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He's not actually thinking about it correctly. And so, we'll point out why.
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But before answering Barry's question, we have to ensure we're all on the same
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playing field. So, first, the 4% rule. If you're not familiar with the nitty-gritty details of the 4% rule, uh,
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I've got some excellent primers that we will link in the show notes for you.
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Some stuff about the basics, what the 4% rule is based on, uh, why many people are using the 4% rule wrong. We talk
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about is the 4% rule too risky. We talk about all the conservatism that's built
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into the 4% rule and why actually, uh, you know, many retirees, if you, uh, look at historical back tests, could get
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away with four and a half, five, five and a half, six% withdrawal rates, something like that. So, I won't dive
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too much into that topic right now. It's just worth understanding what the 4%
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rule is if you're not familiar. What's more interesting and getting really to
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the point of today's question, let's talk about where investment returns come
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from. No, this isn't the kind of question that children ask their parents and involve storks, we need to discuss
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where investment returns come from. Where does the growth come from? If you own stocks, if you own bonds, if you own
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real estate or anything else, how does that return on investment end up in your pocket? The answer of course is
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different for each investment class, but most investments provide their return to
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investors via two separate mechanisms. The first mechanism is that they regularly return some sort of cash flow
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to their investors. It could be interest from a bond. Could be a dividend from a
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stock, which is really like profit from a stock, right? I should say interest from a bond is because you lent someone
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your money and now they're paying you interest. A dividend from a stock is because you own a company. that
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company's making profits and they give you some of those profits as an owner.
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If you own real estate, you might be charging rent and you're collecting some
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of that rent, you know, net of any expenses as the owner of the real estate. So the point is that investments
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oftent times return cash to their owners in some way. But then the second mechanism is that the investment itself
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appreciates in value over time. This could be a stock, a company increasing in price over time as the underlying
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company grows and becomes more profitable. It could be the building you own, the real estate you own growing in
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value due to capital improvements or due to increased demand in its local market.
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In the bond world, it could just be a bond value going up because global interest rates decrease. And now all of
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a sudden, your bond, which is paying a higher interest rate, becomes more valuable to investors. So for a typical
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retirement portfolio, portfolio growth equals dividends plus interest plus capital appreciation. So dividends and
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interest are are kind of one thing. That's the cash flow back to you. And then capital appreciation is the second
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thing. It's the value of your assets actually going up over time. So when someone says, you know, a 60/40
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portfolio grows at 9% per year on average, what they're actually saying is that 9% equals average dividends plus
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average interest plus average capital appreciation over time. So, getting back to Barry's question, do dividends and
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income count toward that 4% rule, the 4% annual withdrawal rate or whatever rule
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you want to use, 4%, 5%, 6%. The answer is yes. If dividends and income are leaving your portfolio, they are part of
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your withdrawal rate. If you extract 2% of your portfolio via income and dividends and then another 1.3% via
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selling assets, which is kind of what Barry outlined in his math above, then Barry's withdrawal rate is 3.3%. It's
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the sum of the dividends and income, which was 2% plus 1.3%, which was selling assets for capital gains. Those
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dividends and income, they are not free money. Don't need to get into that topic
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right now. Some of you might have heard me talk about it before. You might have heard other people talk about it before,
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but dividends and income are not free money. They are one of the key components of your overall portfolio
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return. And if you weren't extracting those dollars via dividends and income,
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you'd reinvest them or the companies would reinvest them on your behalf and and compound those dollars over time.
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Believing that dividends are are free is one of the biggest misconceptions in especially DIY investing. I think very
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few professional investors think that dividends are free. They know better. But I think there is an interesting
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clutch of DIY investors on the internet who uh are really convinced that dividends are free. Very interesting. So
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that really is the answer to Barry's question. You know, I know Barry was quoting the 4% rule. And as many of you
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know, the the 4% rule, any withdrawal rule, it's just a rule of thumb. It's a
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starting point. It's a good way to do some back of the napkin math, but it does become pretty limited. You need to
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go deeper. And so, Barry, I would recommend you try to do maybe a long-term cash flow model to analyze
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your portfolio's planned withdrawal sequence over time, including, of course, income or dividends from your
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taxable account. That withdrawal sequence, it's likely to be lumpy, right? It's not going to be constant.
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It's not going to be 3.3% every year. It'll change for sure once you start
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collecting social security. It'll change again when you hit RMD age. Some years
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are probably going to include Roth conversions or or the realization of 0% capital gains or something like that.
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You should do your best to try to plan that out all ahead of time. And starting your retirement without taking that
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detailed step is probably a risky move. So, if you haven't taken it yet, there's
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no better time to start than right now. Thank you very much for that question, Barry. Here's a quick ad and then we'll
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get back to the show. Every January we make the same promises. Eat better, work out, read more books, and of course,
00:17:07
something about money. You know, this year is the year I finally get my retirement plan organized. Personal
00:17:12
financial planning is one of the most common resolutions out there. So, if [snorts] 2026 is a year you want real
00:17:18
clarity, serious financial planning, a full review of your complex financial picture, or just someone to help you
00:17:23
make good decisions with confidence, I'm currently accepting new clients. You can
00:17:26
head to bestinterest.blog/work and fill out the short form. Let's make better finances the resolution that
00:17:33
actually sticks this year. And with that, let's bring Jeremy Kyle onto the show. Jeremy is a certified financial
00:17:38
planner and chartered financial analyst. He works with clients from uh from his home near Milwaukee, Wisconsin. He hosts
00:17:45
the Mr. Retirement YouTube channel and he hosts a podcast called Retirement Revealed. He also recently published a
00:17:52
book called Retire Today. Jeremy, you could say, likes Retirement and I'm glad
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he's here to share with us today. >> [music] >> Jeremy, you know, you you've built a
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career around helping people step confidently into their retirement. So, when you zoom way out, maybe we can
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start there. We zoomed way out. Here's just a a a maybe this is a softball question or maybe this is actually a
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hard question. I could see it going both ways. What do you think people misunderstand the most about the
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retirement decision itself? The biggest misunderstanding with retirement is how long you might actually be in
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retirement. And there's two parts of that equation. That's why I call it the
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retirement longevity number. It's not just life expectancy, but how long you
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might be in retirement. And there's the beginning, there's the end of your
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retirement. At the beginning, if you ask a 55year-old when might you retire or when you planning to retire, they'll
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tell you 65. But if you ask a 65year-old when did you retire, they'll tell you
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62. Most people retire three years earlier on average. Which is why I encourage you to be ready to retire
00:19:01
three years earlier. >> Whatever your number is in your spreadsheet of I'm going to retire at
00:19:05
this date, subtract three. That's your target so that you'll be ready to retire
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in case you're like the average American who retires early. Or maybe you do the
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math, you get there and you say, "Why am I stick around for 3 years?" So that's
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the beginning part of retirement. But there's a lot of misunderstandings on the end of retirement. your life
00:19:23
expectancy. How long might you expect to retire? It's tough. I can't blame you
00:19:29
for getting it wrong, but chances are you're getting your life expectancy wrong. One part of it is when you read
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the news articles about how long people live, you're going to read 78. >> Yeah.
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>> 78 is the average life expectancy in America for a newborn child. If you are
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planning to retire, you're a lot closer to 65 than you are to zero. And you need
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to plan for your retirement based on being 60 years old, 55 years old, 65 years old, whatever it is. And your life
00:20:00
expectancy is a lot closer to 85 than it is to 78. But who cares what the averages are? Go out, get your own
00:20:07
personal longevity estimate place called longevity illustrator.org. Free site. And I am such a huge fan
00:20:15
because you can get your own personalized longevity estimate and then you're almost there. You're almost there
00:20:21
because you need to understand what life expectancy means. It's the median. It's
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just the halfway point. Half the time you'll die before that. Half the time you'll die after that. You'll live
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longer than that number. And so you want to get an accurate number, but you also
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want to consider what happens on both sides of that line. What happens to you and your spouse and your finances if you
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die before you hit that number? What happens to you, your spouse, your finances if you happen to make it past
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that number? So, get an accurate estimate, but understand what happens on both sides of that. I've got a couple
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interesting follow-up questions. That was two you you sparked two really interesting thoughts for me. So, the
00:21:01
first one, let's go back to the the pre-retire who you said, you know, the average retiree ends up retiring three
00:21:08
years earlier than what they once predicted they would retire at. So, the question that naturally came to my mind,
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it's kind of a two-parter, is when does that change occur? So, you said, you
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know, a 55-year-old will say 65, but then by the time they're 65, the answer
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actually ended up being 62. So, it's kind of when does that change end up occurring for people? I'm putting my
00:21:28
shoes my my myself in the listener's shoes right now. But then also, what are
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those biggest approximate causes that lead that average retiree to pull back their retirement date by 3 years? That's
00:21:39
a great question and I'm going to make some assumptions. I'm going to assume
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it's between 59 12 and 62. At 59 12, you know that your IRA and 401ks are available and that's very tempting where
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you start thinking, do I really want to put up with this anymore? you can get the money out without a penalty. So,
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that's a big trigger. >> 62 is another big trigger because >> do I want to put up with this anymore? I
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can just quit and get paid to not work by social security. So, I think those two are big ages kind of in between.
00:22:08
That's a big turning point. So, there's a bit of the the retirement I call it a
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retirement age trigger. >> Like you don't you're retiring, you're
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doing something because it's just kind of a a number that the government gave
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you or your company gave you, but there's still a trigger and a lot of people come with that. Sometimes it's
00:22:24
your health. Often times it's your parents' health. If you're 60 years old,
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your parents are 85 to 90. They start needing your help or your grandkids are just born, they're 5 years old, you need
00:22:38
to somebody needs to get them to the the bus stop, right? There's a lot of triggers that are family related.
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Everyone kind of thinks, "Oh, I might have to retire early because of my own
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health." It's usually somebody else's health or you're taking care of the
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grandkids or you got a new boss that's younger than your son and you think I
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can get social security and I don't have to put up with this. >> That's really interesting. Well, let's
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pivot then to the on the tail side of retirement. You said it was it was longevityestimator.org.
00:23:06
>> longevity illustrator.org. It's put out by the Society of Actuaries. There's no
00:23:11
one more qualified in the world to tell you how long you might live than the Society of Actuaries.
00:23:17
That's okay. We'll we'll make sure we include that link in the show notes. And
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just for the the listener who maybe wants to check it out but but hasn't checked it out yet, what kind of
00:23:26
questions do they ask you? And then in your experience, I mean, I think you did a good job of explaining. They still
00:23:33
present you with a median outcome, right? They don't have a crystal ball, but I'm I'm really interested to
00:23:38
understand kind of how accurate their medium projected longevity ends up being. This is the number one most
00:23:45
important number to your retirement planning uh is your longevity, how long you might live. So, take five minutes to
00:23:50
understand it ahead of time. You're making million-dollar decisions here. Learn about your longevity ahead of
00:23:56
time. What they do, they only ask four questions. They ask your age. They ask your gender. They ask if you are a
00:24:02
smoker or not a smoker. And they ask your general health. Are you average health, excellent health, or poor
00:24:09
health? And you might think that's four. Come on. Yeah. And so I had Dale Hall,
00:24:13
the uh head researcher for the Society of Actuaries on my podcast, Retire Today podcast. And I asked him that. He said,
00:24:20
"Well, we need to combine being accurate with also people going through and doing
00:24:27
it. And how much precision do you really need?" Right? If I ask you four questions and I get you 95% of the way
00:24:33
there or ask you a 100 questions and you don't even bother doing it, which one's
00:24:38
a better deal? And a lot of times all these other factors about, you know, family health, your own health, you have
00:24:44
a good idea and just answer it. Am I average health? Am I excellent health? Am I poor health? That's going to get
00:24:49
you most way there. And those are the most important factors. Your age, your gender, are you a smoker or not? And
00:24:55
just your overall level of health. So they get very specific just off of those and they'll give you the median. More
00:25:02
importantly, they'll give you the whole probabilities. A lot of people come to
00:25:05
my office and they're asking me about social security and what's the break
00:25:08
even age and what are the odds I'll make it to the break even age. I said let's
00:25:12
go here and let's find the odds that you'll make it to the break even age. So
00:25:16
you can go through and say oh the odds are 72%. >> So is that a number you want to make? Do
00:25:21
you want to take those odds? Those are pretty good odds. If you walk into casino you will take those odds.
00:25:25
>> But also they do something called joint life expectancy. If there's two of you,
00:25:30
it's harder for two people to die than one person to die. Or kind of the inverse of that, it's on average, if
00:25:36
there's two of you, one of you might make it not there. You'll be die below
00:25:40
average. One of you will live longer than average. And you can't just look at
00:25:45
your own individual life expectancy. You've got to look at the life expectancy of the couple. You got to
00:25:50
look at the life expectancy of the person that's likely to make it above average. So, it's that joint life
00:25:56
expectancy is a huge thing to look at when you're a couple. >> Yeah, totally totally agree with that.
00:26:01
That's really interesting. The the the four questions are really powerful and I
00:26:05
think it it illustrates to me for example, I know the one question was about smoking. I I know if that's one of
00:26:11
their top four questions obviously that smoking that binary option must play a really large must have a really large
00:26:19
influence in the outcome of how long you live. And the other thing you made me think of, Jeremy, is that quite
00:26:24
understandably, I think people, we have a hard time with what I would call conditional probabilities. And you
00:26:30
brought it up earlier. I I liked your example with um you know, you look it up in the newspaper, you see an article,
00:26:35
the average person lives to 78, right? That's the average newborn. But once you're already listening to this podcast
00:26:41
today and you're 55, the question should be, what's the average age that you uh
00:26:46
live to conditional upon the fact that you're already 55 years old? Maybe I'm
00:26:51
phrasing that in a way that a statistician wouldn't appreciate, but the point is that all these
00:26:56
probabilities that retirees have to deal with. You've already avoided some of the
00:27:01
negative outcomes. So, it's really, you know, how long will you live conditional
00:27:04
upon the fact that you're not a smoker, that you happen to be a woman, that you're already 58 years old, and you're
00:27:10
in great health. That is a really important and fundamentally different question than just how long does the
00:27:15
average person live? So, I I I really like the fact, and I think that's really
00:27:18
unique take that you have. It's kind of simple in a way like once you hear it,
00:27:22
but right I think there's so many voices in this space that simply are not asking
00:27:27
that fundamental basic question and it takes you five minutes to get there. And speaking of probabilities, here's
00:27:34
another thing that people get wrong with life expectancy. They talk about their own life expectancy as if it's their
00:27:40
death certainty. Like people don't say, "I might live to 80 or I've got a 50%
00:27:46
odds of getting to age 82." They say, "I'm going to die at 80. I won't make it
00:27:51
into my 70s." No, that's not correct. I'm a math guy. I like looking at stuff.
00:27:55
I looked at another math longevity table. It's from the Social Security Administration. Nobody else in America
00:28:02
knows more about Americans dying and living than Social Security because they're paying out or not paying you
00:28:08
out, right? And if you look at their chart and you're 55, 60, 65 years old, whatever the number is, and you look at
00:28:16
your life expectancy, I'm 62 years old. My life expectancy is 87. And the odds
00:28:22
that you actually die at 87, 4%. >> 4%. >> You have less than 4% chance of actually
00:28:28
dying at your life expectancy. You have a near certainty of not dying at your life expectancy. So get the number
00:28:36
correct and then think about what is the near certainty that I won't actually
00:28:41
live to that number and make your decisions based on that. That's so funny. That's so interesting. Well, I
00:28:47
guess speaking of those conditional decisions, Jeremy and and you already did mention social security. I really
00:28:51
liked your take on the on the spousal decision about or or maybe the fact that you know one spouse is likely going at
00:28:57
least one spouse is going to live a long time. that might play into the social security decision at all. But I don't
00:29:03
want to lead the witness here. I mean, what is your take on social security claiming strategies for lack of a better
00:29:10
term? Yeah. So, two parts of social security is one, you ought to learn the math and actually do the math. And when
00:29:16
you look at social security, especially if there's two of you, if there's two of
00:29:19
you, >> your benefits grow by roughly 8% per year by waiting. But if there's two of
00:29:25
you, one of your numbers is bigger. and 8% on a bigger number is a bigger number. Your default thought is you
00:29:33
probably want to take that bigger number and wait a little bit longer than you expected and you probably want to take
00:29:38
that smaller benefit and maybe take it a little bit earlier than you expected because it matters a little bit less.
00:29:44
It's a smaller number and the rules of social security, the survivorship is going to show up to be the higher
00:29:52
number. the survivorship option. If there's two social securities, one of them is going to go away. It's a smaller
00:29:58
one. So, you got a smaller number that doesn't grow as much, that doesn't last
00:30:02
as long. Feel okay taking that a little bit earlier than perhaps you wanted or plan to, but then the bigger one is a
00:30:10
bigger number and it's a bigger deal for a longer time. Probably wait a little
00:30:14
bit longer on there. So, that's kind of a just a quick thought on it. But if you
00:30:18
want one thing to say, how should I approach and make my social security decision, forget the probabilities I
00:30:24
talked about earlier, forget about the break even calculator that you already have in your spreadsheet right now. I
00:30:30
want you to think of social security in terms of its official name. The official
00:30:35
name for social security is the old age survivor insurance program. It's there
00:30:41
to help you in your old age. It's there to help your survivor. It's there to be
00:30:46
insurance in case you live longer than you expected or inflation came in higher than expected or your market returns
00:30:52
weren't as much as expected. So when you're looking at your social security
00:30:56
and thinking of it of how does this help me in my old age? How does this help my
00:31:01
survivor? How does this help the insurance aspect of my retirement and things in case things don't go as well?
00:31:07
That's how you approach social security. >> Got it. And that that makes sense. And
00:31:11
and going back to the the spousal decision-making, just to make sure that I'm following along and and the
00:31:16
listeners are following along. The way I've heard it described before, let's
00:31:19
think of this imaginary couple with two different benefits, one larger benefit, one smaller benefit. I I think the way
00:31:25
I've heard it described is you know that when the first spouse dies, no matter
00:31:30
what, the smaller benefit is going to drop away and the larger benefit is going to continue on with the surviving
00:31:36
spouse. And it really doesn't matter. You know, it's either the larger spouse
00:31:40
dies first and the smaller spouse inherits that survivor benefit or the smaller spouse dies first and okay, the
00:31:48
larger spouse now continues that. So, you just know either way, the larger benefit is going to outlive the smaller
00:31:54
benefit and you'd rather just wait to let the larger benefit grow and grow and
00:31:58
grow a little bit extra. I mean, is that the underlying logic? >> That's exactly it. You should you should
00:32:03
become a financial adviser. >> Yes. Right. Right. I should start a podcast. Well, I mean, thinking about
00:32:07
the way that these different, you know, we've talked about social security, but
00:32:11
we know there are all these different aspects of retirement planning and holistic planning, I found, can feel
00:32:19
overwhelming to people. There are tax consideration, there's income planning
00:32:23
in retirement, how should that affect my portfolio? Do I need to think about estate planning? And sometimes in the
00:32:29
early conversations with people, it's almost like, I know I've got eight
00:32:34
different things I ought to be concerned about. I don't know which one I should
00:32:36
start with. So, how do you tend to sequence your conversations so that your clients or just people that you're
00:32:42
talking to don't feel totally overwhelmed and they have a a specific order to approach these retirement
00:32:48
planning problems. Yeah, that's exactly it. You want to take a comprehensive
00:32:52
look at your finances. You want somebody that takes a comprehensive look at your
00:32:56
finances, but you want to do it in the right order. It's kind of like you want
00:32:59
to make the first decision because it informs the second decision and on down the line. And you know what you're
00:33:04
referencing is the five steps I put in my book. I've got my book retire today.
00:33:08
I call it create your retirement master plan in five simple steps. One, because there's five steps. It's what I've done
00:33:14
for 22 years as a financial adviser to help you create your retirement master plan. But the order I take them in, you
00:33:20
might be surprised. A lot of people start with an order where way down the line in my opinion. The first thing I
00:33:26
think you ought to do when you're looking at your retirement is figure out how much is it you're going to spend in
00:33:31
retirement which is a bit of how much like what am I going to spend every month or every year but it's also the
00:33:36
how long that we have already talked about and a lot of people hit retirement and they're almost afraid to do some
00:33:42
retirement planning because they feel like I've got to do a budget and they hate doing budgets so they just put that
00:33:49
off which means they put off the retirement planning. I tell you don't do a budget. The only thing you have to do
00:33:53
to figure out how much you might spend in retirement is to look at is to look at how much you are spending today. And
00:34:00
the easiest way to do that is look at your paycheck. Whatever shows up in your take-home pay into your checking
00:34:07
account, usually what goes into your checking gets spent. You might make 150,000 for your salary, but if it's
00:34:14
only 3,000 every paycheck times 26 paychecks, it's $78,000 a year that you're spending on what I call your
00:34:21
lifestyle spending amount because you're it's coming in and you're spending that
00:34:26
money on whatever it is you do. And that's great. Go do what you want to do.
00:34:30
What's interesting though about your paycheck is it already took out your tax
00:34:33
cost. It already took out your health insurance cost. So that's the next two
00:34:37
things you put into your budget. You don't have to go out and build a budget
00:34:41
from the ground up. Just look at what's my take-home pay, that's my lifestyle
00:34:44
spending amount. Then let me put into my planning what's my likely health insurance costs, what's my likely tax
00:34:51
cost. You've taken care of most of it just right there. That's the first step
00:34:54
is to look at the the spending. Not let me look at the investments. That's on
00:34:58
down the line. And I suppose I mean does it matter after that point kind of what's next? Now I don't you know we
00:35:05
don't have to go into every bit of minutiae and detail. So, we start with spending. I like the fact that your own
00:35:10
paycheck kind of back you into a a rough outline of what your spending is, but where do conversations go from there? Or
00:35:18
is it just a case- by case basis? And it depends on what's going on in the individual circumstances. The next step,
00:35:23
step two, is what is it you make? Just because you stop working doesn't mean
00:35:28
you stop making money. You might be making money in retirement from a pension, from real estate, from some
00:35:34
annuity that you've already purchased before. And definitely you'll have
00:35:38
income from social security. A lot of these, especially with the social security and the pension, you got these
00:35:44
one-time decisions that affect the rest of your life. >> So, it takes some time here to figure
00:35:49
out what is it that I need to do with my decisions to help set me up for the whole lifetime. That's the second step.
00:35:56
The third step is I know how much I need. I know what's coming in from the consistent lifetime income. How do I
00:36:03
keep more of my money? Step three is keep. How do I project out and plan for the times that I have a lower tax
00:36:11
situation and the times I have a higher tax situation? And the way to do tax planning in retirement is to kind of
00:36:16
even those out. If you see here's a year down the road where I'm going to have a
00:36:20
high tax situation, I want to avoid income showing up that year. But if I have years down the road, often just
00:36:27
after retirement and before you turn on social security, if I have a projected lower income, lower tax rate situation,
00:36:34
you want income to show up at the lower tax rate, usually through Roth conversions. So the step three is the
00:36:39
tax planning, how to keep more of that. Step four is finally to invest your money. Most people think it's step one.
00:36:47
Most people think a financial advisor job is step one to go invest your money. You don't know what you're investing for
00:36:52
until you figure out the first three parts of it. And the biggest thing you want to think of with investing is when
00:36:58
do I need the money? It's not about picking the perfect stock and bond. It's
00:37:01
about having the money available when you need it. And if you need the money in the short term, you need short-term
00:37:06
money. If you need it available in the long term, you need long-term investments. The thing that's
00:37:12
interesting with retirement, why I think it's so scary, you spent your whole
00:37:15
career saying, "Invest for the long run. It's down the road." And then you got
00:37:20
down the road and now you got the shortterm. You got the short run and you need some short run money, but a lot of
00:37:25
times you think that's all you need. No, you still have a long ways away. You
00:37:29
need long-term money. You need short-term money. You need the right mix there. That's what you focus on in step
00:37:34
four. And then you get to the fifth step, which is what is it you leave behind? Some people leave behind their
00:37:39
money. Some people leave behind their mess. And I'm guessing you'd rather
00:37:43
leave behind money to the next generation versus leave behind a mess. So step five is looking at it's a bit of
00:37:50
what's the amount you might leave behind, but it's also what are the things you've done to prepare the next
00:37:57
generation either the documents or the the ways that you've set them up so that
00:38:01
you've kind of taken the risk off the table and make sure that things are going to turn out right even when they
00:38:06
don't happen to be all right. Interesting. I like the five-step process. I mean, it's it's very clean
00:38:11
and it's easy to remember. And I think as humans, we're kind of naturally
00:38:14
aligned to we we like when things go in order. And hey, five is an easy round number to keep track of.
00:38:21
>> Here's a quick ad, and then we'll get back to the show. Did you know my
00:38:24
written blog, The Best Interest, was nominated for 2022 Personal Finance Blog of the Year, and it's been highlighted
00:38:31
in the Wall Street Journal, Yahoo Finance, and on CNBC. I love writing, especially when that writing is to share
00:38:37
financial education. And I usually write one or two articles per week. You can read them all at bestinterest.blog.
00:38:45
Again, the web address is bestinterest.blog. Check it out. I think I heard you, Jeremy. I I want to say it was on
00:38:53
another podcast, although I'm not at this point. I can't quite remember, but
00:38:56
I think I heard you say that tax planning, so it was step three, it was that keep step is the place where most
00:39:04
maybe you said where most retirees leave the most money on the table or something
00:39:08
along those lines. So, I kind of wanted to zoom in on that one. I mean, whether it's a a single mistake that you just
00:39:15
see happening over and over again or whether it's just a a lack of knowledge
00:39:19
and a series of just, you know, missed opportunities that you see. I mean, what's going on there that makes tax
00:39:24
planning so important, but yet also so often overlooked? Yeah, your tax planning is often overlooked because you
00:39:31
spent 35 years working not really having much chance to actually affect your taxes, right? If you're a W2 employee,
00:39:39
you don't own a business and you're worried about that stuff. But if you're
00:39:41
a W2 employee, you get your W2, you give it to your tax person, it's kind of too
00:39:46
late, and you didn't really have too much you can actually do about it. But you hit retirement, you have so much
00:39:52
more opportunity to actually affect your taxes. And that's where the power comes
00:39:57
in of your tax planning where you get the choice of when do you take your money out and what type of money do you
00:40:05
take out, right? You could take money out in December or January. It's two different tax years. That's two
00:40:09
different tax situations. Or you've got your brokerage account, your savings
00:40:14
account, your traditional account, your Roth account. [clears throat] That's four different types of money
00:40:19
with four different types of tax situations. So when you plan out and look ahead and say when do I want my
00:40:27
money to show up to me? When do I want my money to show up on the tax return? Which account am I going to take money
00:40:33
from? You can make positive changes to your tax situation as in it'll be lower
00:40:39
in the long run. That's your projection. And I often see a 20% projected lower
00:40:46
tax burden over your whole lifetime. And if you want to depress yourself one day,
00:40:51
project out your entire level of taxes you'll pay over your lifetime. You might
00:40:57
be sorely surprised. It's probably a million dollars. >> It's a lot of money that you are likely
00:41:01
to pay in taxes over your lifetime. And if all it takes is a little bit of planning and kind of forethought to say,
00:41:07
"Oh, I'm going to pay taxes when it's lower. I'm gonna avoid taxes when it's
00:41:11
higher and you might get a 20% tax savings. It It seems well well worth it to me.
00:41:16
>> Definitely. One of my go-to phrases there is that we all have an obligation
00:41:21
to to pay taxes or, you know, by law we all have to pay taxes, but we also all have, you know, a right to not pay any
00:41:27
more taxes than we otherwise have to. And that's one of those foundational ideas behind tax planning that really
00:41:32
resonates with me. I mean, speaking of tax planning, Roth conversions, just to talk a little more about those, I think
00:41:39
sometimes Roth conversions are talked about like they're magic. Oh, and really, I mean, it's pretty nuts and
00:41:45
bolts. How would you help someone listening right now simply just figure out if they're a good candidate for a
00:41:51
Roth conversion, whether it's today or at some point in their future retirement? I mean, how does someone
00:41:56
know if they're a good fit or if actually it's just kind of not going to
00:41:59
work out for them? Well, everyone should consider a Roth conversion. And what you
00:42:04
do is you project out what your tax situation is going to be like. For me, I have software that projects out every
00:42:11
tax return from here until the end of time. I imagine you have software like that as well, too. Chances are, if
00:42:16
you're a do-it-yourself individual, you don't have access to that tax software.
00:42:20
But consider the kind of before and after situations when your taxes are likely to change before you're retired
00:42:27
and after you're retired, before you turn on social security, after you turn
00:42:30
on social security, before your RMDs, after your RMDs start. And one that's often overlooked is if there's two of
00:42:38
you while you're a married filing joint versus a survivor, a single tax return.
00:42:44
So that's eight before and after, as I just said right there. take a little time, maybe project out eight tax
00:42:50
returns and say, "Wait a second. There's some times here where I'm in the 12% tax
00:42:54
bracket. There's some times there I'm in the 24% tax bracket. What can I do to
00:43:00
try to pay taxes in the 12% lower tax bracket to avoid the taxes in the higher tax bracket? And often the way to do it,
00:43:06
the probably the best way to do that is to do a Roth conversion. is to intentionally pay taxes on purpose on
00:43:12
your traditional IRA by converting it over to the Roth IRA so that that growth now is tax-free and there's no RMD then
00:43:20
on the Roth IRA where you're not being forced out to do that. So that's how you
00:43:25
look at it ahead. But the biggest mistake people make when it comes to tax planning is just thinking they don't
00:43:31
have the control. You do have the control. take some time, put some uh pen to paper, get out the spreadsheet, and
00:43:38
project out these different times, find your low tax situations, try to pay taxes then. Yeah, it totally lines with
00:43:46
my understanding. And uh cuz I think the the funny situation that I thankfully haven't run into much, Jeremy, but it's
00:43:52
come in a couple times from from listener emails or reader emails is people who say, "You know what? I I
00:43:59
haven't really figured out, they might not even know this, that they haven't
00:44:01
figured out their long-term kind of tax bracket projections yet." Here they go.
00:44:08
And they say to themselves, "I've heard Roth conversions are good. I happen to
00:44:11
be 15 years old or 52 years old. I'm a VP at some big company. I'm making
00:44:15
$400,000 a year." and I'm doing a whole bunch of Roth conversions and I sit
00:44:19
there and [laughter] oh no, you're in like the 32 or 35% tax bracket and odds
00:44:24
are if you're making Roth conversions in that tax bracket, it's probably not
00:44:28
ideal for you. And just like you ended on, I mean, the whole point is to identify your lowest future tax years
00:44:34
between now and the end of time and to consider stuffing those years with with Roth conversions. People get convinced
00:44:41
that Roth conversions are magic and they want the magic. So, they don't really
00:44:44
think about their tax situation, but uh I don't know if that resonates at all
00:44:48
with you. >> Yeah, you've got to think about your tax situation because you want to project
00:44:51
out pay the taxes at the lowest time. Figure out when it's best to pay the taxes, that 52-year-old example there.
00:44:57
If they happen to do a withholding from their traditional account, that's a 10%
00:45:02
tax penalty on the withholding because they're below 59 and a half. So, you got
00:45:05
to figure out where you're going to pay the taxes from. But a lot of people think of the the binary of do I do tax
00:45:12
uh Roth conversions or not? And really the answer is should I consider it? Yes. Then the answer becomes well how much
00:45:19
and for how long and when? And so I had a couple came into my office a few years
00:45:24
back and they kept getting hammered with the Irma and the Medicare extra taxes. And so I projected things out and said,
00:45:30
"Well, with your required minimum distribution levels, you're just hitting
00:45:34
this one level just over and over again. But if you happen to use up the entire 24% tax bracket, you will jump to the
00:45:42
next Medicare cost. It's going to cost you extra Medicare for a couple years.
00:45:46
You're going to pay the taxes now at 24%. But hey, you're projected to always
00:45:52
be in the 24%, which at the time was projected to go up even higher. >> And so we did the math and said if you
00:45:57
just happen to take this, it was a $600,000 account. if you convert it over the next three years, 200,000 per year,
00:46:05
you'll save in the long run. It made a lot of sense. This was late in the year,
00:46:09
December. I helped them do the Roth conversion. I said, "We'll do the next
00:46:13
one in January, right?" Only four weeks later. So, I called her and said, "It's
00:46:17
time to do the second of the three." And she said, "Don't worry about it. No
00:46:20
need. It's already been done." >> So, what do you mean? Our plan was to do
00:46:24
three years in a row. She said, "Yeah, but you said it was a good idea, so I
00:46:28
just did the whole thing. I figured just rip the band-aid off. It's not going to
00:46:31
matter anyways. No. >> And by then it was too late. And I said, "Well,
00:46:35
>> all right. Well, thanks for letting me know." And I thought, I wonder how much
00:46:37
it did matter to her cuz she did not stay in the 24% tax bracket for 3 years. She jumped into the 32% tax bracket and
00:46:46
then the 35% tax bracket for that particular year. I did the math. It was $23,000 of extra taxes because she said,
00:46:53
"It doesn't matter. Let me just take care of all of it." She follow what you
00:46:57
said. A lot of people think the Roth conversion is a magic magic pill. You got to plan some things out ahead of
00:47:02
time. >> Yeah, that's a very painful way to rip off the ba the band-aid. 20 $23,000
00:47:07
worth of tax pain. >> Extra taxes. Yes. Exactly. >> Right. Right. Extra taxes. Well, let's
00:47:12
pivot. I' I've got an interesting kind of emotional question for you again. I
00:47:16
think that from my vantage point, there are some big emotional hurdles that people face, especially in either the
00:47:24
last few years leading into retirement or sometimes the first few years at the start of retirement. So, I'm just
00:47:30
wondering in your experience, what are some of those really notable emotional hurdles that that stick out to you that
00:47:36
that people face in that retirement transition phase? >> Yeah, I'd say there's two emotional
00:47:42
hurdles I see in there. One is people think, "Have I have I done enough? Like
00:47:47
am I really going to be okay?" You know, I've never done this before. A lot of
00:47:51
people say to me, I don't know what I don't know. Like I'd hate to retire and
00:47:56
then realize I made a mistake and it's too late to fix it. So that's why like
00:47:59
let me guide you through the process that I've guided hundreds of people before. So you feel a lot more confident
00:48:04
in your money when you know more about your money. And that extra confidence actually helps you make better money
00:48:10
decisions itself. So you want to have a process. That's a a mistake, an emotional, right? If you there's a lot
00:48:17
to worry about if you don't know what to do, but if you know what to do addressing each worry along the way. The
00:48:23
other thing people are concerned about is I've been spending I've spent 35
00:48:29
years saving into my account statements. I've spent 35 years adding to them. How
00:48:36
am I supposed to start taking the money out? I'm a saver and that's a good
00:48:40
thing. and you want me to become a spender and that's absolutely evil. So there's this huge identity people put
00:48:46
into their minds about I am a saver and I cannot become a spender. And my encouragement there is you're not a
00:48:53
saver. You're not currently a saver. You started out planning. You're a planner.
00:48:59
You've been planning towards retirement. The tool, the tactic you were using was
00:49:04
saving, but you're still a planner. And now it's time to use the next tool which
00:49:09
is spending. And so if you can think of yourself of I'm a planner, not a spender
00:49:14
or a saver, you can continue on saying I'm just always been planning. I'm still
00:49:19
planning. It's just I'm using a different tool. But that's I hear that a
00:49:22
lot of I'm a saver. I can't become a spender. And try to disassociate your
00:49:29
identity with those two words and add back in the word that you've always been. you're a planner and just because
00:49:34
you're taking money out of your accounts, it still means you're a planner.
00:49:37
>> I really like that. I, you know, it's just a slight pivot, a slight pivot to
00:49:42
being a planner. I think that does, it resonates with me. You can probably tell by the way I'm stuttering over my words.
00:49:48
I would wager that resonates with a lot of people out there, too, because it is it's kind of like two sides of the same
00:49:55
coin, right? The saving and the spending are two sides of that planning coin. I'm
00:50:00
curious, do you find any any sort of issues? I shouldn't say issues, but in your conversations with clients once
00:50:07
people are a year or two or five years into retirement, do they ever come back to you and say, "Boy, retirement isn't
00:50:13
really what I thought it would be." And if they do come back to you and say
00:50:16
that, I mean, what are the usual reasons why? That is interesting. If uh in the financial advisor space in the
00:50:22
retirement researching space, that's a big hot topic of you want to retire to
00:50:26
something instead of from something and you want to have a a phase retirement and you you want to change your identity
00:50:32
from being this worker person to being whoever it is you want to be out there. And I agree with that for a lot of
00:50:40
people. I just don't see it. >> I just I really don't see it. The people
00:50:43
that come to me, they're not doctors and lawyers and business owners. There are
00:50:48
people that have worked for the same company, a public company with a pension for 35 years. They've been looking
00:50:55
forward to collecting that pension. They've been looking forward to spending
00:50:57
the time with their grandkids. They've got this list of things they want to do.
00:51:01
And they retire. They love it. And they tell me, "I wish I done it earlier." And
00:51:06
they also say, "How did I have any time to do anything when I was working? I'm
00:51:09
not working and I'm still busy as ever." So, it's this interesting thing. It's
00:51:14
like a a certain persona that happens to be the persona that a lot of uh adviserss and retirement researchers and
00:51:22
academics are in. I don't see that outside of that. That's really interesting. I I like that perspective
00:51:27
too. And uh I can admit I think both my parents are very much in your court or in the court of maybe your clients,
00:51:34
Jeremy, where um they both were public school teachers. And I know especially having some conversations with my dad,
00:51:39
he couldn't wait to retire. It's not like he didn't like work, but he knew
00:51:43
exactly what he wanted to do with his free time, and he never looked back. And I he's just, you know, happy as a pig
00:51:48
and slop with with what he's spending his time on in retirement. So, it really
00:51:51
is maybe, you know, to each their own, and um there's a spectrum of outcomes
00:51:55
there. You know, Jeremy, you've shared so much with us today from kind of your
00:51:59
real retirement focus, retirement expertise, and I know you've mentioned podcasting, I think YouTube, and your
00:52:05
book. Let's talk real quick. If someone wants to follow up, if they want to start consuming your content on a
00:52:09
regular basis, maybe they want to order a copy of the book, where can they go to
00:52:13
check out the rest of your work? Yeah, you're listening on the podcast now. Go
00:52:16
out and check out my podcast, Retire Today, which is also the same name as my book. The book is Retire Today, Create
00:52:22
Your Retirement Master Plan in Five Simple Steps. You can find that anywhere, but you can also go directly
00:52:28
to jeremyle.com, je.com. If you're a video person, check me out on YouTube. I'm Mr. Retirement on
00:52:39
YouTube. So, Mr. Retirement is what you would type in to find me there. That is an awesome screen name, Mr. Retirement.
00:52:46
Well, Jeremy Kyle, Mr. Retirement, thank you so much for joining us on Personal Finance for Long-Term Investors. Thanks
00:52:52
for having me on. >> Thanks for tuning in to this episode of Personal Finance for Long-Term
00:52:56
Investors. If you have a question for Jesse to answer on a future episode, send him an email over at his blog, The
00:53:03
Bestin Interest. His email address is [email protected]. [music] Again, that's jessevestinterest.blog.
00:53:11
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00:53:22
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00:53:28
personal podcast meant for education and entertainment. It should not be taken as
00:53:33
financial advice and it's not prescriptive of your financial situation.