Jason and Emilia discuss retirement risks, public policy risks, pension risks and alternative investment risks.

Below is the full transcript:


Announcer: Welcome back, America, to Sound Retirement Radio where we bring you concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement.

Now, here is your host, Jason Parker.

Jason: America, welcome back to another round of Sound Retirement Radio. I have Emilia Bernal in the studio with me this morning. Emilia, welcome.

Emilia: Good morning, everyone. How are you doing?

Jason: Doing good, all right. We’ve got a joke and a verse to share with everybody this morning. I’d thought I’d start with the verse to renew our minds. This comes from Proverbs 15:31: “Whoever heeds life-giving correction will be at home among the wise.” All right, that’s awesome. Then I have a joke for you, Emilia. I know how much you enjoyed these jokes.

 Emilia: I do.

Jason: (Laughter) What did … Where did my joke go? Oh, yeah. What did one shark say to another shark after they ate a clown fish?

 Emilia: After it ate a clown fish.

Jason: This tastes funny. (Laughter) My god, I really like that one. That’s pretty funny.

 Emilia: That is funny.

Jason: Episode 069, Episode 69, this episode is Retirement Risks.

Emilia: Yes.

Jason: We want to just talk about some of the risks that are out there that are actually people are experiencing right now today. Now, there’s a lot of different risks and we’re not going to cover them all, but we want to talk about some of the ones that have been in the headlines here recently.

Emilia: Yes, definitely. Just this week, Jason, there were some big changes to Social Security claiming strategies. I wanted to ask, can you please explain more about that and how it’s going to affect our listeners?

Jason: This is a big deal. I think this is especially relevant because just last week, the topic of our show was having a Social Security backup plan. Here we are, Congress passes new rules. Overnight, the law changes and now we have to be reevaluating our retirement cash flow plan. This is a perfect example of public policy risk. What happens if entitlements change? What happens if Social Security benefits are reduced? What happens if there’s means testing for Medicare and certain individuals have to pay more for Medicare? What happens if taxes go up?

I mean these are public policy risks. The really very front and center with an $18 trillion debt that we’ve managed to rack up in this country, people should be concerned about how it’s all going to get paid for. What I’d like to do, Emilia, is I want to share with everyone the specifics on what happened with the Social Security claiming strategies and I just want to read this article for our listeners and then we’ll come back. We’ll do a little bit of question and answer on this, but then there are some other risks that I want to discuss, too, that have been in the headlines here recently.

On November 2nd, 2015, President Obama signed a budget deal that dramatically changed Social Security claiming rules. For many Americans Social Security is the foundation of a good retirement income plan. These changes to Social Security underscore the importance of having a good retirement cash flow plan that is flexible and can withstand public policy risks.

I’ll remind our listeners, too, Emilia, if they visit SoundRetirementPlanning.com on this specific post, we’ve created as login, a sign-up for people that want to be notified about changes to Social Security and how this is going to roll out and how it’s going to impact them. That’s something that’s available to them right there from the website.

 Emilia: Great.

Jason: Under the old law there were two primary claiming strategies that were commonly known as File and Suspend and the Restricted Application. We had been able to help many retirees plan to increase their lifetime Social Security income by understanding how to structure claiming strategies that maximized benefits over two peoples lifetime. In many instances this planning had the potential to significantly increase projected lifetime income from Social Security.  The new budget deal will begin phasing out the File and Suspend and Restricted Application strategies. We’re working hard to understand the full impact that these changes will have on our clients, our community and the existing retirement cash flow plans that we’ve already created. Below are a few highlights that may be important to our listeners in their retirement income plan.

First of all, the restricted application for spousal benefits. The old law allowed you to file a restricted application in order to restrict taking your own benefit and instead receive just a spousal benefit based on your spouse’s earnings record. By filing a restricted application at your full retirement age, you would allow your own Social Security benefit to continue to earn 8% delayed retirement credits. Then at age 70, you would switch from your spousal only benefit to your own benefit.

The new law that has passed will begin phasing the restricted application strategy out. For people who were born before January 1st, 1954 … That’s an important date so if you were born before January 1st, 1954, the option to file for only spousal benefits will continue. However, if you’re one of the lucky ones whose birthday was January 2nd, 1954 or later, an application for spousal benefits will automatically trigger entitlement to all other benefits. You’re no longer going to be able to file a restricted application and only receive your spousal benefits while delaying taking your own benefit if you were born after January 2nd, 1954.

I think that’s a really important piece for the restricted application specifically. Some people are still going to be able to do it, some people aren’t depending on your birthday.

The other piece there is the file and suspend. Under the old law you could voluntarily suspend your benefits. For example, if you were full retirement age, you could elect to file and activate your benefit and then put your benefit into suspense. This would allow your own benefit to continue to earn 8% delayed retirement credits per year, and by activating your benefits it also gave your spouse, who was full retirement age, more claiming options. Because you had filed for benefits, your spouse became eligible for spousal benefits based on your earnings record. Your spouse then had the choice of restricting their application to file for only spousal benefits or file for their own benefit.

Now, I know this can get a little bit confusing, but the new law causes all benefits to stop being paid under a voluntary suspension. If you suspend taking your own benefit, then your spouse will no longer be able to collect a spousal benefit during the time your benefit is suspended. The old law said that if you filed for your benefits at age 66 and put them into suspense, you could file for a lump sum of deferred benefits at a future time. The new law also eliminates the ability to request a lump sum of benefits.

The changes to voluntary suspension are being implemented much more aggressively than the restricted application changes. If you have already filed for benefits and put them into suspense, you’re going to be grandfathered in under the old law until you reach age 70 or you un-suspend your benefits. The new law only gives you 180 days to file and suspend benefits. If you’re currently full retirement age, then you have the next 180 days to file and suspend, otherwise your benefit election will fall under the new law.

 Emilia: I have a quick question on that, Jason.

Jason: Yeah.

 Emilia: Does that mean that once you come full retirement age at any time or just as of right now when this has changed?

Jason: Yeah. For most people right now, full retirement age is 66 or maybe 66 in a few months. They’re the people that have this opportunity right now to file and suspend.

 Emilia: Only them right now.

Jason: Only them.

 Emilia: Oh, so it’s just this next 180 days.

Jason: Yeah. If you’re 63 years old right now, that you’re not going to have that opportunity. You’ve lost out on that opportunity. Yeah. The good news is that widows benefits in the new law did not change. Widows will continue to still have the flexibility to restrict their applications. For some of the people that we have served, a good Social Security claiming strategy made the difference between being able to retire with confidence rather than worrying about potentially running out of money in retirement. I do think it’s important to remember that our elected leaders literally changed the rules overnight.  I recently wrote an article titled Do You Have A Social Security Back up Plan that our listeners, we just addressed that last week, but … Then I also have some additional resources on the website regarding these changes. We have got an article at Forbes, we’ve got an article at Investment News.

Then we also have … The budget was titled the Bi-Partisan Budget Act of 2015. I think that’s funny that they call it the Bi-Partisan Budget Act because the reality is, if you look at how this was split in terms of votes, just about every Democrat voted for this and they barely had enough support from the Republicans to pass this in the House in the Senate. It’s official. President Obama has signed off on it, so these changes to Social Security are in effect now. What’s really frustrating about that is this public policy risk, that we can do planning based on the way the rules work yesterday and now all of that planning just completely tossed out the window. For some people, we have to look at this all over again.

 Emilia: Great. I just want to remind our listeners, if you go to this article on our website, SoundRetirementPlanning.com, you can click to register for important security claiming strategy updates. If you want to learn more, just visit our website.

Jason: Sometimes I wonder with all of these, we’ve got this warning on the front page of our Social Security statement that says by the year 2033, Social Security is only going to be able to pay 77% of the benefits do.

 Emilia: I have a question then, Jason. Does that mean those benefits are going to last longer now that they’re making these changes?

Jason: Potentially. Potentially that could be a good outcome here because the Social Security Administration said that it was costing them billions of dollars a year by these other claiming strategies existing.

 Emilia: Interesting.

Jason: Sometimes I wonder if maybe we should start calling this Social Insecurity.

 Emilia: Maybe.

Jason: Because it’s really getting wobbly out there. We have our elected leaders that they just want to spend more money, the solution is … I was just listening to an interview from Bernie Sanders who calls himself a socialist, and he wants college to free for everybody and he wants Medicare expanded to every person in the country. It’s like we’re already spending $500 billion more than we’re bringing in, in revenue as a country. I don’t understand how you fix our spending problem by spending more money. I mean it just … Yeah, it’s very interesting to me. It’s become a political issue. Who you vote for? We’re in an election year and who you vote for is going to have a big impact on what’s going to happen.

Certainly, when you look at this and you say, “Well, geez, how our elected leaders voted on it this time around is going to be …” For some high income earners, higher income earners, this could mean as much as $50,000 in loss of benefits from Social Security over a married couple’s lifetime. That’s a lot of money on loss benefits. I think it’s really important not just to listen to what people say but also look at their track record. How are they actually voting that’s impacting real people’s lives?

 Emilia: Yeah. I did have a question. A lot of these claiming strategies you said were about having their spouse being able to do certain things with the claiming strategies. Is it going to impact spouses and/or couples more than individuals?

Jason: Yeah, this is really targeting spouses. Yeah, claiming strategies between spouses. Individuals claiming strategies are really going to remain the same. Benefits are going to remain the same. Widows benefits, the good news there is widow’s benefits are going to remain the same. The hard thing to understand is that it’s actually created three new sets of rules. We’ve got rules for people born before January 1st, 1954; rules for people born after January 2nd, 1954; and then this next 180 day period for people who are currently for retirement age that may need to consider doing a file and suspend.

It’s just gotten more complicated. For some married couples, that means one person could fall under one set of rules and another person could fall another set of rules.

 Emilia: Interesting.

Jason: Yeah. When you’re creating a retirement cash flow plan, Social Security is a great benefit because it’s inflation adjusted tax advantaged income and it has a benefit for the well spouse, but it just makes that planning process a little bit more complex and it makes it harder for the average person out there to do this on their own.

 Emilia: Yeah. That’s what we talk about all the time, Jason, you said having a plan. You’re saying how would you plan something like this? Is it going to be more complex when developing a plan if they’re under different rules for each spouse?

Jason: Yeah, absolutely. Absolutely. We have to go back. In fact, for a lot of the people that we’ve already helped with understanding Social Security, we’re going to probably have to help reevaluate a lot of those. In fact, we’ve already been talking with some of our clients and our community and just sharing this. We just held a seminar specifically for this right here in our community. We don’t have any more of those planned for the remainder of the year, but we will continue to bring people as much information as we can. Again, I encourage folks to sign up at the website if they want to be notified about these changes. It’s not easy to find that signup because it’s not … You have to actually click in the article and then it’s just one little blue link there that you click on to be added to our list of people.

 Emilia: Speaking of links, you have your November Quick Clicks.

Jason: Yeah, thanks for bringing that up. One of the things … I don’t know if a lot of our listeners out there know this because a lot of people just listen as they’re driving down the street or they listen via podcast, but a lot of people don’t necessarily go to the website. every month, what I do is curate because this is all I’m doing all day long is retirement related issues. I’m reading a ton of information, always studying, always trying to learn more. I’m taking articles that are relevant to retirement planning and we curate those. We call them our Quick Clicks.

Every month, I’ll have somewhere between usually 3 to 10 articles that are really relevant for people and we’ll highlight those, we’ll feature those. It helps people that are getting ready for retirement. It just helps them get through all of the noise and say, “Okay, what’s really the most important things that we should be thinking about and looking at?” There’s a couple of articles actually that we’re going to talk about next when we talk about retirement risks.

 Emilia: Sounds great. What are a couple of these articles that you think are really relevant to what’s going on with retirement risk right now?

Jason: One of them that jumped out at me, this was … Let’s see. This was the Atlanta Business Chronicle that had this one. The headline was “UPS Retirees Brace for Pension Cuts.” This is published on October 28th. Carla Caldwell was the editor. It’s basically what they say here is some 8,737 United Parcel Service, Inc. retirees could soon see their pension checks cut. Let me give you a read through this just a little bit down here. A former UPS truck driver who retired in 2007 after more than 30 years on the job told CNN his monthly pension check of $2,903 will be cut to $1,452 as soon as July, if the Treasury Department approves the plan.

Here we are again. I mean when we’re talking about retirement risks, oftentimes when people think of a pension, they usually think that is a pretty secure thing. the reality is we’ve seen this happen with a lot of companies over the years where pension plans get into trouble because actuaries make this pie in the sky projections of 7 to 9 percent assumed rate of returns on their assets. They don’t hit those targets in terms of the returns and then pension plans get into trouble. This is the fall out. This is what happens. One of the things, one of the reasons I wanted to bring this up is because a lot of people that are retiring, many times they’ll be given an option. They can either take a lump sum distribution from their retirement plan or they can elect the pension option. Sometimes they’re even given a combination where they can do half pension, half lump sum.

I think it’s a good thing to think about when you’re diversifying your portfolio how dependent are you on that pension to actually produce. If you are given some type of lump sum option, I think it’s really important that you consider that because you may be able to manage that risk or at least have more control over how that risk is being managed rather than just leaving it in the hands of some actuarial company that you really don’t know who they are. You’re just hoping that they’re going to be able to meet their obligations. This is a big one. We’ve seen this happen.

I’ll never forget years ago, I was meeting with a gentleman and he had retired from one of the airlines that had filed for bankruptcy. His pension was cut significantly when that company got into trouble. I remember at the time because he was a pilot. That was his hobby. That was his passion. He loved flying. He had a personal plane, a little private plane. He had to end up selling that plane, had to sell his hangar. Really disrupted their life. I mean this life, this retirement lifestyle that they had planned became very unsteady as a result of that default. Really important for people to think about, when they’re making pensionable actions, what are the options available to them?

 Emilia: Based on your experience, Jason, what are some of the risk you’re … You said pensions right now aren’t really solid, or [crosstalk 00:19:17]?

Jason: No, I think pensions are solid.

 Emilia: Okay.

Jason: I think most pensions are, but every once in a while when these articles pop up that show where a company gets into trouble or an old pension plan gets into trouble.

 Emilia: I see.

Jason: Especially after the financial crisis in 2008, that decline in market performance really had a negative impact on some pensions. There’s a lot of pensions out there that are really good. I don’t want to send everybody into a tizzy thinking, “My pension’s in trouble.” If people are having to make that election and they’re given some flexibility and some options, I definitely want them to really evaluate and consider if you can take just a full pension or you have the option of maybe taking a lump sum pension or a lump sum with partial pension or just a lump sum. You have to be able to sit down and evaluate that.

 Emilia: That’s what you mean when you say diversify your plan is to …?

Jason: Diversify, yeah.

 Emilia: Okay.

Jason: Yeah, we just want people to understand that retirement is all about cash flow. It’s their income that determines their lifestyle in retirement, not their net worth. If you work for the federal government, if you work for a state government, I saw recently, too, that Illinois, they’ve been in trouble in terms of their financial strength and there’s been a big budget battle going on there. There’s reason to be concerned about whether or not these entities are going to be able to live up to their promises. The financial world is pretty tight right now.

 Emilia: Yeah. It’s interesting that you say, on your Quick Clicks, you also had another article, I think, that talks to another area of risks that’s been affecting people’s retirement. That one was … Was it titled A New Way to Bet on Oil Wipes Out Billions in Investor Savings?

Jason: Yeah. I want to talk about this one, especially, because this low interest rate environment that we’re in, what people do, they think that they can outsmart the smartest minds on Wall Street. They start looking for a lot of these alternative investments. This article, it came from the Associated Press. It talks about a gal who her husband had passed away and so she had some money. Let’s see. It says the financial planner told her about investment partnerships that would allow her to ride the boom in U.S. oil and gas production while receiving steady stream of payments to help her pay her bills. Then later on in the article , it goes on to say, two years later, her partnerships have plunged in value and this woman has lost more than half of the $202,000 she invested, according to a complaint that was filed with regulators.

The bottom line is this: Interest rates are incredibly low. Ten year treasuries are barely paying over 2% per year. What this investment risk or this retirement risk is that people, they hear about something that sounds really good because a lot of these partnerships, these limited partnerships, master limited partnerships, energy partnerships, private non-traded REITs, I mean they’re promising things like 6, 7, 8, 9 percent yield on your money. Look, if a ten year treasury is paying 2% and your junk bond is paying 6% and these other offerings are paying more than that, there’s a direct correlation between yield and risks. If somebody is offering you something that says that they’re going to pay you 6, 7, 8, 9 percent, I just want our listeners out there to have their warning signs flashing saying, “Okay, I may want to pursue something that’s going to pay me this high of a yield, but I also want to accept the responsibility that I could lose half of my money overnight. I could lose a 100% … In the instances where I’ve seen people come in to our office that have lost a lot of money, like a lot, 75, 50, 75 percent or more …

 Emilia: Wow.

Jason: … It usually has to do with these more complex investment structures. We do have an article or a link to the article from the Associated Press on the website that people can go and they can read more about what happened with this particular investor and how it really impacted her negatively.

 Emilia: Sounds great. I had just maybe a general question. I’m not sure if you can, but what kinds of things can our listeners do to prevent from making investment, like should they hire someone to look things over?

Jason: Get a second opinion.

 Emilia: Okay.

Jason: Get a second opinion, yeah. If it sounds too good to be true, just because a friend or a family member made a recommendation, don’t just jump right into it. Go pay somebody to get a fiduciary, somebody that has a fiduciary obligation to act in your best interest, not somebody that’s trying to make a big commission by selling you a product. Get a second opinion.

Emilia, I just realized we’re out of time for this week, but thank you for being here again with me.

 Emilia: Yes. Thanks for having me.

Jason: Until next week, listeners. This is Jason Parker and …

 Emilia: Emilia Bernal.

Jason: Signing out.

Announcer: Information and opinions expressed here are believed to be accurate and complete, for general information only and should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed on this program. Parker Financial, its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risks.

Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Ave, Northwest, Silverdale, Washington. For additional information, call 1800-514-5046 or visit us online at SoundRetirementPlanning.com.