Jason and Bob talk about some of the things they have learned while helping people plan for retirement.

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’m so glad to have you on the program with us. It’s my good fortune to have Mr. Bob Harkson on the program with me this morning. Bob, welcome back.

Bob: Thank you it’s great to be here.

Jason: At this show, if you’re new we are all about retirement. There are 10,000 people, 10,000 baby boomers are retiring every single day and these can be and we hope they are going to be the best years of your life and this program is dedicated to bringing concepts, ideas, and strategies, bringing experts from around the country to help you have a greater retirement. It’s really a privilege and an honor Bob, for the last over 7 years now I’ve been doing this program so it’s great to know that we’re impacting people’s lives all over this beautiful country.

Bob: It sure is Jason. It’s a pleasure to serve with you in this process.

Jason: Yeah, clarity, confidence, and freedom is obviously what we want people to experience more of. Now before I get carried away, you’re listening to episode 110. The title is Always Learning. What I wanted to do is for Bob and I to kind of share with you some of the nuances and intricacies as financial advisors, people who are working everyday helping people with some of these hard decisions, some little nuances we’re finding. We’re committed to always learning and also sharing with you what we’re learning as we go.

 Now, I like to start the morning off in a couple of ways. Number 1 is to begin the morning with a verse. Here’s one I’ve been thinking about and praying on and studying quite a bit here the last week or so. This is Jeremiah 21:11. The verse reads, “For I know the plans I have for you, declares the Lord, Plans to prosper you and not to harm you. Plans to give you hope and a future.”

Bob: I like that.

Jason: Boy that’s awesome. What a great way to renew your mind.

Bob: It is. Absolutely.

Jason: “For I know the plans I have for you declares the Lord. Plans to prosper you and not to harm you. Plans to give you hope and a future.” Man I just love that. That’s wonderful.

Bob: God’s for us not against us.

Jason: Awesome. Now Bob, I do have a joke for you this morning.

Bob: Oh I can’t wait.

Jason: Why are fish so easy to weigh?

Bob: I have no idea.

Jason: Because they have their own scales. Buh-dum-tish.

Bob: Oh wait a minute. I need to take a break my sides are killing me.

Jason: My 11 year old son told me that one the other day. It just put a smile on my face. It runs in the family these jokes. They run in the family Bob.

Bob: Yeah, I guess it could be a generational thing.

Jason: Generational blessings.

Bob: Yeah.

Jason: All right so let’s talk about episode 110, Always Learning is the title. I’ll remind our listeners that all our programs are archived for their listening enjoyment online. In fact, the program as people may be driving down the road in Seattle this morning, they’re listening to us on 1300 KKOL but we have a huge following from around the country thanks to the new iTunes Podcasts and all the other ways that people access those RSS feeds, the podcast from around the country. I would just remind people they can listen to us online. They can download the podcast. We transcribe all these programs for us. You can go directly to sound retirement planning and listen. Here’s the first question. Somebody recently asked us, they were getting ready to turn 70.5 and at 70.5 the IRS sends you a great big birthday card and says, Hey happy birthday. We’re going to start collecting more taxes from you. Bob, why does the IRS send you that birthday card?

Bob: Well they want to get their money back. I don’t know how else to put it but at some point you’ve been putting that money away. You get a tax deduction for it. It grows tax deferred. Now they’re saying we want our share.

Jason: We want a little chunk of the treasure.

Bob: Absolutely.

Jason: A little piece of the pie. It belongs to us. When you look at those retirement account balances remember not all that money is yours. Any money that’s got to come out, the IRS says once you turn 70.5 there’s something called the required minimum distribution. They don’t really send you a happy birthday letter but they do send you a letter saying we’re going to take that distribution. Bob, what’s the penalty on those things?

Bob: It’s a whopping 50%. 50% penalty if you don’t take the thing. Several years ago I ran into the situation where the gentleman, he had to take his distribution was a $40,000 required distribution. We forgot to take it. We were looking at a $20,000 tax penalty. That’s a whopper. I just want to encourage you if you’re getting close to 70.5 remember to take your required minimum distribution. It could be a doozy.

Jason: Absolutely.

Bob: In this particular situation though the question became, because the way the rule works is they say you have to take a required minimum distribution by April 15th of the year following the year you turn 70.5. That’s about as clear as mud.

Jason: Very clear. Why don’t you say it one more time for our listeners.

Bob: Well, let me put it this way. If you were born on or before June 30, you turn 70 then you have to take it before the end of that year and if you are born July 1 or later then you have to take it by the end of the following year. In other words, you have to make the withdrawal before the end of the calendar year.

Jason: It’s the year that you turn 70.5 and the RMD is required by April 15th of the year following the year you turn 70.5.

Bob: Exactly.

Jason: Now if you wait all the way into that next year, April 15 of the year following then what ends up happening is you have to take two distributions that year. You have to take the one for the previous year in which you turned 70.5 and then the one for the current year in which you are now beyond 70.5.

Bob: So that’s two.

Jason: Two. Two RMD’s in one year and the question specifically that was brought to us was would I be better off taking my required minimum distribution the year I turn 70.5 or would I be better off delaying that distribution until the following year before April 15 and then take two RMD’s in one year. Unfortunately this is one of those scenario’s Bob where we can’t just give plain vanilla answers to people because it really depends but we dug into this a little bit. It was really fascinating. When we looked at this scenario what kind of surprised you about it?

Bob: I think what surprised me is you have to look very closely at what your sources of income are. In this particular case an individual was working to age 70, was delaying social security to age 70 so it actually benefited them to wait and take 2 the following year because they’re going to get social security and it was going to be taxed a different rate than their current income.

Jason: Yeah so well, what the analysis requires is what, and this is a little bit tricky because you’ve got to take the tax return out and you’ve got to say okay if I take a distribution this year and I have to take a distribution next year so I spread that distribution over 2 years, in which case do I end up paying the least amount of tax? You actually have to calculate the tax between 2 years and then say okay, I’m going to pay x number of dollars in tax approximately so this would be the best claiming strategy or the best taxation strategy. It’s not an easy formula, it’s not an easy calculation but it’s a good one because what we’ve found in this particular scenario was there was about a 2,000 difference in taxation by understanding how the tax codes work and how these different sources of income are taxed. It wasn’t what we were expecting. It was one of those areas where again, it’s a great question to ask, should I take my RMD the year I turn 70.5 or should I wait to take two in the next year, but it really comes down to everybody’s situation is going to be different and you have to look at like you say all the sources of income.

Bob: Well and it was a pretty significant difference too. It wasn’t a small difference.

Jason: It was a couple thousand bucks.

Bob: A couple thousand dollars just by how you time it.

Jason: That was question one. The second question that we recently ran into, this is one we run into a lot and again, we’re just committed to always learning but we’re helping some people put together a retirement cash flow plan, retirement’s all about cash flow, and the question became would they bet better off starting social security at 62 or would they be better off delaying and earning those 8% delayed retirement credits and waiting till 70 to start their social security, but not just from the standpoint of what produces the most lifetime income for them because that’s pretty straight forward but as it pertains to the retirement cash flow plan what’s the best strategy? We went through that scenario. We crunched some numbers. What did we find?

Bob: In general we found that delaying social security as late as possible provided the best lifetime income for an individual assuming you live to what the mortality tables say you’re going to live. If you live longer it’s even better.

Jason: But for that particular scenario, because we actually, we went through and crunched the numbers and we said, Well if we start that social security at 62 we have to dip into the retirement assets less early on.

Bob: Correct. Correct.

Jason: We were thinking maybe if we run that scenario they will actually end up with more money at the end of their life by starting 62 instead of delaying until age 70 but that’s not what we found to be the case. We actually found in their particular situation they run out of money earlier if they started social security earlier.

Bob: That is correct. One of the benefits of a late start of a husband and the wife, the spouse get to inherit the higher of the two social securities. For example, one of the spouses has a smaller social security and the other spouse has a higher, if that spouse waits to age 70, that’s a much higher payout that the other spouse will get for the rest of their life.

Jason: Yeah. Social security is such a big deal because what that means is when we’re helping people with this question of when to start social security, actuarially we want to understand, this is especially important for married couples, we want to help people make sure they’re getting the absolute highest benefit available over 2 people’s lifetimes. Not a simple one person break even analysis.

Bob: That’s very critical.

Jason: Yeah because when you think about that survivor benefit the way that you just explained is when one person dies, especially if that higher earner dies first the spouse gets to step up to the higher of the two benefits so it can make a big difference not just how much social security income they received but again getting back to the more important piece of all of this, is the retirement plan going to work in the first place, have they saved enough, is the cash flow plan going to work? Ultimately retirement is all about cash flow.

Bob: I got a question for you Jason, let’s say one of the spouses says there’s not much longevity in my family and I don’t think I’m going to live past the ages of my parents or my grandparents which was 75 or 78. Then what do you do?

Jason: That’s such a great question. That’s an important piece that we’ve got to take into consideration because if somebody comes in and they’re battling cancer and life expectancy doesn’t look like it’s going to be very good for them or like you say they have a history of people that aren’t living very long and their health isn’t very good, well all the sudden if we recommend that they wait until age 70 to start their benefits but then they’re going to die at 75 or 76, for a lot of people in order to really benefit from delaying that social security you have to be planning to live beyond 79-81, somewhere in there. If it looks like you’re going to die early not such a good idea. That’s such a great question Bob because we want to again, actuarially make assumptions about life expectancy, ask questions about people’s family, and then help them make a decision not just based on what gets them the most social security but what’s going to support their retirement plan for the longest period of time. We run the scenario some other ways for different people where starting at 62 actually was the best strategy for them so again it’s one of those areas where I wish that we could just say hey, everybody delay until 70 but we’d really be doing our community and our listeners a disservice by giving that advice. That’s not good advice.

Bob: That’s exactly right. I think one of the things to keep in consideration for retirement, if one of the spouses who has the higher social security amount and the other spouse does not have a significant earnings record and they take it at 62, the spouse on her spousal benefit at age 66 will actually get half of what the other person would have gotten at 66. You don’t want to look at a social security statement in panic and say, oh I only get half of what he got a 62. They get half of what he would have received at 66.

Jason: Bob, can I ask you a question?

Bob: Sure.

Jason: Why are fish so easy to weigh? Because they have their own scales.

Bob: We needed a little pattern disruption.

Jason: We’ve been sitting here talking our financial mumbo jumbo lingo and people out there are driving down the road right now and they’re saying what in the world are these guys talking about? You know I’m reminded I had a gentleman come out and repair my heater at my home a couple of years ago. He popped the cover off this thing, worked on it for about 20 minutes, handed me a bill for $250 and I thought, huh. That’s not a bad hourly wage. I made the mistake, I asked him, I said, “Hey what was wrong with my heater.” This guy started talking to me, it could have been Japanese for as far as I was concerned. I just kind of shook my head and listened to him tell me what was wrong with my heater and I had no idea.

 The guy had probably forgotten more about the way my heater worked than I’m ever going to know and he was talking to me as though I were an expert. As though I understood all of his heater repair jargon so Bob, you and I, we need to make sure that we are not talking down to people but that we’re not using language that people aren’t familiar with and confusing the subject. We want people to walk away from this show with a greater sense of confidence and clarity that things are going to work. I think the hard part is it’s hard to give black and white answers in a world that’s really not black and white when it comes to retirement planning.

Bob: I think that’s where sitting down with somebody who understands and can run calculations for you is really important. If you go to the social security office they’re probably just going to tell you this is the best you can get now.

Jason: Then the person should not only be able to run the calculations for you but they should be able to help you understand what all of that means in very general terms.

Bob: Exactly.

Jason: You don’t have to go back to school and get a Masters in finance, in personal financial planning, you don’t have to become a certified financial planner to get some good advice and make sure you’re on the right track. Hopefully as we continue this conversation because some of this stuff is more technical. It’s what you and I geek out on are the little nuance scenarios that come across our table and the next one has to do with a 457B and some eligibility issues that came along with that because typically when people have a retirement account we think we can roll that over into an IRA and kind of get everything in one pop. What did we find out on that particular scenario?

Bob: It depends on how the contract is written by the employer. Some of the contracts may require you to at that point of requirement have it all paid out by the year you’re 70.5. Some will stretch it over 10 years. It may be an unqualified plan but it’s not a 457 but you want to look at it really carefully because it’s going to force you to take income sooner than you expected.

Jason: In a situation where we just kind of assumed well, this is a retirement account. We’ll just roll it into their IRA’s and get everything under one umbrella and make their life simple, what we found was in that case actually we couldn’t do that, right?

Bob: Exactly. We had a case in point where someone had one that had to be rolled out by the year they turned 70 so they decided to lay social security later so they didn’t get hit with too much income at one time.

Jason: Yeah, so again the purpose of today’s show is to just share all these little nuances. It’s actually one of the things I love about the work that we do is it’s not the exact same thing day in and day out. We always have to be on our A game. We always have to be willing to be humble and say we don’t know everything. We’re going to have to research this a little bit. That’s one of the things I love about the work we do is we are always learning. We know a lot but we’re always learning more.

 Here’s another cool one that I ran into recently. It had to do with somebody that was retiring here in the state of Washington from the teachers retirement system. This gal, again retirement is all about cash flow so when people have a pension that’s a big deal. In Washington state our teachers, when they are vested, when they qualify some of them can have a pretty nice pension in retirement. Well, in this particular scenario we didn’t think that there was going to be any pension and so we had to really dig into this because depending on which retirement system you’re under the number of years you work determines whether or not you qualify for a pension or not from your years of service.

 From a distance you would think you didn’t work enough years you didn’t qualify for a pension but as we dug into this what we found was that there’s a lot of exceptions. For example, if you’re over the age of 40 when you’re working the number of years required to become vested is actually shorter than what it typically would be. We also found that years of service from a different school district out from a different state may also qualify for some of those teaching years. After doing a little bit of planning for this particular person we found out that they were going to have a pension. They were going to have some additional guaranteed income that they didn’t even know about. I have to tell you I love coming across those little surprises, those little nuances when talking with somebody. Hey you’re going to have more guaranteed income than you thought you were going to have. How cool is that?

Bob: That’s great. You see that big smile on their face and that surprise and kind of a sense of relief.

Jason: It’s almost like walking down the street and you kick over a bucket of money and you realize it’s yours.

Bob: It’s fantastic.

Jason: I’d like to kick over more buckets like that Bob.

Bob: Oh yeah.

Jason: The other little nuance there with this particular teacher is teachers also, in the state of Washington they have 2 pieces, and they have a defined benefit, a pension if they qualify for it and then they also have the defined contribution and that’s where they’re actually contributing money. With a defined contribution there are some little nuances with that money, with the money that they contributed to the plan where when it comes time for retirement they can choose instead of rolling that money into their own IRA they can actually use those funds to potentially buy higher more guaranteed income and I’ll tell you what, in the state of Washington, every time so far I’m always looking at these things but as it stands recently when you look at the annuity income that the state of Washington promises and guarantees versus the annuity income if you go to a private insurance company and buy guaranteed income, the state of Washington’s deal is much, much better so if we’re going to need even more guaranteed income it may not make sense to roll over that defined contribution plan because we can get that higher annuity. That’s just really cool.

Bob: The key word there is whether you need more guaranteed income. If you’re married or single and you look at your social security and your pension and that’s enough to meet your basic needs then you might consider not rolling it over and hanging on to the money because the problem with some of those is when you die the money goes away or if you’re married it goes away at the death of the second spouse. One thing to consider is if you’ve got enough with your current retirement to meet your basic needs then you may want to consider rolling it into private IRA to grow for whatever purposes you have in the future.

Jason: Yeah, gets back to the cash flow plan.

Bob: Yeah exactly.

Jason: Once the plan is created it helps us make these decisions like do we need the cash flow or should we just roll it into our IRA.

Bob: That’s a great point. Yeah you don’t make emotional decisions about any of this. You start with a plan and you let the plan help you decide the best course of action.

Jason: Another little nuance we ran into here recently Bob had to do with an annuity that we’re evaluating regarding death benefit versus account value to share what you learned on that particular, because you’ve run across a couple of these recently.

Bob: Yes and these were annuities that were taken out in 2008-2009. One of them 1999 but it was really fascinating to see that the cash surrender value, if you cash the annuity in was significantly less than the death benefit, sometimes the death benefit was 2 to 2.5 times higher. When you have those contracts particularly if you don’t need the money sometimes they’re better just to hang on and not spend and leave it for the purposes of the death benefit for your beneficiaries.

Jason: Boy that is so powerful. It gets back to one of my pet peeves where you hear people say, I hate annuities and you should hate annuities and if you’ve got an annuity get out of it no matter what because if you have somebody like this, now you didn’t recommend those annuities in the first place, these are people that came to you and they said Bob we’re trying to put together a plan, is this annuity any good? Should we get rid of it? You look at it and you say, boy the death benefit is so much higher that if you exit this contract this is money that’s lost. I mean if you don’t really understand the terms of thing before you make advice on it you could really be hurting somebody by not giving good advice.

Bob: If you’re looking at somebody who holds one of these that’s in their mid 70s it could take 15 years to even break even on the death benefit. It’s really a no brainer to hold on to that one.

Jason: Yeah, and again getting back to the idea what’s the purpose of the money not a death benefit in the first place but there’s another real need for it well then maybe it does make sense to walk away from the death benefit.

Bob: Absolutely.

Jason: Like you just said a minute ago it gets back to what’s the plan?

Bob: We have people come and say, well this hasn’t performed very well. Well let’s stop and look and see what the guarantees are. Those may override a decision to get rid of it or they may not.

Jason: One last thing before we go to break here is, should I downsize and sell my house in retirement?

Bob: Well I think it depends on your income situation. One of the things is it can add a tremendous boost to your retirement income if you do downsize. Another option is to take a look at a reverse mortgage. Either of those would give you a boost in your retirement income.

Jason: Lot of people today have a lot of their wealth tied up in the walls and foundation of a house and a house doesn’t produce any cash flow for you unless you’ve got renters living out of the thing right?

Bob: Exactly.

Jason: It does produce a tax liability for you. It does produce maintenance costs for you. There’s a lot of things that a house really looks more like a liability on most people’s balance sheets than it does an asset because until that asset is sold or you borrow money against it, it’s kind of dead money. It’s not doing anything for you. Of course it’s appreciated in value based on whatever the market conditions are doing but one of the things I’m reminded of is you can certainly lose money in real estate. I realize we’re just about out of time but it brings up a great question and for some people selling a house is absolutely something that’s going to have to happen in order to make the retirement numbers work. Bob, with that we’re out of time. I’ll see you next week.

Bob: You bet.

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 as solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, it’s representatives, or it’s 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 risk. Jason Parker is the president of Parker Financial, an independent fee based wealth management firm located at 9057 Washington Avenue NW, Silverdale Washington. For additional information call 1-800-514-5046 or visit us online at soundretirementplanning.com.