Growing your wealth and crafting the lifestyle you want in retirement begins with some basic assumptions. Are you basing your entire financial plan on facts or fiction? Many people don’t even know where to start, much less what is true or false. In many cases, the misconceptions are largely considered facts! In this episode, Joe Anderson, CFP®, and Big Al Clopine, CPA separate the facts from the fiction in four key areas of retirement so you can have confidence in your financial plan.
Financial Facts vs. Fiction:
- Investing
- Social Security
- Medicare
- HSA Accounts
Important Points:
- 0:00 – Intro
- 1:45 – Financial Facts vs. Fiction
- 2:21 – Power of Compounding
- 3:51 – Investing Small Amounts Can Pay Off
- 5:09 – Returns by Asset Class
- 5:45 – Download: Retirement Readiness Guide
- 8:07 – True/False: Social Security benefits are not taxed.
- 8:58 – Social Security Benefits Are Taxable
- 11:49 – Delaying Social Security Benefits Pays Off
- 14:21 – Expected Health Care Costs Increase
- 15:19 – Download: Retirement Readiness Guide
- 16:11 – True/False: Contributions to HSA accounts are not allowed once you receive Medicare
- 17:48 – Health Savings Accounts Contribution Limits
- 19:05 – Ask the Experts: My wife is 63 and wants to start taking her Social Security benefits. Will that impact my benefits if I wait until I’m 70 to claim mine?
- 20:42 – Ask the Experts: How do I decide what type of investments are right for an HSA account? Do you do the same type of risk assessment as your other investment accounts?
- 22:09 – Pure Takeaway
- 22:40 – Download: Retirement Readiness Guide
Transcript:
Joe: Do you know the difference between financial fact and fiction? Welcome to the show. The show is called Your Money, Your Wealth®. Joe Anderson here. CERTIFIED FINANCIAL PLANNER™, president of Pure Financial Advisors. And, of course, the show’s not a show without Big Al Clopine. He’s sitting right over there. Hello, Big Al.
Al: How you doing, man?
Joe: I’m doing good! Hey, there’s a lot of facts and there’s a lot of fiction in regards to your overall financial strategy. Do you know the difference? Can you tell the difference when you’re making your assumptions in your overall financial plan? What we found, though, it doesn’t necessarily matter if it’s fact or fiction, a lot of you don’t even know where to start. 90% want to build wealth. 45% don’t even know where to start. Don’t have a road map. Don’t have that game plan. That’s today’s Financial Focus. Financial planning has a ton of benefits. Here’s the latest study. 52% feel more confident if they have a financial planner or financial strategy. 48% are living more comfortably if they have a financial plan. We’re not saying that you have to have a financial planner. I do think everyone needs to have a simple financial strategy. We’re gonna break down fact, fiction, and help you establish that plan. To help us out, of course, let’s bring in Big Al.
Al: Financial fact versus fiction. So, let’s go on a few different categories that people get awful confused. They get misled by some things on the internet. So, why don’t we start with investing? What you oughta know about investing. So, that’s a great place to start. We’ll get into Social Security, we’ll get into Medicare, and let’s touch on HSA plans, because, Joe, there’s a lot of misinformation. The internet is fantastic to get information, but you gotta be careful of your source.
Joe: Yeah, I mean, your overall financial strategy has to really boil down to what your specific situation is, but let’s look at investing first. Fiction: I’m too young to invest, right? It’s never too late to start. Let’s take a look at the numbers, Al. You’ve seen this before. Little John and Jane. You know, John starts investing at age 35. He invests $20,000 every year for 30 years. Jane, however, starts at age 25. She invests $20,000 for every year for only 10 years. He invests–Johnny invests 30 years, Jane for 10. Who do you think has more money at the end of the day? Jane. $2.2 million versus John’s $2 million. She only had to invest for 10 years. She started at 25, ended at 35. John was partying, right? He was hitting the bars. I don’t know what he was doing, but 35, he’s like, “Well, I better get my stuff together.” And he had invested in 30 years and he still lagged.
Al: Joe, I think that’s such a good example on compounding of money. Now, we’re not suggesting that you have $20,000 to invest when you’re 25. But the principle is the sooner that you start, the better. And I know some people would say, “You know what? I’m 40. I haven’t started.” Well, start now. I mean, that’s the point of this slide. The earlier you start, the better you’re going to be. And the compounding– if you can start in your twenties, great. But Joe, you know, another part of this is how much do you invest?
Joe: All right. How much? “Well, I don’t have any money to invest” versus “Well, you can invest in small amounts.” Look at this example, right? Latte. The latte factor here. Little–what, David Bach?
Al: David Bach. I think lattes are a little more expensive now.
Joe: Yeah. Well, let’s say coffee, whatever it is, 4 bucks. Let’s say you have one daily. Well, that’s $123 a month that you’re spending on lattes. Right? If I multiply that 12, it’s about $1,500 per year. Well, if you invested that over 30 years at a 6% annual return, it’s $132,000, right? It doesn’t have to be a big sum of money. 4 bucks a day, right? If you can think about breaking it down to real simple terms, the payoff is huge.
Al: Yeah, and I think we’re not necessarily “don’t get your cup of coffee.” If that’s what you want, get your cup of coffee. The point, though, is you can start small and it can make a big difference as long as you do it consistently. And here’s another thing. Maybe in your twenties, you can just afford a little bit to invest, but every year you get a little raise. Invest a little bit more, little bit higher percentage of your income. It makes a big difference when you get to retirement.
Joe: How about this? The stock market is too risky, right? Better keep my money in cash or something safe. Well, especially when we’re in a bear market or a volatile market, I think this is where people try to go to. I don’t want to throw good money after bad because my 401(k) is down or my IRAs are down. Well, that’s fiction. Here’s fact. Let’s take a look over a long period of time. This is from 2001 to 2020. 20-year annualized, right? Real estate is up 10%. S&P 500, 7 1/2%. Not bad. 60/40 split. That gets you that 6% rate of return. Here’s the funny thing, though, Al. The average investor, the average equity investor, does 3% when the overall market does close to 8%, right? 2.9 to 7.5. Huge difference here and the reason for that is the emotion.
Al: Is the emotion, and we see this all the time. Every year that they do this, we see a disparity between what the market earns and what the investor earns, or compared to what the investor earns, even to a 60/40 split. And why does that happen? Well, it’s emotions that get in the way, right? So, the market is zooming up. We think, “The market works again. I’m gonna invest.” So, you’re buying high, right? And then the market goes into correction and it’s like, “It doesn’t work. I need to sell.” And you’re selling low, and emotionally, we make the wrong decisions time after time. We end up with a much less return. Actually, we’d do a lot better to figure out the right portfolio. Stick with it, rebalance as appropriate, but just stick with it.
Joe: Yeah, without question. If you look at–maybe someone likes individual stocks and he had a huge run, and all of a sudden, they fell, and then it’s like, “Well, it’s down. Do I sell? Do I buy more? What do I do?” You know, we get paralyzed almost. If you can just take a simpler approach. 60/40 split has a really good rate of return over the last 20 years. And we’re dealing with some kind of–the last decade is in there when the S&P 500 was negative for 10 years, right? And it still performs 7 1/2% over that 20-year time period. So, looking at the market from a long-term lens is by far the best way to look at it. Rebalance your risk on an annual basis so you don’t necessarily have to fall in this group where you’re not even outpacing inflation today. Right? So, if you want some more help with this, go to our website– yourmoneyyourwealth.com. Click on that special offer. It’s our Retirement Readiness Guide. Are you ready for retirement? Are you in retirement? Do you need a road map to help you start looking at fact and fiction of your overall situation? yourmoneyyourwealth.com. Click on that special offer. It’s our gift to you. You can download it right now. Go to the website. We gotta take a break. The show is called Your Money, Your Wealth®.
Joe: Welcome back to the show. The show is called Your Money, Your Wealth®. Joe Anderson and Big Al Clopine breaking things down. Fact or fiction… in regards to your overall financial plan. If you need some help, go to our website today. It’s our Retirement Readiness Guide. For those of you that haven’t downloaded, do it right now. Go to yourmoneyyourwealth.com. Click on the special offer. It’s our Retirement Readiness Guide. It is a guide full of retirement tips! Do it right now. Let’s see how you did on the true-false question.
Al: Social Security benefits are not taxed. True or false? Well, they can be. Ha. So, that’s false. In some cases, if you don’t make a lot of money, they’re not taxed, but if you make other kinds of income, they very well are taxed. And that’s–Joe, that was kind of a change, I don’t know, couple decades ago, because they used to be tax-free, right, but now they can be taxed depending upon your income level.
Joe: Yeah. I believe Reagan did that back in the eighties, right? FDR came out with Social Security and said, “You know what? It’ll never be taxed.” But then it’s like, “OK, well, maybe we start taxing it.” But it’s super confusing, and a lot of people don’t really understand this. First of all, OK, depends on what state that you’re living in that the state may be taxable, or it may be tax-free. OK, so, we’re just talking on the federal level here. It’s based on provisional income. What is provisional income? Well, it’s your modified adjusted gross income and then there’s add back. So, you add back half of the Social Security benefits. Also, if you have municipal bond interest, right, you would add that back, too. So, your modified adjusted gross income and your Social Security benefits. I guess with modified, maybe that’s already the add back of muni bond interest. But this is what you have to look at. And then here’s the chart. So, if you’re single, percentage of benefits subject to tax, if you’re under 25,000. So, if this number is under 25,000, or if you’re married, if it’s under 32,000, well, then your Social Security’s gonna be tax-free, OK? If it’s between 25 and 34 or 32 and 44, depending on if you’re single or married, well, then 50% of your benefit is gonna be subject to that income tax, OK? So, if your benefit’s $20,000, $10,000 is going to be taxed. It’s gonna show up on your income. So, it’s not a 50% tax. 50% of your benefit is going to be subject to tax.
Al: Yeah. I think that’s an important distinction. Because I think a lot of people get confused about that. And then, of course, the next category, if your income’s single, above 34,000, or married above 44,000, up to 85% of your Social Security is subject to income tax. It does not mean it’s an 85% income tax. It just means that that’s the part that you get taxed on, depending upon your tax rate, right, which may be 10%, 12%, right? 22. Could be any of those. But that’s how much might be actually taxed.
Joe: Right. So, it starts at 50 and then they add another 35, so, up to 85%. So, a couple of things that we want to look at in regards to planning is that if you’re in these thresholds, be careful of adding income to your overall tax return because then it could really kill you because then instead of $1.00 of tax, and if you have earnings and things like that, provisional income is very important to understand, and looking at these thresholds also is extremely important as you’re creating a retirement income stream.
Al: Yeah, and it’s one of the reasons we talked a lot about Roth conversions, right, or getting money to a Roth, because when you take money out of a Roth IRA, it’s not included in your provisional income and perhaps you can have less of your Social Security be taxable.
Joe: Yeah. Great point. Let’s go to another fact or fiction. Claiming early doesn’t matter. The benefits are the same. Fiction, right? Fact– benefits increase or decrease depending on when you take the benefit. Al, here’s a quick example for you.
Al: Yeah, so, this is Kelly, age 62. So, what happens if she takes her benefit right now? Based upon these assumptions, $1,400 per month. Not bad. But if she waited the full retirement age, which right now is about 66 1/2, it would be closer to $2,000, and then if she waits till age 70, $2,480, right? So, it’s like–a more than $1,000 more than had she claimed it at age 62. Now, I know if you claim at 70, you’re not getting all those payments for those early years, so, there’s, you know, way to think about it. You know, you can take it early if your health isn’t that good or you need the money, but in many cases, if you’ve got a reasonable life expectancy and you don’t necessarily need the money, waiting is a really good thing because you end up with a lot more benefits long-term.
Joe: Yeah, a couple of things to consider as you’re claiming your overall benefits. If you do wait until 70 or 66, there’s an 8% delayed retirement credit that you do receive. But if I go back to the past discussion in regards to the taxation of your Social Security benefits, it might make a lot of sense to have a tax strategy from when you retire until when you claim, such as getting money from a retirement account into a Roth account and delaying that overall benefit. And then when you start taking distributions, if you have more money in Roth and others, well, then, this higher benefit could come to you significantly tax-favored, right? So, if I claim early, and I don’t do any tax planning, well, I receive a lower benefit and then potentially 85% of that is gonna be subject to tax versus if I wait, get a lot higher benefit, and maybe a lesser percentage is gonna be subject to tax, so, it’s kind of a double whammy where you’re really accelerating a lot of wealth, because we know that we’re probably living a lot longer when they established these rules.
Al: Yeah, and that’s such a good point, and I think if you think about state taxation, not all states, but I would say the majority of states treat Social Security as tax-free income. So, it’s very tax-favored. By waiting, not only get the higher benefit but it’s more tax-favored.
Joe: Another fact or fiction! Medicare expenses. Medicare coverage limits out-of-pocket expenses. Fiction. There’s no limit of out-of-pocket expenses without supplemental Medicare. So, if you just have Part A and Part B, right, there is no out-of-pocket maximum. So, be careful when you’re looking at your overall benefits because healthcare costs are rising.
Al: Well, it’s such a good point. I think a lot of people don’t realize that, because you kind of used your health insurance as an employee, which typically, you know, there’s a co-pay, there’s a deductible, but then there’s an out-of-pocket limit. Not so with Medicare. It’s unlimited, which is why, Joe, people get that supplemental insurance to help cover them.
Joe: Right, and look at the trends here. You take a look at 65+ couples. Percentage spending more than 20% of their income just on health coverage, right? So, if I’m looking, the trend is going up. Here in 2040, almost half of people in this age group is going to be spending a significant amount of their disposable income just on healthcare alone.
Al: Yeah, and healthcare costs are going up and we’re getting older, we’re living longer. So, it’s just something that you have to plan to. Fidelity just did a study and they said, well, a married couple age 65, normal life expectancy, can expect to spend over $300,000 over their lifetime for medical expenses. That’s insurance but it’s also medical co-pays. That does not even include long-term care or nursing care if you need it. So, just be aware as far as financial planning, you gotta have a plan for your medical expenses.
Joe: Absolutely. If you need additional resources, go to our website– yourmoneyyourwealth.com. Click on the special offer this week. It’s our Retirement Readiness Guide. Are you ready for retirement? Are you in retirement? Do you have a strategy? Do you know how to pivot your strategy? Do you understand taxes, your Social Security benefits, Medicare, Medicaid, supplemental insurance? Whatever. It’s all in there. Go to yourmoneyyourwealth.com. Click on our Retirement Readiness Guide. You can download it right there on your computer. Go to yourmoneyyourwealth.com. We gotta take another break. When we get back, we’re gonna wrap it up. We’ll see you soon here.
Joe: Welcome back to the show. The show is called Your Money, Your Wealth®. Joe Anderson and Big Al Clopine breaking things down. Fact or fiction. Go to yourmoneyyourwealth.com. Click on our special offer this week. It’s our Retirement Readiness Guide. Are you ready for retirement? If not, go to yourmoneyyourwealth.com. Click on that special offer. Let’s see how y’all did on the true-false question.
Al: Contributions to HSA accounts are not allowed once you receive Medicare. True or false? Well, that’s a true statement. Medicare starts generally at age 65. HSA, health savings account, that’s available if you’re employed or have a health plan that’s a high deductible health plan. How do you know if it is? Well, it will say right on the plan. Your employer can tell you if it’s a high deductible health insurance plan. If so, then you are allowed to make contributions to an HSA account, a savings account, which is actually a pretty good thing, Joe.
Joe: Yeah, up until the age of 65. So, the HSA account is really geared for people that are a little bit younger, potentially, maybe a little bit more healthier, because you have a high deductible health plan that you can start funding pre-tax and it grows tax-deferred and when you pull the money out, it’s tax-free. Once you turn 65, no longer able to contribute, you can roll that money into an IRA if you want to and use that for retirement. But looking at fact or fiction, when it comes to the HSA, can’t be invested, right? That is fiction. You can fully invest your HSA account. It’s a health savings account. Little confusing, right, but it’s an account where you can invest in stocks, bonds, mutual funds, or whatever.
Al: Yeah, I think you’re right. The name implies it’s like a bank savings account. At least that’s what you think of with a savings account, right? But actually, that’s not true. I mean, you certainly can open up account at a bank and invest in, like, a CD, but you’re much better off investing, because then you can let the market work for you over long-term. So, Joe, what are the limits right now?
Joe: Right here. It’s self is $3,650, right? If you have a family, $7,300. If you’re 55, you get a little bit of a catch-up of $1,000. So, if you’re single, $3,650. $7,300, $1,000. Again, these dollars go into this account pre-tax. So, you’re saving money in taxes by making these contributions, OK? Grows tax-deferred, and then when you use it for qualified medical expenses, it comes out tax-free. Quick example is that, all right, if I fully fund the maximum and I have a 6% rate of return, you know, it’s a pretty big difference that can come out and used for medical expense in the future tax-free.
Al: Yeah. And I think it’s important to understand that a HSA account, it’s not like you have to use the funds every year. This can grow. You can contribute for 10, 15, 20 years, and it can grow that whole time, and then you take that money out. As long as you use it for medical expenses, which we tend to have more and more of that as we get older, well, then it’s tax-free. So, not only did it get a tax deduction, putting the money in, but it grows tax-deferred, and then becomes tax-free as long as you use it for medical.
Joe: All right, let’s switch gears, Big Al. Let’s go to Ask the Experts.
Al: All right, this is from Phil. “My wife is 63 and wants to start taking her Social Security benefits. Will that impact my benefits if I wait until 70 to claim mine?” Will that affect your benefits? No, not at all, because it’s separate. So, your wife has her benefits, you have your benefits, and so, they’re not intertwined. They’re separate.
Joe: Yeah, really good question, because sometimes with married couples, when you’ve been married for 40 years, think, “Gosh, my benefits gonna be reduced if she takes” or if you’ve been divorced and the spousal benefits and everything else. Spousal benefits will not affect. Survivor benefits will affect the survivor. But basically, what Social Security does is they take a look at your earnings record for 40 years and then they come up with a calculation to find your primary insurance amount, and then that’s what they base the Social Security on, right? And so, it’s based on your earnings record, not your spouse’s earnings record. So, if the spouse wants to take the spousal, which is half of yours, right, she can elect to do so as long as you’re claiming your benefits, but in this case, it sounds like he wants to wait until age 70. She’s gonna claim on her own benefits at age 62 or 63. That’s fine. You’re still gonna get the 8% delayed retirement credit. Claim yours at age 70 and you’re all good. If you were to pass prior to your wife, then your wife’s would switch to your benefit and she would reap that benefit of you waiting till age 70.
Al: Right. So, it’s not simple, but your benefit and her benefit, they’re independent of each other. So, let’s do the second one. “How do I decide what type of investments are right for an HSA account? Do you do the same type of risk assessment as your other investment accounts?” So, HSA account, we just talked about it. You have the ability to invest it, but Joe, what do you think? I mean, would you invest it the same way as your other accounts or would you think of it a little bit differently?
Joe: I would think of it differently, right, because you might need to use some of those funds, because you have a high deductible health plan, all right? So, what’s a normal deductible? Could be, like, $1,500. Your deductible might be $5,000, right, or $3,000. So, you have to come out of pocket a few thousand bucks before the insurance actually kicks in. And so, maybe keeping that in cash, depending on your health, right? If you don’t, let’s say you invest it in a risky stock fund, right, and the market goes down and you need some of that cash to pay for the deductible, right? I don’t know if that’s a good move, so, I think it really depends on someone’s specific situation.
Al: Well, I think you’re right because, you know, when you think about investing, it’s when do you need that money? Like, let’s say you’re in your thirties and you’re investing for retirement, you may not need that money for 30 years or more. You can be more risky. HSA account, you know, you might actually need some of it next year, or in a couple years or 5 years. So, you might want to be maybe a little bit less aggressive on that. Now, as you get closer to retirement, maybe it comes a little bit more similar because maybe you need funds in both types of accounts, but yeah, think about your time horizon.
Joe: All right, what did we learn today, Big Al?
Al: Yeah, we learned how to distinguish between fact and fiction. Hopefully, we learned that. We talked about investing early and often, and even investing little amounts make big difference. We learned about Social Security strategies, we learned about Medicare, right, how that works a little bit, and we talked about HSA. Basically, Joe, it’s trying to distinguish between fact and fiction.
Joe: Yeah, if you’re still confused, we got the answer. Go to yourmoneyyourwealth.com. Click on that Retirement Readiness Guide. It’s gonna break down fact or fiction of all the things that we talked about. I know it gets to be alphabet soup and there’s a lot of different things that we throw at ya. That’s why we got the guide. Go to yourmoneyyourwealth.com. Click on that Retirement Readiness Guide. All right, you can download it right there on your computer and start the retirement process. How about that? Well, that’s it for us this week. Hopefully, you enjoyed the show. For Big Al Clopine, my name is Joe Anderson, and we will see you all next time.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
