Show Notes

• (00:00) Intro
• (00:457) Real Estate Syndication Deals: Did We Just Make Bad Decisions? (Anonymous)
• (07:57) Thoughts on Alternative Investments? (Andrew, OH)
• (12:54) Read The Benefits of Systematic Portfolio Rebalancing and Download the Investing Basics Guide
• (13:31) Has Joe Modified His Position on Annuities Lately? (Stewart, Serra Mesa, CA)
• (24:42) Principal Protected Investing Options for Structured Settlement for a Minor: Annuity? (Speedy Gonzalez, Western NY)
• (29:52) 7th Annual YMYW Podcast Survey: your chance at a $100 Amazon e-gift card! (type in ymyw)
• (30:35) When to Stop Work and Claim Social Security and Child Benefits? (Steve, Las Vegas – voice)
• (34:58) How’s Our Plan for Retirement Income? (D, Midwest)
• (44:40) Outro
• (45:53) The Derails

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Transcription

Intro

Andi: What do Joe and Big Al think about alternative investments? Andrew in Ohio wants to know. Are real estate syndication deals for real, and a YMYW listener just chose poorly? And Stewart in Serra Mesa is curious whether Joe has changed his position on annuities lately, as rates have “normalized” in the past couple of years? That’s today on Your Money, Your Wealth® podcast number 491. Plus, when should Steve in Las Vegas’ friend quit her casino job and collect Social Security and child benefits? And how is D in the Midwest’s plan for creating income in retirement? Go to YourMoneyYourWealth.com and click Ask Joe and Big Al On Air to ask the fellas your money questions. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Real Estate Syndication Deals: Did We Just Make Bad Decisions? (Anonymous)

Joe: “Hey guys, great show. I’ve been listening over two years and love it. I’m 63 years old, retired at 58, but my wife who’s 4 years younger still works mainly for the health insurance. I drive a 2024 GLE.” What’s a GLE? Is that a-?

Andi: It’s a Mercedes.

Joe: Huh?

Andi: It’s a Mercedes.

Al: Oh, okay.

Joe: “My wife drives a Lexus, Texas.” Lexus, Texas.

Andi: Lexus TX.

Joe: “We bought both vehicles for cash earlier this year. We have $1,700,000 in IRA, 401(k), $600,000 in a Roth, $350,000 in our brokerage account. We also have $345,000 in a real estate syndication.” Oh, that’s-

Al: Oh, okay. That’s giant getting sophisticated.

Joe: Wow. “Also own a home outright, which is valued at $1,300,000. I like homemade margaritas as I control the amount of tequila and my wife likes hard lemonade. My spitball to you guys are-“oh, hard lemonade. I’ve had a few hard lemonades.

Al: Have you?

Joe: Yes.

Al: I can’t say I like them.

Joe: You don’t like hard lemonade?

Al: Not really.

Joe: Do you like lemonade?

Al: Not really.

Joe: Okay.

Al: Too sweet.

Joe: “I went to various real estate syndications after hearing a pitch on a Webex, they promise annual returns of 7+% percent and 2.3x when they refinance or sell the properties. So far, they’ve been duds. And it’s been one excuse after another. First it was CapEx to uplift the properties, then it was occupancy, and now it’s higher interest rates. All this translates to little or no annual return as promised. Do you think these real estate syndication deals are for real?  And we just made bad decisions?  I heard on another podcast recently that multifamily real estate is either flat or going negative.  I was hoping I would receive my 7% on the initial investment to help me with our expenses as I planned to delay Social Security until 67. Thoughts?”  Real Estate Syndication Deals, 7+% rates return, plus a little two or 3 times X at exit?

Al: That it’s, it’s possible. I, usually the ones I see are more like 5% or 6%, but lately that hasn’t been happening because of the interest rates. So, that’s actually a legitimate reason. Because most of these commercial loans for multifamily or commercial are variable. Right? So they’re going to be changing with the change in tides. My brother has had a real estate syndications for 20 years and in general they’ve been pretty good until lately. So part of this is just a timing difference.

Joe: Well, I mean, I think in your own personal life Al, you made a fortune in real estate and lost your assets in real estate.

Al: I did. I did. I did both.  And in fact, if you think about it, if you think about real estate cycles, so the Great Recession was pretty tough on real estate. That’s where I had my problems, as you know. So we’ve had a bull market in real estate probably since about 2009, right? It just kept going and going and going and going and going. So just like any asset class, you do want to buy at the height, now you don’t know what the height is. That’s the hard part, right? But now in hindsight, real estate that maybe we bought a couple of years ago is probably on the high side because with interest rates and now we know what’s going on, real estate hasn’t done as well. And this is the cyclical nature of real estate. So it’s not that they’re duds, but do you realize with a real estate syndication, there are a lot of fees that go to the people that are running it.  Right. And, and. Probably justifiably in many cases because they’re doing a lot of work to get this done so you don’t have to do any work. Nevertheless, they’re expensive internally and then when it’s kind of tougher markets like interest rates, you’re not going to see the returns that you were hoping to get.

Joe: Yeah, if you think about real estate, there’s a couple of different things of how people will get paid or make money. It’s the appreciation on the property or it’s your cash on cash or cap rate of return. You know, depending on, you know, what, what is the debt service on the property? Is there debt, is gonna determine, you know, what kind of income to expect.

Al: Yeah. Yeah. Exactly. And I’ll go back to my brother. He was getting 6% year after year after year until recently. Now not really getting much, and that’s again, a factor of what interest rates are doing.

Joe: Yeah. When you’re paying 0% or 2% on the loan and all of a sudden goes to 8%-

Al: It’s a, it’s a little different economics.

Joe: Yeah, that 5% spread kind of changes the economics a little bit.

Al: Yeah, you bet.

Joe: “Second question, I have been converting to-“ but first of all, I don’t know if you watch a Webex, and then you just give them a bunch of money, $350,000 to do a real estate syndication.

Al: I hope you did a little more due diligence.

Joe: How many Webex do you think he watched?

Al: Well, he says a Webex.

Joe: A Webex, all right. Well, it must’ve been really good.

Al: Great.

Joe: But yeah, I mean, they’re not bad investments. You just need to understand how they work. And then you probably want to look at the underlying investments. What part of town are they in? Are they in Southern California? Are they in Texas? Are they in Tennessee? Or where, what type of properties are they? You know, what has been the, the historical vacancies, the CapEx, the improvements that need to be- So real estate’s a phenomenal investment. But there’s also really bad real estate deals and there’s really good real estate deals. There’s good markets, there’s bad markets. So I think with real estate, as long as you have time, in most cases it will work out.

Al: Yeah, yeah, exactly. But it’s just like anything. I mean, the real estate syndication is just a wrapper. It’s still real estate. Would you buy that real estate? Maybe so. Is it an improving neighborhood or declining? I mean, there’s all kinds of things you look at even though you’re not the one buying it. You’re investing in it. But you should have that mentality, would I want to own this piece of real estate?

Joe: All right, second question. “I’ve been converting to Roth IRA over the past 3 years. I could convert $250,000 this year which will get us up to the 24% tax bracket if you think this is wise. Or should I do a lower figure, seeing that this is the last year for Medicare look-back for me. After this $250,000, it would have almost $200,000 left in the IRA.” Alright, so, second question, should he do a conversion of $250,000? He’s got $1,700,000 in IRA. Right. So, $250,000 is the top of the 24% tax bracket? Yeah, I like that number, 24% tax bracket.  He might be in the 25% tax bracket later, because 22% is going to go to 25%, and then you get the compounding tax-free, he’s probably not going to need the money, because these real estate syndications are going to blow up, or he’s going to get a nice loss. He’ll get a loss on his return.

Al: Sure. I, yeah, I, I suppose based upon what we know, it’s not a bad strategy. We know the tax rates are lower for 2024 and 2025, 2026 they’re scheduled to go back up, whether that happens or not. We’ll see.

Thoughts on Alternative Investments? (Andrew, OH)

Joe: We got Andrew from Ohio “Hey, thoughts on alternatives, define. What are they? Why push by advisors once and they are difficult to get out of?  Why play with sharks?  Does it make that much of a difference percentage?”

Andi: Question mark.

Joe: I’m just reading verbatim here.

Al: Yeah.

Andi: Yep.

Joe:  All verbatim. This is what we get folks.  Why play with sharks?

Al: Yeah. Well, let’s-

Joe: I enjoy playing with sharks. Okay. Alternatives. What’s- there’s all sorts of different flavors of alternative investments. Some are good. And some are bad. Like with any other investment.

Al: There’s real estate, there’s cryptocurrency, there’s private equity. Private credit, right? Hedge funds, commodities. I mean, there’s all kinds of stuff that can be in it. Why are advisors talking about it? And I would agree with you. They are talking about it a lot because in many cases, they’re trying to get an uncorrelated asset class, right? So stocks. You know, whether it’s large company, small company, growth, value, international, there, they go up and down slightly at different times, but they tend to kind of follow each other. But some of these alternatives have a completely different cycle. So they, they can kind of decrease some of the volatility. A lot of alternatives though, they’re very hard to get out of, they’re illiquid. There are some ways to get liquid, daily liquidity in alternatives in certain funds, but in, in probably most cases, Joe, they’re hard to get out of and, and can be a little tricky to invest in. I would say.

Joe: Yeah, you probably don’t wanna get into the alternatives that have daily liquidity. Part of being in an alternative investment is the liquidity premium that you receive. So there’s different things that you gotta consider. Is that you have private markets and you have public markets. So public markets are what most people invest in. You have stocks and bonds. You can go directly into individual stocks, or you can package them up through a mutual fund and exchange traded fund, and you buy and sell, and you can get your money out whenever that you want. But then there’s also private markets, so, you know, smaller companies, they’re not traded on the exchange, but they also want capital. So they are going to go get some capital through a private equity firm. So they’re going to, you know, give business owners some cash for them to continue to build and grow or have a liquidity event. Some of those companies do very, very well and you’re going to receive a pretty high expected rate of return, but also they’re very small companies in some cases. And a lot of small companies tend to fail. So there’s more risk in those types of investments. So, but you have to let that money kind of season within the overall fund. So you have a illiquid premium. Same with credit. So instead of going to the banks and getting some cash, private credit would be, you know, very similar. Is that all right, we’re going to give companies some cash in the form of a loan. We’re going to be able to charge maybe a little bit higher rate of return because there could be more risk involved in this particular company because again, there’s- it’s a startup. They’re smaller companies, but to get access to these types of investments, you have to go to the private markets. As Al says, I mean, there’s some really good ones and some really bad ones, but you just have to do your due diligence and work I think, with the professional that understands how all of this stuff works. And then there’s all sorts of, you could go into like reinsurance that is totally negatively correlated to the overall markets. So there’s beta that goes with the markets and if you don’t necessarily want to have an asset class that moves in correlation to your stocks or bonds, then alternatives is a really good example that can give you a negative correlation to those asset classes. So I think you will hear more and more about alternative investments. I think most people should be thinking about it depending on the size of your portfolio. But if you go with a total liquid – you know, I, I think there’s some good ones and there’s some really bad ones because you lose all of the return that you would receive if you were illiquid because of the fees and cost to package some of this stuff. So again, there’s no real good or bad. And I don’t know if you’re swimming with the sharks because they want to do alternative investments. You could, you could be, there could be some sharks out there. What else did he say? Well, I played with the shark. Does that make that big of a difference? It could, it could. I like alternative investments.

Al: I’m going to say slightly different. I think the average investor, you don’t need to get involved with them. I think if you’re more sophisticated, you’ve got extra assets, you want to try a few different things, then sure. I think the average investor does just fine with stocks and bonds. That’s what I think.

Joe: All right. There you go.

Read The Benefits of Systematic Portfolio Rebalancing and Download the Investing Basics Guide

Andi: However you choose to invest your money, you’re probably aware that a major determinant of your investment returns, and your portfolio risk and volatility, comes from the proportions of various asset classes or investments that you hold. So you likely gave a good deal of thought to your initial selection of what investment mix to hold in your portfolio. But then what? Portfolios drift over time – what do you do about it? Learn the benefits of systematically rebalancing your portfolio in our latest blog post – find the link to read it in the description of today’s episode in your favorite podcast app, along with the link to download our Investing Basics Guide for free.

Has Joe Modified His Position on Annuities Lately? (Stewart, Serra Mesa, CA)

Joe: Stewart from Sierra Mesa-

Andi:  Serra Mesa, here in San Diego.

Joe: Okay. “Hi, Joe, Al, Andi, my wife, 54 and I, 56 enjoy milk and homemade cookies at night while watching the 10 o’clock news on KUSI since we’re now empty nesters.”

Al: Wow. Is that what you do? Is that what you do?

Joe: Stewart.

Andi: I’m totally on with the milk and cookies.

Joe: This sounds just like Big Al.

Al: And we’re, and we’re going to watch some romance movies.

Joe: Yes.

Al: Feel good movie.

Joe: All right. “He commutes 12 miles to work each day with my compact economical 2012 Lexus hybrid still gets 50 miles an hour per gallon.” That’s a hybrid.

Al: Well, he did say 50 miles per hour. I think he meant 50-

Andi: – miles per gallon.

Al: I don’t know. 50 miles per gallon.

Joe: “While my wife commutes one mile to her office on her beach cruiser bicycle. I really enjoy your podcast and want to give you a big thank you, the 3 of you, for providing such entertaining, valuable financial education.” Well thank you, Stewart.

Andi: Have a cookie for us.

Joe: “Has Joe modified his position-? Yes. Excuse me.

Andi: Nothing. Go ahead. Keep going.  What did you say? I said, have a cookie on us.

Joe: Oh, yeah, there you go, have a couple.  “My question, has Joe modified his position on annuities lately? I recall a few years ago, when rates were low, Joe would go on some really fun, entertaining rants about what a big rip off annuities were versus other financial opportunities for your safe money. It seemed like Big Al used to get a couple of words like, if you live a long life, then annuity might be right.” Yeah, that’s a slogan. It goes around, if you live a long life, annuity might be right.

Al: That’s on my bumper sticker. Actually, he quoted me as saying, if you live a long life, then annuity might be an okay deal.

Joe: “Oh, but by and large, annuities were panned for years on your show.” Woo.

Al: Panned.

Joe: Yes. “Lately, it seems like Joe might have quietly softened his anti-annuity position a bit, but it’s hard to tell, other than the lack of another fun anti-annuity rant by Joe.” All right, we can get into some of this.

Al: Yeah, I can’t wait.

Joe: “When rates normalizing the past couple of years, I put 50% of my savings into a CD, 5% rates, in annuities at 6% rate, leaving the other 50% of my savings in the stock market, 40% S&P 500 index fund, 10% international fund. If rates go down, my CDs will be that much more valuable. And I can always choose to sell them for a nice profit on the secondary market, e.g., I got 20% profit after holding 3% CD for two years, this way back in 2020. Regarding the annuities I purchased, if I choose to defer for 9 years, when I’ll get my plan retirement at age 65, the GLWB, Guaranteed Life Withdrawal Benefit, will have a lifetime payment percentage of 13%. So the internal rate of return will be 4.4% when I’m 81, 5.7% when I’m 88, and 6.4% when I’m 96. Yes, longevity runs in my family. These days, it seems to me, like these zero-risk, decent rate CDs and annuities are a better place for my safe money than the high-risk bonds you used- you used to recommend several years ago.” When did we recommend anything on this show, Stewart?

Al: No, and we actually never even suggested high-risk bonds make any sense.

Joe: “Bond funds that perform poorly and return a total of only 6% over the last 7 years, and 3% of those years were being down anywhere from 2% to 16%. Curious, what did Joe and Big Al think about CDs and annuities now? Thanks. Love your show. Stewart.”  Alright. Milk and cookies.

Al: Good stuff. Okay. Let’s, sit back and wind Joe up.

Joe: Okay. I just have to understand what type of annuity that he purchased. It looks like he purchased a deferred annuity at a 6% guaranteed rate, or is that a 6% rate on the guaranteed benefit? Because he’s already doing the internal calculations or the IRR, because that’s the most important piece of any type of annuity. Am I a fan of an annuity? No, I still don’t think they’re a good investment.  I still think it’s pretty much, it’s a longevity income. If you’re looking for income and you’re looking for longevity insurance, that’s what an annuity is. It is income, period. It’s insurance, period. It’s not an investment. So the problem with me with annuities is not necessarily the product itself, as long as people know what they’re getting into, it’s how it’s sold. People will say, here, get into this product because you’re going to get stock market like returns with zero risk. That’s all BS.  And then it’s like, okay, well here, you’re going to get a guaranteed 7%. But the 7% is on the roll up on the guaranteed income of the overall product. So they’re not even getting close to 7% or 8% or 10%.  You have to look at what your IRR is. For instance, let’s say you have $100,000 that you want to purchase into this annuity. And the annuity is going to guarantee you 7%. They’re going to say, you know what, Stewart, I’m going to give you 7% guarantee, but the 7% guarantee is only on the guaranteed withdrawal benefit or the guaranteed income benefit that you are going to receive.  So you have $100,000 in, and then you’re going to pull the guaranteed income out, let’s say in 10 years. So then $100,000 is now worth $200,000, 7% rule of 72, it doubles. So $200,000 out. And let’s just assume that they’re going to guarantee you 5% on your money on the guaranteed income.  So it’s like, all right, well, hell, this sounds like a wonderful deal. I get a 7% guaranteed on my money on the rollup, and then they’re going to guarantee me 5% of income. Who wouldn’t want to take this deal?  So 5% of $200,000 is what, Al? You’re pretty good with math.

Al: 5% of $200,000? I wasn’t even listening.

Joe: 5% of $200,000 is what?

Al: $10,000.

Joe: $10,000. Okay. So I’m going to get a guaranteed $10,000 of income for the rest of my life.  So it’s like, why wouldn’t I do this? This sounds like the best deal ever, but you have to look at the internal rate of return because I can do smoke and mirrors and fake you all out with all this other BS. And I think that if I’m a, if I’m someone that doesn’t understand how these products work, you’re going to get sold these all day long because they sound almost too good to be true.

But then this little red flag comes up and there’s like, well, if it sounds too good to be true, I probably shouldn’t do it and God bless those people because look at the math. Let’s see.  How old is Stewart? Does he tell us how old he is?  55. Okay. I’m going to assume he’s 55. Let’s say he starts at 55. He puts $100,000 in. At age 65, that’s going to double to $200,000. Then he’s going to take $10,000 out for the rest of his life.  So $10,000. So over the next 10 years, he’s going to receive how much? $100,000, right? But then the annuity company has held his money for how long?  20 years. The first 10 years for the rollup and then the next 10 years, they just paid him his money back. So the annuity company held his money for 20 years. What rate of return did Stewart make?  Zero! He didn’t make a dime in 20 years.

Al: At year 20.

Joe: And then now he starts making a return and now I’m cramping up because I’m getting all excited here.  Legs cramping. And then now after year 20 is when he starts making a rate of return. So if he holds that product for another 10 years. Okay. Then he doubles his money or then he gets another $100,000. So it’s like, okay, but that took up 30 years, 10 years, right? For the accumulation- 10 years to get his money back and another 10 years to get another $100,000 out. So that’s 30 years to double your money.

Is that a good idea?  I don’t know. I mean, if you want a guaranteed income or what’s that saying from Tommy boy, you know, if you like a guarantee, I can guarantee whatever piece of doodoo on there, but now interest rates have changed. So I’m not saying Stewart has this, this product, because he’s telling me that he has an internal rate of return of 4%, 6%. And now it’s something else. So I would have to look at the product. I would have to look at the guarantees that the insurance company is actually giving you. I’m not a huge fan of guaranteed income benefits because most times the internal rate of return is very low. Insurance companies are very smart. They’re going to make money. So if they’re thinking you’re going to get a guaranteed benefit, or you’re going to get a guaranteed rate of return, an internal rate of return of like 6%, 7%, the insurance companies would lose on that deal.  So, I don’t know, I would have to take a look. Am I a fan of annuities? No.

Al: I think you made that clear.

Andi: Good rant.

Al: I think CDs are great.

Joe: I love CDs. I named my-

Al:  -your child CD, CD Anderson?  I think, we have, I don’t think we’ve ever discussed high-risk bonds. We actually don’t particularly care for them because the extra risk that you paid, that the income you get for that or extra income does, we don’t feel as compensated by the risk. I think low-risk bonds are a good way to go. I think they’re still a good way to go. They haven’t done great. Yeah, 3 out of the last 6 years. I agree. But as, if you look at in history, they’ve done just fine.

Joe: So he’s got, he’s got a guaranteed life withdrawal benefit, will have a lifetime payment percentage of greater than 13%. So the internal rate of return, it’s going to be 4.4% when I’m 81. Yeah, if this is actually true, then go for it. If you’d want the income and you want a guaranteed insurance on income, longevity insurance, and he says he’s got longevity. So the longer you live, the higher internal rate of return that you’re going to receive. Because there’s going to be mortality credits within the overall functionality of the product because a lot of people that do this are going to die prematurely. And so the people that are going to live a lot longer are going to make a higher rate of return. So if you have longevity in the overall family.  He thinks he’s gonna live past 96 then the numbers probably will work out. But if you lift the normal life expectancy, yeah, it’s probably not that great.

Al: It’s okay.

Joe: Okay, all right. So-

Principal Protected Investing Options for Structured Settlement for a Minor: Annuity? (Speedy Gonzalez, Western NY)

Joe: All right. “Hey, this is Speedy Gonzalez. I drive a 2015 Chevy Suburban. It’s not very speedy.  We live in Western New York. My drink of choice is Tailwind electrolytes to give me energy when I’m trail running in the Anna-“

Andi: Adirondacks.

Joe: Adirondacks? Adirondack mountains. Never been there. Never heard of it.  “If running up the mountains is not discouraging enough, I will listen to your podcast to make it a little bit more painful.”  Gee.

Al: Finally, someone who’s honest.

Joe: Yeah. Thank you. Shots fired. Let’s go.  “I’m kidding of course. I appreciate the great information you provide in such a jovial way. My 14-year-old is about to be awarded a settlement from a municipality for the amount of just over $100,000. I was informed that because he is a minor, the investing options have been principal protected- they have to be principal protected. I don’t want to have full access to the entire amount when he’s 18 for multiple reasons. I’m concerned about it affecting his federal aid package for college, taxes and I feel that is a large amount of money to hand someone with such a small amount of life experience. I greatly appreciate your spitball on the two questions below.  I’ve been told to use an annuity as a principal-protected investment because it would not impact his college financial aid as long as the disbursements were done correctly. Do you agree that annuity is the best option or are there others I should consider?”  I would not do an annuity.  Absolutely do not do an annuity.  Without question. 1000% do not do the annuity.

Al: So not only is it not the best, you wouldn’t do it at all.

Joe: I would not do this, Speedy.  It’s a real speedy way to blow up that $100,000. The only way it’s going to protect it from the- is that you annuitize it. Because there’s two things for college aid. There’s an income test and then there’s an asset test. Right. And so it’s like, all right, well, here, put the money into an annuity and then annuitize it or take distributions from it.  I don’t know, the guy’s, the kid’s 18. You want to let that money grow.

Al: Right, and it’s probably to be used for college.

Joe: Yeah, well, yeah, there it is. He got the money from the municipality, not sure why, but maybe he can use that to spend on college. “What’s the best way to ensure that disbursements are done in a way that will set him up for the most success?” Okay, I’ve never seen a structured settlement from a municipality in Western New York, so I’m going blind here.

Al: Well, it’s a spitball. You’re just spit balling.

Joe: So, but he says it has to be a principal protected investment, or he wants it to be a principal-protected investment?

Al: “I was informed that because he is a minor, the investing options have to be principal protected.” So someone told him that, whether that’s true or not.  But I mean, so yeah, you open, you open up an account, right? Which allows you to invest your kid’s money and then 18, they have full access to it, uses it for college. I do understand it will affect the college financial aid packages, but it’s his asset. I’m not sure how you avoid that one, Joe.

Joe: I would put it in CDs over the next couple of years, and then when he turns 18, I would then have a globally diversified portfolio and let him build and grow that wealth. I think it’s just all about education. You know, I think the earlier that we can teach people the compounding of interest or income or dividends or whatever over a long period of time, from, especially starting with a lump sum of $100,000 at age 16 or age 18, I mean, that money is going to double every 10 years. So let’s just say at age 20, right, from 20 to 30, that $100,000 is now $200,000, from 30 to 40, that $200,000 is $400,000, and then $400,000 is $800,000, then $800,000 is $1,600,000. I mean, so the magic of compounding is real. So maybe he needs some of that for a down payment of a home. Maybe he does spend some of that on college or maybe he takes out student loans. And then depending on what the interest rates are he has that $100,000 of capital that can help pay back the loan I mean, there’s all sorts of different things. He’s got an advantage because at that age most people in their 50s, don’t have $100,000. So I think it’s about education in regards to cash, what you want to do with it in the flexibility that could bring to a young person’s life. But I get it. You don’t want to give them the cash. He’s 16 years old. Next thing you know, you got a Porsche in the driveway or whatever Speed’s driving. He’s got a little another Yukon or whatever. So.  I don’t know. Maybe he ends up being a mountain climber.

Al: That was quite a spitball.

YMYW Podcast Survey – Last Chance!

Andi: What are your favorite and least favorite things about the Your Money, Your Wealth podcast? Complete the 7th annual YMYW Podcast Survey by noon Pacific on August 30th to help us make Your Money, Your Wealth your top, best personal finance and retirement podcast – and for your chance to win a $100 Amazon e-gift card! Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, where you can access the survey and its secret password. And for the listener who said their least favorite part of the podcast is the little breaks for the announcements, how else would you have known about the survey? US residents only, no purchase necessary, survey and giveaway close and winner chosen at 12pm Pacific time on August 30th, 2024. 

When to Stop Work and Claim Social Security and Child Benefits? (Steve, Las Vegas – voice)

“Hello, YMYW. Steve from Las Vegas.  Someone I know recently turned age 62.  She planned to immediately claim Social Security until I explained to her that she would be locking in a permanent 30% Social Security reduction by beginning Social Security so early. I also explained that if one has not reached full Social Security retirement age and continues with employment, Social Security payments are reduced $1 for every $2 of job earnings above a certain threshold.  She grosses a bit over $25,000 annually from her casino job and that’s about it. She has no other pensions or assets. However, there is an added complication. She adopted a young child.  If a parent’s retired and their child is under 18 or under 19 if the child is in school, that child can receive Social Security payments.  At this point, we have exceeded the limit of my knowledge. What do you recommend? Do you recommend a Pure Financial Social Security analysis for her? I am imagining a female financial planner with children, so my acquaintance and the planner have something in common.  Your planner could plug numbers to the Social Security calculator and discuss the results.  And of course, the central question is, what age is best for her to quit the casino job and then claim Social Security for herself and apply for Social Security benefits for the child? And maybe there’s an option of reducing work hours to part-time and claiming Social Security at the same time she makes that work hours reduction. Thank you. Steve from Las Vegas.”

Joe: Thanks Steve.  All right, so a lot of moving parts here. She’s 62. She could claim the benefits. She works at the casino, makes $25,000 bucks a year. And has a child that’s in school. What did he give the age of the child?

Al: I don’t think he did.

Joe: There’s a family maximum in regards to Social Security, so if she claims she’s going to get an added benefit because she has a child that’s under the age of majority, I don’t, I forget what that age is.

Andi: Yeah, she says she adopted a young child, so.

Joe: But she’s in school or something, right?

Andi: Right.

Al: Yeah, probably, yeah, probably several years.  You’re the Social Security expert. I have no clue.

Joe: We should introduce her to a female CFP® here at Pure Financial Advisors, and we can do a Social Security analysis. I don’t know, I think, you know, off the cuff, as a spitball, if she’s 62, depending on her age, if she’s, I would claim it, because you’re gonna get that benefit as well, and that added benefit. At $25,000, I think, what is- as a single taxpayer, what is the income limitation?

Al: It would be $22,320.

Joe: $22,300. So she makes $25,000, so she will receive a little bit of a reduced benefit on her own record just because she makes over that threshold. But it’s not going to be that drastic. She does get a 30% haircut on the overall benefit, but she gets it at 62 plus another benefit because of the child. I would absolutely want to run the numbers, but I’m thinking off the cuff. I would take it now just to get the- because she’s not going to get the child benefit without her claiming her own record. So we’ve ran analysis like this before, and I think it does make sense for her to claim early. I don’t know if it’s at 62. I don’t know how old the child is. So maybe if she waits a year or two, she’s going to have increased record, I mean, increased benefit on her own record. And then so she’ll still get the family benefit.

Al: So, yeah, I don’t know though. I mean, if she, you lose $1 for every $2 of earnings above the limit, if she’s almost $3000 above the limit, right? She’d lose $1500. She may not have that much benefit anyway. So you have to run the numbers. We don’t, we don’t know all the numbers, so it’s hard to say.

Joe: Good point. So find a good CFP®, female, that’s got children that they could have something to relate to. Thanks, Steve.

How’s Our Plan for Retirement Income? (D, Midwest)

Joe: “Hey, Joe, Big Al, Andi.  I’m taking a break from driving my great handling 2022 Honda CRV hybrid to cuddle up with my Cockapoo-“

Al: Cockapoo.

Joe: “- Cockapoo and Madipoo.”  What other kind of poo?

Al: Malti.

Joe: Maltipoo. Thank you.

Al: We have a Cavapoo.

Joe: You got a Cockapoo?

Al: Cavapoo.

Joe: Got it.

Al: Cavalier poodle.

Joe: “- while sipping on a little sweet-“

Andi: Moscato.

Joe: Moscato. What is Moscato wine?

Andi: It is “a sweet white or pink wine with a low alcohol content that pairs exquisitely with desserts and spicy food.”

Joe: Moscato wine.

Al: There you go.

Joe: Alright. “-to write you a little spitball analysis request from my Midwest screen porch.” Oh, you got a little screen porch. We own two other 2013 vehicles, a Mazda CR5 crossover and a Honda Odyssey minivan.” Alright.  Nice little group of automobiles there.

Joe: Yes. And this is D.

Al: D, yeah.

Joe: “During the summer of 2024, I was turning 56 before the end of the year. My husband of 33 years will be 56 years old. I grossed $25,000 working part time. We apply the net of his 15% to 20% annual bonus on his $170,000 gross annual salary to college funds for our two kids who are still in the nest.  His last 5 years of bonuses before retiring at 65 will be used for travel, home maintenance, Roth conversions during the years before we turn on our Social Security. Our goal is to leave inheritance to our 3 kids in after-tax accounts and the home held in trust to provide a step-up in cost basis.”  We can have the terms of financial terms though.

Al: It’s impressive.

Joe: It’s like these just thrown at us here.  Right. “Our only debt is a 3%, 30-year mortgage, which we’ll never pay off. We are hoping to retire at the end of 2033, the year we both turn 65. I intend to start Social Security at age 67, then take half my Husband’s FRA when he begins collecting Social Security, the year we both turn 70. In our spitball analysis, we presume that I’ll keep working part-time until at least age 60 and he’ll keep working full-time until 65, assuming no life events or health issues interfere with that plan. My husband’s pay increases 3% to 5% a year. He saves 15% in his Roth 401(k) and his employer matches 8% into the pre-tax 401(k). He has no pension.  Our projected home equity at this time will be $600,000 to $675,000, which will be used to buy a home or a condo outright at a lower cost area. Our current home equity is $280,000. We have 6 months of expenses in a high-yield savings account and several sinking fund accounts for cars, vacations, home repairs, vet care, etc we are seeding with my pay through 2025, they are $95,000 in total. Beginning 2026, my pay will all go into an after-tax brokerage account. Pre-tax retirement accounts currently total $535,000. Post-tax retirement accounts are $267,000. Those are our assumptions.  We are projecting growth on all accounts at 7% until age 65, then at 5% after 65. I will have a small public pension with about $325 a month beginning at 65. At the age 65 we estimate we will be in the 25% federal tax bracket or lower, expecting tax rates will increase in the future. Our current $7300 a month budget will remain essentially the same till 65.” Wow, this is a long question.

Al: Wow, keep going.

Joe: What are we doing here, D?

Al: This is a good thing to give to your financial planner.

Joe: Oh my God.

Al: Plug into the system.

Joe: Where’s, yeah.  I’ve totally lost track of everything she just told me.

Al: I got you covered.

Joe: All right. “The elimination of the $1523 mortgage and having the kids out of the house will be offset by greater health care costs as we-“ oh, you’re just telling us the assumptions. Ask me questions.  “We are projecting these account totals when we retire 65 with growth and contributions, post-tax accounts or pre-taxes, $1,200,000, post-tax $800,000. Brokerage account will be a minimum of $100,000, possibly $250,000 if I work until 65. The emergency fund will have grown to $60,000. What do you think of our plan for income? These projections are net of Medicare premiums and income tax.”  Okay. “For two years after age 65, draw $120,000 a year from pre-tax accounts, reducing the balance to $1,000,000 at 5% interest.” Well, first, you can’t do things like this.

Al: I, I think when you come up with an income strategy, you got to wait until you get there, right? Because things are going to be a lot different than you figure. I mean, right now at 56, you want to make sure you have enough to retire. Then you look at the situation of what you end up having, what your current expenses are, what your health is, right? What your goals are. And at that point you can devise the best strategy, trying to have as much as possible in a Roth IRA at that time.

Joe: Yeah. All right. So they need $120,000 a year. So at 65, $120,000 a year from pre-tax accounts. “And then at age 67, we turn on our Social Security of $844 a month and draw $115,000 from pre-tax accounts for 3 years at age 70, bringing the balance down to $727. At age 70, we will turn on my husband’s Social Security and increase mine to half of his FRA benefits for a combined net $4350 after taxes and healthcare premiums. For the next 9 to 11 years, until about age 80, we’ll draw down $66,000 to $70,000 per year pre-tax accounts until they are zero. At age 80, our untouched post-tax accounts will have grown to $827,000 to $1,600,000 or greater over the 15 years, paired with our Social Security benefits, these funds will support us for the remaining of our lives.  What’s your spitball take on our projections?”  Oh, boy.  I mean, she’s got this thing dialed in.

Al: Yeah, she’s already done the calculation. I’ll give you my spitball, Joe. So, I took a look at current spending, which works out to be $7300 a month or $88,000 a year.  And then I looked at a 3% inflation rate, 9 years from now, that’s $115,000. She got $120,000. So we’ll just go with her $120,000.

Joe: Okay. $120,000 at age 67?

Al: 65.

Joe: 65. Okay. She stopped her part-time job. Her hubby is done with work. So they need to draw $120,000 from the overall portfolio.

Al: Yeah, they’ll have, they’ll have about $2,000,000, according to their calculations, based upon how much they’re saving and what they currently have.  And the fixed income, when husband starts collecting Social Security, hers, his, and the small pension will be $5500 a month. So call it $66,000 a year.  Okay. So let’s just say- we’ll round it to $70,000. So they need $120,000. They got $70,000, they’re $50,000 short. They got $2,000,000. Looks good.  So that’s my quick spit ball. In terms of how you take those dollars, it completely depends upon what your tax brackets are at the time, which we can’t possibly even know what they are two years from now, let alone 9 years, or 15 years, or 20 years from now. So right now, the goal is to save, which you are, which is great. It looks like, to me, you’ll have enough to do what you want to do, which is great. How you distribute those is going to be contingent upon all the things I just talked about.

Joe: Well, a retirement income strategy, you can’t run it on a calculator or on a spreadsheet, because it’s the sequence of returns is what really matters once you start pulling the dollars out. So you’re saying, Hey, I’m going to pull $120,000 out of my pre-tax accounts, and I’m going to let my after-tax accounts grow. Is that the right strategy? And add 5% to pulling $120,000, you’re assuming that you’re going to get that certain rate of return each and every year. That will never happen unless you have a 5% fixed-rate CD. And who knows what interest rates are going to be by the time you turn 65. If you plan on a 5% annual growth rate, some years you’re going to get 12%, some years you’re going to get 1% or negative, right? So it’s that sequence of returns. And as you’re pulling that $120,000 out, right? If you have negative years for a couple of years, you know, that money’s going to burn out a lot quicker. If you have positive years, then that money’s going to continue to grow. So you have to look at it year by year and you have to have a strategy. From a high level to say, hey, from a 30,000 foot view, are you on track for retirement? The answer is yes, you are definitely on track. You’re saving a good amount of money. You spend within your means. You want to give a legacy. So you’re dialed in on your goals. You’re already mapping this stuff out. So you are like in the one percentile of the entire world that it is planning for retirement and you’re doing a hell of a job on your own. So congratulations there. The only thing is, it’s like once you get to retirement, you, you have to switch your strategy. It’s a totally different ballgame. You can’t run it on spreadsheets because it’s going to, who knows what happens, as Al says, with tax rates. Does it make sense to pull your after-tax accounts and then convert? Right. Or do you do a little bit of a combination, depending on where tax rates are, what’s going to happen with Social Security and so on and so forth. So from a high level, like I said, I think you’re on track. You’re doing a great job. And I think I’m going to just send you some spit balls here moving forward. So thanks D.

Outro

Andi: Serra Mesa and milk and cookies in the Derails at the end of the episode, so stick around. Your Money, Your Wealth is your podcast, so tell us what you think: complete the podcast survey in the show notes, leave a comment on our YouTube channel, and share your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts and all the other apps that accept them. 

Your Money, Your Wealth is presented by Pure Financial Advisors. Schedule a no-cost, no obligation, comprehensive financial assessment with the experienced professionals on Joe and Big Al’s team at Pure. Click the Free Financial Assessment link in the episode description, or call 888-994-6257 to book yours. Meet in person at any of our locations around the country, or online from home via Zoom, and the Pure team will work with you to create a detailed plan that’s tailored to meet your needs and goals in retirement.

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

The Derails

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