Bob Pozen

Robert C. Pozen is currently a Senior Lecturer at MIT Sloan School of Management and a non-resident Senior Fellow at the Brookings Institution. In 2012, he won acclaim for a popular book showing professionals how to get more done at work, entitled Extreme Productivity: Boost Your Results, Reduce Your Hours. During his distinguished career, Bob [...]


Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
August 28, 2017
how to fix retirement savings and social security
Harvard Business School Senior Lecturer and Brookings Institution Senior Fellow Robert Pozen suggests fixing the retirement savings crisis with the Automatic IRA and using Progressive Indexing to fix Social Security. Joe and Big Al discuss 6 Ways to Survive Retirement Income Shock, recourse versus non-recourse loans, RMDs on annuities in a 401(k), the difference between stocks that pay dividends and those that don’t, and Aretha Franklin’s plans for retirement.

Show Notes

  • (00:57) Recourse vs Non-Recourse Loans and Aretha Franklin’s Plans for Retirement
  • (10:01) Robert Pozen – The Automatic IRA to Fix Retirement Savings
  • (19:45) Robert Pozen – Progressive Indexing to Fix Social Security
  • (31:15) Big Al’s List: 6 Ways to Survive Retirement Income Shock
  • (40:47) Emergency Savings & Home Equity
  • (49:11) The Pros and Cons of Stocks That Pay Dividends
  • (54:01) Can You Defer Distributions from an Annuity in Your 401(K)


My proposal is pretty simple: grow the Social Security payments more slowly for the wealthier, higher income, while keeping it for the lower income, and that would really go a long way toward helping the system reach solvency. – Robert Pozen

That is Harvard Business School Senior Lecturer and Brookings Institution Senior Fellow Robert Pozen. Today on Your Money Your Wealth, he explains to Joe and Big Al how Progressive Indexing can help fix our ailing Social Security system, and how the Automatic IRA could be the answer for America’s retirement savings crisis. No wonder Joe says Bob might be the smartest man in the world. Also, Big Al Lists 6 Ways To Survive Retirement Income Shock, recourse versus non-recourse loans, RMDs on annuities in a 401(k), the difference between stocks that pay dividends and those that don’t, and Aretha Franklin’s plans for retirement. Now, here are Joe Anderson, CFP®, and Big Al Clopine, CPA.

:57 – Recourse vs Non-Recourse Loans and Aretha Franklin’s Plans for Retirement

JA: Sitting down and we’re in a new studio today.

AC: Yes, it feels different. It’s kind of cool, although we’re kind of sitting in a chair at a high table. I kinda feel like a kid again. I can hardly get up to the top of the table. (laughs)

JA: I know. My feet are swinging and I’m 6’5″. (laughs) You got to stick around today because we have probably the smartest man in the world.

AC: I think you could spend a whole segment reading his bio. Maybe you should start that.

JA: We’ve got Robert Pozen, he’s coming on. He’s a senior lecturer at MIT. Guy went to Harvard, got a law degree from Yale. Was an executive chairman for MFS Investment Management. He worked at Fidelity. He was president of Fidelity Management Research. He is a senior fellow, he worked for President Bush, he’s worked for Mitt Romney. He’s been the chairman of the Securities Exchange Commission.

AC: Gosh, we don’t even know what to ask him. We’ll do our best.

JA: I’m a little nervous. (laughs) Hey, you know what I heard on the way into the studio this morning, was that there’s a new loan program. Because we talked about student loans the other day, or the other week, and that’s kind of the coming crisis, is that I think most graduates are coming out with student loans of about 30 some odd thousand dollars, some of them are coming out with several hundred thousand dollars. Al and I’ve seen young dentists that have several hundred thousand dollars in student loan debt. And then they try to buy a practice and next thing you know, they are $1 million in debt.

AC: Yeah I think that was our record. It was $1.2, $1.3 million in debt, and they were just getting started.

JA: 30 years old. Oh wow. And then you got a mortgage on top of that. And then you’ve got kids, it’s like, man you’ve got to clean a lot of teeth. You better be sharp. (laughs)

AC: You better be a good dentist.

JA: But, you can now roll into your home mortgage some student loan debt. So you can refinance that. And there’s pros and cons to this because there are recourse loans in non-recourse loans. What’s the difference, Big Al?

AC: Well, start with the non-recourse loan, is usually what your home loan is. Meaning that, if you fail to pay, the bank can only collect based upon the equity in your home. They have no recourse to come after you. In a recourse loan, they can come after you. A lot of people don’t realize this when you refinance your home in California, it often switches from a non-recourse loan to a recourse loan. Be careful of that.

JA: Really. So how would you know?

AC: You’d have to look at the fine print.

JA: Yeah and who does that?

AC: Personally, I have tried to figure it out by looking at the fine print. I can’t make heads or tails of it.

JA: So OK, let’s say I have a mortgage, $500,000. It’s non-recourse. I refinance it to get a lower rate, or maybe to spread out my payments, maybe I did a 15 year, now I want to do a 30. Or vice versa.

AC: Yeah and I probably have mortgage lenders saying, “Clopine, you don’t know what you’re talking about.” (laughs) I will say, whether that’s true right now or not, that’s what I heard. That’s what I’ve heard over time. I don’t know if it’s changed or not. So that’s news up to date. (laughs)

JA: (laughs) Fact check. Fake news.

AC: (laughs) We gotta fact check our own broadcast, it’s terrible. Anyway, strike that, but I do know the difference. The recourse loan, the bank can come after you, personally, to collect the debt.

JA: So with student loans, there are different programs. So you’ve got to be careful with that, because if you are running into problems then you can do, like, income based loans that could reduce your overall payment, let’s say if you lose your job or you are underemployed, or something like that, where you were making maybe $150,000, you lose that job, now you’re making $60,000. You can kind of readjust the loan.

AC: That’s true, there are those provisions.

JA: So you don’t want to just look solely at the rate, and I think that’s what, a lot of times, we do when we’re looking at mortgages is just like, what is the lowest rate. But there are also some different areas that you want to make sure that you focus on.

AC: In other words, there are actually some benefits of having it be student loan debt, as opposed to home equity debt. Not to mention the home equity debt, if you refinance your home to pay off a student loan, well that’s not a purchase money mortgage interest and may not be deductible. So there you go. That I do know. I didn’t have to fact check that. That’s that’s a fact. (laughs)

JA: OK. Yeah, that’s all I got for this segment. (laughs)

AC: Well I got something. You like Aretha Franklin right?

JA: I do love Aretha Franklin.

AC: Respect?

JA Yes, R-E-S-E-P-C-T? (laughs)

AC: I got no respect for your spelling ability. (laughs) You gotta listen to the song a few more times and you’ll get it. Anyway, so she’s retiring this year. 75-years-old.  She’s going to do one more album with Stevie Wonder, going to collaborate with Stevie Wonder, which is cool. But so she’s going to retire.  And so, what do you think her conception of retirement is? She’s going to open up a little club in Detroit, downtown Detroit for musicians to perform. She said from time to time, “I will sing there, of course” because she still loves music.

JA: Well yeah, because she’s gotta to draw people into Detroit. (laughs)

AC: Have you ever been to Detroit?

JA: I have been to Detroit.

AC: Yeah. Me too. Of all things, I was there in 1984, roughly a week after the Tigers beat the Padres in the World Series. And it was interesting, to say the least.

JA: I’m from Minneapolis, and our good friend Matt Horsley’s from Detroit. So I loved it, I had a really good time in Detroit.

AC: It’s improved now right?  Because I saw it in 84′ and it was….

JA: Well I saw it probably 10 years ago, or seven. Was it better than 84 maybe? (laughs) There were still a lot of homes that were boarded up, and there was some kind of sketchy areas. But I think that’s with every big city.

AC: Yeah. And I know Detroit, more than many big cities, it’s been kind of a one industry town with automobiles, which has been somewhat of a shrinking industry.

JA: Here’s what you don’t want to do, if you’re just not Aretha Franklin, is to open up a nightclub when you retire. (laughs) Because that is probably one of the most challenging businesses is the restaurant or bar business. My uncle had a small bar in Minnesota. And that’s why he retired with maybe $20,000 to his name.

AC: So you saying it’s not the most lucrative way to go?

JA: Well, yes. Most of them fail.

AC: Why is that? Because I mean, the markup on the drinks is humongous.

JA: Yeah but you get people that like to change venues. I lived in downtown San Diego for many years, and so they need uplifts, and the hottest bar one year – people are fickle. So it’s just like, “well no, I’m kind of over that. I want to go to this one.” So all these different nightclubs need to spend millions just to rebrand themselves. Like I know what the heck I’m talking about. (laughs)

AC: This whole segment. (laughs) Hopefully, there is some humor here because there’s not much information.

JA: I think a lot of times it’s like, OK well I work 9:00 to 5:00, I did the grind, and then I’m retiring, and I’m going to follow my passion or do something that I always wanted to do, and open up a little bed and breakfast, I’m going to open up maybe a little tavern, maybe a wine bar.

AC: And it doesn’t work out like that.

JA: Not necessarily.

AC: You got the big house though. A bed and breakfast might work out.

JA: Here we go again with the house. (laughs)

AC: Conspicuous consumption? (laughs)

If you really want to learn something, stick around – Robert Pozen is about to tell us how this country could fix both our retirement savings problems and the Social Security system. In the meantime, if you want to learn about tax planning, investing, retirement planning, Social Security, estate planning, small business strategies, Medicare and much more, remember to visit YourMoneyYourWealth.com after you listen to the podcast. We’ve got white papers, articles, webinars, over 400 video clips, retirement classes, the works. It’s a veritable treasure-trove of information just waiting for you at YourMoneyYourWealth.com.

10:01 – Robert Pozen – The Automatic IRA to Fix Retirement Savings


JA: Alan, we probably have one of the smartest guests that ever came on our show.

AC: I know and you’re going to introduce him, and you’ve got a couple of pages.

JA: I’m nervous. We’ve Robert Pozen on He’s currently a senior lecturer at MIT. The gentleman went to Harvard, got law school from Yale. He’s worked at MFS, Fidelity. He’s tried to fix Social Security. There are many, many things that this gentleman has done, and now he graces us, here at Your Money, Your Wealth. But Bob, it’s a real pleasure to have you. And at the break, we were kind of talking about a few different topics, and Al and I have talked about this for many, many years. We’ve been doing the radio show here now for over 10 years. But if you take a look at two people, one has a 401(k) plan at work. The other one does not have a 401(k) plan at work. They make the same amount of income. And if you fast forward 20 years, the person with the 401(k) is going to have 1200-fold more dollars saved for retirement than the individual that doesn’t. What is going on? Why can’t we just fix this thing to make sure that everyone is working with on the same playing field?

RP: Yeah, it’s a great question, and it all comes down to inertia. When people have a 401(k) at work, and it’s really easy for them to contribute, they do contribute, especially if their employer matches them. But there’s something like 40% of all U.S. workers, which is 70 million workers, who have no retirement plan at work. Now, in theory, they could go themselves, fill out an application, and contribute each month to some financial institution. But they never get around to it. If you ask them, they all say, “yeah, I’d like to sometimes, but it’s too much of a hassle.” That’s what I mean by the power of inertia.

So what we’d like to do, is to have employers who employ the 70 million, hook up their payroll systems to any reasonable qualified IRA provider, and then to send in money as part of the payroll process. But if the employee doesn’t want to do it, he or she can opt out at any point. What we know is, that something between 60 and 80% of all these employees will choose not to opt out. That is, they’ll be OK with that money automatically going to an IRA. But if you ask them to go and fill out the application and do everything themselves, they wouldn’t get around to it. Now, as we were talking, California and Oregon and several states have tried to bring in this sort of program, and there were some rules coming out of the Labor Department to expedite these programs. But in the end, Congress decided they were against having each state do their own thing. And that’s a perfectly legitimate reason.

But why can’t we have a federal program? We should have an exemption for small employers who are only 20 or fewer employees, say, and we should make clear that the employers are not required to contribute anything to these retirement plans. They’re not going to have complicated ERISA fiduciary duties. All they have to do is connect their payrolls. We could easily have this done on a federal level, and then it would be uniform. Wherever you went, whatever state you went to, whatever place you want, it’d all be the same. And it’s really a good idea, and it would probably take, out of those 70 million people who don’t have any retirement plan, we’d probably get something like half of them. 35 million people now having retirement plans. That would be a huge step forward.

JA: What happened? So the Obama administration put together the myRA and that just folded a couple of weeks ago. What happened there?

RP: myRA was sort of too small. It basically was geared to people who were only going to save, like, $50 a month, or $25 a month, and they could only put their money into some special Treasury bonds. And there was no employer mandate. The employer could choose to get into this program, but almost no employers did. And most of the participants thought, for such small amounts it’s really not worth it. And then other participants said, I’d rather be in a stock fund or something else, I don’t want to be just in Treasury bonds. So it just never got off the ground. If we want these programs to work, we need a federal program that has uniform requirements. But we need to say to all employers who have more than, say, 20 or 25 employees, you’re required just to hook up your payroll system with a qualified financial institution – that’s all. No contribution, no ERISA fiduciary duties, nothing like that. Just hook up. And then if the employees want to opt out, they can. No problem. myRA showed that without an employer requirement, and with these very small amounts, it’s not going to go anywhere.

JA: So what you’re saying is, the reason why these small employers do not offer these 401(k) plans or a defined contribution plan, is just they don’t want the responsibility to be a fiduciary under the ERISA rules. They don’t necessarily want to put the cost together to put these plans up. Maybe they can’t afford, necessarily, to match any contributions. But what you’re suggesting is that all they’ve got to do is just plug into another program, where it wouldn’t cost the small employer, or even a large employer, any dime out of their pocket, but it would give the employee an option now to go direct payroll deducted, pre-tax or after tax, depending on what they wanted to do, into this plan, in any qualified, let’s say, 401(k) provider.

RP: Yeah. And so, really, the provider would be an IRA provider, not actually a 401(k) provider, and the provider – a bank, or mutual fund company – they would do all the work. As you say, the only thing the employer would do, they would have a little startup cost in the beginning, just to connect their payroll system. Most employers with more than 20 or 25 employees are on some sort of electronic payroll system, whether it be ADP or something like that. And so, just a little bit of administrative work at the beginning, and that’s all. We can’t expect these employers to do a lot of stuff that costs them a lot of money and make a lot of matches. But, hooking up their own payroll system, it’s not a very big deal.

AC: And so we talked before you came on, and California was pretty far along with this program, and I think Oregon was even further along, just really about really to implement it, which to me makes a lot of sense. And then the federal government came down and said, “no you can’t do it.” And I guess I understand, maybe taking your reasoning, because of the fact that it needs to be federal, it needs to be consistent. That does make a certain amount of sense, but when they repealed it, there was no mention of what they were going to offer.

RP: That’s absolutely right. Part of the other reason is there’s a technical legal problem, called pre-emption, that there is a part of ERISA, that the federal pension law, that pre-empts various state laws relating to retirement plans. So there’s a practical question and there’s a technical issue, and that’s why it gets really involved with all these legal issues, and litigation. Obama tried to change that through a Labor Department reg. But that reg is now abolished by Congress. And you’re right, it’s perfectly OK for Congress to abolish that reg because they don’t want each state going off and doing its own thing.

But we never heard of any federal legislation. And over the last five or ten years, there have been lots of senators and congressmen who have co-sponsored this bill, which is sometimes called the Automatic IRA. And actually, the two guys who originally put it together, one was from the Heritage Foundation, which is a conservative foundation, and the other one was from Brookings, which is a more liberal-oriented foundation. So both of them were backing this, so this should be a bipartisan issue. I know there aren’t a lot of bipartisan issues left in the United States. But this is really one that should be bipartisan.

There’s bipartisan, then there’s the President and his own party. We’re told that the biggest tax cut ever is on its way – will it happen this year? The President and the GOP remain divided on a number of key policy questions. How might income tax, estate tax and business tax change? Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com and download the white paper, “Tax Reform: Trump Vs. House GOP” to find out. Are your tax strategies at risk? Get year end tax-planning tips that can help you stay on track in the midst of uncertainty. Download the Tax Reform white paper to find out more. Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com

19:45 – Robert Pozen – Progressive Indexing to Fix Social Security

JA: Joe Anderson and Big Al hanging out. We’re talking to Robert Pozen, he’s a senior lecturer at MIT. Harvard grad, Yale grad, served under President Bush’s commission to strengthen Social Security, Fidelity, MFS and so much more.

AC: Bob, let me ask you another question. So with an IRA, you can only put $5,500, in but a 401(k), $18,000. And of course, the catch-up, you can do an extra $1,000 if you’re over 50 for an IRA, but an extra $6,000 for a 401(k). Can we get these uniform? Can we get these the same? Shouldn’t they be the same?

RP: Well, I think, given the current system, we want to have 401(k)s be a little more generous because we want to encourage employers to offer 401(k) plans. The second thing is, if you look at the statistics in most companies, there aren’t a lot of people who get up to $12,000, $15,000, $18,000. Frankly, it’s like the best is the enemy of the good. If we could get people to actually put $5,000 a year, it’d be a big step in the right direction. So yep, maybe we should change those requirements. But in fact, there are very few people who max out. And so, I personally feel, let’s get the automatic IRA going, and if we could increase the contribution limits for that, that’s great. But first things first.

JA: (laughs) Alan and I have been yelling in these microphones for 10 years, telling people to maximize their 401(k) plans, and Bob, you just kind of burst my bubble. No one’s listening to us. (laughs)

AC: Well, it’s because we only have three listeners. (laughs)

JA: Yeah, so I’m going to say just put $3,000 in! Dammit!

RP: If we could get people to put $5,000, it would be a big step in the right direction. And what’s interesting is that people have said for quite a long time that Millennials and people define it differently, but roughly between 20 and 35 years old, that they aren’t saving at all. But interestingly, the new statistic shows that they’re starting to save more, and that’s a really good sign, probably, as we pull out of the financial crisis. But what’s a little disturbing is, they’re not saving so much for retirement, they’re saving for nice vacations, nice restaurants, good PT, this sort of thing. So we really want these people to save, but we’d like them not to use it all up, and to think about their future. It’s a little hard when somebody is 25. But that’s why we need to educate them, as you’re trying to, to say if you do this regularly before you know it, you got a big nest egg. And we really need to educate young people that this is important. It’s hard for people to think that far ahead. But as you point out, if you save $5,000 a year for 40 years and invest it, you’re going to do pretty well, and you’re going to get some really good stuff for retirement. And if you don’t, I dunno what’s going to happen. You don’t know what’s going to happen in the long run. But we don’t want to see a lot of people really left out in the cold without enough money for retirement. That wouldn’t be too good.

JA: I’ve got one last question for you. So in 2001 and 2002, you served on President Bush’s Commission to Strengthen Social Security. Right now, the latest numbers come out that the trust fund, the OASI fund, will be completely depleted in 2035, and then maybe 70, 75%-ish would still be able to be funded. My question is: what I hear of why is this age wave, that you have the baby boomers, you’ve got 10,000 baby boomers turning 65 every day for the next 10, 12, 13 years, whatever it is, and they’re drawing a lot of the money, only a couple of people putting into the system per one person putting out, and then when it started, there was like 42 people putting into the system. But if I look at the largest generation, it’s the millennials. The Millennials are the biggest generation that we have. So as they continue to age and build the workforce, and still contribute to FICA tax, I don’t understand the math. Because if the millennials were a lot smaller number, then I could see how the math makes sense. But if they are a lot larger than the baby boomers, how does all this work?

RP: Well, first of all, it all depends on how you define these groups. But the baby boomers, for years, were the largest group going through the system. Millennials may be a little larger, but remember, these baby boomers have been contributing, and they’ve had scheduled benefits that have been too generous, in the sense that this system can’t handle it. And so, as you say, I think it’s actually now 2032, if we do nothing, then Social Security benefits will be cut across the board by about 25%. So, I’ve come up with a proposal, which is called Progressive Indexing, and you can look it up, but here it’s very simple. It says, right now, we give people more. Their schedule of benefits initially, not after they get Social Security, but initially, we take your average career earnings and we increase it by more than the Consumer Price Index. We increase it by what’s called the Wage Index. And so, the schedule is giving people more than the Consumer Price Index.

And so my proposal is pretty simple. You take the lower third of people, for whom Social Security is their major, and many cases, their sole retirement, and you keep the same schedule for that lower third. But the top third, let’s say people making more than $80,000 or $90,000 a year, you say to those people, “from now on, we’re going to give you Price Indexing, not Wage Indexing.” And it turns out that what may seem like a technical difference makes a huge difference, and it would save something from the system like $4 trillion or $5 trillion. And that would make the system not totally solvent, but it would last a lot longer. Enough so that you would have time for the millennials to come in and provide enough support. So, here’s the main thing. Over long periods of time, wages rise faster than consumer prices by about 1%. That’s how people have money to save. So over 35 or 40 years, it’s a 40% difference. In my opinion, you can’t make the people who are totally dependent on Social Security, the lower earners, people making 30, 40, $50,000, we can’t cut back their Social Security benefits. But think about all those people with 80, 90, $100,000. Those people all have 401(k)s, they all have IRAs, which are tax subsidized.

So that’s my proposal, to basically grow the Social Security payments more slowly for the wealthier, higher income while keeping it for the lower income, and that would really go a long way toward helping the system reach solvency. We need to have these millennials be in the system for another 30 or 40 years before we get the full benefit. If the system goes bankrupt in 2032, it’s not going to help us very much. I should also say that this proposal for Progressive Indexing was endorsed by both The Washington Post and The Wall Street Journal in about 2007, 2008. So it’s got some bipartisan support. And it’s a fair thing. That is, it’s fair because we spend what’s called the Tax Expenditure Budget. We subsidize IRAs and 401(k)s to the tune of over $100 billion a year. And that subsidy goes to the top third of earners, mainly. So we can slow the growth of their benefits, they would still grow at the same Consumer Price Index that we have now. But they would grow less quickly than the schedule, and we protect the people who really need it. So, that’s my simple solution to Social Security. But Social Security is such a political nightmare that people don’t want to touch it.

JA: We’re talking to Robert Pozen. Bob, I really appreciate it. Bob writes articles on the Financial Times, The New York Times, Wall Street Journal, Harvard Business Review, he’s written a few books. In 2008, he wrote a book, “Too Big to Save: How to Fix the U.S. Financial System.” We could spend probably an hour on that. We didn’t even get into that. And then “The Fund Industry: How Your Money is Managed”. Bob, where can people find you, besides those areas that I just mentioned?

RP: I have a web page called BobPozen.com. And about two years ago, I wrote a book on how to improve your own personal productivity. It’s called “Extreme Productivity: Boost Your Results, Reduce Your Hours”. So that’s been translated now, that book, into 10 languages, and it’s really a practical short book, and a lot of people find it very helpful.

JA: Bob, I really appreciate your time, this has been a true pleasure of Al and me’s, and hope to get you on again, and we can dive into the how to fix this financial system we’ve got.

AC: We might need an hour on that.

RP: Okay, let’s do it.

JA: All right buddy, that’s great. We gotta take a break. The show is called Your Money, Your Wealth. We’ll be back in just a second.

I’m glad we have brilliant financial minds like Robert Pozen’s thinking of solutions to our political nightmares like Social Security since it and Medicare are among the most important issues for anyone approaching retirement. If you or someone you know is turning 65, it’s time to start navigating the Medicare maze so you can choose the right plan for you, at the right cost. The Understanding Medicare Video Series, featuring two more brilliant financial minds – Certified Financial Planners Joe Anderson and Jason Thomas – will be available to watch on demand beginning Thursday, August 31 – sign up to watch it for free at YourMoneyYourWealth.com. Learn the basics of Medicare, how to Bridge the Gap to Medicare, and 11 Common Medicare Mistakes to Avoid. Just visit YourMoneyYourWealth.com and sign up to watch the Understanding Medicare Video Series for free on demand.

Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 6 Ways to Survive Retirement Income Shock

31:15 – Big Al’s List: 6 Ways to Survive Retirement Income Shock

Forbes Article: 6 Ways To Survive Retirement Income Shocks

AC: So there was a recent paper, study, done by the National Endowment for Financial Education, co-authored by professor Teresa Ghilarducci, which, I love saying that, that’s why I brought it up. Anyway. So here’s a couple of things they found in that survey. Before we get to the six ways to survive the shock is, by the time men reach age 66 to 70 – I’m just reading what it says, it doesn’t say, women, I’m just reading what it says – by the time men reach age 66 to 70, 96% have experienced at least four such episodes of an income shock. Which they didn’t really describe. Well, I guess they kind of did.

JA: Is a shock good or bad?

AC: Bad. Losing your job. Helping parents with assisted living. Your child may move back because they can’t find a job, you may get divorced, lots of ways to become financially shocked. So then they also said, 61% of all workers, I suppose men and women aged 25 to 70, experienced at least one episode, I guess that’s an income shock, in which they lost their earnings for an entire year.  61%. Have you ever lost your earnings for a year?

JA: Never. Knock on wood.

AC: No. Me neither. Yeah right?

JA: But I don’t think I ever would. If I’d lost my job, I would get another job. It wouldn’t matter. If I have to do whatever.

AC: Would you work at Home Depot?

JA: I could, yeah. Even though I’m not very mechanically inclined. (laughs)

AC: Work in the plumbing department? (laughs)

JA: Yes exactly. (laughs)

AC: “You want a pipe? Well, we got the pipe section. Help yourself. It’s a self-serve.” (laughs)

JA: Yeah. I would be really bad at Home Depot.

AC: So anyway, what can you do to survive a shock?

JA: So if you have an economic shock, here are your tips.

AC: Yeah. And every one of these tips is being prepared before the shock. So it’s a little misleading.

JA: Now this is the time.

AC: Yeah. (laughs) So the idea is, what can you do to survive a shock, well then you need to prepare. So let’s start with the first one, fully fund your 401(k) type plans. Could be a 403(b), 401(a), 401(k)…

JA: Just a defined contribution plan, keep it at that. Your retirement plan.

AC: We don’t have to go into each one?

JA: No. But here’s the deal. I think sometimes we get complacent, and we only have just a finite number of years of the income that you’re currently making, and you want to make sure that, every year, that you take a look at that income. Are you utilizing it the best that you possibly can in all aspects of your life? It’s not save every last penny of it, but I think we spend first, save later, and that is the wrong methodology.

AC: Yeah and I think the tendency, Joe, is we’re in our 20s. I mean, each decade you can sort of understanding. In our 20s, we’re paying off our student debt. We get into our 30s and gosh, we want a little bit better car, and we want to save for a house, and then the kids come along. All that expense. Oh, now we’ve got to start saving for college, and you wake up and you’re in your 50s with not much in savings. The point is to do this a little bit differently. Instead of saving last, save first. Just kind of get it on autopilot. And that’s the really nice thing, if you have an employer that has a 401(k), 403(b) because it comes right out of your paycheck, you don’t even have to think about it. That’s the best way to do it, because most people, what happens is, no I’m not going to put money in the 401(k). At the end of the month, I’m going to see what’s extra, and I’m going to save that. And you know how this works, there’s nothing left over.

JA: There have been so many times that I’ve tried to help people with their overall cash flow. And I used to use a strategy where, in a sense of, if you refinance your mortgage, maybe you throw in a couple of high-interest rate debt inside the mortgage, you push the payments out, that’s going to free up a couple of thousand dollars a month, and then take that a couple of thousand dollars a month and throw it into your 401(k) plan. Because right now, all their excess cash flow is going to either high credit card debt, maybe a car loan, their mortgage, maybe they have a home equity line and everything else. And so then I’m thinking, “hey I’m a really good financial advisor, I understand numbers, and if you take a look at this, this is going to free up X amount of dollars. And so if you save that, that’s also going to build wealth, yeah I know you might pay a little bit more extra interest over the long term because you’re pushing some of this debt out that should have been paid off in five years, you’re kind of refining it to over 30. But then if you look at the time value of money of those excess cash flow dollars that were developed by doing the strategy, and if you saved it at a rate of return you would make out far ahead.”

AC: Yeah. So on paper on paper, it sounds great.

JA: On paper, you’re a genius. Guess what, in real life, it doesn’t happen. It never fails.

AC: It’s not so easy. Because you got more cash flow, and you spend it.

JA: There’s a reason why they have their credit card debt, there’s a reason why there’s a home equity loan, there’s a reason why there’s a 401(k) loan, there’s a reason why there’s very little savings, to begin with. It’s the spending And so you say we can free this up, and it frees up a few thousand dollars. And then three months later you see them and guess what. “Oh, well, we bought a new car. Oh, well, we needed that needed the new kitchen.” And it’s like OK now you’re even in worse shape. I just blew you up. I did not help you at all, I just destroyed your financial life.

AC: In that case, you would have been better just paying off the debt faster. So when it comes to 401(k), then it’s like it’s automatic. So just set it up. You don’t even think about it because you get used to seeing your net pay. And most cases, probably these days, most people it’s a direct deposit, it shows up in your checking account, and that’s what you’re used to spending. You just get used to that. And then as you get raises, you keep increasing that percentage till you max out. By the way, the maximum right now is $18,000 per year. And if you’re over 50 you can add another $6,000, what they call a catch-up. So you can do $24,000. And there’s yet another bonus, I guess, on a 401(k), is the employers more often than not will match at least some of what you put in. So you put in a dollar, they put in a dollar. They’re not going to put in $18,000. But maybe the first 3 or $4,000, they’ll match it with you. So at an absolute minimum, you want to contribute up to the full match, because that’s free money.

JA: Right. But here’s the problem. I heard, read, saw, whenever, that there’s a large percentage of our population that if something happened in their financial life that cost more than $500, it would blow them up.

AC: Yes. Yeah and we see that all the time.

JA: They couldn’t handle the $500 medical bill or vet bill.

AC: Or the tires wore out.

JA: Whatever. It’s like $500. They don’t have it. We’re telling you to save $18,000. What’s the next one?

AC: Next one is related. Fund a Roth 401(k) or Roth IRA.

JA: Wow, this is genius. (laughs)

AC: (laughs) But why would you do a regular versus a Roth?

JA You would get the tax deduction for a regular. You do not get the tax deduction for the Roth. The Roth IRA, however, it grows 100% tax-free, or Roth 401(k). We can debate this all day long. I’m Roth 98%. In most cases for most people, I don’t care what tax bracket you’re in, I think the Roth IRA is a better way to go. I honestly do, because, I get it that you do not get the tax deduction. But unless people are saving a lot of money outside of their retirement accounts.

AC: Right. And they have control over their taxes in the future.

JA: No, what I mean by that is that most of the savings that Al and I see, that you have all accumulated, is in your retirement accounts. So your IRAs, 401(k)s, defined contribution plans. You’ve got millions of dollars in those plans, but you have very little money outside. There’s very little money in a non-qualified or a brokerage account. And then you might have accumulated a little bit of cash. But most of the dollars that you’ve ever invested is in the retirement accounts. If a disciplined investor is maxing out their 401(k) plan and also saving additional dollars outside of their retirement accounts, then yes, that’s the 2% that I’m talking about, that I would say go pre-tax, because a lot of times, they’re just saving into the 401(k) plan. They’re getting the tax deduction. But there are no other savings. So what that means is that the tax deduction that they’re getting, they’re not saving the deduction. So why don’t you force-save it and just go after-tax? And then everything is going to come out to you tax-free.

Visit YourMoneyYourWealth.com and sign up for free financial assessment with a Certified Financial Planner. Find out if you’re on track for retirement. How much money will you need? What Social Security strategies are available to you? How much income can you get from your portfolio? Stress test that portfolio and find out. Make sure your retirement strategy is aligned with your retirement goals. Sign up for a free two-meeting assessment with a Certified Financial Planner at YourMoneyYourWealth.com. 

40:47 – Emergency Savings & Home Equity

Well, we’re talking about six ways to survive retirement income shocks, and mostly it’s about preparation before an income shock. Income shock is losing your job, it’s getting divorced, it’s having the kids move back home after college when you weren’t expecting it, it’s having to care for the parents when you weren’t expecting it, that sort of thing. So another one, and this kind of basic stuff, but I think it’s important to talk about, make sure you have a liquid emergency savings. A lot of people that we see that do have the self-diligence to save, the ability to save, they tend to invest everything, and yet they don’t have anything in liquid savings. And I had a number of people, this is back a few years ago, but a number of people told me in the 2000s, all the way to about 2007, even 2008, “I don’t need emergency savings because I got a home equity loan.” And what happened during the real estate crisis? The banks pulled the home equity loans. That actually happened to me, too. They said, “all right, no more. What you have on it, you’ve got to pay off, and we’re not giving you any more.” There goes your emergency cash reserves. Everything else is invested. The stock market went down whatever, 30%, 40%, 50%, whatever you are invested in. And now you’ve really got no cushion. And I think for me, Joe, the Great Recession was a great reminder as to why you actually need some very boring liquid savings. CD, cash, that sort of thing.

JA: Right. I think it just takes one time to shock you, it would seem, to say, I don’t want to live through that again. You know how much financial stress that put on myself, on my family, and how you felt during that time. We’re not trying to put fear, saying hey it’s going to happen again, but there’s going to be volatility. It came back a little bit this week in the overall markets. And we’ve had a very low volatile market, and I think that breeds overconfidence. And when you have overconfidence in your investment ability, that usually brings problems. So, just be careful if you’re in retirement or close to retirement, if you don’t have a strategy to create income from the portfolio, if you don’t have an investment strategy then has the liquid safe assets that you can easily draw from. Versus now, we’re seeing a lot of 60, 70-year-olds that have a portfolio that looks like it should be someone in their 30s, because of the greed factor.

And then yeah, you’re right Al. We would run into so many people in retirement, it’s like, “well I have everything in my retirement accounts, everything is fully invested in fairly volatile, high-growth type investments,” and they’re using their home equity line as kind of a cash buffer. And then all of a sudden they pull that home equity line, and then now the market’s down. Now you have to sell stocks that are down 10, 20, 30, whatever percent. You don’t want to sell stocks when they’re down. You want to buy more. But you don’t necessarily have any mechanisms to do that, because of how your portfolio is actually structured. And I get it. Everyone hates diversification in an up market because you’re looking at whatever you hear on the media of like, “the S&P 500 is up again, all time highs, all time highs. The Dow Jones…” Those are just small slivers of the overall market. What happens when that goes down? We load up on things that are doing well. But when that goes down, everything is loaded up on that, so there’s no way to buy more of it, or to rebalance the portfolio, or to create the income that you need. So now is a really good time to take a look, to say, “what am I doing? Do I have a strategy in place?”

AC: I think so, and I think a lot of financial planners will say to have six months of living expenses in an emergency fund so, you spend $100,000 a year, six months, half of that, that’s $50,000. Some financial planners will say three months, which honestly, partly the reason they do that is because when you say six months, it sounds too hard. Some is better than nothing. But it also depends upon your ability to earn income.

JA: It’s your human capital.

AC: Human capital. So for example, if you work for the government, really safe job, you’ve been there 30 years, and you’ve got a great pension? Probably three months is enough for you. Or you’re a contractor. You never know where your next job is going to be, maybe a year or more, two years would be more appropriate. So it’s just kind of depends upon the job.

JA: Right. And then if you’re in retirement, then we have a totally different perspective because now you need to live off the assets that you’ve accumulated. So then it’s figuring out, you have to stress test the portfolio if you will, you want to look at different downturns of the markets in past, and say, “What is my recovery time of the portfolio to get it back to where it was before the crisis happened, or before the correction happened, or the Big Bear Market happened? So is that going to take me 12 months to recover, is it going to take me 36 months to recover?” If you look at the last downturn, it took some people five years to totally recover. But if they were taking dollars and distributions from those assets as well, some of them may still be on that road to recovery. So we look at, maybe it’s a five-year cushion that you have in capital, that is in Treasury bonds. TIPS or Treasury inflated protected securities. The really short term, high-grade corporates, or things like that, that you know that is going to be your safe haven when the markets are a little bit more volatile or fluctuating on you, that you don’t have to sell them – if you’re living off your assets. But don’t get confused, saying “I want everything in safe investments as I retire,” because you still have a 30-year retirement, you still need growth in the portfolio.

AC: Yeah you do Joe, and we’re talking about how to survive income shocks, and one is considering your home equity. And we’ve talked about this before and I think a lot of people don’t necessarily want to dip into their home equity, and we would generally agree with that statement, but sometimes there’s not a lot of choices. And that is, for many of you, it’s an asset. It’s one of your biggest assets, in some cases, it is your biggest asset. And if you do have an income shock, if you’re one of these people that get forced retirement earlier than you expected, or you’re out of work for a year or longer and having trouble getting back to work, there always is that home to fall back on. And in some cases, even though it’s not the first choice, at least it’s there. So you can downsize, you can sell the home and access some of that equity, you can borrow against it, although that can be difficult if you don’t have an income. If you have a home equity loan already set up, you can borrow against that. But when you’re in your 60s, 62 to be exact, or older, you can do a reverse mortgage. We don’t have enough time to go and all the pros and cons of reverse mortgages, and we don’t sell them, we’re independent.

JA: We’re not mortgage brokers. We proved that in the first segment. (laughs)

AC: (laughs) Yeah we did. Yeah. But here’s what I can tell you, as a fee only fiduciary advisor, is the reverse mortgages, in my opinion, are better now than they used to be. And for many people, I think they’re worth a look. In terms of supplementing retirement income, particularly if you’re in Southern California or at or a place that has a property that’s very expensive, and you have a lot of home equity, for many of you, it’s not necessarily the asset of the last choice.

Joe and Big Al aren’t mortgage brokers, but recently, they spoke at length with retirement researcher and American College Professor Wade Pfau about “Banking on Your House in Retirement” on the Your Money, Your Wealth television show. Visit YourMoneyYourWealth.com and learn more about reverse mortgages, the home equity line of credit or HECM, and other options for utilizing what is likely your largest asset, your home, as an income stream in retirement. Dr. Pfau, Joe and Big Al discuss why the reverse mortgage no longer deserves a bad reputation. Visit YourMoneyYourWealth.com and watch the episode, “Banking on Your House in Retirement.” And hey, don’t blame us if you end up binge-watching hours of the Your Money Your Wealth TV show while you’re there!

It’s time to dip into the email bag, with financial questions courtesy of Advisor Insights from Investopedia, and you, the Your Money, Your Wealth listeners. Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com

49:11 – What Are the Pros and Cons of Stocks That Pay Dividends?

JA: Ooh. Here’s the title of the email: “What are the pros and cons of stocks that pay dividends? I’d like to be able to tell the difference between stocks that pay dividends and those that don’t. First off, how can you find out whether or not a certain stock pays dividends? Second, is there a specific reason that some stocks pay dividends and others do not? What factors contribute to this? Finally, what are the reasons for and against investing in stocks with dividend payments?”

AC: That’s a great question. How do you find out the ones that pay dividends?

JA: Well, let’s paint this with a broad brush first, then we can kind of get in the minutia. Here’s what my advice would be for you. You want to invest in all stocks paying dividends, or non-dividend paying stocks. There are certain characteristics of dividend paying stocks, they’re a little bit more mature, versus growth, or companies that are still in very much of a growth phase, because what a dividend is, is just basically a distribution, to the shareholders, of cash. The companies do their books and say, “Here was the profitability, we need to retain some of these earnings for future growth in the overall organization, maybe we want to hire more people, we want to put more technology in, we want to expand, we need to have more infrastructure, we need whatever.” And then they look and say, “OK well we’re going to pay this dividend after that.” And in some cases, that dividend yield is somewhat flat, unless something bad happens in the overall company, where the stock price goes up, or maybe the economy, where the entire market kind of goes down. But those companies are kicking out dividends. If you have a small business, you know exactly what I’m talking about, because you pay yourself a salary, and then at the end of the year you’re going to take a dividend of whatever profits are left in the overall organization. Big organizations do the exact same thing, just on a larger scale. Other companies do not issue dividends because they’re reinvesting everything back into the overall organization.

However, that doesn’t mean it’s a good or bad thing. So there’s no pros and cons. You can create your own synthetic dividend. This is where people really mess up because they want that dividend payment. So they’re just going to focus solely on high dividend paying companies, or high dividend paying stocks because they want that income. Here’s what the confusing part is, once that dividend is distributed, the stock price goes down exactly how much the dividend was paid out. So if you got a $10 stock, and they pay you a dollar dividend, the ex-dividend date goes to at $9 a share, because they’re distributing assets out to the shareholder. People will say, “No, that doesn’t happen to my stock.” No, there’s no magic beans here. That’s what happens. So let’s say you have a company that does not issue a dividend. It’s $10 a share, but you sell one share, that’s $1. So then you just take that and spend it, and then all of us and you have nine shares. It’s the same, same. The same thing happens, it’s the same output, it’s the same outcome. So don’t be solely focused on dividend paying stocks, or solely focused on non-dividend paying stocks.

You want to make sure that you have a broadly diversified portfolio, to make sure that you’re accomplishing your overall goals. I think Al would agree, a lot of retirees and a lot of people that come into our office at first, they might have that single focus of saying, “hey I need income. So what dividend paying stocks should I be getting into? Is there a high dividend yield ETF or exchange traded fund, index fund, mutual fund, or whatever account?” Just be careful with that mentality, because that could burn you because you might be taking away too much-concentrated risk in that small sector of the overall marketplace.

AC: I couldn’t agree more Joe because when you’re looking at dividend paying stocks, as you said, they tend to be more mature companies, which are great. Johnson & Johnson, other companies like that pay dividends, but it’s only one kind of company. You tend to have the largest U.S. companies paying dividends, and you’re missing out on a whole range of companies. It turns out the smaller companies – actually, if you look at total return, which is an increase in the market plus dividends – total return is higher over the long term for smaller companies and value companies. It tends to be the companies that pay dividends are more mature, and the total return tends to be a little bit lower. The problem with dividend paying stocks, besides a concentration in a certain kind of company, is that you have no choice. They declare a dividend, whether you want the income or not, you pay tax on it.

JA: That’s Warren Buffett. He said, “Berkshire. I don’t want to give dividends, why would I want to do that?” I don’t want stocks that have dividends because I want to control the distribution when I choose to, when I need the capital, when I’m ready to pay tax. Not necessarily having the company dictate when I get my income or when I pay tax.”

AC: Right. And the flip side of that, as you already mentioned, is when a dividend is paid, the stock price goes down. So it’s kind of same-same. I’d rather be in control. And that’s what Warren Buffett learned years ago, and that’s why his company Berkshire Hathaway does not declare dividends.

54:01 – Can I Defer Distributions from an Annuity in My 401(K)?

JA: All right, we got time for one more. OK, “can I defer distributions from an annuity in my 401(k)? Now that I’m 70 years and six months old, is it necessary for me to receive distributions from a 25-year-old annuity that is held in my 401(k)? Someone told me that I would have a required minimum distribution once I reach this age. The annuity is worth $196,000, but I would like to defer any distributions. Can the distributions be deferred without penalty when the distribution is made? Is this taxed at ordinary income rates?”

AC: Interesting question. Well, it doesn’t really say if there are other assets, but inside a 401(k).

JA: True. Let’s say the 401(k) is just one big annuity. It’s probably TIAA-CREF but that would be 403(b).

AC: I guess if you only have one asset in your 401(k), or whatever it is, yes. At 70 and a half, you have to take distributions, there’s no way around that. Now I guess where my mind went, Joe, was if there were other assets in the 401(k). You could do the required minimum distribution on the other assets, and just let the annuity go.

JA: Here’s what I get out of this is that he doesn’t want to take any distributions, he wants to defer it. He doesn’t want to pay the income. So can the distributions be deferred without penalty? No. You have to take the distributions. So let’s say you had an annuity. An annuity grows tax deferred if it’s outside of it 401(k) plan or inside the shell of an IRA or 401(k) plan. So it doesn’t matter, you got tax deferred there. If it’s in a 401(k) plan, you have to take the distribution. You have to pay tax on that distribution. There is no more deferment from that. You have to pay ordinary income tax, based on a factor on publication 590. So once you turn 70 and a half, there is no way around it. So you have to take the distribution, take it out of the 401(k) account. If it was in an IRA, then there would maybe be a different story if you had another IRA. You could take the full required distribution. The RMD is based on the entire amounts of retirement accounts that you have, and it’s a percentage. But with 401(k) plans, you have to take the distribution out of each 401(k) if you have multiple. But if you had multiple IRAs, you could take one distribution out of one IRA that would cover the RMD for all your IRAs – but that’s not true for 401(k)s.

AC: So the IRS looks at IRAs as a singular IRA, even though you have 10 different ones. 401(k)s, not so much. In fact, they each consider them all separate. Now, you can roll, generally, an old 401(k)  into a new existing one, if you’re currently employed. If your plan allows it. Or you can roll it to your own IRA. And I will say this, when you do take the distribution, yes it’s taxed at ordinary income. You got an ordinary tax deduction going in. So you have to pay ordinary income taxes when it comes out.

JA: Hey, we gotta get outta here. Hopefully, you enjoyed the show. For Big Al Clopine, I’m Joe Anderson. Show’s called Your Money, Your Wealth.


So, to recap today’s show: Stocks that pay or don’t pay dividends both have their pros and cons, it just depends on what you’re looking for. Liquid emergency savings, fully funding retirement accounts, and considering home equity are ways to survive retirement income shocks. A couple other suggestions would be funding a Health Savings Account and looking at long term care expenses. And, you should probably only consider opening a nigh club in retirement if you’re Aretha Franklin. I can respect that idea.

Special thanks to our guest, Robert Pozen, for giving us his thoughts on fixing retirement savings and Social Security. Learn more about Bob, his ideas, and his book Extreme Productivity at his website, BobPozen.com.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, this show is about you! If there’s something you’d like to hear on Your Money, Your Wealth, just email info@purefinancial.com. Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

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

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