Chris Mamula retired early – at age 41! He now blogs about his experiences at CanIRetireYet.com. How did he do it, after making a decade of retirement planning mistakes? Plus 5 Things to Consider Before Tapping Your Retirement Accounts, and the good, the bad and the ugly of the popular “guaranteed income” products known as annuities. But first, the fellas have a bone to pick with CNN Money about the confusing new business tax deduction.
- (01:58) Who Can Take the New Business Tax Deduction? Even Tax Experts Aren’t Sure
- (10:40) Chris Mamula from CanIRetireYet.com
- (21:52) Chris Mamula on deciding he was ready to retire at 41
- (29:30) Big Al’s List: 5 Things to Consider Before Tapping Your Retirement Accounts
- (38:46) Big Al’s List continued: Medicare and RMDs
- (47:10) Annuities: the Good, the Bad, and the Ugly
- (55:16) Al in Futaleufú, and “Should I sign up for Social Security and Medicare at the Same Time?”
A woman helping thousands of people pay off thousands in debt – right from their smartphones, a man helping young entrepreneurs make their dreams come true, and a woman studying the retirement readiness of Americans and helping them to retire better! It’s all coming up on future episodes of Your Money, Your Wealth! Subscribe to the podcast at YourMoneyYourWealth.com so you won’t miss a minute with Ted Jenkin, Catherine Collinson and Jackie Beck on Your Money, Your Wealth – new episodes will download right to your device like magic, for you to listen to when YOU want. While you’re at YourMoneyYourWealth.com, catch up on anything you might have missed, like our recent interview with cryptocurrency expert Amanda B. Johnson. And if you don’t have time to listen, transcripts are available for every podcast in the last year, and my fingers are really tired from all that typing, so check it all out at YourMoneyYourWealth.com!
“You have to know what you spend, so you know you need to support yourself forever. We weren’t very serious the first decade of our career. It was just really this last five, six years that we got serious. And when we started tracking our spending, it was eye-opening. We always saved a high percentage. We always lived, basically, off of one of our salaries and saved the other, was what are our method was from day one, so we were saving about 50% after tax. But, we knew nothing about investing. We knew nothing about tax planning. So we were making massive mistakes, actually, for that first whole decade.” – Chris Mamula, CanIRetireYet.com
That’s Chris Mamula, who retired at the age of 41 and now blogs about his experiences at CanIRetireYet.com. How did he do it, after making a decade of retirement planning mistakes? He’ll tell us his secrets, today on Your Money, Your Wealth. Plus, before he heads off to Futaleufú, Big Al’s got 5 Things to Consider Before Tapping Your Retirement Accounts. And while Joe and Al almost never discuss annuities, today they’ll explain why, and they’ll cover the good, the bad and the ugly of these popular “guaranteed income” products. But first, the fellas have a bone to pick with CNN Money about this confusing new business tax deduction. Here they are, Joe Anderson, CFP® and Big Al Clopine, CPA.
01:58 – Who Can Take the New Business Tax Deduction? Even Tax Experts Aren’t Sure
JA: What are we doing today? We got some personal finance stuff, taxes, mortgages.
AC: Yeah it’s all the above. I’m actually pretty excited. I feel like I’m more prepared for this show than for weeks, and it’s because of Andi. She has printed out a number of great articles. So we may have to go for a third hour today.
JA: (laughs) I don’t think that’s going to happen, Bubba. I got to catch a flight. I have to go to the homeland. Minnesota.
AC: Good time of year to be going back.
JA: Oh, it’s awful. It’s 73 degrees here and it’s -2 in Minnesota.
AC: (laughs) You’re going to Minnesota just for a visit.
JA: I got some little family biz.
AC: You do. Your mom’s getting a new home.
JA: Yes. So I have to sign my life away, I guess. But yeah, it’ll be fun. Just a short trip, just couple of days. So let’s let’s kick this thing off here, Al. A lot of questions in regards to the new tax reform. The personal side we’ve been through a million times. And those are more or less small tweaks, and we can go through that if you’d like. But this article that appeared in my inbox.
AC: Yeah, one that Andi found for us.
JA: So it says this: “Who can take the new business tax deduction? Even tax experts aren’t sure.”
AC: Well so I’ll comment.
JA: This is CNN Money.
AC: Yes. So there are some incorrect facts in this article, so-called facts, but that first statement is true. And the reason why even tax professionals don’t even know exactly who qualifies is because of the very vague definition of what’s a service business, versus not a service business. We’re going to have to be wrestling with that for a while.
JA: So a couple of things. There’s a small list here, and I’ll just hit a couple of them, because some of them are right on, and some of them are in left field. But this is CNN Money. You would think…
AC: Yeah they would go check it out. They’d have their tax attorney at least look at the article before it goes out.
JA: So is my pass through a domestic trade or business? “Only pass-throughs that perform work in the United States and sell goods and services on U.S. soil can qualify for this deduction.”
AC: OK, well that’s true.
JA: That’s true. Number two: is my taxable income low enough to automatically qualify me for the deduction? So when you look at tax planning for small business owners, this year there’s going to be multiple strategies that they would probably want to consider. If you’re just a 1099 consultant, if you have a small business, if you have employees, non-employees, whatever. Because no matter what type of business that you’re in, you will qualify for this 20% deduction – the 199A?
AC: 199 capital A. Accountants like to say “199 cap A.” So if you heard your account saying that, that’s what they’re referring to. It’s a new 20% deduction for your business.
JA: So if your taxable income will be no more than $157,000 if you’re single, $315,000 if married, you will qualify for the deduction. So that’s on.
AC: That’s correct. That’s true. With one caveat, and that is there’s a secondary test which, if 20% of your taxable income is lower than 20% of your business income, you have to use that amount – the lower of the two.
JA: But keep in mind, taxable income is more than your business income and includes all income sources, such as your spouse’s earnings and your investment income. “It makes it a lot harder to get under the threshold,” is what this tax expert said.
AC: Yeah, especially if you have more income than just your business. Now, some people, maybe that’s all they have is their business, and then they get their standard deduction, and lo and behold, their taxable income is lower than their business income.
JA: But the key is, it’s on taxable income. Line 43 on your tax return. It’s not necessarily the profits, or things like that, because you could, let’s say, set up a defined benefit plan, and shelter a lot of your business income, and your business income could zero out. And then if my taxable income is under $157,000, would I still qualify? How would that work?
AC: Well see, that’s a good question, and here’s something that’s, at least to me, not entirely clear. Here’s how I think it works. So let’s say your business income is $400,000, you’re married, so you’re above the $315,000, and you do a $200,000 defined benefit plan, just to give you an example. And let’s forget all other deductions, so let’s pretend your taxable income is $200,000, and your business income is $400,000. So I think the business income part of that is, I’m thinking, it may be before the pension, because the pension is treated in a different spot on your tax return, and I could be wrong about this. Maybe some accountants are saying, “no, that’s not right.” It’s not clear to me. So the 20% of $400,000. But if your taxable income is $200,000, it’s 20% of 200, but if you have $200,000 of other income, now your taxable income is $400,000, your business income is $400,000. Do you get the 20% on the $400,000, or do you get it on the $200,000? Do you have to subtract your pension?
JA: Right. And that’s where this is going to get extremely complicated. Because when Alan and I talk tax strategies, it’s not just one strategy. We multilayer different strategies on top of each other to maximize the true benefit. But what field is my business in? So this is where it gets a little fuzzy. It says, “The law prohibits service business in certain industries from taking the deduction. These industries include health, law, accounting, actuarial service, athletics, consulting, financial and brokerage services, and the performing arts.” That is not true.
AC: Well, not only is that not true, but it conflicts with the first statement.
JA: Exactly! So this article, the headline is, “who could take the new business tax deduction? Even tax experts aren’t sure.” It should say, “even I’m not sure” – whoever wrote this!
AC: Yeah, yours truly doesn’t even know.
JA: Yeah, “I don’t even know what the hell I’m talking about, but I’m going to put this article out on CNN Money.”
AC: So here’s what we do know for sure, is if your taxable income, as a single taxpayer, is below $157,000, married $315,000, you qualify for this deduction.
JA: No matter what business.
AC: No matter what business, service or not. It’s only when your income is higher than those figures.
JA: Right. That’s when you started phasing out.
AC: Correct. And the phase-out is fairly tight, especially for a single taxpayer. So it’s like $50,000. I’ll round it. By the time you get to $207,000 of taxable income, single taxpayer, you can no longer take the deduction – if you’re a service business. And for married, it’s from $315,000 to $415,000. So once you’re above $415,000 then you can’t take this deduction. If you’re in between, then you just get a pro-rata part of the deduction.
JA: Right. And then when you’re over that, then the service businesses are no longer, but manufacturing businesses, and everything else, they will still qualify.
AC: That’s absolutely correct. And then there are some other crazy qualifiers, because not only is it the 20% of your business income or 20% of your taxable income, then it’s in the lower of. And then it’s also the lower of this other thing, which is two things the higher of.
JA: Right. So there are all sorts of different tests. You look at three different angles.
AC: The first test is 50% of your wages, in the business, not just you, the business wages, and the second test is 25% of your wages plus 2.5% of your equipment. Depreciable equipment. if it’s fully depreciated, you don’t get it, unless it’s less than 10 years. You get that, for 10 years. Talk about complicated. (laughs)
JA: Right! Tax simplification it’s best here.
“Tax simplification” indeed. For help on how the new tax law affects your business, and you personally, call us at (888) 994-6257. That’s (888) 994-6257. Are you eligible to take this new business tax deduction, and how can you take advantage of all the new changes in this tax law? We’ll help you figure it out – and if you like, we may even put you on the air to have your question answered live by Joe and Big Al on Your Money, Your Wealth, so make it a good one! Call (888) 994-6257. That’s (888) 994-6257.
10:40 Chris Mamula, CanIRetireYet.com
JA: Big Al!
AC: Time for a great guest, Joe, someone who is retired and younger than either you or me.
AC: (laughs) For you.
JA: Yeah. I gotta figure out this program.
AC: You better get on this!
JA: We’ve got Chris Mamula on the phone, and he retired at 41.
AC: Yeah, a couple of months ago.
JA: Just a couple of months ago. I’m excited to talk to Chris. Chris, welcome to the show.
CM: Thanks for having me.
JA: So what the heck are you thinking retiring at 41? You just couldn’t do it anymore, and you wanted to experience new things? Tell us about your story.
CM: Yes, sure. I was a physical therapist was what my career was. And I think you kind of get into that like you’re getting into the healthcare field, and you think you’re going to be helping people, and it’s really exciting… and just the just the bureaucracy of our health care system, it just kind of wears you down. And I think like in most careers, there’s a lot of places you can progress to. And as a physical therapist, I just found that it got very repetitious, and if you wanted to progress, you get into the management side, and again, with the bureaucracy of health care, that was the last thing I wanted to do, and I just didn’t really see a way out. So I just started planning, how could I retire early. I saw that as kind of my way out, and my way to just have the free time and just the general freedom that I wanted.
JA: As a physical therapist, what type of patients were you helping?
AC: I worked in outpatient orthopedics, so a lot of sports medicine, a lot of rotator cuffs, knee replacements, things of that nature.
JA: My ex-girlfriend was a physical therapist and she was crazy. So I can see why you got the hell out of there. (laughs)
AC: (laughs) You said that on the radio?! In front of everybody?!
JA: (laughs) Well she’s not going to listen, she hates my guts! Don’t worry about it.
AC: How many ex-girlfriends do you have?
JA: Oh, just four. (laughs) If you’re talking about this week.
AC: I think it’s more than that.
JA: So you work in the grind. You’re like, “OK, this is something that I don’t necessarily want to do.” So I’m 43. You’re 41. I couldn’t imagine myself – there have been days where I wanted to retire. Well not necessarily retire, but maybe just take a couple days off. But you said, no I’m done. How did you be able to? How are you supporting yourself and being able to say I’m financially independent at 41?
CM: Well, I would say there’s kind of two different paths we can go down with that. So on the first side, I would say that there’s this whole financially independent / retire early movement, that I would consider myself part of. And so kind of the thinking is, you save a high amount of your income, and in the process of doing that, you do two things One, you build up a lot of assets, which are then going to grow and compound and kick off income. And at the same time, because you’re saving a lot, you’re getting your expenses low, and again, low is a relative term, depending on how much you made. And so, you don’t need a whole lot to support yourself. So that’s the first way that I would consider myself financially independent. I think that I could make it forever, or at least can make it 20-30 years. We have a substantial amount of savings. But then, I think the other side of that equation is, and kind of what I’m trying to do through writing the blog and sharing my story is, I really think that we need to redefine the term retirement. I don’t really see me being in a position where I’m not going to earn any income for the rest of my life. And I think most people that can retire early, financially, probably can’t retire early, because it’s just not kind of in your genes. If you’re not wired that way, if you’re able to do the things that it takes to retire early, I guess. If that makes sense.
AC: So Chris it sounds like you went from physical therapy to now being a blog writer and so that’s partially filling your time, and I assume you have a lot more time for leisure activities or whatever?
CM: Absolutely. We skied three times this week already, and it’s been a good week for snow here. So yeah, we’re big skiers, and that’s kind of what originally drove me was I’m very into outdoor activities. I like rock climbing, I like skiing, we do mountaineering, and we were kind of gradually on this early retirement idea, but then we had a daughter five years ago. And that really cemented that my time is so valuable. And that’s what really got me serious, and that’s when I got into the technical planning side of it, and I got serious about it.
JA: So tell me about the process that you went through in regards to the planning and the preparation to be able to leave your career at such a young age. Did you say, “this is how much that we need to live off of on a monthly basis” and then re-engineered the math? Tell me a little bit about your financial planning process.
CM: Yeah for sure. So that’s where I would say we started it, is I think, and what I encourage everyone to do who wants to go down this path is, you have to know what you spend, so you know you need to support yourself forever. So yeah, I think tracking is very important, and that helps you to, first off, know what you’ll need long-term. And again, we weren’t very serious the first decade of our career. It was just really this last five, six years that we got serious. And when we started tracking our spending, it was eye-opening. We always saved a high percentage. We always lived, basically, off of one of our salaries and saved the other, was what are our method was from day one, so we were saving about 50% after tax. But, we knew nothing about investing. We knew nothing about tax planning. So we were making massive mistakes, actually, for this first decade. And then just other little stuff. I don’t really preach the whole “extreme frugality.” But my wife talked a while about getting rid of cable as something that just wasn’t necessary, and I always liked having cable. And she kind of talked me into it. And when you see the impact of, first how much it saves you, but then also how much time it frees up, and it kind of improves your life, and in a kind of motivated me to make that change. If I didn’t see how much it was costing, I probably would have done it. But it has a lot of impacts beyond the financial side. I just kind of did it as an experiment when I saw how much it was costing, and it really improved my life dramatically. So yeah, I think tracking your expenses is just vital.
AC: So the last five or six years, seven years, you got more serious. So how much are you saving at that point? Just so our listeners have a sense.
CM: So that first decade, we were basically living off my wife’s salary and saving mine, after taxes. So once we kind of started switching our mindset, we never really used our 401(k)s, at least not very much. We went to get our match. So we started maxing those out, so that’s saving us like an extra $8,000-$10,000 a year in taxes. And then, just through cutting investment fees, that was saving us, when we started, probably $8,000 to $10,000 a year, and then as our investments grew, if we would have been doing what we used to be doing, that’s probably an extra $20,000, so there’s a lot of money that was just seeping out that we didn’t even realize. I would say, the last two years, three years, we probably pushed 60, 65% of our savings rate, and that timeframe also, that was after my daughter was born. So my wife cut back to part-time work. So that was without even having the two full-time incomes that we had before.
AC: Good for you. So anyway, you retired two months ago, December 1st. And how did you make that decision, OK, now’s the time?
JA: Yeah and I got another question – were you planning on, so at 30, you’re like, “you know what, this sucks. I’m done at 40.” (laughs) So you’re like honey, she’s saying, no more cable, and you’re saying no more this than that. We’re going to start saving 50-60% of our income so I can get out of the grind at 40?
CM: Well actually, no. We did not do things optimally, and we did not have that great plan to retire early. My wife and I both came from pretty modest backgrounds. She had about $15,000 or $20,000 of debt, which in today’s terms, doesn’t sound like a whole heck of a lot. But I came from a family where debt was just absolutely a no-no. And I was able to get through school with pretty much no debt, and we were getting married, and it kind of freaked me out to go in with that. And she was also of that same mindset, she hated debt, and so we agreed that, before I even started my job as a physical therapist, we were just going to live off her salary for that year until we got married, because I was still in grad school. But I was also working part-time while I was in grad school, and I was just going to pay off her debt. And it was really just not wanting to have the debt. And then we found that we were actually living pretty good, and so we just kept saving as a down payment on a house. And then once we got our house, and we just kind of kept doing that, and we really found that we were happy living off our salary. And we were both growing our incomes at the same time too, so we weren’t stuck at any certain level, and it wasn’t really purposeful saving a set amount of dollars and being as frugal as possible. It was just, we were happy and content. And so that’s what we did.
JA: Most people, once their income increases, then they spend up. It sounds to me like you were comfortable with a certain lifestyle, and then as certain expenses dropped off, or as certain income went up, you continued to stay with your lifestyle, and then saved the additional, versus spending up – buying a new car, or upgrading to a better house, or a new wardrobe. You were like, hey, we feel really comfortable with this. Any additional income that we’re receiving, you were disciplined enough to just to sock it away.
CM: Yeah, and probably one advantage we did have is because we started so early – like most people, we were spending every penny that comes in the door, but we did allow ourselves lifestyle creep a little bit. But we just, because we were starting on one income, as it grew, and then we kind of grew our careers pretty parallel up until, again, when my wife had the baby, and she stopped working full time five years ago. So we weren’t set. We allowed ourselves to spend more. And again, I wouldn’t consider a very frugal. We traveled the world, we’ve done some pretty incredible things, we’ve been to the Super Bowl. We’re not like some ultra frugal, save every penny, watch every penny you spend. We do spend on things we value. So I’ve never really had a super nice car, or I’ve never got into fancy clothes. But by the same token, we ski regularly, we travel, we do that kind of stuff.
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21:52 Chris Mamula, CanIRetireYet.com, on deciding he was ready to retire at 41
JA: Welcome back to the show, the show is called Your Money, Your Wealth. Joe Anderson here, Certified Financial Planner, Big Al Clopine. Thanks for tuning in. We’re talking to Chris Mamula, Can I Retire Yet? So when did you start the blog CanIRetireYet.com? So you started the blog when, and what are some of the things our listeners can learn from your blog?
CM: So I actually started blogging because I was following conventional wisdom, and I wasn’t finding that it was getting me where I wanted to go and I found these weird bloggers who blogged anonymously. And at first, I didn’t trust them. And then as I started doing my research, I found this stuff’s legit, and I kind of did my homework, and I checked academic resources, and I met with a CPA who’s a friend of ours, and everything kind of checked out. I was like, this is awesome, but my story was kind of different because I had made a lot of mistakes and I wanted to share my story. So I started blogging about three years ago but I had a different blog. It was called Eat the Financial Elephant. And just on January 1st, I just started partnering with Darrow Kirkpatrick, who has CanIRetireYet.com, and he started about six years ago. He is also a fellow early retiree, and he retired at 50, and I just found, I really related to his story more than some of the more extreme blogs. And it was one that really helped me. And we just ended up having a mutual need, where he needed some extra content, and somebody to take on some of the things that he was burning out on with promoting the blog, and he’s developing new calculators, and he recently wrote a book, and I needed that credibility that he brought, and the traffic that he already has on an established site. So it just kind of worked out really nice for both of us.
JA: What is it with these people that don’t want to share their names blogging?
CM: Well, so I am public now. You guys know my name and Darrow’s, but I think when you’re working, there’s a lot of factors that go behind it. if you’re planning to retire, you don’t necessarily want to tell your boss that four years in advance or five years in advance. When you’re starting. honestly, I thought that this was real, but I didn’t know that it was really possible, and I wasn’t sure exactly what I wanted to do. So there’s that part of it. I think when you’re in healthcare, there is this impression that you’re making a ton of money, and people don’t like to pay their copays, and people get angry because of our health care system. The reality is, our reimbursements were going down the last three or four years. And it’s a challenge, and I didn’t really want to be having that conversation with everybody knowing what I’m doing, and thinking that we’re rolling in dough, because people don’t understand that we’re not making a lot, we’re being very intentional with how we spend. And I just didn’t want to deal with the headaches of that aspect of it. There’s the litigious aspect, again, when you’re doing healthcare, and you can open yourself up to maybe lawsuits and stuff. There are just a lot of reasons to stay anonymous. I like the fact that I could just come out and be open and say who I am. It was very stressful, and I was glad to lose that anonymity. But I also see why people do it.
JA: What was your little pseudo name?
CM: So my blog was called Eat the Financial Elephant and so I was Elephant Eater.
JA: (laughs) Elephant Eater.
AC: Hey, I still want to go back to December 1st. What was your mindset? Why did you think OK, now’s the time, versus a year from now, or a year ago?
CM: You get to a certain point where you have these assets built up. And I think you always question, “is this enough?” And I honestly don’t know that you ever know the answer. So when I quit, I had my investments, not including my personal residence, was about 25 times my expenses, which was the traditional definition of financial independence. But I would say that what I would consider safe, is when you give a timeline like I do, to not be spending down your principal. So I would almost probably like to have at least 33 times or even 50 times. And I know I didn’t want work that long. So for me, it was just, we had enough that I knew I was very comfortable, and we could be flexible. And I can kind of see if I can make some other things work. So I haven’t even ruled out doing a little bit of part-time PT work if I had to, like maybe a traveling assignment for two or three months a year. I hope I’m going to make some money off the blog. But there’s no guarantee of that. I’m not going to this blog expecting to make six figures a year, or anything like that. It is kind of a side hobby thing. But kind of what I’ve realized is, if you have enough that you can withdraw 4%, and say I live off $50,000 a year, if I can just make $1,000 or $2,000 a month, now I’m only withdrawing 2 or 3%, and you get into that really safe range. So the retirement plan, it’s all kind of, I guess, how you define retirement and having some flexibility built into your plans. I just reached a point where I was comfortable financially, and I was ready career-wise, I needed a break. And that’s why I made that decision for December 1st, specifically.
JA: What part of the country do you live in?
CM: So right now, we live in western Pennsylvania, outside of Pittsburgh. But I guess I was another part of the reason is, I did have this new project. I agreed with Darrow, my partner at CanIRetireYet.com that we were going to work together on this blog back in October. And I wanted to kind of get the ball rolling, and get out and start doing things, and then we’re going to be moving across country. We actually bought a house in Utah. I said we’re big skiers, we’re going to be right on the backside of Snow Basin Ski Resort. And that’s where we’ll be living as of this summer.
AC: Yes that’s a great story.
JA: Yeah, Chris, you got a great story there. Where all can people find you?
CM: The easiest way is CanIRetireYet.com, that’s our blog. I did start a Twitter account with it, I’m not real big into the social media, but we do have a Twitter account, so you can find me there it’s @canIretire_yet – and that’s probably the two easiest ways to find me.
JA: CanIRetireYet.com There it is Chris. Man, that was awesome. Mamula that’s an interesting name.
CM: (laughs) I’ve heard it all. I’ve heard it many ways – you guys did good.
JA: Yeah, well our crack research team, I’m hooked on phonics.
AC: She spelled it out so even we could figure it out.
JA: I had to practice it 14 times before we went on the air.
AC: Yeah we’re looking at this “MAM-you-la.” Then we go a little faster, Mamula.
JA: Love it. That’s Chris Mamula, folks, right there. Any parting words my friend? Any other nuggets you got for our listeners?
CM: The only thing I would say is, I think the reason that I am sharing my story and that I’m so motivated to do so, and to put myself out there, is just that I think a lot of people don’t think this is possible for them. And again, I think that I did make a lot of mistakes. I did not have an optimal path. I didn’t make a ton of money. I didn’t come with a silver spoon in my mouth, but I think that this is more possible than people think, and that’s kind of the message I’m trying to share, and I hope people will look into it if they’re interested and check us out.
JA: All right, that’s awesome, that’s Chris Mamula, CanIRetireYet.com.
So you’re dying to live life by the FIRE – that is the financial independence / retire early movement. At YourMoneyYourWealth.com you can learn from others who have already done it like Chris Mamula, as well as Andrew Fiebert from the Listen Money Matters podcast, the Dough Roller Rob Berger, Millennial Millionaire Grant Sabatier and many more, all previous guests of Your Money, Your Wealth. Hit the search bar and look for “early retirement” at YourMoneyYourWealth.com to get on your way to FIRE.
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, 5 Things to Consider Before Tapping Your Retirement Accounts.
29:30 Big Al’s List: 5 Things to Consider Before Tapping Your Retirement Accounts
AC: I think this is timely for a lot of people, because baby boomers, we’ve been saying this for years. About 10,000 baby boomers are turning 65, what do we say, each and every day.
JA: Yes sir. For the next, now what, 13 years?
AC: And we could probably say 10,000 baby boomers are turning 70 every year for the next whatever – 17, 18 years. Maybe it’s 9,900. (laughs) Not all of them made it, but most of us, hopefully. Anyway. We’re going to get into this pretty good article on things to consider because I think a lot of people learn how to save money through their 401(k) or their 403(b)s or IRAs. But that’s like, “now I got this money…” Because in the olden days, Joe, there were more pension plans. And so you just got a check. You retired, you got a check, you didn’t worry about it. Now, in many cases, even in most cases, the majority of your retirement income is coming from your IRAs and your 401(k)s for a lot of people.
JA: It sure is. I think before too, people had shorter life expectancies. So you had Social Security, pension, a little bit shorter life expectancy, so they didn’t necessarily have to take the potential risks of the stock market. They were more or less savers, not investors. So it’s a totally different ballgame. And I think, now, with the information and education, people are very familiar with saving. “I need to max out my 401(k) plan, maybe I should put money into a Roth IRA. I could just pick a target date fund and dollar cost average.” So there’s a lot more information around accumulating. But then when it comes time to taking withdrawals and distributions, it’s a totally different set of rules. It’s a totally different set of planning.
AC: It is, and so Joe, the first thing to consider, per this article, is how your withdrawals will be taxed. And in a way, it seems kind of basic, but a lot of people don’t think about this. Most retirement accounts, regular 401(k), 403(b), TSP plan, IRA, you have to pay taxes when you pull the money out. It’s all taxed as ordinary income, which is taxed the same way as your paycheck. It’s ordinary income. These are the highest of tax rates. I guess there’s one benefit, you don’t have to pay Social Security, Medicare taxes on it, but you pay the highest of tax rates, whatever bracket you’re in.
JA: So I would say most of our listeners want to replicate their paycheck in retirement. Some of you will actually spend a little bit more in retirement. Some of you, of course, we’ll spend a little bit less. But the main goal – and you and I’ve been doing this for many, many years. And so when people come into our office and they say, “yeah, I want to maintain my same lifestyle, I’m spending x amount of dollars today, I want to continue to do that, maybe add another $10,000 for trips and vacations, or spoil the grandkids.” But still, the assumption is that most people still think that will be in a lower tax bracket in retirement, but if they’re trying to replicate their paycheck, and if their paycheck is being replicated by monies coming out of a retirement account, the likelihood of them being in a lower tax bracket might not be…
AC: Yeah, we see that all the time, and of course if you haven’t saved much money, you’re not going to be at a higher bracket. We’re talking about people that have saved, who are our listeners, correct?
AC: I’m making that broad assumption. I think that’s pretty good. But now here’s the thing to consider though is, if you have a Roth IRA or a Roth 401(k), when you take money out of that, then there is no taxation. Presuming you follow a couple rules. (laughs) The five-year clock and a couple of things like that, but it’s tax-free. And if you have money outside of retirement accounts, like in your individual account, or joint account, or a trust account, not part of a retirement account. If you take money out of those accounts, first of all, savings account, there’s no tax there. If you sell some stock or mutual funds, index funds, you do pay tax, but only on the gain. You bought a mutual fund for $10,000. You sold it for $11,000. You pull $11,000 out, you pay tax on $1,000, that’s the gain part. And that’s the capital gains rate. So the reason I’m bringing all this up is because, in retirement, you want to take a good look at what you have. You have money probably and 401(k), IRAs. Do you have money in Roth IRAs? Do you have money outside of retirement? And then you start devising a strategy on how much to take from each type of account, depending upon your tax bracket. And another thing, Joe, just to take that even further is, many people when they retire, they just have money in a 401(k) and an IRA, and you may temporarily be in a lower tax bracket if you defer your Social Security. You’re not yet 70 and a half. You don’t have to take a required minimum distribution. So these are wonderful years to be doing rather large Roth conversions.
JA: Let me piggyback off that too, because if we put into the new tax reform, last year the brackets were 10%, 15%, 25%, 28%, 33%,35%, 39.6%. So let’s just talk about maybe the the the three main brackets that most people fall into. So 10%, 15%, 25% brackets for 2017. And so those brackets, as we would do financial planning with our clients, those were our go-to zones to look at, “what bracket are you in? Does it make sense to maximize those lower brackets to get money out of a retirement account to convert it to a Roth?” If you look at those brackets this year, the 10% is still 10%, but that 15 went down to 12. 25 went down to 22. So now, these conversions for a lot of you could be “on sale,” for lack of a better terminology.
AC: Yeah. And even the next bracket is 24% versus 28. So there’s actually a lot of room for people to do conversions that maybe didn’t want to do them before. For example, if you’re single and your taxable income, line 43, your taxable income is less than $157,000, the maximum tax bracket is 24%, which means some of your income is taxed at 10%, some at 12%, some at 22%, some at 24%, you probably, on your Roth conversions, most of you, may not want to go past that amount, because then you jump up into 32%.
JA: Right. And last year at $157,000 of income of a single taxpayer, potentially we saw some people fall into alt-min in that range.
AC: Yeah, which was an equivalent rate of 35%. Now it’s 24%. that’s 11% lower tax.
JA: Right. And then you have to think, “how long do you think these lower brackets are going to be here?” We have a window. Take advantage of it.
AC: Yeah, this is pretty big. Now if you’re married, you just double these numbers. So the 24% bracket goes up to $315,000 of taxable income. In most cases for California taxpayers, we’re from California, because of the high state taxes and state tax deductions that aren’t allowable for alt-min purposes, usually a married couple was subject to alt-min around $200,000, $225,000 of income, sometimes lower. And so that means, they were in an equivalent rate of 35%, which if you’re interested, send me an email and I’ll explain it to you. (laughs) But most people could care less. It was just the high tax rate. And so what we used to do is we used to the Roth conversions up to what we called the alt-min crossover rate, which means at the point you hit alt-min, any future dollars going into Roth IRA are taxed at 35% which is no bueno. No good for most of you.
JA: It would’ve killed you. But now there’s so much room in these brackets to potentially start leaking a lot of your retirement accounts and get it into a tax-free environment forever. If you’re not looking at this – man, this is going to be a great window of opportunity.
AC: I think for a lot of folks Joe, based upon 2017 versus 2018, they could convert over $100,000 or more than they did the prior year, and be in lower brackets still than they were last year. It’s pretty amazing stuff. Joe, the second thing to consider is will your withdrawals cause you to be taxed on your Social Security. And that’s an important one, because Social Security is, in some cases, it’s tax-free. It depends upon your income level. In some cases, 50% of it is taxed.
JA: Yeah, that’s $32,000 or $44,000 if you’re married.
AC: Right. And in some cases, 85% of it is taxed. And so, just realize, the higher your income, the more of your Social Security is going to be subject to tax.
Now, you and I both know there are a lot more than just five things to take into consideration before you retire and start spending down your life savings. And honestly, getting all the tools and confidence you need to make informed retirement decisions requires more than listening to Your Money, Your Wealth. Southern California, we have several opportunities for you to make sure you’re doing it right. Learn from our team in person at our two-day financial planning courses, or at our free monthly Lunch ’n’ Learn events. For dates, times and locations in San Diego, Orange County or Los Angeles, just visit The Learning Center at YourMoneyYourWealth.com or call (888) 994-6257.
38:46 – Big Al’s List continued: Medicare and RMDs
JA: Hey we’re talking about distributions, I guess, from your retirement accounts. It’s Al’s list of five things to consider before tapping your retirement accounts.
AC: Right. We talked the last segment about, “find out how your withdrawals will get taxed,” and “will your withdrawals cause more of your Social Security to be taxed.” So number three Joe, is “will your Medicare premiums go up?” Some of you may not know this, and particularly if you’re not 65 and have signed up for Medicare. The more money you make, the higher your premiums are.
JA: So right now, if your modified adjusted gross income for a single taxpayer is less than $85,000, or $170,000 for joint, your Medicare Part B premiums are $134 a month. But then, if it goes up one dollar, so if you’re making $85,001 single or $170,000 to $214,000 joint, it’s 187.50. (corrected from recording) But the point is that it starts at $134 a month, and it could get as high as $428 a month for your Medicare Part B premiums.
AC: Yeah, and that’s if your modified adjusted gross income, single, is $160,000, married is $320,000, and there’s a two year look back. So for 2018, they look at 2016. So these figures we’re talking about, you’d have to go back to 2016 return to figure out how much you’re going to be paying in Medicare premiums. And in most cases Joe, the Medicare premiums just get deducted from your Social Security. So you don’t actually pay them, but you also don’t receive your full Social Security, because they’re withholding it.
JA: Right. We talked about this a few weeks ago, but a client of ours, hypothetically, was like, “Joe, why do they keep on reducing my Social Security? What are they doing?” And it’s like, “well, you’re making too much money,” because he’s still a practicing dentist or physician. “Well, you gotta stop working if you want your Social Security to grow,” because he’s paying max Medicare benefit.
AC: Exactly. And a lot of times, people come to us when we ask them, “what are you getting in Social Security?” And they’ll say, “I don’t know $1,500 a month,” but then we have to ask the follow-up question. “Well is that what you’re receiving, or is that the gross amount?” “Well, that’s what we receive.” “Well, you’re going to be taxed on something higher, because they’re deducting the Medicare premiums,” so that always has to be factored in, because you pay taxes on the gross amount, not the net amount is how that works. The fourth thing is, what are your required minimum distributions? I think there’s a lot of confusion and mystery on this, but here’s the basic rules: your 401(k), your 403(b), your IRA, you, SEP IRA, your SIMPLE IRA. You need to start taking required minimum distributions at age 70 and a half, whether you want to or not. And so it’s s formula, and the formula for the first year is, whatever your balance is, you divide it by 27. Or if it’s easier for you to think about this, multiply it by approximately 4%. So if you have $100,000, that’s a $4,000 required minimum distribution. If it’s $1 million, it’s a $40,000 required minimum distribution – $37,000 and change, but you get the idea. That’s roughly how you do this. But then there’s all kinds of confusion, Joe, about, “well, do I just take one RMD? I got multiple accounts, I got four IRAs and six old 401(k). Do I just take one, or do I have to take it monthly or quarterly, can I do it once a year?”
JA: Right. It is confusing because it really depends on the classification of the account that you have. If you have multiple IRAs, then you can satisfy the required minimum distribution from one IRA. So you have one IRA at Fidelity, you have one IRA at Merrill Lynch, you have one IRA at T.D. Ameritrade, another one to Schwab. So then you could take the aggregate of all of those IRAs, add up the balance, and then you would take the divisor of how old you are to figure out your required distribution, and you could take that RMD from one account.
AC: Yeah. So an IRA, an Individual Retirement Account, would also include a SEP IRA and a SIMPLE IRA. So those can all be grouped together, and you take a single required minimum distribution.
JA: But if you have multiple 401(k) plans, so you have an employer-sponsored plan, and you’ve contributed to it, and you are no longer working there, and let’s say you have three different for 401(k) plans.
AC: So you kept your old ones when you left the job.
JA: You didn’t consolidate. You liked the plan, whatever. Then you would have to take three separate required minimum distributions from each of those plans.
AC: Three separate ones.
JA: So each plan needs to have their requirement taken out, versus on the IRA side, the requirement satisfied with just one, but the numbers are the same. So you figure out your required distribution on like these four or five different IRAs and let’s just assume the RMD is $40,000. So you have $1 million total in four different retirement accounts, $250,000 in each. So instead of taking 4% out of each of them, you could say, I’m going to take $40,000 out of this account, and that satisfies your required distribution. Let’s say you had four 401(k) plans. $1 million in the four 401(k) plans total, the required distribution, total, is $40,000. But you would have to take 4% out of each of those different retirement accounts to satisfy. So you’d have to pull $10,000 out of each of the four retirement accounts to satisfy the RMD.
AC: And so the person that didn’t know this rule and they took that $40,000 required minimum distribution out of their IRA, along with the IRA required distribution, so they should have taken $40,000 out of their 401(k)s. So when the IRS catches up with that, then they’ll assess you a 50% penalty. So now you have a $20,000 penalty. And plus, oh by the way, you still need to take the $40,000 out and pay tax on it.
JA: Right. Or another example would be, I have four 401(k) plans. I take $40,000 out of one 401(k) plan. So on your tax return, you’ll see a distribution, an IRA distribution of $40,000. You’re like, “OK, I pay tax on the $40,000,” but you still have three other 401(k) plans that still need to have the requirement taken out. So you still owe another $10,000 on each of those plans to take out. So you already took the $40,000. You pay tax on the 40. Then the IRS comes back and says, “hey guess what. You didn’t take these RMDs out of the other three 401(k)s. Those are required and you didn’t take it out. Now you have a 50% penalty.” So now I have to take the $10,000 requirement, plus 50% of that is five. So now I have to take $15,000 out of each of those retirement accounts and pay tax on them all! So now I have to pull another $45,000 out of the accounts to pay the tax! So my required distribution that should have been $40,000 is now $85,000 and it just blew you up!
AC: (laughs) It happens all the time, Joe. And I will tell you this. The IRS will, in many cases, be lenient the first year of the mistake. Go to your accountant, have your accountant write a letter to try to abate the penalties. But it doesn’t always work.
The final consideration before tapping your retirement accounts is to make sure you aren’t reducing your retirement balance too quickly – the last thing anyone wants is to run out of money in retirement. To keep that from happening, perhaps you’re considering guaranteed retirement income from an annuity. Before you make that decision, visit PureFinancial.com/annuities to learn more from our own Jason Thomas, CFP®. He’s written a blog and recorded a video to help you understand the pros and cons of annuities. Jason explains the different types of annuities, the tax perks, the guarantees, qualified longevity annuity contracts, as well as the costs associated, and things to watch out for. That’s PureFinancial.com/annuities. For more help in deciding if an annuity is right for you, pick up the phone and call us at (888) 994-6257. That’s (888) 994-6257. And now, let’s hear Joe and Big Al’s take on annuities:
47:10 – Annuities: the Good, the Bad, and the Ugly
AC: Joe when it comes to annuities, we typically don’t talk a lot about them, because as a fee-only advisor, a lot of annuities, not all, this is where it gets a little tricky, a lot of annuities have very high internal costs. They have very high commissions to the advisor that sells them, and they’re not necessarily in the best interest of you.
JA: Well, you got to break it down. First of all what is an annuity – an annuity just means income. So then there are different variations of it. You have a variable annuity, which I think you were referring to, where you can get into mutual fund type accounts, it will grow, and there’s a guarantee of some sort. So if you die, there could be a guarantee of principal to the heirs. If you want to put some other riders or bells and whistles on it, you could get a guaranteed income. So it grows at X amount, and then you’re going to turn on the income stream and put it on for life. There are fixed annuities where you just want, all right, that’s guaranteed by the insurance company. “They’re going to guarantee me 2 or 3%, all of that money grows tax-deferred. When I pull the money out, it’ll be taxed at ordinary income.”
AC: Or the growth will.
JA: Right, depending on if it was an after-tax contribution or if it was in your retirement account, sure. Or you could do an immediate annuity, which I think Al and I are more in favor of because this is just true insurance. You’re given a lump sum dollar figure to an insurance company, and what you would get from that lump sum is a guaranteed income stream for the rest of your life.
AC: So it’s kind of like you’re buying a pension plan.
JA: You’re buying a pension plan. So I give you $100,000, in return for that, I’ll receive $3,000 for the rest of my life. Something like that.
AC: Yeah, or whatever the number is. It’s a little bit higher than that because you’re getting principal back too, over your lifetime. And there is a train of thought, Joe, that goes like this: you take a look at your expenses. You subtract out your fixed income, like Social Security and other pension plans, and if you’re short, $20,000, $10,000, $30,000, whatever the number is, one strategy is to buy an immediate annuity to cover that shortfall, and then, therefore, it shouldn’t be 100%, because once you put the money in, you can’t get it back.
JA: Right, it’s just an income stream. It’s just like you have you think of like a company pension. You want to take the lump sum or would you rather take the annuity? This is the same thing, you’re just buying an income stream with a lump sum.
AC: Yeah, but there’s a couple of things you have to consider, I guess, if you’re considering that strategy is, these immediate annuities, the fixed ones, generally they’re not indexed for inflation. So it is what it is. So a thousand bucks a month now might feel different from a thousand bucks 20 years from now. Obviously, with inflation, it’s not going to buy as much. And the other thing that I think, right now, is a little tricky, is interest rates are really low. So if you’re buying an immediate fixed annuity right now, you’re locked in for life. And so what some people do is maybe they’ll buy one now, wait five years, ladder them. So that’s a strategy. But yeah, I guess why we don’t talk about the strategy that much is that there are these variable annuities that you hear on this and other radio stations all the time, and we don’t recommend them because of the high costs.
JA: Well that’s not necessarily true because there are all sorts of different sizes and flavors. Because we have clients that do have variable annuities, but they’re low cost, no fee, variable annuities, because of the tax consequence that would cause that. They put it into a variable annuity non-qualified account, they put $100,000 into this thing 20 years ago, now it’s worth $500,000. Well If you blow out of it, you’re going to have ordinary income tax of $400,000, so that doesn’t make any sense. Then you’re looking at, how do I rescue this thing to eliminate a lot of the unnecessary fees? So Vanguard, or there are other companies that have very, very low cost of those types of products.
AC: Right, so you actually said it better than I did. I guess where I’m coming from is, when you hear people just talking on the radio, over and over again about how great they are, maybe not in all cases, but in a lot of cases, those are the high-cost ones. There are lower cost ones, and that’s what we recommend. If you want to consider an annuity strategy, certainly costs are a big factor.
JA: Yeah, I don’t think the purpose of the program is to recommend anything. I think it’s just to have people understand, if you want to have a guaranteed income stream, well that’s an option for you. But the problem I think is what you’re alluding to is that there’s a lack of transparency, potentially, when it comes to the fees or cost or the motivations by certain individuals to sell something. If there was a little bit more transparency to say here’s exactly how it works. Here’s your true internal rate of return on this product. Because all they hear is the good things – guaranteed income. You could get a roll-up of 7%. Yeah, 7% sounds good and a guaranteed income, I can’t lose. Yeah, that sounds really good. But when you run up the numbers, like you usually do, right, you’re a CPA, so you say, “well, your real true internal rate of return on this, what you’re really getting as a return, is somewhere closer to 2%. Some people are fine with that to say, I don’t care, I’m buying insurance for my income.
AC: And of course, it depends how long you live.
JA: Of course, there are a thousand different variations.
AC: Here’s another flavor though that some people are considering, and that’s qualified longevity annuity contracts or QLAC for short. And this is where you can take a portion of your IRA, right now, 2018 that’s $130,000, but it cannot exceed 25% of your IRA balance, but you put it into this special kind of annuity, and the benefit here, Joe, is that you don’t have to take a required minimum distribution on that annuity contract. And in fact, you don’t even have to take distributions. You have to take them by 85.
JA: So how that works is this is what I’m guessing, let’s say I put $100,000 into the contract. So now it’s sitting in a contract. But that contract doesn’t really turn on until I’m 80.
AC: Yeah, or until you decide to turn it on.
JA: Right, and then it gives me a significant income.
AC: Right. So if you turn it on at 80 you get one level, if you turn it on at 83 it’s higher, 85 it’s higher still.
JA: And it’s just ensuring significant longevity.
AC: Long life. And to me, I think the concept’s fine. Again, I like the way you said it better than me. It’s the transparency.
JA: There’s a lot of things I say a lot better. (laughs)
AC: (laughs) Oh my goodness.
JA: (laughs) That was a softball.
AC: (laughs) Yeah, I suppose. It does happen occasionally.
JA: Once a year.
AC: But the transparency of the contract, the fees that you’re paying, what you’re really getting, that’s a really important component of this.
JA: Right. People are getting a little bit nervous. it’s a little frothy. Let’s maybe get in our profits and not worry about this anymore.
AC: It’s something at least worth considering, and then like I say, the downside is the fact that interest rates are really low right now.
JA: Right. I think there’s more probably down than up.
AC: Yeah, that’s partly why we don’t talk about it a lot. We’re not huge fans of annuities, but I think in their place, and the right kind of annuity, they can they can make a ton of sense.
Are annuities right for you? Visit the blog at PureFinancial.com/annuities to consider all the pros and cons of annuities in more detail, and again, before you make that decision, call us at (888) 994-6257 and we’ll help you out. (888) 994-6257. Next up: should you sign up for Social Security and Medicare at the same time? If you aren’t sure about the ins and outs of Medicare, stay tuned. But first: Futaleufú!
55:16 – Al in Futaleufú, and “Should I sign up for Social Security and Medicare at the Same Time?”
JA: What’s your book on tape that you’ve got going on right now?
AC: I’m listening to Spanish Pimsleur Level 2.
JA: (laughs) Oh my god, why do I ask.
AC: So I’ll just ask you a simple question. Let’s see, what should I ask you.
JA: When are you going to Chile
AC: Valentine’s Day when we leave.
JA: Oh. Very nice. Very nice.
AC: So I’ll ask a simple question. ¿Quiere comer conmigo?
JA: No idea.
AC: (laughs) I just asked, “would you like to eat with me.”
JA: Oh no thank you. I’m full. (laughs)
AC: (laughs) I knew you were gonna say no. That’s why I don’t ask you to do things.
JA: So Chile. What’s the agenda? What are you going to do?
AC: Well interestingly enough, I think we fly down to Santiago.
JA: How long is the flight?
AC: I don’t know how long. It’s not as long as Africa. Probably half – I don’t know. I think we go to Houston first.
JA: Oh yeah Houston is really close to Chile. (laughs)
AC: (laughs) Yeah right next to it. I think it’s due south. I think that’s how this works. I don’t know.
JA: You didn’t look at the ticket? You had your wife do all that?
AC: Annie did all that. I think by the time we leave San Diego to where we get to Santiago, it’s probably about 10-12 hours, something like that. So Ann’s cousin Siever, who’s in his early 60s, has been an adventure tour guy for 20 plus years in a place called Futaleufú in Chile. And so I’m not saying chili, I’m saying Chile because I’m getting used to Spanish. So anyway, he does whitewater rafting trips, he does fishing trips, leads hiking trips, kayaking, horseback riding.
JA: So you’re going to do all of that?
AC: I think so.
JA: You’re gonna go horseback riding, kayaking, whitewater rafting?
AC: Yeah, we’re going to be there, I think an activity probably every day.
JA Are you in shape for that?
AC: Oh yeah.
JA: You’ve been running up and down your stairs? (laughs)
AC: (laughs) Yeah, I’m solid, I’m good. So it’s right smack dab in what’s called Patagonia. And Patagonia, from pictures, I’ve never been there, is some of the most beautiful spots on earth. And Futaleufú is right in the middle of all that beauty. So anyway, I’m very excited about it.
JA: Futaleufú. Maybe you can get me a hat that says Futaleufú.
AC: I’ll bring you a hat that says I Heart Futaleufú. (laughs)
JA: (laughs) Perfect.
AC: Yeah. So I guess you’re going to have to find a guest or something.
JA: Yeah, we’ll figure it out. Best of. (laughs)
AC: (laughs) I know. We have all these plans to bring in a guest, “eh, let’s just do best of.”
JA: Go play golf.
AC: Well I know we’re going to we’re actually going to tape a show in advance, so there’s only one show that you’re going to have to figure out.
JA: Yeah. And I’m sure I can handle it. That’s exciting, Alan. Are you staying in like a hut? Staying in a hotel? What’s the lodging look like?
AC: Yeah I think we’re going to stay in a cave. No. (laughs) There’s a little hotel in Futaleufú so we’re staying in that.
JA: Is this like rustic Chile, or is it like in the city?
AC: Rustic. This is like an adventure town. So this is not like Santiago. No this is rustic.
JA: Running water?
AC: Yeah and I think there’s even Wi-Fi. I think. Maybe not. You may not hear from me for two weeks. (laughs) But I think, yeah. Running water. I think they have a restaurant or two, there’s a little grocery store.
JA: Oh OK. So maybe you have some cervezas.
AC: They have cervezas.
JA: What is a Chilean beer?
AC: No idea. I’ll find out. I will do some research. I’ll bring you back some cervezas. Dos cervezas, por favor is about all you need to learn down there.
JA: There ya go, that’s all I know.
AC: Dos cervezas frias.
AC: Yes. Very good. Look at you.
JA: Spanish 101, eighth grade. ¿Que tiempo hace? Where is the Biblioteca? I got a D. (laughs)
AC: I didn’t do so well in junior high either, but now I’m getting it, I’ve learned a couple of things.
JA: Well any parting thoughts here as we’re kind of burning up the clock?
AC: Yeah I guess we only have a few more minutes. I got this one article. “Should I sign up for Social Security and Medicare at the same time?” What do you think, Joe? Should you or shouldn’t you or it doesn’t matter? What are your thoughts there?
JA: Well depends. You need to sign up for Medicare about three months prior to your 65th birthday. If you sign up for Social Security prior to your 65th birthday you’re automatically enrolled in Medicare. Yes. So what are you asking me? This is a stupid question.
AC: No, it’s a great question because nobody knows what you just said. And I’ll repeat that because it’s important.
JA: Oh I thought you were quizzing me.
AC: Well we are doing a radio show. (laughs) It’s for our listeners, I think. It’s not just you and me. Assuming we have listeners. But anyway, if you’ve already signed up for Social Security before age 65, you will automatically be enrolled in Medicare. That’s so that’s an important thing to know right off the bat.
JA: Right. But then people get confused why don’t want it. Because I’m still working. Well, don’t worry about it. You get it if you already have a qualified health care plan. It depends on the provider but that will still probably be your primary. Medicare will be your secondary. In some cases, it’s vice versa. But then you don’t necessarily have to pay the Medicare Part B premiums until you get off your employer plan.
AC: That’s right. So to kind of repeat and add to what you said is if you’re still working at age 65, and your company has a health plan that covers 20 or more people, then you don’t have to sign up for Medicare. And the thing is, you may not want to because Medicare Part B costs you money. Part A doesn’t cost you anything, that’s hospitalization.
JA: Well, it costs you a lot, actually. It cost you 1.45% for your entire working career. (laughs) “It’s free!”
AC: But it doesn’t cost you any more to sign up for it than not sign up for it.
JA: So I took a bunch of people, a few years ago, to Minnesota in the summer for my fortieth birthday party. So we all got off the plane. I rented a bus. And we went up to these cabins up at Gull Lake and so we played golf, we had pontoons, and I rented two pontoons, I think I rented six cabins, and then the bus was full of soft drinks, adult beverages, whatever you want, snacks, you get to the cabin, cabins are filled with beer, snacks, whatever. Play golf. We have shuttles to play golf. Get back, pontoons are in the water, full of beer, snacks, waters, whatever. And my buddy, “everything’s free! This is great!” Mikey Martin, the whole time! “Everything’s free! Oh, everything is free! I gotta move to Minnesota!” I’m like, “this stuff ain’t free!”
AC: I get your point. However, my point is, whether you sign up or not, there’s no change in what you pay for Part A. But here’s another thing is, if you’re not working, and you have not you haven’t signed up for Social Security, you better sign up for Medicare, either three months before your 65th birthday, or your 65th birthday month, or 3 months after your 65th birthday month, or you may be penalized, when you finally do sign up, for the rest of your life.
JA: That’s it for us today hopefully enjoy the show for Big Al Clopine, I’m Joe Anderson. Have a wonderful weekend everyone. We’ll see you next week.
You can learn just about everything you need to know about Medicare in exhaustive detail at YourMoneyYourWealth.com – we’ve got a brand new blog post breaking down Medicaid vs Medicare, we’ve got a 3 part Understanding Medicare video series, you can learn how to bridge the gap to Medicare, and find out Medicare Mistakes To Avoid – it’s all at YourMoneyYourWealth.com. Check it out.
Special thanks to our guest, Chris Mamula. To follow Chris’ adventures in early retirement, visit his blog at CanIRetireYet.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, if you have a burning money question for Joe and Big Al to answer on Your Money, Your Wealth, just email firstname.lastname@example.org, or call (888) 994-6257! Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com.
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