Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:08 – Should I Take the Pension Lump Sum or Monthly Income? (June, WA State)
• 09:23 – How Much Should We Convert to Roth Each Year? (Homer & Marge)
• 16:26 – Should I Convert My Entire IRA to a Roth? (Pompous Assets, Arkansas)
• 23:00 – $5M All in Pre-Tax. Should I Buy an Annuity Before It’s Too Late? (Johnny Mercer, GA)
• 36:00 – Outro: Next Week on the YMYW Podcast

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: June in Washington State is 62 with $2.5 million saved and a $350,000 pension on the table. Should she take the lump sum or the monthly check for life? Spoiler alert: there’s a 3-to-1 vote in the studio, and Big Al is the one, today on Your Money, Your Wealth® podcast number 581. Plus, how aggressive should “Homer and Marge” get with Roth conversions, and is it smart to pay the conversion tax from an inherited IRA RMD? Pompous Assets drops his big, fat wallet on the YMYW table next: with millions in tax-deferred and taxable accounts, why is his financial advisor fighting him on a Roth conversion? Of course, Joe and Big Al have some thoughts on the subject. Finally, Johnny Mercer in Georgia is eyeing an immediate income annuity and a MYGA. The fellas break down why that 7.5% “rate of return” might not be what he thinks. If you like what you hear today on YMYW, do us a favor and tell one friend about us. Word of mouth is how we grow. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should I Take the Pension Lump Sum or Monthly Income? (June, WA State)

Joe: Let’s go to June.

Al: Okay.

Joe: Washington State. Hello.

tuning in just since I discovered you guys a couple years ago. Still listening. June. That’s wonderful to hear.

Al: Yeah.

Joe: We get a lot of subscribers and a lot of de subscribers every single day.

Andi: De subscribers. Good word. I like that.

Al: do we stay even, or

Joe: it’s just, it’s a revolving door.

Andi: two steps forward, one step back, two steps forward, one step back.

Al: Yeah.

Joe: Yeah. it’s a wonderful merry-go-round, Alan.

Al: Yep.

Joe: My husband and I are planning to retire in three years when we both hit 65. Our current portfolio asset mix is about 70 30. Given the time horizon in our age, do you think our portfolio would generate enough gain to cover us through retirement?

Should we keep the current allocation? We got 70% stocks in 30% bonds.

Al: Okay.

Joe: We have a pension of $350,000.

Al: If we

Joe: take the lump, if we decide to take the lump sum,

Al: yeah.

Joe: Or we’ll receive a monthly payment of around $2,000 a month. No cola adjustment. But our, but with a survivor benefit, historically, longevity runs at both our families living until eighties and nineties.

What do you think? Should we take the lump sum and invest it in the market or take the monthly annuity? Total assets equal two and a half million dollars, $600,000 in cash bond cd. The rest in equities, monthly expenses is $7,000, not including travel monthly. Social Security is $4,200. For the both of us.

Monthly pensions is 2000, so call it 6,200 Al. current annual gross income is 230. Your spitball in input would be greatly appreciated. Again, thank you for what you do, which is so awesome and informative. Big fan of yours. June, okay. She’s in Washington State. Would like to retire. Do you think the portfolio would Jen, generate enough return, I guess is what she’s saying to, or

Al: well

Joe: have gain to cover us through retirement?

Al: Why don’t we start with the pension? Should, they take the lump sum or the pension? It’s, I just do the quick back of the envelope method. it’s 6.4% the, total pension divided by the lump sum and there’s no cola. You’re gonna do something more fancy.

Joe: Yeah. But they have longevity, right? So your IR is gonna be a lot higher.

Al: Could be.

Joe: in most cases, if they lived to 95 or if they live in their nineties, it’d be better the pension. But you’d never know when you’re gonna die, right?

Al: No,

Joe: the planning would be a lot easier. what, so what would you do, Al?

Al: I would probably take the lump sum, which is how I did the calculation.

So start with two and a half million plus three 50. That’s two of 2 million. 8 53 years. 6% adding, I dunno what they’re saving. I just said 30 k. I have no idea. So I, so they end up with about three and a half million.

Joe: How, old are they? Ho

Al: They’re 62.

Joe: 62.

Al: One retired. 65.

Joe: I’m gonna go 30 years.

Al: You do that calculation while I go through this math.

So you end up with three and a half million, 4% distribution is probably a good number. You could spend about $140,000, in future dollars. Your expenses of 84 will be 92,000 at that point. So there’s a excess of Joe, about 48,000, from the, assets, meaning that could be used for travel. So, and that’s before Social Security.

So yes, I think it looks great. I think there’s going to be able to do almost any kind of travel they wanna do.

Joe: okay, here’s the internal rate of return on the pension versus the lump sum.

Al: Okay?

Joe: If they live until 80, at 62 to 80, taking the annuity is gonna guarantee ’em 2.5%.

Al: Got it.

Joe: If you think you can do better than two point a half percent.

Al: Yeah.

Joe: then you probably take the lump sum,

Al: right?

Joe: if they live until 90, it’s a guaranteed five.

Al: Five.

Joe: I like that.

Al: Guaranteed. Five. We use 6% for portfolio. But gu there’s something good about guarantees.

Joe: There’s something good about a guarantee.

Al: yeah.

Joe: And if they, like that 70 30 split, they can take on a little bit more risk and probably get a higher rate of return with the other liquid assets.

What if they got two and a half million dollars? That’s not including the 350,000.

Al: That’s right.

Joe: I don’t know. They got 2 million there. Plus their Social Security Ford, that’s six. They want to spend how much

Al: I wanna spend 84. So there, there’s, yeah, this works no matter how you look at it.

Joe: I would take the, monthly annuity in my pension that would cover most of my living expenses.

and I would take on more risk in the portfolio.

Al: I like that.

Joe: Then I would look at conversions. I would,

Al: I think I would take the lump sum because you got a pretty good Social Security. And then I got plenty of money to do whatever.

Joe: But I bet my strategy at the end of the day, would, could, would give better results for most.

And here’s why I say that.

Al: Okay.

Joe: For you let, it, assuming the same market, right? Yeah. But you have experience in the market.

Al: Good point.

Joe: You wouldn’t freak out when things go bad.

Al: Yep.

Joe: You are able to continue to pull income from the portfolio, right? You have your discipline strategy. You’d be fine. I think most investors would not be able to weather storms as well as you.

So if I had a fixed payment that was covering most of my living expenses, I could take on more risk in my portfolio. You have to take less risk in your portfolio because you have to draw income from it.

Al: Sure.

Joe: Would you agree with that?

Al: Yeah. Or at least have enough bonds to cover several years. Yeah.

Joe: So my target rate of return would probably be more, my expected rate of return would be higher than yours on a lower number.

But since I’m taking on more risk because I don’t need that portfolio at the end of the day to maximize the total wealth of the family. I don’t know it.

Al: Yeah.

Joe: it could come out dead even.

Al: Yeah, it could

Joe: be. or else I would edgy out.

Al: You make valid points. And I, will say one thing as I get the older, I do kinda like fixed income.

Joe: Yeah. You like that paycheck?

Al: I like it. Yeah.

Joe: That paycheck coming in every week. It’s like, yeah, it feels good. It’s all right. I don’t have to spend this or that.

Or it’s not like, oh my gosh, I gotta a plan every quarter. What am I gonna sell?

Al: Yeah.

Joe: To, create the income or put in cash, or am I going to do it monthly? Am I gonna do it annually?

Al: That’s, true. That, that what you said is totally valid. I still think I do the other,

Joe: alright.

Al: Me personally,

Joe: what would you do, Aaron? Would you take the annuity or would you take the lump sum? Aaron’s taking the annuity. Andi, what are you doing?

Andi: I’m taking the monthly.

Joe: no, she’s taking the annuity.

Al: Oh. I’m outnumbered three to one.

Joe: That’s why I’m a certified financial planner here.

Al: I’m only a CPA.

Joe: showing my stripes.

Al: How would I know?

Andi: This week on the Your Money, Your Wealth® TV show, Joe and Big Al walk you through their 11-step path to financial freedom: from taking inventory of what you’ve got, to figuring out how to actually sustain your money through retirement. The same kind of math Big Al just ran for June’s? That’s the kind of stuff they cover. Click the link in the episode description to watch. Oh and see that link to the Financial Blueprint? That happens to be the special offer in this week’s TV show. It’s a free tool you can use right from home: answer some questions about where you are now, and it’ll spit out a personalized roadmap of where you actually stand, 3 scenarios for what your retirement future could look like, and what you need to do next to get there. If you’re just a few years from retirement like June, and wondering whether your numbers really work, this is a good place to start. Click the links in the episode description to watch YMYW TV and to calculate your free Financial Blueprint.

How Much Should We Convert to Roth Each Year? (Homer & Marge)

Joe: All right. We got Homer and Marge.

Al: Oh.

Joe: Simpson is, are they still airing?

Andi: It’s yeah, it is still active and it has been on since 1989, December of 1989 to present.

Joe: Wow.

Al: Wow. Okay.

Joe: So 36 years. More than 30?

Al: Yeah.

Andi: Oh my gosh.

Joe: Hi, Andi. Joe, Big Al. I’ve been listening to you all for years. Love the show. I ruined in a few years ago, but things have changed. I would love a little spitball as I’m confused. Drink of Choice is a good 15-year-old Scotch Drive, a Su Subaru these days. I’m 63, wife’s 61, both retired. We bought a house South Carolina for my wife’s daughter, son-in-law, granddaughter, and soon to be player to be named later, early next year.

Oh, that’s kind of cute. South Carolina was just in Charleston.

Al: You were

Joe: loved

Al: it. Okay.

Joe: Yeah. Played Little Kiawah Island.

Al: I’ve heard good things about it. I’ve never been.

Joe: they’ll be living with us forever. Yes. I live here too, along with my two dogs. They pay for gas, electricity, internet, and half the food wife and I bought the house and pay everything else.

Alright. So they bought the house and they pay for everything else.

Al: Yeah.

Joe: I love stress and being tortured.

Al: Evidently

Andi: he’s being facetious, obviously.

Joe: All right. Evidently. All right. I am looking for determination on how much of a Roth conversion to do each year, and a review of how I’m doing of about $2.1 million in investible assets.

Zero debt. We spend about a hundred thousand dollars a year. About 40% of this is discretionary spending, so we could cut back if needed. Summary of accounts, about $1.2 million in IRAs, 400,000 in Ross, 480 in a brokerage account. All accounts. Average at about 58% stocks, 42% bonds, treasuries, cash. My Roths are a bit more aggressive.

68% stocks, 32% bonds. About 14% are in international and index funds. Do you think this guy is like an engineer? I mean, just round.

Andi: What does Homer do? He do. He works in a nuclear power plant.

Joe: Yeah. more detailed breakdown if he cares below. No, don’t care. I have $34,000 yearly pension with a yearly cola, which will last me for life.

My wife and I will get a combined Social Security of about $55,000 per year at 77 years from now. Detailed breakdown, two inherited IRAs, one about 180. Which we take a yearly RMD under the old stretch rules, one with $30,000 under the new 10 year rule, 401(k) of $980,000 deferred, 400 Roth 401(k) three 20 in a brokerage.

Second brokerage account is 157 and mostly short term treasuries. Used for monthly spending about $50,000 in cash accounts. In an emergency fund, I have done about $65,000 in a Roth IRA conversions each of the past two years. I pay the taxes from the inherited IRA-RMD plus additional draw as necessary.

My question is this, how much of a Roth conversion should I do each year if I want to do it for the next five to seven years? Does paying outta the RMD make sense? I get about $14,000 yearly in interest in dividends from my brokerage account, 34,000 from my pension. I take 50,000 each year from cash and treasuries.

The retirement finance stuff is more work. Then when I was working, looking forward to your expert opinion on the mess above. Thanks in advance. See,

Al: okay.

Joe: It is a little bit more challenging once you retire.

Al: It is. I would agree with that. You don’t really have to think about it when you’re working.

Joe: No. You just plug away.

Just keep paving.

Al: Keep paving. That’s all you gotta do.

Joe: Take on a little risk, see what happens. Get lucky. Tone down the risk. Then retire.

Al: So Joe, they got about 2.1 million.

Joe: Yeah.

Al: Very good. That’s great. spending a hundred thousand pension, 34 shortfall 66,000.

Compared to 2.1 million, 3.1% distribution rate without Social Security.

Looks great.

So, yeah, it’s so, so far. Check

Joe: the Social Security’s gonna pay them $5,500 or $55,000 a year, plus 34.

So 85,000, they wanna spend one 10. So once Social Security happens in seven years. all So they’ll need about 20, 30,000 from the portfolio.

Al: Yeah.

Joe: The RMD, will be more than what they’ll need to spend.

Al: Yeah.

Joe: Is

Al: I think they can do, Roth conversions in the 12% bracket, and here’s why I say that. ’cause interest in dividends are 14,000 pensions 35. The, inherited IRA about 8,000, give or take 57,000 minus autotomized deductions, Joe, that would leave ’em about 25,000 a taxable income, do about 70 5K conversion, do that every year, tell Social Security.

And then you chipped away at this pretty well,

Joe: what do you think about paying the tax out of the RMD?

Al: I think I, you, you can’t pay the tax outta the RRMD, but I mean,

Joe: you can Well, she’s, he’s taking the RMD, the Oh,

Al: I see.

Joe: See, I see what you’re saying. In paying the tax with the RMD.

Al: Yeah, but that’s not for 10 years.

I think he reevaluated in 10 years and see,

Joe: no, he’s got two inherited IRAs.

Al: Oh.

Joe: He’s taking the RMD from the inherited, to pay the tax.

Al: Okay.

Joe: That’s, that was one of his questions.

Al: Okay, gotcha. yes, that’s just fine. In fact, that would be a main source in addition to the taxable. Yep, for sure.

Joe: Yeah.

I don’t think it makes a difference because let’s say if he takes the RMD and puts it in a brokerage account, then takes the brokerage account to pay the tax. It’s the

Al: same thing. same, yeah. Or put into savings or checking, pay it that way, whatever. It’s the same. Same,

Joe: yeah.

Al: That’s what I probably do 12% bracket.

I think that makes sense in this case probably.

what else you got? Is that it?

Joe: Yeah, that was his main question. How much would you do over the next five to seven years? And does paying the tax outta the RMD make sense? How much? I don’t know. 12 or 22.

He’s got $1.2 million in retirement accounts. He is 61, 63. He got 10 years. He’s got cash that he’s living off of. That 1.2 grows to two and a half million dollars by his RMD age four times two is eight 80,000 plus his pension plus his social securities in the 22.

Al: Yeah, could be.

Joe: So it’s gonna be close.

I’m, I think I might go to the 22.

Al: Maybe to start.

Joe: Maybe to start, I don’t know if I go to the top of the 22, but I think I would want to get more onto the retirement accounts, given that he has a pension and Social Security that’s gonna cover most of his needs in seven years. He’s got brokerage account that he’s already living off of and he is got these inherited IRAs that he can live off of too. 22. That’s my number

Al: 22. I go 12, 22 occasionally.

Should I Convert My Entire IRA to a Roth? (Pompous Assets, Arkansas)

Joe: Alright, let’s ramp it up with Pompous Ass.

Al: Assets.

Andi: Joe probably thinks it’s gonna be about the same either way.

Joe: We got another Roth conversion question. Imagine that. Should we convert all summer? None of our retirement accounts to a Roth. I don’t care.

Andi: Wow. Spicy today. My goodness.

Al: Wow.

Joe: I’m kidding.

Al: Maybe we should just drop this question off.

Joe: This is a pop.

Andi: Should we keep doing this show? I mean, why Joe doesn’t care.

Joe: It should seem the amount is going to be taxed at higher rates regardless. if it’s us or our two kids now or in the future if we don’t plan to use any, Doesn’t plan to use any. Should he do conversions? I figure it’s best to just eat the tax now and let it grow for as long as we live plus 10 years after and not have to worry about RMDs or taxes on that amount. Financial advisor is fighting against us using any type of the portfolio to pay for taxes.

We have enough capital losses to offset any capital gains upon liquidation to pay the taxes on the conversion. All right. Ready for this Big Al?

Al: I’m ready.

Joe: He’s got 12 and a half million dollars in a brokerage account.

Al: That’s a good start.

Andi: He waited until he got his words out before he gave you the big fat number.

Joe: He is a pompous asset. 12 and a half million. Good for you. Yeah. That’s awesome. $685,000 in cash. $5 million in the old IRA six and a half million dollars in paid off real estate.

Al: Okay. You think they can

Andi: afford? And a million dollars an other, what’s the other?

Joe: A million bucks? I don’t know. Just some odds and ends.

Al: Yeah. Yeah.

Joe: No debt, retirement, fixed income pension, Social Security. 80,000 living expenses. 4

Al: 54. 54

Joe: 50 in Arkansas.

Al: That’s, living high.

Joe: That’s,

Al: wouldn’t you think

Joe: Sam Walton style 65? Maybe it’s Sam

Andi: Walton.

Joe: It could be 65 and 67. Okay. yeah, $80,000 of pension Social Security in the 12% tax bracket I would convert.

I would not rip it all off.

Al: No, of course not.

Joe: What, bracket?

Al: I would go 24 or 32. I’m not, I don’t know. I mean, need a little more. I would do 24 in a second, but Would you go 32?

Joe: I would go 24 as well.

Al: Yeah.

Joe: I would go 24 as well. ’cause you, convert all 5 million and you can stay at a hundred percent equities. I see his point though. It’s like, okay, here I convert $5 million, I paid $2 million in taxes. I got the capital offices. So now there’s 1.5 million goes to 10 million and I got $5 million in a Roth that I can just lever. And that 5 million grows to 10 million, grows to 15 million. I never have to touch that money. I die. My spouse never has to touch that money.

Al: Sure.

Joe: She dies. The kids get it. They don’t have to touch that money for 10 years tax free. That is called compounding tax free.

Al: Like the fact that there’s so much brokerage account, it, would be kind of tempting, wouldn’t it?

Joe: I know. Looking at this, I might do it.

Al: I might too. I mean, I think the, right answer’s 24%. But

Joe: I think this is what I would do. I would go 24, 24, 24 until like a 73. When I turn 73, I’ll see how much money that I have.

Al: Yeah.

Joe: And then the whole thing, do it right before my RMD

Al: or you do 24 24 24 and the market crashes.

You do the rest of

Joe: it and do the rest when the market down 30%.

Al: Yeah. Maybe that’s what I would do.

Joe: And why do you think his broker’s fighting him on not taking any money out of the brokerage account to pay the tax?

Al: Yeah, that seems kind of obvious. by the way, a lot of times brokers get paid on the amount of your assets, so they don’t necessarily want you to take money out of your brokerage account because they get a

Joe: a pay deduction. Pay deduction, yeah. In any Roth conversion strategy, the advisor’s gonna

Al: works against the advisor if

Joe: it works against the advisor a hundred percent of the time.

Al: That’s right, because you’re giving away assets,

Joe: right. Because you have to give those assets away to pay the tax.

Al: Right.

Joe: Their asset base goes down so they’re gonna get a pay cut.

I’m not saying that advisors are of course worried about that. Maybe some,

Al: maybe some,

Joe: but it does work against them. So, and when fighting you against it, when you, I would run the numbers and I bet the family’s way better off, with ripping the bandaid off and doing a conversion given this guy’s situation.

Al: Yeah. Yeah. It’s tempting.

Joe: It is.

Al: I think that’s what I do though. I think you, you say it 24 and then market collapses and you do the whole, the rest of it.

Joe: Yep. He’s got time, he’s got 10 years to get the money out. He doesn’t have to do it all at once. I like doing it all at once

Al: in a way. Yeah.

Joe: In a way, just because it’s like now all in the Roth and so all future growth of all those dollars are 100% his and his wife’s in the families. He takes his partnership off the table of the IRS.

Al: True.

Joe: They’re no longer involved in Pompous Assets. They’re, no longer involved in the Pompous Assets.

Al: Yeah, that’s right. That was hard to say.

Joe: Yeah. Very cool.

Al: Okay, that’s pretty good.

Andi: Notice how Pompous Assets and Homer and Marge got two pretty different answers to their Roth conversion questions? That’s because there’s no one-size-fits-all rule for how aggressive to convert. It depends on your tax bracket now, your tax bracket later, what’s sitting in your brokerage account, what you actually want to do with your money in the future – and those are just the obvious variables, you may have even more! Get smarter on all of that before you consider your next conversion. Download the Ultimate Guide to Roth IRAs. Learn about different conversion strategies. The backdoor Roth, for those of you who make too much money to contribute directly to a Roth. The differences between Roth IRAs and Roth 401(k)s. How tax diversification helps your portfolio. The rules you have to know before you pull the trigger. And much more. It’s free, the link is in the episode description, and it might just save you from making a multi-million dollar mistake. And when you request it, you’ll have the option to tell us how you heard about us and I’d appreciate it if you chose “podcast.”

$5M All in Pre-Tax. Should I Buy an Annuity Before It’s Too Late? (Johnny Mercer, GA)

Joe:  Dear Andi, Joe and Al, Johnny Mercer here again from the great state of Georgia. Joe, please sit down before you read this next line. Yeah, I’m sitting down.

Al: Are you sitting? Yeah, you’re sitting.

Joe: Okay. Yes I am. I’m losing my voice though. I have a couple of questions about annuities.

Al: Oh boy.

Joe: Let’s go. First the details. I’m almost 70 and still working. My lovely and intelligent wife is almost 67.

She loves California Pinot and drives a 2022 Lexus NXI. I’m a logger beer guy and drive a 2023 Toyota RAV4. We have a spoiled king Charles Cavalier who runs the house. What’s a king? Charles Cavalier.

Al: It’s a dog.

Joe: I understand, but I, well, what does it look like?

Al: Maybe Andi will call it up. I have a Cava poo, which is half poodle, half King Charles Cavalier, so I can show, I can tell you what half of our dog looks like.

Joe: Got it. All right. there you go. Let’s-

Andi: it’s one of these, they’re cute.

Joe: Oh, okay. King Charles. Got it. I plan to retire in December, 2026. We spend $300,000 a year after taxes. but I expect that in retirement we’ll spend around 275 that equates to roughly 335,000 married finally jointly before taxes in the great state of Georgia. Starting this year, we will receive $80,000 from Social Security. When I retire, I’ll get a government pension of another $35,000 a year. We have roughly $5 million in various qualified accounts, which I will consolidate once I retire $85,000 in a Roth IRA and about a hundred thousand dollars in a brokerage account. I’m doing some relatively small convergence to the Roth, but don’t have much in after tax dollars to pay the tax. So I’m not making them a priority. My questions relate to income annuities in MAGA, multi-year guaranteed annuity. MYGA. I am leaning toward both, but I wonder if I’m being misled.

First of all. I’m thinking about buying an income annuity that will start when I retire. I will put a million dollars to cover both of us for life with a refund. That death, if we both die before the million is paid out, it looks like we can get around $75,000 a year. That wouldn’t mean we would be right around that magical 4% withdrawal rate from qualified accounts to make up the difference.

There is no cola for this, so I know that the relative. The importance of the annuity would decrease over time, but it seems like to be pretty reasonable deal anyway. All right. the second question I have is about multi-year guaranteed annuities. As far as I can tell, they seem to be. Equivalent to a cd, but are offered through insurance companies and have less liquidity, but offer a higher yield.

I know they are not FDIC insured, but as far as I can tell, the default rate is almost zero, especially if you buy from a highly rated insurance company. The lack of liquidity is not a big issue for us since we do have backup emergency funds available elsewhere. Alright. I’m thinking about having about five years worth of my gods rather than bonds and CDs to pay for the RMDs and living expenses, et cetera.

I’d love to hear your spitball on this before making any comments. Thanks again. Johnny Mercer. Or commitments.

Al: So let me just start with this, the, these, here’s my thoughts right off the bat. So first of all, some of these annuities, you can get low-cost annuities nowadays, Joe, that when we talked more about this 10, 15 years ago, was harder to get low-cost annuities. So there. In my view, some of them are better vehicles than they used to be, but they’re not the same as a CD. What happens? Yeah, you get a higher return rate, but that’s because it’s your principal coming back to you and when you die, that’s it. Now, there’s a refund option if you don’t get the million dollars. I understand that, but a CD is, yeah, it’s a lower return. You still have the principal to use.

Joe: And he’s talking about the yield though, on the multi-year annuity.

Al: No, I know. Which is,

Joe: which is the thing that he’s doing here. There’s a deferred annuity, then there is a immediate annuity. So I guess my 2 cents is this. If that, if you want to hedge against longevity, then go for it, because all it’s insurance. You’re buying insurance. So it’s income insurance you will receive.

It’s gonna be based on mortality rates. How long that you live is gonna determine what your internal rate of return is. So you’re gonna give the insurance company a million dollars. in response to that million dollars, they’re gonna guarantee you $75,000 a year for the rest of your life. If you don’t get the, million dollars back, they’re gonna sum you up to get you the million dollar principal back.

So he’s got like a little bit of a death benefit here to get the million dollars back. So you’re giving million dollars to the insurance company. They’re taking your money and they’re investing in it, in their portfolio, and they’re probably looking to get a certain target rate of return on that.

That is going to be less than what they’re giving to you. Because they have a big pool of money, they’re gonna be able to guarantee you at least at $75,000 a year at age 70. So you wanna give them a million dollars to give you $75,000 a year back. And if you die, you get your million dollars. So you made zero return on the money.

To be clear, you made zero, right? You get the, you gave them 1,000,015, you die 15 years later, you’re gonna get the million back. Over that 15 year time period, you made zero income or interest on those dollars. You agree with that?

Al: a hundred percent. 75,000 times 15 years is a million.

Joe: So you have to live longer than that. If you die prior to that, you make no money and, that’s fine. You’re just guaranteeing that you get your $75,000 per year. No matter what happens to the market. The market goes down 30%. All right? You get your 75,000, the market goes up 30%, you get 75,000. It’s not a 4% distribution rate because you’re taking principal along with it is what you were kind of referring to.

Because you’re looking at the principal plus income is gonna equal that 75,000 and you’re gonna, you don’t make a dime on the product until you outlive that 15 years and then everything after that was, is going to be your return. So if you’re fine guaranteeing income and, don’t worry about the return, then go for it.

But if you wanna make a little bit of money on your money, then it’s like, all right, well is there other options?

Al: Yeah, I think that’s well said. I mean, but a lot of people still get confused about that. They see 7.5% rate of return. That’s phenomenal. CDs pay two or three, whatever they’re paying right now. And, but the,main difference is that’s seven point half percent is also your principal coming back to you. So that at the end of the term, when you pass away, there’s nothing left unless in this case you don’t get your million back. Which, if I agree with you, Joe, if you get your million back for, maybe you got 75,000 for 10 years and then you get another chunk of two 50 or whatever it is, yeah. Then you’ve made nothing for 10 years.

Joe: He’s gonna start it at age 70. He’s gotta be 85. That’s life expectancy. 75,000 plus 15 is bucks.

Al: He’s just getting his money back at that point.

Joe: He’s just getting his money back. They’re,just slowly giving you money back over to that 15 year time period.

So he’s gotta live until 90 to make a couple of percent on the money.

Al: Right.

Joe: Right?

Al: Yep.

Joe: so then, so that’s immediate annuity. If you wanna have a guaranteed income stream, it’s coming from your qualified dollars, so you’re gonna pay ordinary income tax on it. You have less flexibility. You’re putting yourself into, what tax bracket you have no flexibility in the withdrawals.

Yep. So he’s got $80,000 in social security plus another pension of 35,000. So he wants to live off of $300,000.

Al: Yeah, he says 2 75.

Joe: Okay. 2 75. So, and that’s gonna give him another 75,000.

Al: Yeah, well right now his shortfall, so he is wants 2 75. Fixed income is one 15. His shortfall is one 60. Divide that into his assets, and it’s a 3.3% distribution rate.

So he is looking good no matter what he does. So I think he’s probably just looking for some guarantees, but he may not fully understand the, whole concept of the reason you’re getting 75,000 is they’re paying you your money back. So that’s probably the thing you gotta say. Now, if you live to a hundred, it’s probably a good deal, right?

Joe: Yeah.

Al: But I think you

Joe: I think it’s longevity insurance is what you’re buying.

Al: Yeah. But I think you still have control of your distributions, right? Because it’s inside a retirement account. So you, no,

Joe: because he’s buying it, he’s buying an immediate annuity inside. So you’re taking a lump sum and you’re exchanging the lump sum for $75,000 a year.

Al: I know, but inside a retirement account so you don’t have to take it out, right? Or am I misunderstanding?

Joe: Oh, you mean, well, the 75,000? No, what? Why wouldn’t you take it out? What do you mean?

Al: Well, you could, but if you didn’t need it, you could leave the 75,000 in the IRA. So you

Joe: wouldn’t, but you’re just one.

Alright, so you give the insurance company a million dollars. Your IRA is now worth zero. The first year it would be worth 75,000, and the second year it would be worth a hundred. You wouldn’t do that?

Al: No. No.

Andi: Why not just invest the money?

Al: Well, that’s what Joe and I would do. but we, have, you know, and I also think it, it depends upon, so we’ll go back to your sleep factor, Joe, if it helps you to sleep better at night, it’s okay.

You just have to understand what you’re getting into. But I’ll go back to my first comment was, you do have to look at the rate of return. You have to live a long time for this to kind of make sense financially. But, at the same time, because there are lower cost annuities, lower cost in terms of the upfront fees.

Joe: but there’s no fees in this. Immediate annuity has no fees.

Al: I know, but no.

Joe: You’re, exchanging money. For, it’s a spread. That’s how the insurance companies make their money. It’s just kind of, it’s similar to a cd, it’s a spread what they’re taking your money and investing in it, giving you a lower expected rate of return over that time period.

Yeah, so if I got a variable annuity, has a bunch of fees in it, if I have a, like a guaranteed income benefit rider within a variable annuity, then those have fees that I don’t necessarily have to, you know, take withdrawals. He’s talking about immediate annuity. I’m just gonna exchange it for an income stream.

That’s longevity insurance. You’re buying insurance to give you the $75,000 every year guaranteed. No matter what happens within the overall market. If you live a long time, you’re probably gonna make money. If you live a short time, well at least he gets your million dollars back. You didn’t make any money there, but you know what?

You were able to sleep well at night because you were able to get that guaranteed income. It’s like fire insurance, right? You know, want your house to burn down. But you’re gladly to pay that insurance. And if it does happen to burn down, then there you go. you got coverage or car insurance or anything like that.

You think of this as an insurance policy. I’m insuring income for the rest of my life. So no matter what happens to the market, everything goes to hell in a hand basket. It’s fine. I’m gonna get that as long as the insurance company’s gonna be solvent. But you know what? I watched last night, it’s too big to fail and when a IG kinda shit the bad, right?

there’s, then the government has to step in and kind of bail you out. But I’m not saying that. I think there’s a lot of reserves and there’s a lot more regulation and things like that within the insurance company. and these guys are smart, right? they know what they’re doing. These actuaries are like the smartest people in the business and, it’s really smart money.

So, anyway, I digress. I should’ve.

Al: I’ve got an actuary joke for you, and this is Okay. An actuary that I used to know and he said, he said, I really wanted to be an accountant, but I didn’t have enough personality, so, so it became an actuary.

Joe: Wow. I think we end on that note. I am losing my voice. My brain is fried.

Outro: Next Week on the YMYW Podcast

Andi: Next week on YMYW, can elite performers Ron and Harry semi-retire at 43 and move to Portugal? Plus, mike2me17 on Apple Podcasts and Rand and Elayne come out swinging at the fellas over YMYW’s “absurd” early-retirement safe withdrawal rates. Don’t miss it.

Your Money, Your Wealth® is your podcast, and y’all get pretty vocal on our YouTube comments. Especially if you think the fellas missed something. I love it! Already got a spitball? Go check out what people had to say about it on YouTube.

Your financial situation is different from anyone else’s, and you need a real retirement plan that fits your needs and goals, not a bunch of generic rules of thumb pulled off the internet. When you book a free financial assessment with an experienced professional on Joe and Big Al’s team at Pure Financial Advisors, they’ll walk through your full picture – your accounts, your income, your tax situation, and your goals. And you’ll come away with a real strategy you can actually use. There’s no cost, no obligation, and no pressure. Just a conversation about your money and your future. You can meet in one of our offices around the country, or via Zoom from anywhere – even Portugal. Click the link in the episode description to schedule your free financial assessment.

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

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