ABOUT THE GUESTS

ABOUT Devin

Devin Carroll is co-host of the Big Picture Retirement podcast and the Social Security Intelligence blog. Devin has been a financial planner for over 16 years. In 2010, Devin opened his own firm, Carroll Investment Management in Texarkana, TX. His website is DevinCarroll.com. Devin has a wife, Karen, three children, and two dogs. [...]

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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently shares the CEO role with Michael Fenison, the original founder of the company. Alan is primarily responsible for the day-to-day activities of the firm while Michael’s focus is on expansion and hiring. Alan joined the firm about one year after it was [...]

Published On
January 11, 2019
Devin Carroll on Sex and Immigration: How Do They Affect Social Security?Devin Carroll on Sex and Immigration: How Do They Affect Social Security?

Devin Carroll (Big Picture Retirement podcast, Social Security Intelligence blog) explains how sex could save Social Security and the surprising effect that immigration has on your Social Security benefits. Plus, Joe and Big Al answer your questions: How should I diversify from a single highly appreciated asset? And one of the most common questions: will I outlive my money in retirement?

Listen to the podcast on YouTube:

Show Notes

Transcription

Today on Your Money, Your Wealth®: if you own a whole bunch of stock in the company you work for and it’s shot up in value, how do you diversify that? Joe and Big Al discuss various sheltering strategies and they get in the weeds discussing charitable remainder trusts, life insurance trusts, and the collar strategy – stick around to find out what that’s all about. The fellas also answer one of the most common retirement questions, will I outlive my money? Somehow they end up gossiping about George Zimmer in the process. Before we get to all that, Devin Carroll of the Big Picture Retirement podcast and Social Security Intelligence blog joins us to share some surprising considerations when it comes to the future of Social Security. I’m producer Andi Last, and here with our guest, Devin Carroll, are Joe Anderson, CFP® and Big Al Clopine, CPA.

:43 – Devin Carroll: The Effects of Sex and Immigration on Social Security

Joe: Tell us about how sex can save Social Security?

Devin: OK. So you know, frankly, that topic was not my first choice. (laughs) But we were sitting around trying to figure out, “OK, what are we going to call it?” Because this originally came out of a video that I did on my YouTube channel. And so we were thinking, “OK what can we call this to get people to click on it and thus potentially understand the subject matter?” Because people on YouTube their attention span is very short. So if I were to call it “the correlation of fertility rates and the longevity of the Social Security trust fund” no one would have clicked on it, right?

Al: (laughs) Yeah, not even me!

Devin: Yeah right. You’re like, “no, I don’t think so.” So I started thinking, “OK well, let’s call it how sex can save Social Security.” So we run it up and down in here and finally just decided, yep that sounds like a good title. So when you look at the Social Security trust fund, the trustees make several assumptions within that, and those assumptions fit into three broad categories: there’s the demographic assumptions, the economic assumptions, and then there are disability assumptions. And when you look at any of these assumptions, they generally model out an average scenario, what they refer to as a high-cost scenario and a low-cost – which, another way to think about that is worst case and best case. One of the key assumptions that they make is based on fertility rates, which is a weird thing. Now, I’ve never taken even a single class in population science or anything like that – that I remember. But, I do know that it’s a complex deal and what causes trends in fertility can be a little bit unknown. Now we had a war that happened, people were coming home. They wanted to procreate because they were faced with their own mortality and all of these things that happen, and it caused us to go through this baby boom. But throughout history, there’s been other things that have caused these either mini baby booms or the full-blown type like we had back in the late 40s. So, when you look at the baby boom that we had, I wanted to just see what would happen to the Social Security trust fund if we would go through another one. Because right now the assumptions for the Social Security trust fund running out of money, becoming insolvent, bankrupt, the sky is falling in 2034, is based on each woman having two children. Now the funny thing is, they’re being a little bit generous there because in 2017 the fertility rate or the birthrate per woman was 1.76 children. So it’s actually a little bit lower than they’re projecting it to remain moving forward. But they look at three scenarios and their three scenarios, 2.2 children per woman and 1.8. And none of those scenarios really move the needle for extending the longevity of the Social Security trust fund. But using the variance that happens between those, I wanted to see what would happen if we had another baby boom, and the births per woman got back up to 3.68, which is where they were back in 1957. Now, that’s a lot of kids. I don’t even want that kid so I’m not willing to do my part. I have three, I’m good. But, there are, again, different reasons for people having all these children and baby booms happening. And when you look at the data, if we went back through another baby boom, all the problems would be gone completely. Now, do I think that’s going to happen? No, I don’t. The Social Security trustees don’t believe that’s going to happen either. There’s a lot of reasons for that. There’s the increased use and availability of birth control, there’s female participation in the workforce that’s different than it was back in the day. The postponement of marriage and so on and so forth. There’s a number of factors here. But what I was really trying to underscore with this whole thing is not a conversation on fertility, but really, it was to underscore the fact that when we’re dealing with something over a long term period, there are a few factors that could be off. That could dramatically change the scope of what we’re facing. So again, do I think it’s something that doesn’t need to be addressed with the shortfall in the Social Security trust fund? No, I think we need to take some steps – but I don’t think that the skies necessarily falling in quite the same way that others do.

Joe: Devin I have an interesting take on this as well. Everyone kind of blames the baby boomers, right, this age wave. So you got 10000 baby boomers turning 65 every day for the next so many years and so on and so forth. And that because this age wave is coming through and that so many more people are collecting the Social Security benefit that it’s blowing up the overall system and that our population is aging and dying. But I’ve seen studies, and I’m not an expert in population at all, but you look at the greatest generation, and then you have the baby boomer generation, then you have what Generation X, Y, millennials, then Z and LMNOP, whatever – but the largest generation are the millennials.

Al: Yeah at the moment.

Joe: So it’s like okay well there’s this age wave. There was a little bit of gap I guess in Generation X, which is me, because yeah, I’m still single, don’t have kids. (laughs) But if you’ve got the millennials that are coming through the system with the largest population, they will be making income, paying taxes, feeding the system. What’s your take on that, sir?

Devin: You know, I think there’s a lot of factors that will impact Social Security – now we’re getting to a point though where we have a very shortened window to deal with this. Every year when the trustees’ report is coming out, they’re able to get an accurate measurement of all of those assumptions from the prior year. And truthfully, they’re being pretty accurate. But let me give you a couple of examples of things that could change. Number one, we have birth rates, right, we’ve already talked about that. Just an interesting side note on birth rates: I haven’t verified this either, but I’ve seen a couple of articles on this – that there are some countries who are recognizing that declining fertility rates is an issue. We have the optimal replacement rate of about 2.1 per woman. So each woman needs to have 2.1 children in order for us to replace the population. In other countries, they’re right around that same mark, and they’re not there either. So, I saw a report that said in Italy that they are offering free land to anyone who will have a third child. (laughs) And then I saw another report where someone had raised the proposal of some college loan forgiveness for having three children in the US. I mean, so who knows. There’s a lot of things that could happen, but it’s gonna take a while for that stuff to work its way through the system.

Let’s look at the impact of immigration. So there is another one of the demographic assumptions that they make. Now, this has been a hot topic lately.

Joe: Hot potato.

Devin: Yeah, it’s heavily divided, right?. But let’s just forget all of the division that’s happening and let’s talk about what’s actually going on. So we’ve got these immigrants that are coming into the U.S. They are doing work, and they are mostly paying Social Security taxes that are going into the earnings suspense file. Now, that’s where the Social Security Administration puts money that comes in that they can’t match up to an earner. Now, why can’t they match that up to an earner? Well, it’s because most of these immigrants are using a Social Security number that’s not theirs. Now, let me give an example of the kind of dollars we’re talking about here: in 2010, the Social Security Administration estimated that unauthorized immigrants contributed $12 billion into the trust fund and that they only expect that to increase. So, built into the assumptions of the trust fund, is an increased amount of individuals who are paying into the system who will never get a penny out. Now, if that changes either way, if we have more immigration than we expect, or if something happens and we suddenly start to have less immigration than we expect, now we have an issue again. You guys are a border state just like we are. You see some of the impacts of immigration and what’s going on there. But you know, I don’t know what the answer is in terms of immigration. I don’t wanna spend too much time on that. I think we need to find some way to deal with the issue that both treat these people as fellow humans, but works within the laws of the nation too. But the fact remains is that there may not be a big incentive to fix this problem if you’ve got this kind of money being pumped into the system.

Then you’ve got mortality. We have, for the first time in a long time, mortality rates that have declined for the middle age group. Now, for older people they’re increasing, for younger people, it’s increasing. But the middle age group, we’re seeing reduced mortality rates. If that trend continues, that’s not calculated into the trust fund, and that’s all – mostly, rather – due to the opioid epidemic. You know, when you really dig into the Centers for Disease Control and the census reports that are out there, some fascinating stuff and this stuff swings on a lot of variables. So who knows.

For links, resources, and a transcript of this interview and all of our past interviews, check the show notes at YourMoneyYourWealth.com. Next week on the podcast: is a recession looming? You asked, so we are providing: Schwab Chief Investment Strategist Liz Ann Sonders gives us her market outlook for 2019. Plus, Chris Hogan from the Chris Hogan Show talks about his brand new book, Everyday Millionaires: How Ordinary People Built Extraordinary Wealth – and How You Can Too. Tell everyone you know, and subscribe to the podcast at YourMoneyYourWealth.com so new episodes will download automatically to your device free and on demand.

10:38 – Devin Carroll: The Future of Social Security

Al: Devin, I was just talking to my team yesterday about life expectancies in the United States have actually been dropping the last couple of years. But that’s a bit of a misleading figure. I think the opioid crisis is probably a big factor. I do think that Americans are getting more and more obese. I think that’s a factor, but more importantly – and we help a lot of folks that are near retirement – that’s an irrelevant stat. The real stat is, what’s your life expectancy given a certain age that you’ve already made? And that’s a completely different figure, because a couple age 65, there’s a 50% chance that one of them will make it into their 90s, and so then you have to learn, “OK, so maybe the life expectancy from birth is in the 70s, but if I’m already 65 I gotta plan to at least 90.”

Devin: Yep, you are absolutely right. And I think the post-age 65 mortality rates are only going to increase and get longer. You know, we’re gonna see those folks living longer. And some of those assumptions have been built into the trust fund. But if we have a group of people in that middle age that doesn’t last as long, then that will also have an impact.

Joe: What advice would you give looking at this study that you’ve done? Would you tell someone, are you telling your clients to claim at 70? Of course, there are many, many variables, but for a healthy couple are you still telling them to push it out, or are you telling them to take it right away? What are some of the strategies or conversations that you’re having around claiming?

Devin: Again, there are simply way too many variables to have any kind of rule of thumb advice there. There are multiple scenarios where it makes sense to file as early as you possibly can. And then there are certainly scenarios where it’s best to wait until later. There are many variables, and it does irritate me so bad when I see these articles that, you know, “the best age to file is blah.” Well no, there’s not. You know for example, if you are one of the few million, I can’t remember what the number is, who, you are retirement age and you have either a child or a grandchild living at home, they are entitled to a Social Security benefit, but they can’t get that benefit until you file. So if you look at total family benefits, it makes sense for you to file early in many cases. So factors like that, that are individual, that each person brings with them, and who knows, if you have a spouse who is older than you but is the lower wage earner, they can’t collect their spousal benefit until you file. So for total family benefits, it may make sense to file earlier. There are some really stupid reasons to file early as well – such as “Social Security is going bankrupt I need to file now!” You know, that’s just ridiculous. If Social Security benefits are cut, if we see a 25% haircut to these, would you rather get a 25% haircut on a small amount or a larger amount? Because they’re going to be cut across the board if nothing is done. They’re not gonna say, “OK you filed at 62? OK, we’re not going to mess with yours. We’re going to only mess with people who waited until their full retirement age.” So right now I’m digging deep into some of the proposals that have been put out there by both the Republicans and the Democrats, and really neither of them are very good solutions, to say the least. (laughs)

Al: Well it’s because we’re not right up against 2034 yet, but they will have to change as we get closer.

Andi: Devin, in your opinion, what is the most likely, most effective solution to the Social Security problem, as we do approach the 2034 deadline date?

Devin: Well, if you just stand back and look at it from a mile back, you know, I think some sort of means testing is what seems to fix everything. But the problem is, it’s just too complicated and too costly. And they’ve done a horrible job of doing that with Medicaid and some of the other programs. And it’s just, the program costs of doing that are just too high. So you’ve got, on the Democrat side the one proposal that continues to come through is to either increase or completely eliminate the maximum taxable wage base. So right now, you only pay Social Security taxes on up to, I believe in 2019, it’s going to be $132,900 in wages. Anything above that and you’re not paying your Social Security portion of the FICA tax home. So the proposals are, “well, we need to raise this.” And you know what? They have some validity when they’re making that argument, because if you look at the wage base that they base that on, when it first came out, that was $3,000 and it’s been increased on an annual basis to where we’re now at 132 almost 133. But if you look at the way wages have grown, which is what that wage base is supposed to keep up with, wages have grown faster than that wage base – especially wages in the top 10% of wage earners. You know, if you look, I believe it’s since 1979, and I don’t have the charts in front of me, the top 10% of wage earners have seen a 34% increase their wages, and the bottom 10% have seen somewhere around a 1% increase. So when they’re referring to that income inequality, they’re going, “wait a minute, we’re not collecting all the taxes we’re supposed to.” When they first rolled this out, it was meant to capture about 90% of all of the earnings. And now it’s capturing about 83% of all of the earnings. So an adjustment to that is probably going to come, but then you have to calculate, OK, right now the maximum Social Security benefit is about $2,700. If we increase the maximum wage, do we give them any credit towards an additional Social Security benefit for an amount that they pay in excess of that base, that $132,000? So if they pay up on the first $200,000 of their wages, do we somehow give them an increase to the Social Security benefit, or would we just say, “you’re paying in and getting nothing”? Well, that’s not gonna be very popular. But by the time they start increasing Social Security benefits to keep up, then all of a sudden, it’s not quite as lucrative for the longevity of the Social Security trust fund.

Al: So what’s in the Republican plan?

Devin: So the main thing we’re seeing there is to increase the full retirement age. You know, all the way, I’ve seen the proposals from 68, 69, and 70, but 70 tends to be the one that most people are looking at. But that’s going to bring some very unique issues. If everything remains the same, and they extend the full retirement age and let’s say that you can still file at the earliest age of eligibility, 62, but all of the reductions still apply. That means that you’ll be able to file at 62 if you’re full retirement age is 70, but you’ll only receive 55% of your benefit. So then are we going to run into higher poverty rates at that point? Because right now I can tell you that 55% of the average Social Security benefit is below the poverty line on a monthly basis.

Al: Yeah it seems you’d almost have to increase the minimum age to take it if you’re going to try to make this work, if you want to go to age 70.

Devin: Yeah, but then you have people who are saying, “wait a minute, this is my retirement. I don’t want to wait.” And so I don’t think either of the political parties are going to say, “we want our legacy to be hung on the nell of the party that made everyone wait to retire.”

Al: Yeah, and then, of course, you’d have to phase it in, because a lot of people have already planned on the rules as they stand right now.

Devin: Certainly, it would absolutely be a phase in. But doesn’t matter how you look at it. That would be a benefit cut because if you’re filing it 70, receiving the same benefit that you used to could have received 67, and then no delayed retirement credits? But I imagine it’s going to be a combination of all of those things. One of the more popular Democratic proposals is to put in income thresholds to where. leave the cap in place. but then Social Security tax becomes – you have to start paying tax again if your income crosses $300,000 and then $400,00 it goes to a different threshold. So there’s a lot of things out there, but I imagine we’re going to see a change to the taxable wage base to get it back in line to where 90% of wages are covered, and we’ll probably see some playing around with the full retirement age as well, just strictly based on where we are with life expectancies now of a 65-year-old, versus what they were when the system came out.

Joe: Well I thought we were going to talk about sex. (laughs)

Devin. I know. (laughs)

Al: You’re pretty bummed, right? (laughs)

Joe: I know, I’m all depressed.

Andi: It was just a hook to get you into the conversation about how to save Social Security. (laughs)

Joe: We’re talking to Devin Carroll, folks. Hey Devin, where can people find you?

Devin: Well, the easiest place to find me and all the stuff I’m involved in is DevinCarroll.com – that has a listing of my podcast, my blog, the books I’ve had, and everything else is right there.

Joe: DevinCarroll.com, hey, I really appreciate you hanging out with us. Happy New Year. And hopefully, we can get you back on the show again real soon.

Devin: All right. Thanks for having me.

You can find links to Devin’s website, his podcast, his blog and his YouTube channel in the show notes for today’s episode at YourMoneyYourWealth.com, where you’ll also find the link to download the Social Security Handbook for free. Learn the history of Social Security, the current rules regarding spousal, survivor and ex-spouse benefits, as well as important details to consider about when to collect your Social Security, working while taking your benefits, and how Social Security is taxed. Check it out in the show notes atYourMoneyYourWealth.com, and if you have any questions about your own Social Security or any other money question for that matter, you can always email info@purefinancial.com. That’s info@purefinancial.com. Let’s answer some of your emails now:

20:33 – How Should I Diversify from a Single Highly Appreciated Asset?

Joe: This is John. He goes, “Greetings. While researching retirement planning and taxation issues I found an article on planned giving on your site below. Here are my questions and overview of portfolio. Please review and advise how to proceed. Thank you.”

Al: Okay maybe we’ll just kind of take it in chunks, right?

Joe: Yeah. Well you know, he’s got 1, 2, 3, subset 5… (laughs)

Al: He’s got Roman numeral 6…

Joe: Yes. So here’s a little backdrop. “We are located in the San Francisco Bay area.” He’s got three traditional 401(k)s. $800,000, they’re all in target-date funds. But he’s got three target date funds. So John, first of all, no bueno. B. Two rollover traditional IRAs totaling about $90,000, they’re invested in stocks. He’s got this ESPP plan. He’s got about $1.1 million in that, very low cost basis. He’s got liquid assets from dividends. So I guess he’s not reinvesting his dividends, they’re going in the cash, 40 grand, and his residence there in the beautiful San Francisco Bay Area, mortgage free, is about $1.5 million. “The most challenge now is to diversify from the single equity position.” So he’s got a ton of his company stock.

Al: That’s the ESPP, employee stock purchase plan.

Joe: You got it. So, $1.1 million all in one company stock. The basis on it he says is around $40,000.

Al: Was that the cash amount or is that the basis?

Joe: “Cost basis is $40,000, some of them have no record as they are over the record retention period.”

Al: Gotcha. So he’s going to have to pull some records.

Joe: Yeah. “So there’s large long-term capital gains tax preventing us from taking action to diversify.” He’s considering setting up maybe a charitable remainder trust. If we can discuss what that is. “Would like to set up a life insurance trust to preserve donate value to kids in case trust terminates before they are ready, two kids, ages 30 and 25.” He would also like to set up a living trust. He would like to convert 401(k) and IRA to a Roth IRA, and he’s got about 8 years before he reaches RMDs.

Al: Okay. So that means he’s about 62. Does it say, is he working or not?

Joe: Um… We’re only halfway through. So let’s just stop there.

Al: Okay. That’s enough to work with.

Joe: A few different things. So I think this is very true and we’re seeing this quite a bit from a lot of individuals that have a high concentrated stock position. So he’s worked for this company probably for several years, and so his cost basis is almost nothing, and now he’s got a $1.1 million gain. It’s like, “Man, do I want to sell that?” So if I got $1.1 million, let’s just say that that’s the gain. So I’m going to have to pay, what, 34% in tax?

Al: Yeah, call it 34 and it depends whether the Medicare surtax is involved. Call it 38 to be safe. 38%.

Joe: So that’s roughly $400,000 in tax. So do I diversify $400,000 out of my $1.1 million? Now I have $700,000 and it’s like, “oh, that’s a big check to write.” So a few different things he’s thinking about. He’s like, “maybe I put this stock inside of a charitable remainder trust or we call them tax-exempt trusts as well, you might have heard that terminology. And the benefit of doing that is that you could put the stock inside that trust. The trust sells the stock and pays no tax. So now you’re working with your full $1.1 million, then you diversify as you wish. So it’s invested, diversified portfolio, stocks, bonds, real estate, commodities, whatever. And then you can create an income from that depending on how you structure the trust. And basically, it just defers that tax over a longer period of time.

Al: Right. So as you receive income payments, for the rest of your life, by the way, and if you’re married, the rest of your spouse’s life – whoever lives longer gets these payments and the payments are your income and principal over the term of the trust, and they’re designed so that, by your life expectancy, 90% of all the assets come back to you.

Joe: Well it depends on how you design it.

Al: It does. But that’s the most common, I’ll say that. You’re right. There is flexibility there. But 90%, that’s how most people do it, 90% comes back to them. And so they’re getting that plus a lot of income and they didn’t have to pay that tax upfront. Now you do have to pay tax as it comes out. So as it comes out, if it earned interest and dividends in the trust, part of your distributions is interests and dividends and the rest is capital gain. So a couple really good things there, one is, you don’t have to pay the $400,000 tax right up front so you have the whole asset to invest for your whole lifetime. Number two is when you actually do pay that capital gains tax it’s not all at once so you’re not in the highest brackets.

Joe: Right. You’re sheltering it out over 40 or 30years.

Al: Right. And the truth is if you’re married the first $77,000 of income, capital gains are tax-free. So you might actually – depending upon your other income, now with IRAs and 401(k)s of almost a million dollars, there’s a required minimum distribution and Social Security, so maybe not much would be tax-free, but there’s that consideration. The downsides of a charitable remainder trust, just so you understand, is that whenever you pass away or your spouse, the second to die, whatever’s left in the trust goes to charity, not your kids – it goes to charity. And so what some people do is, as he talked about, they set up a life insurance trust.

Joe: An ILIT.

A: An ILIT, yeah, a life insurance trust meaning that if you were to pass away prematurely, the kids don’t get the asset in the charitable trust – that goes to charity. But maybe you set up a life insurance policy to cover that so the kids are still made whole from a different source.

Joe: Right. So it’s a little complicated. You put a stock or a highly appreciated asset inside a trust, it’s an irrevocable trust. If you die prematurely, both spouses, depending on how you set up the trust,100% of it is going to go to the charity. So you didn’t really benefit from it. So if you want to protect the children, to make sure that, “hey this million dollars, I would like to make sure if we do die prematurely, that they would get this asset.” So you’re replacing – it’s a wealth replacement trust is another terminology for it. So you’re replacing that asset if you were to die prematurely, but then you’re looking at, well what’s the cost of that? You’re 57 years old. You want to buy a million dollar second to die life insurance contract. So then it’s based on both you and your spouse’s lives. So both spouses have to die for the policy to get paid out. So those are a little bit less expensive and they’re designed especially for this or estate planning tools.

Al: Right, exactly. And something else to mention there, another downside Joe, is that you although you do get an income stream, you don’t have access to the principal anytime you want it. And most people don’t put all of their stock in. They might put some of their stock in and sell some of their stock because the trust itself does create a tax deduction because there is a future charitable component. And the tax deduction happens in the year you actually set up the trust and put the asset in the trust. Typically, it’s 10% of the asset value. So let’s just say he put half in. So that would be $550,000. So the charitable deduction would be $55,000 – that goes right on his tax return in that year. That would help shelter some of the capital gains on the other stock that he was was going to sell.

Joe: No, good point. So it’s just running the numbers to say, “how much do you want to put in the overall trust?” In most cases, in this scenario, you probably wouldn’t want to put it all in, but you may. He does have some other liquid assets, but that’s 50% of his liquid net worth.

Al: That’s a lot.

Joe: You jam up into this trust that you have very little control over.

Al: Yeah. There’s not a lot of other assets outside of retirement, at least from what you describe. So I would not put it all in. Maybe – I’m just throwing out a number. I mean do some analysis, but let’s just say put in half or 60% or whatever, keep the rest outside of retirement. Maybe you come up with a three or four-year strategy to sell that, to diversify. You diversify the stuff that goes in the charitable trust immediately, and you diversify another chunk because you’ve got a tax deduction from setting up the charitable trusts – so it can all fit together. By the way, I’ll say one more thing. This works really well for people in this situation that have highly appreciated stock or that have highly appreciated real estate. This is where this can be a great tool.

Joe: Another way – now you’re gonna set up a few different trusts here. “I gotta set up of the irrevocable life insurance trust, I’ve got to set up a charitable remainder trust,” and he’s also talking about just a standard living trust. Now you gotta buy three trusts. I mean, this could get fairly expensive and then you gonna file a different tax return for the charitable remainder trust. You gotta get Crummey letters for the Irrevocable Life Insurance Trust and then you have to get a separate trustee for here… For a million dollars? I mean it seems like there’s a ton of stuff going on here. Another easier strategy, it’s a little bit more complex, but there’s a collar strategy where you’re using puts and calls on that particular highly appreciated asset. So you’re just kind of freezing. So you’re not going to get a lot of movement in that stock. So if the stock plummets it protects you, because you’re selling puts or buying calls to protect the variation or the volatility of that particular stock. And then you can slowly divest from that stock over a period of years. So you just take a look at, “well how much capital gains do I want to take this year?” And then you look at your tax return and your other income sources, are there other deductions that you can use? And then maybe you come up with a two, three, four-year strategy divest from that particular stock. You’re not going to see a lot of movement of it, you’re just basically freezing the price if you will.

Al: Yeah. So a certain target, so you can’t get below a certain amount or above a certain amount.

Joe: If the stock is trading let’s say at $100, you could put a move of maybe 10% of either way. So you’re not going to get the full appreciation, but you’re not going to lose more than 10%, hypothetically. So you could protect it. Because half of his liquid net worth is in this particular security. So he could potentially do that as well and avoid all these other types of trusts. So it really depends on what his overall goals are.

Al: Yeah you bet. And by the way, you can do those very cost-efficiently.

Joe: Yeah it’s a zero cost collar.

Al: Yeah, because one of those costs you money, but the other one you make money and you can set them so they offset.

Joe: Yeah it basically zeros out. So hopefully that helps, John from San Francisco. He’s got a couple more questions, I’ll just answer those privately.

This week on the Your Money, Your Wealth TV show, Joe and Big Al are Getting Real about Real Estate in Retirement – watch it online on demand at YourMoneyYourWealth.com. Be sure to subscribe on YouTube so you can catch new episodes every Sunday. While you’re at YourMoneyYourWealth.com, click special offer to download our new white paper, 10 Tips for Real Estate Investors for free, and check out all the other free resources in the Learning Center like the Social Security Handbook, Big Al’s Quick Retirement Calculator, the Roth IRA Basics white paper, and over 600 educational videos. Now let’s get to another email question – send yours to info@purefinancial.com.

31:52 – Will I Outlive My Money in Retirement?

Joe: This from our friend Nick. I run out of paper printing out Nick’s email questions. (laughs)

Al: I run out of paper writing down all the facts that you tell me as you read it. (laughs)

Joe: Yes, this is gonna take 15 minutes just to read the fact pattern here, Nick. All right. So the question is, “will I outlive my money?” So Nick here, he’s 53 years old, planning to retire in January of 2020 at 55 years old. His pension starts at 58. So he’s 55, he’s gotta bridge a gap. So his pension starts at 58, $2,400 a month. And then if he passes, his lovely wife would get 50% of that pension. So he’s planning on starting to withdraw from 401(k) for three years and then the pension will start in 2023. So he’s going to retire at 55. He’s going to pull the money from his 401(k) for three years, I’m guessing at $2,400 a pop, and then he’s going to stop with the 401(k) and then turn the pension on in 2023. But his monthly living expenses are $3,000, and occasionally $4,000, an additional thousand dollar buffer to withdraw as needed. Retirement budget includes living expenses, health care, a lot of booze. (laughs) Sorry, Nick. That was not part of it.

Al: You were thinking about your retirement?

Joe: “Other discretionary expenses.” All right. So he has no mortgage. “The current home will be sold to pay off home in the Philippines and money left to purchase a car et cetera, approximately $80,000” – or $80,000 gain. Okay. Fact pattern here, he’s got $550,000 in a 401(k) plan. $124,000 in a Roth, $120,000 in the IRA, $175,000 in a brokerage account, and about $60,000 in an emergency fund. So add all that up Al, what do we got?

Al: $970… let’s call it a million bucks.

Joe: He’s got a million bucks, and then he’s got a little cash reserve, call it 60. So, “we’ll claim Social Security at 64. $3,000 a month for me and wife combined. Please advise. Thanks.” (laughs)  Please advise what, Nick?

Al: He wants to know whether he runs out of money. It’s the first question you read.

Joe: (laughs) Oh. “Will I run out of money?” Got it got it got it.

Al: (laughs) “Please advise. Just advise. Just tell me what I need to do.”

Joe: I think everything looks pretty good. So he’s got a million dollars, so he needs to pull out about $30,000 a year for a few years. Call it 40 grand.

Al: 4% distribution rate, that’s OK.

Joe: So you’re right in line there, 4% plus a little tax, though.

Al: Yeah plus a little tax so it’s going to be a little bit higher than that, but that’s only three years. Then you’ve got your pension for $2,400 and Social Security, what’s that again?

Joe: Social Security is going to be $3,000. So once Social Security kicks in then that’s six grand. That’s going to probably cover – long term it looks great.

Al: But even right off the bat we would say you’re retiring at 55, and typically when you retire that early, we might say maybe only pull 3% out of your portfolio because that’s a young age to retire.

Joe: Right, if you had no other income.

Al: Right. But because there’s the pension, because later their Social Security, 4% is just fine. This looks great, actually.

Joe: This looks wonderful.

Al: I wish it was me because I want to buy the beer. What did you say, the alcohol? Living expenses, health care, and booze?

Joe:  Yep. That’s what I read. (laughs) Sorry.

Al: (laughs) That not was written but that’s what you first saw for yourself. But that’s how you think about it. Let’s just say he was retiring and had a pension right now. And so then ask another question- What can I spend? So 4% of a million is 40 grand. And then you’ve got $2,400 pension, we’ll call that $30,000 a year. So that’s 70 grand. Now maybe retiring at 55, maybe you want to bring that down to 60 grand instead of 70, but you’re in the ballpark.

Joe: So here’s what you have to consider. The first step is how much are you truly spending? We’ve been doing this a couple of days, and a lot of you underestimate how much you truly spend.

Al: Yeah. That’s probably the biggest mistake we see from people.

Joe: So you have to be honest with yourself, first of all.

Al: And a lot of people have no idea.

Joe: True. But then there are some people that will say they’re going to cut their expenses significantly in retirement.

Al: Yeah because the publications, a lot of them say you’re going to spend 70% of what you normally make.

Joe: Right. And that is absolutely true for a lot of people. Some of you might be 50%, but some of you it’s gonna be 200% of what you’re currently spending.

Al: Right. And some of that, Joe, is just because the 70% you were saving into your 401(k).

Joe: Yeah, well, how many people 30%? (laughs)

Al: Well not many, but I just said “some,” I didn’t say “all!” (laughs) I said some of that is because of the 401(k). (laughs)

Joe: Right. But 401(k) maybe, there’s gasoline…

Al: Like suits, are you going to wear some suits in retirement?

Joe: Well I will. (laughs)

Al: (laughs) Because you like the way you look? (laughs) You’re going to like the way you look, I guarantee it! I think I heard that somewhere!

Joe: That guy got the boot. What happened with that?!

Al: I heard that, I didn’t hear why.

Joe: Didn’t he start the thing? Or was he just the spokesperson?

Al: I thought he started it.

Joe: And the board said, “we don’t like the way you look anymore!” (laughs)

Al: (laughs) Well he stopped saying “I guarantee it.” He said, “I think you’re gonna like the way you look?”

Joe: “I don’t know, the cut of this suit isn’t that great. But it’s cheap!” (laughs)

Al: “You got that goin’ for ya! You could buy three suits where at the other store you buy one!” (laughs)

Joe: Right. (laughs) You’re going to like the way your wallet looks. He’ll guarantee it.

Al: So you had some big point you were gonna make. How to look at this.

Joe: Yes. Start with your living expenses. How much money are you… and then maybe put a little buffer in there.

Al: And so I got a little tip for you. So look at your net pay. If you get paid once a week, what’s your net pay? Thousand bucks. Okay great. 52 weeks you get paid? Yeah. So $52,000 is your net pay? Okay. Are you saving some of that $52,000? No, everything’s going to the 401(k). Then you’re spending $52,000. That’s a quick way to figure it out.

Joe: Yeah. Because you can’t look at your gross pay, because then if you are saving into your 401(k) plan, with all the other deductions that you have, just take a look at the net. But then there could be some add backs too because you’ve got health insurance if you’re going to retire early. There are other maybe travel expenses. So just spend a little bit of time to figure out what that number is. And then you look at some math. “Well if I’m retiring at 55, do I have a pension that’s going to be able to kick in?” Like Nick here, he’s lucky, he’s got a nice big fat pension that starts at age 58. Congratulations for Nick, but a lot of you that are listening will not have a pension. So it’s your assets that need to create that income. Then you have Social Security, so you’ve got a couple of bridges that you want to take a look. If I retire at this age, when am I going to receive that fixed income? That’s why a lot of times people retire at 62, just so they can get some sort of fixed income. Take that expense minus your fixed income – whatever you believe that you’re going to receive from Social Security, pensions, real estate income, whatever. And then you find that shortfall. So if I wanted to spend $70,000 a year and I have a $30,000 fixed income, well then I’m going to be short 40. So $40,000 needs to come from my portfolio. We talked about what the rule of 4%?

Al: Right. Which, easier way, multiply it by 25: $40,000 times 25 is a million bucks.

Joe: So now you need a million dollars.

Al: And if you’re retiring young you probably need a little bit more. If you’re retiring later you probably need a little less. I mean that’s just a quick start. There’s a lot of variables that can affect this one way or another, but that at least tells you whether you’re in the ballpark. Because this question that Nick had is is pretty much what’s on everybody’s mind that comes into our office.

Joe: Yeah, can I retire.

Al: Because they don’t know.

Joe: But there’s a lot more to this, too. I mean that’s just the tip of the iceberg when it comes to the math. All right, well hey, for Big Al Clopine I’m Joe Anderson. I want to thank Andi Last for producing such a wonderful show.

Al: Yeah, and I second that.

Andi: Thank you guys, I appreciate that.

Joe: All right, we’ll see you next week, the show is called Your Money, Your Wealth®.

_______

To find out if you will outlive your money, and to get deeper than the tip of the iceberg, just sign up for a no cost, no obligation financial assessment at Pure Financial.com.

Special thanks to our guest today, Devin Carroll, learn more about his blog, podcast and YouTube channel at DevinCarroll.com

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