When to Claim Social Security and the Truth About Annuities - 509

Summary

Your Money, Your Wealth Podcast - Episode 509 Summary

Title: When to Claim Social Security and the Truth About Annuities
Hosts: Joe Anderson, CFP® & Alan Clopine, CPA
Release Date: December 24, 2024

---

Introduction

In Episode 509 of the Your Money, Your Wealth podcast, hosts Joe Anderson, CFP®, and Big Al Clopine, CPA, delve into critical retirement planning topics. The episode primarily focuses on optimal strategies for claiming Social Security benefits and demystifying annuities. With real listener questions and engaging discussions, Joe and Big Al provide actionable insights to help listeners navigate their retirement pathways effectively.

---

Social Security Claiming Strategies

Listener Questions Addressed:

1. Richie and Heather from Idaho:

   • Scenario: Richie (62) and Heather (61) plan to retire early (February 1, 2025) with substantial investments totaling $2.6 million. They aim to spend $120,000 annually, excluding taxes.
   • Social Security Details:
     • Richie’s benefits: $2,747/month at 62, $3,851 at 67, and $4,789 at 70.
     • Heather’s benefits: $1,830/month at 62, $2,680 at 67, and $3,358 at 70.
   • Planned Strategy: Heather plans to claim Social Security in September 2025, while Richie contemplates claiming at full retirement age or delaying until 70.

2. Dan from Phoenix:

   • Concern: Dan notices a significant disparity between his Social Security benefits and his wife’s—his benefit is approximately $3,000/month, whereas his wife receives around $800/month.
   • Analysis: Big Al explains that the difference likely stems from variations in their earnings records, with Dan having higher lifetime earnings leading to a larger Primary Insurance Amount (PIA).

3. P. Ware’s Roth Conversion Scenario:

   • Case: Roth conversion considerations after age 70, including the impact of potential changes to Social Security taxation under proposed legislation.

4. Jerry from Phoenix:

   • Inquiry: Impact of Donald Trump’s proposal to exempt Social Security from federal taxes on claiming strategies.

Key Insights:

• Balancing Social Security Claims:

  • Joe: “If Heather takes Social Security at 62, she gets about $20,000 annually, necessitating additional withdrawals from IRAs and brokerage accounts to bridge the income gap.”
  • Big Al: Advocates for at least one spouse delaying Social Security to maximize survivor benefits, recommending Richie’s potential delay until 70 to ensure Heather’s earlier claim doesn't overly strain their financial resources.

• Tax Implications:

  • Joe: Discusses the importance of strategic withdrawals to manage tax brackets, suggesting that pulling from inherited IRAs and regular IRAs can help maintain a lower tax bracket.
  • Big Al: Emphasizes the need to optimize distributions to minimize taxes, ensuring that withdrawals don’t push the couple into higher tax brackets unnecessarily.

• Roth Conversions:

  • Joe: Explains how delaying Social Security can facilitate Roth conversions by keeping taxable income in check, thereby allowing more funds to be converted into Roth IRAs without triggering higher taxes.
  • Big Al: Suggests that once spending needs are below their required burn rate, Roth conversions become a valuable tool for tax-efficient retirement planning.

---

The Truth About Annuities

Listener Case: Rebecca and Sam’s Deferred Indexed Annuity

• Scenario: Rebecca and Sam invested $1 million in a single premium deferred indexed annuity in 2022. Post-retirement, they seek advice on managing this annuity alongside their existing pension and Social Security benefits.

Discussion Points:

1. Annuity Mechanics:

   • Joe: Breaks down the complexity of deferred indexed annuities, highlighting the confusing terms and potential misleading benefits. For example, he illustrates that while the annuity promises significant returns, the actual realized gains may not meet expectations, especially over extended periods.

2. Evaluation of the Product:

   • Joe: “It’s a deferred indexed annuity. No wonder why you didn’t understand what you’re buying here.”
   • Big Al: Points out that with substantial fixed income from pensions and Social Security, adding an annuity might be redundant. Emphasizes the importance of evaluating whether the annuity aligns with their retirement goals, especially considering the high fees and surrender charges.

3. Options for the Annuity:

   • Joe Presents Four Options:
     1. Keep It and Begin Payments: Fixed annual payments with limited growth potential.
     2. Let It Ride Longer: Potential for increased payments based on index performance, but with inherent complexities and uncertainties.
     3. Cash It Out: Immediate withdrawal at a loss due to surrender charges.
     4. Other Alternatives: Considering whether the annuity serves as a useful longevity insurance or if it merely locks funds without offering significant benefits.

4. Advisors’ Fees and Transparency:

   • Joe: Criticizes the 2% advisor fee associated with the annuity, labeling it as excessive and potentially indicative of hidden costs.
   • Big Al: Agrees, noting that such fees are above industry standards and may erode the annuity’s benefits over time.

Key Takeaways:

• Understanding Product Terms: Investors must fully comprehend the terms and conditions of annuities to avoid unfavorable outcomes.
• Assessing Necessity: With existing fixed income sources, additional annuities should be carefully scrutinized to determine their true value.
• Fee Awareness: High advisor fees can significantly impact the overall returns, making it essential to evaluate the cost-effectiveness of financial products.

---

Taxation and Social Security Proposals

Listener Jerry’s Inquiry:

• Question: How would the potential exemption of Social Security from federal taxes, as proposed by Donald Trump, affect claiming strategies?

Hosts’ Analysis:

• Big Al:

  • Skepticism on Policy Changes: “I doubt it [Social Security exemption from taxes], but it could be. I mean, what's the chance? Below 10%?”
  • Advises against making immediate changes based on proposed, yet unimplemented, policies.

• Joe:

  • Historical Context: Mentions that Social Security taxation began in the 1980s under Reagan and has remained largely unchanged.
  • Potential Benefits of Exemption: Discusses how exempting Social Security could allow for more flexible Roth conversions and tax management.

Conclusion:

• Prudent Planning: Emphasizes the importance of adhering to current strategies while staying informed about potential legislative changes. Recommends consulting with a fiduciary advisor before making any adjustments based on speculative policies.

---

Additional Insights and Call-to-Actions

• Spitballing on Advisor Fees: Joe and Big Al debate the appropriateness of current advisor fees, advocating for transparency and alignment with clients’ best interests.

• Tools and Resources:

  • Free Social Security Handbook: Offers comprehensive guidance on maximizing Social Security benefits, available via the episode’s description.
  • Financial Blueprint Tool: Encourages listeners to utilize their free tool to analyze cash flow, assets, and retirement spending, aiding in the formulation of a robust retirement plan.

• Upcoming Content:

  • Teasers for the next episode (Podcast 510 - New Year's Eve Edition) hint at continued exploration of Social Security and other retirement planning topics.

---

Notable Quotes

• Richie from Idaho ([01:00]):
  “We're planning to retire as early as February 1, 2025... Our house is worth around $800,000 and we plan to spend $120,000 per year in retirement, excluding taxes.”

• Joe Anderson ([04:31]):
  “I think you'd keep one of you wait longer because whoever survives the other should receive the higher benefit.”

• Big Al Clopine ([06:11]):
  “I personally would probably wait to 70... That is when you have to spread out distributions more carefully.”

• Joe Anderson ([16:28]):
  “If she wants a guaranteed income that she never has to worry about running out of money, then do the annuity. But if you want to leave money to your kids, maybe think twice.”

• Big Al Clopine ([27:18]):
  “2% is a little on the high side, but it also depends what services you're getting.”

---

Closing Remarks

The episode wraps up with festive greetings and a reminder for listeners to engage with future content. Joe and Big Al encourage continuous learning and proactive financial planning, reinforcing Pure Financial Advisors’ commitment to acting in clients’ best interests.

Final Note: As always, the hosts remind listeners that the podcast offers general financial guidance and should not replace personalized advice from a certified professional.

---

Access More Resources:

• Ask Joe & Big Al On Air: YourMoneyYourWealth.com
• Free Social Security Handbook & Financial Blueprint Tool: Links available in the episode description.

---

This summary captures the essence of Episode 509, highlighting the critical discussions on Social Security strategies and the intricacies of annuities. For personalized advice, listeners are encouraged to consult with a certified financial advisor.

Transcript

[Andi Last]

When should Richie and Heather in Idaho and Rebecca and Sam in Virginia collect their Social Security benefits? Why is Dan's benefits so much higher than his wife's? Plus, P. Ware has a Roth conversion case for claiming Social Security after age 70, and Jerry in Phoenix wonders how Donald Trump's plan to stop taxing Social Security could impact claiming strategies. That's today on youn Money, you, Wealth podcast number 509. Plus Joe is checking back in as he rants, I mean spitballs on Rebecca and Sam's $1 million Sing Single Premium deferred indexed annuity. The fellas also spitball on their Roth conversion and retirement strategy and how much is too much when it comes to advisor fees. I'm Executive producer Andi Last with the hosts of youf Money, you, Wealth, Joe Anderson, CFP and Big Al Clopine, cpa. To get your money questions answered or to get a retirement spitball analysis of your own, click or tap ask Joe and Big Al on air in the episode description and send us an email or a voice message like this one.

[Richie]

Hi Joe, Big Al and Andy. This is Richie from the great State of Idaho. I'm 62 and Heather is 61. Heather and I are looking for a spitball on our retirement plans, including when to take Social Security and possibly rolling a portion of our IRAs to Roth IRAs. We're planning to retire as early as February 1, 2025. I discovered your podcast last year and have been listening while working out, hiking and mountain biking. Thanks for educating us with comedy. I drive a 2018 Ford F150 Lariat and Heather drives a 2021 Ford Explorer Platinum. Fine Red Wine anytime is our drink of choice, along with an occasional IPA or a sip of tequila. Unfortunately, we have no pets at this time. We are debt free. Our house is worth around $800,000 and we plan to spend $120,000 per year in retirement, excluding taxes. Our investments total $2,625,000, with a 60 40th split between equities and fixed income. We have $330,000 cash and $215,000 in equities in our brokerage account. Our traditional IRAs total $1,423,000. Inherited IRAs $145,100 and Roth IRAs $511,000. I make $12,250 a month and Heather makes $5,900 a month. My Social Security per month at 62 is $2,747. $3,851 at 67 and $4,789 at 70. Heather's is $1,830 at 62, $2,680 at 67, and $3,358 at 70. We've been maxing out our Roth accounts the last few years, and we'll add an additional $20,000 to our brokerage account by year's end. We plan to take Heather's Social Security in September 2025 and mine at full retirement age in 2029, but are considering waiting until 70. We plan to withdraw $50,000 next spring to upgrade our travel trailer to bridge the gap until Social Security kicks in. We will use the inherited IRA's brokerage account and Heather's Social Security. This will buffer us from market downturns early in retirement. Looking forward to your spitball on our plans. Thanks a bunch, Richie.

[Joe Anderson]

All right. Hey, what does that look like now that we're filming this stuff? So is it just like Al and I just looking at the paper?

[Andi Last]

It's whatever Aaron decides to edit it to be. But the last time, I think he actually had a waveform down at the bott bottom so that you could see some movement there while you guys were listening to the question.

[Big Al Clopine]

Oh, okay.

[Joe Anderson]

Got it. I was just wondering. I'm like, man. And then I'm just listening to a robot.

[Andi Last]

Yes. Explains in full numbers.

[Big Al Clopine]

You're right. I know. AI is maybe taking over Joe.

[Joe Anderson]

Got it. Richie and Heather.

[Big Al Clopine]

Yeah.

[Andi Last]

And I think that's a reference to Richie Sambora from Bon Jovi and Heather Locklear from Melrose Place and Dynasty. They were a couple, so. Yeah.

[Joe Anderson]

They give you a little side note on that, or.

[Andi Last]

No, but I'm thinking if it's Richie and Heather, it seems pretty likely.

[Big Al Clopine]

Got it. Well, that's as good a guess as any.

[Joe Anderson]

Well, Richie Sambora, she's still alive.

[Big Al Clopine]

I believe so.

[Joe Anderson]

Okay.

[Big Al Clopine]

Yeah. Where's.

[Joe Anderson]

I know. Okay. So he's got, what, two and a half, $2.6 million. Wants to spend $120,000. Here's what I don't like about the strategy is that he's kind of grouping things into these different buckets versus looking at the entire whole of the investment account.

[Big Al Clopine]

Yeah. Especially when he talks about where to take the money from.

[Joe Anderson]

Right. He's trying to bridge this gap until Social Security. And so he doesn't know when to take Social Security. Heather's going to take it at 62. I want to wait until age 70. So if Heather takes it at 62, she gets what, $2,000 a month, or call it 20, $24,000 a year. And then I'm going to take it from my inherited IRA and my brokerage account. Well, you got $145,000 in your inherited IR spend. 120. Social Security is going to come in at 20, so $100,000. How old are they? 61 and 62.

[Big Al Clopine]

Right.

[Joe Anderson]

I mean, they got an eight year bridge.

[Big Al Clopine]

Right.

[Joe Anderson]

So, and then his brokerage account is 100% equities.

[Big Al Clopine]

Right.

[Joe Anderson]

So you need to be figuring out a strategy because if the market tanks on you, you're already close to right around a 4% burn rate. So you're taking out 3.5% if she takes hers at 62.

[Big Al Clopine]

Right.

[Joe Anderson]

I would be careful with a strategy this way. I'm not saying he can't do it or he's pretty close, but if you start blocking, well, I'm going to take my inherited ira, then my brokerage to supplement. Maybe I don't take my Roth. I want to look at the tax implications of your distributions. How much money you should be taking from the inherit or just qualified accounts in general, how much you should be taking from the brokerage, how much you should be taking from the Roth. Because he could keep himself probably in a pretty low tax bracket, you know, for life.

[Big Al Clopine]

I, I agree with that part. And I'll go back. I think I'm okay with her taking Social Security at 62 because. And with him waiting because what, what you want to do in the case of a married couple is at least have one of the two. You wait longer because whoever survives the other, the, the other spouse will get the higher benefit. So I kind of like the idea of, of at least one of them in this case, Richie waiting till age 70 and then Heather taken at 62. I'm okay with that. And if she does, if they want to spend 120,000, her benefit's about 22,000. 90,000 is a shortfall. You divide that into what they have, that's 2.6 million. That's a 3.8% distribution rate. I'm fine with that. At age 61, 62, particularly knowing that Social Security is coming. So I'm fine with this strategy. If you want to take Richie, if you want to take, take Social Security earlier, I'm okay with that. But I personally would probably wait to 70. But then what Joe is getting at and Joe is how do you bridge the gap? And I think you want to be a little bit more careful. Yeah, Some will come from the inherited ira, but then some will probably come from your regular ira. You're basically trying to max out the lower tax brackets. And if you do it the way you're thinking of doing it, you're going to leave money in the 12% bracket that you could have taken money out of your deferred and paid very little tax. So you want to be a little bit more careful how you do your distribution plan.

[Joe Anderson]

Yeah, I think you have to look at the numbers here, too, because if he did his strategy, you're going to take the inherited IRAs and the brokerage account, and so he's going to be in a low tax bracket. So you either have to take money from the retirement account, the two point or the $1.5 million that he has in IRAs. You either convert that to a Roth or you take a distribution to the top of that 12% tax bracket.

[Big Al Clopine]

And you can pick either, as long as you're filling up that 12% brack.

[Joe Anderson]

Yeah, but I don't think he's gonna be in a giant tax bracket because of the spend. He's a 4% burn rate. I think you fill up the 12% bracket with the distribution versus conversions so he can keep more of that liquidity with his brokerage account.

[Big Al Clopine]

Yeah, I'm okay with that. Yeah, that's probably what I would do for that exact reason. And that is when you have a bunch of money tax deferred, which they do, but they're gonna pretty much use it. They're gonna use it for their own spending it. Now, here's where it gets trickier. Like when you. When, like, let's say the numbers are.

[Joe Anderson]

Double, like they've got, or their spending.

[Big Al Clopine]

Is less, or half the spending's half, however you want to say it. Right. And so now you've got way more coming out than you need. Right. That's when you start thinking about more Roth conversions because you'll be in higher brackets than what you really need to be in.

[Joe Anderson]

So cool. Idaho. I wonder where he lives. I was in Coeur d'alene, Idaho.

[Big Al Clopine]

I know you were. Yeah. You play some golf out there?

[Joe Anderson]

I did. And then. Very beautiful place.

[Big Al Clopine]

Yeah, it is.

[Andi Last]

So should you claim Social Security early at full retirement age or wait until age 70? The difference can mean thousands of dollars of additional retirement income every year or a permanent haircut. So how does your claiming strategy fit in with the rest of your retirement plans? Make sure you know all the available options and that you have a solid plan in place before you start Collecting Social Security benefits. Download our Social Security Handbook for free to learn how to maximize your Social Security payments. This guide explains who's eligible, how Social Security benefits are calculated, the difference between collecting early versus late, working while taking Social Security, details on spousal, ex spousal, and survivor benefits, and how your Social Security is taxed. Click or tap the Social Security Handbook. Link in the description of today's episode in your favorite podcast app to download your copy for free. Courtesy of Pure Financial Advisors. And you'd money you wealth.

[Joe Anderson]

Hello, Andy, Al and Joe. Love, love, love, love your show.

[Big Al Clopine]

That's a lot of love.

[Joe Anderson]

And she loves her husband, Sam.

[Big Al Clopine]

Wow.

[Andi Last]

And you know what? I think these folks are from Cheers, Rebecca and Sam.

[Big Al Clopine]

Oh, yeah, I think you're right. Yep.

[Joe Anderson]

Rebecca. It was Diane.

[Andi Last]

But Rebecca was after Diane.

[Big Al Clopine]

Rebecca was the second one.

[Joe Anderson]

Rebecca was.

[Andi Last]

Rebecca was Kirsty Alley.

[Big Al Clopine]

Yeah, the second. The second Cheers gal. All right, you're right. The first one was Diane.

[Joe Anderson]

Yeah. Yeah. She got a little overconfident. Maybe she thought she could do the big motion pictures.

[Big Al Clopine]

I think so. Yeah. Did a couple.

[Joe Anderson]

That was about it. Yeah. All right, so my husband Sam and I are now both hooked and look forward to every episode. Sam is also going back to older episodes as it took a while for me to convince him to listen. And so he's a bit behind the eight ball, I thought.

[Andi Last]

That said, he's a bit behind the spitball.

[Joe Anderson]

So here's the question. I greatly appreciate your spitfall on what I should do with a million dollar single premium deferred annuity. I bought in 2022 prior to my YMYW education million dollar single premium deferred income annuity. Al, you know what that is?

[Big Al Clopine]

Indexed annuity. Yeah, I do know what it is.

[Joe Anderson]

Oh. It's a deferred indexed annuity. Oh, boy. Okay.

[Big Al Clopine]

Yeah, that's how we can get your blood boiling.

[Joe Anderson]

Yeah. Million bucks. That guy made a lot of money off of Rebecca and Sam. All right, I'm 60 years old, fully retired, 2023. Sam, 61 and retiring next year. We drive a 16 and 07 Hondas and I really enjoy red wine or a caramel macchiato. Macchiato. Stout. What is that?

[Andi Last]

I think it's a macchiato. And I think it's a macchiato. Yeah, macchiato.

[Joe Anderson]

I don't drink stout, so I don't know. Well, Sam enjoys IPAs. Our two kids are launched 95% independent as we pay for flights home. That's it. Big Al, you still pay for cell phones.

[Big Al Clopine]

A Couple things. Still, it is cheaper on the family plan.

[Joe Anderson]

Got it. All right, here we go.

[Big Al Clopine]

I guarantee you 20 years from now.

[Joe Anderson]

20 years from now. Oh, my God.

[Big Al Clopine]

All the same stuff.

[Joe Anderson]

Yeah. I'll be so senile 20 years from now.

[Big Al Clopine]

Just take it, kids.

[Joe Anderson]

It's all yours. All right, the data we got traditional IRA, 750 Roth IRAs, 35 tsp, 1.2 million, inherited traditional IRA, $44,000, brokerage account, $620,000, cash savings CDs, $120,000. And then this annuity of $1 million. Current accumulation value is $1,100,000. And then the benefit base was funded by my 401. All right, if you rolled the 401, bam. Right into that nice big annuity, if.

[Big Al Clopine]

You'Re keeping score, it's about $3.7 million in assets.

[Joe Anderson]

3.7. Good for you, Sam and Rebecca. Sam's pension, $60,000 beginning after retirement. Social Security, $60,000 combined at 62 and 63. Almost the same benefit each and 83.5 combined at fra. And $103,000 combined at age 70, not adjusted for inflation. We get $1 million in inheritance, come in in the next 10 years. House is paid for, worth about $700,000. All right, so they got a pension. If you got a pension in fat Social Security, why are we buying an annuity here?

[Big Al Clopine]

A lot of people when they retire, they start thinking about, I'm not going to have a paycheck anymore. And they want to try to recreate it. But you're right, they already have it.

[Joe Anderson]

They already have pretty good fixed income. All right, let's see what we can do here.

[Big Al Clopine]

In fact, Joe, when you add up the Social Security at 70 and pension, they have about $160,000 of fixed income. They want to spend 125.

[Joe Anderson]

Yeah. All right, so I'm struggling what to do with this annuity. If anything, I bought it for risk free stability and to create a pension stream for myself. But I'm now thinking I could have achieved equal or higher returns just keeping it invested. Of course, that's hindsight and what's done is done. I did not fully understand the product at the time, but now have much better understanding of what it is since I've retired and had time to research. Here are four pot options. I see. Number one, keep it as is and begin a lifetime benefit payment in year 3, mid-2025. Since I selected the fixed increase of 3.5% for this year, the benefit base will increase to 7.25 to $1.2 million next year, resulting in a choice of either A defined definite $54,000 fixed annual payment or 47,000 increased payment. All right, I'm going to come back to that and do the math for her. Number two, let it ride a little bit longer. The payment Percentage increases by 0.1 each year I wait. And the benefit base increases to a minimum of 2% each year, depending on the selected indices. If a selected indice or index has a positive return, it is multiplied by 1.5 plus an increase of 2%. For example, a 4% index gain increased the base by 8%, which is 4% times 1.5 plus 2. Oh, my God. No wonder why you didn't understand what you're buying here.

[Big Al Clopine]

I don't even.

[Joe Anderson]

This is complicated. Hypothetically, if I could just average the same 7.25% base increase over the next five years, the payment would be $85,000 fixed or $75,000 increasing in year eight. The worst case scenario would be growing at a minimum of two. All of these numbers are garbage. Let me do the math for Rebecca here. This is what she has to be thinking about, because this is where people get confused with these products. They're like, okay, well, here we're going to tie to an index. You're not going to lose any money. And if the index has a positive return, we're going to give you some return with the cap and then, oh, we'll throw a bonus bs and you look at these numbers. She's thinking, all right, well, in a really good scenario, she's going to get seven and a half percent, or maybe I could get eight percent, eight and a half percent or nine percent. I'm going to get this fixed payment of X amount of dollars for the rest of my life.

[Big Al Clopine]

Yeah.

[Joe Anderson]

If I keep the money in the annuity and then they're going to give me even a higher payment, and then I'm going to get this locked in fixed payment forever. Correct. All of that. If I was in Rebecca's shoes, I would be like, yeah, that sounds really good. Most people hear those numbers and it's like, fantastic.

[Big Al Clopine]

Where do you get an 8% return?

[Joe Anderson]

Who gets an 8% return? Wow. You're going to give me an 8% return. And I'm not trying to be rude to Rebecca because that's how this. I was going to say another word. Stuff is sold.

[Big Al Clopine]

What word were you going to say?

[Joe Anderson]

I don't know.

[Big Al Clopine]

I don't remember.

[Joe Anderson]

Okay, you put a million dollars in and let's just say, all right, hey, you keep it in the product for 10 years. Right? And so at 10 years, we're going to give you a 7% rate of return. I'm just going to keep the math simple, okay? Right. 7% over 10 years, your money's going to double and it's a guarantee. So now in 10 years, when you want to turn on the income, it's going to be a 2 million dollar base. And we're going to give you, let's say, 5% on the money.

[Big Al Clopine]

All right?

[Joe Anderson]

So 5% times 2 is $100,000 a year.

[Big Al Clopine]

Wow. And that's. And I only invested a million.

[Joe Anderson]

You only invested a million. You're going to get a guaranteed $100,000 a year, or make it 120, I don't care.

[Big Al Clopine]

Right, right.

[Joe Anderson]

But here's what Rebecca needs to do with these. With all these numbers that are super confusing to the average investor, let alone a sophisticated investor.

[Big Al Clopine]

Right.

[Joe Anderson]

Look at the time that the annuity company holds those dollars, right? So in this example, you gave the annuity company million dollars. Ten years goes by on your statement. You see? Wow. Now it's worth 2 million. And then I'm going to get a guarantee, let's say, of $100,000 a year, and I'm going to turn on that income. I'm never going to outlive that $100,000.

[Big Al Clopine]

Right.

[Joe Anderson]

Sounds awesome. But then I look at it and say, all right, well, let's see, another 10 years goes by. So you get $100,000. So $100,000 times 10 is what, a million dollars? A million. So the annuity company has held Rebecca's money for 20 years. What rated return did she receive?

[Big Al Clopine]

0.

[Joe Anderson]

0.

[Big Al Clopine]

You got your money back.

[Joe Anderson]

You got your money back after 20 years. Now she is 80 years old, right?

[Big Al Clopine]

Right, Correct.

[Joe Anderson]

So now she's got to live. Let's say she lives until 90.

[Big Al Clopine]

Right.

[Joe Anderson]

So she gets another hundred thousand dollars a year. So she doubles her money. But it didn't take her 10 years to double the money. It took her 30.

[Big Al Clopine]

30, because this goes away when you pass away.

[Joe Anderson]

Right? And it's gone. So I'm just making up the numbers there because they are. This is super complex. All right, well, whatever index you pick, we're going to give you X and it's a cap. And then, oh, we're going to add another 2% here. Oh, well, what the hell, we'll just throw in another four. Right. It's like, God, how I'm the luckiest person in the World, how did I find this product? So, okay, all right. Sorry. I digressed.

[Big Al Clopine]

All right, so now we number three.

[Joe Anderson]

So I'm mailing it in lately.

[Big Al Clopine]

Okay, you got your blood pressure up, so, yeah, let's look at the choices. Three and four.

[Joe Anderson]

All right, cash it out. Invest. Current surrender value is 954,000. So you're going to lose 50 grand? Yeah, I don't know. Lose 50,000 or take 30 years or maybe less. I would have to do the math. This is hypothetical. And you please get a review by a professional that's a fiduciary to do the math for you, but cash it out. All right. Surrender charges, phases out eight more years. Trust me, it doesn't matter what the surrender period is. The annuity company always wins. They do. That's why they're in the biggest buildings in every metropolitan area. They're smart. They got actuaries that have PhDs. So if you want the annuity for fixed guaranteed income, keep the product.

[Big Al Clopine]

Now, if you live to 110, you win.

[Joe Anderson]

It's awesome. But no, it's insurance. An annuity product is insurance. So if Rebecca wants a guaranteed income that she never, ever has to worry about, running out of money, then do the annuity. If you're thinking it an investment, it's not an investment. It's insurance. Right, so it's longevity insurance. You want a guaranteed income stream, but she already has a lot of fixed income. You spend $20,000 a year, you already have half of that in a pension of 60 grand.

[Big Al Clopine]

And Social Security is more than you.

[Joe Anderson]

Need, so you got to pull 60,000 from the portfolio. 60,000 into three and a half million bucks is a pretty small distribution rate, right? So I don't know. There's a lot more to this thing. Maybe I've answered a question.

[Andi Last]

Well, then jump down to the red part.

[Joe Anderson]

Penalty free withdrawal each year. They can only take 5%. I thought it was usually 10. But this is such a great product. Why in hell would you want to take more than five?

[Big Al Clopine]

And then you got to wait eight years.

[Joe Anderson]

Yeah, just lock you up. Lock you. Yeah, there's an annuity product that we used to see with like an 18 year surrender period, right? Yeah, you know, we called that one. We call that Hotel California.

[Big Al Clopine]

You can't get out.

[Joe Anderson]

You can enter, but you can.

[Andi Last]

You can never leave.

[Joe Anderson]

You can never leave. So. All right. I researched the index choices, track the performance over the last 10 or so years and understand the risk. Since we don't need the payments right away, I'm tempted to Try and max out the growth a few more years. And in the meantime, withdraw from the brokerage and the ira. Instead of covering retirement expenses and reduced taxable income Prior to the RMDs, we would like $125,000 per year in retirement and leave a minimum of $1,000,000 in inheritance to each kid. Okay, now this is just even getting more frustrating. So the goal is not guaranteed fixed income.

[Big Al Clopine]

No. They want to leave money to the kids.

[Joe Anderson]

They want to leave money to the kids.

[Big Al Clopine]

And it's now an annuity that goes to the insurance company.

[Joe Anderson]

Right. And again, I'm more or less ripping on the agent that sold the product, not Rebecca, because it sounds really good to the average investor.

[Big Al Clopine]

Actually, I'm sitting here and I'm thinking, this sounds amazing.

[Joe Anderson]

Yeah.

[Big Al Clopine]

Right.

[Joe Anderson]

I'm annuity business.

[Big Al Clopine]

I need to go get one of these.

[Joe Anderson]

But like I said, if she wants a guaranteed fixed income for the rest of her life and wants to ensure that and not worry about the markets and fluctuation of volatility and everything else and that's a wonderful product. Go for it. But it's like, oh no, I want to give a bunch of a few million bucks to my kids.

[Big Al Clopine]

Yeah, right.

[Joe Anderson]

Oopsie poopsies. We'd love to also get your spitball on when to take Social Security, whether the 2% we are paying our advisor is excessive. Now you're paying up 2% as well with the commission, but only on $1.2.

[Andi Last]

Million of their funds.

[Joe Anderson]

Oh boy.

[Big Al Clopine]

Well, that's because they already got the commission on the mill.

[Joe Anderson]

Yeah. Killed it on the. Made about $80,000 on the annuity. But I'll save that for a future not.

[Big Al Clopine]

Okay.

[Joe Anderson]

All right. Well, no. 2% is extremely excessive. Of course I don't know what annuity contract she's in. I have no idea what the details are. It could be a phenomenal product for.

[Big Al Clopine]

Given you're talking generally from what you've.

[Joe Anderson]

Very high general of how these products work, how they're usually sold, how they're positioned. You could have a very good advisor. But the sounds to me that this.

[Big Al Clopine]

There'S red flags based upon what? You know. We don't know because we don't have the contract. Right. But what would you do out of these four?

[Joe Anderson]

If it was me.

[Big Al Clopine]

Yes.

[Joe Anderson]

And if it was my money.

[Big Al Clopine]

Yeah.

[Joe Anderson]

And I put $1 million in and I can get out of it for 954.

[Big Al Clopine]

You might do that.

[Joe Anderson]

I might think about that pretty hard.

[Big Al Clopine]

I am with you to me. If they're Young if. Right. If I could take out 10% penalties free, I might do that. But 5%, that's. That's not enough.

[Joe Anderson]

I don't know. Yeah, you could let. I don't want to give advice. We're just spitballing.

[Big Al Clopine]

Well, all we're saying is what we would.

[Joe Anderson]

Yeah, I mean, we're not.

[Big Al Clopine]

We don't know.

[Joe Anderson]

I would need to know a little bit more about your goals and aspirations, your time frames and your tax bracket and whatever.

[Big Al Clopine]

And of course, I mean, I answer this in the context of myself, which may or may not be Rebecca and Sam's situation, but that's what I would probably do. I would say, boy, that wasn't my best choice. I'll get out of it. I only lost 50 grand. Good enough.

[Joe Anderson]

Yeah. I think 2% is pretty excessive. Selling commissions and not maybe disclosing what the commission is is probably, you know, you might want to understand that a little bit. What are the costs and fees associated with it? And really, what is your irr. Your internal rate of return? If you're looking at a guaranteed income product.

[Big Al Clopine]

Right.

[Joe Anderson]

Again, it's insurance. So if you want to insure against longevity risk, then annuities do a really good job of doing that. But doing a tax deferred indexed annuity.

[Andi Last]

So when should they take Social Security then?

[Joe Anderson]

Well, they got a $60,000 pension and they have plenty of cash. The distribution rate is low. If they have longevity, they would take Social Security. I would push it off as long as you can. And then their fixed income is going to cover most of their income needs, depending on what inflation does. The biggest issue I see is taxes. So let's say they turn the annuity on. It's a 401k plan that she rolled into the IRA and she waits. She doesn't do anything with the money. She lets it defer. Right. And then you get a lot larger guaranteed fixed payment, but it's going to be 100% ordinary income tax.

[Big Al Clopine]

Yeah. Taxable.

[Joe Anderson]

You have a $60,000 pension. That's ordinary income tax.

[Big Al Clopine]

Right. And Social Security and Social Security.

[Joe Anderson]

So you're just locking in a lot higher income, potentially that you're spending. And all of that income is taxed at the highest of rates of ordinary. So. Yeah. But good news is you're not going to run out of money. You can do. Take more trips, buy more booze, drink more wine, have fun. Right. And then you don't have to worry about the markets. You don't have to worry about managing the money. I don't know, or you got someone, you're paying them 2%, so they can manage that.

[Big Al Clopine]

But yeah, 2% is a little on the high side, but it also depends what services you're getting, so we can't really say for sure.

[Joe Anderson]

Yeah. Last thing I want to do is bash.

[Big Al Clopine]

I know. Yeah, me too. But I would say it's higher than industry standard.

[Joe Anderson]

Yeah.

[Big Al Clopine]

Could you say that?

[Joe Anderson]

I'd buy about 100%.

[Big Al Clopine]

Yeah, that's about right.

[Joe Anderson]

Well, double. Yeah, I heard $3 million. I'm going to charge you 2%. It should be. Well, I don't know. It's 60, 70 basis points.

[Big Al Clopine]

They're only charging 2% on 1.2 million because they already got the commission on the annuity.

[Joe Anderson]

That's right. All right. Sam, Rebecca, congratulations on your retirement. Congratulations on accumulating the wealth that you have. Yeah, you're in great shape financially. The products and the planning that you're in. Could it use some tweaks in massaging? Sure.

[Andi Last]

You can see for yourself how those tweaks and massaging can affect your retirement plans and see your likelihood of retirement savings success with a financial blueprint. Click or tap the Financial Blueprint link in the episode description. Input your details and our free tool will analyze your current cash flow, your assets, and your projected spending for retirement. It'll then calculate a detailed report with three scenarios to help you determine your probability of retirement success. Your financial blueprint even includes future taxes and actionable steps you can take now to achieve your financial goals. Take control of your retirement future. Click or tap the financial Blueprint link in the episode description to get started. Once you're armed with the information you need, consider meeting with the experienced professionals on Joe and Big Al's team at Pure Financial Advisors for a financial assessment either in person or online. To go over your financial blueprint. Both the blueprint and the assessment are free. With the goal of educating and empowering you. The Pure team will help you develop a thorough financial plan that goes beyond the basics and offers guidance that addresses both your unique immediate needs and your long term retirement vision. At the end of the assessment process, you can decide whether Pure is a good match for your needs and what the next steps look like. Get your financial blueprint and schedule your financial assessment both for free. Click or tap the links in the episode description to get started.

[Joe Anderson]

We got Dan. He writes in. He goes, hey, why is my Social Security about paper $3000 and my wife is only 800? I have no idea Dan. It's probably your wife had a certain earnings record With Social Security, I'm guessing.

[Big Al Clopine]

Your earnings record, Dan, was higher.

[Joe Anderson]

Yeah. You made more money than your wife. And so how Social Security calculates the benefit is based on 40 years of earnings history. How much money did you make and how much money did you put into the overall system? And that creates your PIA or your primary insurance. Am Right. And she probably made a little bit less. And so when you do the calculation, her benefit is 800. I don't know. When did she take the Social Security? She took it at 62. She's going to get a permanent haircut. Maybe Dan pushed his out to a later age.

[Big Al Clopine]

That could be. Yeah, you're right. I think it's the 35 years. It's income over 35 years, and it's the highest 35 years. And if you only work 15 years out of the 35, it counts as you making zero for 20 years. So it averages that in, I don't know, your wife's situation, but she probably either worked less than you or she made less than you, or she took her benefit earlier than you. So those are reasons why it could be lower.

[Joe Anderson]

Yeah, great, Great question, Dan. Very simple, to the point. Move on.

[Big Al Clopine]

Yeah. You didn't have to read.

[Joe Anderson]

No, it was like two pages. I get a little dizzy. Okay, we got. Let's see. Where do I start reading this one here?

[Andi Last]

This is a YouTube comment that was.

[Joe Anderson]

Help me out with this one, Andy.

[Andi Last]

This is a YouTube comment by P. Ware. He commented on podcast 504 in reference to emailer John who planned on taking his Social Security at age 70 and a half. And you guys said there's no reason to do that. Take it at 70. So this is P. Ware's comment on that.

[Big Al Clopine]

Oh, okay. It's a comment.

[Joe Anderson]

There is a case for drawing Social Security past age 70 up to 70 and a half. Okay, now we're splitting hairs here.

[Andi Last]

Actually, this did cause me to have a question for you, so I'll let you read it and then I'll ask you my question.

[Big Al Clopine]

Okay.

[Joe Anderson]

If your birthday is in the second half of the year, say July, and you are trying to max out Roth conversions up to a certain tax bracket limit, then taking Social Security in the year you turn 70 will lower the amount you can put into a Roth conversion. When you start Social Security, you have the option to select the start date up to six months earlier and then get the lump sum for the previous months. Oh, look at the big brain on pware.

[Big Al Clopine]

You know, Pware is correct.

[Joe Anderson]

He is an advisor. Guaranteed correct. Yep, that's a Great strategy, Pware. And you're right. So kudos to you. That is absolutely right.

[Big Al Clopine]

So 70 is the last date where you can collect Social Security, but when you start collecting it, you can actually have a start date six months earlier, and you get a lump sum. So let's say your birthday's in July. You put in for benefits in January. The next year. That lump sum of six months would go into the next year. So this. This could work. It's actually not a bad idea in certain cases.

[Joe Anderson]

Ever tell you about the lady. This is several years ago that came into the office, and she. She had this baby.

[Big Al Clopine]

Okay.

[Joe Anderson]

Strangest woman I think I've ever met in my life comes in unannounced, wants to talk to me about a question she has about Social Security, right? So she's 72 years older, somewhere close to that.

[Big Al Clopine]

Okay.

[Joe Anderson]

And she goes, hey, I should claim Social Security because I'm 72 years old, but can I put the account into a different. Like, how do I get. How do I move them or change the account number where the money goes to if I married. Because I'm married, and I, you know, I don't want my husband actually to see the benefit.

[Big Al Clopine]

Okay.

[Joe Anderson]

I said, okay, that's straightforward.

[Big Al Clopine]

Sure.

[Joe Anderson]

I don't know what kind of marriage you have. She's like, well, should I get. I should get a family benefit, too, because I have this baby.

[Andi Last]

She's 72, and she had a baby, 72 years old.

[Joe Anderson]

It's like a miracle baby. I was like, all right. But then this is when RMDs were at 70 and a half. And I was like, well, here. Well, are you taking RMDs? She's like, well, what's an RMD? I was like, do you have a retirement account? Yes, I have a retirement account. Well, you have to target. Start. Start taking dollars from that retirement. She's like, oh, gosh. Well, can I. Can I move that into a different account as well? And I was like, you could do whatever you want. I was like, well, what. Why are you trying to hide all this money? And she's like, yeah, well, my husband thinks I'm, like, 60.

[Big Al Clopine]

I remember you telling me that he's got this baby.

[Joe Anderson]

Oh, my God. This is.

[Big Al Clopine]

Oh, my gosh.

[Joe Anderson]

Anyway, okay.

[Big Al Clopine]

Miracle baby or.

[Joe Anderson]

I thought I had a miracle baby.

[Big Al Clopine]

Yeah, well, you're nothing compared to that.

[Joe Anderson]

All right.

[Big Al Clopine]

Okay.

[Joe Anderson]

Go to Jerry from Phoenix.

[Andi Last]

Well, I wanted to ask a question on this same topic about. About claiming Social Security after age 70. As late as 70 and a half. Now, my because I ended up researching this and I found out that if you claim like at 70, you know, and you get the six month lump sum, it actually takes you back to whatever the monthly payment would have been six months earlier is your permanent amount that you're getting going forward, which is why claiming it 70 and a half, then you're getting your age 70 benefit in the lump sum for that six months that you ask for. Right?

[Big Al Clopine]

Yeah. Both those statements are accurate. But you also can claim Social Security without getting a lump sum, and then you get the benefit you're supposed to get. Yep.

[Andi Last]

So I know somebody who waited until the age of 73 to claim his benefits. So he would have gotten that lump sum, but. And that would have been still at the age 70amount. Correct. Even though he waited that long, he collected the benefit.

[Big Al Clopine]

Correct.

[Andi Last]

Right.

[Big Al Clopine]

The only increase there might have been a cost of living that he would have got. Right. But otherwise it's the benefit at age 70, at 73, with the cost of living for whatever Social Security did for those few years.

[Andi Last]

So that's why P. Where is suggesting waiting until 70 and a half so that when you get that lump sum, it is at the age 70amount, not at the age 69 and a half amount.

[Joe Anderson]

No, what he's saying is that if, let's say his birthday's in July and so you claim your benefit at age 70, you receive that paycheck from Social Security in July. Well, you have six months of income on your tax return of Social Security that otherwise you could eliminate on your tax return and then you could do a Roth conversion to that dollar figure or whatever. Right. Because that's going to show up on the return. Let's say Your benefit is $30,000. So $15,000 of Social Security is going to be on your tax return for that year. Because it's half the year. He's like, well, don't claim it until the next year. You're going to get a lump sum of that 15,000 that you should have January 1st. But you could have done a Roth conversion of an additional, let's say $15,000 in this example to, you know, or higher or $15,000 additional because that income didn't show up on the retirement return. That strategy probably makes sense. One out of.

[Big Al Clopine]

I'll go back to your original comment. You're kind of splitting hairs. I mean, to get an extra.

[Joe Anderson]

I mean, because the following year you.

[Big Al Clopine]

Have that, you got extra income, you got extra, higher bracket. But whatever. I mean, it, it does work. It's. It's Actually, it is a reason where you could do it.

[Joe Anderson]

Yeah, so he is right.

[Big Al Clopine]

I get it.

[Joe Anderson]

All right. Hi, Andy. Big Alan. Joe. I'm getting third wheel here lately.

[Andi Last]

No, you're getting. They're saving the best for last. Come on.

[Joe Anderson]

I haven't really talked about my insecurities about this in a while, but I'm noticing it a lot. Just saying.

[Big Al Clopine]

It's popping up. Huh.

[Joe Anderson]

Got it. I've been listening to your podcast for a couple of years and would like to submit my second question for your podcast. Okay, Jerry, by all means. Thanks for answering my first one a year or so ago. I drive a 2021 BMW 430i and my drink of choice is though Mint Ultra. During the election campaign, several tax changes were discussed and perhaps given the red wave. Red wave.

[Big Al Clopine]

Give him the red wave.

[Joe Anderson]

Got it.

[Big Al Clopine]

Got it.

[Joe Anderson]

I'm guessing that's the Republican wave.

[Big Al Clopine]

Correct.

[Joe Anderson]

I wanted your spitball on whether current Social Security strategies might change. Today, our investment income, small pensions, wife, Social Security and Roth conversions are filling up to the 24% tax bracket. My 66 year old bride of 44 years started claiming Social Security at 62 in five months. I'm 67 and I've been planning to take my Social Security at age 70. Given our tax bracket and current tax laws, 85% of our current and future Social Security payments will be taxed at 24% or higher if one of Trump's Social Security proposals to stop taxing Social Security becomes law. And assuming there is no means testing, my $57,000 annual Social Security would be avoided 11.6 in annual federal taxes. And my wife's estimated annual Social Security increase with the spousal offset could avoid $4,000 in federal taxes. We live in Arizona, so Social Security is already not taxed on the state level. So here's my question. I think if Social Security becomes exempt from federal taxes, that I should go ahead and just file for Social Security prior to age 70. I've been filling up the 24% tax bracket and Roth conversions and tax free Social Security would also allow me to continue with my goal of having my IRA split 5050 between deferred and Roth. Do you think tax free Social Security income will impact my Social Security claiming strategy or do you think the current strategies will remain? Thanks in advance and thanks for making your podcast so informative and entertaining.

[Big Al Clopine]

All right.

[Joe Anderson]

What do you think, Big Al? Social Security tax free?

[Big Al Clopine]

I doubt it, but it could be. I mean, what's the chance? Below 10%?

[Joe Anderson]

I would say below 2.

[Big Al Clopine]

So here's what I would say. I would say there's all kinds of proposals, particularly on a presidential campaign. And, and just don't go to the bank with them just yet. Right. Don't make any changes until something actually happens. If it does happen, then you could re look at it again. But in my, the way I think about this, I think it's more important that you do the right claiming strategies as opposed to whether you get a little bit more Social Security for a couple years and still do your Roth conversions. And in a lot of cases, I kind of like the spouse with the higher benefit to wait till 70 if you can afford it, just because then that's the higher benefit that, that whoever survives the other one will receive. So I would look more at the benefit of Social Security rather than the taxation.

[Joe Anderson]

Yeah. I think they changed the law. What Obra Omnibus Budget Reconciliation Act.

[Big Al Clopine]

Yeah. Where they tax Social Security in that. But that was a long time ago.

[Joe Anderson]

That was under Clinton, I think.

[Big Al Clopine]

Yeah.

[Joe Anderson]

But then when they first started taxing Social Security, it was under Reagan.

[Big Al Clopine]

Yeah.

[Joe Anderson]

How many years ago? That was in the 80s.

[Big Al Clopine]

In the 80s. Yeah.

[Joe Anderson]

And so, but they never indexed the, the amount. That would be like $44,000. Anything over $44,000, 85% of your benefit is something to tax.

[Big Al Clopine]

Right.

[Joe Anderson]

I mean $44,000 in the 1980s was like $150,000. Today there's a lot more. I mean they haven't done anything with the system in regards to taxation for years and years and years. And for someone on the campaign trail to say, hey, we're going to have tax free benefits for Social Security benefits, I love the concept.

[Big Al Clopine]

Sounds good.

[Joe Anderson]

I mean we live in the state of California and the state of California doesn't tax Social Security. But on the federal level, you know how much taxes that would be?

[Big Al Clopine]

Well, if I would say if we had a balanced budget every year. Yeah, maybe. I don't think we've had a balanced budget in my entire career.

[Joe Anderson]

No. What for big alright on the campaign trap. All right, that's it. That's it for us today. Social Security questions galore. Appreciate everyone coming in with your questions and thanks for the, for the fun time today. Happy holidays. We're gonna have this wonderful holiday season, big guy.

[Big Al Clopine]

We are. I can't wait.

[Joe Anderson]

Yeah. All right, thanks, Andy. Wonderful job.

[Andi Last]

Thank you.

[Joe Anderson]

You're welcome. All right, we'll see you next time. Show's called you'd money, your money, you.

[Andi Last]

Wealth is your podcast. And this show would not be a show without all of you. You are our holiday gift. So keep sending us your money questions, tell your friends about YMYW and leave your honest reviews, comments and ratings for your money, you wealth in Apple podcasts, on our YouTube channel, and in all the other apps that let you do that. Sheri in California, Houry in New York, and YouTube commenters get smart, Paul and Pware. I've asked Joe and Big Al to spitball on your questions and comments and so many others next week on ymyw.podcast510 the New Year's Eve Edition 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.