Retirement Income

Good morning Vero Beach. Welcome to the Financial Pulse Radio Show. My name is Danny Howes, CEO of East Coast Tax and Financial Planning and your humble host. Welcome, welcome. I hope everybody has had a great week thus far. We certainly have. We’re in deep into tax season, one of our favorite times of the year. We’re weird like that. Of course, we have a tax firm so we’re kind of have to be that weird guy. We are having a great time. If you are new to the area, you just moved in the last couple of years, and you’re looking to move various services down here where you are; or maybe just looking for a change, or you’ve listened to the show and you want to experience a little bit of East Coast Tax and Financial Planning – you can give us a call and set an appointment to have your taxes prepared. Whether you’re a business owner, we do full service accounting. For small and medium-sized business as well as for individuals and families, we do tax preparation and so forth; and tax planning. Give us a call 772 774 7970 or better yet just go to our website www.eastcoasttacandfinancial.com. You can even register for a tax preparation appointment right there on the calendar. It’s all done in the confidential office. There are no cubicle forums here. We just take our time, we relax, we have a good conversation, and lots of coffee and soda or whatever you like to drink, and we try to make this unpleasant time of the year for you as pleasant as humanly possible by making sure that we are squeezing every single possible time we possibly can out of Uncle Sam.

Today I want to talk about retirement income. You know income is a life blood of anybody’s financial life, of course.  Without what I call “ifcome”, the “when is it going to come in?”, that can cause a lot of anxiety and uncertainty in people’s lives. I had a mentor of mine at one time, a smart guy, extremely successful, and he said, “You know Danny, predictability and certainty in your life allows more incredible amount of spontaneity”. What did he mean by that?

In a financial world, having predictable retirement income allows you to be spontaneous. If you’re retired, that allows you to maybe check off some things on the bucket list that you didn’t think you could because you have certainty of income. You have enough or lots of cash flow coming in to cover what you need. If you run across a great deal on a cruise, or maybe that great deal on that car you’ve always wanted, or something as simple as “honey, we’re going out to dinner tonight, we’re not cooking”; spontaneity because you have certainty and predictability in your life when you’ve set up your income and retirement properly. When you have made sure that all your basic expenses and more are covered by guaranteed income sources so that the rest of your life can flow a little bit easier.

“Ifcome” is horrible because you’re constantly worrying about whether or not you’re going to outlive your money or not. Nobody likes that feeling.  If you’re a business owner, it’s the same thing. It’s about creating passive streams of income and predictable business flows and cash flow into your business. If it’s that constant ifcome that happens… How am I going to make this happen? I need more money at the end of the month than I have in months, not the other way around. There are things that you can do, especially in retirement, to put yourself in a position of power, and that power being income – that’s certainty in your life.

Think about retirement. And we’re going to focus more about retirement income. It’s basically a three-legged stool that’s been built upon here in the United States over the years, and one of the legs of the stool is social security. 2/3 of all retirees depend on social security in order for them to actually make it through retirement. The second leg of the stool would be pensions. Pensions are going the way of the dinosaur. Very few people are getting it nowadays unless you work for the government or if you’re blessed, you work for health care or maybe a school system and so forth. There are a few companies that offer them but not very many. Gone are those days, most of the pension aspect of it or retirement savings is now forced to the burden of the worker in a way of 401Ks, IRAs, and all those tools that have come out. The third leg of the stool is income from investments. If you have done a good job saving up your money whether it be an IRA or 401K or just brokerage accounts, or CDs, or you just stuffed them under the mattress – whatever it is. Once you got your nest egg, the next thing is to turn that into income in the distribution stage of your life.

The problem is with pensions going in the way of the dinosaur, and the fact that because of government engineering in the financial system and having artificially low interest rates to get us through the financial crisis, and quantitative easing, and we just start raising interest rates as a reason. Because of that low interest rate environment that a hidden tax on savers, we aren’t able to do what we are taught to do all these years, and that is “I’m going to invest my money and CDs and bonds, and safe investments, and I’m just going to live off the interest and conserve my principal”. But how can people do that in a one to two percent environment in safe investments and CDs with triple A bonds and treasuries? The stool gets a little bit wobbly when one of the legs doesn’t do their job. In fact, the reason why so many retirees’ retirement is awkward now and that’s because many people now only have two legs to the stool: social security and income from their investments. And it gets a little bit more wobbly and awkward because if there is barely any income out there available, people had to get really creative and take on more risk. You can’t get retirement income from where you need it and you absolutely have to have it. One of the two things are going to happen: you’re either going to go out and take more risks so you can try to get more income and gain more profit, or you have to go on a lifestyle diet – you are going to have to cut back. Maybe you need to move to a smaller place. Maybe just not go out to eat or vacations. Whatever the situation may be, every level is different. But at the end of the day, those are basically the options and the choices.

So what happens in the marketplace is people get really creative. A lot of products out there are being pushed around to answer this low interest rate environment problem. There is a lot of stuff out there. There are annuities, dividend income portfolios, promissory notes, high yield bonds; they pay more because there is risk involved.  Some are actually pretty good but you’ve got to be really careful because when something’s paying higher than what the safe stuff is doing, then there is going to be inherent risk there.  People are scrambling around and basically starving for yield. Now the stock market has been doing great since Trump was elected. That’s just kind of happening right now. That’s not something that you peg your retirement on. It’s a great thing that things are going up and we’ll take it while we can get it.

When you’re talking about long-term predictability and certainty in your life, then that shouldn’t come from the roller coasters of stock market. That should come from predictable investment vehicles you have put in place that are coordinated so you can make that number that you need happen every single month and year. How do you evaluate these things? How do you figure out which one is right for you? When we get back from the break shortly, I’m going to dive in to the biggest elephant in the room, lots of seminars on these things, and we utilize them quite a bit. There is one arrow in the quiver, so to speak, one tool box that we can use but that’s annuities. We had Annuity August back in the summer and we did a lot of videos that we posted on the website, Financial Pulse. We also recorded those radio shows because we talked about all the different types of annuities. I want to revisit that again because now that the season’s here and things are buzzing I want to make sure that everybody’s equipped and prepared, and just has a good basic knowledge of how annuities work, which ones might be right for you, and are they even appropriate in your situation? They’re not one size fits all. Many times they’re way overused or misused. We’re going to take a break and talk about that.

If you want to go to our website www.eastcoasttaxandfinancial.com, if you need your taxes prepared, maybe you just moved down recently and you’re looking for a new provider, or you just listened to our show and you like our approach on things; go ahead to our website eastcoasttaxandfinancial.com. You can just pick up the phone and call us, and schedule that appointment; or you can even schedule it online there, if you like to do that. We’ll be back in just a bit.

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Welcome back Vero Beach to the Financial Pulse Radio Show. I’m your host Danny Howes, CEO of East Coast Tax and Financial Planning. Welcome, welcome.

For those who are just joining us, we are talking about income. Retirement income specifically and the three-legged stool, of course; being one of the legs is social security, the other leg is income from the investments, and the other leg is pension. With pensions going the way of the dinosaur, we have found ourselves a lot of the time with a two-legged stool. Because the interests are so low, the income from investments leg has gotten really weak. That’s a cause for a lot of people to try to go out and find solutions to that problem.  One of the things I want to talk about over the next couple of weeks, we’re going to have bonus material on our website eastcoasttaxandfinancial.com. If you click on Financial Pulse on the front page it will take you to the blog section where there are videos, write-ups and things that I do about there. So if you like the show, you’ll like that section of our website. We’re going to be putting some bonus materials on there because I really want people to understand how these things work: annuities can be very complex instruments with a lot of caveats. They can be great. We use them in our practice here at East Coast Tax and Financial Planning. We are a full service financial planning firm. We do written financial plans and retirement plans. We manage money in the market and we also have an insurance agency that handles long-term care life insurance, annuities, disability – things of that nature having to do with estate planning and retirement.

With annuities, there are basically 3 different types that are out there. There are variable annuities which are essentially money in insurance contracts, and that money is invested into mutual funds predominantly, sometimes exchange-traded funds; for the most part, mutual funds. With variable annuity, that account can actually go up and it can go down in value. They have different riders attached to them like income riders that you can get and death benefit riders that provide guarantee and security. In case the market doesn’t do what you wanted to do, you still have some insurance elements to those contracts that help you. Maybe not outlive you money, maybe it gives you guaranteed income for life when you’re turning on, or maybe it enhances the account value upon death, or maybe it even has some principal protection there that your premium or your initial investment can actually be preserved if you wanted to get out because the market had not treated you very well.

Some of the caveats with variable annuities are the fact that they’re so complicated. There are so many different types of riders. There are so many different riders involved. The mutual funds have fees. The insurance company has fees on the annuity, mortality, and expense charges; admin fees, rider fees. It’s not uncommon to see a variable annuity push 5% in fees just from all those different things. If you’re paying 5% in fees and you want to make 5%, you got to make 10 just to net 5, right? You got to make 5 just to avoid losing money from fees. There are efficient variable annuities and we’re not against them at all. They have a place in retirement planning. They have a place in the investment world, there’s no doubt. But just like with anything else, there are good ones and not so good ones; but you really have to protect yourself by empowering yourself with knowledge in order to understand how these things work. The bells and whistles on them are so attractive. It’s easy to just kind of move over the details and find yourself kind of financially disappointed at that investment decision because there are things there that you didn’t know or realize at the time to really figure out.

We’re going to actually devote the whole radio show to variable annuities coming up here. I think we are going to do variable annuities next week. We are going to talk about fixed index annuities coming up, too. Fixed index annuities are fixed annuity contracts that cannot lose money due to market volatility but they are very complex annuities as well. Just like variable annuities and anything else, there are good ones out there and there are not so good ones out there. One of the big things that can be disappointing with fixed index annuities is the performance. Because we’re in a low interest rate environment, even though the story goes that a fixed index annuity can lose money but can make money that’s linked to a common index like the S&P 500 or the Dow Industrial Average. The caveats with them are the fact that caps are low. Meaning that the market could do really great making 10, 25, 20%, but you might be stuck at 3. We literally see them as low as 3, or the max you could make is 3%. Of course the most you can lose is zero. You can’t lose your money. So it’s a secure investment, and a lot of times it can be a good alternative to things like CDs or bonds. A lot of times we use them as part of asset; diversification… almost like a bond alternative if people are risk averse but really have to be careful because some of the index options that are available out there and the crediting rates and the participation rates and the renewal history with the insurance carriers. There is so much to consider.

We’re going to devote a whole show to fixed index annuities. Of course the third class is kind of just a vanilla fixed annuity, almost like a CD alternative where you can pick a term – 3, 5, 7, 10 year term – the longer the term the higher interest rate but the longer the term the more interest rate risk there is. There’s a tradeoff there. But typically you pay more than your average CDs or money market rates. It can be a good parking spot for dead money that’s not doing anything but you don’t want to take any risk. Maybe it’s that CD money laying around and you don’t want to renew again for only one in a quarter when you can maybe go out and get anywhere from 3 or 4 percent in fixed annuity. The spinoff of that is income annuity. It’s called the SPIA – Single Premium Immediate Annuity and those are when you basically make a big deposit and then they immediately start paying you a paycheck. It’s a guaranteed fixed amount for a period of time, or for the rest of your life. It’s just an income annuity, there’s really no growth aspect to it. You’re basically just getting a pension off the bucket of money. The reason why we’re going to dive in to these things and we’re going to get into private placements like real estate investment trusts and some of the promissory notes stuff floating around against commercial real estate that we have seen a lot of. We will empower you on how these things work, some of the risks that are involved but also some of the opportunities so that you can make well-informed financial choices along the way because people really want to make money with their money.

But again it all goes back to reverse engineering.  It all goes back to begin with the end in mind. What is the true goal of your money? You’ve heard before every dollar has a job so do you have all your dollar working? Are they really working on the right project? Are they doing the right thing for you? Part of that is your investment decision along the way, so that’s why we’re going to devote so much to this topic because especially with annuities, there are a lot of seminars out there that promote them. There’s nothing wrong with that. You have to be an informed investor. You don’t have to be rocket scientist and you don’t have to be a PhD in this stuff. But it does help you if you’re armed with information that’s not biased to make those decisions.

We’re excited for the next couple of weeks. I hope you are too. Make sure you tune in every single Thursday 10:30AM 107.1FM on your radio dial or 1370A right here on WAXE radio. We’re just going to go through it; all these annuities and all and we’re going to teach you how they work. We’re going to give you a bonus material that you can even go to our website to see some videos, tutorials, and you can be empowered with knowledge.

It is tax season. Tax season is upon us. So if you’re looking for a good, quality tax firm that doesn’t just record the past and punch a bunch of numbers into a machine and hand you a big bill, but is proactive with you and helps you to strategize to get that bill down as much as possible to save money from Uncle Sam. If you’re a business owner,  you’re really wanting some good tax strategy and sound proactive advice rather than reactive waiting till the end of the year; you feel like you have a bunch of machinery to save yourself on taxes, give us a call. Our phone number is 772 774 7970 or you just go on our website and register for a tax appointment right on our website. So go ahead and go there. You’ll find out all kinds of information on us. Until next time folks, make sure you’ve protected that money. But most importantly, make sure you know and where you’re protecting it from. I’m, Danny Howse from the Financial Pulse. We’ll talk to you next week.