Episode Transcript
[00:00:00] Speaker A: Any examples used are for illustrative purposes only and do not take into account your particular investment objectives, financial situation, or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
[00:00:17] Speaker B: Welcome to all Things Financial, the show that helps upgrade your financial literacy. Trey Peterson and Yellowsay coutts, our retirement planning specialists here to provide a unique and conservative approach to managing your money. Now, here are your hosts, Trey Peterson and Yellow Seikoots.
[00:00:37] Speaker A: All right, good morning. Good afternoon. Good evening, everyone. My name is Ryan Moffat. Welcome to the All Things Financial podcast, episode 14.
It's been 14 episodes. Yalase.
This is going well. I enjoy this.
[00:00:51] Speaker C: Well, the number of episodes doesn't mean it's going well. Ryan.
Good morning to everyone.
[00:00:58] Speaker A: Always the optimist. Always the optimist. Well, today we've got a number of things we're going to be reviewing and going over with you, but it's all about sunny money. I feel like a lot of times our topics are not always the most positive. You know, sometimes it's a little like, ooh, you know, kind of the eke reaction, all important topics. But today it's all about how to improve your retirement outlook this summer. It is beautiful may in Minnesota, and it's our favorite time of year, which is spring and summer if you're a Minnesotan. And so we are looking at how to improve your retirement outlook this summer. Listener call out thank you so much for tuning in. Whether it's in the moment or after the fact, if you're in Burnsville, Egan, invert Row, Shakopee, Bloomington, kind of that whole area, we're just welcome you to the podcast and are happy you're joining us.
Overview today we've got a number of things we're going to talk about how much has your nest egg grown? And we're going to talk a little more inflation. I know that's kind of an ongoing topic that seems like, but it's worth discussing because it has impacted us greatly, especially over the last few years.
[00:02:12] Speaker B: And now for some financial wisdom. It's time for the quote of the week.
[00:02:20] Speaker A: But yellow say, do you want to kick us off with the quote of the week or would you like me to do the honors?
[00:02:24] Speaker C: Yeah, I can share the financial wisdom.
[00:02:26] Speaker A: Yeah.
[00:02:27] Speaker C: This week it's coming from John F. Kennedy. The time to repair the roof I'm sorry?
[00:02:33] Speaker A: The 35th president.
[00:02:35] Speaker C: Yeah, the time to repair the roof is when the sun is shining.
[00:02:40] Speaker A: When the sun is shining say you're a bit of a do it yourself or when's the last time you had a project on the house?
[00:02:46] Speaker C: When's the last time I haven't had a project on the house?
I've come to the realization that it just never ends. You never get to the point where you finally have done enough projects where the house is to your liking, to whatever standard you have. It's just there's always going to be something else.
[00:03:04] Speaker A: I was working on some stuff over the weekend while the sun was shining, by the way, and I had a moment where I was putting all my tools away, and I thought, you know, 15 years ago, this would have been a lot harder because I didn't have all these tools and I just had this like, like, you know, I've kind of made it when it comes to do it yourself stuff because I have all the equipment needed. So that was a nice moment. But I think, you know, taking that, how do you turn that into your retirement plan where you can look back and say, you know what, I've made it. Things are in a good position.
I think we'll talk about, and part.
[00:03:35] Speaker C: Of the reason why I have so many projects, I feel like there's, there's, I don't know what the publication is, but they track like the cost of the project itself, materials and the cost of labor. And for a long time it was 50 50, 50% for the materials, 50% for the labor. And I think now it's closer to like 25%. Everybody's complaining about the cost of materials going up, but really the cost of labor is actually far exceeded the rate for materials. So the way I look at it is like, hey, 25%. I'm saving myself 75% on labor by doing it myself. Our way to build equity into your own. And I also have a lot of tools that would simply sit there and go unused if I didn't do it myself.
[00:04:22] Speaker A: Right, right. I met with a couple yesterday, and she was giving him a hard time about all of the toys that he has because they have some acreage. So he's got the four wheeler and he's got a side by side and a chainsaw.
And he said, they're not toys, they're equipment. You got to have equipment.
I was like, man, this guy has got some wisdom.
Well, lets dive in. Were going to first start with what to do when your nest egg reaches $250,000. So what to do when you reach that quarter million dollar mark? And I think theres a handful of topics surrounding the sum of money the value. But really, its not just about the 250. Its looking at the future with that quarter million dollars. And what can I now do to best steward this and improve it as best as possible?
Yelse, do you want to kick us off with point number one?
[00:05:17] Speaker C: Yeah. So the Federal Reserve, they, they have a survey of consumer finances, and they actually, they report, on average, how much people have on their retirement savings, their retirement nest egg, and they break it down in a number of different categories. But one thing I thought that was interesting is $250,000. Like, when does that happen for most people? We're, on average, we're meeting retirees, on average, 59 plus, I would say our average client is 65.
But according to the survey, those between 45 and 54, on average, had accumulated $254,720. Of course, this is an average, so it doesn't represent any one individual person, but that's what they had accumulated according to the survey. So we're talking to people between the age of 45 and 54. Now, thats a critical time to be looking at your retirement nest egg, because retirement, its not necessarily around the corner, but its important to start getting things right in those years because there really isnt as much time as you think there might be.
I was born in 1989, and the average retirement account savings for someone in 1989 was 87 granddaddez I mean, of course, we've had a lot of inflation, but today the average is actually, if you don't look at any age category, just on average, what do people have in their retirement savings across all age categories? It's $333,000. So a lot has changed between now and 1989.
[00:06:50] Speaker A: Well, so the 330,000, that could be somebody you're counting in the 25 year old and the 85 year old, including.
[00:06:57] Speaker C: People that have already entered the distribution stage of retirement.
Retirement savings.
[00:07:03] Speaker A: Interesting.
[00:07:04] Speaker C: Interesting. But, you know, one of the most important things to do, and there's a lot of articles on diversifying your retirement savings. And I just, I guess I would say be careful, because we get this question all the time.
I have a 401k. How can I continue to max out my 401k, do whatever I can at work, but also I want to contribute to my traditional IRA or my Roth IRA. What are the advantages and disadvantages to doing both?
And one of the things that I want to know is you can certainly contribute to a, an IRA, but the one thing to keep in mind is if you're actively contributing to an employer sponsored plan, your IRA contributions might not be deductible, so you actually lose the tax benefit. You can still do it. But the alternative is putting the money into a Roth IRA, if you can. But just to kind of break it down a little bit, if you're married and you currently contribute to a 401k, your IRA contributions will not be deductible if your modified adjusted gross income exceeds 143,000. And to further complicate things a little bit, imagine if you're married once again, but you don't make the employer plan contributions, but your spouse does. Well, then you can make IRA contributions as long as your modified adjusted gross income does not exceed $240,000. So there's all kinds of rules like that that could trip you up, especially if you're not dealing with this sort of thing on a daily basis.
[00:08:32] Speaker A: Yeah, not confusing at all.
[00:08:37] Speaker C: You know, there's more to it than simply knowing the contribution limits, which, of course, those are important to know, too. You know, most people are taking advantage of. The contribution limit is set at $23,000 for 2024. And if you're over the age of 50, as many of our clients are, that gives you an additional $7,500 catch up. With an IRA, the limits are a lot lower. We're talking $7,000 this year and only an additional thousand dollars if you're over the age of 50. As far as the catch up provision goes.
[00:09:06] Speaker A: Yeah. So not talking about the taxation. I want to talk about that in just a moment. But yellow C. Would you say considering a Roth 401K, if that's available to an employee, is that a good idea?
[00:09:19] Speaker C: Well, what I often tell people is, if you could pick, you would have all of your money in the Roth IRA. There's clear and obvious advantages if you could simply pick. But there's a conversation to be had here, because on your traditional 401K, your traditional IRA, you get the tax benefit. This year, if you make a contribution, you're reducing your taxable income, you're deferring your compensation. You're saying, hey, I'm not going to take this money home. It's not going to be income, but it's going to be deferred compensation. With the Roth Ira, you're kind of biting the bullet. You're saying, no, instead, I'm going to introduce the income this year, but I'm going to put it away into a Roth IRA or Roth world, in your question, and you do have to pay the taxes on that income. That money that you put, the contribution is considered after tax dollars. The nice thing is eventually that money is going to grow. And the idea is you won't have to pay any taxes on any of the growth.
So in the earlier years of retirement, that might be fantastic. You might actually really benefit from that.
The thing to consider is eventually, if your income grows, there are contribution limits based on income. So if you're single and you make more than 153,000 and you're modified adjusted gross income, you can't make a Roth contribution. If you're married, that number is 228,000. So it doesn't necessarily double just because you're married. And a few podcasts ago, we discussed some of the marriage penalties within our tax code, if you will, and that could be considered one of them. Right. It doesn't double just because you're married, but those are the limits. So for many folks, they eventually their income continues to grow and they can't make those contributions. And then in the earlier years of retirement, they really like the deferred compensation, lowering their tax bill when the income was low and they needed every dollar. So there is a little bit of a catch 22 there.
[00:11:09] Speaker A: Yeah, for sure. Well, one of the interesting things that I hear a lot of times is when people are talking about just the general rules of, hey, how do I prepare for retirement? What should I do? And there's a lot of these kind of, again, we'll call them a rule out there as far as, well, every time you get an increase in your income at work, whether it's, hey, I got my annual 2%, or whether it's a promotion where you're getting a much larger percentage to just always bump your contribution to a 401K plan, et cetera, one of the things that oftentimes isn't talked about, because the goal with that mindset is always just to, hey, I'm going to save more because I'm earning more. Right. One of the things that's not talked about that, though, oftentimes is for some people, depending on the promotion or depending on where your income lands, it might also be a way to keep your tax bracket lower if you're at the top of the twelve or if you're at the top of the 22 and all of a sudden you get that next increase again, whether it's just an annual or whether it's a larger promotion, a way to keep you in that lower tax bracket is also to look at the deductions that you're getting through those 401K employer plans or even an HSA. Right?
[00:12:19] Speaker C: Yeah. Yep. Absolutely. And I'm often surprised how often I'm having this conversation.
Just, I think people lack just that. We talked about financial literacy. I think it was last week or the week before. But people seem to lack just a basic understanding of our tax code. I'm just surprised how often I'm explaining something as basic as our progressive tax code. You hear this all the time.
I'm so worried that I get a promotion, I got to raise that work. Or maybe I've introduced some additional income because, I don't know, you sold a piece of property or maybe some investment. It's bumping me up into a higher tax bracket.
Now I'm in the 22% tax bracket, 24% bracket. And I have to remind people that, no, we have a progressive tax code. Just because you introduced a little more income and it bumped you into a higher tax bracket, it doesn't mean that now all of your income is taxed at the higher rate. Only the dollars that spill over into that tax bracket are taxed at the higher rate. So like all of us, like if you have income that's less if you're single than 11,600, that 11,600 that is taxed at 10% for those that are married, your 1st 23,200 that is taxed at 10% no matter what bracket you're in.
And then if it obviously goes on to the twelve, the 22, the 24. But to give you an idea, all of your income between 11,640 7150 if you're single, all of that income will be taxed at 12%. If you're married, that's 23,000 to 94,000. All of that income at 12%. And I know I'm kind of beating the horse to death here, but I get this question all the time.
I will say there is one caveat. In retirement, it is a little bit different. It's not as simple as saying, hey, this is my income. This is the bracket that I'm in in retirement. You have to look at a couple additional things, like Social Security. We talked about this a lot. Social Security. You have to not only consider the additional dollars that spill over into the next tax bracket, but you also have to ask yourself, how much of my Social Security is now taxable too? Because Social Security by itself, you don't have to pay federal income taxes. It's only when you introduce additional dollars that up to 85% of it can become taxable. So you have to ask yourself, is 85% already taxable? Is my income high enough where that's where I live, 85% of my Social Security will always be taxable? Or do I have to consider the impact of each additional dollar on my Social Security benefit?
[00:14:51] Speaker A: Yeah. How many, speaking on the retirement thing? Because I think it's a good point to bring up not just on the tax bracket portion of it, but how often do people's tax brackets change in retirement? Right. Hey, they start out in one bracket, and then whether it's five or eight or ten years down the road, all of a sudden something changes.
[00:15:09] Speaker C: I actually think quite often, um, we, you know, we often talk about the earlier years of retirement, and the reason we even use that phrase is because there's really a lot of flexibility built in. Because in the earlier years of retirement, I think on average, most people retired in their early sixties. I think it was like 61 or 62, something like that. And probably because you can file for your Social Security benefits at 62. So I'm sure that's why those dates coincide.
But for most people in those earlier years, there's a couple of things that that could be happening. Number one, if you're married or even if you're single, but especially if you're married, maybe both of you haven't turned on your Social Security benefit. Maybe both of you haven't retired.
There might be a pension out there that you haven't turned on yet because you have to wait until the age of 65, potentially.
Certainly you haven't started IRA distributions, probably. Or if you have at least you have some flexibility, you can make some choices.
You might be in a smaller tax bracket, but then eventually what happens at the age of 70, everybody turns on their Social Security benefit because there's no reason to delay. Your benefits don't grow anymore beyond the age of 70, except for the cost of living adjustment. But then eventually, at the age of 73, going to 75, you have to start introducing RMD's. So I would say that although it's not necessarily true, it's not true every single time that your tax brackets change. I would say that those three things, definitely for many people, result in a change in your taxable income.
[00:16:38] Speaker A: So what youre saying is that retirement plan isnt necessarily a set it and forget it strategy?
[00:16:43] Speaker C: Oh, yeah, absolutely not.
[00:16:46] Speaker A: No. Its something that really does take, take review pretty frequently from a standpoint of what are the things that are going to impact me that I dont have control over? But then there are a lot of things that you do have control over that you can impact right.
On the taxation side of things. Another one of the topics is not just a matter of saying, okay, what do I want to do today for tax purposes? What do I want to plan for in my early into mid retirement years for taxes. But then at the same time, looking at it and saying, long term, do I have enough fixed income that my nest egg, my 401k that I have saved, et cetera, is that going to be around long after I'm gone? Yes or no? Or like some people, are you going to have so much fun in retirement that you bounce the last check? Right? Well, if you are looking at it saying, hey, there is going to be a good portion of money here at legacy funds after I'm gone, there's some tax conversations to have on that, too, right?
[00:17:40] Speaker C: Absolutely. And really, a lot of these conversations are centered on how old you are and what's happening in your life. And the reason I say that, I don't say that as an obvious statement.
There's some really good reasons to consider your age. And a lot of that has to do not only with your eligibility for Social Security, but your eligibility. Eligibility, excuse me, for Medicare. So you retire prior to the age of 65 and you're no longer working. And you're, and if you're married, your spouse is no longer working. So you can't be on your spouse's health care plan.
You have to shop the open market. And we find so many people in that predicament where they're 62, 63 years old, and they need to keep income low because they're applying for healthcare tax credits. And the only way you get those is if your income is low enough. So they don't want to compromise that because healthcare insurance is extremely expensive. And here in Minnesota, we have a fantastic system through Mnsure where you could actually have an amazing tax credit. It's actually given to you. You can choose to have it when you file for your taxes, or it can be given to you ahead of time every single month to help offset the cost of healthcare insurance. So a lot of times in those earlier years, people are looking to say, hey, what tax bracket am I in? How can I keep my income as low as possible? Sometimes we even had some folks that take Roth distributions earlier than they intended to. Most people are waiting to save their Roth as long as possible. That's the last thing that they want to tap into. But if you're compromising your healthcare tax credits, that's a consideration to make. So your age really plays a huge factor in determining the income strategy that you have and how much taxable income you want to introduce. And of course, the second thing is the types of accounts you have, the types of investments that you have. That plays a huge role. Like if you have lots of after tax dollars that's going to be completely different than somebody who entirely relies on pre tax dollars. And I would say most people are in the pre tax category. Most of the dollars that we're working with that we're managing, that we're helping people plan for in retirement in terms of a distribution strategy, most of the time we're dealing with large amounts in pre tax dollars, 401 ks, iras, because that's what we've been told, right. Our entire working career, we've been told, hey, make sure you're saving for your retirement, deferring your compensation. We've talked a little bit about the 401K limits and IRA limits, but most of the time it's that. But if you're fortunate enough where you have a lot in Rothdeh or a lot in an after tax category, after tax investments, then you have so much more flexibility. And it's important to utilize that correctly because you certainly can make better decisions with your finances than simply pulling for the most convenient place.
[00:20:27] Speaker A: Yeah. So we've talked a lot about the 401K piece and employer plans, but what about the business owners or self employed people out there? And what about retirement plans for that?
[00:20:40] Speaker C: Yeah, absolutely. You know, whether it's a, it's a solo four hundred one k, a simple or a SAP, I mean, there's all kinds of different plans out there. And actually, you know, there's, in terms of contribution limits, many of them have much higher limits than your traditional iras and in some cases, you know, even more so than the 401K because you, you're contributing on behalf of the employer as well in those circumstances.
[00:21:02] Speaker A: Yeah. One of the interesting things, if you are a self employed person or a business owner out there, I, some of these were hire a plans that are specific to self employed people. They have much higher contribution limits because they also understand that, hey, if you're self employed, you might have a down year, you might have a phenomenal year. And if you had a fantastic year, they want you to give you that opportunity to maybe even do a little bit of catch up. If you had two years that were mediocre and you couldn't contribute too much to retirement, and now all of a sudden you have just a totally phenomenal year. Well, great. Play some catch up and youve got a much higher contribution limit that you can take part of that year, which, of course, also lowers your taxable income as well. So I had somebody ask me about that a while ago and theyre like, well, that doesnt seem very fair. Of course, this was somebody that works kind of a corporate nine to five and said why did they get more contribution limits? And of course this person wasnt even contributing to the max allowable anyway. So its kind of one of those comical points. That's really the whole idea of it, right, is that if you're self employed, business may be up or down in any given year and they're giving you that opportunity to hey, on the great years, let's capitalize on the retirement saving and the tax deductions.
Yeah, yeah. So looking at, we've talked a lot about taxes and I find frequently we're, we're talking about the same few things, right. Taxes, inflation and what to do. But there's so many different ways that this impacts it, right. And one of the things, and you brought it up yellow say was talking about what are the investments that youre in and how is that going to impact your taxation. But I think what investments youre in is also worth looking at. Having your portfolio reviewed from an inflation standpoint. What type of investments do you have and are you protected against inflation as well? I mean, the last couple of podcasts this has been a topic as well, but its been high the last few years. And when is the last? I mean, knowing that were spending a lot more on our daily goods, daily life, whatever it may be, have we looked at our portfolio to say am I protected? Am I getting the best of what I can based on the investments available to me to help protect me against the high, high inflation weve had the last few years?
[00:23:16] Speaker C: Steven? Yeah, for sure.
When it comes to inflation. I was just reading on a few things that some companies are doing. One that was really interesting, target is actually lowering prices to help fight inflation and I dont know what to make of that. So many of the articles that ive read, I feel like in the last maybe year or so, maybe year and a half, talking about how corporations are price gouging, how theyre actually increasing prices even though maybe they havent experienced inflation on that specific good or that specific item, but theyre raising prices anyways because its almost expected.
So I feel like that's been the flavor of the conversation for a long time in terms of corporate greed and everything in the last couple of years. So it's interesting. Target is actually lowering their prices to help fight inflation and they're lowering prices on approximately 5000 basic items and it ranges from food, beverages, household essentials. And I think it's 15 other items that have already received price reductions. And they plan to cut a total of 5000 different types of products. And it mostly includes their own in house products, but also some additional items as well. And the big reason for that is their sales have declined for the first time in seven years, and they're attributing that to inflation and higher credit card cost. We talk about credit card costs all the time. How the average credit card rate, I think it's like, what, north of 20%? 21. 21.7%.
Yeah. So that's what they're attributing it to. And it's very interesting. Inflation overall under Biden's administration, it's up like 20%.
We often talk about year over year annual inflation, but the total inflation, the price that we used to pay for something back in 2021, it's up by 20% under this administration. And I'm not putting it all at the feet of Biden, but it's under this administration that we've seen that it's placing a considerable strain on us households.
Food, rent, I think groceries in general are up 21%.
Energy prices, we've seen a huge rise in energy prices, 38.4%, shelter housing, 18.37% in just a few short years. And the prices are never going to go back down to the previous levels, especially since the stated objective, the objective inflation percent is two, were going to maintain at least 2% year over year. And as Ryan mentioned, I think it was in the previous podcast where you actually had a list for the last 100 years, the inflation percentage end. I think theres only a handful of times that we managed to get to 2% or just below Preston.
[00:26:07] Speaker A: It was not the majority, its very few one hand, probably four or five.
[00:26:12] Speaker C: Yeah. So the stated percentage might as well be, whatever, it doesn't matter. We are hitting the target. We rarely hit the target, and we're never going to go back down to the prices that we used to have. So it's important for us to consider inflation. I know we talk about it on every podcast, and I'm sure that we have some listeners that might be rolling their eyes at this point, but it's a very real cost and it's something that is affecting every household.
[00:26:38] Speaker A: Yeah. There's a stat that says the average us household now spends an additional $227, $227 per month compared to last year due to inflation. Well, it's really interesting, right, because last year inflation was high.
[00:26:51] Speaker C: Oh, looking at an additional $227. Yeah. Okay.
[00:26:55] Speaker A: Yeah. So it's an additional 227 per month is that they're saying currently this year on top of last year. Last year was high also. So when you start adding those, what's.
[00:27:07] Speaker C: That it seems like it's a little low, 227 per month. I feel like, wow, that's somebody who can really live within their means. On as many of our clients on a day to day basis, it seems like it's a lot higher than that.
[00:27:21] Speaker A: Yeah. Well, I think part of what's not represented in that is that they're saying that that's a stat for this year. Current, they're not saying over the past three to four years, uh, like the 20% like you were referencing under our current administration. They're just talking about this year, a bonus, $227.
[00:27:38] Speaker C: Yeah.
[00:27:39] Speaker A: Which, you know, you start adding that up like, okay, well, if this was 227, then last year was probably the same thing. Right? So it is interesting to look at that. And I know Trey has talked about it a lot, too, saying, hey, we're not talking that much about how much it has gone up in total. We're just talking about year by year basis. But once you add up two, three, four years of these high rates, it's substantial.
[00:28:01] Speaker C: Yeah. I mean, it's around 20%.
[00:28:03] Speaker A: It is. It is. It's, it's nuts. And I've, I've got four kids, so, I mean, I swear, because it used to be, you know, the joke used to be that everything costs $100. You gotta go to home depot to pick up supplies for your project. Everything's a $100. Right.
[00:28:17] Speaker C: I haven't experienced that. But you know what?
[00:28:20] Speaker A: You haven't experienced it because now it's $500.
It's, you can't go there and just pick up some basic. We were doing some flowers last week at the house, and I was like, I cant believe I just spent $250 on flowers for that. Were not going crazy, gardeners or anything. We just wanted a few flowers for the shed now.
But its nuts.
[00:28:41] Speaker C: Yeah, its no surprise. You cant blame everything on this administration. Certainly the previous administration had a problem with spending and maybe caused some of the inflation. And of course, Covid happened during that time, too. But its no surprise ultimately, these numbers are coming out monthly and it is a referendum on Biden's administration.
And it's no surprise that according to a recent Gallup poll, only 38% of voters express confidence in his economic decisions.
[00:29:09] Speaker A: Right, right. One of the lowest percentages that we've seen in a long time as well. Right.
I don't know what the stat is on it. I just, I remember hearing on it on the news the other day. They were talking about the vote, the confidence portion being extremely low compared to any type in recent history. So. But you know, the chairman of the.
[00:29:31] Speaker C: Federal reserve as well.
[00:29:33] Speaker A: Right, right. And then, you know, there are people in place and, you know, some people take the standpoint not to get political, but some people take the standpoint of like, it's that person's responsibility and that person's fault. But you said it best where it is. It's the entire administration. It's a lot of people making these decisions. And we're working with, with what? With what the economy is doing. We're trying to balance that out and bring inflation down with interest rates, et cetera. But it certainly hurts the day to day and the month to month, I know, for a lot of people. So one of the things that's worth doing, if you haven't already, is getting a health check on your retirement plan. Is your retirement plan in good status, good order to protect yourself from this inflationary period? Are you maximizing taxes as far as saying, hey, I know I'm going to be in this tax bracket for a period of time, but it's going to jump up, or maybe it'll go down in either direction. Or even if it's just something as simple as saying, hey, what about a portfolio review? Am I still in the best position where I could be? We'd be happy to do that with you. You can give us a call anytime. The phone number is 612-286-0580 most likely you'll have Jessica answer the phone. And any of us would be happy to work through some of those things with you. Or you can email any of us. It's our first name. My name is Ryan at g wealth.com. the letter g, the word wealth.com, yellow, say, or treealth.com. be happy to dive into any of those things with you. So yellow say, what's next?
[00:31:04] Speaker C: Let's go through some of the misconceptions that we hear all the time, starting with employer matching. Doesn't matter how clean it is.
[00:31:17] Speaker A: Yeah, it's an interesting one. Right? I think a lot of people don't fully utilize or even understand how their employer match plan works. So it's not always as simple as I put in three, they give me three or whatever it is. Oftentimes we see plans where it's a percentage of what you put in up to a maximum of blank. Well, no, that's not as simple as just saying something as straightforward as, hey, here's a straight percentage.
It is worth doing that quick calculation to saying, hey, what can I get out of this? And how can I maximize the free money that my employer is giving me for my retirement plan on that. But a lot of people do miss out on that because of a lack of understanding.
[00:32:04] Speaker C: Yeah. And I would say that for many of our younger listeners, this is especially important because we hear this all the time as we're meeting with their parents. Our clients are mostly 65, as I keep mentioning, but they might have children in their thirties and forties and fifties. And the concern is, hey, my son just, I can't get him to start taking his employer plan seriously. And the response that they often get is why? I just, I can't afford to contribute right now. Things are really tight. I need every dollar I have because that's what's helping me pay for all the expenses in this period of inflation. Right.
And the response to that, the correct response to that is you can't afford not to.
[00:32:46] Speaker A: Right.
[00:32:47] Speaker C: You have to find a way to make those contributions. And especially, like, if you wanted, if you want to do the bare minimum, contribute right up until you receive the entire employer match, take advantage of the employer match. Like, so for instance, let's say you contribute $1,000 to your four hundred one k, and your employer matches at 50% up to, I don't know, let's say, 6% of your salary. That could be an additional $6,000 a year that you're getting by way of an employer match. It's very real money. Sure, you can't access it until you're 59 and a half, but 59 and a half is going to be here before you know it. So take advantage of that match.
It's incredibly important and probably the best thing you can do for yourself in terms of like, the low hanging fruit, the easiest and the best thing to do. At a minimum, take advantage of the employer match. Yeah.
[00:33:36] Speaker A: And if you don't fully have a grasp on how the employer match works, not to sound too smart here, but ask, you gotta ask, you gotta advocate for yourself. These plans are out there, and if it's going unused, that something being offered out, and it's going unused, and really there's only one person to blame, right? Unfortunately, and we don't like being the person to blame for our own mistakes oftentimes, especially not when I'm talking with my wife, I don't like to admit any fault, but simply ask if you don't fully understand how it works. A lot of times we see people, and I, it's that example where yells, I just gave, where, hey, you get 50% up to 6%. Well, yeah, it could be stated a little bit clearer, but if you don't get it, get a clear understanding on it so you know what you can do. And by the way, once that money is being contributed to your plan, you'll find a way not to miss it. It just because it comes out automatically. You still get your net amount. It's a little bit less because you're contributing, but you don't miss it pretty quickly. You realize, like, oh, yeah, this is what my new normal is. Right.
It takes a lot more discipline when you get the total amount and you have to put it in yourself and you have to do the calculation when you can do it automatic.
[00:34:53] Speaker C: Right.
[00:34:53] Speaker A: Yeah. It makes life so much easier.
[00:34:56] Speaker C: It does. It does. It helps you stick to it for sure.
[00:34:58] Speaker A: Yeah. We have a lot of people that come through and they kind of don't realize how much they've saved up in their 401k because they just say, well, put it in. And they increased my car a couple times and now I've got x amount of dollars in retirement. Looks great, you know?
[00:35:13] Speaker C: All right, well, let's go to misconception number two. This is a fun one. Annuities are bad.
[00:35:19] Speaker A: We should have some, like, dark, ominous music over that. I wonder if we can edit that in, right? Just like annuities are bad.
[00:35:27] Speaker C: Actually, I actually feel like I'm doing something wrong just by saying the word.
[00:35:34] Speaker A: I know, right?
[00:35:36] Speaker C: You know, you have to be. You have to be careful making blanket statements probably, like, really about just about everything.
[00:35:43] Speaker A: Right?
[00:35:44] Speaker C: Annuities are bad. Okay. Yeah. Yeah, they can be. Many of them are pretty awful. And I feel like you can't be in this industry for very long without coming across an annuity that has, like, 3.3% to 5% in fees. The client might be paying for a rider that they may or may not need. I met with somebody last week, and they have a huge income problem in the sense that they have more income than they need. By the time they actually reach RMD, they'll have over $100,000 a year in excess income, income that they do not need. This is income that goes beyond their expenses by a huge margin.
[00:36:24] Speaker A: Doesn't sound like that bad of a problem.
[00:36:27] Speaker C: I tell people all the time, income is a good problem to have.
[00:36:31] Speaker A: Exactly, exactly.
[00:36:33] Speaker C: But it's something that you need to plan for. And the only reason I bring this up is they each had an annuity, and they each had an income rider on their annuity. It was a variable annuity. They were paying 1.25%, one and a quarter percent on an income feature, they don't have an income problem, they reduce their income. So they're paying this and it's a huge amount. I mean, you think about, I think one of the annuities they got in the early nineties and the other one, I don't know, maybe 1012 years ago, and they've had these income riders and I'll give whoever the advisor was, I'll give them the benefit of the doubt. Maybe in the early nineties and later on, maybe it wasn't apparent that this family was going to have too much income in retirement.
[00:37:15] Speaker A: That's fair.
[00:37:16] Speaker C: But if you're doing your job, if you're keeping an eye on things, if you're regularly meeting with your clients, at some point it becomes very obvious that the income feature, the income rider that you're paying for, won't be used, won't be needed. You're just throwing money away. And of course, the one and a quarter charge, that's just for the rider. Now you're considering the m and e fee, right? The mortality and expense fee that you have to pay, the admin fee that you have to pay plus an average of 1% on the sub accounts. And for some people, here's the, I mean, annuities, gosh, it's a four letter word for a lot of people and for good reason.
You know, I've seen a number of annuities where somebody is so upside down, they can't even get out of the annuity that they have and it's not performing. And in many cases, it's just too cost prohibitive. And a lot of times people don't even know what they have. So it's, you know, you can see why it's a very loaded, loaded word and a misconception because of how many things that we see that really just aren't in someone's best interest.
[00:38:25] Speaker A: Well, so what's interesting about this is that, you know, a little basic understanding on annuities is that there's a ton of different types of annuities. They all have different goals, they all have different reasons that they exist. Right. So to your example with the couple you were talking about last week, right, giving the advice of the benefit of the doubt, perhaps at the time it seemed like the best plan. They're thinking, hey, once we retire, we'll have this additional pension, so we'll have Social Security, we'll have basically a self funded pension through this annuity, right? We put money into it, it's going to pass out for our lifetime. We love that idea. We love that concept. It kind of puts your plan on autopilot to a degree. Right. Because now I'm just getting. I'm continuing my paychecks from a different form, but I'm continuing my paychecks. But to your point, for them, how things ended up, they already have more income than they need. So this is now something I'm paying 3% on a year to receive a paycheck that I don't need, that I'll pay taxes on some of the other things out there. And one of the more sophisticated products that we see oftentimes makes a lot of sense for people that isn't quite as dramatic as the example you just gave. But the fixed index annuities, there's a number of different types of annuities, whether it's variable or fixed or single premium, immediate, a spea, as they're known, or a fixed index. And oftentimes we see those that they're very safe investments. And if that same couple came in and looked and said, hey, I've got more income than I need, and I've got my assets here, and I just want safety on my assets, then they're just simply in the wrong product at that point. They're in the wrong type of annuity. It's like, it's like, again, I know I've mentioned this a couple of times. I've got four like me going to the dealership and saying, I really like that roadster convertible. That's the wrong product. I can't have a roadster convertible. Poor kids, right? It makes no sense. So simply looking at it and saying, no, I can't say that a convertible is a bad thing. It doesn't make a whole lot of sense for me individually right now. But you're just simply looking at it and saying, which one of these is going to best suit my needs, right? Which one of these is going to best either protect my assets and there are people out there that do want. And a paycheck like that does make sense.
But again, to your point, man, if it's been around since the nineties, at what point in time was that reviewed?
[00:40:48] Speaker C: Yeah, and I agree with that. Not all annuities are bad. They can absolutely be used correctly, and they can be a great tool. Sometimes they can be used as a bond replacement. If you have a 60 40 portfolio and you've allocated 40% towards bonds, and those really maybe haven't performed to your liking or to your expectations, certainly you can carve out a portion of your portfolio, but make sure that it's the correct vehicle, as Ryan mentioned.
One thing that I'll say that we've really noticed, even on the fixed index side, annuities are very largely interest rate driven. So if you got an annuity, even a fixed indexed annuity, let's say you got it in 20, 202-021-2022 when interest rates were incredibly low.
Well, unfortunately, the insurance company, they take your premium and they invest in long term investments at the time. And we have a number of people who come in and say, hey, interest rates are so high, I can get 5% at my local bank. I can put it into a CD or a Treasury or money market fund. I can get a great rate of return. Why is it that I can't do the same on my annuity that I purchased in 2020, 2021?
[00:41:59] Speaker A: Great question.
[00:42:00] Speaker C: Unfortunately, it would be like saying, why isn't my CD from 2020? Why didn't that pay me 5%?
It just wasn't available. There wasn't CD paying 5% in 2020 or 2021. And unfortunately, an annuity, in some cases, at least in terms of the term, that's a seven year product, a ten year product, it would be like buying a seven or ten year long CD. And if you bought it in 2020, you're getting like half a percent, maybe if you're lucky. So the reason why that's important is, you know, because it's a long term commitment. In many cases, seven years, it could be five years. I mean, there's all, there's obviously a variety of terms on annuities, but the reason why that's important is the annuities that are available today are much like the cds and other instruments, cash instruments that are available today. The rates are much better. They've improved the ability and opportunity for earnings. The potential, your upside potential has increased a lot, too. So make sure if you have something, depending on when you got into it, make sure you have that reviewed. Make sure it's still the best thing for you. And whether or not it's a variable annuity, a fixed indexed annuity, a fixed annuity, a spea, whatever you have, make sure you have it reviewed. Take a look to see. Is this still the best thing possible? You don't want to be like that family who ended up getting something from the nineties and they're paying on a feature that they don't need and haven't needed, probably for. It was probably obvious if somebody did any type of review, probably been obvious for the last 1520 years that this wasn't a feature that was needed.
[00:43:34] Speaker A: Right. Well, one of the other quick things I'll say before we close here is, again, knowing that you're in the right vehicle is important, making sure that it's the right one for your plan, but also just looking at the fee side of it. Oftentimes we see things, and the variable annuities are always the highest fee. They just are because there's always additional writers. Like Yellowstein said he went over kind of a brief list here just a minute ago, but they're always the highest fee. Oftentimes we see these products and we see different types of annuities that are actually very low fee or even no fee annuities. And when you can get principal protection, when you can get moderate growth and you're not paying anything on it, that's something worth looking into. Uh, real quick, just as we wrap things up again, whether it's just a review of your plan for inflation purposes or maybe you're listening right now going, you know, I do have that annuity. I have to, I don't know what it is or I need to review or I just simply have questions on it. I haven't looked at it in the last five years. We're happy to do that with you.
Happy to look at things and say, is this still the right vehicle for your plan and for your purposes? Again, our phone number is 612-286-0580 my name is Ryan. With me is yellow, say, and out of town right now is Trey. You can email any of us or first nameealth.com dot. That's the letter g, the word wealth.com. so yellow say. Any final thoughts as we close?
[00:45:07] Speaker C: Yeah, I think you covered it.
[00:45:08] Speaker A: You know, we've got a great sunny day and a sunny summer. I can feel it. And not to sound too cheesy, but it's worth looking and making sure your retirement plan is on the right track so you can have a sunny retirement as well. So with that, we thank you for listening. Have a great day and we'll talk again soon.
[00:45:27] Speaker B: Thanks for listening to all things financial. You deserve to work with retirement planning specialists who care about your money and take a unique approach to your financial and retirement needs. Visit allthingsfinancial.com and set an appointment today.
