Pensions aren’t the same for everyone, therefore it is important to organize yours in a way that meets your financial needs and habits.

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In this episode, Zacc Call, Laura Hadley, and Bart Wagstaff, CFP®, discuss the ins and outs of pensions and go into significant detail about whether you should take the lump sum or monthly pension benefit.

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Read the Full Transcription:

[00:00:00] Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have, whether you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics into practical, actionable steps. Our mission is to guide motivated people to become financially successful. Welcome everybody. We're excited to have you back on The Financial Call. This is an episode guided path. One three. So specifically that means that we're in the first season. Laura gave us that, that vernacular, right? We're Bart. You don't know this, but we're calling these seasons like Netflix style we're in season one and we're sure people are going to binge these. I'm sure that you can't stop listening to these financial planning episodes. , but yes, we're in season one, we did organizing retirement income and then we did social security basics with Tyler. So that was a good one. So if you're, if you're trying to understand, , and I

[00:01:00] it's really hard because we thought it would be basics, but it wasn't just basics. It was, it was good. It was really good, but probably more than the base. Yeah. So don't get fooled by the basics. The only reason we call it basics is because, , the next entire season is on social security. And, and so we're going to go from in-depth to, into the deep, dark abyss of social security, right? So it'll be, it'll be a lot, , in next season, but this will be helpful. That's what we found has really helped a lot of retirees. Is the fact that most people don't understand the technicalities and nuances of social security. So this will be good to go through that entirely. , but back to season one, which is income planning. So we've been talking about income planning and there are different components of it. We did, , organizing retirement income. So this. In what order should you think about and strategize? I think people get really confused because they start to think about, well, I have, I may have a pension, I have social security, I have rental income. I get a

[00:02:00] little bit of royalties. In fact, we still have people that get royalties. I have a couple of clients getting royalties from oil and gas interests, things like that. Isn't that weird. , so, and, and even book royalties and things like that. But anyway, you have all these different pieces of income and then you also have various accounts from which you can withdraw. And it's really hard to know which piece of income should you kind of lock in first and make a decision on first, because each decision you make as you work through your income streams affects the next decision. Right? And so we talked about organizing that retirement income in terms of social security first, and really analyzing your social security strategy too. What would be the best option for you? And again, there are sometimes multiple options. You really got to listen to the last one, we talked about a lady who'd been married three times, one of those guys has passed away and divorced from all three and she has four different social security benefits to choose from. And, and so it's not just a matter of one, you know, picking your social security benefits.

[00:03:00] Sometimes it's a matter of choosing which social security benefit and then switching, so today, once you've made your social security. We're going to start working through some of the fixed income sources. So income like rental income. I mean, that's just going to happen, you don't have much of a choice other than selling the property income, like, you know, royalties again, you just hope you get them. And there's not a whole lot of decision-making, the pension decision, however, is entirely. The pension decision is a one-time decision that affects the rest of your life. So we want to spend the entire episode today on pension decisions, and we know that not everyone has a pension and if, and if you don't have a pension or you won't have a pension, that's okay. Skip this episode if you want. , if you, you know, there are some concepts here. That if you still listen, you'll understand how to think about income streams in general, there are a new cities out there that recreate pensions and this conversation should help you understand

[00:04:00] the trade-offs and decisions around that same concept. In other words, a pensioner might be deciding between a lump sum benefit or a monthly Bennett. But a normal retiree could recreate that same decision of, should I take a lump sum from my portfolio and buy a monthly benefit through an annuity? So, anyway, the bottom line is if you want to listen, stick around, if not skip to the next episode, and we're happy to have Bart here today. So Bart is one of our most tenured advisors, Mr. we call him grandpa Wagstaff. And we had to convince him to bring a computer into the room. Just to look a little bit younger. I'm not the oldest here anymore. That's some other advisor I barked did some recruiting. I specifically brought in a couple other advisors that are all than that. Right. That's true. The last two people that we hired are both older than you and you sourced both of them. It was strategically planning, very strategic and call me grandpa. It's true. I feel like we've. We've really cooled it on the grandpa wax death recently, we're going to have to keep working on it. I know that's right.

[00:05:00] , but anyway, he had paper. We have an article, that I work on something called mind and money. With Terry Flint. So Terry was the lead of a program at a, at a big hospital in Utah called LivWell. The program was all about, , basically living healthy and living well, but not just from like a, , what do you eat and exercise. It was actually mentally healthy and, and handling life in jail. And so we do a lot of financially healthy conversations, right. And she does a lot of just enjoying and maximizing life. And so Terry and I have gotten together and we've broken down the retirement transition into seven steps. And one of the articles that one of the steps within those articles for me was pension decisions. So we have that article, that article is available eventually. I'm sure we'll put a link to it on the website. That's coming. , if you are seeing this on YouTube, then

[00:06:00] you saw the website, it has, you know, a link for every episode with the video. Again, we'll figure out how to get this article up there, but I'm going to put the article up and we're going to work through some of these concepts, but know that it's available. And, and we talked about the scarcity of pensions. It's only 4% of employers now that have a pension, which seems crazy. Right. But, and, and the generation before us, They would work for an employer for 30 years. And this pension benefit was just a fantastic, solid, you know, Han to call it guaranteed, but guaranteed by the employer. So not necessarily guaranteed, but really steady income. Right. And, and that was in the 1980s, 60% of private sector workers had some sort of pension. Wow. I think that's just crazy to see the difference. I am not opposed to it though. Like I think it's okay for people to have their own options on how they want to invest. I mean, think about it. Those people who have pensions never really had the opportunity for, for Roth money, right.

[00:07:00] Because it was, it's all taxable. So there's some benefits to not having pensions. Also, I think people feel less. , tied to their employer and less, , what's the word trapped in terms of having to stay with their employers. So the golden handcuffs, right? You can clearly see that the employer has shifted the burden of managing money through the 401k plan, to the, to the employee. And so that's the reason why there's not very many times anymore. It's kind of fun to see this though. People might be stressing about their pension decision, but before you start stressing, Just be glad you have the pension either way, it's an awesome benefit that not a lot of people have. Right. Right. Okay. So , we want to talk about a couple of concepts here. There's two, let's take this, this conversation and break it into two categories. There is math that you can do to determine how strong of a pension benefit you have, meaning the monthly benefit and the lump sum benefit and comparing that lump sum versus the monthly. And

[00:08:00] there's some, there's some specific math that we're going to show you. It's called a required rate of return. We'll go through that and explain how we get to that number. But it's been really fascinating to see that the rate of return that you need to earn on your monthly, sorry, on your lump sum benefit to match your monthly benefit is not the same across employers, right? Like we see that very frequently that it varies even across employers and sometimes across employees within the employer because of how long they've worked at the firm and how rich their benefit was. And anyway, so the benefit needs to be run individualized from a math standpoint. But before we talk about this. And this is like everything in financial planning, there are certain, , feelings and certain risk factors that will completely trump any math equation that you can do and emotions, what people don't have. Those sometimes they take over. I had a late night conversation with my 13 year old daughter last

[00:09:00] night, and believe me, there are emotions. High is so high. Okay. So we want to talk about what we call deal breakers and the deal-breakers are those emotions. And there are four in particular that we need to talk about before we get into the math. And, and we'll go, we'll go through the math in, in more detail later, but these four deal-breakers are inheritance, that's one, the nervous, Nelly, or nervous about investing that's two, and then wanting to cut ties with your employer. That's three. And then the fourth one is being maybe a spendthrift. And that just means, , if you have a big chunk of money, you might have the propensity to spend it quickly. , and you, and you might be, you might benefit from the structure and restriction of a monthly pension benefit. And that, and that's a hard one. We'll get into that more, but that's a hard one because most people don't admit that about themselves, but we definitely run into it. Right. Let's talk about

[00:10:00] deal-breaker one. So inheritance and, and the way this sounds is someone says if my spouse and I die, I would hate for this money not to pass on to my kids. And that's, that's what it sounds like. , when you do a monthly benefit from an employee, If both spouses die and you have a joint life benefit, it's just gone after that. And we see that often we see this, actually I think this is probably the number one emotional deal breaker. Don't you think? I would definitely say so with, you know, with the people that I meet and the pension options that they have and what I've come across in my experience. Got it. So definitely a deal breaker. Number one has I think the most impact on. On people's decision-making and it's pretty simple. I don't know if there's much more to go through on this one. Other than people just don't want the money to just disappear when they die, right? Yeah. Basically, if you can't handle the idea of the money, not going to your kids, then you should go with the lump sum. Right,

[00:11:00] right. And that, and then the math that we're going to talk about later, doesn't matter. Right. You don't have to do the math. It makes it easy. It's a big decision. When you think about it, somebody is working for a company for 30, 40 years, and there's this big lump sum value that they have access to. And the. Not allowing that to pass onto your errors is, I mean, if you put yourself in that position, it's a, it's a, it's a big decision. Yeah. And think about health concerns here, right? If someone has a history of, of cancer, heart attacks, other major health concerns. , especially if both spouses do, then it's hard to justify taking the monthly benefit in that case. Right. And the math is going to show that particular thing. So we will be able to at least do some math. Laura is like, you don't have to do the math. And I'm like, but we want to do the math. There's some personality differences in the room here. I think we can put it in a spreadsheet. We might be able to who knows, who knows, okay, so that's a deal breaker. Number one. Deal breaker. Number two is nervous about

[00:12:00] investing. And, and again, this, this sounds like I'm so scared of investing. If I took the lump sum, I just put it under my mattress anyway. And not typically, they don't put hard cash under the mattress. Right. We see things weird, things like that every once in a while, but they put it in such conservative investments that they're not able to keep up and re-create the pension they had anyway. Right. It's they just don't make enough money. And this one's, this one's tough too, because everybody says their risk tolerance is high until Russia invades Ukraine. Right. And then all of a sudden, you know, the gloves come off and everyone, it feels a little bit different about it. , and just, just know that if you're listening to this at some point in the future, these episodes should stick around on the guided path for a long time. It's March of 2022 right now. And when you're listening to this, you probably have the benefit of knowing how all of this. , resolved itself or is resolving itself. But right now we're sitting here wondering it's a big deal and impacting, and there's always a

[00:13:00] big deal happening in the market. , that's the other thing is I hope that this stands as a, as a reminder because some people will listen to this episode and be. You really were that concerned about that at that time? And, and we'll say, yeah, we were, but that we'll have seven more events by time. Some people listen to this episode that are maybe even more impactful, so it'll be, it'll be interesting. , but if you can't handle the uncertainty of the market, Then nervous about investing might be a deal breaker for you. If you don't, in fact, if you don't invest the lump sum, it's not going to be able to recreate what the monthly would do. You have to invest in. So if people are completely against it, then that could be a deal breaker and you don't have to do the math. And you talked about the inclination last time, Laura, on, on the inheritance side, the inclination would be. Take the lump sum. Yeah. But the inclination on this one is going to be potentially take the monthly benefit. Right? So it's, in other words, not all of the deal breakers are going to push you one way or the same direction. They

[00:14:00] might push you one way or the other. Right. Okay. Deal breaker number three. And we hear this all the time and we have to be a little bit sensitive when you're talking to employer groups on site about this. Like we, we, by the way, we teach employer groups all over the state about their own benefits and how to analyze their benefits from a third party point of view. And we teach them about social security. And anyway, this is a tricky one because basically we get disgruntled employees every once in a while who are just feeling like I don't want anything to do with my employer anymore. I want to cut ties. They want to cut ties. I don't want it in the idea. This sounds like them saying something like I am done depending on my employer for. And that might be enough for them that the math, again, doesn't matter. Right? Well, on this one, Zack, you know what, what you're doing is you're saying, I, I want my company to manage this money to give me a monthly income payment for the rest of my life. And S and some people just don't trust that. And right now I don't trust them to give me a job for

[00:15:00] the next two years. I'm not going to ma I'm not going to trust them for retirement for the next 30. Yup. Yeah, that's good. They just want to take the money and run. So Laura, the inclination in this case is, , if you're, if you want to cut ties with your employer, then you'd obviously take the lump sum. Yeah. All right. So last deal breaker, and this is the one we talked about a little bit earlier, deal breaker. Number four is being a spendthrift. And again, this is also a hard one because, sometimes you can't really go out outright and say to the client, like you're terrible with money. You probably should take, you probably should take them. And they just, and especially if you, if you started it that way, they'll probably do the exact opposite of whatever you say. Right. , but we do run into people that have not had good money management habits for their entire life. And, and in fact, most people spend just about everything they make. , we have some old episodes that we've done and I have a system called the fake page.

[00:16:00] And it's the whole concept of that is that most people spend everything they make. So in order to force yourself into savings, just recreate them with a little paycheck and spend your entire fake paycheck. And then that way you'll have some leftover that you didn't send to the fake big paycheck account. And so the concept with this is kind of that same idea. Like they might need a paycheck, they might need a steady, confined and restricted paycheck. Yeah. And the, and Zacc pointed out, we can usually tell if we meet with somebody, if they're a spender or not. , but if you're looking at this yourself, it requires you to take a look at yourself and, you know, do that, introspection to see if you are a spender, if you get that huge lump sum, if you're going to want to, you know, go on a big trip and spend it down in a few years, when in reality you shouldn't, , it's not going to last you throughout life. So I think this requires some honesty with yourself to know, okay, will I spend through that? Which

[00:17:00] can be hard. Yeah. That's a great point, Laura. Oftentimes when we're meeting with, you know, somebody new and we're going through all their financial details. With, without really kind of getting too much into it as we're gathering their financial information, you can almost kind of see the picture as your, and I think we can disclose some of the telltale signs here at Bart. Like what is, what is one of your telltale signs? Cause, cause by the way, Bart is one of our advisors that has met with more clients than just about anybody here. And he's seen more profiles and more client retirees situation. And so, you know, as you're going through and asking them questions, you usually are gathering things like how much have you saved and how much do you make and, and how much do I have any debt that's right. And that's that kind of the big one. If, if we're, if we're meeting somebody and I can see that they, you know, they're retiring, let's say they're 65 and they've still got a pretty sizable amount of debt. Let's say they've got a mortgage, they've got some consumer debt, and their debt is greater than their assets,

[00:18:00] basically their savings, what you know, and what they've saved in retirement accounts. That's a pretty good indication that, , they, they might spend, if they lump sum of the pension, they might spend through it too quickly on the contrast to that. If, if, if I'm meeting with somebody and I can see that they've saved really well, maybe they don't have a mortgage. That puts them in a really good spot to, to make the decision, to take the lump sum if they wanted to and not necessarily be forced. The income from the, from the pension that they may not want to have because maybe social security gives them enough income in there, their report, you know, in their, in their financial situation to where they don't necessarily need the income from the pension. Right. And in those cases, I mean, we sometimes will look at the balance of their 401k and IRA. Compared to their pension lump sum benefit. Right? And if we see that this is a little trick or a rule of thumb, that if,

[00:19:00] if your 401k is maybe half the size of your lump sum pension Bennett, There's a really good chance that you, you didn't save as much as most people out there. That's the bottom line, right. I'm trying to be kind of, kind about that, right? You really haven't saved as much as most people have out there. And well, let me start that over. Most people that we end up talking to right. Because we all know that there are most people when I say most people out there. The general public hasn't saved hardly any at all, but of those that have prepared for retirement, we find that those that are most ready, if they have a pension they've also saved in their 401k to at least somewhat match or get closer to the balance. The real scary ones are when or when we see high debt and then nothing, they haven't contributed in the 401k at all. And they have a lump sum pension of a half, a million to a million dollars. That means that they made a lot of money over their career to have a pension lump sum of a half, a million dollars to a

[00:20:00] million, and they didn't save any of it. And they ended up with debt and those ones. Now let's talk, let's talk real clear here, because this is the client's. Is it the retirees money, they can do what they want with it. So let's say that they have this deal breaker number four, in our opinion, that they might be a spendthrift, but in their opinion, they not only are done depending on their employer for money, but they also want an inheritance for their kids. In those cases, we need to respect their wishes and help them accomplish their goal. So deal breaker one in three of inheritance and cutting ties with employers. Are going to push them to the lump sum side. And then, they may also be a spendthrift. And in that case they need an advisor to work closely with them to create proper expectations of what they can spend, we had an employer. This has been about seven or eight years ago, and I won't say the name of the employer, but there was an employer that offered an early buyout here in Utah and they, they

[00:21:00] let a lot of people go. And in that process, they made their pinch. , available to them. Right. And these people were in their fifties, most of them, and many of them retired and they didn't have good advice or good throughout the process and many of them now this was, gosh, I'm getting the years wrong, time flies. But this was actually before 2008. Oh, wow. Sorry. It's been like seven years. Okay. This was before 2008. Sorry, everyone. And they lost money in the. And S and those that were also spendthrifts just went through that money, like crazy, and many of them in their late fifties to early sixties, where basically their pension was gone and now they were looking for work again. And it was really interesting to talk to the employees who stayed at that employer. Because, , men, many of them had been so shocked by their old colleagues

[00:22:00] coming back for work because their retirement was gone. And it was interesting that a lot of the more responsible employees had that experience, that they wouldn't even consider the lump sum because they were so convinced that if it happened to their friend, it was going to happen to them as well. Anyway, we had a lot of people. , that just went in the monthly, because that was the experience in history that they had seen people. They actually ran out of money within five to six years because of two things, the market dropped and they were spendthrifts. Now that wasn't everyone, we do know people from the same employer who took the lump sum and were prudent, had some money set aside conservatively. So they made it through the recession and spent the appropriate amounts and they have way more money than when they started with. So it's not like that, retiring into a recession, forces your hands to have to go back to work, retiring into a set, a recession, not being invested well and spending too much money. Sure. You're going to be looking for work again. Right. Anyway, that was just a really unique scenario that happened here in Utah. That impact impacted

[00:23:00] an entire employer and all the employees there. And they had. I'm trying to think of the word. Like it was a very poignant experience for the ones who even stayed there to watch their old friends go through that, okay. So that was, those were the four deal breakers. We're about to get to what I consider the fun part Zack on, on deal-breaker real quick on deal breaker, number four, I just would point out here that a good financial advisor. , even if somebody, you know, wants, wants to take the lump sum because of inheritance reasons and they want to get the money out of the company, a good financial planner will sit down and assess a client's financial situation and, and let, and, and, and we often have to deliver that hard message, right. That even though you feel this way, you should probably take the monthly. Because of the reasons that we just mentioned, I always let the client know you're the captain of the ship. And, and we're the

[00:24:00] co-captain, we're here to educate you and let you know what we think is best for your financial plan. And that's a good point. , let's talk about, because the financial advisor, oftentimes doesn't want to deal with that conflict in that conversation. Right. But I'll go to one. We'll do it. It's tough. And I also find that there's unfortunately, financial advisors out there. They don't go through all of these details and they're looking to have the client take the money so that they can help them manage it, but that might not be the best decision for the client. The best decision might be to take the monthly income. That's a good one. Right? So there's a little bit of a bias or conflict there for the advisor, right? Because they can charge a fee on the assurance, how we earn money. Right. We can charge a fee on the assets that we met. , and this is why I think it's good to work through some of us, more of a system like this. Like it's exactly for deal breakers, here's your math. And based on that, you know, we check these boxes in our heads and say, okay, this is what you should be doing. Hey, and just,

[00:25:00] maybe I'm going to help. , everybody out there almost interprets the language because I don't think a financial advisor is going to say, you're a spendthrift right. You know, they're not going to lay out that claim for you. They're going to say. You know, I think you would benefit from a more steady stream of income in retirement. And that's a much softer way of saying, like, I don't think you can handle this, this big lump sum, right. Or the big lump sum of money. , I think they'll say something like that, or, you know, you probably should have more protected income or you, you know, they'll, they'll use terms like that to help the client understand the need. And sometimes they'll tell them, like, I think very rarely though someone would say like it's, because I'm not sure it would be good for you to have access to that much money. That's right. But, and, you know, I think that's just a tougher part of the conversation than the job. Hopefully people listening can kind of read between the lines. I don't feel like I run into this that much. I think one out of every 50.

[00:26:00] Households. I worry about them spending too much and not being able to handle it, especially because if we're going to be on board to help them, you can take someone who would typically be a spendthrift on their own. , let's call it the accidental spendthrift right. Not because not because they were irresponsible, it's just because they don't know the boundaries. And so you can take an advisor who can give them a boundary and they'll live within the boundary just fine. Right. And they could take the lump sum if they want, and they have a guideline, therefore they're not going to become an accidental spendthrift. Yeah. They may not know that there are spendthrifts, they may not know that they're spending too much money. Right. So they need that guidance. Yeah. Okay. Good point BARR. I like it. All right. So we're going to dive into this math and in particular, we're using a specific case and some of these numbers are real, of course, , from, from real scenarios, we've run through, the individual is totally made up in that case now, , with names and, and we've, we've rounded things a little bit to make it easier on the ears and

[00:27:00] mind to be able to understand what's going on. , so, but this, this is pretty close. We see pensions very similar to this. , we have Rochelle, she has, and a pension lump sum of $356,000. Sounds like a lot of money, , in retirement. It, you know, it is a lot of money, but we're going to show you how that works out in terms of monthly benefits for her, it would be $1,800. Okay. What we find is that there are two ways that people do really bad math on this, and we're going to go through those. And then we're going to tell you how to do the right math. And of course we can help people with that too. But, so let's assume that Rochelle rolls that lump sum into an IRA. Some people will say, okay, let's just take that $1,800. And figure out what that is, in terms of how many months would that last. So I'm going to take $356,000 and divide it by

[00:28:00] $1,800. And that equals 198 months. And then they'll say, and you know what? I actually have the ability to draw here. So if you're watching, , we're looking at this right here where we're seeing $356,000 divided by 1800 per month is 198. And then we're saying, okay, well, how many years is that? Divide that by 12 and it's 16.5 years. And we see people do this math all the time, but they're forgetting something. They're forgetting the fact that they might actually earn some interest on that lump sum benefit. You really hope they get some growth out of it, right? This scenario would be true if you put it under the mattress, that's a good point. That's a good point. And so then anyway, so they need to somehow equate for the growth on it. So then people will try to handle the growth on it, but. Okay, well, in that case, then I'm going to do, what's called a, like a, , payout rate. So they'll say, okay. In one year, $1,800 a

[00:29:00] month works out to be $21,600 a year. So I'm going to take that 21,600. And I'm going to pretend like it's interest, basically. I'm just going to say, like, this is like an interest payment to me. And I'm getting this 2100 21,600 a year. So if I take that and divide it by the lump sum of 356,000, they are saying, and if, again, if you're watching, we're taking 1800 times 12 is 21,600 divided by the lump sum is in this case 6.07%. We're going to round it to six to keep life and conversations easy. So the payout rate is 600. And they look around the marketplace and say, I can't get a CD that pays 6% and I can't get a bond that pays 6%. I could have this fixed income that pays me 6% per year. And that's also inaccurate because in a CD and a bond and all these other alternatives, there's actually a value leftover

[00:30:00] when the payment is done. Whereas in this case, there's no value leftover when the payment is done. So those are our two bad math scenarios that we run into. I don't blame clients for the system. I mean, it's pretty logical to think that way, but totally, there's more complexity that you'll, that you'll go. That needs to be considered, right? That's a good point bar. And we actually use that payout rate sometimes to help get a feel for, okay. That's the basic idea. That's a basic concept of where the payout cash flow is. Yep. And could we recreate that cash flow? , anyway, so that's, that's a really good point. Yeah. That's something else to look at. Some people don't get the option of the lump sum or the monthly. They just have a monthly pension. And this is just interesting to see, okay, maybe you're entitled to $1,800 a month. Maybe that does or does not sound like a lot of money to you. But when you realize that that is about $356,000 worth, the value of that monthly pension is about $350,000. That's a lot of money. , so those pensions are a little bit more valuable.

[00:31:00] I think that people sometimes think totally. I have a client who thinks he's poor and he has a pension that equates to about $60,000 a year. , but he thinks he's poor because he doesn't see some big balance. Yeah. But if we did the reverse math on these same payout rates, a $60,000 a year pension is really close to a million dollars, probably a million dollars just shy of a million dollar portfolio. And the guy doesn't realize that he's a millionaire in terms of income streams, just getting out on a monthly basis. Right. All he sees is his is, , what is it? He's about $60,005,000 a month in pensions. Yeah. So, so anyway, that is a really good point, Laura. I think people don't do the reverse math when they, when the numbers are not put in front of them. The lump sum number is not put in front of them. They don't think about how strong that is. And going back to social security, we know a lot of people that get 50 or $60,000 worth of social security between a couple that's like that, especially because it has a cost of living

[00:32:00] adjustment that makes the lump sum value even more valuable. Right. And that's like another million dollars. So that client, if he's getting 50 to 60,000. Income stream from social security and a $60,000 pension. That is like a $2 million portfolio. Yeah, he's a buddy. He feels poor. Anyway, He did great. He did. He did. All right. So how do you do the math? Right. What you need to figure out is your required rate of return. And that's a new concept for most people. So we want to really take it easy on this and slow and, and help people. This is the last thing we're talking about today is what is a required rate of return? How do you understand. And, and what does it mean? What do the different numbers mean? So hopefully again, just now that we've talked about everything else, deal breakers, the bad math, , this should, this should make sense. We hope. , but the required rate of return is what Rochelle really needs to know. It's how much growth does she need on the lump sum

[00:33:00] in order to reproduce the monthly benefit. And if that required rate of return is really high, that means that that lump sum really has to earn a lot and it might not be worth taking the lump sum. If the required rate of return is really low, then that means she doesn't really have to try very hard at all. Right. She could take a really conservative portfolio. And it, I call the required rate of return, the hurdle rate. Right? I like that. It's what we have to, if we were to do the exact same thing that the pension plan is offering that person, this is what we would have to do. To make it the same. So let's talk about Rochelle, $356,000. She takes that lump sum and she puts it into an IRA. And by the way, sometimes let's just get this out of the way too. Sometimes people think the lump sum is going to be this huge taxable event. Yeah. Someone explain why it's not. Cause it's what we call qualified money. It's tax deferred money,

[00:34:00] and it can roll over to a tax deferred retirement account, like an IRA. Yeah. And as long as you do that, there's no tax liability. And then when you take the withdrawals, you'll pay taxes on those little withdrawals. And so in effect, If Rochelle takes the lump sum, puts it into an IRA. And then every month she sends herself $1,800, or if she leaves it in the monthly pension and gets 1,800 a month, the tax liability is the exact same. You got it. Okay. So, and so the tax liability is a non-variable because it's the same, right? So all we really care about are things that are different between those two scenarios. And those are the two scenarios where. So she takes the lump sum and sends herself $1,800. And let's say, Rochelle thinks that she's going to live until 90 years old, which a lot of our retirees laugh at that. But I think a lot of them will live that long, especially if you're thinking of one person

[00:35:00] within a couple, the odds go way up of one person making them. But Rochelle is going to make it to 90. We say, so the question is, how much does this? $356,000 lump sum need to earn in interest or growth or whatever you want to call it? How much does it need to earn to create that $1,800 a month payment until she turns 90 and, and passes away exactly at that time. Right? So that the scenario is again the same, because. She runs out of money exactly at 90 or in the, in the monthly benefit she dies. And there's no, there's no inheritance on that side either. So we're trying to eliminate all the variables and get the required rate of return. And in this case, it's 3.9%. That's different than 6.07%, right? The 6% is the payout. So the 6% is about 2% of that. Two to 3% of that is her own actually

[00:36:00] 2%, sorry, is her own principal coming back to her in a sense. Right. , so really, if she earns 3.9%, then she will have replicated the monthly benefit and all the while, if she passes away sometime before 19. There is some, a lump sum benefit available to beneficiaries after she passes away. So that's, I'm trying to think, like I want to get into the required rate of rates of return, at different ages. In other words, what I'm saying here is I'm about to get a little bit more complex and Laura, I need your help because sometimes, cause I'm not a normal person, I need you to help me, like, do you think we've got. At a level like that most people who are looking at their pension can understand or provide more explanation on that. I think so, just the interest rate. That's how much the money needs to earn each year. So we're saying, okay, the money needs to get an average return or interest or increase of 3.9 per. Each year to reproduce that monthly income, I think that's yeah. Pretty straightforward part. Would you agree? Yeah, it's again,

[00:37:00] the hurdle rate. It's, it's what we'd have to basically guarantee like we gotta get, we gotta do better than this in order to, , match or beat what you would get from the pension. I think now the biggest question for people is, is that reasonable? Is that 3.3 0.9%? Is that a low rate of return? Is that a high return or required rate of return? They don't. Yeah. Once they get that number, what do you think like this case? Like if you're talking to Rochelle, how would you communicate that with Rochelle with the 3.9%? , that's relatively low. If you have, if you invest that wisely, that lump sum. I think that's definitely doable depending on risk tolerance. And if someone's completely risk averse, like a nervous Nellie, like we talked about before then, probably not. , but if someone is reasonable and can take on a reasonable amount of risk, I think that's true. We hear that all the time. Right. Where they, where people will say, I'm going to take that lump sum. And I just want to put it in CDs or bonds or something like that. And that would be a mistake,

[00:38:00] right? Because especially in today's environment, you're not getting 3.9% on anything like that. Any CDs or bonds, unless they're high risk bonds. In which case your portfolio risk would probably be better just being diversified across 15 or 16 asset classes. Right. So really good point, Laura, it depends on their risk tolerance and I don't think people. Realize that, right? Yeah. They don't realize that how aggressive or conservative they invest means that at some point the hurdle is too tough if they're going to be invested conservatively. Right. Okay. So now the question though is, is that there's, there's a variable in here that none of us can predict perfectly. I mean, you have a health history, but nobody can exactly predict when they're going to die and you can take some rough ideas around. And say, well, my parents passed away at these ages, but oftentimes that doesn't mean anything. So, I'm thinking about my grandparents. I mean, my grandma's is

[00:39:00] almost a hundred and my grandpa died in his fifties. How do you, how do you figure out, you know, a life expectancy off of that? And it's actually the same situation with my other grandparents. , my grandma lived to be 87 and my grandpa died in his early sixties. So, so in other words, I have no clue for myself in terms of. What type of longevity to guess. So if you're watching you, there's this, there's this chart that kind of looks like that Dubai twisting tower. , if you're just listening, if you've seen that before the pictures of that, , building that kind of looks like a big sale of a, of a ship, anyway, it, it, it shows you the required rate of return gets wider or bigger towards the, the longer you live or the, in this chart, it's the bottom. So if somebody lives to a hundred years old, And that the in Rochelle, if Rochelle lives to a hundred years old, she's been getting $1,800 every single month from let's say she took it at 65, which I think was this case all the way

[00:40:00] until 100, she needs that lump sum to earn 5.4% average annual return in order to reproduce. So the required rate of return went up from 3.9 to 5.4%. Because she lived so long now, if she dies at 82, she doesn't even have to earn anything. Right. The required rate of return is basically zero at that point. So she could put that money under the mattress. Like we talked about earlier, take $1,800. And she would run out of money at exactly 82 years old. And, it would be like she took the pension and died at 82. Anyway, that would be the same scenario. And it gradually climbs from a 0% required rate of return up to about four, as they get, as Rochelle gets to 90 and then climbs to a little over five. By the time she gets to a hundred. Now we've seen other pensions and I've come across pensions where the client might not be strong on a deal

[00:41:00] breaker one way or the other. And then we'll run the math and they will have like a five and a half percent required rate of return to age 90. And that's a surprise sometimes that w I mean, let's interpret that, that means that the employer is often offering either a pretty small lump sum or a really large monthly, because they're making it really difficult on us to take that lump sum and recreate that monthly benefit they're offering. So. If they're stuck with a small lump sum versus a large monthly, even if that individual may be somewhat, just slightly leaning to the lump sum, it might make sense to go with the monthly benefit just to, just to take advantage of how hard it would be for us to recreate it. Anyway, Zacc, I CA I just barely came across this exact scenario a couple of weeks ago. Yeah. I had a client. She was. She was pretty certain that she wanted to take the lump sum

[00:42:00] benefit for reasons one and three actually, and she's well off financially. So one in three being, , some heretics and cut ties with that ties with the employer. You want the money out of the company plan, and I want to leave some money to my errors, which by the way, I don't mean to interrupt you too much, but like Delta. Pension went bankrupt and had to use the insurance that is associated with PBGC, with insurance, with in pensions and not everybody got everything that they thought they were going to get. So that's a real, like cutting ties with an employer. It's a real risk. This isn't just an emotional thing. This is a true calculated risk. Anyway, go ahead. So she's in a great financial situation, you know, she's debt-free, she's got a really good retirement savings account. She wants to take the lump sum, but I ran her required rate of return, her fertile. And it was over 7%. Well, like the lump sum, the lump sum amount compared to the monthly, the lump sum, to your point, the lump sum. A lot smaller compared to the monthly benefit that the pension plan was going to give her, which is

[00:43:00] weird. I'm surprised the employer would, would offer that you would think they would increase the lump sum a little bit because they could get that monthly obligation off their books and, and improve their own. Financial balance sheet. It didn't make sense to me either, but I, so I told her, I showed her the numbers. You know, we've got to, and I'm sure you'll talk about this later, your, your pension calculator that we have that runs the, , that we can use to determine the required rate of return. I use that and I show her, I show her the math and she's. I tell her that you really ought to probably consider taking the monthly because of this very reason. And you've probably said it just like that, like not super, like you have to take the monthly, but it's like, maybe you should, or I want to say this nice and soft. So, she's going to take the monthly because we feel it's the right decision for her. We feel like she's going to get it. And she's, and she's super healthy by the way. So, she could, she could live a really

[00:44:00] long time and it's clear that the numbers work out better for her to take the monthly income, even though, you know, from the emotional side of things. She wants to take the lump sum. I see. Okay. That's really interesting. , okay. So two things to talk about, and then we'll wrap up for the day. One is what Bart just said, this, this podcast is really designed. Hopefully to just educate and provide an incredible amount of free resources. , but obviously we run a business at Capita, we're financial advisors, but at the same time, you should know that if you did want, it's really simple for us. We basically need about three or four numbers. Lara has done this for many of our podcast listeners, right? We get emails through, , our podcast emails and Laura will oftentimes throw the numbers in the calculator, create a PDF and send it out to you. So we're happy to create your required rate of return report and send one out to you at no cost or anything like that. , maybe just in exchange for

[00:45:00] that, you could give us some feedback about the podcast, or maybe like a reasonably high rating on something. Just give us a, like that's all we're, we'll give you a report. You give us a, like, I feel like that's pretty good. , but anyway, or share this with somebody, the goal is really to just, , if you know me, my goal is to. , better financial planning, strategies and knowledge to as many people as possible. And that could be because we're doing it as advisors at Capita, or that could be through presentations and the podcast on The Financial Call. But both of those have the same mission. We're just trying to get better financial planning out to as many people as possible. So we'll do that for you. That's no big, no big deal at all. Okay. So that's number one. I guess I'm trying to think. Go to the financial. Dot com. , right now though, the website's being revamped and we should, I think before this episode comes out, it should go live. So that should be good, go to The Financial Call.com. You should be able to find some sort of contact us. This is funny cause I know it's

[00:46:00] going live. So forgive me for not knowing, okay. Contact us up at the top. You ought to be able to put in an email address. And your name and you don't have to put in your phone number. That's not required. It has a field there. If you want us to reach out to you, but send a message and then say, I want a pension analysis. We'll reply back and tell you what data we need. And then we can run it for you. , no big deal. Happy to do that. Okay. The last one is I want to talk about something called a pension max strategy. So if you, you, you now understand the basics of pension decisions. This is like an enhanced strategy. I just want to throw it out there, without explaining all the nitty-gritty details about it, I'm going to provide the context, we'll wrap it up and call it a day. The pension max is where. Someone might want to take advantage of the higher benefit of a monthly payout, like, like your scenario of this lady? I can't remember. I don't know if I know she's single or

[00:47:00] she's married. Okay. So there's, this is an example. She could consider this, especially being healthy. She could consider this pension max strategy where I'm going to throw out some numbers and just make up numbers, because I want it to be easy, but let's say that she had a $4,000 a month pension and let's say. On a single life payment that, so that's something we haven't gone through on the pension conversation, but there's single life options. Meaning if you die, it's gone. It doesn't matter if your spouse is still alive. If you die, it's gone. And then there are joint life options, which means that if you die, your current spouse can continue receiving that payment for the rest of their life as well. And then there's the. Like joint and survivor 50% and 75% and different pensions have different levels that you could, you could choose like, okay, $4,000 payment, I'm going to do joint survivors, 75%. So if I die, my spouse gets $3,000 instead of 4,000. , but that they'll

[00:48:00] probably start you a little higher versus a joint survivor, a hundred percent. Only be paying you 3,800 instead of 4,000. Okay. So those are some of the benefits and we can run the math on that as well. , and by the way, let's just talk about the Utah retirement system here in Utah. We, we do, we help a lot of educators and other government employees around town and they have an option it's option five on the Utah retirement system pension. And it's the only institution in which I've seen this option. But what they do is they have a joint life. But if the non-worker spouse, well, actually let's start over. If the worker spouse dies, then the non-working spouse gets the joint life payment for the rest of their life, but let's flip it around. If the non-working spouse dies, the worker spouse jps from that joint life payment up to the single life payment, which is higher. I've never seen this anywhere else. Yeah. It's hard to beat that one. Their pension

[00:49:00] plan is nationally recognized as one of the best pension plans in the nation. Right. And yeah, it's incredible. And, , we haven't really talked a whole lot about this, but they also have a great cost of living adjustment, inflation adjustment to, , the income payment. Most employers don't have a distrust of living adjustments, so that $1,800 a month that we were talking about in this example, that Rochelle's. It's $1,800 a month today. It's $1,800 a month in 20 years from now. Right. And that's Michelle's case she's not a government Utah, Utah retirement system employee. So she doesn't get that cost of living adjustment. Yeah. Most government employee pension plans, I find, have a cost of living inflation adjustment because they can just tax whatever they want. Right. I'm sorry. I didn't mean to go there. Don't give Bart started. Right. , where are you going to say something? I was just going to say, when you have that cost of living adjustment, that can increase your required

[00:50:00] rate of return because that amount that's coming out, it goes up and our calculators account for that as well. It only accounts for it because Laura found the problem. Let's just get that out here on the table. She's like, Hey Zacc, there's an issue with this. And it was, and I was like, oh, shoot. Okay. You're right. Got it. , okay. The pension max. And then again, we'll wrap up. So now that we've talked about single life and joint life payments, and some people let's say that your client has a joint life payment of $3,000 a month and a single life payment of $4,000 a month, that would be an extreme difference. That's usually not that wide, but we need easy math for conversation's sake. And the more extreme the difference, the more this strategy makes. So she has, I'm going to give her a fake name. Cause I don't know her name. Susan is her name today. , so Susan has this opportunity to take either a single life at 4,000 or Susan and her husband. Mark could take, ,

[00:51:00] 3000 if and so the idea here is what if Susan takes 4,000 and then she buys a life insurance policy. With the other thousand. So maybe the thousands taxable. So we've got to think about that. And maybe there's $800 left of that thousand after taxes. And so then she could take the $800 to buy a life insurance policy. One that is as low cost as possible. We're pretty big fans of buying for specific things that could be termed, but might not be in this case. Cause you want it to last. Maybe a longer period of time. There are some guaranteed life insurance policies that are a little bit less expensive than your typical life investment insurance policies. And so anyway, we'd want to walk through that, but anyway, try to keep the costs as low as possible, and make it as efficient as possible. And then maybe she can take that $800 a month. And buy a life insurance policy so that if Susan passes away, mark, he loses the $4,000

[00:52:00] income, but he might have enough of a death benefit to recreate either three or $4,000 of income. And he can choose maybe he doesn't need that guaranteed income anymore, or maybe he has, he has flexibility. , if that gap. 4,000 to 3,800, then it, she's not going to buy much of a life insurance policy for 150 to $180 a month. But if there's a wider gap there, she might be able to take advantage of that. And, and that's something that's a more advanced strategy that you would want to look at. It's called people, oftentimes call it a pension max strategy. , we do very, very, very, very little life insurance but that might be because we tend to be more investment tax and estate planning, focused and feeling, bottom line is there probably are some opportunities there for people to take advantage of that. , but for the most part, we see people either pick a lump sum or they do like a joint life, , a hundred percent payment. , I think that's, I think that's probably right, right. I mean, it's at least with us, I feel like we ended up seeing

[00:53:00] maybe two thirds to half to two thirds. Do the lump sum, maybe a little bit more than half. And that less than half, probably two thirds. And from what I see, yeah. And then one third picks some sort of monthly benefit and not so the Utah retirement system, they don't, they have a small lump sum. So we see at URS that most people just pick the full monthly because the lump sum are small. But for those who have a full lump sum back. That two-thirds one-third seems to be, seems to be a trend. , I think we got it. That was good. That was a pretty strong overall review of it, right? Yeah. There was one other idea. I just wanted to bring it up. If you are going through your fixed income with social security, maybe your spouse has a pension and you have plenty of income from those sources. Then you might want to take the lump sum, right? If you're going to take the monthly, your monthly as well, it's just going to increase your taxable income. And you're just going to stash that money in the bank. Anyway, then that might be a reason also to take that lump sum, just leave it in there, let it grow. And then when you need to

[00:54:00] take it out, you can do that. That's why you start with social security, right? Yeah. So that you can understand. Yeah. I call that being, being forced fed income, that you don't need taxable income that you don't necessarily need because of your financial situation. Very strong. Yeah. They probably have a good problem to have. Yep. All right. Thank you for joining us today. Appreciate it. Thanks. This podcast is intended for informational purposes only and is not a substitute for personal advice from Capita. This is not a recommendation offer or solicitation to buy or sell any security. Past performance is not indicated or. Of future results. There can be no assurance that investment objectives will be achieved. Different types of investments involve varying degrees of risk, including the loss of money invested.

[00:55:00] Therefore. It should not be assed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or proposed by Capita will be profitable. Further Capita does not by legal or. Tax advice, please consult with your legal or tax professional for advice prior to implementing any strategies discussed during this podcast, certain of the information discussed during this podcast is based upon forward-looking statements, information, and opinions. Including descriptions of anti anticipated, mark get changes and expectations of future activity. Capita believes that such statements, information

[00:56:00] and opinions are based upon reasonable estimates and assumptions. However, Forward-looking statements, information and opinion are in hair only uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore undue reliance should not be placed on such forward-looking statements, information and opinions. Registration with this C S E C does not imply a certain level of skill or training.

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