Do you collect people? More to the point, do you collect service professionals? Here’s what I mean.
A while back, a couple, call them Ben and Judy, who had been to one of our Social Security workshops held at schools around New England before COVID-19, came in to see me afterward. Now, this isn’t unusual; most of the people who attended came in to talk about their retirement income plans. Some even came in just to talk about Social Security, and that’s OK. But this couple came in to talk to me as “the Social Security guy.”
As I dug a little deeper, I learned why they thought of me this way. It turned out they already have a “financial planner” (the guy who buys and sells their stocks), an insurance guy, an accountant, an attorney, someone they refer to when they need advice on their employer-sponsored retirement plan (their “retirement guy”), etc. So now I was their “Social Security guy.”
So as not to disappoint them, I ran their Social Security illustration and showed them the most efficient way to elect, and as I did so, I could see the consternation on their faces. By far the most efficient way for this couple to take their benefits was to wait until later to elect — to the tune of over $150,000!
The problem was, the “plan” they were putting together with the help of three or four of these other people called for them to take it immediately. Essentially, they had come to me to bless that plan. “We want to have our money sooner rather than later,” Judy said.
“Yeah, while we can enjoy it,” echoed Ben. “We’re planning to retire at 62, enjoy life while we can, and then by the time we’re old and feeble, we won’t need that much money anyway. Our financial planner agrees with us. Our plan is to move our entire 401(k) into his management company as soon as we do retire. He’s the one who told us to take Social Security as soon as possible.”
“So does our accountant,” said Judy. “She told us to hold off on using our 401(k)’s and then take as little as possible so we can save on taxes. That way, we can leave more to our kids. But to do that, we need to take Social Security as soon as we can get it.
“Our lawyer’s on board, too,” Judy added, picking up momentum. “He has set us up with a trust and a ‘pour-over’ will. The trust is the beneficiary of our 401(k)’s, and also all of our other assets when we die. He says that’s the most efficient way to set things up, and he’s agreed to be trustee so we don’t have to worry about that.”
As if playing the trump card, Ben finished with, “Even our insurance guy is in agreement. He’s recommended we purchase a variable annuity with the money my parents left me, and he says it fits right in with our plan.”
Ben and Judy fell quiet and stared at me as if to say, “What do you think of that, Mr. Social Security guy?”
“What I think is,” I explained, “that you have way too many cooks in the kitchen. Rather than having a different adviser for every different piece of your plan, you should have one adviser acting as sort of a head coach, helping coordinate your entire plan. Then you would not be running into some of the mistakes you are making.”
“What mistakes?” they chimed in unison. “We have several different people who are all agreeing with each other.”
“Well, first,” I said, “is your Social Security election. Two or three of your ‘advisers’ have told you the best thing for you was to take it as early as possible. We’ve already demonstrated that has the potential of costing you up to $150,000 or more in lifetime benefits. How can that be a good thing? It looks to me like your current advisers either don’t know any better or believe waiting would not be in their best interest.
“Next, you have a ‘financial planner’ who sees the opportunity to take all of your 401(k) money under management. Of course, he’s going to endorse the plan — it works in his best interest. In addition, you’ve got a lawyer who has set you up so that as soon as both of you are gone, he can probate your entire estate — even the portion that should be in the trust will be probated. In addition, he has recommended he be the trustee, meaning he gets to control all your assets after you’re gone, including your tax-qualified retirement plans, which should pass, by beneficiary designation, directly to your beneficiaries.”
“What would you suggest?” they asked.
So, I told them.
“First, I would fire your lawyer and find one who has your best interests at heart. Second, I would use the Social Security analysis we ran as a base-line income plan. We already know that if one of you lives past life expectancy — of which there is greater than 80% chance — this will provide you the most money from a guaranteed asset. Further, that money lasts for as long as either of you is alive, so it makes sense to maximize it.
“Then, I would look at ways to maximize your qualified money by reducing or eliminating taxes from it. We have a couple options: the ‘Roth Advantage,’ in which we can recapture most, if not all, of the taxes you pay to convert, or the ‘IRA 590,’ which allows you to take two to three times as much as your RMD allows without drawing down any of your IRA account, and then leave the full amount to your beneficiaries tax-free. Either of the strategies would allow you to enjoy much more of your tax-qualified retirement accounts, dramatically reduce the taxes to your kids, and maybe even reduce taxes on your Social Security benefits.
“I would steer clear of a variable annuity, but I would investigate all of the guaranteed income strategies available to ensure that you never run out of money, no matter how long either of you lives. You want to get out of a situation where you are relying on market-risk products for income. Any money left you could feel free to invest any way you like, after you have ensured you have enough money to live your life out in comfort and security.
“Finally, I would make sure whoever is advising you is acting in a fiduciary role, where your interests are put first. Only by having someone who both understands and has visibility into your entire financial picture, and is required by law to put your interests over theirs, can you get solid, knowledgeable advice that’s designed to work in your best interest.”
Not too bad for a “Social Security guy,” right?
Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, NH, he services Greater Boston and the New England areas. He is author of five books, including “Tell Me When You’re Going to Die and I’ll Tell You How Well You Can Live,” which deals with the problem that unknown lifespans create for retirement planning. It and his other books are available on Amazon.com. His radio program, The Free Money Guys, can be heard every Saturday at 8 AM on WFEA and each Sunday at noon on WCAP. He also conducts planning workshops at his New England Adult Learning Center, located in Nashua. Initial consultations are always free. You can reach Steve at 603-881-8811 or at www.FreeToRetireRadio.com.