Dwight and Mitchell provide some Medicare updates for AEP before cautioning listeners about Target Date Funds and their lack of performance due to bond exposure. Do you have a tax and income plan for your retirement – contact us today to get started!
Contact us today to get started.
Schedule a Free Consultation Here
Questions? Call Dwight Mejan today at (910) 235-0812
11.3.23: Audio automatically transcribed by Sonix
11.3.23: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.
Producer:
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.
Producer:
Welcome to Retire 360 with your host, Dwight Mejan. Dwight is a licensed fiduciary and financial advisor who always places your needs first. Dwight works hard each day to educate Americans like you on how to reach the financial freedom they've worked so hard for, and he can help you, too. So now let's start the show. Here's Dwight Mejan.
Dwight Mejan:
Hey, we want to welcome our listeners back to the Retire 360 show, brought to you by 360 Capital Management. I'm one of your hosts, Dwight Mejan. Next to me is Mitchell Keiser and Sam Davis, our executive producer. Guys, we we decided against good judgment or with good judgment not to bring the horror stories the week of Halloween, of the retirement mistakes that people make because we didn't want to drive our listeners away. So we are refraining. Many of you will be happy to know, from giving you all the big mistakes that people have made and have caused nightmares for some of our listeners, or maybe not listeners, but people who have made mistakes with their money. This show is about helping you win with your money. So we've changed course and we're going to keep it positive today. For the most part, we want to give you good information and help you make wise choices with your money. That's what this show is all about. But hey, we're glad that you are with us if you're driving today. Thanks for tuning in. We've got a good show. We're going to hop pretty much right in here, but we want to let you know who we are.
Dwight Mejan:
We just want to welcome you to the show. And just a shout out to our listeners in the western part of the state and the Watauga County area and the Moore County area here, where we're broadcasting from today. Any time during the show, reach out to us. You can leave us a message. You can go to our website, Retire360Show.com. If you want to dive deeper or have questions on your specific situation, we welcome calls from our listeners. Of course, if you're in that western part of the state, our number (828) 278-7814 in Moore County we're (910) 235-0812. If you want to check out some of our podcasts from previous episodes, you can go wherever you download podcasts and just type in Retire 360. And we also have a YouTube channel. You can check us out there. And we also have a Facebook and an Instagram account. So if you want to learn more about us, go to those social media places and check us out. But guys, how are we doing today? Sam and Mitchell?
Mitchell Keiser:
Mitchell here. I'm doing well. I will say this past week has been a treacherous gust of cold that we were not used to. It brings me back to my Pennsylvania days, but I'm good. I've been busy with helping people with their Medicare Advantage plans. We're going to talk about that here just in. I can vouch for that, that.
Dwight Mejan:
Mitchell has been very busy because the phones have been ringing off the hook. So yeah, it's common. Mitchell likes job security, don't you, Mitchell?
Mitchell Keiser:
Yeah, it's it's been a pleasure helping you folks. And there's always areas of improvement. So like educating people as we do on here and meeting with people face to face. It's been a good time, but how are you doing, Sam? I'm doing well. We have a cold front that.
Producer:
Has kind of whipped through the south. I'm down here in Atlanta and the fall colors are looking great. Pressing through towards the holiday season. Before you know it, it's going to be Thanksgiving and then Christmas and then a Happy New Year. So we're carrying on and excited to bring some more important information to all the listeners today.
Dwight Mejan:
Yeah. Well great. Yeah, we we are glad that folks are tuning in. And of course, our our faithful listeners, thanks for being a part of this show regularly. It's an honor to broadcast to you. And much of the content, as I like to remind our listeners, is shaped by your call ins and shaped by some of your comments and questions. When you log in to the various places that you communicate with us. So keep those questions coming, keep the calls coming, and thanks for the topics that we're going to talk about, some of which today we're going to discuss on the show. But Mitchell, you've got a couple updates before we dive right into the financial side. We're going to kind of stay camped out here for just a few minutes on the insurance part, because it's an important enrollment season, otherwise known as an annual enrollment period. And you've got some great reminders for our listeners. But just Mitchell, just start out letting people know the deadlines here. Many people need to be reminded on that.
Mitchell Keiser:
Yeah. So if you guys don't know if you haven't been listening to us, the deadline is from October 15th to December 7th. What that is, is a time when you should be evaluating your Medicare plan, whether that's a Medicare supplement or a Medicare Advantage plan. It's always good just to keep your options open and to know what you have. I'll say we've I've met with a slew of people this year that were on supplements. And no, this is not supplement season. You do not have to change a supplement now, but it was a good time for them to switch to an advantage plan. I'll tell you one couple that I met with this past week. They were paying over $10,000 in premiums for their Medicare supplement, and the maximum out of pocket. And the health care plan that they chose with an advantage plan is 2900 each. So that's about like 5800 together. So even if they had the worst year ever, they're still going to be net saving over $4,000. That's a that's a serious lot of.
Dwight Mejan:
Medical care though too, based on I don't know the plans like you do. But there's a lot of, you know, there's small cost sharing in there, and hospitalizations tend to drive up a little bit of the sharing, but there's a lot of medical out of pocket costs to hit that. Right.
Mitchell Keiser:
Oh, absolutely. We have a couple hundred people that I know we've switched over just the past couple of years. And I mean, I haven't heard of anybody coming anywhere near a maximum out of pocket. We've had clients that have had pretty bad years, and they're still, you know, we they're still not more than a thousand or a couple thousand dollars. And that's, you know, in a really bad a really bad year. So.
Dwight Mejan:
We're good. Well, I know there's some also opportunities for people if they're not careful to, you know, get some bad information or worse yet, you know, run into some problems where they get scammed or defrauded. So maybe just a couple of reminders to people with that. Yeah.
Mitchell Keiser:
So you guys want to be aware of unsolicited contacts. So that could be a phone call, an email, a door to door visit. I know I've had clients tell me that people have claimed to be a part of our office and have tried to get some of their personal information over the phone. Those calls, just so you're all aware, if somebody is an actual Medicare representative like myself, technically, if they're selling you over the phone, they have to read you a whole list of disclosures. And unless they're doing that, then it's probably a scam. And I'd hang up the phone. We also, whenever I have a meeting with a client, they usually bring out a whole big long list of mail that they've got because they thought it was something from Medicare, and more than likely it was just it was just marketing spam or marketing solicitations. Also, just another reminder for you folks protect your Medicare card. Nobody is ever going to be asking you what your Medicare number is over the phone. Maybe you'll feel safe to do that if you know the person. But I'll tell you my rule of thumb even when people call in off the radio, because I've had people call off the radio and they have asked for me to just do everything over the phone, and I prefer not to do that.
Mitchell Keiser:
I think it's good that you can lay eyes on somebody that they can see Mitchell is a real person. Here's where I need to go. I have questions, or if I need help and I'm unable to reach somebody. I think there's a lot just in being able to meet with a physical person. I know all this stuff, all this technology is pushing us all away from meeting in person, but I still think it's pretty powerful to sit down and meet with somebody, or to have a specific person that can help you navigate through these waters. Because one thing I can guarantee you is that everybody, to some degree is confused. And this stuff's confusing. I mean, do this for a living, have a degree in health care, fully insurance license, then I still think this stuff can be confusing. So if I'm confused and I can find this stuff confusing, I know everybody else could be, you know, feel clueless on certain topics of their health care so well.
Dwight Mejan:
And I've said Mitchell to what your to your point that I've said this for decades, having started in the insurance side of the business, that your insurance coverage is oftentimes is as good as the advice that comes along with it, meaning the agent who you're working with. So that trusted advisor, you know, we're talking in the area of, you know, avoiding being scammed or taken advantage of, you know, just make sure you're you're dealing with somebody that you trust. Make sure they're a fiduciary. Lots of agents out there just sell this from a 1 or 2 company, you know, perspective. But make sure that someone's working and have a lot of, you know, companies that they're registered with. You can actually check that out through your through the local Department of Insurance website. They'll, you know, you can go there, look up a rep and see the carriers that they're licensed with. So just another way to check. Yep.
Mitchell Keiser:
Good tip. Yep.
Dwight Mejan:
So Mitchell, we're going to jump into the financial part or anything else you wanted to add to the Medicare side, or I'm going to jump in here right on our financial.
Mitchell Keiser:
No, I just encourage our listeners that there's no stupid question revolved around your Medicare, and I'd be happy to take a couple minutes or to set up an appointment again, if that's something that's of interest to you, give us a call at (910) 235-0812. Or if you're in the Boone area, you can call us at (828) 278-7814. And Dwight, before you hop into this next segment, I do just want to remind our listeners that we do have our next educational event coming up in Boone, and that is going to be at Appalachian State University. And the date on that is going to be November 27th, which is the Monday after Thanksgiving. We are going to be doing a 10:00 class in the morning and a 1:00 pm class. You guys are interested in attending that event. Give us a call at our Boone office, and we can make sure that you guys have a seat reserved. And that office number again is (828) 278-7814. And if you have any further questions, perhaps what we're talking about or certain things that we may or may not go over, feel free to give us a call and we'll give you the information you need. Yep.
Dwight Mejan:
Look forward to seeing many of our listeners there. It's always fun to meet our listeners in person, so thanks for sharing that news, Mitchell. And we're going to dive in. Last week we were talking about, you know, income guarantees and streams of income and pensions. And we're going to get into a specific example here in a moment. But what Mitchell and I wanted to do to kick off this segment is just we've been talking about, you know, guaranteed income and just how people today are demanding that we went to just find our team pulled up. Just some recent articles that you can find in reference on this. You're on your own. And we'll give you the source of where this came, where these came from. But if you don't think having a personal pension is important, just try. Look at what happens when you start taking it away from people. And we're seeing that now with a lot of different sectors of the economy. And to give you the first one here, just to kick it off, the Teamsters Union, this is in the Wall Street Journal of 2023. Teamsters Union is threatening a strike against trucking giant yellow after the company missed health care and pension payments. So there's one article right there. Mitchell, you got another one. We're just going to whip through some of these.
Mitchell Keiser:
Yep. And the next one I have for you guys is from NPR. And you guys have heard that autoworkers used to have lifelong health care and pension income. And they want it back and can add to that personally and can tell you. So my father retired. He was a union teacher. And they have a union up there in Pennsylvania. And they negotiated a lifelong health care for him. So I know he has that for the rest of his life. But my mother, who started a couple years after he did, they stopped it. So a lot of the benefits I know even he had had, they no longer have. And no starting teachers don't have the benefits that teachers, you know, ten, 20, 30 years ago have. I mean they're slowly chopping all that down.
Dwight Mejan:
Mhm. Well, absolutely. Well it's not just happening here in this country. Garbage piles up as French strike nationwide over a pension change. And that was in a PBS article this year. So you know worldwide it's not just here in the United States but there's global issues going on. And people um, it's something to be said about people wanting those guarantees. What's the next one? Mitchell we got.
Mitchell Keiser:
And we have Las Vegas hospitality workers overwhelmingly permit union to call strike against hotels and casinos. And that was according to the Associated Press.
Dwight Mejan:
Yeah. Here's one for you from Reuters. This year, an overwhelming 99.47% of flight attendants represented by the labor union voted to authorize a strike. And folks, this is all around benefits. You know, pensions. It's all those guarantees that you hear us talk a lot about on this show. I think we have one more Mitchell for you to share. Yep.
Mitchell Keiser:
Speaking of strikes, the Portland Association of Teachers will strike starting on November 1st unless an agreement with school districts have been reached before then. And that is according to ABC news. So. So people are fed up.
Dwight Mejan:
Yep. And folks, the point we want to kind of make here is, you know, pensions are dying and the only two big branches that we see or sectors that we see pensions coming from these days are teachers, somebody in the education system, there's some pensions typically, and then those that serve our great country in the military there's pensions there. But for most other people, it's been made very, very clear that the responsibility of your income and your assets and retirement are coming from you, with your employer hopefully giving some kind of a match into the retirement plan, be it a 401 K, a 403 B, you know, whatever the plan is. So those those days of pensions pretty much behind us, less than 14% of full time workers today, I think was the last statistic I saw that have some type of company or employer funded pension plan. And the reason so many people today are revolting and wanting these things back is they want that peace of mind of having a guaranteed income for the rest of their life. And that brings us into we were talking about this last week. So if you want to pick up last week's show, just go to one of our podcasts, download last week's show, or you can go to our YouTube channel and listen to it and get caught up. But I promise to bring a specific example for those of you who say, you know, Social Security, it's not enough. I want more income in retirement and I want more of it guaranteed.
Dwight Mejan:
Folks, I want to tell you that before I get to this example, I had a person I thought of about a month ago that came to our office and somewhat apologetically said, you know, I should have done a little better job of saving. They were in this retirement red zone that we're going to talk about on today's show as well, which is being a few years away from hanging it up completely and fully retiring. And kind of sheepishly, they said, you know, didn't really save probably what I should have saved. But, you know, I'm just wanting to know if I'm going to be okay. And as I went through their assets, then we got to their income. This person had a couple different pensions that amounted to a pretty good sum of money to the tune that I looked at them and I said, you don't need to be given any apologies. I said, what you have here with with two pensions. And it was pretty close to six figures that this household was going to be getting and guaranteed income from these two pension streams. And this was in addition to Social Security. I said, what you have here is the equivalent of about $2.5 million of money saved in your portfolio, because if I just applied the 4% rule, which just states, if you take 4%, no more than that out of your savings, if you have a moderately, you know, diversified portfolio, invested statistics and these things called Monte Carlo simulations basically tell us that you won't statistically run out of money as long as you're not doing anything too crazy in that portfolio.
Dwight Mejan:
That's what this person had is about $2.5 million, on top of the statements that they brought in that they did have. And when I pointed that out to them, you could see a light bulb go on in their head and they were like, huh? Guess I never really thought of it that way. And I said, yeah, for me to have that in. Come with just those pensions. I need $2.5 million saved in retirement. And that's just a simple rule of thumb, folks. If you're wondering, hey, you know, we always talk about reverse engineering. You know, the amount of money, if you still have years ahead of you to save and retirement. And you say to yourself, hey, I want to have in today's dollars, I want to have, let's say, throwing a number out there, 80,000 of income, and I want to have that income guaranteed. Well, we can figure out how much of that is going to come from Social Security. But then we have to look at what kind of money do we need if we have no other, you know, pensions or guaranteed income sources, how much do we need to have at that retirement age to generate the additional amount needed to get to that $80,000? And the way that we do that is we just, you know, reverse engineer that, find the number that's going to produce that 4%, and that's the amount that people need.
Dwight Mejan:
Okay. But if you have those pensions or a guarantee like I'm going to show you right here, this is just one example. We're not prescribing something here for every listener who's listening to this. This would be for the listener right now who says, you know what, Dwight? You're speaking my language right now. I'm listening to what you're saying. How do I get guarantees with my income and still maintain some control over the money that's producing that? You know, where I don't have to worry about losing that paycheck that I want to get. In addition to that, well, here's an example of a product from nationwide, the nationwide that you all know. This is the fixed indexed annuity, which is money that's not at risk or exposed in the market. This is a principal protected instrument that's used. And the way this product and again nationwide, this is an A-plus by three major credit agencies. This is Moody's S&P and triple B nationwide. Peak ten offers currently a 20% bonus on the amount that you invest. So for example, you invest $300,000. Your account value would start at $360,000. Okay. The nationwide peak ten also has what's called a ten, an 8%, I'm sorry, an 8% interest roll up every year that you defer taking that lifetime income. So let's just say you, you know, you want to wait three years before income is going to start from this instrument. What happens is every year you defer, there's an additional 8% that's being added to that account value.
Dwight Mejan:
That's going to produce your income. And then what happens is in that, let's say that third year, I'm just using that as an example, because you get to determine when you turn that income stream on. So the longer you defer it, the bigger the payments going to be. Okay. And there's there's certain factors in here you can reach out to us if you want to get an illustration on this product, because we can predict. And this is what a lot of people like. We can predict a worst case scenario for anyone that's looking at income. We can tell them with certainty what their income would be if they take it right away, what they what it would be in three years, what it would be in six years, what it would be in ten years. There's predictability with this product because there's a guarantee to that pension stream of income. And a lot of people are wondering, well, when I do that, I'm giving up control of that money. And if I take a payment, for example, what happens if I die and I take, you know, six months of payments and there's all this big bucket of money there? Well, the good news is that lump sum of money is going to transfer to your beneficiaries. It's not like the pensions that many of you who who have pensions that might be listening. When you pick a pension option for a lot of companies, you pick that option.
Dwight Mejan:
If you don't have a survivor benefit on there, like your spouse gets 100% or two thirds, your payment might be a little lower depending on what option you have, but there is no lump sum that's transferring and many of those situations to a beneficiary with the nationwide indexed product that lump sum upon your death. If there's death benefit, it's going to transfer to your heirs. And that's what a lot of people like about this product is. They're getting safety of their principal, they're getting guaranteed lifetime income, and they've got a lump sum if there's balance remaining, depending on how long they live, that lump sum balance is going to a beneficiary. So if you have an option, let's say you're listening and you have a pension or something, you know, from your employer and you're in that red zone and you're going to elect an option with that employer. Be sure before you do that, you reach out to someone like us and we'll be happy to run numbers, and we can get you an illustration and let you see the exact number that you'll be looking at. And folks, I'm going to tell you, having done this for three decades, that the people who come into our office that have these types of arrangements with a piece of their portfolio and folks, this is not the right thing to do with 100% of your money. I'm going to tell you that right now.
Dwight Mejan:
There's there's appropriate percentages that you need to use. We need to be diligent with that. We need to be suitable with that. That's something that we would need to discuss with you as far as the percentage of your total investable assets. And that's why we're not prescribing this for everybody. We're not prescribing the amount. We're just using that as an example, you know, in this segment. But if you're facing a pension decision, make sure you get a quote from us to see if there's a higher payout. Because here's what could end up happening. We had this happen just recently. I had a actually a friend come into the office and we were looking at something from their employer, the exact same thing. I'm addressing his payment per month. He's single, he's not married. What his payment was going to be was going to be less than 5% a month less through an option that we ran for him. But here's why he made the decision to go with it. Because in the option that he was going to get through his employer, the option he elected when he dies, he could take one payment and the lump sum that funded that pension. It's wiped out and it's gone with our option, the lump sum balance, the full amount of it. After that, one payment was there was going to transfer to his beneficiary. And he had a, you know, a niece and a cousin that he wanted to leave that to. And that was the deciding factor.
Dwight Mejan:
He said, I don't want to take this. It's just 5% more money. I want to be able to control that lump sum and leave a legacy. So he wanted to do a little bit of estate planning with that and make sure somebody else had that money when he started this, and he's starting this in his 70s when he starts it. So reach out to us. We'd be glad to go over this with you. And just keep in mind there's growth in this account as well based on external indexes. So you can link your growth to indexes like the S&P 500. And the worst that can happen is if the market goes down your principal, which is the money you're going to leave to a beneficiary. Ultimately, with this contract, that money is protected in a down in a downward market. So we'll get you an illustration. We'll spell it out for you a little bit more than that. But I promise to give you all kind of a highlight on that. And it just ties in with kind of what we've been talking about so far on this segment, which is the guarantees and, you know, just the peace of mind that people have that goes with that. So what it's like to work with us, hey, reach out to us. We'll run some comparative analysis. We'll look at your existing. Portfolio and see, hey, is there is there a better way to harvest income out of this portfolio? You have to look at things like the tax implications.
Dwight Mejan:
You may have a lot of money saved up and you're in an account that's going to be taxed. Do you have a tax efficient strategy in place? Those are some of the things that we work with with all of our clients. And if you're at a point right now where you're getting ready to say, okay, I'm getting ready to pull the trigger and accumulate and start taking income, what's the best bucket to pull it from? What's the best instrument to use for my income? We'll lay out all the options. We're not going to put you in a product and say, this is the way that you do it. We're going to present you with multiple different options, and you'll see the right one that makes sense for you. Okay. Our job is to educate, not to make decisions for you. So reach out to us. Our phone number, if you're listening in the western part of the state is (828) 278-7814. If you're in the more county area, we're at (910) 235-0812. And you can always reach out to us through our web address at Retire360Show.com. That's Retire360Show.com. And you can book a complimentary meeting with us, and we'll look forward to answering your questions and seeing what would work best for your situation, particularly if you're in that retirement red zone and looking for how am I going to get more guaranteed income. So let's take a break. And when we come back, we'll continue our show. We'll be right back.
Producer:
At 360 Capital Management. We know you've worked hard to earn your money and you've worked even harder to save it. When it comes to wealth management and planning for retirement, Dwight Mejan is passionate about helping people protect and grow their wealth. Visit Retire360Show.com to schedule your free consultation today. It's a $1,500 value provided at no cost to you. Book yours now at Retire360Show.com.
Mitchell Keiser:
You guys are listening to the Retire 360 show, brought to you by 360 Capital Management here in downtown Southern Pines and in Banner Elk, North Carolina. Next we're going to hop into a segment on required minimum distributions. As you guys know, the deadline is coming up quick, and our listeners know by now that the Secure act had updated the age from 72 to 73. So if you turned 73 this year, you are required to take your required minimum distributions. They had changed that age quite a few times, but the current age is 23. And Dwight, I'll turn the question to you when are these required minimum distributions due by.
Dwight Mejan:
Yeah. Good question Mitchell. If you're turning 73 this calendar year in 2023, the IRS is giving you a little bit more of a window to prepare for that. For that first distribution, you actually have until into March to make that actually actually April 1st, to be technical, you have until April 1st of the following year to take your first RMD. That's only if it's your first time and then you can pay the taxes on it. There's a caution that we put out there in doing so is that you'll have to take another one by the end of that same year, next year. So if you were turning 73 this year as an example, and you decide, hey, I'm going to wait until April 1st and throw it into another tax year, you may not be doing yourself a favor because you're going to have to take the second one out by December 31st of 2024. So essentially you'll have to in the same year. Now, depending on what your income is, depending on other things that could be happening on your tax return, let's say next year you sell a house or a second property that you have and you did that. The problem there becomes you're adding more taxable income and a capital gain on top of that. And then you could be thrown into higher Medicare premiums. So we always say it's best to do that in the year that it's due. That's that's a simple formula.
Dwight Mejan:
I would say that's the best I don't want to say it's 100%. I always leave room for an exception for somebody, but I would say in at least 90% of the cases, it's wise to take that first distribution in the year you turn 73 and then just pick it up every year thereafter. We like to set them up for clients who've been doing it regularly sometime in the month of November, certainly by December 1st, because if you miss that, if you miss that all important RMD in the year that it's due, it's a very stiff penalty in the tax code. In fact, last year it was the stiffest penalty in the Internal Revenue Code. It was 50%. They've made some adjustments on that to make it a little bit more friendly, which we're glad to see. But still there are penalties if you fail to do it. Had somebody in my office this past week, they showed me the letter. It was a well known broker dealer firm. I'm not going to bash or disparage any broker dealer. I don't know the details behind it, but they had an apology letter from this large broker dealer that their R&D didn't get processed until the 10th of January, and they showed me the letter and they said they're trying to rectify it with the IRS. They were owning the mistake. But at the end of the day, the burden of responsibility is on the individual, not on the company.
Dwight Mejan:
It's the company's responsibility to notify people in writing the first year that they're required to do it. But at the end of the day, folks, you, the listener, it is your responsibility to be compliant and get that RMD out. And that is something that I know we do here. We're heading into that here into November now, and this is the time of year where we are doing not just required minimum distributions, but we're doing tax loss harvesting for clients, which is, you know, just ways to to take money. That's out of highly appreciated assets, taking some assets that are at a loss. And maybe somebody is too heavy in one specific sector in their portfolio. And if they have losses that they could, you know, write off against some of those gains. It allows opportunities to reinvest that portfolio. So I know that's something that we are vigilant about doing along with Roth conversions. And I think we have time Mitchell are we going to we have a segment coming up. We're going to talk about that Roth conversions. Is that right? Yep. Okay. So we'll get to that. I'll I won't go there. But that's that's really you know when I see the the fourth quarter coming into play, that's what I start thinking about tax loss harvesting, RMDs and Roth conversions. Those are things that just we put on a cycle with our clients.
Mitchell Keiser:
So Dwight, just real briefly, because I know a lot of our listeners and we have people that always ask during our classes, what does a Roth conversion look like practically? How does somebody get that done on the broker side, and what does that look like for their tax?
Dwight Mejan:
Axes.
Dwight Mejan:
Yeah. Good. Good question. We always want to distinguish the difference between a conversion and a contribution. So a contribution is simply you have to have earned income to qualify to contribute to a Roth account. We won't get into it. But there's, there's phaseouts and then there's points where you can't contribute any more if you have, you know, higher incomes. But we're talking specifically here. Mitchell is asking the question about a conversion. A conversion is simply moving money out of a tax deferred account, like a traditional IRA, and moving it and opening, if you don't have one, a Roth account. And folks, there are no restrictions on that in terms of age or the amount that you're limited in doing. And you might be wondering if this is kind of new language for you. Why would I do a conversion? What's the benefit of me moving money out of that tax deferred account and paying, you know, a large tax bill on that right now? Well, the percentage of what you're going to pay is going to be dependent on other factors, like the year in which you consider doing it. It's going to be dependent on all of your ordinary income. Ordinary income could be wages, could be distributions from the account which includes the possible conversion. It could be interest, it could be dividend income, all of that. The other thing that complicates that is, you know, capital gains if you sell things or your portfolio has transactions in it that create capital gains, you sell a rental property in that year.
Dwight Mejan:
This isn't something, folks. If you're listening, you want to just do blindly, okay? If you're seeking a lower tax rate in retirement and the possibility of paying lower lifetime taxes over your estimated life expectancy and retirement. Roth conversion strategies could make a lot of sense. And here's the other reason they make sense. Mitchell so our listeners understand this tax rates, most people would raise their hand to the question, do you think tax rates are going to be higher in the future year? And they certainly are going to be higher by most people's accounts. We just don't know when those changes are coming, and we don't know what those new changes are going to look like. All right. But certainly if you're in that that middle range of the tax sector, somewhere in that 20 to 24%. Those are the brackets that tend to change a lot. And I'll share something we share in a lot of our classes. If you go back to the 60s when Kennedy was in office, President Kennedy, what today is the 24% bracket for many of you listening to this in that era, that same tax bracket, if you were if you're 24% today was 56% in that era. So imagine taking money or worse yet, being forced into taking money out, which is the required minimum distribution and having to take larger sums out. And you have no tax control of how to take that money out. You're just subject to the Internal Revenue Code.
Dwight Mejan:
That is what we believe of the IRS knows is coming. They know what's in those buckets. They know everybody listening to this show right now. They know exactly how much money for each listener that's in the sound of my voice, how much is in those tax deferred buckets? And they know the trend for most people is we're going to wait to pull money out of this bucket until it's forced upon us. So when they want to change the tax code, which I'm sure is likely going to happen, like most of our listeners would agree, the theory here and the practice is let's get money set up now in these lower rates that we're paying and convert the money over the taxes could come out on the conversion. And here's the cool thing, folks. Your investment strategy isn't changing. If you own Apple stock and you're going to move Apple stock into a Roth account, you'll still own Apple stock. You'll still own it for the same price. You're just going to pay the ordinary income on all of the amount that you move. But now your Apple stock is sitting in a Roth account, and it's going to continue from that point forward through the growth and or dividends. All of that growth and income moving forward from that point will be tax free. And when you pass away, your kids and the beneficiary of that account has to pull that out over ten years. But all of the gains in that in that account are going to be tax free to the heirs.
Dwight Mejan:
So and that's an important reason a lot of a lot of our clients do it because their kids are in good earning years. You know, they're working. Maybe they got a spouse, one of their daughter in law or son in law's working, and a lot of their kids are at the highest tax rates. They might be in the 35 or 37% federal rate. Parents might be in the 12% bracket. So our suggestion to our clients is, let's say you're on the low end of 12%. You're down there at the at the bottom of the 12. Bracket. You might have room of 30 $40,000 left to still be in that 12%. Pay the tax on it. If it's important to you to leave a legacy and you want to do some estate planning, and you're somebody listening here that has a lot of money built up in these tax deferred accounts. We advise clients and we show them on a tax map. We'll run a tax map for you that's free to our listeners. You call us and say, I want that tax map, and I want to see some strategies of what I can do, like what you were talking about on the on the radio program today of how can I move that money over and get it into a bucket tax free and pay those taxes on it now at 12%. So if I pass away, my kids aren't paying the tax on that account at 37%.
Mitchell Keiser:
I know something else you talk a lot about is the red zone. The retirement red zone. And I think you mentioned it a little earlier on this show. Can you just specify what do you mean when you say retirement red zone?
Dwight Mejan:
Yeah, we use that term a lot for maybe some of our newer listeners, if haven't defined this in a while, that's basically people who are in a critical period within retirement, five years away from anticipated retirement, or if you've retired within the last five years, that's what we call the retirement red zone, and we call it a red zone. You know, just because, you know, it's very critical what happens to your portfolio inside of these years. Many people haven't adjusted the way their portfolio is allocated and they're retiring and they have too much exposed to risk. And they need to make some adjustments in their asset allocation. So you've got a special need to protect your hard earned retirement savings. If you're in this red zone. As you shift into that decumulation phase, which is either where you know you may not need income, but you don't need to be taking unnecessary risk with the portfolio because your your, your years of working to make up those losses are, you know, are kind of behind you there. So, you know, we say portfolio losses that occur within this ten year window, they're going to have a significant impact on your future lifestyle and retirement. This is because you stand to lose more than you ever did during your working years during that accumulation phase.
Dwight Mejan:
So the other thing I want to just mention to the listeners, Mitchell, is that, you know, losses get masked today, and I wish this was one of those things. I wish we'd see the SEC and Wall Street change. Most of our listeners don't read their mutual fund prospectuses or, you know, investment returns to look at what their average is. I always ask people when we run an analysis, I'll just say to them, what do you think your portfolio is? Average rate of return has been over the last ten years. And they'll give me a number and then we'll show it to them. And sometimes they're surprised by, you know, the difference in what they guessed and what it's actually doing. But one thing I always like our listeners to know is average rate of return doesn't matter to Dwight as much as real rate of return. And I'm going to introduce an example to that. Let's just say you simply have $100,000 in an account. And today and today you've got 100 grand. And a year from now that market's down 10% and you're invested just like the market is. How much do you have left in there, Mitchell in that $100,000 account?
Mitchell Keiser:
100,000 down 10%. So you've got 90,000 you passed.
Dwight Mejan:
If you said what Mitchell said, you you passed as well. You got 90 grand. So let's just suppose that the following year we have a 10% gain. So what's the value of your 90,000 at the end of year two.
Mitchell Keiser:
Would then have $99,000.
Producer:
You'd have.
Dwight Mejan:
99,000. So here's my question to the listeners. Mitchell knows the answer to this, but I'll ask the listeners, what is the average rate of return over that two year period of time? You lost 10% and then you made 10%. Well, most people would say the average rate of return is zero. Right. You take the total, divide it by two, you get your net zero. My question is, where did the $1,000 go? If you average 0%, you started with 100. Why do you have 99,000 left if your average return is zero? After two years? That's because, folks, there's a difference between the real rate of return and the average rate of return that average rate of return has to do. As soon as you introduce a loss into a period of time that you're measuring averages, you are going to get skewed results. And your money, the actual money in your hand, is not going to line up with that average.
Mitchell Keiser:
I want to share this chart because I think it's pretty relevant for what you're talking about. We share this a lot during some of our classes, and what it is is gains needed to recover from certain losses. So for example, if your portfolio went down 30%, how much of a gain do you need to get back to where you were. So 30% you would need a 43% gain to get back to where you were. If your portfolio lost 40%, you would need a 67% gain. And if by some chance we had another oh eight or some other catastrophic event and you had a 50% loss in your portfolio, you would need a 100% gain just to be back to where you were. So just talking about, you know, as you're approaching retirement and how long do you have to, quote unquote, wait it out? You have to consider factors like that, because you may not have the amount of time that you think you have, and your money might not last you as long as you thought.
Dwight Mejan:
Yeah, you're right on the money, Mitchell. And I hope our listeners heard what you said there. Those are very relevant stats. I appreciate you sharing those with our listeners, folks. It's just really critical, this retirement red zone, that you make sure your portfolio matches your risk tolerance because imagine going out you that's what I don't like about some of these prospectuses when they're showing us average rate of return. Imagine having ten years that's being measured. And you had of those ten years you had a 20% drop, an 8% drop and a 12% drop. When you factor those three negative down years into those ten years and come up with your average, you can't start with 100,000 and get it where your money's going to equal that same amount, because those years where you had those losses, that's not measuring the real rate of return. What Dwight cares about with my portfolio and what I ultimately care about for my clients, isn't the average rate of return. It's the real rate of return on my money. Okay. And what you're being shown by prospectuses and a lot of people that don't mean ill will to you when they're showing this. I just want our listeners to be aware that average rate of return is different than real rate of return.
Dwight Mejan:
At the end of the day, it's your money. That's what you want to hang on to, right? You want to you want to make money on your money, but you don't want to do it at the expense of giving it up. So just be careful with that. And if you're in that retirement red zone, you haven't had, you know, a risk assessment to your to your goals. And then looking at your portfolio, that is one of the things that will give you as well. When we run a tax map for you just by being a listener to this show that normally if somebody just comes in off the street to me and says, hey, what would it cost me to just do a financial plan where you run your tax map, do a portfolio allocation strategy for me and map out a financial plan? We're 599 bucks when we do that. And you don't hear me, folks, if you've been listening for any length of time, we don't talk about fees that we charge. That's just not a big part of the show. So guess I'm saying that for a reason, because some people might be listening, going, what is that going to cost me? You just have to make sure that you say, I'm a listener to your radio show.
Dwight Mejan:
And when you do that, we will run that for you. I will spend one meeting with you. Beyond that meeting, there might be a charge. Okay. And I'll be up front to tell you if we meet again. Here's the cost for that. But to get that and to have me go over it with you, I've carved out a little time for people knowing that we'll get some calls from it. I'll be happy to do that. I'm not saying it'll be here next time I get on the air, but that's that's what we're willing to do for our listeners. If you call in, just mention you're a listener of the show. And with that, we're going to take a quick break. But if you have a question on anything we just talked about in this segment and you'd like to talk to me personally, my number is (910) 235-0812. Or you can reach Mitchell or myself if you're in the mountains at (828) 278-7814 or go to Retire360Show.com we're going to take a quick break and we'll come back and finish today's show.
Producer:
Are you interested in protecting your assets from market volatility, rising taxes, and economic uncertainty? Then tune in to Retire 360 with Dwight Midgen to learn how you can protect and grow your hard earned money. Retire 360 Sundays at 3 p.m. right here on talk 97.3 FM, 104.1 FM and 990 a m W.E.B. protect your hard earned money today at Retire360Show.com.
Mitchell Keiser:
We are back and you guys are listening to the Retire 360 show, brought to you by 360 Capital Management. Next, we're going to hop into our segment on target date funds. We have a lot of listeners and clients that come to us initially and have these target date funds in mind, and they think that is a good solution for when they're going to retire. They have a certain time period in mind. Dwight would like if you could just explain what is a target date fund, and why would somebody use them as a retirement strategy?
Dwight Mejan:
Yeah. Great question Mitchell. People are wondering they see them sometimes on their 401. I call it the menu of options that our listeners have to choose from. But just a quick little small history lesson, kind of a history geek here. But, you know, ever since Congress enacted the Internal Revenue Code, section 401, and they did this in 1978. As we've been talking about on today's show, pensions have been offered less and less in the American workplace. So the implementation of 401 plans really marked a major shift of responsibility from retirement planning from the employer, taking care of the employee, going to the employee. You know, my dad, he drove a truck for Pepsi-Cola for 36 years, and he was fortunate. You know, he hit a high school education, but he had a pension that my mom my dad's passed on, but my mom is still drawing two thirds of his pension. He took a two thirds option pension. But back in his day, it was common. You could have worked for a bank. You know, in teller operations, there's been people who've had pensions, maybe not large, but they've had pensions nonetheless. But today the shift is putting people into 401. So where do you find these target date funds and what are they? Well, they're sitting as an election inside of a 401 K plan. And why did they come about? Well, a lot of people aren't comfortable picking, you know what.
Dwight Mejan:
What is this large cap fund or what percentage do I put in this international stock or this mid cap or, you know, this bond or this international bond. So they just they wanted to make something a little bit more simple to people that kind of like the what I call the set it and forget it. And that's the worst thing you can do is hope you're going to find out from this segment. You don't want to set it and you don't want to forget it. In fact, I would advocate for you. Don't set it to begin with target date funds as you're going to learn here. And if you're driving and you're in one of these, I don't mean to make you late, but you need to give it five more minutes here. Okay, folks, because if you're in this, we're going to tell you the dark side of target date funds and why, if you're in them last year, why you lost a lot of money. But with most employees that I just said having no experience in matters of investing, many have gravitated to these target date funds which stick out among the multitude of investment options inside your work based plans. But we don't want the listeners here to be fooled into thinking these funds are right for you. Just because you're planning to retire at a certain age, and that's the whole purpose of these funds.
Dwight Mejan:
So let me explain it to you. Let's say that your target date for retirement is 2035. Okay. You're roughly 12, 13 years or so from now. The goal of this fund is to make it simple for people to say, hey, that's my target date, and the fund itself is going to pick the stocks percentage, not just the holdings, but we're going to pick the percentage that should be in equities versus how much should be in fixed income in bonds. So if you're in a 2035 fund, you're going to have more equity positions in there than someone who's in a 2025 fund, because someone who's in 2025 is set to retire in the next 1 to 2 years. They can't have a lot of exposure to the equity side of a portfolio. There's more risk there. So there's naturally more of a tendency and not to use a technical term here, but there's something called a glide path. And the glide path is this natural progression of money being moved not by you inside the target date fund. And believe it or not, guess what's making that move? It's a computer algorithm. It's a program that's looking at your date and at a certain points along the way, it's sliding through this glide path. More and more money is moving out of equities and moving a heavier percentage into the bond side of a portfolio.
Dwight Mejan:
So just imagine last year you were target date fund was 2022. What happened to bonds in 2022? It was one of the worst years on record that we had for it was the worst, I should say, for the bond market. And if you owned a 2022 target date fund, I got Sam coming up here because his team did some research on some of the returns. I'm going to bring Sam on in just a minute, but he'll go over this with you. But more and more of the portfolio was sitting in bonds. And as the feds advertised, we're going to raise rates. What did they do 11 times last year? They raised interest rates. They basically were advertising. If you're in bonds, we're about to clobber your bond portfolio because as interest rates rose, the value of the bond portfolio had an inverse relationship. And those went down. So target date funds were one of the worst things to be in. We can't stand target date funds. And I'm emphatic because you don't hear me. If you listen to this show a lot, talk about these. But if you're in one of them, you need to get consultation and get out of them. You'll know how to reach us here. But I'm going to bring Sam and Sam, share with our listeners what you did a little research on on this. I thought this was fascinating.
Producer:
Yeah. So we wanted to get a good baseline to be as fair as possible to the target date funds. Because I agree with you, Dwight. This is a poor excuse for an investment decision and retirement plan, in my opinion. And so we're looking at the same issuer, different target date funds every five years from 2025 to 2050. And simply looking at how each of those funds performed over the last five years. And it's really concerning, Dwight, because we were just talking about the retirement red zone and how important it is to protect your principal, protect the savings you do have as you're nearing retirement. The 2025 fund, which is the fund that we measured with the earliest target date, is down 6.1% over the last five years. It actually performed the worst of any target fund that we measured. The 2030 fund is down 2.5% over the last five years. The 2035 target date fund is down 1.8%. It wasn't until we got to the 2040 fund that we started to see a positive return, albeit a small one. The 2040 fund had a 0.26% return over the last five years. And listeners to to this show here know that we talk a lot about inflation and a 0.26% return over five years.
Producer:
That is a that is a melting ice cube investment, because you're not keeping up with the rate of inflation at all. And on on up here, you know, the 2045 fund had a 7.5% return. And the 2050 target fund with a target date way out in the future, a 10.9% return over the last five years. So it was really upside down. If you're using one of these and you've got it in your head that this is going to help prepare you for retirement as you get closer, be cautious, because the use of bonds in these funds has really led to some negative performance. And just as another baseline comparison, I call the S&P 500 kind of the thermometer of of the equity markets, the S&P 500 had a 52.4% return over the last five years. So even that fund or that index alone, the S&P 500, which it would be considered fairly risky to be investing in, just that fund, had a much greater return compared to any of the target dates. So really concerning.
Dwight Mejan:
Well, Sam, thanks for sharing that. I think just to as we're getting near the end of the show, I'm going to have Mitchell, Sam and real quickly we've got about 7 or 8 other things we want to let you know about real quickly about the dark side of these target date funds. Mitchell, why don't you share with our listeners the first one real quick and we'll get through these.
Mitchell Keiser:
Yep. So number one lack. Of customization. So these target funds are designed to be a one size fits all, which means they're likely to not align perfectly with an individual specific financial goals, their risk tolerance and their needs.
Dwight Mejan:
Okay. And I would say the next one here folks we're going to give you these rapid fire fees. Target date funds often have really high maintenance fees which can erode returns over time, especially if you're a long term investor. Sam, what's the third one we came up with here to be cautious of?
Producer:
Yeah. Dwight. Beyond fees, there's other hidden costs because some target date funds sometimes invest in other funds, leading to layers of fees, bad expense ratios. And this can make it challenging to understand what you're actually paying for your investment in that fund. Yeah.
Dwight Mejan:
Yep.
Mitchell Keiser:
Good, good. And then next just follow that with your risk tolerance may not match. So the level of risk taken by a target date fund will not align with every investor's actual risk tolerance. For some, this could result in over being overly conservative, or for others you could be overly aggressive.
Dwight Mejan:
We see that all too often with people that have maybe more risk, and they're sitting in a fund that's got them, you know, way too conservative. And the the opposite is true. So yeah, the next one here was limited investment control. Investors have limited control over the fund's asset allocation. It's typically set by the fund manager. And this additional lack of control can be frustrating for people who desire more hands on approach to managing their investments. We got three more here, Sam. What's the next one?
Producer:
Yeah. We mentioned you are running a risk of being a bit too conservative because as that target date approaches, the funds are going to have to start using more bonds and guaranteed income solutions to meet that target date, which may not be ideal for a retiree who needs to maintain those savings and even grow it.
Mitchell Keiser:
Yep. And then would add market timing risk. So target date funds may rebalance and adjust their asset allocation at specific intervals which can expose investors to market timing. Risk at these adjustments do not align with market conditions. So an example they could be switching positions at a time where they really should be keeping it put or vice versa.
Dwight Mejan:
Yeah. And the last thing we came up with for our listeners here, you know, unpredictable returns, the performance of target date funds can vary widely depending on the fund manager's decisions and the underlying assets. Some funds may underperform their benchmarks. So folks, the point here let us do an x ray, an MRI of your situation to see what other options you have. Many of you can possibly, if you're over 59.5, can do an inservice distribution, get that money out of there and get it into an account even though you're still working. So that's the point. Contact us. Mitchell's going to give you give you our contact information. Wrapping up today's show. Mitchell. Just give him that date one more time and close it off with our listeners, giving them our contact information. And we'll look forward to seeing them next week.
Mitchell Keiser:
So our next class is going to be at the Appalachian State University there in Boone, North Carolina. If you guys are interested in joining us to learn about taxes and retirement, we'll briefly touch on Social Security and also Medicare. But if you're interested in that, that will be on November 27th. And we will have a 10:00 class and a 1 p.m. class. If you are interested in that, give us a call for details and we can save you a spot. The phone number to reach us at is (828) 278-7814. Thank you guys so much for listening and we will be back next week.
Dwight Mejan:
Have a great week everybody.
Producer:
Thanks for listening. To Retire 360, you deserve to work with an experienced and licensed expert who will strategically work to protect and grow your hard earned assets. To schedule your free, no obligation consultation with Dwight, visit, Retire360Show.com or pick up the phone and call (910) 235-0812. That's (910) 235-0812. Investment advisory services offered through Brookstone Capital Management LLC, BCM, a registered investment advisor. Bcm and 360 Capital Management are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results.
Producer:
Fixed annuities, including multi year guaranteed rate annuities, are not designed for short term investments and may be subject to restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.
Producer:
Any bonuses mentioned may be subject to additional restrictions and regulations based on the offering annuity company. You may not receive the bonus if the contract is fully surrendered, or if traditional annuitization payments are taken, and if the policy is partially surrendered. It could result in a partial loss of bonuses because these are bonus annuities. They may include higher surrender charges, longer surrender charge periods, lower caps, higher spreads, and other restrictions that are not included in similar annuities that don't offer a bonus feature.
Sonix is the world’s most advanced automated transcription, translation, and subtitling platform. Fast, accurate, and affordable.
Automatically convert your mp3 files to text (txt file), Microsoft Word (docx file), and SubRip Subtitle (srt file) in minutes.
Sonix has many features that you'd love including enterprise-grade admin tools, automatic transcription software, advanced search, world-class support, and easily transcribe your Zoom meetings. Try Sonix for free today.