SYNOPSIS

Shoreline founder Sean Humeston and Steve Savant discuss the role of liquid money in retirement.

FULL TRANSCRIPT

Steve Savant:

00:01

Everyone, I’m Steve Savant, syndicated financial columnist and bloodied color commentator on today’s show, liquid money in retirement is essential part one of our series on building a firm financial foundation for retirement, but financial advisor for Sean Humeston. Welcome to the show, Sean.

Sean Humeston:

00:01

Thank you.

Steve Savant:

00:17

Sean. We’re talking about liquidity and retirement. You know, people say, well, you know, I have all my money tied up in qualified plans. I have all my money tied up, but sometimes even in annuities, but we need liquidity in our, in our retirement. Sean, tell me, why do I need it? Where do I go to get it?

Sean Humeston:

00:32

I think it’s important to recognize that most people, uh, who have investments, have portfolios. Even just safe money, uh, having liquidity retirement is extremely important primarily due to the fact that if you need money, you know the kids need money, a roof caves in your ac goes out, especially here in Arizona, you know, you’re going to have to provide some liquidity. And uh, where do you get that? That’s really the question.

Steve Savant:

00:55

Okay, so I want to most retirees say I want it to be a safe place, can’t risk it in the market. I got to have access so I can have people worried about taxes and surrender charges if I can. I mean I’m going to be some taxes, but as much as I can mitigate it as much as possible, I’m looking at basically when you say liquidity, what kind of period are we talking about?

Sean Humeston:

01:14

So it could, it could range from as short as just a money market account that’s purely liquid and I think that’s real important in retirement to have a piece of that, uh, how much that is depends on the individual, but a lot of what we do is what’s called a laddered method. So you can actually have cds or certificates that mature at different times where you have access to your money all the time, you know, every six months or every year or something like that.

Steve Savant:

01:35

I noticed is you promote both. You talk about laddering of cds, you also talk about laddering of annuity. So there’s reasons to do some time. Sometimes those certificates of deposit and sometimes injuries. What’s the difference in your mind?

Sean Humeston:

01:46

Well, you can imagine with lower interest rates now today, uh, the concern of course is that the interest rates on cds is going to be lower. So with annuity certificates or what we call a certificate annuities, which are shorter term contracts, as short as a year, you know, you can get a better return on your money and still create that same ladder that you would with cds.

Steve Savant:

02:05

Well, when I’m looking at one, a one year, two year, Rachel probably went around the point point and a quarter somewhere in that vicinity or you to get better than that.

Sean Humeston:

02:12

Yeah, with a certificate annuity, a or let’s just call it a cd or ca, right. Is what they are sometimes refer to him as. You can get one and a half, one point seven, five today. Which nationally is going to be a little bit more than the know.

Steve Savant:

02:25

They still want you to park it for a year, right?

Sean Humeston:

02:25

Yep.

Steve Savant:

02:27

Okay. So when you’re talking about real liquidity, I might have to look into money market and not paying much, but it’s their one percent of passbook account and my checking account that maybe they’ll give me a point two five. All right, so I’m doing liquidity as a retiree because I know, I know already I’m going to have problems. You know, you’re going to have medical issues, you’re going to have maybe your automotive, you’re, you said your house, you get things you have to fix up. You don’t know about life’s it. Just life just happens sometimes. You just got to have it. Okay. So. But I’m also looking for liquidity, but I’m willing to say I don’t need. Today I’m looking at for a little farther out. So again, we’re looking at, right now I’m on bankrate.com. I’m looking at, you know, basic rates here that are short term at one point five fifteen and they’re five year rate. Some of these banks are at two and a quarter for a five year. I noticed that you had that, but you also included annuity rates that were more than that. If I’m going to hold for five years, why shouldn’t I get a better rate? Exactly, and by the way, a little side note, if I’m going to get a better rate, tell me, is there really a distinct difference for the client between a CD at two and a quarter and a annuity at three, three and a quarter hole point more. I’m getting more, but I’m getting tax deferral is their power. Is Their economic leverage for me not paying taxes every year?

Sean Humeston:

02:27

Sure.

Steve Savant:

03:44

So, so talk to me about that.

Sean Humeston:

03:46

Well, when you compare the CD, obviously you’re paying interest on money that you’re generally doing every year, right? You get a 1099 INT, that’s gonna Create a sum taxable interest game with a deferred fixed annuity or a multiyear guarantee annuity. They refer to it as you know, generally you’re going to get that tower, the tax deferral, that power of a tax deferred growth. And I think for some, if they’re, if you’re not spending it, why pay taxes on it now? Eventually you will. So you’re not going to get away from that, but there are strategies to actually get the power of the tax deferral today and then of course wait until later on to either utilize the money or they pay the taxes then.

Steve Savant:

04:23

Okay. So if I’m willing to hold that long and the CD, I’m like almost a whole point more on an annuity and I don’t pay taxes until I actually use it.

Sean Humeston:

04:32

Yeah. And then the other concern too is that a lot of our clients on you, you mentioned a five year fixed annuity contract, a lot of those accounts have liquidity as well. Ten percent, 15 percent, 20 percent penalty, free withdrawals every year. So you can actually still gain that liquid a need but still maximize the return while you’re not spending it.

Steve Savant:

04:52

So if you had to get to it, there’s some, you know, exit strategy to this.

Sean Humeston:

04:52

Absolutely.

Steve Savant:

05:05

Okay. So I, I, and I noticed that you do a lot of build outs. You have a three, four and five year fixed annuity rates are fixed seedier on the clients needs. You’re looking at that, that, that laddering approach. So every three years I have things coming due are going to look at the current, you know, the Fed just raised the rate again the next three or four years. It could happen again if we’re doing well. Uh, that’s a pretty good strategy for people.

Sean Humeston:

05:20

Yeah. And I think the other thing too, to keep in mind is that a lot of accounts that we offer are what we call flexible. So if you did have a three, four and five year term, as the three year comes, do some of our clients will add that money to their four year term or added to their five year term and you can continue to do that while maintaining the original maturity date, those accounts. So there’s some, there’s some validity there and of course you can still get a better rate if the, if you’d, like you said, if interest rates are higher at that time, you can purchase something new, but you can also get into something that you already had.

Steve Savant:

05:49

I was noticing, I looked out at the the annuities that are out there, I mean 20 year, rates that are out there, even though they’re sitting at around three, seven, I’m not really sure if you can get three and a quarter for five, if 50 basis points is really worth it to tie it up for twenty?

Sean Humeston:

05:49

It’s not.

Steve Savant:

06:05

It’s not so, so people that recommend this or the math doesn’t really work in the long haul I think you and your your thinking and you were saying?

Sean Humeston:

06:13

Yeah, generally you’re going to get the two types of people where they either want to save them money and even for the kids, right where that case, the term really doesn’t matter or they wanted you to be able to utilize the money and have that liquidity so you’re absolutely right. It doesn’t make sense to have something long term.

Steve Savant:

06:26

Now I noticed that the crossover rates, you’re, you’re, you’re predominantly, you are predominant, your practice – you’re at the five year, you don’t go too much out. You have a few that are, that are maybe a few people in eight years, but really five years seems to be the cap because of the way our interest rates had been for the environment for the last decade.

Sean Humeston:

06:26

Correct.

Steve Savant:

06:41

Alright. So in your strategy, strategic thinking, thinking about the Fed, you know, bumping it here, it up there, we might get a few more bumps. It’s still pretty good strategy to do the three, four, five laddering approach and rotating about probably not going too far out past five years.

Sean Humeston:

06:41

Correct.

Steve Savant:

06:56

Okay. So when we’re talking about liquidity, we’re talking about short term needs money markets could be for all the things that happen in life from auto repair to roof repair, to medical to longterm care. I might have little things that I have to do on that deductibles with Medicare, but I also have these other areas, right? I really don’t need it now. Might as well let it grow. Don’t really want to pay taxes on it. That’s what I’m hearing you say. And that could be another form of equity. So there’s very, very short term liquidity and then there’s this kind of between zero and five medium liquidity. So people have to think about liquidity. That’s what I’m hearing you say retirees. I’m a boomer. I’m looking at my group. We’re all retiring. We need to have access to money, but maybe not all of it. Now you said I liked this part. I want you to explain it. 10, maybe even 15 percent withdrawal without a penalty. I said I might. Would I have to pay taxes on that withdrawal though?

Sean Humeston:

06:56

Oh sure.

Steve Savant:

07:46

Probably. Okay. So if I pull that money out, I still have access to it. I just want to next to all of it. So if I have a three, four and a five, am I. does that mean I get 10 from my three, 10 from my four and 10 for my five.

Sean Humeston:

07:57

And even in some cases the five year terms actually have a 15 to 20 percent per year withdrawal. So here we even have more liquidity than the shorter term ones. The three and the four.

Steve Savant:

08:06

Okay. So really when I think about it, if I’m taking a chunk of money, let’s say I put a half a million and I divided that depending upon equally are not equally fender fundamental. My need is that three, four, five year rate, I’m going to have 30 percent at the minimum.

Sean Humeston:

08:06

That’s right.

Steve Savant:

08:20

So, so it’s not as tied up as people think. I think a lot of people have, uh, an imagination that if I tie it up in a new ds, I don’t have the liquidity issue.

Sean Humeston:

08:28

Yeah. It’s like a mental block. Right? So if they think five years is just too long, I, I, you know, I might need the money sooner than that, but when you really kind of educate them on the idea of, of that partial or that penalty, free withdrawal and it makes a huge difference.

Steve Savant:

08:42

Are All these annuities, do they have some kind of payout provision? So they could, let’s say you said, you know, I, I don’t mind to pay not what am I annuities? Could I get a 10 year lock down certain payout?

Sean Humeston:

08:54

Yeah. In some cases it’s even shorter. Only like a five year commitment, so have you purchased a five year fixed rate and then let’s say in a year you want it to create an income stream. You can only, uh, only be required to do it at least a minimum of five years or longer.

Steve Savant:

09:09

So they have not only the savings capability but the ability to generate income. Now, if I was ready, let’s say the next four years, I would say a lot of people are looking at age 70. So I’m looking at myself for years from now, I’m going to be looking at numbers at, at, at age 70, I’m going to say, hey, you know, I’m ready to take some income and I might want to go not just five, not 10, but I might want to go a lifetime. Can I do that with these kinds of annuities? Now I noticed you shopped the market before you pull the trigger on these annuities, you’re shopping the market. Hey is the single premium immediate annuity. The best is the deferred income annuity. To the best is the or maybe sitting in an index contract that has an income writer. You’re always pricing this stuff out, right? How can it change so much? I mean, Sean, it seems like it’s changing every 30 days.

Sean Humeston:

09:53

Well, I think a lot of it has to do with the, you know, the economical factors. I think a lot of it has to do with, with, uh, where insurance companies are with their price points and their expenses. Um, I think when we do shop that it just gives us the ability to actually have the right product for the consumer.

Steve Savant:

10:09

Don’t forget to watch our next segment on paying lifetime obligations with guaranteed lifetime income part tumor series on building a firm financial foundation for retirement. And keep in mind before moving forward with any of the ideas on the show. Always check with your tax consultant, legal counsel, financial advisor. You’ve been watching Steve Savant’s money. The name.

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