SYNOPSIS

Matching your domestic obligations to guaranteed income is a wise money strategy. It should be antithetical to pay obligations with fluctuating income based on the performance of the stock market. Watch the interview with financial planner Sean Humeston.

FULL TRANSCRIPT

Steve Savant

00:04

I’m Steve Savant, syndicated financial columnist and money color commentator. On today’s show, paying lifetime obligations with guaranteed lifetime income, part two of our series on building a firm financial foundation for retirement. The financial advisor, Sean Humeston. Sean, I find it to be almost antithetical in retirement that we’re trying to pay discretionary income. You know, I have bills to pay, I have discretionary. I also have obligations to pay with non-guaranteed income. I’m going to, you know, I don’t know if my dividends are going to be there this month. I don’t know if my bond interest is going to produce that. So I’m trying to match, I have guaranteed obligations. I have my normal utilities, I have my garbage, I have my gas, I have all these things and discretionary I want to go see my grand-kids. I want to go on a trip, a vacation. Those are already fixed in my budget and I’m trying to use risk based investments to cover that.

Sean Humeston

00:59

Well, I think that’s a big mistake with some, a lot of consumers. You know, like you just said with income or with your expenses, those are fixed expenses. So why not cover those fixed expenses with fixed income and making sure that you have that paycheck coming in every month.

Steve Savant

01:16

I was looking at the social security, we’re going to talk about this today. Social Security, these a single person based on the average. This could be more, but the average American single, there are benefits, might be worth a half a million in income to them. A married couple, almost a million.

Sean Humeston

01:34

Yeah.

 

Steve Savant

01:34

So it’s not a small number. So I know I’m getting social security matchup for those, so I’m going to have to take my budget as a planner. How many people that you meet? Boomers, I hate to say this because I already know my other for my group. How many are actually doing a budget for retirement?

Sean Humeston

01:49

Very little. In fact, I just spoke at an instructing class where a lot of the consumers that are actually had a budget worksheet in the very back of their notebooks and few of them didn’t even know what that was. I’ll just kind of goes to show you, it’s a needed thing. Most consumers really missing that boat.

Steve Savant

02:07

I think it’s really a problem because if we have to be able to force our clients to do the right thing. I have a budget, have had one for a long time. I look at it, it’s my reference point. I’m measuring, Hey, am I staying on budget? And my pretty good? I have a pretty good idea what my retirement’s going to be like, it’s interesting. Social Security is going to be there, guaranteed. We may or may not get a cola. Remember the last six years?

Sean Humeston

02:32

Very little.

Steve Savant

02:34

Actually three years we get anything right?

Sean Humeston

02:35

Right.

Steve Savant

02:35

But the for three of those years we got a small amount this year, it’s like point three. I mean it’s ridiculous. So I know I’m going to get it guaranteed, I might even get a small bump, right? So, people that are looking at social security right now, they’re looking at the idea of saying, I need to use this and I didn’t get a lot of people when they hear me share this and they hear you talk, they say, I get it. I really need to use social security’s guaranteed. I don’t know if social security will cover all my discretionary spending. I don’t know if it’ll cover all my obligations, my normal living expenses, so I have to talk about that, but I’ve noticed that you’re kind of, you’re moving a kind of down this road as a planner. You’re suggesting people, hey, you may want to weigh about taking your social security at 62 and try to wait until eight-70. Why is that a big concern?

Sean Humeston

03:19

Well, when you really look at it, the math. You know when you take it early at 62, you’re taking a 25 percent reduction between taking it at average age 66 or 67 depending on your birthday. So and then every year you wait, you get an eight percent increase and I don’t think a lot of consumers really have just comprehended that math, we’re talking a significant amount. Years ago it wasn’t such a big deal because naturally, you could do better in the market, you can do better and other assets and investments, but now getting the guaranteed eight percent by waiting at least every year until 70. That’s a huge return. Almost 32 percent are exactly 32 percent.

Steve Savant

03:55

Sean, I don’t think there’s anything on the market that I can use the G word with and say guaranteed eight percent simple.

Sean Humeston

04:03

Doesn’t exist.

Steve Savant

04:04

And if I convert this to compound it, sit somewhere north of five percent compounded, I’m not going to touch numbers like this.

Sean Humeston

04:11

Right.

Steve Savant

04:11

So it’s really important and people who take it 62, some of our people are still working.

Sean Humeston

04:16

Yeah.

Steve Savant

04:16

So now it’s not only a 25 percent reduction, I’m getting taxed on my benefit.

Sean Humeston

04:20

And our earnings test reduction.

Steve Savant

04:22

How important is this as a we decision? I have to say, hey guys I’m 62, I’m taking the money, but actually his wife is going to outlive him right? 80 seven percent of the time. So it’s a we decision, you know, it’s her number we’re talking about.

Sean Humeston

04:35

Right. Yeah, because it’s solving for both lives. So this survivor benefit, of course, would be reduced if he or she took it early

Steve Savant

04:43

I’ve noticed I have the breakpoints in front of me here. The guy said we’ll see if, How long do I, if I’ll wait till 62, but I don’t like it, you know, I want my money now though. Coaching may be going to hell in a handbasket, I don’t know. He says, but at 62 to 65, if I wait till 66, when is the crossover year? When I would have done and I said 76. If you’re 62 and you would wait till 70, it’s only three years more 79. If the average males living to 86 six, if the average female is living to 88 eight, and if the survivor of that marriage, that person according to stats, and this is the average, again, not the outlier, 93, age 93. So to me, no matter what point you’re measuring this on, it’s totally worth doing. Now, it’s not going to pay the whole bill here. So that’s why I want to talk to you about a single premium immediate annuities. Let’s say we got everybody to do a budget, and by the way, if you’re watching our show and say, Steve, I haven’t done a budget. I confess I’ll send it to you absolutely free. Just go ahead and write me and I’ll send you our budget that we use and then when you’re done you’re going to look at your social security at the maximum level of age 70 and we’ll go ahead and look at that and see where it is, but you’re going to fall short almost everybody I know. So I’m going to need some other guaranteed income. Talk about single premium immediate annuities and why that could be what we’re looking for.

Sean Humeston

05:58

Well, if you look at the alternative first, right? If you look at bridging that gap between somebody not drawn into 62 and waiting until 66 or even 70. The general rule of thumb is just I’m going to pull from other money, right? I’m going to pull from CD money and pull from the market money. I’m going to pull from any other investment or asset that they have, but what they don’t realize is that by using these single premium immediate annuity contracts, you can guarantee that that money’s going to come in every month for that period. And if you want to go longer, you’re going to get that guarantee either for however long you choose or in this case it could be for the rest of your life.

Steve Savant

06:33

Now let’s just talk about the rest of your life because sometimes it’s hard to think in those terms right? Now, I just saw old Susanna die last year, May 2016. Your old Susanna, she died. She has the last price and touring in the US. She died at 116. If I had that annuity and I had my social security coming in, would I get that 160?

Sean Humeston

06:52

Absolutely.

Steve Savant

06:54

So, so it doesn’t matter how long I live?

Sean Humeston

06:55

Yeah, It’s a lifetime.

Steve Savant

06:56

It’s a lifetime. If I’m Jeanne Calment, the Guinness Book of World Records, I just want to exasperate the point. If I’m the Guinness Book of World Records and she is 122 years, 164 days, and Jeanne had an annuity, an SPIA that would have paid out that long?

Sean Humeston

07:10

A single premium immediate annuity would still give her a monthly check every month.

Steve Savant

07:14

So we don’t care how long it is. So between social security and a single premium immediate annuity, I could guarantee my essential spending? I could guarantee my discretionary spending because I pretty much know if I’m going on vacation, so forth. Between those two, as first asked, have a budget though, have to have a budget, and I have to be formally at that. Once I have that, I’ve covered all my obligations with guaranteed income. Now you still have money in the market for inflation and so forth, but this is the money I need to guarantee my lifestyle. I have obligations, I have to pay for these. Now when you’re doing single premium annuity, I also noticed that you are kind of a big fan of these living benefit writers. Talk about this living these income benefit riders that you use with your SPIA.

Sean Humeston

07:55

So there are a lot of products out there that actually have these additional benefits. So if you’re receiving a fixed income every month, but let’s say you need a care in a facility or having part-time care come into your house based on a specific active daily living expense or active daily living cycles that you cannot perform. Some of those living benefits where you’re getting that fixed income every month will actually increase for that meat.

Steve Savant

08:20

Now I’m just going to be very frank here. There’s not many long-term care contracts out there any longer. I mean it’s really small universe now and most people have a hard time passing the physical Simon and the older we are in our sixties and seventies, we have issues, we have impairments. So these annuities are the annuities with these long benefit riders, they seem to have living benefit writers. They seem to have a little bit more benevolent, see about their underwriting issues.

Sean Humeston

08:47

Yeah.

Steve Savant

08:47

So I can get this protection without going through a physical?

Sean Humeston

08:50

Yeah, you don’t have to do anything other than answer one question in most cases and that is whether or not you’re in a nursing home currently. Which naturally most people are not.

Steve Savant

08:58

Now, will this pay for people like me who are just dye in the wool assisted home living, I’m never going to a nursing home. Would it take care of that? Could they come to my home?

Sean Humeston

09:07

Absolutely.

Steve Savant

09:07

These would work for that?

Sean Humeston

09:08

Absolutely, it doesn’t matter where you are. You can be assisted living, skilled nursing, or just receiving part-time care at the house or full-time care at the house for that matter.

Steve Savant

09:15

Well, I don’t know about you watching the show, but I’m totally into staying at home. I did not want to go to a nursing home. Now, if I have that I have these living benefits, If I don’t have long-term care. These hybrid products like this annuity, this is a pretty strong area to look at.

Sean Humeston

09:29

Yeah.

Steve Savant

09:29

I mean we’ve talked about taking care of my obligations, but I’m going to have future obligations here and the annuity if I don’t need it, no harm, no foul.

Sean Humeston

09:37

Exactly.

Steve Savant

09:38

I don’t lose anything. I had it, but if I needed, I could tap this and accelerate those benefits. Is that what I’m hearing you say?

Sean Humeston

09:44

In some cases, if you’re receiving a thousand dollars a month from this annuity benefit, which is a lifetime of income and all of a sudden you need care in some cases, that thousand dollars can be now worth $2,000 a month and we’ll double.

Steve Savant

09:56

Because of the benefit.

Sean Humeston

09:57

Because of the benefit.

Steve Savant

09:59

That’s huge, I think that’s a huge issue for baby boomers to start looking at annuities with living benefits that will help you have a long-term care. Don’t forget to watch our next segment on Roth conversion strategies. Part three of our series on building a firm financial foundation for retirement, and keep in mind before moving forward with any of the ideas as you hear on our show, always check with your tax consultant legal counsel or your financial advisor. You’ve been watching Steve Savant’s money.

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