Just because you stop working in retirement doesn't mean you stop making money.
Today, Jeremy Keil is back with step two of his 5-Step Retirement Revelation Process, a step that is all about discovering what you’ll be earning during retirement. In this information-packed episode, Jeremy highlights the complexities that can come with making decisions about how you’ll make money in retirement. You will also learn how professionals like Jeremy can guide you as you consider what your monthly lifetime income will be.
In this episode, you’ll learn:
- Different ways you can make money in retirement
- Why you might not be retiring when you think you will
- The importance of considering your spouse during your decision-making process
- How behavioral finance can affect your decision-making
- And more!
Join Jeremy now as he walks you through the next step in his retirement planning process to help you solve your retirement puzzle!
Resources: Keil Financial Partners: (262)-333-8353 | 6 Questions Retirees Aren’t Asking But Should Be | 3 Keys You Should Know Before Choosing a Financial Advisor |
The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.
Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.
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Retirement Revealed Episode 4: What Will You Make In Retirement?
Are you ready to uncover your retirement solution? Learn more as Jeremy Keil and his guests guide you along the path of retirement and reveal the five steps you need to take to solve your retirement puzzle. Now onto the show!
Aric Johnson: Hello and welcome to Retirement Revealed with Jeremy Keil. Today we're going to be talking about the next step in the five steps of the retirement income process. Jeremy introduced this topic on the last podcast with step number one, and that was what do you need? So if you haven't heard that podcast, please go back and listen to it. Very informational, and it gives you a great foundation for what we're going to be talking about today. You don't have to stop this podcast. By all means, finish this one and then go back and listen to it. Jeremy, how are you doing?
Jeremy Keil: Doing well, thanks Aric.
Aric Johnson: All right, I'm excited. So we're covering number two today, possibly more depending on what time allows, but what is the second step in the retirement income process?
Jeremy Keil: Well, the second step is looking through and figuring out what you are going to make in retirement. Just because you stop working your normal job doesn't mean you stop making money. A lot of these times you get one shot at making a decision on how you're going to be making this money, so it's well worth it to spend some time and figure out what your monthly lifetime income is going to be looking like.
Aric Johnson: Obviously it's incredibly important to make money in retirement in order to have enough to do everything that you need to do and meet your goals, really all the things that we spoke a lot about on the last podcast. So why is it so important that people know exactly what they're going to be making in retirement?
Jeremy Keil: Well, a lot of people go into retirement and they focus on things like, what are my investments going to do? What am I going to get for interest rates? They're completely ignoring that 20-40% of the money coming in during retirement that might be things that are outside of that. We see people all the time where one spouse retires before the other one retires, or a lot of times retirement doesn't mean completely quitting. It might mean taking a consulting job or switching to a different type of job. There's a little bit less stress, which might mean less money, but you're making money from these income sources like work, whether it’s one or two of you, social security, your pension, and annuities. A lot of these places, especially the last few I mentioned, the pensions, annuities, and social security, you might be making more or less money depending on when you fill out a form and how you fill it out. That's a big deal.
Aric Johnson: Ah, yeah. So filling out a form in the wrong way can obviously cost you in the long run. How do you find out all of that information? I mean, my easy answer is to talk to you, but is there an easy way for the audience to say, you know what, I need to take a look and see if I’ve done this correctly because I am about to retire. What’s your best advice?
Jeremy Keil: That's exactly it. Talk it over with somebody that's done it before. Most of the time, you get to retire once. For folks like us that are retirement planners, we get to do it like once or twice a month, right? We are meeting people all the time that are retiring, and we get to talk through those decisions with their pension, social security, or annuities, all these different types of income that you get where you probably have one, two, or even three. You just have to sit down and think it through and see what your options are.
Aric Johnson: Yeah, and obviously those options are important because some of them are permanent. If I'm not mistaken, I know that with social security if you take it at a certain year, there really is no fixing that if you take it on the very onset. You could have made a lot more if you had delayed it even a month. I think it changes month to month. So that's something to know when you go into it, and plus, I think another issue is that people don't realize how long they're going to be retired, especially with advances in medical technology and all of that. Do you see people accounting for that normally, or are they kind of surprised at what the statistics say?
Jeremy Keil: Yeah, you need a little bit of guidance on all of that or even just talking through their own social security. I'm certain we will eventually spend an entire episode on social security because you certainly can. I've given over 100 talks on social security. I just did a few days ago to the Wisconsin CPA Association. They asked me to come on out and talk to some of their members about how social security works and what they should be looking at with all of that. The second part of what you're talking about there is most people don't understand how long their retirement is going to be. I'm reading this stuff all the time, and if you talk to an average 55 year old and ask them, when do you think you might retire? They'll probably say 65, and then if you talk to them and say, how long might you live? They'll probably say 80. Well, let's go talk to that 65 year old. They're going to tell you, I didn't retire last week. I retired back at 62. Most people retire before they think they're going to retire. That's what the numbers are showing, and most people underestimate their life expectancy. So it's a bad combination that leads to planning for a shorter retirement while you end up getting a longer retirement. When we're talking about these monthly incomes that'll last your whole retirement, it is a big deal. I can see Aric that you're surprised a bit about retiring early, and a lot of times when people think through why they might retire early, usually what comes up is health. What if my health changes? A lot of times it's not your health, but it's your parents' health. When you're 62, how old are your parents? You know, maybe 85 or 90, right? A lot of time you are looking at your parents’ health and thinking, I got to make a change here so that I can help them out.
Aric Johnson: Yeah, I didn't factor that in there. That's a whole different subject that I'm sure we could cover on another podcast as well.
Jeremy Keil: Yeah, and retiring for that reason is a big honorable thing to do, but you have to see how it affects your plan. Like we said, if you're thinking that you will retire at 65 and be done with retirement at 80 and you're looking at a 15 year window, you'll make completely different decisions than if you're looking at it through the real lens that you might retire earlier than you thought. I don't know what it is, but for some reason as humans we don't get the life expectancy game right. I can't blame them. How many people walking around are life insurance actuaries? Not too many people look at those numbers all day, but we are looking at those numbers, and a lot of those numbers show that if you're 65, on average you'll probably make it to 85. What those numbers fail to show is that if there's two of you, it's harder for two people to die than one. If you are a couple, the second person is likely to pass away at age 92. That's what the stats show on average. So if you're planning your retirement and you're 55 thinking that you’ll retire in 10 years and that you’ll have a good 15 years of retirement, well a lot of time you get to age 62 and realize that you might retire early and later on you’re 92 realizing that you had a 30 year retirement. That's what you ought to be planning for most times compared to a lot of times when people are making a decision based on a 15 year timeframe.
Aric Johnson: Wow. Yeah. I think my wife would make it to 92. I'm not going to be the second one.
Jeremy Keil: Well, I hear it all the time, and right now generation and work situations are changing. For a lot of the people we talk to right now, they're retiring and the husband's a couple years older. The husband happens to have a little bit higher social security or pension because it was the wife that took the time to raise the kids. So the wife who is 92 years old is living on a decision that her 62 year old husband made 30 years ago. We got to help you plan that out ahead of time.
Aric Johnson: Yeah. That was like a slap in the face right there because you're absolutely right, and my wife and I are just about the same age, so she will have plenty of time to kick me in the butt for that one.
Jeremy Keil: You got it. You need to think about this stuff ahead of time.
Aric Johnson: Yeah. Well you brought up three different areas, right? I believe it was annuities and pensions, and then we obviously touched on social security, which we will do a full podcast on or maybe even a mini series on social security, but do we want to start with annuities?
Jeremy Keil: Yeah, let's go alphabetical. We'll start with annuities, and let's start there because you hear all the time that people either love or hate annuities. There's no one that says that they are just ok. You either love them or hate them. And a lot of times you even see advertisements about people that hate annuities. You see that a lot, but no one really understands what an annuity is. I taught a few personal finance and corporate finance courses and annuity is a technical word. All it means is that you're exchanging a bit of money for a series of future payments. So you go talk to an insurance company or a pension company and say, I'm going to give you $100 and you will give me some money back over a period of time whether it’s every month, every year, or whatever it is. That's an annuity. The financial service industry has a ton of different types of annuities. So whether you love annuities or you hate annuities, you have to figure out which ones you love or hate because there's just so many different types, so it might be worthwhile for us to figure out a few of those different types that are out there.
Aric Johnson: That's what I was actually going to bring up is that for everybody that's in the audience right now, there are many different types of annuities and different types of products. It really depends on the annuity. You've got to have somebody that knows a lot about it and that has done the research because people hate annuities because they've seen really, really bad ones, and people love annuities because they've seen really, really good ones. So it pays to do the research or find somebody who has done that for you, and I'm excited to get into it because I don't know a lot about annuities. I know that there's different kinds. I just don't understand all the timeframes and all of that good stuff, so teach me!
Jeremy Keil: Yes, let's talk about a couple of them. Then again we could do a whole other podcast just on annuities and I am sure we will do that in the future, but let's just talk about two different types of annuities. One is called a plain payout annuity. It's basically like your pension where instead of getting a big chunk of money, it's not like you called up your pension company and asked for $100,000 out, but instead of something like that you just get this monthly amount, whatever it is, and you have to pay for it. What’s essential about particular kinds of annuities is that they can last as long as you do, just like your pension does too. When you take a look at all these financial researchers, there's all these people trying to figure out, how do we help Americans save for retirement? How do we make sure that they have enough money in retirement? They're just struck over and over again that people don't have enough of these particular types of annuities, and I think the big reason is that people are misunderstanding them. They hear these different words and they're not sure exactly how things work. Another part of it too is they might have been used to the way things were way back when perhaps you gave over your money to this insurance company, you're expecting a dollar amount back every single month, and then you pass away early and your beneficiaries, the people that you thought were going to get your money, didn't get as much as what you thought they were going to get. So there can be some things to keep in mind, even with these types of payout annuities, the ones that the retirement researchers out there are encouraging people to look deeper at. It's a good idea when you look at an annuity to check out some different areas, but even this one that the retirement researchers are encouraging people to explore, you have to be careful and understand what your beneficiaries are going to be getting from this annuity and if that is something that you want to have happen.
Aric Johnson: Got it, and that's the discussion they need to have with a professional, period.
Jeremy Keil: Yeah. You got it. Have a discussion with the person that's helping you out. Have a discussion with the person that's selling it to you. That's where annuities get a little bit of a bad rep too, is that oftentimes the people that are talking to about annuities are making a commission, perhaps a large commission. You know, who knows what large really means, but perhaps a larger commission. There's a lot of fees that are inside of these annuities, especially the ones called variable annuities, so you have to look into these different types of fees and annuities and just make sure you know what you're getting into. It's not necessarily that they're a great or bad product like people call them. You just need to know exactly what you are getting into when you sign up for these.
Aric Johnson: Got it. I know you mentioned variable annuities. Can you just give me a picture or give us a picture of how those actually work?
Jeremy Keil: Yeah, so that variable annuity is basically an investment, right? You put some money aside, and it's supposed to grow up or down with whatever the market is doing, and a lot of times people are required to keep that money there for a certain amount of years. So if you're being proposed a variable annuity, you want to find out what types of investments are there and the fees on those investments. Oftentimes you're required to keep it there for a certain amount of time. The technical term for that is the surrender period, so that's a great question to ask the person helping you out is, what's my surrender period? How long before I can get out of this variable annuity if that's what I want? Along with that, what's the surrender charge? How much might I be penalized if I get out of this early? What's interesting about these variable annuities is that a lot of times they've got these extra features or ways that you can get your money back out of it. I am thinking of someone I met a few years back where they came to me and said, we’ve got this great account. It pays us 5% a year. Okay, tell me about it. Well, it turns out it doesn't pay them 5% a year like they thought. It just meant that their income grew by a bit each year, and there were some very specific rules that they needed to meet to actually get that money back out. That's unfortunate because they went into this account that had fees associated with it, had this lock up time called the surrender period, and they are upset that they weren't getting what they thought they were getting. So they wanted to get out of it, and we run into that a lot of times where people might already have an account like that, and when they find out what the cost is and what it is truly being promised to them, they say, I want to get out of it. I just don't want to deal with that company anymore. And sometimes we say that if you really want to stick it to them, stick with the annuity, stick with that account, and just follow those two or three steps and make them follow back up with you with those promises. If they promised you a 5% payout, make them stick to that and find the ways to get the best out of this contract that you already have.
Aric Johnson: Yeah, because I'm sure like you said that there's fees or penalties associated with cancelling it I’m assuming?
Jeremy Keil: That's about it, and that's what's unfortunate a lot of times when you're getting into these certain kinds of investments is that it gets to be more than even an average financial advisor can understand. That's just a good point to keep in mind whenever you're looking at an investment, whatever it is or whoever's helping you out with it, make sure you understand it. That's one of the downsides we see sometimes is certain accounts have a tendency to be a little bit less easy to understand than others. So that's exactly it. If you don't understand what this word says, if you don't understand the surrender period or the surrender charge, make sure you figure out what that means. Make sure they explain to you what it means before we get into that type of account.
Aric Johnson: Yeah, absolutely. All right. Anything else on annuities before we move on to pensions?
Jeremy Keil: Yeah, that's the main thing when we run into people all the time that have annuities. It's wise to understand how that works, and we're always making sure we educate people on how those annuities work. Those annuities can be a good way to get income because it might show up on a consistent basis every single month. What more do you want in retirement than making sure you get that money this month, the next month, and monthly after that. So besides annuities, and of course we're seeing it less and less these days, are those pensions, but they're still out there. Again, it's a situation where there's one chance for you to figure out what you're going to do with the pension. You fill out the form, send it off to your company, and then you're getting that pension for life. You can't change it. You made your one decision. You might be 90, and you made that decision when you were 55.
Aric Johnson: Wow. I didn't know that. I don't have any experience with pensions, so I certainly don't have one, which it would be nice to have that, but I didn't realize that either. You can't make adjustments to it?
Jeremy Keil: Yeah, generally not. Oftentimes the way a pension is figured out is it's based on your income, how much you earn with the company, and how many years you stayed with the company. It's just crazy how many different rules are out there and how they calculate the pensions, but basically if they figured out that you're owed maybe $1,000 a month for life from their company, there are a few things that you need to figure out. When does that start? A lot of times people have that at the age of 65. A lot of the pensions that are from unions might be a lower age. Sometimes with a lot of people now the companies are pushing out that retirement date to 67 because they're trying to match it with where social security is at. So you might be thinking, I'm going to get a certain dollar amount at a certain age, but there's a lot of reasons why it might be different. You get this pension, and oftentimes once a year they send you this number. Let's just say it's $1,000 a month. You're going to get $1,000 a month when you hit retirement. Well, let's figure out that retirement date that the company you work for is expecting the payout. That’s based on you and your life alone, but a lot of times there might be two of you that are involved here, so if you have a pension and you have a spouse and you go sign up and say, I want to get my $1,000 a month, they'll ask you, do you want that $1,000 a month, or do you want less to make sure that there's a survivorship so that you're able to pass along the remaining part of your pension if you happen to be the first one to die. Well of course if you have this extra benefit where it passes along to your spouse, you're going to get less for it, right? You might get $1,000 yourself, but if you die, your spouse gets nothing. Or maybe you get less. Maybe you get $850 a month, but then if you pass away first, your spouse keeps getting the same $850 a month. That's one of the cautions we have for people. If you spent your lifetime seeing this number of $1,000 a month, whatever it is, and then you show up to get your forms, all of a sudden it feels like they took that away from you. It's $850 if I want to keep my spouse involved as well too. You keep thinking of all these reasons why you need the $150, but you can’t forget about the reasons why your spouse might need the $850, so this is a joint decision here. When you're seeing that number over and over again, the $1,000 a month or whatever your pension has promised, keep in mind that's for you alone. If you are married expect to see a lower dollar amount that will pay off for both of your lives, if that's the best way to take it.
Aric Johnson: Yeah, that's interesting because there's a lot of different factors that go into that decision. You could both be super healthy and you say, well, if I take the $850 my spouse's guaranteed something, but if I take the $1,000, I can take that $150 and invest it or do something with it so it makes money. But who knows when you're going to die because we never know when the bus is going to come for us or whatever tragic story might happen. That's a lot to consider.
Jeremy Keil: Yeah. There’s a lot to figure out there. We see all the time that the husbands and men are the ones that more often are in these jobs that have pensions, especially when it comes to unions. They're thinking about what they can do with that $1,000 a month, but in reality, let's start thinking about what the both of you can do with that $850 or whatever that amount might turn into. This is a joint decision that affects both of you. Make sure that you're both involved, and make sure that you're using real numbers. Just like we said earlier, if you're thinking you're passing on in 5, 10, or 15 years, you might want all that money as soon as you can get it, but if the reality is it's 30 years that it might be paying out to you, that'll be a different decision. So at least use the right numbers when you're looking at this and trying to decide what's best for you and your spouse. There's a company over here in Milwaukee, WE Energies, where we get all of our utilities from out in this part of the world. For WE Energies, for whatever reason when you are trying to see what your retirement benefits look like, they don't really show you that monthly amount. They just show you a dollar amount. They say, oh, your pension is worth $200,000 or $300,000, and we've got a lot of WE Energies employees as clients. I'd say that's probably actually the number one company that our clients are retiring from, so we see this all the time when our clients come in and are used to seeing that number. There's this thing called behavioral finance, and I'm sure you've maybe heard of that area, but some of us might not have. The idea is that a lot of researchers, economists, and financial people say, well, this is what humans ought to do. That's what people ought to do, but then they do something different. That difference is called behavioral finance. Why are people doing different things than maybe what the math tells them they ought to do? One of those terms is called anchoring. When you see that $200,000 or $300,000 on your statement for 5, 10, or 15 years, you start thinking of all the things you can do with it. Then you get this choice of do you want $300,000 or $2,000 a month for the rest of your life. You're thinking the lump sum of $300,000 looks way more than $2,000, right? But you're not comparing that to what $2,000 per month really looks like. So we see that a lot of times where people see this dollar amount and they look at the lump sum and they know what $300,000 looks like, but they don’t know what $2,000 a month can turn into, so it’s important to make that comparison. That's truly an apples and orange comparison, so it's worthwhile to find someone that has made that comparison before that can help you translate what $2,000 a month really means to you or maybe what that $300,000 lump sum really means in terms of a monthly income. At that point you can make a good comparison of what’s best for you or rather the both you.
Aric Johnson: Well, I'll tell you what $300,000 looks like to me. That's a cabin and a bass boat, right? That's the temptation, right? Is that okay? The $300,000 right now is great. We can have that for retirement. We can do A, B, and C with it, but out of that we want to enjoy our first few years retired, so we really need to get that RV. I mean, that won't take that much out of it. Only $50,000. So now we've got $250,000. It can be a slippery slope if you're not disciplined, and again, that's what you're for, to help guide and help be that accountability partner. I know you do that for your clients already.
Jeremy Keil: One thing you didn’t mention there is the tax part of everything. You have to take taxes out of it. So that's another factor. You forget that all these different pieces come into play. We start with one piece which is that you get this dollar amount. Well, what could this mean monthly to both you and your spouse? But then there's another piece coming in with the tax part of it. It's not exactly that lump sum. You don't get that top dollar amount. You're going to take some taxes out of there. So there's so many things that come into play, and that's why it's so important to research a lot of these things. I'm thinking of WE Energies specifically, and there was just someone that we were talking to two days ago. What we do with them is they have this thing called a summary plan description, and it's 20-30 pages explaining exactly how the pension is calculated. It gives you some resources on where you can go to learn more. So that's what we did. We called up and spoke with the pension folks. It turns out there's four different ways this person's pension is calculated. How is that? How's that regular Joe supposed to figure that one out? How's a financial advisor supposed to figure that one out? But it was just so fun to figure it out to make sure that this guy is making the right decision for him and his wife. It felt really good when the person on the other end of the line complimented us both, the client for reaching out to an advisor like us, but then us too, for calling in to ask all these different questions. The guy on the line said that he works in the pension department. All the time people are calling and asking for ways to get their money out. He said that almost all the time it’s the lowest value. It’s not the one that gives them the highest value. It’s because they didn’t take the time to look at this lump sum vs. monthly option. They didn't take the time to see which of these four different options are available. They didn't consider the tax part. Again, it's a decision that you make once that affects the rest of your life, perhaps a rest of your spouse's life. This is a 30 year decision that a piece of paper is going to figure out for you. Spend some time ahead of it to research this and make the right decision for you.
Aric Johnson: Yeah, absolutely. Alright Jeremy, I know that when we started this podcast, we said that there were three things that you were going to be covering: annuities, pensions, and social security. You also said that we could probably have a full podcast just on social security because there is so much information and you work with folks all the time on it. Here's the thing, the first two parts of this were so robust, and I’m sure we didn't even scratch the surface of all the information that you have, but we're at the end of this podcast. Would you be okay with bumping the social security stuff to the next podcast and just doing a full podcast on social security?
Jeremy Keil: Yeah. I think that makes a lot of sense. Social security is such a big topic. There’s a lot of information that's out there and a lot of people making decisions without the full information. I think you're right. It's really well worth it just to spend an amount of time only focusing on social security.
Aric Johnson: Yeah, I think that's great. I think this is a good stopping point for the day. You gave a ton of great information. All sorts of things clicked with me, and I wrote down some notes. If somebody is listening to this right now and they're saying, you know, I need to talk to somebody about this because I had no idea that it could be this complicated just to make these simple decisions on both annuities and pensions, what is the best way to get ahold of you?
Jeremy Keil: Yeah. If you're somebody that has an annuity and you’re trying to understand more about what it costs, what it does for you, or maybe you've got this option to take a pension or a lump sum amount and you're trying to make this decision, we're helping people out with that all the time, so please feel free to just reach out to us. Our website is keilfp.com, or give us a call at 262-333-8353. We would love to get the chance to talk to you.
Aric Johnson: Fantastic. Jeremy, I appreciate your time today.
Jeremy Keil: Yeah, thank you Aric. It has been fun talking to you.
Aric Johnson: Absolutely. For the entire audience I want to thank you for listening to the Retirement Revealed podcast with Jeremy Keil. If you have not subscribed to the podcast yet, please click the “Subscribe Now” button below. This way, when Jeremy comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends, family, and coworkers, and let's face it, somebody listening to this right now is thinking, now I've got some buddies at work that need to hear this, and we should probably talk about it and see if we can help each other out. Please share this with them and they'll appreciate it as they get to know Jeremy and all the information that he has. Again, thanks for listening today. For everyone at Keil Financial Partners, this is Aric Johnson reminding you to live your best day every day, and we'll see you next time.
Thank you for listening to the Retirement Revealed Podcast. Click on the subscribe button below to be notified when new episodes become available. Visit Retirement-Revealed.com to learn more. The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.