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How to Make Good Decisions that Will Lead to a Secure Retirement
James Lange, CPA/Attorney
Guest: Julie Jason, JD
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- Introduction of Special Guest – Julie Jason, JD
- Determining Safe Withdrawal Rate
- Should You Borrow Against Your Home to Enhance Retirement?
- Determining When to Take Social Security
- Choosing a Financial Advisor
- Understanding Fiduciary Relationship
Nevin Harris: Hello, and welcome to The Lange Money Hour, Where Smart Money Talks. I’m your host, Nevin Harris, and of course, I’m here with James Lange, CPA/Attorney and best-selling author of the first and second edition of Retire Secure! and now his new book, The Roth Revolution: Pay Taxes Once and Never Again. Jim is the president of a CPA firm and prepares tax returns, a law firm that drafts wills and trusts, and a registered investment advisory firm that provides cutting edge retirement and estate planning strategies. Tonight, Jim is joined by Julie Jason. Julie is a great champion of the consumer in the financial services world. When AARP, that is the American Association of Retired People, wanted to publish a book about making decisions regarding retirement, they tapped one of the great consumer advocates, Julie Jason. Her fifth book, The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad, has received several awards and was named one of the top ten business books of 2010 by Booklist. With both Jim Lange and Julie Jason, two world-class retirement experts, you are sure to enjoy a lively and informative conversation. It is a pleasure to have you on the show, Julie.
Julie Jason: Well, thank you, and it was quite an introduction.
Nevin Harris: Well, you’re very welcome. But before I turn it over to Jim, I want to remind our listeners that the show is live, so please feel free to call in. The number is (412) 333-9385. Good evening, Jim.
Jim Lange: And hi Julie. I actually added that part about the champion of the consumers. I was reading your book and then talking with you in preparation of the show, and I thought, “Wow, here’s a woman who is really trying to help people,” and I really mean that. So my hat is off to you both, and your practice and your books. I genuinely got the feeling that you have nothing but the best intentions for people, and that is also the type of author that AARP looks for. Anyway, when we spoke, you said that one of the things that you were very interested in, particularly these days, and it’s actually something that we have addressed on the show, and I’m also very interested to get your take on it, is the issue of the safe withdrawal rate, or how much money retirees can spend in retirement. So, I was wondering if you could tell our listeners a little bit about some of your thoughts on the safe withdrawal rate and how they can determine how much money they can safely afford to spend given the resources that they have?
Julie Jason: Yeah, you know, if you think about it, that’s really the most important question you can answer if you’re approaching retirement or in retirement, and the problem that I keep coming in contact with is people who think that there’s some sort of magic number that is the answer, and you see either a 3% or a 4% or a 5% or, even when I was writing the AARP book, just a couple of…it came out in 2009. At that point, financial advisors were actually saying you could take out 8 or 9 or 10 or even 11% safely out of your portfolio, and of course, there is no magic number, and the reason why there isn’t is because it all depends on how much you need to live on and how you invest and how long of a horizon that you have ahead of you. So, it is a completely personal sort of exercise, and one number will be appropriate for one person, and another number will be appropriate for another person, and it may change as markets change, and also, inflation changes. So, there’s no quick answer to this.
Jim Lange: But that’s what our listeners want to hear. They want to hear the quick easy answer. But let’s try to look at this a little bit more specifically. One of the things that you said that was very interesting, and something that I agree with, and I think Bill Bengen, who did some of the original research in this area, would talk about is actually the length of time that you need the money. So, let’s say, for discussion’s sake, and I know that you don’t like a one-number answer, but I think, at least traditionally, 4% of your portfolio was deemed the safe withdrawal rate. In other words, if let’s say we make it a nice easy number, that you have a million dollar portfolio and you could safely withdraw 4%, or you could, in effect, take out $40,000 a year and within a reasonable probability, never run out of money. Well, and that might be a starting point. You might argue that it should be smaller than that, but I think both you and I would agree that that number might be even too high, or at least you certainly don’t want to go over that if you are sixty years old and you’re very healthy and your parents lived to be one hundred. On the other hand, if you’re ninety-five years old and you just went to the doctor and the doctor said, “Oh jeez, that spot on your lung is inoperable,” then obviously, you could afford to spend a lot more than 4%.
Julie Jason: Yeah, the time horizon is one of the elements that need to be looked at. No one knows how long he or she is going to live, obviously, but a sixty year old’s plan should be at least thirty to forty years. So, you’re right. The longer the horizon, the lower the rate should be, but as the devil’s advocate, let me ask you, Jim: if all of your money is in CDs, would you say that a 4% withdrawal rate is the right number?
Jim Lange: Well, what I would say, of course, what Bill Bengen would say is he has actually, in effect, recommended portfolios for different safe withdrawal rates.
Julie Jason: Right, so it really depends on how you are invested and how you think of risks as to what that safe withdrawal rate might be, and of course time horizons, but when you really sit down with a client and you take a look at their cash flows, and you take a look at how they’ve been investing, you can draw some conclusions as to what might make sense for the future, but it really is investment-dependent and market-dependent, and of course cash flow-dependent.
Jim Lange: Well, I would agree with all of that. At the risk of oversimplifying though, what I would like to do, and you can certainly make a counter-argument, is to give people, say, some guidelines rather than just saying “Oh gee, it depends on your situation.” So, if you like, I will talk about, let’s say, some of the guidelines that I see both in the financial planning association and Bill Bengen, and maybe you can respond by saying if you think that would be appropriate. And by the way, if I was a listener, this is I think very important information. And these might be a little bit higher in terms of safe withdrawal rates than you might be comfortable with, Julie, but I’d be very interested in your reaction. So, he would say for a 45-year time horizon with a 65% equity allocation and a 35% fixed income allocation, that 4.1% would be the appropriate safe withdrawal rate. And then, let’s say, a 25-year timeline would be a 4.7% safe withdrawal rate with a 45% equity allocation, and for a 10-year time horizon, so you’re really talking about people in their late 70’s or even 80’s, that the maximum safe withdrawal rate would be 8.9%, and that would be with a 40% stock and a 60% bond allocation.
Julie Jason: So, the intention there is to go down to zero, to have a terminal value of zero at the end of that period? Is that right?
Jim Lange: Well, I think that he would say that that’s not necessarily the goal because none of my clients have successfully spent their last dollar and died, mainly because they’re too prudent so they would not do that, but that is the number that presumably they could spend without the intention of leaving money to the next generation.
Julie Jason: Yeah. As a money manager, I would argue with every single one of those.
Jim Lange: I figured you would.
Julie Jason: Let’s go back in history a little bit. In 1999, we’re in the middle of the internet bubble market, so in January of 2000, I actually had a couple come into the office and they were referred by a very good client of mine so I had to be really, really nice to them, but they wanted to go 100% into the technology market, and they had a really well-invested portfolio that was a good collection of classic high dividend paying stocks, well-managed companies and bonds, and their allocation probably was about a 60/40 allocation, and what they wanted to do was move 100% into technology because they felt left out. So, I told them that I would not be able to do that for them and that they would have to do that somewhere else.
Jim Lange: Good! Good for you.
Julie Jason: Right, and they were very upset, I have to say! It was a very difficult thing for me to do. So I say what’s the market doing if they had moved 100% to technology stocks, or let’s say they moved 60% to technology stocks. They would’ve lost 85% of that technology provision, and let’s say they were in their eighties. Would they have been able to withdraw 8.9% of the portfolio? No. The portfolio would’ve gone to zero.
Jim Lange: Well, sure, and of course, I am making assumptions about a well-diversified portfolio that I perhaps didn’t speak to. The reason why I like to give people some number, and I understand that it depends on what the portfolio and what’s going on right no, is that I just didn’t want to be namby-pamby and not give anybody any guidance.
Julie Jason: Right. See, if I were to come up with a number, I would be really looking at the down…see, here’s another aspect of it. Now, someone who invests on their own, if they’re applying these numbers and they’re investing on their own and they really don’t spend much time doing any research, let’s say they just look at Money magazine and pull some hot stocks or hot mutual funds and they’re buying funds because of past performance, they need a lower withdrawal rate because you need lots of experience in the market to really know how to withdraw a higher number. So I think it’s also experience-based. Someone who is working with you would have your guidance. Someone working with me would have my guidance. So we can take on a little more risk than the average person. I don’t think that there’s enough said about that. I think this is why it is so personal because it deals with cash flow, but it also deals with how does the individual address risk? And many people, left to their own devices, address risk in the wrong way. The Morning Star publishes data on investor returns. If you look at investor returns, you’ll see that people pull out of the market at the wrong time and they put their money into the market right at the wrong time. So, their actual returns generally are nowhere near the return of the actual, let’s say, mutual funds. Their returns are just lacking that mutual fund return. So, if you also give them the idea that they can pull out a high number, that just compounds the problem. They’re taking money out at the wrong time, putting money in at the wrong time, and then they’re taking out a high number. So that’s why it’s so hard to give an exact number, but your suggestion at being at four-and-a-half percent, I would lower to 2% if they have no experience and maybe 3% if they have a little more experience and perhaps 4% if they are experienced. If they’re working with someone who has experience, such as you, for example, then that’s a different matter altogether.
Jim Lange: And I guess I was assuming a well-diversified portfolio, and to me, one of the reasons that you use a money manager is not necessarily because you’re shooting for the moon, but because you are looking for a downside protection, and you’re not gonna get that by putting it all in CDs and fixed income, but by a very broadly well-diversified portfolio, and I think that that is the underlying assumptions of some of the numbers that I gave. But it’s still fine to, if anything, you want to err on the side of being conservative, that is, not going over, and what you don’t want to do is be ninety years old and broke.
Julie Jason: Right. You don’t want to move back in with your children.
Nevin Harris: Alright, Julie and Jim, we’re gonna take a quick break. When we come back, we’ll continue this conversation. I want to remind our listeners out there that we are live tonight, so if you have any thoughts and you want to chime in, you can give us a call at (412) 333-9385. We’ll be right back in a minute with Julie Jason and Jim Lange on the Lange Money Hour.
Nevin Harris: Hello there, and welcome back to the Lange Money Hour. This is Nevin Harris, and I’m here with Jim Lange and Julie Jason, author of The AARP Survival Guide.
Jim Lange: Anyway, back to the topic, Julie. I’m still looking for a little bit more retirement income for some of our clients, and, you know, I’m not talking about some of the products. One of the things that we have not taken into account in the calculation of safe withdrawal rates, and I am interested in your take on this, is, let’s assume, for discussion’s sake, that somebody has a paid-up home. So, if we go back to our initial example of having a million dollars in investible assets, and I understand that you’re a little bit uncomfortable with the 4.4% safe withdrawal rate that I used for a twenty-five year life expectancy, but let’s even say that we knock it down to 4% if it’s managed responsibly, or even less. What can we do if, or how can we adjust our thinking if there is a paid-up home, and let’s assume, for discussion’s sake, that the fair market value of the home is maybe $300,000?
Julie Jason: Are you thinking in terms of a reverse mortgage?
Jim Lange: Well, I was actually expecting you to bash a reverse mortgage!
Julie Jason: Well, I think reverse mortgages are, you know, there’s a lot of advertising that goes on on television and the like, and the thing about reverse mortgages that you have to be careful of is that it really is a lifelong decision because they can be extremely expensive, and people going into a reverse mortgage only think in terms of the money coming out, and it is just one of these solutions that you want to just be very, very careful that you understand exactly what you’re paying, what can happen if there’s default on the mortgage and what do you have at the end of the process. So, let’s say that you need to go into a nursing home, and let’s say that you’re away from that home for more than a year, and there’s a possibility that the bank could take that home away from you, and if the cost of a reverse mortgage is very high, which it can be, then there may be no value for your children. So, it’s just the sort of thing that you just really want to address very carefully before signing on. It’s not one of these ten minute-type of decisions.
Jim Lange: Well, I would agree with that. I love the concept of it. I like the idea that, in effect, you could spend more money in retirement and not leave all the equity of your home if that’s not what you want to do. On the other hand, sometimes some of the costs and restrictions and the importance of that decision might lean you in other directions. I know that what Jonathan Clements says, and I’ll be interested to hear your take on this, is that he says when you are calculating the base for what you multiply the safe withdrawal rate, that you can actually take 60% of the fair market value of your home into account. So, in other words, what he would do is he would say, “Okay, the fair market value of the equity,” or, in this case, a paid up home would be $300,000, and 60% of that is $180,000, then he would multiply that number times the 4% or the 4.4% or whatever safe withdrawal rate you are using, and he would say that it is safe to spend that on the theory that at some point in your life, you could either get a reverse mortgage, a traditional mortgage, a home equity loan, or, if absolutely necessary, to sell the home, but he would say that income-hungry retirees would not be limited purely to the safe withdrawal rate times their portfolio value. I don’t know if you have ever used…
Julie Jason: Yeah, you know, I have not seen that argument, but I could tell you, you could probably tell I’m a little more conservative than a lot of folks.
Jim Lange: Well, I can tell that, and that’s one of the reasons why I say that you are the consumer advocate.
Julie Jason: Yeah.
Jim Lange: You want to make sure that none of your clients are broke when they’re old.
Julie Jason: Exactly, exactly. Personally, I would never do that, and I have to ask whether this theory come up during the housing bubble, or whether it’s still applies today?
Jim Lange: Well, I’m not exactly sure of the exact timing. I will tell you, though, that Jonathan Clements and I did an article that did appear in the Wall Street Journal, and the gist of it was that you might do better with a home equity loan, even if the intention is to never repay the loan in full to get additional money. And the other thing that, of course, these days, it’s getting harder to get a mortgage, and this might be another area where you might be more conservative than I am, but I would hate to see people have a terrible restriction on their lifestyle when they have a huge amount of equity in their home, and the possibility of borrowing against it, either with a traditional mortgage or a home equity loan would be a possibility for them to enhance their retirement.
Julie Jason: Again, jumping in is just the devil’s advocate, with a home equity loan, one would then take cash out of the home, and then have, typically, a variable interest rate where they would owe money at a variable interest rate, typically, right? It sometimes can be fixed, but…
Jim Lange: Yeah, I actually would obviously prefer fixed, but I would probably agree that more home equity loans are variable than fixed.
Julie Jason: So, the scenario would be, let’s say, you know, somebody has, let’s say somebody takes $100,000 out of the home. So now, they use that money for lifestyle, or do they use that money to invest?
Jim Lange: No, no, I would never take money out and invest it, and I wouldn’t even take out $100,000. What I would do is, I would, if necessary, and by the way, I wouldn’t do it if cash flow was good. I would do this as a, let’s call it a last resort if it is needed. So, rather than taking out $100,000 trying to invest it, or trying to do something with it, is I would say well, I know that I have $300,000 of equity in a house, and, if necessary, let’s say that I need another $10,000 or another $20,000 per year, and maybe I won’t need that for five years or ten years or, I hope to plan so that I would never need it, but knowing that that equity is there in the back of my mind, I could then afford to spend a little bit more than if I had zero equity in the home.
Julie Jason: Right. I can see the logic.
Jim Lange: Okay. I would take it out in smaller chunks as needed.
Julie Jason: Yeah. I can see the logic.
Jim Lange: It bothers your “spidey senses.”
Julie Jason: Well, it does because you know why? Because my theory is you can’t retire on plastic, and that’s a way of doing that. You know, it’s basically using your house as a credit card. One more thing: I see a lot of people who are approaching retirement and are in retirement, as I’m sure you do as well, and one of the things that I find is that the people who are really successful at retirement, meaning people who are happy and financially secure, tend to be the ones who are aware of how much they’re spending, and it doesn’t mean that they’re necessarily watching every dime or that they’re living with a budget, but they’re just aware of the cash flow. So, one of the things that, and I’ll just give you a really quick example. If I walk into the grocery store with a credit card, I’m really not paying attention to what…I don’t add up everything when I’m running in to buy something at the grocery store, but if I have a $20 bill in my hand and I left the credit card in my office, I add up everything. And in retirement, that attitude of knowing where it’s coming from, where the money’s coming from and what I’m spending really helps people achieve a sense of security, and I’ve seen it time and again. I’ve seen people with tens of millions of dollars, if they don’t have a handle on the cash flow, they may not have enough to live on, whereas somebody with a tiny amount, again, if they’re aware of their cash flow, and it comes down to this. It comes down to looking at what the pension income is, what the Social Security income is, and then looking at the essential expenses and seeing if there’s a match. And if there is a match, if the pension income and the Social Security income cover the basic expenses, then you can monitor the discretionary expenses and come up with some number from the portfolio that makes sense to maintain that lifestyle.
Jim Lange: Well, I think I have a lot of clients who would like you because, what I sometimes see is probably the opposite, and maybe it’s just the type of people who are attracted to the kind of information that I provide, and most of my clients are not the ten and twenty million dollar types. They’re the, let’s call it, the $500,000 to $2,000,000 or maybe $3,000,000 types, and they are, let’s say, and I would even think a lot of the KQV listeners are the kind of people who worked very hard, got married young when they didn’t have a lot of money, worked for twenty-five, thirty, thirty-five years, put money in their retirement plan, but it was hard to save money. They were paying for their kid’s braces, and then later on for their college and their car payments and the mortgage payments, and now, after retirement, they have a significant amount of assets and retirement income, and I find a lot of people, in that situation, actually being very thrifty and maybe even your conservative safe withdrawal rate number spending actually far less than they could afford. I don’t know if you run into that?
Julie Jason: Well, I actually do run into that, as well. I do run into people who are spending less than what they could spend, and I don’t want to give the impression that we start your portfolio to withdraw only one or two percent. We start your portfolios based on what the demands of the portfolio are. So, what are the income demands, and then we structure in such a way that creates those demands. But of course, the numbers have to work correctly. As I said before, you know, you as a professional and I as a professional, we can structure a portfolio that can take on more risk than the average person can do, and the reason for that is that we have a mechanism to deal with anything in the portfolio that’s not working properly, whereas the individual investor left to their own devices doesn’t have that mechanism. They just don’t have the software. They don’t have the data. Many times, they don’t have the research to back up when and why something should be sold. So you can structure a portfolio to create more income, and I say income, you know, it can be total return or it can be income so that the lifestyle needs are met. But again, it takes someone with that experience to be able to deliver that.
Jim Lange: And earlier, you made the point that one of the problems with being a complete do-it-yourselfer is that we are emotional animals, and when the market is very volatile, including times like right now, we feel very nervous and we tend to get out of the market and, in effect, sell low, and then, when the market does well, we start to feel really good and we buy into it, which, in effect, is buying high. So, we’re selling low and buying high which is the worst combination, and sometimes the discipline of a financial professional can save us from that.
Julie Jason: Right, exactly.
Jim Lange: Yeah, as you had mentioned, even people investing in, let’s say, Vanguard or a particular mutual fund does worse than the index or the mutual fund because of the emotional buying decisions. I’m still trying to pick up some additional income for our retirees, and I know one of the areas that you like to talk about is Social Security, so I was wondering if you could tell some of our listeners some of the strategies that you like for people who are approaching retirement or retired, and what they should be thinking about and when they should be thinking about Social Security, and perhaps maybe the different cases of if they are single and if they are married.
Julie Jason: Okay. Now, Social Security, I have to say, is something that is not as easy as it looks, and I hate to say this, but individuals really have to call up the Social Security department and look at a couple of different scenarios. So, if they want to retire at the age of 62 or 65 or put if off until later, what they can do is, they can do a break-even analysis, and there is a tool on the Social Security website that allows you to do that. So, you can actually model out when would be a good time to take Social Security, and the theory is the longer you wait, the higher the payment, and all of these numbers are run based on actuarial assumptions, so they turn out to be, if you live long and you started at 62, you will get more Social Security benefits than if you waited and lived a short life. Now, I suppose the other thing to point out is that if somebody is divorced and has been married for more than ten years and not remarried, people tend to forget that there may be a benefit for a divorced person that they could look up. But Social Security, surprisingly, is not as simple as it should be, and there I really caution people to just take their Social Security number to the Social Security office and get advice for their particular situation.
Nevin Harris: Alright, Julie and Jim. We’re gonna take a quick break. When we come back, we’ll continue this conversation. I want to remind our listeners though out there that we are live tonight, so if you have any thoughts and you want to chime in, you can give us a call at (412) 333-9385. We’ll be right back in a minute with Julie Jason and Jim Lange on the Lange Money Hour.
Nevin Harris: Hello there, and welcome back to the Lange Money Hour. This is Nevin Harris, and I’m here with Jim Lange and Julie Jason, author of The AARP Survival Guide.
Jim Lange: And Julie, I would agree with you that the number of years you expect to live is an important variable in deciding when to take Social Security. And I do want to get to the issue of if you are married, but there’s one other thing that I’d be interested in your opinion on, and this actually is not an original idea. This came from Larry Kotlikoff. Larry Kotlikoff is an economist at the University of Boston, and we were talking about the same type of idea, that is, if you take it early and you live a long time, and let’s say the break even number of years is something like 82 or 83 and you live until you’re 95, you would’ve been much better off if you had waited until age 70, but if you die early, you have been better off taking the money early and enjoying the use of the money, and I was having a similar conversation with Larry Kotlikoff and Larry, this was live right on the radio. He didn’t even say “Jim.” He said, “Lange, quit thinking like an actuary!” And I said, “Oh, sorry, sorry!” and he said, “The idea is, you don’t want your clients to ever run out of money or be uncomfortable when they’re old. You’re better off waiting because that guarantees you the future income. If you die early, you’re dead! It doesn’t matter!” So, there are different ways of looking at it!
Julie Jason: I love that, I love that.
Jim Lange: Yeah, I thought that was pretty good. But I will tell you that I have found, in practice, that that is a fairly tough sell. When somebody has been expecting to take Social Security, and even if they weren’t gonna take it early, if they were expecting to take it at 66, and they come in and I say, “Hey, look, you know, you look great. You don’t have cancer. You don’t have health. Your weight’s appropriate. Your parents lived well into their nineties. If you do, you’re likely to end up much better off by waiting,” and that’s a little bit of a tough sell. They usually want to take it earlier.
Julie Jason: Yeah, I’ve noticed that as well, and again, it comes back down to cash flow. If other money is there, enough to support people in their lifestyle needs, than delaying Social Security is really the best course of action.
Jim Lange: Yeah, and I sometimes split the baby a little bit. I’m a little bit reluctant for people who have nothing but IRA money to have to withdraw IRA money and pay income taxes on it while they are deferring their Social Security.
Julie Jason: Yeah, that makes a lot of sense. It depends on where the money’s coming from.
Jim Lange: Yeah, so I’m gonna try to split the baby a little bit. Alright, the other thing that Larry talked about, and I don’t know if you use different strategies, and let’s forget for the moment for the divorce strategies that you had pointed out before. Let’s assume that you have a married couple, both, let’s say, at Social Security age, maybe at 66. Do you have advice, and I guess it could be, you could do either working or not working, do you have advice as to when you would take Social Security, and if there is anything special that people in that situation, and here, what I’m doing, is I’m distinguishing between single and married people.
Julie Jason: Actually, I don’t. How about you?
Jim Lange: Oh, alright.
Julie Jason: What would you do in that situation?
Jim Lange: Well, what I like to do, and this is actually a little trick, and this will be an interesting one for you. What I like to do, and I’ve actually looked at some numbers on this, and the numbers work out very, very well, and sometimes the difference over a lifetime could be $50,000 or more, and let’s assume that you have one who is typically financially stronger than the other. In the old days, that was usually the man. That situation is certainly changing, but let’s, just to keep things simple, let’s assume that the independent, or the one who has the greater earning power…what we have found is a very good strategy is to apply for Social Security and then suspend collection, and you think, well gee, what good did that do? You applied for it and then you said I don’t want to get the money. Then what you would do is you would have the spouse apply for Social Security based on the husband’s benefit. Now they will get half the benefit. So, in that situation, what you would have is, you would have, let’s say, the husband applying and suspending so nothing is coming in the husband’s name. The wife would then make an application based on the husband’s earnings, would get, let’s say, roughly half of what the husband would get. Then that pattern would continue, and what’s very interesting is even though the wife is collecting based on the husband, it is not held against the husband when the husband starts collecting on his own at age 70. So, every year, the husband’s getting an 8% bump in terms of what the monthly benefit is gonna be, despite the fact that the wife is actually collecting on his amount. Then, when the wife turns 70, what happens is…then, in the meantime, she hasn’t collected anything on her own account, so her own account is continuing to build. And in that scenario, particularly if one or both of them are long-lived, you can end up getting a lot more money out of Social Security. And that’s kind of a little-known little wrinkle to Social Security…
Julie Jason: Very interesting.
Jim Lange: …where the idea is you apply and suspend, and it was very interesting. By the way, a quick side story with Larry Kotlikoff. So, Larry actually went through that analysis on this show, and I thought it was really good, and when I was writing a book about Roth IRA conversions, I wanted to put that in because the other advantage of holding up on your Social Security is that your income is lower. That is more advantageous for Roth IRA conversions, and one of the problems that you have to be careful of with Roth IRA conversions is that you make a conversion that will bump people’s income up that will result in increasing the tax on Social Security. So, Larry’s strategy of holding up on the Social Security fit in very nicely with my strategy of doing a Roth IRA conversion early. But I wanted to make sure that I had Larry’s strategy right, so I got out a transcript of the show and I tried to nail it, but to make sure that I had it right, I actually e-mailed the chapter to Larry to make sure that it was right, and what he did was, he got back to me and he made maybe about two paragraphs worth of an additional thought that was excellent, and my mom, who is actually 94 years old and she still edits my books, and believe me, my book had plenty of red ink after my mom was done with it, but for the two sections that Larry wrote, he not only didn’t have any red ink on it, but at the end, she put “Very good!” So, that’s an interesting Social Security…but earlier, you had mentioned that if you have Social Security and a pension that covers at least a large portion of your basic expenses, whether they be the property taxes or if you’re still renting and the food and things like that, that that gives you a little bit more leeway on your portfolio, and I agreed with that.
Julie Jason: Yeah, it’s all cash flow.
Jim Lange: Yeah. And the other thing that you write about and that you talk about, and I think it’s an important thing for our listeners, is you talk about different standards of care between different advisors, and you have a very good section in your book on how to pick an advisor, and you talk about fiduciary duty and the different fiduciary duties of different types of advisors, and I think that might be a good area for our listeners to hear about. So, if you could talk a little bit about the fiduciary duty and duty of care and how to pick an advisor?
Julie Jason: This is an interesting area because there have been a number of surveys done by the regulators of what the individual investor perceives to be the way of the world when it comes to engaging a financial advisor, and the perception is that every financial advisor, no matter what kind of financial advisor it happens to be, is held to a fiduciary duty. So, the public thinks that every financial advisor is no different from every other financial advisor in terms of duty. So there’s an educational process that needs to go on to explain to the public that there are different kinds of financial advisors, and it all has to do with regulation. So, there’s a lack of awareness that different advisors are regulated under different sets of laws. So that’s the starting point. Now, I recently saw something that was put together by a consulting firm teaching financial advisors how to present themselves as fiduciaries, so these were fiduciary advisors, and what was interesting about that was that it was presented incorrectly. So, here’s a consulting firm that’s teaching financial advisors how to tell their clients what they do as fiduciaries, and what they said is that you must take a holistic view when you approach your clients, and then you’re acting as a fiduciary. Well, that has nothing to do with fiduciaries. So, what a fiduciary is is very simple. It’s it you have a conflict of interest between yourself and your client. A fiduciary is required to put that in writing and to address that conflict of interest and to act in favor of the client. So, a very simple example is a hidden fee, and there are many financial products that have hidden fees built into them, and it’s not something that is, you know, it’s a standard in the industry that certain products are sold and a commission is paid to the financial advisor, but that fee that is paid to the advisor is not clear and it’s typically not known to the consumer unless they ask for it. So the fiduciary must disclose that fee to you. The non-fiduciary does not have that disclosure requirement. So, a product with a hidden fee is not illegal for a non-fiduciary advisor, whereas it is illegal for a fiduciary advisor.
Jim Lange: Yeah, and by the way, I just realized that I have missed something that is very important. I did not give people a strong enough plug for your book. I think we mentioned it at the beginning, but I do want to do that. Julie’s book is The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad. Actually, Julie’s written five books, but that is at least the one that I like the most, or that I liked, and Julie, are they better off getting that on Amazon, or should they go to your website if they are interested?
Julie Jason: Either way. Amazon has the book, and my website is really easy to remember. It’s just www.juliejason.com.
Jim Lange: Okay, so again, that’s The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad by Julie Jason, and you can find that at either amazon.com or at juliejason.com.
Nevin Harris: Alright, Julie and Jim. We’re going to take a quick break. When we come back, we’ll continue this conversation. We’ll be right back in a minute with Julie Jason and Jim Lange on the Lange Money Hour.
Nevin Harris: Hello there, and welcome back to the Lange Money Hour. This is Nevin Harris, and I’m here with Jim Lange and Julie Jason, author of The AARP Survival Guide.
Jim Lange: Julie, we were talking about different standards of care and you used the example that if somebody was perhaps selling a product that had some type of commission that that had to be disclosed, and by the way, I’m a fee only advisor, so I am not a product guy. But I would say also that there are other conflicts that people might not know about, and that is, even forgetting the issue of how an advisor is compensated, there might be a difference in what is best for the client. In other words, as a CPA and an attorney and a registered investment advisor, the regulations make it very clear that I am required to make recommendations that what I think are in the best interests of the client, not in my own best interest, and I know that that is the same with you, both in terms of a regulatory as well as a moral standpoint, but I don’t know if everybody appreciates that that is not the same standard for everybody.
Julie Jason: Yeah, and this goes back to the survey data. The survey data tells us that the public is unaware that that is the case, and, you know, people ask me well, isn’t that a terrible thing? And the truth is that regulation exacts accountability and the consumer needs to be aware of the regulation. So, people who are held to a fiduciary standard must put the interests of the client first. That typically shows up, Jim, don’t you think, in terms of fees and commissions because that’s the first thing…how do you put somebody else’s interests ahead of yours? Well, first of all, you don’t sell something or you don’t take an action that can be harmful to the client and beneficial to you, and that, many times, is a fee-based decision.
Jim Lange: Yeah, and I would agree with that. I know also, and I don’t want to mention any names, but I know that there are certain financial institutions that might have a reason to sell a particular product or a particular security, and either through direct commissions or other methods of encouraging their sales force, will try to, in effect, encourage people to buy a particular product when it might not be in the client’s best interest, where you and I would have both the legal and the moral and, let’s say more importantly here, the legal responsibility, and we are regulated. So the advice we give must be in the best interest of our client.
Julie Jason: Right. And then, you know, if you think of physicians, for example, an ophthalmologist may also be selling eyeglasses to make it more convenient for his patients, but then again, it’s in the ophthalmologist’s interest to sell eyeglasses. So, you have these conflicts everywhere. So, it’s just a question of being able to identify the conflicts and be able to understand what your role is as a client. So, for a non-fiduciary relationship, the client must ask what are you getting paid if I buy this product? What other products have you considered, and why do you think this product is the best one for me? It doesn’t have to be a product. It could be a course of action or an investment recommendation, but it’s quite interesting to see that there are big differences, and as one is approaching retirement in particular, it is extremely important to understand what your role is as a client and what is the advisor’s role and to probe if there is no disclosure document given to you that sets out what the duty is of the advisor. It’s your responsibility to ask for that, and it’s a way to find out if you’re working with a fiduciary or not.
Jim Lange: Well, I think that’s very good advice. Although, personally, I would kind of go along with, I believe his name is Blaine Atkins, who is very interested in changing the regulations, and what he wants is, he wants all advisors, whether they be insurance salesmen or stockbrokers or registered investment advisors to all have the same duty of care, which would be a full fiduciary, and frankly, I would like to see that because it then means that people are going to get better representation.
Julie Jason: And again, it depends on disclosure. It all turns on disclosure, what is given to you in writing that tells you what the deal is, you know, how am I getting paid, how’s the advisor getting paid, how is the advisor making decisions, and what are the conflicts in writing. That’s the fiduciary that under the law right now has to provide you with that kind of disclosure, and if you are working with an insurance agent, for example, who could also sell you products that are retirement income products, for example, there is no such requirement, and I know that there might be good options there and good solutions offered to individuals, but because of the non-fiduciary relationship, it’s up to them to ask those questions.
Jim Lange: Well, and frankly, this might sound a little bit self-serving, but personally, I think it would be better to just go to somebody who does have a fiduciary obligation rather than to make somebody who doesn’t disclose that they don’t, and then try to be very leery about what their recommendations are. In other words, I would rather go to somebody who I know is acting in my best interests and has to act in my best interests, rather than somebody who says, “Hey, I’m not required to act in your best interests, and here’s what my recommendation is.” Anyway, the book is The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad by Julie Jason at amazon.com or juliejason.com. This is Jim Lange. You’ve been listening to the Lange Money Hour, Where Smart Money Talks.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.