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Jane Bryant Quinn, America’s Leading Financial Journalist, Joins Jim Lange
James Lange, CPA/Attorney
Guest: Jane Bryant Quinn
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|Click to hear MP3 of this show|
- Introduction of Guest – Jane Bryant Quinn
- Adjust Your Withdrawal Plan Accordingly
- Inflation and Harvey the Rabbit
- College Education Vs. Retirement
- Dangers With Early Retirement
- Reverse Mortgages and Immediate Annuities
- Plan For Your Spouse With Two-Life Pension
- Delay Taking Social Security Benefit
David Bear: Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks. I’m David Bear, here in the KQV studios with James Lange, CPA/Attorney and author of two best-selling books, “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again.” We are honored to welcome one of the nation’s leading commentators on personal finance, author and long-time CBS reporter Jane Bryant Quinn, to this edition of The Lange Money Hour. For years, Jane’s syndicated columns have appeared in hundreds of newspapers throughout the country, and Newsweek featured her personal finance section. Her classic bestseller, “Making the Most of Your Money Now,” completely revised for the risky new economy, was recognized by Consumer’s Union as the best personal finance book on the market. She contributes regularly to Bloomberg.com, aarp.org and dimespring.com. And so it’s sure to be an interesting and informative hour, and with that, I’ll say hello, Jim and welcome, Jane.
Jim Lange: Welcome, Jane.
Jane Bryant Quinn: Thank you very much, Jim and David.
Jim: Jane Bryant Quinn has an enormous worldwide reputation as a champion for the consumer. But when you read “Making the Most of Your Money Now,” as well as her enormous body of articles, works, TV shows, etc., you clearly get the impression that Jane’s goal is to help consumers, genuinely help them, lead productive lives, retire securely and retire with dignity. Though she’s obviously a woman, she’s not well known as a financial writer who writes on women’s topics. There are other financial experts who specifically hold themselves out as experts for women, and write books addressed to women. But if you review her work, I would maintain that the topics that Jane poignantly addresses, though certainly relevant to men and women, would likely be especially valuable to women. This show will concentrate on listeners who are approaching retirement, or who are already at retirement. Jane, in your book, which I really…by the way, I don’t know if you know this, but I actually have…I call it the ‘no return library,’ and I’ve given out quite a few copies of your book, you know, particularly to people who really need some grounding in a lot of the basic areas. You cover so many. So, we’re actually going to skip the first thousand pages…!
David: It is a tome. It is a tome!
Jane: Actually, Jim, before you get any further, I’d like to just make a comment on what you said about women. I have deliberately never written a book specifically intended for women, and I could have if I’d wanted to, but I didn’t because money is not pink or blue. Money is green, and the idea that somehow, there’s something special or something different or something, you know, I don’t know, dimmer, or whatever it is about women. I think some of these books are quite condescending when they just say, “This is for women only.” I completely disagree with that. I have always believed that good financial planning, men and women alike, look at the same terms, look at the conditions, and a woman doesn’t need a special book baked for her only. All you need to know is basic general personal finance.
Jim: Well, I think that’s a very good point. I guess what I was saying, though, is partly particularly because of longer lifestyles, your emphasis on security, some of your thoughts on Social Security that some of the benefits of reading, yes, are men and women, but sometimes, women might benefit more. But I certainly understand…
Jane: No, I just mean in terms of writing a book, you know. The idea of writing a money book for women only has just always bothered my feminist soul.
Jane: You know, it’s the same thing whether you’re talking about how to make money last for life, yes, women’s lives are longer, on average. Men’s lives are shorter, but both men and women have to plot that out, and the strategies they use to plot that out are exactly the same.
Jim: Well, speaking of the same, and again, skipping the first thousand pages, on page 1013, your chapter ‘How to Retire in Style,’ which, by the way, I thought was perhaps probably the most informative chapter although I think so highly of the book. You put things in a way that I’d never heard it before. You said that you start deciding how much money you could spend, or whether you have enough to retire, if you take your annual needs and multiply that by 25. And that, kind of, the inverse of that, is the old safe withdrawal rate of 4%. Are you still an advocate of using the 4%, or the multiply it by 25, in terms of spending?
Jane: Yes, I am with…the 4% rule says that if you…and it’s been tested on a variety of portfolios, but let’s assume that it’s basically the center, 50/50, half stocks, half bonds, which does not represent a lot of retiree’s portfolios today, I should add, but if you have a 50/50 portfolio and you withdraw 4% of the amount in your first year of retirement, and then the next year, you draw that same dollar amount plus inflation adjustment, theoretically, that portfolio should last for thirty years. So, this is the fundamental 4% rule, and I think that, on the whole, it has served us very well. But in today’s very low interest rate environment, you’re just not getting from bonds what you used to get, and so I would say that when you’re looking at a thirty-year retirement, something like 3 ½% would be a better withdrawal rate if you are saying, “I want to keep my withdrawal steady.” Now, there are different kinds of strategies. You can say, “I want to take the 4%, and if the stock market goes down or my bond portfolio goes down, then I will temporarily take less, and then I’ll take more at another time.” So, people are varying their approaches, but I would say that if you want the absolutely steady approach, as long as we have these extremely low interest rates (and we don’t know how long they’re going to last), 3 ½% would make more sense to me for a thirty-year retirement. Obviously, if you’re older and you’re looking at twenty years, then you’re up to 4% or more.
Jim: Okay. Well, that’s a great answer, and I’ve heard similar things like that, and I’m personally comfortable with the idea of the potential adjustment, maybe if it’s not a drastic change in lifestyle, but the idea of being willing to change your spending a little bit, depending on circumstances, particularly after a bad year.
Jane: Yeah, I mean, this makes total sense to me. Who locks in a plan for thirty years, you know? You just don’t lock it in. But you need a plan to start out with so that you don’t withdraw too much. So, the 4% or 3 ½% is nice to start out with, and then you keep an eye on what you’ve got, how your investments are doing, mostly what you’re doing with spending, which is critical, and then you adjust as you go along.
Jim: Well, I think one of the problems that people underestimate is inflation, and everybody talks about the market and interest rates, etc., but I don’t hear a lot of discussion about inflation, and you have a very good discussion in the ‘How to Retire in Style’ in your book “Making the Most of Your Money Now.” And you make, what I think is, a wonderful analogy. So, I’ll ask you: why is inflation like Harvey the Rabbit?
Jane: Well, you have to remember that Harvey was invisible, and only his co-star Jimmy Stewart could see him, but his performance, Harvey’s performance, was so riveting that the rabbit stole the show. And I think of inflation as the rabbit, as Harvey, simply because you don’t particularly notice it, especially at low rates, but it’s creeping along there anyway. It’s a little bit invisible to you, but over time, it reduces your spendable income, and this is why you continue to invest in stocks for growth even at a younger retirement age, and this is why, when you look at what you’re withdrawing from your 401(k) or your IRA, wherever your money is, that you need to plan for an inflation adjustment as you withdraw just to keep your purchasing power steady. Now, for older people, sometimes…they’ve been doing some studies about consumer price inflation and older people, and some say that the inflation rate is much higher for older people because of medical care. Other studies have suggested that it’s not because older people simply aren’t making as many purchases as they used to, so it’s not entirely clear that inflation is higher for older people than it is for younger people. But, at any rate, inflation is there and you have to consider it when you’re planning what your income is going to be in the future.
Jim: I think that might be particularly true of people who have fixed pensions, and I think there are a lot of people that don’t really believe that Social Security’s going to quite live up with the cost of living.
Jane: We’ll have to see if they change the way that they calculate Social Security cost of living. But first, Social Security will be there, and the only reform for it on the table is to change from the current consumer price index to something that they call a ‘chained price index,’ and what that means…and that’s just like 0.1 or 0.2 percentage points below the consumer price index, and what the chained index assumes is that…let me just say, what regular consumer price index assumes is that if the price of chicken goes up, you’re going to keep on buying chicken and you’re going to pay more for it, whereas the chained inflation says, if the price of chicken goes up, maybe you will switch to something that’s cheaper. And so, that probably reflects consumer behavior pretty well, and they are now talking about whether the chained price index should be used for the automatic increases for Social Security. We’re a long, long way from doing that, but Social Security will always have an inflation adjustment and will be there.
Jim: Well, I know you are…you do make that point, and we’ll come later on in the show specifically about Social Security. You have a couple really good rules in the section called ‘Piling Up the Cash,’ and a few that really hit home for me (and I have clients in this situation), you said that if you’re saving for both retirement and college for your children, that you should put retirement first. Now, I have some clients who are absolutely not taking this advice. By the way, I have said this to clients, Jonathan Clements has basically said the same thing on the radio show, but I have clients who said, “Hey, look. When I was growing up, the deal was my parents always paid for undergraduate, and maybe even graduate school, but at least for undergraduate, and I’m going to do the same for my children.” And I have a client specifically right now, and this guy, I mean, a very hardworking couple. He works, like, in a machine-type environment, repair, and he’s making about $55,000 a year, and he is basically putting all his savings into his child’s education, who’s going to school for the bargain sum of $60,000 a year. What advice would you have for a guy like that? And it’s not like he’s loaded and he can afford it. Let’s say he has a half million dollars in an IRA and maybe a small pension on top of that, and he’s nearing what for most people would be retirement. What would you advise for somebody who is wrestling between paying for their children’s college education when their own retirement is not still quite secure?
Jane: First, I have to say I’m a little puzzled about that case because if he’s making $55,000, his child should certainly not be paying full rate for $60,000 at school. So, I’m not clear whether he has properly applied for student aid. Is there a hitch there?
Jim: Well, let’s even say that there is some student aid, or maybe it’s a little bit less than $60,000, but that was actually the number that the client gave me, and I actually was not perceptive enough to say, “Hey! Why didn’t you…?”
David: Spending his entire year’s wages, yeah.
Jim: That doesn’t make sense!
Jane: Yeah, go fill out the FISA form tomorrow!
Jane: But I think that the idea of what we have to pay for our children’s education is highly overblown, and we like to say “I want my child to go to any school they want.”
Jane: That seems like something that parents like to feel. But the way to lower your college costs really are to manage your child’s expectations from a pretty early age, and say, “You know, if you can get into a school that has a high cost but you can get practically a 100% scholarship, fine. You know, apply, let’s do it, let’s go. But otherwise, we’re going to be looking at state schools. 80% of the students in America go to state schools, and they get great educations and they’ve got a great future. An in-state school in particular where you pay in-state tuition is the right thing to do.” And we have to encourage our children to pay attention to what the cost will be, not only for the parents, but for the kids when they get out of school.
Jane: We have a terrible problem with student debt going, but we also have a growing and terrible problem with parent debt because parents are taking out these private loams to go to school. They’re taking out PLUS loans from the government…
Jim: They’re mortgaging their houses.
Jane: And you’re seeing higher and higher amounts of debt, part of it’s student debt, part of it’s mortgage debt, for people going into retirement. And at a certain point, that becomes very difficult to pay, and the government, if you’ve got a lot of parent loans that you took from the government, they will go after you. You know, they can garnish not only your wages, they can garnish your Social Security, they can garnish your disability, you can’t get rid of the loan in bankruptcy. To take out loans to send your child to college when you are close to retirement age is very dangerous unless you really have a lot of money. And if you have a lot of money, you should pay cash.
Jim: Well, I think that that’s some very good advice, that clients are, at least…I have a lot of professors and engineers and people who are highly educated, and they just assume that that’s what they want for their own children, and it sometimes scares me because I’m thinking, “Well, gee. What if this guy gets sick and he can’t work, and he has debt, and he has insufficient assets to spend what he wants during retirement.
David: He wants the return on his investment, there.
Jim: Well, that’s another question. I think Jane’s implying that you get a better return on a state school than a, you know, even a $60,000 a year like CMU.
Jane: You know, the number of bankruptcies of people in their seventies and eighties are going up. The treasury is starting kind of a larger scale program to garnish Social Security for people who had their student loans, or their parent loans, and didn’t repay. There are about 150,000 Social Security accounts being garnished right now up to 15%. So, you know, there’s a point at which going into retirement with a large loan is just crazy, and if you want to take out loans to help your child go to a school, you want a loan that you know you can repay over ten years, maximum, but ideally, repay it before you retire. You’re probably looking at having to work longer. But not having…there’s another angle to this. You know, if you don’t have enough money to retire on, and at some point, you are broke, who is going to take you in?
Jane: Your child is going to have to take you in, and there is an increased number, I did a column on this for the AARP, an increasing number of parents going to live with their children, not because they’re frail and alone and old, but because they’re broke. And that’s a terrible, terrible, embarrassing situation for the parents to be in, and it’s a tough situation for the children to be in, and I know you don’t think about that if you’re eighteen or nineteen and you’re going to college, but you really need to say, “I want to be sure that my parents are in good shape when they retire.”
Jim: I don’t know who’s quaking more, the children or the parents.
David: All right. Well, listen, let’s just take a quick break right here.
David: And welcome back to The Lange Money Hour with Jim Lange and Jane Bryant Quinn.
Jim: Jane, in your book, which by the way, I would recommend all our readers get. This is, like, the classic. It’s called “Making the Most of Your Money Now.” Consumer’s Union gave this an award for the best consumer book out there, and I think it’s just terrific. But anyway, in “Making the Most of Your Money Now,” you write “Don’t kid yourself about early retirement.” And I have clients, actually, and a brother who’s probably not listening, who want to retire earlier than I feel comfortable with them retiring, and it sometimes scares me, and you have some pretty strong feelings about retiring early, and I think what’s a little bit even worse is sometimes you have money managers or financial advisors who, while you are working, they don’t have an opportunity to make money because all your money’s in your 401(k). So, they actually have an incentive because, presumably, if you retire and that money is available, they either manage it or they use it to purchase products. They have an incentive to tell you to retire early, where I’m just kind of like the conservative fuddy-duddy who worries about people running out of money when they’re older. So, again, self-interest, I’ll tell people not to retire. But you have some strong feelings about retiring early, and maybe if you could inform our listeners of some of the dangers, or what you do think about the possibility of retiring early.
Jane: Retiring early is a dream for many people, but they just don’t have the money to do it, and to retire early, I mean, you want to retire at 55 and you might live to 95, I mean, how are you going to live? How is your money going to last? You shouldn’t even think of retiring early unless you’ve got really a lot of money and you’ve run it through some kind of a good financial plan that tells you what is my income going to be? Now, people often get a target in mind. “I want a million dollars.” “I want two million dollars.” “I want whatever.” You know, the dollar number isn’t the point. The point is, how much annual income can you withdraw from your Social Security, of course, which you don’t get until 66, your Social Security, your pension (if you have one), and your savings. And can you live on that amount of income? And it’s very difficult to put together enough income at, you know, 53, 54 or 55, to actually live for the rest of your life and your spouse’s life, if you’re married, because one of you, at least, is likely to live to 90+, and I’ll say something else, too, not just about the financial side, but also about the emotional side. You know, a lot of people say, “Oh boy, I’m going to retire early. I’m going to do all the things I always wanted to do, and then you retire early, and you say, “Hmmm, now what was that that I always wanted to do?” And there are a lot of emotional issues that come up after the first joy of saying, “Ah! I don’t have to get up this morning and go to work!” There’ve been a lot of psychological studies, you know, a year later, the fact that you don’t have to get up in the morning and go anywhere becomes a very tough thing to live with. There’s a lot of depression. There’s a lot of difficulty, and people have to learn a new way of living in retirement so that they fill their days. They feel productive. They feel valuable. And it’s not always easy to get from here to there even if you retire at the regular retirement age. At the early retirement age, it’s even harder, and you have that huge risk of running out of money. Back to your point about people who are encouraged to retire early, what might happen is that a broker or an insurance salesman comes up with some kind of a plan, probably not a good one, showing you can live the rest of your life just fine on your pension. They probably forget to put in inflation. And they say, “Retire early, you’re fine. I will put all of your 401(k) into a tax-deferred annuity, and that’s going to throw off a future income for you and you’ll be fine.” And they do that because tax-deferred annuities have a very high commission rate for them, and once you do that and you’re retired, and if the plan doesn’t work (and it very well might not work), you’re stuck.
Jim: Well, I would agree with you. I mean, I’m personally an advocate of low-cost index investing, and I know last show, you really railed on annuities and got me in a little trouble with a few of the people who, let’s say, if we’re going to be generous, genuinely believe that it’s the right thing for the client. But I would kind of say, “Well, gee, if you’re making 8% to 10% off the top, is the insurance company really going to invest the money that much better that it makes it worthwhile, so…”
David: It’s not guaranteed, you know.
Jim: Well, supposedly it is, but on the other hand, if you read the fine print, a lot of times, that guarantee is a death benefit. The other thing that I find clients don’t take into account, you know, I ask people how much they spend and I get incredibly low numbers, $3,000 a month, $4,000 a month, and sometimes even lower, and then they say, “Oh, by the way, I did just redo the driveway. I did just redo the roof. We need a new furnace coming up.” And they have these, let’s say, not annual recurring events, but they do have very predictable costs and they don’t take those costs into consideration, and particularly for a long retirement, that’s even scarier.
Jane: Sure, because they’re going to have those expenses, and their car is going to conk out and they’re going to need another car. They’re much better off looking at what their annual expenses were over an entire year, not just looking at their monthly running rate, and once they’ve got that, then these special expenditures pop out and they’ve got to say, “Well, this is going to happen, or something’s going to happen during my retirement, too,” and I think that gives them a better picture.
David: Something always happens.
Jane: Something always happens, yes!
Jim: And the other thing that scares me is that some of them say, “Well, gee, I look at my parents. They didn’t really get around that much when they were older. So, I’m going to spend more money now, and then I’m going to spend less money later on.” And I think that that’s problematic, and actually, speaking of the safe withdrawal rate, we had Bill Bengen on, who did the original analysis on the safe withdrawal rate, and he said, “No. That thinking about spending more now and less later doesn’t apply because, a lot of times, you will have increased healthcare costs when you are older, and that therefore you really can’t afford to ‘spend more now, and plan to spend less later.’”
Jane: Mmm-hmm. You’ll have increased healthcare costs. There will be decreases in other things. I think that for somebody extraordinarily disciplined, if you have such a client, spending a little more now to travel for a couple of years, or do something unusual, is not out of the question. But then, you have to say, “Okay, at the end of this couple of years when I take all the trips I never took because I was working too hard, how much will I have, and then how much will I have to live on for the rest of my life, and can I do that?” I think it really goes against human nature if you say when you retire, furthermore, you should never travel and you should never do this and you should never do that, and sometimes, it does amount to a little more in the first year or two. But the key is, once that little binge is over, you sit down and you look at what you’ve got.
Jim: Yeah, and I actually think that it sometimes…I mean, the common rule of thumb is that you’ll spend less money after you retire than when you’re working, and what I would think is for at least a lot of my clients and probably a lot of our listeners, that that might not be true because I think, for some people, one of the reasons they don’t spend more money is because they’re too busy working. And if they weren’t working, they would be traveling and they would get involved in hobbies and they would do things that cost money.
Jane: Yes, they would, but of course, they’re not paying such high taxes. So, there are other things that offset the costs of hobbies, and statistically, in fact, people do spend less as they get older. Maybe it’s because they have to because they don’t have the money, but maybe it’s because, as I say, after that first burst of a year or two, they start looking at their budget and they start thinking differently about what they have. And downsizing is not at all unusual, as I’m sure you know among your clients. I certainly see it all the time. You don’t think you’re going to, but then all your friends are, you know? A lot of people do. They sell a big apartment; they buy a smaller apartment. I’m a New Yorker, so I’m thinking about it that way. I’m seeing it very much among my friends, who have a reasonable amount of money, but they start saying, “You know, I do want to travel more. I want to spend it in a different way. I don’t need a big apartment.”
Jim: Well, you actually have a great chapter in “Making the Most of Your Money Now” that talks about housing choices and some of the different options that retirees have. One of those is, you talk about a reverse mortgage and I get the impression that you like the idea of the reverse mortgage, but you don’t like the fees that come along with it. Is that a fair characterization?
Jane: I think it’s a fair characterization with an exception, and there are exceptions due to unusual circumstances. First, a reverse mortgage is something where just…your listeners probably all know about it, but I always just like to make a quick explanation where you can take equity…basically, you’re taking equity out of your home. It’s not a loan because it doesn’t have to be repaid. But you can take out the equity. You can take it out as a credit line. You can take it out as a lump sum, and then you have that money, and you do not have to repay that money, that reverse mortgage, until the house is sold. So, you are taking a loan against your equity, and when the house is sold, which means if you move, if you go into a nursing home, if something happens, you sell the house, only then do you have to repay the loan. Until that time, the loan is yours, tax-free, to use. So, it’s an expensive loan. There are a lot of fees upfront, and I have always thought that the time to use a reverse mortgage is only later in life when, if you’ve run down other money and you really are in a state of health where you can stay in your home and you want to stay in your home, that this is the last kind of loan you should take. So, you should wait until your late seventies or your eighties before you start thinking about a reverse mortgage, and then, you may decide you don’t want it anyway! You say, “I’ve had it with cleaning the gutters. I’m going to buy an apartment!” So, that is generally what I’ve always thought about reverse mortgages. Here is one exception, and it’s an exception for people who have…basically, I would say, for people who have money. Interest rates are so low today that you can get a larger line of credit against your home equity than you could get if interest rates are higher. So, taking it now and having a large line of credit, even if you don’t use it now, you’ll be able to get a larger line of credit against your house than you would if you took it ten years from now, assuming interest rates are up ten years from now. Now, that is speculative. I would only do that if I had a lot of money and I thought, “Well, it would be good to have that there so that I could use it for expenses, and I could let my investments…I have more stock investments. I could wait and let them grow.” It’s an interesting planning device that’s being kicked around by planners now, which is different from the usual advice on a reverse mortgage. I wouldn’t use it if you had kind of a middle income, but it’s something that people with higher incomes are looking at.
Jim: In “Making the Most of Your Money Now,” you do talk about tax-deferred annuities, which you have been on a history of not being a fan of, but you do advocate immediate annuities for some people, and right now, interest rates are probably pretty much at an all-time low, and presumably, with an immediate annuity where you give an insurance company a chunk of money and they give you an income stream, perhaps, every month for the rest of your life, in the low-interest environment, you might not get as much as if you purchased an immediate annuity when interest rates were higher. What is your thinking now on immediate annuities, and do you still like them, but maybe wait a little bit until interest rates go back up?
Jane: You know, it’s very hard to advocate immediate annuities now when you’re getting such a low return on your money. It may be necessary for some people because they are frightened of running out of money, and they want that monthly check no matter what, but I would hate to advocate immediate annuities when you get such a tiny, tiny return. Although people are always working on these things, right, Jim? So, I spoke to a planner who’s been getting very interesting theoretical results when he combines a portfolio of immediate annuities at today’s rate, and the other part of the portfolio is 100% stock. So, no bonds, 100% stock. And with different kind of splits, you know, 80/20, you know, 30/70, 20/10, in general, this is producing, theoretically, a higher return than the traditional 60/40 bond/stock portfolio. Now, whether that actually is going to work out, I don’t know, but this is what’s so interesting about our time, Jim, is that there are so many people working on these kinds of plans of how to live on your money for the rest of your life, and new ideas are popping up everywhere you look.
Jim: Well, and that might even be an argument against getting an immediate annuity now. By the way, I would agree with you. I don’t think now’s a good time to purchase an immediate annuity. So, when I have college professors, for example, who have been in the habit of annuitizing their TIAA-CREF, and I say, “Why don’t you wait until interest rates are higher before you annuitize?” and they say, “Well, what should I do in the meantime?” And I say, “Well, just spend money from your portfolio and have some type of well-diversified low-cost index fund as your base investments.” They kind of look at me like I’m a crazy guy, but for whatever it’s worth, I like the idea of an immediate annuity where you are guaranteed a certain income for the rest of your life that, let’s say, combined with Social Security, is maybe enough to, you know, keep shelter over your head and food on the table and maybe gas in the car, but I don’t think that locking in that immediate annuity now makes a lot of sense.
David: Well, this is probably a good place to take one more break.
David: And welcome back to The Lange Money Hour with Jane Bryant Quinn and Jim Lange.
Jim: Jane, in your book that I’ve really been plugging and highly recommend to our readers, “Making the Most of Your Money Now,” you not only address immediate annuities, but you also stress the importance of covering both husband and wife for the rest of their lives. So, sometimes, when somebody has a pension and they are retiring, they have a choice of, let’s say, getting, whether it’s $3,000 a month, or whatever it is, or they could take a smaller amount, but have that guaranteed for both the husband’s and the wife’s lives, in which case, they would both be protected. And I know that there are a lot of insurance agents who say, “Well, gee, you’re better off taking the single life, getting the higher income, and then protecting the surviving spouse with life insurance.” And I was wondering if you had any opinions about doing a one-life or a two-life pension, and whether you thought a one-life and insurance would be appropriate, or what some clients do (it just bothers me to no end) is they take a one-life, and then they don’t do any insurance.
Jane: I have a very strong opinion about this, and that is…
Jim: You have a strong opinion about a lot of things, but go ahead!
Jane: Who, me??
Jim: Who, ME???
Jane: If you have a pension, and you have it to cover only your own life, how selfish can that be? Now, if your spouse has a pension of her own and it’s equally good, well, you know, that’s fine. If you have plenty of money so you don’t need your pension, that’s fine. But if the spouse needs that pension money to live on and you cover only your own life and then you don’t care about it because you’re dead, I’ll tell you: not only will your spouse not be happy with your memory, neither will your kids. And it’s very important to make any kind of forward planning when you’re looking at how much money you’re going to have, what kind of monthly income you’re going to have to live on, you look at it not only as a couple, but you look at it as if one of you dies, if the other one of you dies, how much money is there going to be? Because you remember, also, if one of the couple dies, there’s going to be less Social Security, too, because the spouse benefit will vanish. You are absolutely morally required to make sure that your spouse is going to have enough to live on. Now, the idea of taking a single pension and then a life insurance policy, generally known as ‘pension maximization’, that is so risky for the wife. It just upsets me. First, most of the illustrations don’t work. Ideally, the extra money you get from your pension is supposed to be paying for the life insurance premium, so it all works out. I, once upon a time, held a contest when I was working for Newsweek. I said, “Okay, all you life insurance guys out there who say, ‘You can pay for this with, you know, your pension money and you still have the same standard of living,’ show me how you do it. Send me the illustrations.” Well, I got a whole bunch of illustrations, and you want to know? Every one of them had something wrong with them. They didn’t consider taxes. They didn’t consider one thing or another. So, those illustrations, they show you how its going to work out, it’s not going to work out. But then, aside from that, so you die, so your spouse, your wife has an insurance payout. How do you know that your wife is going to be able to manage that money to give her a decent income for the rest of her life? Maybe it will be invested badly. Maybe the same insurance person who sold you the life insurance will sell her an annuity that doesn’t work for her. You know, it is putting your spouse at tremendous risk. So, if you have the opportunity to have a Joint and Survivor pension that covers your spouse, I just think you are morally required to do it.
Jim: Well, I happen to agree with you. That certainly is in a minority view, certainly for the financial planner world. Let me ask you this: is there a compromise position? Because sometimes, clients say, “Well, how about if I take 100% for me and I guarantee a 50% benefit for my spouse?”
Jane: Well, oh sure, I’m a spouse. “Sure honey, I don’t mind living on less after you’re dead!” I don’t think so! Sorry, I don’t think so.
Jim: Well, I agree with you, but, by the way, I would say the majority of my clients actually don’t take 100% for the spouse, and I’m usually advocating something that they don’t want to hear, and a lot of times, I’ll even start the meeting by saying, “Is it okay if I represent both of your interests?” and they usually say yes, and then, I don’t understand how having anything less than a two-life pension is really representing the life of the survivor.
Jane: And what do the spouses say? Or are they not sitting there?
Jim: Well, no. They are sitting there. Interestingly enough, and I think that this is going to change, but I think, interestingly enough, I think a lot of times, the wife is just kind of going along because the husband has been the money guy, and I really don’t like that at all, and I feel I almost have a moral obligation to stick up for the wife, even though presumably, I’m representing both husband and wife, and saying, “Hey, no. This just isn’t going to work, and let’s do some analysis of what happens if the husband dies early,” and basically, what it comes down to is the wife is not going to be able to maintain the same lifestyle, and the argument that “Oh, well, they’re not going to need as much to spend,” I don’t go for that because…
Jane: No, I don’t go for that. That is incredibly selfish of husbands who say, “Oh, she’s not going to need as much.” And as I say, he’ll be dead so he won’t care, but his family will not remember him fondly if he has left his wife, his children’s mother, without enough money to live on.
Jim: Yeah. The other decision that I think can work very badly for, let’s say, the dependent spouse is the issue of when to take Social Security, and I know that you have some strong opinions on that. So, if you could tell us a little bit about your opinion for taking Social Security, and why don’t we assume that there is a husband and a wife involved, and that one of them has a stronger Social Security record than the other. What would your advice, in general, be for people’s plan…?
Jane: Yes. My advice, in general, would be please don’t take Social Security at 62, because you’re going to get a 25% reduction if you are the wage earner, or if you have, on your own benefit, you’re going to get a 37% reduction if you’re taking a spouse benefit. So, wait. Don’t take Social Security benefits if it is at all possible financially until your full retirement age, which is 66. Now, at 66, there’s really something fabulous you can do to stretch the total benefit that you will get as a couple over your lifetimes. And so taking the case that you offered me, say, if the husband can file for retirement benefits at 66 and then he gets his full retirement pay, but he can suspend them, meaning he doesn’t collect. If he doesn’t collect, his retirement benefit continues right up to age 70, gaining 8% a year plus the inflation rate. So, at 70, he can retire with a much higher benefit than if he took it at 66. But, because he filed at 66, his wife can file for…at her full retirement age, can file for spouse benefits on his account. So now, she’s collecting spouse benefits, but her own worker benefit is now still increasing 8% a year plus the inflation rate. So, theoretically, they could both claim their separate benefits at age 70 and do much better than if they had claimed them earlier.
Jim: Well, by the way, I happen to strongly agree with you, and I’ll add one little piece of information to the party, that if you hold up on your Social Security, and if you are retired, that will also give you more room to do Roth IRA conversions, and I ran a couple numbers that show the difference between taking Social Security at 62 with small Roth IRA conversions and waiting until 66 and then do apply and suspend, and during your lifetime, even if you just live until age 86, you yourself (forget your kids for the moment) are better off by $219,000 in today’s dollars, and then, if you don’t spend all that money and you die and you eventually leave it to your children, your children are actually better off by $519,000. So, I would agree with you. The other advantage of waiting is when…it’s again going back to the issue of protecting both spouses, if you wait, and then, let’s say, either one of you dies, the survivor will then get a higher income for the rest of their life, which is protecting them.
Jane: Umm-hmm. It’s definitely good for spouse benefits, and if the wife, say, does not have a large benefit of her own and it’s even better if the wife does have a decent benefit of her own. But, you know, it’s interesting, Jim, psychologically, it’s often very hard to get people to wait. There’s someone in my family who I was talking with about doing this, and they should absolutely wait until 66, but you know, he was saying, “Well, what if I died early? I would be giving up all that money.” So, the whole idea of “I’m afraid I’ll lose something if I don’t take it right away” is a very, very strong psychological urge, to which I’m trying to convince him that the danger is not that he’ll die early, but that he’ll live too long, and as long as he lives past his life expectancy, he is a winner on Social Security because he will get more than he would have if he had taken it earlier. But, psychologically, it’s a very interesting hump to get over.
Jim: Yeah, and I’ll just add one more thing because everybody’s waving at me: but Larry Kotlikoff would say to the family member that you’re talking to, “If you die early, you’re dead. You don’t have a financial problem. What your problem is is living a long time and not having sufficient income to live comfortably.”
Jane: For sure!
David: So, with that, let’s say thanks to Jane Bryant Quinn, who can be reached directly at her website, www.janebryantquinn.com, and thanks also to our program coordinator Amanda Cassidy-Schweinsberg, and as always, you can her an encore broadcast of this show at 9:05 on Sunday morning here on KQV, and don’t forget Jane Bryant Quinn’s book “Making the Most of Your Money Now,” and you can always access the audio archive of past radio shows, including written transcripts, on the Lange Financial Group website, www.paytaxeslater.com, and while there, check out the latest video clip of Jim’s interview with John C. Bogle, founder of the Vanguard Group, who explains what hurts the everyday investor now. And finally, please join us on Wednesday, May 1st at 7:05 for the next edition of The Lange Money Hour when Jim’s guest will be Jack Tatar, author of “Safe 4 Retirement: The 4 Keys to a Safe Retirement.”
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.