Originally Aired: November 12, 2014
Topic: Retirement Decisions to Make Right Now, with Ray LeVitre, CFP
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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- Introduction of Ray LeVitre, CFP of Net Worth Advisory Group
- ‘Safe’ Withdrawal Rate of 4% Is a Flexible Guideline e
- Divide Retirement Assets to Address Immediate, Future, Long-Term Goals
- ‘Bucket Approach’ Allows You to Better Manage Stock Risks
- Replenish ‘Cash Bucket’ With Bond or Stock Earnings, Depending on Market
- Rebalancing Borrows From Good Investments to Boost Lagging Investments
- Taking Social Security at 62 Has Advantages and Drawbacks
- ‘Apply and Suspend’ Can Enhance Social Security Benefits, Especially for Wives
- Joint-Life Pensions Are Essentially Life Insurance
- The Fiduciary Question: Does Advisor Work for Me, Himself or His Company
- Look for Advisor Who Is a CFP With at Least 10 Years’ Experience
Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
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 studio with Jim Lange, CPA/attorney and author of two best-selling books, Retire Secure! and The Roth Revolution: Pay Taxes Once and Never Again. If you are thinking about leaving the workforce and retiring, know that decisions you make now will have a profound financial impact on the rest of your life. Most people only retire once, so it’s important to do it right. To offer insights on the subject, we welcome Ray LeVitre to today’s show. With more than two decades experience in the financial services industry, working with Fidelity, Citicorp, Mutual of New York and Merrill Lynch, Ray started a fee-only financial planning firm, Net Worth Advisory Group. The author of The Retiring Boomer’s Financial Handbook and 20 Retirement Decisions You Need to Make Right Now, has also been featured in Money magazine, Newsweek, Kiplinger’s and the Chicago Tribune. Jim and Ray will discuss a range of topics: Do you have enough money to retire? When should you start collecting Social Security? What about medical expenses? How much of your retirement portfolio should you invest in stocks, bonds and cash? How to identify the investments that are right for you. What about life insurance? Should you pay off your mortgage at retirement?
Listeners, stay tuned for an interesting and informative hour. And since our show is live, you can join the conversation. Call the KQV studios at (412) 333-9385 with your questions and comments. And with that, I’ll say Hello, Jim and welcome, Ray.
Jim Lange: Welcome, Ray.
Ray LeVitre: Hi. It’s good to be here.
Jim Lange: Well, I’ll tell you what. Your book 20 Retirement Decisions You Need to Make Right Now is a great source of information in many areas, but rather than trying to cover all 20 of them and not do a very good job, what I’d like to do is kind of delve into a couple of the ones that I thought provided some real insight, and some of the ones that I think are very valuable.
Ray LeVitre: Excellent.
Jim Lange: One of the issues that I think is really important, and of course it’s related to do I have enough money right now to retire, is the related issue of safe withdrawal rate. So, if we could have a little discussion assuming — we’ll get into the specifics of Social Security maybe later on — but assuming X dollars in Social Security, maybe $25,000 or some number, I’d like to discuss how much money people need to have to retire, and since people have different lifestyles, and the way we typically measure it on how much money they can pull from their portfolio, we usually measure that as a percentage of their portfolio. So, if the portfolio is a million dollars, the classic Bill Bengen analysis is, OK, you can spend 4 percent, or $40,000, from your portfolio and do that for the next 30 years. I would be very interested in what your take on the safe withdrawal rate is, and what you think you need in terms of how much money do you need to retire now?
Ray LeVitre: Good question. I think, first of all, the safe withdrawal rate at about 4 percent, like you mentioned … actually, a lot of studies kind of come back and say that that’s, you know, that’s doable. But I think you have to go a little bit further than that and you need to do some projections as you get close to retirement and while you’re in retirement and look at a number of different things that could impact how much you’re taking out of your portfolio.
So, typically, what I’ll do with someone that comes in and has this question is, we’ll plug it into some software and say, “OK. What would happen if you were to spend 4 percent from your portfolio every year? How long would it last?” And then, with that, we’ll start throwing some curve balls at it, like what if we have higher inflation? Then how long will it last? What if we have longevity? What about that? What about, you know, a nursing-home stay somewhere along the way? And see how the portfolio can handle all of those potential problems as they arise going forward. And then from that, step back and go, “OK, based on all of that, it looks like we can spend somewhere between $35,000 and $45,000. You know, given your scenario, do you want to be on the more aggressive or conservative side, which would dictate yeah, let’s withdraw $35,000, or let’s withdraw $45,000.” So, it really depends on … there’s a lot of factors, but I think 4 percent gets you in the ballpark. But then, you need to take it another step and really say, “Hey, could this handle all the things that might come up in the next 30 years?”
Jim Lange: Well, how would you answer some of the commentators who say, “Well, 4 percent might have been fine back when Bill Bengen did the analysis 25, 30 years ago, but gee, right now, CDs are paying, you know, 1 percent or 2 percent. The prospects for the market are not as high. We have greater volatility.” We’ve seen, just in 2008, you know, practically a 50 percent drop, and if somebody were to retire tomorrow with, say, 50 percent or even more of their reserves in the stock market. Is 4 percent really a safe rate, or is that just kind of a guideline that you can go on understanding that there is a risk that it could end up less than 4 percent?
Ray LeVitre: Sure, and that actually speaks to planning, and that’s something you should be doing, you know, if you’re retired and you’re taking money out, you should be revisiting that question every six months to every year, and basically doing the same thing. “Here’s how much money I have. Here’s how much I’m withdrawing. Will it last?” And if you’re on top of that and if you feel like you’re spending a little bit too much, then you have a chance to adjust some things in your budget so that you don’t in fact live longer than your money. But, the other part of that, and the other thing that people I think should do as well is to do some Monte Carlo calculations where you can basically go in and do some statistical analysis and say, “Let’s look at the probability of hitting my goal. I’m given lots of different possibilities from a return standpoint.” And that analysis takes into account having periods where you have great returns, and periods where you have poor returns, and then says, “OK. Given all of that, could you still hit your objective?” — meaning not running out of money too soon.
Jim Lange: And probably, for our listeners, we should clarify the 4 percent. So, let’s again go back to the million dollars, and if you’re going to use a 4 percent, that means you could take out $40,000 the first year. And then, according to the Bill Bengen analysis … he’s kind of like the classic author on this work … the next year, you could take out $40,000 plus inflation. So, let’s just say, for discussion’s sake, that inflation is 3 percent. Then you could take out $40,000 plus 3 percent, or I guess that’s 41 something. Then, the next year, you could take out $40,000 plus two years’ inflation, and theoretically, you could do that without looking at what the underlying value of the investments are. Now, I’ve always been too afraid to do that. I’ve always said, “Well, even if we’re going to use 4 percent, I’m not going to just never going to look at the value of the portfolio again, I’m going to reassess.” If the market goes down, at least consider the possibility that we’re going to take out 4 percent of the new number, not 4 percent plus a number of years inflation on the number the year that you retired. And I don’t know if you’re doing it that way, or how you’re doing it. So, maybe I’ll ask you that question: 4 percent of what?
Ray LeVitre: Yeah, and I think that’s a good question, and it comes back to the planning. We meet with our clients every six months, and clients who are withdrawing money, we look at, “Hey, here’s your current balance, whether the market’s been up or down. What withdrawal rate could you sustain based on that current balance?” And so, it may be that you’re in a 2008 market. Your portfolio’s dropped. Hopefully, you weren’t too aggressive and it’s dropped maybe 15 percent or 20 percent instead of 50 percent. And then, you ask the same question: “Given my balance right now, if I want it to last for 30 years — or whatever time frame you’re looking at — how much can I spend safely?” And you’d be probably pretty safe if you just said, “I’ll take 4 percent of that amount, whether the market’s up or down.” And I actually did a study in my book that says, what if I took 5 percent of the balance at the end of every year?” So, here’s my nest egg. I take 5 percent out of whatever the balance is at the end of the year. That also takes into account market ups and downs. So, I think 4 percent, I think you just use that loosely as, “Hey, this’ll get you kind of in the ballpark, and then you have to decide, ‘Do I want to be a little more aggressive or conservative?’ ” And the way to decide that is on an ongoing basis, to continue to look at it, continue to do the projections.
Jim Lange: And the underlying investments make a big difference. So, interestingly enough, sometimes people think if they are more conservatively invested, that that allows a higher safe withdrawal rate, but actually, as John Bogle points out with inflation, if you have too much money in fixed income, and you’re earning 2 percent and you’re taking out 4 percent or 5 percent, that you’re chopping away at principle, and you’re not going to be able to maintain your lifestyle in your older years. So, he advocates a better diversified portfolio that will also take into account inflation and have some upside potential.
Ray LeVitre: Yeah, and I would agree with that. In fact, I think probably most of my retirees as they enter retirement are about half stocks, half bonds, give or take. And typically, what we’ll do is structure the portfolio, and this is the recommendation in my book, so that you’ll have one to two years worth of living expenses in cash, so money markets, CD, bank, wherever you’re keeping that. The money you might need in years, say, three through 10, is money we put in bonds, typically. And money that I don’t need to cover my spending for 10 years or more is the money I keep in stocks, generally speaking. And that way, if the stock market drops, I don’t have to get too concerned about it because I have 10 years before I need that money that’s invested in stocks, and so I can ride out those ups and downs.
Jim Lange: Now, do you actually maintain those in separate portfolios, or is it all kind of just mushed together?
Ray LeVitre: It depends on the client, but typically, it makes sense to say, “Hey, let’s have the money you’re going to spend in the next year or two. Let’s have that in the bank, and you’re controlling that, or in a money market, and you always know … we’ll keep replenishing that from the portfolio, but you always know you’ll have one to two year’s worth of income sitting there in the bank, which hopefully means you won’t touch the portfolio, and let it do its thing” And so, generally speaking, everything else would be in a brokerage account or an IRA account, and be somewhat, as you said, I don’t know if it’d be jumbled together, but in the same account.
Jim Lange: It’s interesting that you say that because we actually take a very similar approach. Particularly one of the money managers that I work with, and as I mentioned to you when we were speaking privately, the way our office works is I, in my office, do the strategic work, like Roth IRA conversions, Social Security strategies, how much money you could spend, tax planning, et cetera, and our joint-venture partner P.J. DiNuzzo of DiNuzzo Index Investments does the actual money management using Dimensional Fund Advisors, which is a low-cost set of index funds, and he has what he calls the DiNuzzo Stack Analysis, where he does something very similar to what you do, where he has a certain amount of money, let’s say in six months or a year, that would be, say, cash. Now, he might break it down a little bit more and say, “OK, well, what about years two to five?” And that’s pretty much going to be bonds and maturing CDs and things that are very liquid, and then as you go out, maybe years six to 10, a higher percentage of stocks and equities and then, maybe, beyond year 10, a much higher and potentially then even different portfolios for different types of tax statuses. So, for example, he will typically have the most aggressive portfolio, that is, the highest percentage of stocks in the Roth IRA on the theory that that’s going to be the last dollars that we’re likely to spend. And that sounds like it’s kind of similar conceptually to what you’re doing.
Ray LeVitre: Yeah, I think exactly. And I think the nice thing about that is you segment the portfolio. We call it the “bucket approach.” We put three buckets in front of us and bucket one is the near-term money, bucket two is the intermediate term money and bucket three is the long-term money, which is the stocks. The nice thing about that approach, or the stack approach as you mentioned in your case or P.J.’s case, is that there’s some psychological advantage to that, so that if the market goes into a downturn, I can step back as an investor and go, “You know what? I have the next eight to 10 years’ worth of my living expenses covered in assets that aren’t stocks. And consequently, hopefully, that brings enough peace of mind so that I can get through the downturn without getting too emotional and messing up my portfolio too much,” which tends to be the case more often than not, I guess.
Jim Lange: Well, I like that for the same reason. I might be a tiny bit more aggressive for some clients, rather than having eight to 10 years of money available in cash and bonds, but the same idea. And the way P.J. and I like to do it is we literally like to have separate accounts, and then you show people, well, your investments really didn’t change at all. The only thing that’s really changing is your cash and your short-term money, but your investments, since we’re not touching them, we will allow them to grow back as they insistently have, and you’ll be no worse.
Ray LeVitre: Right, right.
Jim Lange: And in the long run, you’ll be a lot better because it’s very clear that owning companies, which is what stock is, is more lucrative, though more volatile than lending money to companies or governments, which is what a bond is.
Ray LeVitre: Yeah, no question about it, and I like that approach, too. I think we’re speaking the same language, for sure. But yeah, if companies make money, stocks will go up, and if you’re buying stocks, you’re making a bet that capitalism works and companies will figure out a way to be profitable regardless of what happens in the government or the workforce or whatever. And yeah, you shouldn’t buy stocks, I guess, really unless you have that belief. Companies will figure out a way to make money.
Jim Lange: Well, I actually believe that, and I know that a number of money managers and people that make sense to me always say, “Well, what do you do even after something bad happens?” So, for example, what did we all do on September 12, 2001? Well, I know what I did: I went to work and I tried to make some money. And that’s what companies do, even if something bad happens. So, you can talk about all the problems that America has and all the risks that we have and things like that, and I think bad stuff will happen. I don’t think it’ll be one continued horrible disaster unmitigated that we’re going to end up shooting each other for space in a trailer court, but I do think that there’s going to be some bad things that are going to happen, and just like 9/11, the market’ll go down and then it’ll recover, and then life will go back to some type of normalcy, and then just the cycles might be a little bit more intense and a little bit more volatile than they have in the past, but ultimately, in the long run, companies the day after something bad’s going to happen are going to try to go back and make some money, and usually, history has proven that they usually do, and the people who invest in those companies do better than the people who lend money to the companies.
David Bear: As you draw down the near-term bucket, the cash bucket, you obviously are going to have to replenish it at some point from the longer-term buckets and convert some of that into cash. Is that not right?
Ray LeVitre: Yeah, absolutely. So, typically, we’ll chip away from some of the bond portfolio and add that to the cash portfolio, and then that gets spent and we just continue to do that. Every six months or every year we’ll replenish cash. If one part of the portfolio is down, you always can take from the part of the portfolio that’s up. So, right now, if you’re withdrawing, you might say, “You know what? Bonds are down a little bit. I don’t want to sell bonds when they’re down 4 percent. Maybe I’ll chip away a little bit from my stock portfolio and rebalance and use that to cover my expenses.” So, there’re other ways you could look at that or chip away at the portfolio to cover your expenses. But, generally speaking, you should look at your stocks and say, “That’s my money I’m not going to touch for seven, eight, nine, 10 years and beyond, and again, consequently, if I don’t need it until then, I don’t have to worry about it going through the natural ups and downs that it’s going to go through.”
Jim Lange: Although you did use the magic word “rebalance,” and that is something that even Bernstein says is worth roughly half a point a year. Can I take it that you are a fan of rebalancing? And in the most recent example, the way you’re going to rebalance is rather than sell something and buy something, is you’re just going to sell something that is, in effect, high, and going to use that to replenish the cash in bond account. Is that fair?
Ray LeVitre: Yeah, absolutely. In fact, you could say I’m a fan of buying low and selling high, which is what rebalancing forces you to do is to chip away a little bit of your best positions and add to the positions that you don’t like at the moment, and it forces buying low and selling high, and it’s super counterintuitive because who wants to sell something that just went up? But if you ask somebody, “Hey, how do you make money in stocks?” They’d say, “Oh, you buy low and sell high.” But actually, the doing it part sometimes is difficult because that means, again, selling something that I’m in love with and buying something that, at the moment, I hate. But in the long run, as you mentioned, it should provide a little bit of enhancement to your return and control your risk as you go.
Jim Lange: Now, David is chomping at the bit for the commercial, but I just want to finish this one point …
David Bear: One more thing, all right!
Jim Lange: … and then we’ll do that.
David Bear: We have flexibility.
Jim Lange: I agree with you completely because it is exactly against human nature, because human nature, for thousands of years, when bad things happened and we thought we were in danger, we would run. So, if the market goes down, the natural instinct is to sell, and when things are good and things are plentiful, the natural thing to do is to do more of it. But in the market, that’s the exact wrong conclusion.
David Bear: Well, on that note, let’s take that quick break, and if you have questions or comments for Ray LeVitre or Jim Lange, call the KQV studios at (412) 333-9385.
David Bear: And welcome back to The Lange Money Hour with Jim Lange and Ray LeVitre.
Jim Lange: The next issue that I wanted to talk about, because it’s certainly critical for retirement issues, is when to take Social Security. And I know, Ray, that you have some strong opinions on when to take Social Security, so if somebody was coming into your office, or if you were giving a talk, or if people were interested in your general opinions on Social Security, what advice would you give, particularly people maybe in their early 60s, on when they should be considering taking Social Security?
Ray LeVitre: Yeah, good question. Typically, we’ll do an analysis and we’ll show people, “Here are your options, and here’s what the implications of these options are.” In general, though, just to answer that question, I’m typically a fan of starting earlier versus later, meaning that if I’m 62 and I’m no longer working, I’d typically recommend that person start taking Social Security early. They’d take a reduction but get a four-year start over, say, starting at 66 at full retirement. And the reasoning there would largely be that if someone starts taking Social Security, that’s going to take some of the pressure off the portfolio, meaning they’re not going to have to withdraw as much to cover their expenses. And so, essentially, it’s a way of just hopefully making the portfolio last a little bit longer.
Jim Lange: All right. And by the way, I agree with you on a lot of topics and much of your book, and it’s perfectly acceptable to have viewpoints that are not consistent with yours, but I will take the liberty of saying that I actually have come to the opposite conclusion. The analysis that I have done is in terms of “breaking even.” So, let’s say that we take somebody with … and let’s forget the marital benefit for a minute. Let’s take somebody who has a choice of taking the money at 62, or they could — let’s take the extreme — wait until 70, or even do 66 and do apply and suspend. But the breakeven point … so, the way you’re doing it, presumably, what you’re doing is taking heat off the portfolio, or looked at another way, you’re taking money and theoretically investing it, and let’s say that that money is invested at, say, 6 percent. The analysis that I did showed that the breakeven point was age 84. In other words, if you make it until age 84, and the interest that you earned on the money was 6 percent, you’re at exactly the same point you would be as if you had waited, and I was doing this analysis actually on the radio with a guy named Larry Kotlikoff, who’s an economist, and he wouldn’t even accept that analysis, because this is what he said. He said, “Well, you can look at it like an actuary and say age 84, or you can look at it like an economist, and an economist would say, ‘Your danger is not dying young and having more money, because if you die young, you’re dead! The danger is living too long and running out of money.’” So, he advocates actually holding off, and doing, in effect, the safety play of holding off.
David Bear: And drawing down your portfolio.
Jim Lange: And drawing down your portfolio. In fact, in his book called Spend ‘Til the End, he even says that it’s OK to spend some of the money in your portfolio, knowing that you’ll get a higher amount. But Ray, very frankly, it’s perfectly fine to have … you’re probably, I don’t know if you’re in the majority, or what the percentage is, but I know that there are a lot of clients and a lot of experts who would agree with you also. I hope you don’t mind if we have a little friendly disagreement.
Ray LeVitre: No, no, that’s perfectly fine. It’s one of those issues, in fact, that I think is just not black and white, meaning I think I can make a really good case for taking it early, but I think I could also make a pretty strong case for taking it late, and so are waiting and delaying the benefits. So, I think the best approach, and the approach that I use, is I’ll actually say, “OK, let’s look at all the scenarios. What if you take it early? What if you take it at full retirement age? What if you wait until 70, or anywhere along the line? What’s the impact long-term? Where do you get the most bang for your buck?” And I’ll show that, and say, “All right, here are the options, and here are the pros and cons,” and then, most often, the client can choose.
Jim Lange: And they want to take it right now! I have to sometimes try to convince my clients to hold off. But there’s also an intermediate step, and there’s a concept in the law called apply and suspend, which, to me, is maybe some compromise between what the two of us are talking about right now, you know, one, which is where you take full benefits at age 62. The other where you wait until age 70, and actually, I wouldn’t even say it’s a compromise. I would say it’s a win situation. And if I could set up this scenario, let’s say that you have a husband and wife, and I’m going to be old-fashioned for a minute and assume that the husband has the stronger earnings records, and let’s assume that they are both the same age, and even retiring at 62, what I would typically recommend, and again, my big thing is I never want to see anybody run out of money, or even be short during their lifetime, is I might recommend that the husband apply for Social Security at age 66. Then, I would typically recommend that they suspend collection.
So, what’s the point of applying and suspending because she’s not getting anything? If the husband in that situation applies and suspends, then the wife can apply for Social Security, not on her record, but actually as a spousal benefit, which would be one-half of what the husband would have received. So, let’s say the husband would have received $25,000 or $30,000. The wife could get $12,500 or maybe $15,000, and then collect that from the time that they are 66 until the time they’re 70. Then, when the husband is 70, he goes back and collects on his own record, in which case he doesn’t get any diminution of what he received. So, it’s as if he had never collected a nickel. And then, depending on whether the wife’s earnings record is strong enough on its own or whether she gets a spousal benefit, she collects the full amount at age 70, and the fact that she took money between 66 and 70 is not held against her. And we’ve run numbers that you can literally be better off by close to $200,000 over time by doing that. And I don’t know if that has entered into any of your calculations, if you’ve ever recommended that course for a client.
Ray LeVitre: Yeah, absolutely, and in fact, in the analysis we do, we actually show 20 different options.
Jim Lange: Oh, just 20?
Ray LeVitre: Just 20. And then we put the numbers next to them and then talk about the pros and cons, but if you take the reinvestment side out of the equation and just look at the straight numbers, if doing what you said generates the most bang for your buck, assuming that you have at least average to a little bit beyond average life expectancy. So, no, I totally agree with that. When you add in the fact that, hey, I didn’t have to pull money out of my portfolio because I was taking Social Security, now that money’s growing. You know, that changes the scenario a little bit. But actually, again, with some longevity, waiting until 70 and doing suspending and then having the spouse restrict still ends up being a little bit more bang for your buck. So, no, I definitely think that’s a vital option, and for the right person, it’s a great deal.
Jim Lange: And interestingly enough, I’ve actually discussed this exact issue with Jane Bryant Quinn, and for whatever it’s worth, this is her take on it. Now, she doesn’t like when financial advisors write for “the women’s market,” you know, like Financial Advising for Women or something like that. But she does, to some extent, see this as a woman’s issue because statistically, the woman is going to survive the man. They’re often a few years younger anyway, but even if they’re the same age, actuarially they are likely to survive the man. At least, in today’s economy, for people in their mid-60s, usually the husband does have the stronger earning record, and the goal for most couples, stated or unstated, is to make sure that both members of the couple have a comfortable lifestyle for the rest of both of their lives. So, by holding off on the Social Security at least until 66 for the apply and suspend, or maybe until 70, that you’re not only supplying a higher base for the husband while he is alive, but let’s say that he dies and the wife survives him by five, 10 or 15 years, or, in my mother’s case, actually for 25 years, she received a higher Social Security base for that entire 25 years. So, she kind of sees that as a little bit of a woman’s issue, or I should be more fair and less sexist and say let’s say a dependent-spouse issue. I don’t know if that ever comes into your analysis.
Ray LeVitre: Yeah, I mean, that would be something that we would look at, again, just projecting out looking at different life expectancy possibilities, and then saying, again, “Which option would have given me the most benefits over my lifetime?” And again, we draw those scenarios out and then say, “You know, again, here’re the pros and cons, and here’s what we suggest,” and let the client pick. I’ll tell you one thing that’s … and you mentioned that sometimes you have to try to talk your clients into waiting past 62. The one thing I find that plays into that decision often for somebody who has the option of hey, I’m going to retire now and I’m going to take Social Security, or consider taking it at 62, is just kind of the trust in the government side of things, which is always an interesting discussion, and some people take the view of, “Hey, you know what? I’m going to start it now because I want to get it while I can, or get it before, perhaps, it changes,” and that fear of that unknown drives some people to start, I think, earlier, and maybe earlier than they should in some cases. And I don’t know if that’s entirely a fair assumption because I think the program is stronger than most people think. But it does play into a lot of people’s minds, I think.
Jim Lange: Well, I’m not sure if the program is strong enough, but I think, politically, there would be a real price to pay for any candidate, Democrat or Republican, to make a significant reduction for people who are of that age. Now, whether that’s going to be, let’s say, less available for people, let’s say, in their 50s, that might be another story. But one approach that I like, and we actually have a very similar approach, is that the both of us, I call them “number runners.” So, we say, “OK, here are the numbers. Here’s the objective analysis. And you, client, get to decide, but we’re not going to be shy about what our recommendations are.”
And I know one of the areas that you run numbers is when somebody does retire with a pension plan, and I know that these are a little bit of a dinosaur, and that, in the old days, a lot of people would have a guaranteed defined-benefit plan where they would, upon retirement and working there 30 years, they get the gold watch and the pension that would last for the rest of their lives, and/or a smaller pension that would last the rest of their life and their spouse’s life. And I know that you have some opinions and you have run some numbers on whether you recommend a one-life or two-life scenario. So, what if you had a client who came in maybe in their early- or mid-60s and said, “Well, it’s time for retirement. We’ve calculated that we think we have enough money. We’d like to retire.” And again, let’s use the old sexist analysis, assuming that the husband’s pension is the stronger of the two, do you typically recommend that they take a 100 percent benefit, meaning if the husband dies, the wife gets nothing? Or a 100 percent two-life, meaning a significant reduction, but if the husband dies, the wife gets the same amount that the husband would have received? Or some hybrid? And what do you typically recommend in those situations?
Ray LeVitre: Yeah. Generally speaking, I think, for most people, I think most of the people I work with would end up with the joint-life annuity, or the joint-life pension, in this case. What they’re doing, of course, and then the discussion always goes here, and that is if you opt for the joint-life option, essentially, you’re just buying life insurance. And so, you’re basically saying, “Hey listen, I could just get this for my life and get, let’s say, $12,000 a year, or I can opt for $10,000 a year and get this for my life and my spouse’s life.” And in that scenario, basically, I’m saying, “Hey, I’m going to take a $2,000 a year reduction in my payout so that I can cover my wife if I pass away, which basically means I’m paying $2,000 a year for a life-insurance benefit that will cover her until she passes away, assuming that she outlives me.” So, I’d say the majority of people probably end up with the joint life, but you should run an analysis and see if, in fact, it would make more sense to offer the single-life annuity option or pension option, and then, rather than taking the reduction in payment by using the joint life, just simply take that $2,000 difference and buy a life insurance policy. Or it might even cost less. It just depends.
Jim Lange: Yeah. By the way, again, I like your running-the-numbers scenario. I will tell you, though, if you’re trying to compare apples to apples, the numbers we’ve run have typically indicated that, depending on the health of the client, you’re often better off taking the two-life annuity, which, very frankly, is against self-interest because life insurance is part of our practice, but we are … and if we have time after the break, talk about being a fiduciary and doing what’s in the best interest of the client.
David Bear: Well, Jim mentioned that break. Let’s take it now.
David Bear: And welcome back to The Lange Money Hour with Ray LeVitre and Jim Lange, and we have about 10 more minutes to talk?
Jim Lange: Yeah, yeah. But frankly, I’m going to talk to Ray in the areas where he is strong and the areas that he talks about in his book, and I think one of the things that we just touched on is the idea of working with a fiduciary advisor, and Ray, I used the example of whether somebody should purchase life insurance and take a one-life pension rather than doing a two-life pension. So, obviously, if you were that advisor, and let’s say life insurance was part of your line, you’d make more money, but then you wouldn’t necessarily be doing what you believe is the right thing for your client because you just said that normally you prefer a two-life after running the numbers. Could you tell our listeners the difference between a fiduciary advisor, and who do you have a duty to represent? Do you have a duty to represent the client, or somebody else?
Ray LeVitre: That’s a great question, and one that everybody who has an advisor should ask, and that is: Does my advisor have any fiduciary responsibility? And the difference, really, it can come down to is my advisor fee-only or is he commission-based? And, typically, if you’re commission based, you work for a firm and you’re an employee first and an advisor second. If you’re a fee-only advisor, you’re getting paid directly from the client. You’re an advisor first. And I think the thing that everybody needs to ask is, “How is my advisor getting paid?” And you should know exactly what they’re getting paid, and by doing so, you’ll know whether or not you’re getting the right amount of service, or the right amount of work, for the dollars you’re paying. But typically, my recommendation would be find a family advisor — someone who can’t sell commission-based product, so they don’t have that in their back pocket and need cash for the month as so they whip out an annuity that they’re going to make 5 percent commission on. Find an advisor that you’re going to pay a little bit at a time, over time. They’re not going to make a big commission up front and then have no incentive to work with you on an ongoing basis. So, whether you work with a commissioned advisor or a family advisor, make sure that they’re paid over time.
Jim Lange: I would agree with that. The only thing that I will say in defense: I do believe that there are some ethical brokers who are doing what they believe is in the best interests of their clients, even if they aren’t being paid that way. But in general, let’s say a broker by definition does not have a legal duty to do what he or she believes is in the client’s best interests. In fact, they would typically have a fiduciary duty to do what is in their employers’ best interests, and that brings up some pretty bad results, and I don’t want to name names, but some of the bigger brokerage firms have been hurt when some of the employees have been incentivized to do something that isn’t necessarily in the client’s best interest.
But to me, the safer thing to do is to work with somebody who has not only the moral obligation, which in my opinion every adviser has, the moral obligation to do what they think is in the client’s best interest. But I actually think it’s safer if they have the legal obligation. Now, I know you as a CFP, you have a legal obligation, not just a moral obligation to do what is in your clients’ best interests. And I, as an attorney and a CPA, I’m a registered investment advisor, also have that same legal responsibility, not just moral responsibility. Therefore, if I recommend a high-fee annuity … and by the way, I’ve never recommended a tax-deferred annuity to any of my clients … but if I did, I would not only be breaking my moral obligation to the clients, to do what is in their best interests, but also my legal, because if I don’t believe that’s in my client’s best interest, then I am literally breaking the law. And I think that it’s the same thing for you. Is that correct?
Ray LeVitre: Absolutely the same. You said it beautifully there, and that is: “Does my advisor work for his or her company, or does my advisor work for me?” And if they work for the company, you know, for the company first, then it’s possible that there’s going to be some conflict of interest there. And I saw that in a number of the firms that I worked with before setting up my own firm and going fee-only, that managers were beating on the table in front of these advisors saying, “Hey, you’ve got to produce! You’ve got to hit these targets. If you don’t, you might lose your job.” That kind of makes advisors go out there and kind of say, “All right, I’ve got to hit these targets. What products do I have in my products stable that I can sell so that I can hit these targets?” And oft times, that means selling a product that comes with a big commission up front and that satisfies my employer, but it may not be the best thing for my client. And so there’s something there. I think, ultimately, though, you’re exactly right, there are definitely some ethical people that work on the commission side of the business, and the way to check that is to make sure that you have a financial plan, they’re meeting with you routinely, you have a solid investment strategy, they’ve disclosed all the fees, all the ways they get paid. And once you know all of that and you’re still happy with the pay structure, then go with it. But it should be disclosed. You should know how you’re paying your advisor and make sure you’re getting enough service, equivalent to what you’re paying.
Jim Lange: And I agree with that, that you should ask your advisor how he’s making every penny. Now, very honestly, you mentioned a 5 percent commission, but sometimes, on some of these annuities, there is a 10 percent commission. Although in my world, if you sell a guy a million-dollar annuity and you make a 10 percent commission, that’s $100,000. Now, in my world, I’m probably going to have to work about 20 years to make that much money, doing the Roth analysis, meeting with people at least once a year, doing the Social Security analysis, the tax planning, et cetera. So, it’d be a lot more profitable to sell somebody a product and walk away with a big check rather than do 20 years of work, but then if I did that, I, like you, would not be a true fiduciary.
Ray LeVitre: Exactly. For people out looking for an advisor, my recommendation, I have a short list, is find somebody who’s been in the business 10 years, make sure they’re a CFP or equivalent. Make sure they do a financial plan for you, and not a once-and-done plan, where you just look at it once, but one that’s going to be revisited at least annually. Make sure the plan includes an investment strategy that’s very defined and super-diversified. And if you do those things, typically you’re going to end up with a pretty decent situation or a decent advisor. The key is, have a plan and make sure it’s reviewed often. And that’s where, so often, I think people — they skip that step, they invest their money, and they never get a plan, and they miss some thing in doing so. They leave some holes in the portfolio. They leave some holes in the plan, for sure.
Jim Lange: Well, I liked all that advice. And the other thing is, I should say, it’s self-serving, because we do all that stuff. Perhaps the difference is we typically are doing it now with low-cost index investing, where I do the strategy and we have an actual money manager doing the actual low-cost index investing.
David Bear: Well, you know, I want to say, we’ve come to the end of the show, and I wanted to say thanks to Ray LeVitre. You can reach him directly at his firm’s website, networthadvice.com. And check out his book, 20 Retirement Decisions You Need to Make Right Now. Thanks also to Dan Weinberg, our in-studio producer, and program coordinator Amanda Cassady-Schweinsberg. As always, you can hear an encore broadcast of this show at 9:05 this Sunday morning here on KQV, and you can always access the audio archive of past shows, including written transcripts, on the Lange Financial Group website, www.paytaxeslater.com, and you can also call the Lange offices directly at (412) 521-2732. Finally, please mark down your calendar to join us on Wednesday, September 4th at 7:05, when we’ll welcome Weston Wellington, vice president of Dimensional Fund Advisors, to the next edition of The Lange Money Hour.