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Episode #527 - The Challenges Of FIRE
Roger: This show is a proud member of the Retirement Podcast Network.
Quick note before we get started here. Every morning when I wake up and start my day, I reread the mission of this podcast and everything that I do, and it is to empower people to rock retirement. Sometimes, we can miss the target. We think we did that in the Rock Life segment on health, and supplements. I want to chat with Bobby really quick so we can clear that air so we can get on to helping people rock retirement.
So, what are we talking about here, Bobby? What do we want to clean up?
Dr. Bobby Dubois: Well, I used to turn a phrase that was really inappropriate, and I regret that and apologize.
I was talking about testing supplements in military recruits and referred to them as laboratory rats, which is an awful turn of phrase, and sort of adds to kind of a long-standing concern in the military that they're often being asked to be just that.
So, I appreciate the feedback from listeners and I always reflect upon what you say. I may not say things as properly as possible, and I may get some things factually wrong. I aim to hit the mark. When I don't, please let me know.
Roger: Yeah. Thanks for all the emails that we got on this.
We listen just like we have our current survey going on. So, thank you, and let's go on to helping you rock retirement.
"When you are angry, you will give the most incredible speech that you will ever regret."
- William Urie.
That quote has nothing to do with today's show, but I thought it was incredible when I heard it, so I wanted to share it with you.
Hi there.
My name is Roger Whitney. Welcome to Retirement Answer Man podcast. By day, I am a practicing retirement planner with over 30 years’ experience and founder of Agile Retirement Management, The Process. This podcast is my lab to noodle on how to not just survive retirement, but how to have the confidence because you're doing the work to rock retirement. I've learned so much from you, and I hope you learn something from me as we explore this together.
On today's show, we will continue to explore the FIRE movement and what we can learn from it. Remember, FIRE is Financially Independent, Retire Early with Kevin Sebasta, coach in the Rock Retirement Club. Today, we're going to talk about the challenges of retiring early if you're financially independent because it's not all roses that you get benefits, but you also get some challenges that you have to face.
Then next week, to close out this segment, Kevin and I are going to explore what we can learn if you're beyond retiring early, what we can learn from this fire movement that and incorporate into our own retirement plan.
In addition to that, if that was not enough, we're going to have the incredible, he really is, Andy Panko on to answer some of your questions.
Before we get started, I have a few tasks that I am supposed to do or Nichole "Rockstar" Mills will scold me. Number one is next month is the show's tenth anniversary. Pretty incredible. I'm shocked by that.
We're going to have a host of guests to explore retirement. We're going to have Dan Crosby, the behavioral finance expert. We're going to have Christine Benz from Morningstar. We're going to have Michael Easter, New York Times bestselling author of The Scarcity Brain and an amazing guy. We're going to have Rick Nason, someone that you haven't heard of most likely, author of It's Not Complicated. He is a systems expert and professor, and I'm really into systems thinking right now. So, we're going to have him come on to talk about how systems thinking is going to help you and I rock retirement.
We have really big shows. I was supposed to tell you that, and Nichole wanted me to let you know that we are doing our annual listener survey, and you'll get a link for that in our 6-Shot Saturday email. It'll be in the email for a few weeks.
Every year, we ask you questions. What do you like? What don't you like? What do you want to hear more of? What do you want to hear less of? What you're worried about and what you're excited about because we incorporate that into the show to try to improve the show to make it relevant for you. So, it'd be awesome if you would answer it and click on the link in 6-Shot Saturday and answer the survey. It would help us a lot and help you.
If you're not signed up for our email list, it's even better than the show. It is a summary of all the questions that we answer. It has links to things that we reference as resources, so you can sign up for that at 6shotsaturday.com or rogerwhitney.com.
Alright. With that, let's move on and talk about FIRE and its challenges with Kevin Sebesta.
PRACTICAL PLANNING SEGMENT
Now it's time for our third segment on FIRE, financially independent, retiring early with our FIRE extraordinaire Kevin Sebesta. How are you doing, Kevin?
Kevin: Great. I can't believe after all I've said, you're having me continue this.
Roger: Yeah. Well, we sort of just have to trudge through, buddy. We just have to trudge through.
Kevin: Who knows what's going to blow up in the next two weeks, but we'll see.
Roger: We are talking about the challenges of not so much financial independence, obviously there are challenges in getting there, but leaving traditional work early definitely has a set of challenges to it. Early could be like you defined in our first segment I mean, that could be in your mid-fifties, really.
Kevin: Absolutely.
Roger: Or prior to Social Security because there are certain things at 65 Medicare and then Social Security a little later that aren't going to kick in for a while.
Kevin: Let's be clear. When there's no paycheck, that is a gut check for anyone.
Roger: That is tweetable.
If there's no paycheck, there is a gut check. So, we're going to explore some of the challenges of retiring before those paychecks in terms of Medicare as well as Social Security kick in. So, let's start with the money. I mean, we have to just pay for life. Right?
That's job number one.
Kevin: Finances are the foundation of how you get through every week, every month. No matter where you're at in life, all the way back to if you have an allowance and all the way till end of plan, that's the foundation. Right?
Roger: I've heard it defined as the red blood cells that have to flow.
Right? In a business, you have to have cash flow, free cash flow that flows. That's what fuels everything. No different than if you retire, whether it's early or not. When you retire early, as you stated, your cash flow on an income end goes to full stop because there's no social security.
So, what challenges does that present when you do this?
Kevin: The significant piece is how much do you need to spend to survive, and how much do you want to spend to enjoy your newfound freedom time. You have to figure out that balance or you have no idea how your current months are going to go or how you're going to project to this unknown end of plan state where it could be a normal retirement of 20 to 30 years, which is a ridiculous long time to just have your own free time. But if you're early retired in your forties or fifties, you're talking about 40 or 50, 60 years. We don't know how long we're going to live nowadays.
It comes down to that structure of, I think, the needs, the wants, the better lifestyle, and balancing those in any given year.
Roger: Let me restate that, and you tell me if I'm correct. You really need to have a sense of what your base great life costs, those nondiscretionary expenses to live the life. Right?
Kevin: Right.
Some people talk about my net worth is and they count their house or they count their retirement account balances. But your retirement account balances are only partially yours. Maybe 70 percent, maybe 80 percent if you're in a low tax bracket because the government's waiting for their share. It's not just that big number that's available to you. And if you have a nice house and a lot of your assets are in your house, you're not going to sell a closet when you get hungry for one month or need to fix your car.
Roger: Your retirement accounts can be complicated or prohibitive in just getting the money because you're 45 or you're 50 or 55.
Kevin: Yeah. If you're 55, you might have some options depending on when you leave your employer with a 401k. If you're 52, you have other issues on how to address that. Penalties that you might accept, 5-year Roth conversion ladders.
There's the crazy tax 72t's that you can set up to have substantially equal periodic payments. I've talked to a lot of people on lots of different thoughts about that.
Sometimes the easiest one is just to get a little side hustle going, little part time income to just give you that buffer of cash flow from an employment, and so you hit your lower withdrawals from your accounts at different times.
Roger: So, it's just difficult to get that retirement money.
Kevin: Pretty technical, by the way.
Roger: Yeah, and pretty restrictive too in what the rules are around it to make sure you don't get caught.
Kevin: Someone wants part of your money, if you're asking me that way.
Roger: What do you mean?
Kevin: The government's always got their eyes on you to get a little share of something.
Roger: Especially the money that you haven't been taxed on yet, and that's definitely a wrinkle if you don't hit the 59 and a half or have Social Security starting.
Kevin: But they're going to take employment income. They're going to take capital gains. What if you're an art dealer on the side? They're going to want money from collectibles.
There are all kinds of impacts to your assets and your cash flow. That's why we always talk about taxes and Roth conversions and all these bracket stuff, the nerd talk, because some people, it's important that they optimize it and fine tune it a little bit more detail. And then after a while, you kind of loosen up. It takes most people a year, year and a half to kind of calm down from the money side and start doing the life living side because they've figured out their base great life spending.
Roger: And how they're going to cover it.
I think that's the key challenge is how am I going to create red blood cells or income or access assets in order to be able to pay my base great life and some of those discretionary wants.
The other wrinkle, I think, Kevin, is health care. It's actually a lot easier than it's ever been because of the ACA, at least I would argue.
Kevin: It's available now where it used to be very hard with private insurance.
When I started in my retirement, I had private insurance, and it was more expensive than you would think and different coverages. So, yes, there's options now. Most people don't realize how expensive it is.
Roger: Prior to the ACA, you had to deal with getting approved and preexisting conditions being exclusive. So, if you're in insurance, you're sort of stuck if you have a preexisting condition because you're going to get that as an exclusion in something else. So, I think the ACA has really worked from that perspective.
Now let's talk about the cost end of it because it really is intimidating to everyone, and it should be, depending on your income.
So, I'll use myself as an example just because I know the numbers. If you don't get any subsidy via the ACA, whether it's the current scheme of roughly 8 and a half percent as a cap or the scheme that we'll go back to, I guess, in 26. We don't need to get into that right now.
I pay roughly 2000 dollars a month for my wife and I with 0 subsidies. So, let's call that and my out of pocket is about 10000 dollars. I pay 24000 dollars a year in premium. If an event happens, my exposure is at 10000 dollars before the insurance kicks in. I'm simplifying this a little bit.
That's significant, but that's because I'm in my high-income earnings years. If you retire early.
Kevin: Well, Kathy and I pay almost the same, just under 2000 a month for insurance. We're on more of a Cadillac plan through her retiree coverage because she retired early and took that coverage and we budgeted just about 2000 a month, a thousand dollars each. Our deductibles are lower in the hundreds. Fritz Gilbert budgeted to a thousand a month per person.
So that just seems to be a safe amount for people to budget. But 24000 means you're not getting.
Roger: Well, well, I would push back on that a little bit because I know Fritz, and he has income sources that causes his income to go up. He has a pension that he's talked about and other things, and you have a Cadillac plan. But let's just use simple math.
If you are going to earn 70000 dollars a year, let's say, and under the current scheme, it's roughly 8 and a half percent is the cap. So that's 6000 dollars a year. So, a lot of it depends on your income, but also whether you want the Cadillac plans or not.
Kevin: Is that married filing jointly income at some point?
Roger: I just took 70000 and multiplied it by 8 and a half percent.
Kevin: There's a lot of people in FIRE who are single filers and single filers get hammered from multiple aspects of taxes and coverages and costs and risks.
Roger: I think the rule of thumb is if you want to say what's worst case, it's going to be 20 grand a year, 24 grand a year if you're married, and then you can dial in what yours is.
But this is a significant amount to factor in because you don't have an employer that's paying for any of this or subsidizing it.
Kevin: I think it's important to mention that when somebody 1 of the couple or both people turn 65, Medicare is not free. You could pay thousands of dollars a year for your premiums, your additional premiums with IRMAA, your co pay, whatever they have, your coinsurance, it's not free at 65, and people don't realize that either.
Roger: Yeah. I think the estimate we use without IRMAA is about 12, 13000 dollars a year for a married couple if you're getting part B, part D, and Medigap insurance.
Kevin: So, half maybe.
Roger: Yeah. Just Yeah. This is an obstacle. Well, let's rephrase.
This is a challenge that you just have to navigate if you want to return.
Kevin: It is another of the expenses. A third of our budget is insurance between car insurance, home insurance, umbrella insurance. In perfect world, we don't use any of that. We just pay it out because if you use it, something bad's happening.
Roger: Anything else in the money that you want to point out that you've experienced with challenges when it comes to retiring early?
Kevin: I think one thing that's interesting is we've talked about in the RRC having a board of directors to assist you, guiding you, advising you from other perspectives. A lot of people in FIRE, I just read an article that introverted people tend to be more FIRE type people. Introverted people are one third to one quarter of the population. That means we're going to think we're figuring out ourselves, whereas we really need an outside perspective, things that we're not looking at.
Part of that's the money, is the planning, the focusing. But having, like, a group of people that you can talk to, work with, or a team of professionals, actually more important with the longer timeline of early retirement, and it's just as important with the normal timeline of retirement. So, FIRE people tend to be self-sufficient doers, and that's kind of a "gotcha", I think, in the overall plan.
Roger: Would you also say that people that retire early that are really into figuring all this out can suffer from overcomplicating or thinking it?
Kevin: No way.
You can't overcomplicate. This is good stuff.
Roger: Uh, okay. So, the answer is yes that. So, the answer is yes.
Kevin: Okay. Yeah. The answer is yes.
No. Yes.
Roger: It is. Come on. I can't tell whether you're joking or not.
Kevin: I'm serious. It's not like I have that spreadsheet open on my screen every day. Do my startup routine.
Roger: Okay. So, you're joking. I get it.
Kevin: Oh, I'm not.
Roger: You don't have your spreadsheet open every day?
Kevin: It's open every day just because it's interesting. Now I'm not working on it. I'm just balancing life.
It's like a comfort pillow, comfort blanket, whatever that is.
Roger: Okay. We're going to agree to disagree there.
We're talking about all the challenges, and we're trying to focus here, and these can seem daunting.
I'm going to end at least I have an idea, and I'd encourage you too, Kevin, that these are just challenges. I mean, it's no different than challenges that you face if you're thinking about having a kid. Oh my gosh. How much is it? How much I can create spreadsheets on health care or if one of the spouses stays home, how much money we're going to lose in income or if nannies and college and doctors.
You do the math on having a child, you wouldn't have a child because of all the challenges. So, it's very similar to that. In the end of the day, we almost all just figure this out as we do it. So, let's talk about some of the non-financial challenges, and I think you just hit on 1 which is lack of community.
You're sort of on an island.
Kevin: Who's your Tuesday at 10 AM, buddy? Is there someone available to do things with? You know, we're supposed to be more social people, creatures. I said FIRE people tend to be introverts according to a study, so the social thing is a big deal.
That's why a lot of people really like the FIRE community and people that they talk to because we're different in the way we think about money in life and Instagramming our lives. So, finding people that balance that or pull you into other areas outside your comfort zone, I think is an important piece.
Roger: Well, I think I'm holding up a coffee cup. People can't see that. Right?
We live a life inside of our own bottle or coffee cup, right? We're in the middle of everything going on, and I see this in the club all the time and I think one of the biggest values of the community is we don't have any perspective.
I can't tell you how many times I've had someone who knows me make an observation or suggestion on something I'm dealing with, and I'm like, that's brilliant. I couldn't see it because I was in my own mix of emotions and fears and everything else. Once they tell me, I'm like, that's so obvious. How could I not see that? I think that is sort of what you're hitting at is that perspective of having people that are dealing with the same things you're dealing with that can offer different perspectives to help center you when you get too far one direction or the other.
Kevin: I was thinking about centering, and I think there's a lot of people who when they leave their career and retire, they want to do things or they want to do new things. If you're younger and you leave a career, theoretically, you have this extra time. You have these extra go-go years. You have a long go-go period. What if you plan to reinvent yourself and you just don't in early retirement? What if you just kind of get into a groove and the groove becomes a rut and you don't really motivate yourself or do something special, that's a concern.
Someone said in retirement, something that takes two hours can now take two weeks because you don't have these deadlines. So, depending on how planned out your lifestyle is, you can be young and not do anything.
Roger: For a long time, and the wake up is, what did I just do?
What happened to all those adventures I wanted to have or impact I wanted to have or whatever? So there needs to be some intentionality around it. Every single day.
Kevin: You have to set a vision and maybe goals. And maybe on your computer, it pops up at 9 AM and noon. Get off the computer window like mine does. Go do something.
Roger: Maybe you do need to have your spreadsheet open every morning. That's what you're saying?
Kevin: I'm telling you right before we started talking, it said go do something for an hour. Okay. I'm trying to improve. It's an ongoing process and it makes sense.
So, it's a light switch differently when you're younger instead of a dimmer switch to retirement. Some people go back to work. Like, some of the risks we were talking about, other risks that people don't think about are couples. There might be a death, might be an illness, could be divorce. There's been people in the FIRE community that got divorced and it changed their whole financial structure, and people don't talk about that as much because it's going to be great. We're just going to have time together to travel. It doesn't always work out that way. Sometimes one spouse likes passion driven pursuits and the other one wants just to have a calmer, slower life.
Roger: One of the other challenges too, I think, Kevin, is if you're married, is what if you have a major medical event where it necessitates somebody going back to work? If you are aimless and don't stay sharp and let your skills atrophy and your abilities to be a project manager or whatever it is, it's going to be pretty hard to get back into the workforce.
Harder.
Kevin: I thought I thought about that. I thought about if you retire early in your early fifties, it's hard to get a job in your fifties.
Roger: Just even if you're skilled.
Kevin: Right.
I kind of believe people that position themselves to leave a career because they're financially sound are really intelligent, organized, planned people and will be in demand at some level of employment. Not necessarily at Home Depot building stuff in the backroom, but still projects people, leaders.
Roger: I don't disagree with that, but I think of this like I think about fitness. It's like my fitness goals used to be about being the fastest, being the strongest, being a lot better. My fitness goals have changed dramatically or in the middle of changing of I just want to be if Michael Easter or somebody calls me up and says, “Hey you want to go to Costa Rica?” I can pretty much get off the couch and do it because I keep myself at a certain level.
I would imagine with skills and abilities, it's that. It's like you don't have to be improved like you were in your career, but you have to be able to get off the couch and go be a contributor if you have to.
Kevin: I think curiosity and learning are a big part of a successful retirement for anybody.
Roger: For sure.
Kevin: So that can build the foundation for a different employment or activity process in retirement no matter what age you are. It's the mentality.
Roger: Yeah. I think another challenge in retiring early is execution risk.
There's a lot more that you have to manage in the system of finance and fitness and purpose and not being aimless. Execution risk, which is defined as just all the decisions that you have to make to housekeeping operate your early retirement, there's a lot more opportunity because of a lot longer time frame that you just mess up.
Kevin: You know what makes me curl up in the corner, afraid, is when I calculate just a 3 percent inflation over 40 or 50 years, how a 100,000-dollar lifestyle today, which is nice, great lifestyle, is 7, 800,000 dollars a year in the future. The math is incomprehensible to me, and I know it's going to flow over time and everything's going to adjust in your returns, but that is the most frightening thing to imagine when your financial assets have to fund that financial life. That's the scary one.
Most people don't think it out, they'll say, oh, it's possible my Monte Carlo projections would say we have between 4 and 16,000,000 in 40 years. I say, well, divide that by 4. Doesn't look that exciting, does it, in today's dollars.
Roger: I did a video on our YouTube channel about the difference between complicated and complex problems as it relates to retirement. I think we're coming out with a Forbes article soon, and it hits on this is it doesn't matter whether you're retiring at 65 or 45. You can't figure this out. It's not a complicated problem that you can tease out all the issues and just solve for. It's a complex problem with variables that can interact in ways that we can't even understand. So, it just has to be managed.
Kevin: The whole Agile process you talk about is kind of setting a vision, setting a path, setting a structure, revisit that as you're going along to make sure you're on a path that's going to be feasible for you. If you choose to do this optimization, you know, that makes the path a little smoother on the edges possibly. That's where maybe for some people, a team of professionals, not just one expert, but a couple different experts can help you feel that path is a little smoother. Because in retirement, especially early retirement, if you're off by 10 percent at the start and you don't adjust, it's going to go haywire. But if you're off by 10 percent, we're all going to be off. But you adjust a little bit each year or every couple year, you'll sort it out. You'll be able to adjust to that.
I think that's the big key is thinking ahead and adjusting but enjoying where you're at.
Roger: Just like when you're going to have a child or get married, it's going to be awesome, but not anything you expected because of all the adjustments you have to make that you don't even understand.
So, I think it's important that we address the challenges, and it can be intimidating. It can be, oh, I'm not going to do that. That I'm going to take the safe route. But I think the safe route isn't safe. There are other challenges there, but I like this exercise of looking at, oh, what could go wrong and what are the things that we're going to have to face. Most of them are overcome-able, if that's a word, with some planning.
So next week, Kevin, we're going to wrap this up and talk about what someone in their sixties or just what everybody can learn from the FIRE movement that they can perhaps incorporate into their planning to help them have a better perspective on, well, rockin' retirement.
Kevin: All about rockin'.
LISTENER QUESTIONS WITH ANDY PANKO
Roger: So now it's time to answer your questions, and to help me do that is the amazingly funny looking Andy Panko. How are you doing, Andy?
Andy: I'm better now. Thank you for that. Thanks for having me.
Roger: Why did I choose this one to have video? That's the question.
Taylor Schulte I should've had the video with.
Andy: I don't know. I have no response for that. I'm honored. Let's say that.
Roger: Yeah. We were joking beforehand. So, if you have a question for the show, you can go to askroger.me and type in your question, leave an audio question, and we'll try to answer it on the show. Andy, tell me what's going on in your life. I know you restarted your podcast.
Andy: Correct. Yes. So, the podcast is Retirement Planning Education. Took about a six-month hiatus. Started it back at the beginning of this year, 2024, and rolling along.
So, episode a week comes out every Thursday.
Roger: Awesome. Awesome. Alright. Well, let's get to the questions because I know you love questions.
Andy: Yes.
WHICH SOCIAL SECURITY BENEFIT SHOULD WE TAKE?
Roger: Right?
So, our first question comes from Ron related to Social Security, and it's,
"Hey. I've been listening to the show for a while. Love the content in many topics.
Question is, I'm 63. My wife is 62. My working history is much greater than my wife's. Thinking of taking her Social Security earlier and then deferring mine as long as possible.
Will we be penalized if we take hers while I'm still working?"
Devin Carroll, who is a Social Security guru, had some thoughts on it.
So how does that work if the wife is ultimately going to have or any spouse is going to have the other spouse's spousal benefit? What happens if they take early on their own record that's substantially lower?
Andy: Sure.
So, couple things come into play here or can come into play here. By nature of the question, it sounds like he's asking specifically about what's called the earnings test.
So, he's still working, still earning income. The earnings test says if you start a benefit prior to your own full retirement age, which for them, I can't do the math that quick in my head, but somewhere between 66 and 67, I think they're in that age range. If you do get a benefit and you're younger than your full retirement age and you're working, your benefit can be reduced depending on how much you earn.
I think that's where he's going with the question. That's one of the two angles.
The good news is he's saying he's not yet taking his benefit, but he's the one still working. If his spouse takes her benefit while he's working, will his earnings impact her benefit under the earnings test?
The answer is no.
So even though I assume they file a married joint tax return, so his earnings collectively are taxable to both of them for purposes of Social Security, each person's benefit is looked at independent for just their own earnings, if any.
So, no, his earnings will not reduce her benefit. But there's a second reduction that will come into play for her because she is younger than her full retirement age and she is starting a benefit. It will be reduced from what it otherwise would be. So, her base benefit, if you will, will be whatever amount she'd get for retirement age if she were to start then. If she starts earlier, it's reduced. If she starts later than retirement age, it's increased. So, it will be reduced for that, but not because of the earnings test.
Roger: Yeah, and the other angle is related to the spousal benefit because he mentioned that his benefit is going to be a lot higher. When we think of, well, the spouse with the lower benefit will get at least half of the highest earners benefit as a spousal benefit, but it's really up to half.
How does that work if she takes her lower benefit early when he ultimately claims his?
Andy: Right. Great point.
So, the fact that she is claiming hers early, she will get a reduction from her full retirement amount. Let's just assume that's making this number up 200 dollars a month is the reduction when he starts his benefit later, the door gets unlocked for her to switch from getting her own benefit to now getting a spousal benefit off of him. Assuming the spousal benefit's larger than what she's getting on her own, she can make that change.
Now, normally, the spousal benefit will be half of what the higher earners full retirement age benefit is or was up to half. In her case, though, the 200 dollar per month reduction she has now for starting her own early will carry over and also apply to her spousal benefit when she does start that, that'll be reduced by the same 200 dollars a month from whatever that spousal benefit would have been.
Roger: Yeah, and where that would ultimately go away is if he were to pass before her, she would step into his full benefit. So there definitely is a haircut if she were to take on her own benefit early.
Andy: Correct. This is the I don't want to say good thing about survivor benefits, but like I said with spousal benefits, while he's still alive, she will have this reduction if she switches to the spousal benefit off of him during his life. If and when he predeceases her, she can then switch over to the full amount of benefit he was actually getting at the time he died or what he could have gotten had he started at the time he died and the early filing penalty or reduction she had on hers will not apply when she eventually switches over and takes the survivor benefit, again.
Roger: The only way to avoid that cut while they're both alive is if she would wait until her full retirement age. So, she would wait until her full retirement age.
Andy: Correct. Yeah. She has to wait until her full retirement age if she wants an unreduced benefit of her own or an unreduced spousal benefit while he's still alive.
That's correct.
Roger: Complicated stuff.
Andy: Really is. Unfortunately, it's a very important system, but unwieldy and difficult to navigate.
RELATING TO WORKING WITH A BAD FINANCIAL ADVISOR
Roger: Our next one is related to, really, a comment on Rosie's case study.
I don't know how much you tracked the original Retirement Plan Live with Rosie and then the update, but we definitely have a lot of feedback on this one.
This feedback, and it comes from somebody that's anonymous. They didn't share their names.
"I was very captivated by your latest podcast with Rosie. I can definitely relate to her disappointment with a financial advisor as I have had several bad experiences with such folks.
Also, it seems like I learn a lot more from retirees that are not as well off and have to prioritize decision making.
Thanks so much for the broadcast and the guidance."
But I thought it might be interesting to take a moment here to talk about experiences with financial advisors. It's almost, you know, the old attorney jokes about it the jokes about attorneys. It feels like financial advisors have a good reputation when it comes to jokes or bad experiences. How does somebody navigate that?
I mean, I think you would concur. Yeah. There's probably is a lot of that.
Andy: It's hard. I just coincidentally did a podcast with someone else on my podcast where he's a real person, not an advisor and he was discussing the same thing, how it was challenging for him to filter through the noise and all the terms and labels and the people out there who call themselves advisors or financial professionals or what have you.
He's a very knowledgeable guy, and he jokingly said, I should write a book about this or the average consumer how they can help find a good advisor for them, and I stopped them. I was like, that's not a joke. Like, you should. I'm going to hold you to that.
I think that's a fantastic idea. It would mean a lot to come from someone who's done it, a consumer who's done it. I'd be willing to help them out with however I can.
So anyway, I fully recognize it's hard. An advisor is not an advisor is not an advisor. They're not all created equally. You should not pick one simply because he was referred to by someone you know or happens to be local or is someone you know from a place of worship or something.
I don't like equating advisors to doctors. I think the analogy breaks a lot of times, but at a high level, I think it makes sense here. Think about, like, doctors.
Just because someone's a doctor doesn't mean they can do heart surgery on you or do reconstructive foot surgery or whatever, be a specialist in your kidneys. Advisors are sort of similar. There are generalists and there's folks that intentionally specialize in certain things. Big distinction here is the accumulation stage of life where you're working, saving, building, adding assets, and then de accumulation. You go from no longer working and saving, but now retired and spending using your portfolio. Very different planning considerations, things to consider, different knowledge base, like Social Security is sort of a cornerstone of a good de accumulation plan.
A lot of advisors who just focus on helping folks accumulate, don't know much about social security beyond some basic talking points. So how does someone know how to find that? It's hard. You and I have chatted about this, and we kicked around ideas to try to put together a list of resources or helpful hints.
It's knowing that they're not all created equal. It's hoping you know other folks who know what they're doing and have gone through this journey that you can lean on to ask them.
It's finding good content sources, be it your podcast, my podcast. There's plenty of blogs, YouTube channels, Facebook groups out there. Some of its noise and sales, but a lot of it, you hang out long enough, you'll get a feel for what's genuine good information versus what's just people trying to sell you something.
Eventually, you sort of soak it up and pick up what you need to know and what can help you find one.
I feel like this isn't great because it's not really, like, tangible, here's what you should do, but I think that's the honestness behind how difficult it is to find someone good and sift through all the junk. What are your thoughts?
Roger: Messy field, and it's a sales field at its core. I do agree that the I think the analogy of a generalist versus specialist does hold, right? A retirement planner is very different than a generalist financial planner.
Andy: Yes.
Roger: We have a resource of how to interview and search these out that we can share in 6-Shot Saturday that at least gives you a framework to interview.
I'm guessing you would agree with me on this, Andy. When it comes to retirement planning, the importance of investment decisions, although they're important, I don't want to underplay them. In the levers that you have in your life to impact your plan, it becomes a much smaller lever compared to tax management, cash flow management, et cetera.
So, we'll share that resource. A lot of it comes down to the question behind the question of asking the follow-up questions, I think, Andy. Everybody's going to talk about retirement planning because that is where all the money is from a financial advisory perspective, right? So, everybody's going to talk about financial planning and retirement planning.
But I would argue, at least in my experience, very few have really detailed thought out processes beyond the talking point. So, they're not very deep in their process for how they think through things. Just asking follow-up questions when they start talking about their process, I think, can help weed out some of that shallowness that exists.
Andy: Yeah. And this is where you need a basic level of knowledge. So, for example, retirement specific planning things or, like, one of the questions we'll talk about soon, Medicare IRMAA or premium surcharges, Roth conversions, Social Security claiming strategies, taxability of pensions, what have you, these are all things specific to retirement.
If you ask a prospective advisor a question about Medicare IRMAA, about Roth conversions, about Social Security, about pensions, and they don't know the answer or they give you some generic, doesn't sound like you're talking about answer, they're clearly not a retirement focused planner even though they may say they are.
WHAT DO I DO WITH AN OVERFUNDED WHOLE LIFE INSURANCE POLICY?
Roger: So, our next question is an audio question.
I have to see if I can make this work and how we record this for video. So, I'm going to play. You tell me if you don't hear it though, Andy, because then I'll have to pivot on this one, and we'll edit it out. Okay?
It's a pretty straightforward question on overfunded life insurance. So, David is calling from Pittsburgh, Pennsylvania, and his central question is, what can I do with an overfunded whole life insurance policy?
I know you've dove into some of the insurance as a retirement investment philosophy, at least in LinkedIn as I've seen. So, if you have an overfunded whole life insurance policy and let's assume. I don't think David tells us here. He doesn't have a need for life insurance. What are some things that you can do to net use that as an asset in retirement?
Andy: Sure. So super quick background. There's regular term life insurance where you pay for 10 years, 20 years, 30 years. If you die in that time, you get paid out. If you don't, policy runs its course. Nothing else exists. You know, there's no asset to take and use whatever it simply ends.
Permanent life insurance such as whole life is something there is an asset.
You have it for your whole life, assuming you keep it enforced and actually pay when you're supposed to. There will be a death benefit until you die, be it 80, 90, a hundred. But there also builds up cash value within the policy, which is an asset. You can take the cash out. You can borrow it. So that's what he's talking about here.
Overfunded simply means he has a whole life insurance policy where there's a lot of cash value built up inside of it. Question is, I don't particularly need life insurance. Let's assume, you know, he has enough other assets or doesn't have people who would be financially hardened if he were to pass. So that's objectively I'm guessing he is saying he doesn't need it.
What do I do with it? Well, there's a few things.
You can just outright surrender it. In effect, cancel the policy and walk away with whatever the cash value is, whether it's 10,000 bucks or a few hundred thousand bucks, I don't know, but you can walk away with that.
Now there could be tax implications. If you take out more than you paid in total, the difference will be taxed. So, if he paid 100,000 dollars in premiums throughout his whole life and there's a hundred and 120,000 in cash value, he takes that all out. He pays tax on 20,000 dollars.
Roger: But if he's taking incremental amounts, it's coming out without tax until he gets his premiums back or that hundred thousand dollars. Correct?
Andy: That's correct. In accounting speak, it's called FIFO, first in first out. So, it's assumed he's taken out his contributions first only after he's taken out a hundred thousand dollars, then are these subsequent withdrawals taxable to him.
So that's one option. You do that, the life insurance is over.
You no longer have that death benefit, but you can take away the cash value and leave and do what you want.
Another is keeping the policy, and then you can just sit on it, not do anything with it. The cash value will continue to grow. The death benefit's still going to be there till you die. That's another option.
Or you can borrow against it. So, you don't have to give up and fully surrender the policy to get money out of it. You can borrow against the 120,000 dollars in this example, cash value you have where the policy is basically collateral. You're in effect taking a personal loan from the insurance company. They're collateralizing that loan by the cash value of your policy.
The interest rates are usually fairly favorable compared to, like, credit cards at least. I mean, it's probably 5 percent give or take currently to borrow money against your life insurance policy.
So why would you borrow it? Well, A, if you want to keep the death benefit intact, but still kind of monetize and get use of it in the meantime, you can borrow against it.
It can also be a good buffer, sequence of return buffer in technical retirement speak.
So, if you are entering retirement and as we all know, if there's a few really down years at the beginning of retirement, it's not ideal to have to sell off positions from your portfolio when they're beaten up, especially early in retirement. So, if you have non correlated, quote unquote, buffer assets that can help you sort of ride out the roughness, you can help preserve your portfolio so you're not taking money out when it's down. Borrowing against a cash value life insurance policy could be a good way to do that. You take the cash out. You're not touching your investments to get your cash.
Now, the other potential benefit of borrowing against life insurance is you generally don't have to repay it during your life. What happens is if there is still a loan outstanding when you die, that loan simply gets paid off by the death benefit proceeds. So, if you have a 500,000-dollar whole life policy death benefit and you have a hundred thousand dollars of loans outstanding, let's say, when you die, only 400,000 dollars actually gets paid out to your heirs. A hundred of it's carved out to pay off the loans you had outstanding. It could be a neat utilitarian tool.
Roger: A lot of it depends too. In whole life, I don't think it runs into this as well as I say a variable life policy does.
Internally, what's happening is the cost of insurance is increasing every year and I've had instances, not with whole life, but with other structures of permanent insurance where significant loans were taken out and the person had to either continue to fund the policy or rebegin putting premiums in to keep the policy afloat because of this ever increasing insurance cost or it would implode is the nontechnical term, or the cash value x the loan would no longer support it, and it would implode, which would create a big taxable event.
Andy: Correct.
Roger: Whole life, I don't think, is much of a risk there as some others, but that's something they could think about.
Andy: Yeah. Whole life is much more stable, with less variability. It's a universal life chassis that you're referring to. Regular universal, index universal, variable universal. The cost of insurance does increase as you age.
There are more ways in which they can go wrong and backfire, especially if you have a lot of loans outstanding. The policies can implode, and your kind of stuck at that point.
Roger: Yeah, and then you have a big taxable event that you can't avoid.
Andy: Right.
HOW ARE IRMAA SURCHARGES CALCULATED?
Roger: I'm going to pull out something, Andy, that I don't pull out very often. But definitely with you, it's a good thing to pull out. You can't see it if you're on the show. But this is my geek hat. Alright?
So, I'm going to put my geek hat on. It just has a big G on it for those of you that are listening, for our next question related to IRMAA.
IRMAA is the potential surcharge on Medicare part B and d if you earn too much money in two years prior to the year that you're incurring it. It can get very confusing.
We don't need to go down the rabbit hole of IRMAA. But the question is a good question is,
"Are IRMAA brackets for the surcharge established two years back?"
As a good example, I can look at what the IRMAA surcharges are for 2024. So, are you paying the IRMAA that's for 2024 when you're thinking two years in the future, or is it whatever the surcharges are in the year that you actually encounter IRMAA? So, for example, in 2024, is the 2022 income used to determine whether it's the IRMAA surcharge and the amount of IRMAA, or is it the 2024?
Andy: Yeah. I got the question, and I had trouble wrapping my head around trying to sort of verbalize for people how to visualize it. Maybe I'll start by saying how it works, and that may clarify the question in the process.
In 2024, the amount of surcharges, if any, you have to pay for your Medicare is based on the income reported on your tax return in 2022. Now, what are the actual thresholds?
This is where the confusion in the question lies. When are those thresholds set? The question was, is it in 2022 or 2024? Neither. It's actually 2023.
So, what happens is in October, November 2023, that's when the CMS, which is Center for Medicare Services or something, whatever, the government agency that oversees Medicare, that's when they established what the income levels will be that will apply to your 2022 income for purposes of your 2024 premium surcharges.
Clear as mud. Right?
Roger: Totally clear. So, 23 is when they establish the thresholds for 22, which is going to impact 24.
Andy: Yes.
Roger: Maybe I can have an editor create a visual of this. Okay.
Andy: Visual would help tremendously, I think. Yeah.
But I think how you just word it is the most concise. You can boil it down and get the dates and the logistics across.
Roger: Then what about I don't think this was really asked, but then what about the amount of the surcharge? Because that changes year to year.
Andy: Correct.
That also is announced in that same October, November announcement from CMS.
The reason why they need to wait to do that is because the surcharges are keyed off of what the base premium amounts are so Part B for example this month this year 2024 it's what 175 bucks give or take a few cents. In October, November of last year, that's when CMS announced what the base part B premium will be for 2024. IRMAA surcharges aren't willy nilly just picked out of the air. It's a percentage of the base premium.
Roger: I understand. They have to know the base in order to do the percentage.
Andy: Correct. Exactly. Exactly. The income thresholds at which those different tiers start, that's just a function of inflation.
So, you can sort of guesstimate those throughout the course of the year as inflation plays out, but the actual Part b base amounts and the surcharge amounts, you won't know until CMS announces those in October, November of the before the next year.
Roger: So, as an example, let me see if I can share a particular tab. Let me see if I can pull this into here. Maybe I can't do it, so the editor might have to pull this out. But for 2024, the level for the first IRMAA surcharge is 206,001 dollars. So that if you look at the 2024 important numbers, we'll share that in our 6-Shot Saturday so you can have that document.
That amount was actually established last year is my guess.
Andy: Correct.
Roger: This can be sort of important because these are tripwires. If you're one dollar over, you're going into the whole whatever next level it is.
As a result, when you're trying to do some planning around this, give yourself some buffer is essentially the solution, I think.
Andy: So common question may be for people who are trying to plan their incomes in 2024, such as Roth conversions or taking taxable distributions from IRAs or whatever, they may be asking, well, what income amounts do I need to stick to not get into IRMAA territory?
The answer is we don't know. We're not going to know until fall of 2025. They will announce 2024 income thresholds for 2026 IRMAA amounts.
So, the best we can do is take what you just said, Roger, this year's the 216,000-dollar level, which is for married couples not single, single is half of that, and assume worst case, there'll be no inflation increases to that going forward. That's the limit you'd want to keep yourself to if you're trying to stay, you know, not beyond that cutoff.
Roger: This is totally an optimization question. If you're dealing with this issue, getting it wrong is likely not going to be devastating to your retirement. It'll be annoying.
Andy: Correct.
Especially if you're over by a couple bucks, that'll really sting. But IRMAA only lasts 1 year. Every year, they reset this process based on this rolling two year look back of your incomes. There are also some waivers discussed in previous shows about retirement as a waiver where you can get them to amend your reported income if you've since retired and things like that.
Roger: Okay. I'm going to take my geek hat off now. With this hair, thanks so much for hanging out with us. As always, we'll have you on here soon.
Andy: Thanks for having me. Always a good time.
TODAY’S SMART SPRINT SEGMENT
Roger: On your marks. Get set, and we're off to set a little baby step we can take in the next seven days to not just rock retirement, but rock life.
Alright. What do we need to do in the next seven days?
So, in the next seven days, I'm actually going to incorporate that quote at the beginning of the show from William Ruri, which is, when you're angry, you're going to give the most incredible speech that you ever regret. One of the things that he talks about in his interview with Tim Ferriss, which is a great interview, not just on negotiation, which William Urie is an expert at, but creative problem solving.
One of the suggestions he gives or tools he uses is when you're in a conflict or in a disagreement is to breathe and go to the balcony. Remember, like, the Muppet guys on the balcony? To go to the balcony so you can observe yourself and whoever else you're talking with more objectively, because it's easy, especially when we're getting excited and angry or having a discussion to just keep going forward and forward and forward or to turtle. Some of us will just turtle. And his suggestion is, 1, go for a walk, reset yourself, and while you're doing that, go to the balcony. Have a perspective outside of yourself to observe it without all the mix of emotions and everything else.
So, it's a good concept. So, when you find yourself in a discussion and you're getting riled up a little bit, maybe take a little walk and go to the balcony.
CONCLUSION
Hey. Thanks for hanging out with us this week. If you haven't, go to youtube.com/retirementanswerman. We have a YouTube channel where we're posting videos of Andy Panko. A lot of the answers we're going to have, Andy and Panko and I will be on video, but I'm also doing original videos on core concepts that we talk about on the show. It's easier to organize them in core concepts.
So, if you haven't checked that out, go to youtube.com/retirementanswerman and subscribe, and you can see me just fumble around, not just hear me. Have a great day.
The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All performance references are historical and do not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax, or financial adviser before making any decisions.