The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney

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Listen every other Wed. on KQV 1410 AM, at kqv.com or click below for our archives. Gain FREE access to the best information available from the country's leading IRA experts including Ed Slott, Bob Keebler, Natalie Choate, Barry Picker & Jane Bryant Quinn.

 

 

Smart Advice from Jane Bryant Quinn for Making the Most of Your Money
Jim Lange, CPA/Attorney
Special Guest: Jane Bryant Quinn, Financial Author
Episode 20

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TOPICS COVERED:

  1. Introduction of Special Guest:  Jane Bryant Quinn
  2. Saving for Retirement Plans While You're Still Working 
  3. The Importance of Knowing What Your Retirement Benefits Are
  4. Encouraging Seniors to Spend More
  5. Deciding When to Take Social Security

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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.


1. Introduction of Special Guest: Jane Bryant Quinn

Hana: Welcome to The Lange Money Hour Where Smart Money Talks. We are talking smart money. Thank you so much for joining us tonight. I’m Hana Haatainen Caye joining Jim Lange, nationally recognized IRA, 401(k), and Roth IRA conversion expert. Jim is the author of the best seller, Retire Secure! with testimonials from Larry King, Charles Schwab, Jane Bryant Quinn, Ed Slot, and 60 other financial professionals. Tonight we’re excited to receive outstanding financial strategies with one of the best guests we could possibly hope for. Jane Bryant Quinn is one of the most popular financial writers in America today. For years, Jane’s syndicated columns appeared in hundreds of newspapers throughout the country. Newsweek magazine featured her personal finance section and her expert advice can be found online at Bloomberg.com. Jane has recently completed  Making The Most Of Your Money Now, the classic bestseller completely revised for the risky new economy recognized by Consumer’s Union as the best personal finance book on the market. Jim I think you wanted to add a few words before we get started tonight?

Jim: Yeah before we get into the substance of our show tonight I’d just like to tell our viewers a quick story. Back in 2001 I wrote an article and it was regarding the new IRA and minimum required distribution rules both while IRA owners were alive and after they died. And the new rules had a major impact on estate planning and it fit in perfectly with the estate planning I had been doing for years. So I sent out an email newsletter and I called it The Ideal Beneficiary Of Your IRA. You know I have 30, 000 subscribers and who knows who gets these things. The next day about 5:00 in the evening I get a call and it’s Jane Bryant Quinn. She said, “Do you have a minute to talk about this?” No Jane, I’m sorry I’m too busy, of course. So this was the best thing that could have happened. Anyway, over the next two weeks, we spent over four hours on the phone talking about the new rules and my response to the rules for what was the best way to handle IRA Distributions and Estate Planning for IRA owners. So just think of this, she spent over four hours and it ended up being a one-page article in Newsweek. So think of the preparation that went into that, she spent four hours for one page. And now with her new book, Making The Most Of Your Money Now, it is 1100 pages, it is an unbelievable book. And Jane I just want to congratulate you on really what I would consider a monumental accomplishment.

Jane: Well thank you Jim I really appreciate it. I do remember being back and forth on the phone with you because some of it was a little unclear to me and you taught me pretty well.  I was just trying to get it very very clearly in mind and we had a lot of back and forth. Actually speaking of the work for this book, if I can tell you, it was supposed to come out a year ago. It’s due as you know the pub date is December 29, and you can pre order it on Amazon. So we’re almost ready to roll with this book, but it was supposed to come out a year ago. And as we started getting into the year I saw that things were changing rapidly and I said to Simon and Schuster, we cannot bring out this book because things are changing. I really have to wrap my mind around what’s going on with this economy and the stock market. And they tossed it back and forth, and I said, well I’m just not going to write it. And they said, well in that case okay. So I did wait, thank heavens, because of course everybody knows about the panic of ‘08 and what has subsequently happened and the new administration and new changes in financial roles. So I was able to catch them all, but the downside is that I had to revise the book a second time.

Jim: Well I know you are a hard worker and it shows in the book. It is a monumental accomplishment and I actually thought you did a wonderful job of including many of your classic consumer oriented low cost strategies, along with things for the new risky economy.

Jane: Well thank you Jim, I appreciate that.


2. Strategies for Saving for Retirement While You're Still Working

Jim: Jane, what I thought we would start on is, you were always a big fan of people putting money in their retirement plans. And now we have the Roth IRAs and Roth 401(k)s and I thought maybe we could spend a couple minutes for the workers who are listening who have access to retirement plans and what are the best strategies. I’m not looking for specific investments like you know IBM or the XYZ mutual funds, but general strategies regarding saving for retirement plans while you are still working.

Jane: Well, first of course you should use them if you have a 401(k) or a 457 or something that is offered by your employer. One thing that has happened in recent years is that many employers will sign you up automatically when you join the company, which is wonderful. So people who might not otherwise have savings have them. You know you can opt out if you don’t want it but practically nobody opts out, everybody just stays in the plan. And some companies are also automatically signing up people who are currently employed who have not been in the plan before and this is a wonderful thing for them. They will discover in the future they have money they wouldn’t otherwise have had. The second thing that you can choose in many companies now is to have your automatic increases in the money that you put into the plan. So every year presumably, hopefully when you get a raise there’s a small increase in the amount of money you’re putting away in your savings and it all happens while you sleep you don’t have to do anything, you don’t have to think about it, which in my experience is the absolutely best way to save money for your future. You make it automatic, you have it happen, you have automatic increases and then you get on with the rest of your life and you don’t have to think about whether to put the money in or not.

Jim: So what you’re recommending is basically always taking advantage of whatever the employer is willing to put in whether it’s a match or whether they just put it in no matter what you do, and then you’re saying put in the most you can afford and preferably the highest amount that you’re allowed to into your retirement plans in the 401(k) or 403(B) or 457 is that right?

Jane: Absolutely and obviously you’re probably not going to be able to start with the max the first year but you should sign up for these automatic increases. Jim, I’m also concerned about the people who don’t have these plans, people in small companies, people who are self employed, they know they need these plans but there’s no company doing it for them automatically, they have to do it for themselves and it is just absolutely essential that they start an individual retirement account or you know if they’re in a small company a solo 401(k) or you know one of the many plans that are out there for individuals. And if you don’t have such a plan that gives you tax deferred savings, please, please, please go out and do them. You can find them at your bank, you can find them at mutual fund companies, they are very easy to start but you just need a little initiative yourself which is sometimes a little bit harder than people who have it come to them automatically at their companies.

Jim: Well I agree with you completely and I like maxing out retirement plans, and also if there is money available to put money in Roth IRAs, but maybe we should talk for a minute about in the event that people have an option between traditional retirement plans and let’s say in a traditional Roth 401(k) or, I’m sorry a traditional 401(k) or now if your company offers it a Roth 401(k) that is going to give you tax free growth. I know that you have a little bit about that in your book maybe you can expand on that thought, and let’s say that somebody is interested in starting their own plan now you can have a one person 401(k) that has a Roth component also.

Jane: You know this depends you know this is one thing about writing 1100 pages Jim because some of these things depend, you can’t say everything is absolutely right for this person and say this is it and get it over with, some of it depends on your situation. So if you are starting a traditional 401(k) it is deductable, your contribution is deductable on your tax return, so you can save yourself a little money in taxes by having put money away, whereas if you start a Roth 401(k) well it is not a deductable contribution so you’re putting in, generally putting in a little more upfront and in return you get tax free accumulation and some other benefits. So it really depends on whether you want to pay taxes now or pay taxes later. People try to predict what their tax return will be in retirement, which I find you know a pretty risky thing to do. Who knows what your tax bracket is going to be in retirement? So that is really the things you look at. Generally speaking the people who start the Roth IRAs are people who have more money and expect to have much more money in retirement because one of the advantages of a Roth IRA is that you don’t have to make mandatory withdrawals. A traditional IRA you have to start taking money out at 70.5 a Roth IRA you don’t. So if you have a considerable salary and you don’t mind saying well I’ll pay a little extra tax now and put the maximum into the Roth because later when I’m retired I probably won’t even need this money, I won’t have to draw it out I can leave it to my kids, that’s the ideal person for a Roth IRA. The ideal person for a traditional IRA is someone who says you know maybe they don’t have quite as much money and says I really need a tax deduction if I’m going to put the maximum into my traditional IRA. And then when I retire first I’m going to need the money and second you know and if I have not a lot of money I might not even pay taxes at all, I might be in an extremely low bracket. So those are the two ways to look at it and I basically divide it by the level of wealth you expect to have.

Jim: Well I agree with you, I think a lot of it relates to tax bracket and particularly people who will be in a high tax bracket later, and if taxes go up then the Roth 401(k) and Roth IRA contributions make sense but if you’re going to be in a lower tax bracket or if you need the tax deduction now maybe the traditional. The other thing that actually kind of surprised me because I always think of you as very prudent, plan for retirement, low cost investments things like that, but I also you know that you have a high regard for education, and a lot of people in the middle are deciding between whether they should put money into their own retirement or whether they should fund their children’s college educations. And then you said to heck with the kids take care of yourself first and that kind of surprised me so I thought I’d ask you to expand on why you like taking care of your own retirement before you educate your poor children.

Jane: Well I mean this is a terrible choice obviously between parents who can’t easily do both, which I might add is practically everybody in the United States cannot easily do both, but if you approach retirement broke what are you going to do if you haven’t saved enough money? I mean there is not a lot of chance for earning money, I mean you know you get very low paid jobs if that when you are retired, when you’re an older person, there’s a lot of discrimination in hiring against older people. So you have no chances for further money coming in, and your expenses are going up, and maybe your house isn’t worth as much as you thought it was going to be worth, and so gradually you could become impoverished, you could run out of money. And then what’s going to happen you’re going to look to your kids and say well you’re going to have to support me because I don’t have any other choices except maybe going on welfare and your kids might not want that. So it’s a terrible thing to approach to be in retirement and find that you’re running out of money and that’s why I say do retirement first. For your kids education first they can be working and saving some money, second they don’t have to go to Harvard or Yale they can go to all kinds of excellent lower cost schools where they may get a substantial state grant, they may get, they may or may not get a federal grant, loans are available, and kids have their lifetimes to pay off the loans they take. Of course some of them do take a lifetime, but they have that. Whereas if you say even if you take on debt when you’re 60 to help your child go to school what are you going to pay it off with if you’re 65 and retire or if you’re pushing to retirement all of a sudden unexpectedly? You simply must look at your retirement plan first and then plot a really sensible strategy for what your kid can afford, what you can afford, what kind of school is proper, and I do have you know there’s much more of what I call merit scholarship money around, which is based not on family income but on all kinds of different things whether it’s athletic ability, or whether it’s brains, or whether it’s you play the flute, or whether it’s you know we’re in Wyoming and we want to have more kids from the east coast, I mean there are all kinds of schools that have merit scholarship money. And in my book I have a long list of places you can look for that, so there are ways that your child can get a good education and even without your having saved a lot of money. Whereas there is no way you can have a good retirement if you are broke.

Jim: Well I have a couple responses. First, all throughout your book you give a lot of references and places where people can get more information if the 1100 pages you provide isn’t enough. Second, I would completely agree with you. I know that one of the worst fears that a lot of my clients express is running out of money and having to rely on their kids, and that is something that we really do every thing to avoid. And the other thing for whatever it’s worth, and I’ll personalize this, I know I was a better student when I had skin in the game. You know I went to law school at night and nobody was paying except me and all of a sudden I was a much better student then I was as an undergraduate because I was paying for it. So I actually think that that is great advice, that it goes counterintuitive to what a lot of people do. You know they think well I’ll somehow make it up but it’s just too tough for a lot of people.

Jane: It’s hard, I mean emotionally it’s hard to say I am not going to do something for my child because it’s your child and you have the responsibility and you love them and you want them to have the best start in life and all these kinds of things, but here is something where you might be able to do both Jim. Now if you have this automatic money taken out of your salary, taken out of your paycheck, and it is going into your retirement account and you’re increasing the amount that goes in every year. So you’ve got less money in your check book. Now people tend to spend what they see in their checkbook. So if the money is taken out in advance they kind of automatically fit their living standard to what they see in their checkbook and so that’s why I love automatic savings. Now once you have all this money automatically coming out of your paycheck so let’s say your retirement is now being taken care of year by year you may look at what is left in your paycheck and you may say well for my budgeting you know we have the house, we have the rent, we have whatever, but I’m going to put X amount per month into say a plan for my child’s college education. You can then make that decision out of the money you have left. So as long as you have that automatic money going into your retirement account then you know you have a choice when you’re looking at what is left and you can say well maybe I do want to, maybe I can save something for education. So typically if you can save say up to a third then you get sort of a third in loans and a third in grants of some sort and that’s kind of a rule of thumb. But saving the maximum for your retirement does not preclude your saving something for your child’s education then it becomes a choice, what matters to you more you know a bigger house and a bigger mortgage or more money in your child’s college savings account? Then I would say well don’t have the big house or the big mortgage then save for your children.

Hana: Okay we’re going to take a time out right now and we’ll be right back with The Lange Money Hour Where Smart Money Talks.

Hana: This is Hana Haatainen Caye, and we’re talking smart money with Jim Lange and Jane Bryant Quinn. Jim there’s still quite a bit we’d like to cover tonight with Jane. How about another question?


3. The Importance of Knowing What Your Retirement Benefits Are

Jim: Jane you’ve so many gems in your book but one of them that I thought was particularly appropriate and something that I’m kind of shocked but I often find this problem in my practice is that people don’t know what their retirement benefits are and they don’t know what is available to them both with a 401(k) plan in terms of what the employers putting in and perhaps more importantly they don’t understand their defined benefit plan. I thought maybe if you could expand on the importance of knowing what you have available to you that that might help some of our listeners.

Jane: Well you put your finger on it Jim. Some people you know they’re hardly even aware of their defined benefit plans. A colleague of mine at Newsweek who was taking an early buyout package the only thing he had been looking at for the past 15 years when he had been there was the amount of money that was going into the 401(k) and Washington Post company stock and Washington Post owns Newsweek, and what that stock was worth, and what his contributions were. And then he came into this buyout package and he suddenly discovered that he had a pension plan and he hadn’t realized that he had this regular source of money in addition to the 401(k). So I think that a lot of employers are kind of dumb because they’re putting this money aside and they’re not explaining to their employees that they have this benefit. So number one I’d  say, employers need to do a better job of teaching employees about it. If you do have a defined benefit plan and you are coming up,  you’re approaching retirement you {absolute defined benefit}, meaning the traditional pension plan where you get a certain amount of money based on your age and the number of years you worked. You should start finding out what it’s going to be worth and typically you will have a choice between taking that money as a lump sum, you don’t get the lump sum that’s there is discounted for its present value, so seeing whatever you can get as a lump sum versus signing up and saying okay I’m going to take this as monthly payments for the rest of my life. And that is a very, that’s a really important choice and that’s at a time when I really do recommend your finding an accountant or a fee only financial planner to help you, not a planner who sells products because you know they might steer you wrong but somebody who will just layout what the choices are on either side. If you take a lump sum you know how well will it be invested? Is it going to do better than you would if you had a fixed amount of income for life? And so those are things you have to think about very carefully especially if you have a spouse to protect because if you take the traditional pension you can take a joint survivor so that if you die first your spouse has a pension left to live on, and if you take the lump sum and you invest it badly your spouse could have nothing left to live on. So there are many, many things you have to think about when you’re making that kind of choice and that you very much have to know how much it’s worth if the monthly income that helps you know how much else you have to save on the side.

Jim: I think it’s interesting that you had somebody at Newsweek that literally didn’t know about their plan.

Jane: Didn’t know,  hadn’t a clue, was very grateful of course. By the way that’s like the automatic savings, something you don’t know you have coming and then suddenly you say wow I have more then I thought.

Jim: I had a client who came in and she gave me all her information and she was giving a huge amount of money on the annual basis to a religious organization, and I’m the last guy in the world that wants to discourage people form giving money to any type of charity but at the rate she was going she was going to run out of money. You know I said you know if you keep doing this you’re going to run out of money and I’m really concerned. She said don’t worry I’m not worried God will provide for me. I thought oh my goodness what will I do she’s giving so much money. We talked further and it turned out that she worked for a company that I knew had a pension plan and I said well don’t you have a pension plan from this company and she said no, no, no, I took the whole lump sump after I retired. I said well I think this is on top of your lump sum. She said no no, I said well do you mind if I do some research. She said no they know about me, I get my health insurance through them. I said well I want to check this out anyway. Anyway it turns out she does have a pension and it covers $1000 a month and now she can give money to her organization and live comfortably, but she literally didn’t know it. The other thing I think is important for people to understand is that the nature of these pension plans and particularly if you are an employee of a state retirement system like in Pennsylvania it’s the PSERS. The way it works is you get more and more of a percentage of your last three years the more years you work. So for example I have a lot of let’s say even teachers who might prefer to move to a different state and I really discourage that because to have let’s say 15 years at state 1 and 15 years at state 2 is going to be nowhere near the pension as 30 years at either state system, and that probably goes for a lot of the private pension plans too. So that’s another reason why it’s so important to know what your options are.

Jane: Now some companies of course have switched to a pension that’s known as a Cash Balance Plan, and that is much more like a 401(k). I mean you have a guaranteed amount that is put in for you but you don’t get increased amounts based on your longevity. So if you have that kind of a pension then longevity or staying on the same job doesn’t matter as much. But certainly especially in the state some of these state plans have even inflation increases, I mean these are just wonderful plans. Of course there’s a question of whether some of them can actually be paid because so many of these states are in deficit and that’s I guess another risk you have to look at but basically these are pretty reliable and quite remarkable plans, in fact people who want to retire early so often I run into early retirees. First, they always have a pension of some sort, and they especially are apt to have a government pension.

4. Encouraging Seniors to Spend More

Jim: If I can go back to something else in your book. I did take the liberty of looking at Amazon to see because I knew that readers could go to Amazon  and order the book now and one of the things that was on Amazon was a good chunk of my favorite pages in your book, which was basically the first 13 pages where you tell people what to do and you make a financial outline, and then you even say well here’s the meat and the rest of the thousand pages is filling it in, which is obviously an exaggeration. But I thought that that was terrific. So you say if you’re in this age group do this, if you’re single do this, if you’re a widow do this, which I thought was terrific. One of the things that another thing that kind of surprised me and now we’ll go to, let’s say to the older category is when you talk about advice for people aged 76 and older and you correctly note which is consistent with my experience that people 76 and older tend to be depression era mentality type folks who by nature are not great spenders and you say the heck with the kids spend, spend, spend. And I think of you as this kind of very prudent advisor who would probably recommend obviously you should do wills and beneficiary designations etc., but you’re encouraging seniors to spend some of their money rather than to hang onto it for their kids.

Jane: Well you know it’s really for the--I sound as if I’m anti-kids.

Jim: No college, no inheritance.

Jane: Spend your kid’s inheritance right? I wish to say I have two children and six step children so I’m very much aware of what kids need and how you can help kids, but I have a couple of feelings about this. First, you know a lot of parents help their adult children during their lives. For example, they might help with a down payment, they might help put something forward to help their grandchildren go to college, and so I consider this kind of a down payment on their inheritance if you will, sort of getting the inheritance or some of their inheritance early when they can especially use it, it’s a wonderful thing to do if parents have the kind of money so that they can do that. I just hate to see older people scrimping and saving because they think that it is essential that they leave something to their children. Most likely they will leave something to their children anyway because they probably own a paid off house their children will get that and there will be other assets that the children will get. I just hate to see people of an older age depriving themselves because they are not thinking about their own lives and what’s comfortable for them. They’ve raised their kids, they’ve helped in various ways, I mean this is a time when you should say this is what I was saving all of this money for, this is a time when I really want to be comfortable and enjoy the last ten or fifteen years of my life. And so that’s why I say that, and I guess it sounds a little sick but sometimes you really do have to encourage people to say you know you really can afford to take that cruise or there are things you really can afford to do don’t be afraid to spend the money.

Jim: Well I find that most of my clients probably even maybe even younger than 75 tend to really be savers and spend well under, and you talk a little bit about the safe withdrawal rate you say basically a 4% safe withdrawal rate and might even be higher if you’re 75 or older but a lot of those folks will spend less than that. I agree with you completely that they should spend some money and if they want to do something for their family maybe to take their family on a cruise or have a family vacation, which is a great experience for their family also.

Jane: And also you know some people just become afraid of dipping into their principal and they say I can only afford to live on the interest or dividend earnings. And you know I mean that certainly is one way of looking at your retirement income but the older you get you know if the principal is sufficient you know it doesn’t hurt to dip into principal. You still have the option for growth assuming you have some sensible allocation still to stocks or growth, which I still think is good for a period of 15 years or more. So that’s another way that they need to look at it. By the way Jim, if I can come back just one minute it just occurs to me that there’s something I wanted to say about pensions, the traditional pensions, and that is there are many people who will come to somebody who’s retiring and say give up your pension, use or take just a single life pension, use the extra money you get from you know if you get a joint and survivor to cover your spouse you get a smaller check. They say take a single life pension and then you have extra money, use it to buy an insurance policy and if you die first your spouse gets the insurance payout and if your spouse dies first well lucky you, you have this higher payment for life. I think that is a terrible thing to do. First, most of the illustrations are deceptive in some way because it is very hard for you to get the same returns for your spouse. If you take the single life pension plus the insurance company usually you can’t, so there’s something wrong with the illustration they show you. And second there is so much that can go wrong if you do that that you might find out you can’t afford the insurance policy any more or something that in the illustration that was deceptive means that it doesn’t work out the way you thought and then you die and your spouse doesn’t have the pension that you would have had if you had joint and survivor. So I always try to encourage people when they are at the pension age to think not just about themselves but to think what is going to keep my spouse safe as well. Now the spouse may have plenty of income and pension and what not of his or her own and that’s a different situation, but if you’re responsible for the spouse I just really want people to think carefully about what they’re doing.

Jim: Well I would agree with you because we actually run numbers in those situations and we have found in most cases particularly for state pensions that you are much better off getting a two life pension rather than getting a one life and the life insurance. But my big thing is you have to do one of the two, in other words to protect both people assuming that there’s only so much money there and that the surviving spouse doesn’t have their own resources you either have to do a two life, which usually works out the best or one life and insurance. And sometimes what happens is people do a one life and then they don’t get insurance and that to me is leaving a big gap and vulnerability.

Jane:  Well also you know their situation might change in the future where they got the insurance but then they can’t afford to pay the premiums you know that can happen too. So it’s much less sure for the spouse so that sort of goes to your attitude toward risk and how much risk you want to take on your spouse’s behalf. And I think that spouses which are usually women in this case need to understand that when they are hopefully sitting with their husbands making a joint decision on that.

Jim: Well I know I really like the security of a pension, and one of the things a lot of people don’t have pensions these days they have 401(k)s and you talked a little bit about buying an immediate fixed annuity, in effect kind of creating a pension from existing monies or retirement plans. And I know that usually you are not a fan of a lot of financial products but this one you seem to think is okay. Maybe you can talk a little bit about in effect giving a chunk of your money to an insurance company and then getting a monthly income for the rest of your life.

Jane: I think that is a highly desirable solution for people who don’t have pensions because you know it’s very comforting to have that regular check in the mail and know that you’re going to get it for life. So as you and other people who have read my columns know well I am very, very doubtful even well let’s say it, I hate these commercial tax deferred annuities that make you all these promises about what you’re going to get in the future and their fees are incredibly high and they say oh you invest in stocks and bonds you’re going to make so much more money and it just doesn’t work out that way and the fees are largely obscured, you don’t realize what you’re paying, you don’t understand how these things are going to work in the end because they’re very ,very complicated, and so you go and buy them and they are not good. I am really against these kinds of commercial tax deferred annuities and guaranteed minimum benefits all that stuff. But  this other kind of annuity where you just take the lump sum and you give it to the insurance company and you buy yourself a personal income or an income for yourself and your spouse I think that’s a wonderful thing to do. Now I wouldn’t do it at 60 or 65 because then you’re exposing yourself much more to the risk of future inflation and these fixed payments are not going to be worth it, but if you’re 75 and you’re starting to say gee I’m a little bit worried of how long my money is going to last, I think that that kind of annuity, a fixed immediate pay annuity is a terrific choice. And the costs aren’t high at all so they’re very competitive. You know you can go onto a website, www. immediateannuities.com, and you can see right there if I had $50, 000 to put in an annuity how much monthly income at my age can I get from all these competing insurers. It’s a very simple easy buy, you understand it, you can see what’s the best buy, you can look at the insurance companies and their safety and soundness ratings and make a choice.

Jim: And I also think that it goes to help alleviate the biggest fear that most of us, in  particular, seniors have which is literally running out of money. This will assure that even let’s say with social security and at least annuitizing at least a part of your pension that there’s food on the table, roof on your head, and gas in the car.

Jane: And you know, absolutely, and the other thing is you know when you’re first retired you tend to spend more money than you are going to spend in your later years. The fact is I mean my mother is 94 and in wonderful health.  I had a lovely thanksgiving with her and you know when you say to her what do you want for Christmas she says I don’t want anything and she means it, she really is trying to get rid of things not accumulate things. As you reach your older age you know you have your stuff, you’re not giving big parties anymore, you’re not buying fancy clothes, I mean you’re in kind of a different place. So in fact your spending does go down when you are older, I mean some of it goes down because you know you’re feeling you may be short of money but even if you’re not your spending does decrease in older age, which is something to consider when you’re buying an immediate annuity. You say oh well it won’t keep up with inflation. Well maybe not but maybe your spending will decline.

Jim: And actually the great French writer Voltaire actually has some advice for our listeners who do choose an immediate annuity. Voltaire says go on living solely to enrage those who are paying your annuities.

Jane: Well that works for me.

Jim: So I think that that’s really good and I like the idea that there’s always going to be something, some type of income, and obviously it works better for people who have good genes and a healthy lifestyle and a longer life expectancy than somebody who just got back from the doctor with a terrible report obviously that would not be a person who would be a good prospect for an immediate annuity.

Jane: That’s true. You know going just for a minute about these commercial very complicated annuities you’re paying 3% and 4% for them and you’re thinking somehow you’re going to beat the market just because you invest in stocks inside the annuities and it’s just never going to work. But they’re so complicated people don’t understand them. I got an email from a reader just yesterday and I just pulled it up. He asked me something about a different product and here’s his email. He says thank you for the informative response, not once has a sophisticated strategy proved worthwhile for me personally. So when I think of all these complicated things that are on the market that are sold as sophisticated strategies like these very complex annuities I looked at this email and said God bless, something we should raise for people.

Jim: Now I’m going to get a lot of hate mail from a lot of financial advisors that are selling these but that’s okay Jane I’m interested in your opinion.

Jane: Okay well it’s your show and your hate mail but they can send it to me too. As a matter of fact, do you know I’m starting a website, Jim I have always been just too busy to keep up a website and keep up to date things going because I was always writing columns and books and I just didn’t want to start a website and then not tend to it. Well in two weeks I’m going to have a website up, JaneBryantQuinn.com with opinions and ideas, and so they can send their hate mail to me there too.

Hana: Thank you Jane we’re looking forward to checking out your website. We’re going to take a short break now and we’ll be right back with our guest Jane Bryant Quinn on The Lange Money Hour Where Smart Money Talks.

Hana: This is Hana Haatainen Caye and we’re talking smart money with Jim Lange and Jane Bryant Quinn. Jim, I know you have another question for Jane.

 


5. Deciding When to Take Social Security

Jim: Oh I have a lot we’re going to run out of time but I have a lot. Jane one of the things that I really liked about your book was your chapter on when to take social security. I thought it was really clear in an area that is very murky, so for example in some situations that you say that the primary income earner which let’s just say for discussions sake is the husband should delay retirement and delay social security but that the dependant spouse or often the wife should start collecting her own at age 62, which is an interesting strategy. Or that perhaps wait until the husband retires when she reaches 66 if he hasn’t retired. Could you expand a little bit on some of your advice for people taking social security? I know in my office we have software that calculates when is the best time to do it and you put in earnings records, and you put in what’s going on with both spouses, but sometimes frankly we just do it a little bit mechanically without really understanding all the concepts behind it and that’s one of the great things about your book is that you actually explain the concepts and why these things work.

Jane: Well thanks for that Jim I appreciate it. The thing is that married couples need to look at their social security together. For simplicity’s sake let’s assume that the wife has earned less and has a smaller record and the husband has a larger record that is flipped for many couples but this is a more traditional way to look at it. So many a woman will say my social security is just wasted I pay taxes in but I wind up taking a benefit on my husbands account because if your husband retires at full retirement age you get half of your husbands social security. I can take the benefit of my husbands account so all the money I put into my own account is simply wasted. But there is a way of not wasting it where you do get something out of the money and that is that at 62 if you have a small account and if you will go in your husbands account as a spouse later you go ahead and you take that social security at the earliest, you own social security at the earliest age you can, age 62, and you hang onto your own account until the time when then you can go on your husband’s account and get the spouse’s benefit then but in the meantime you’ve had all this additional money from your own account. So you have to look at what’s happening to both accounts and what you as a spouse whether you are going to go on your husband’s account in the future or whether you’re not that makes a big difference. So it sort of seems complicated but if you lay it out saying well here are all the different circumstances and these are the best ways to take social security that’s the way you have to look at it.

Jim: And the other thing and this has been very unusual for me Jane because I’ve gone practically an hour without talking about Roth IRA conversions.

Jane: I knew that was coming.

Jim: It had to. And it wasn’t even by design I just thought of it while you were saying another benefit of waiting, particularly for the primary wage earner, is that you can have these very low income years where you don’t have income from your social security, perhaps you are retired and you don’t have income from you job or your wages and if you are less than 70 then you don’t have income from your minimum required distributions and that might be the ideal year to make a Roth IRA conversion. In fact I’m yelling and screaming to anybody who will listen for seniors not to necessarily think about 2010 for their Roth IRA conversion but 2009 when they don’t have a minimum required distribution. So that would fit in very nicely with some of the advice that you’re giving.

Jane:  Well of course one of the things about the Roth conversions which are very big for as you point out what’s left of this year and for 2010 especially is that if you’re going to do the conversion you’re going to pay taxes on the amount that you convert from a traditional IRA to a Roth IRA and it really doesn’t make sense if you have to use the conversion money to pay the tax. But if you can if you have enough outside savings to pay the tax on the conversion so you can convert the whole amount into the Roth IRA then it makes some sense. So I’d say that’s the key thing for people to consider when they’re considering conversions, how are they going to pay the tax they should be able to pay for it with outside money.

Jim: I agree with you I like to pay from outside money. The only thing that I like to do and we call it running the numbers because I actually think that unlike many areas you can quantify and you can run models of how much you can convert and which years. What we have found is rather than for most tax payers rather than converting the whole thing either in 2009 or 2010 or any one year that we find that people are best of doing a series of conversions over a number of years and one of the main reasons for that is because that way they can accomplish the conversion at lower income tax rates.

Jane:  I guess this sort of goes to what we were talking about before that retirement decisions are often very best handled by having a professional accountant or a fee only planner, somebody who doesn’t sell products, take a look at what the numbers are so they can help you make decisions about what you should do. Whereas somebody who is selling financial products may want to hustle all your money into a rough conversion of some sort because he or she will make money by doing it.

Jim: Well yeah I really do believe in running the numbers and coming up with an optimal Roth IRA conversion regardless of how the money is invested. The other thing that I thought that we would touch on is because frankly you had such an impact on my career by including some of the advice that we talked about back in 2001 because after your column and I don’t even know if I told you this but after your column things really opened up for me because other news sources were interested. So after that I was actually in the Wall Street Journal, the New York Times, Financial Planner, Kiplinger’s, and a whole slew of other places talking about the flexible type of estate planning. And actually I wasn’t surprised but there it was on page 1057 you include a discussion about that in your book. And  we were talking about the benefits of flexibility in estate planning, of course you always you know you have a section on how important it is to have a will and a retirement plan and to have that filled out properly. I thought maybe you could expand a little bit about the flexible plan that you talk about in the book you know specifically you were talking about, the other thing that you did is you had a great discussion about titling, that is after the death of an IRA owner.

Jane: This is something that will be new to many people and it’s really important for people to know because so many professionals you know sort of stock brokers or insurance agents or other financial professionals still don’t know it and they may make mistakes, and that is if you inherit an individual retirement account, if you’re a spouse you can just roll it over into your own IRA and continue it and you know there’s no problem it’s very simply you continue to get the tax deferral. But if you inherit an IRA from your mother or your father it used to be that you had to take the money and pay the taxes over a limited number of years. But now there’s a new thing called an Inherited IRA and you can roll the money into this “Inherited IRA” and then you can stretch it out over basically over your lifetime. You have to take something out every year but you can stretch the money out over many, many, many years which gives you a wonderful increase because you’ve got all this tax deferral with the money you have invested. But you’ve got to do it the right way. If you inherit the money and you roll it into your own IRA you’re finished. It’s taxable that’s it. Whereas if you take the money and you roll it into an IRA that is sort of titled roughly you know if your father’s name is Frank you say you know Frank’s IRA inherited in your name and the day Frank died and the day you got it there’s a whole long list of the way you have to title this new IRA. You do that and you transfer the money into the IRA that way and bingo you’ve got years and years of tax deferral ahead for yourself. You know if you go to somebody to say okay I just inherited this money what should I do with it, he and she have to know about this Inherited IRA and if they don’t bring that up right away in the titling you’re at the wrong person because they don’t know that, they’re going to say okay we’ll take the money we’ll put it in your account we’ll invest it in this and that and you have lost a vast amount of money because you’re paying taxes earlier than you have to.

Hana: Jane we want to thank you so much for joining us tonight. I’m sure our listeners will agree when I say this has been a most enlightening hour. Thank you so much for joining us. This is Hana Haatainen Caye with The Lange Money Hour Where Smart Money Talks. Please join us in two weeks on December 16th at 6 PM when Jim will talk about Roth IRA conversions with special guest John Bledsoe, noted author of two Roth IRA conversion books.

 

James Lange, CPA/Attorney

Jim is a nationally-recognized tax, retirement and estate planning attorney with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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