Are You Ready to Retire?: Preparing Your Assets and Making the Important Decisions

[00:00:00] Cody Niedermeier: Hello everyone and welcome to BFG Financial Advisors’ webinar series. My name is Cody Niedermeier. I’m an associate and CFP candidate here at BFG. And I was lucky enough to be a new webinar host. Today we’re going to be discussing, are you ready to retire, preparing your assets and making the important decisions for retirement, which is a lot of people’s favorite question. And we are welcoming once again, Eric Brotman, who’s the founder of BFG. He is a podcast host and author of don’t retire, graduate. And we’re lucky to have you. Eric, welcome back.

Yes, no, we we seem to always have more fun than a lot of others, so I’m, I’m definitely happy you’re back and excited to work through this topic with you. Any insights before we get started, or are you ready to go?

[00:00:54] Eric Brotman: Well, I, you know, I’m certainly ready to go. I think we have to make sure we weave into our conversation today, what retirement means because you know, people think, am I ready to retire? They think does that mean I’m ready to quit my job and, and, and sit home or sit on the beach and financially, there’s a piece of that, but there’s a lot of this that’s psychological. So it, it, it takes a long time to, to prepare to retire. And a lot of it has nothing to do with money. So let’s make sure we cover both the qualitative and the quantitative discussions today, because I think sometimes that’s just as important.

[00:01:28] Cody Niedermeier: No, absolutely. And I’m sure we’re going to be touching on the subject of not looking at it as the finish line, like you alluded to and more of a graduation. And then to what retirement really does mean. So without further ado, the disclosure slide, and I think we’re ready to get after it. And I think we’re going to start this whole thing off, just talking about how do you really know if you’re ready to retire?

Retirement to a lot of people was looked at as, as an age. Like I hit this age and I’ve done. They base it off social security and when they can first take it or waiting until 70, which is the latest, you can take it. And by working through retirement planning in our business every day, we understand that there is much more to it than that. So just based on your expertise, how can a client really know, or how can anyone really know if they’re ready to retire?

[00:02:19] Eric Brotman: I think we have to approach this two ways. Quantitatively it’s are you financially independent? What does financial independence mean? It means a lot of different things to a lot of people. In fact, even the idea of retirement means different things to different people.

For some retirement is working one job instead of two. And for some it’s a yacht in the Mediterranean. So we can’t possibly use the same definition for everybody across the board. That seems a little bit, a little bit silly. To me, financial independence is that moment where work is optional, where you have enough resources, enough assets that can create income so that you don’t have to earn a paycheck anywhere.

And once you reach that point financially, you’re ready to retire in the traditional sense. Now being ready to retire is more than just do I have the money. And I think a lot of it has to do with what are the things that retirees that are most important to people who do this in terms of life. And the first is having purpose and maintaining a reason to get out of bed every morning.

Yeah. I mean, you don’t just wake up one day and you’re done with 60 and 70 hour weeks and you get the gold watch and then you just ride off into the sunset and everything’s great. You’re bored in a week and a half. Truly. I mean, I don’t, I don’t know. It’s I don’t know if anyone out there has tried to take a vacation longer than two weeks, but at some point it feels like you’re a little bit idle.

It feels like you’re a little bit bored. And at least for me, I feel like my brain starts to atrophy in, in a short period of time, just cause I’m not using it. That’s not to suggest vacations are a bad idea, but I do think it’s important to, to understand that retirement could be 30 years. It could be more than that.

So this is not a vacation. This is a third of your life and half of your adult life, and it needs to be spent with purpose. So to be ready to retire means not only to have financial independence, so that work is optional, but also to have things you’re passionate about, whether they’re for money or not. It could be consulting, it could be part-time work. It could be volunteering. It could be family, grandkids, lots of things. But you have to have something you’re passionate about to continue to get out of bed and to continue to thrive people who don’t, don’t thrive and they don’t live very long. And it’s very sad because so many people, they work their entire adult lives to build this massive nest egg and then they never enjoy it. And to me that’s tragic.

[00:04:45] Cody Niedermeier: Yeah. No, absolutely. And you know, what would you say to those people who have been on that track and they’ve just been trying to build their wealth. And just with the idea of that date of retirement, is would you say, you know, really take an internal audit and take a look at, you know, what are you really looking forward to once you do get to retirement and you know, how, what goals to set? What do you think the best way for people who haven’t looked at it that way? What steps could they take towards kind of turning the, turning it around some might say?

[00:05:17] Eric Brotman: I think you nailed it yourself with this idea of an internal audit Cody. I think there’s a there’s definitely a push and pull between saving for the future and living for today and striking a healthy balance matters. I mean squirreling away every penny you make for the rainy day is problematic because the rainy day may or may not come. You might not be healthy enough to take that trip in 10 years. Maybe you should take it now. On the other hand, spending every, every dime you make in the hopes that, that, you know, everything will be fine is also not a healthy approach.

There’s a balance. So I think understanding what it will take to get to financial independence at a reasonable age funding and putting away enough money to hit that target every year and then enjoying the rest. You don’t have to put away extra money just because it’s there. If you’re on track to hit financial independence, whatever else you have spent, any way you want.

You know I, I call budgeting the B word. I don’t like it. If, if you have, if you make a hundred thousand dollars a year and you know that to be financially independent, you have to put away 25,000 put away 25,000. And then the other 75, I realize the government’s taking a piece and there’s housing and medical and other expenses, but whatever, you’re able to budget into that for fun, have fun. Do some living. It doesn’t pay to wait entirely until later.

[00:06:40] Cody Niedermeier: No, I think that that’s a perfect introduction to kind of everything we’re going to be talking about today and to build off it is something we talked about in our last webinar. So for some listeners and some viewers, this might be kind of a reminder for those that are new you know, maybe a quick synopsis of kind of what we discussed in our last webinar about when you should start preparing for retirement. For those that are new to this, that haven’t heard the last one we discussed, you know, preparing for your retirement in your twenties and kind of the idea of the earlier the better. But now we’re getting people in all stages of their life of I’m just getting started or I’ve been doing this and I thought I was ready to retire. Kind of based on your expertise again when should individuals start preparing for retirement?

[00:07:31] Eric Brotman: W what time is it? I, I think noon, noon would be good. People should start preparing for retirement immediately, as soon as they have a paycheck. And preparing for retirement psychologically means finding hobbies and things you’re excited about even if you’re still a young person. Financially, it means having a trajectory to get to where you need to be. And if you’re in your twenties and thirties, and we talked a lot about this last month, if you’re there and you’re dealing with student loans and other issues, it may feel like retirement is a pipe dream and you can’t get there.

The reality is that even figuring out a way to get out of this. Is preparing for retirement. There’s lots of ways to prepare. One of them is asset growth. One of them is figuring out what you want to be when you grow up. I love asking that of adult people. I like looking at somebody 65 years old and say, what do you want to be when you grow up?

And they look at me, cross-eyed like, no one’s asked them that since they were seven. And I think it’s important to continue to ask that, like, I don’t know what I want to be when I grow up yet, but I want to have choice. I want to have the freedom and flexibility to evolve whatever way I choose to evolve. And, and so I think you start preparing for retirement the day you get your first paycheck, and that might mean something as simple as contributing to an HSA or a 401k. It might mean chipping away at a student loans or other debt. It might just mean beginning the planning process and figuring out what will it take to be financially independent at some point in the future? Whether you’re 45 or 75 when you get there is not material when you’re first starting out. What’s material is can you get there at all? And the earlier you start, the easier it is.

[00:09:09] Cody Niedermeier: Yeah. And you make a great point of, you know, kind of the first paycheck is when you should get started. For those that are getting the first paycheck, then aren’t really sure. You know, what is the best decision, whether it is paying off that loan or, you know, putting money towards that retirement plan and trying to get the free money of an employer match that might be available to you. You know, what types of resources are out there that can help guide them other than, you know, like the webinars that we’ve been hosting where can people find information that will help them with preparing for this retirement so far down the line?

[00:09:43] Eric Brotman: There’s a number of different resources out there. And just the ones that we’ve put out at bfguniversity.com. We put out a financial literacy course that talks a lot about getting started and making those decisions and what’s important to start with, and that’s a free program for anybody who would like to take it. And we certainly encourage people to check that out. There’s also at lowtaxbook.com, we published a white paper that basically says, here are four places you can put money where it will never be taxed again, if it used properly. And it’s so powerful because I don’t know anyone who doesn’t expect tax rates to be higher in the future than they are now.

Just looking at our national debt, looking at our, looking at our outrageous spending and things that are happening, we’re eventually going to be paying for some of that. And so I think it’s important to do some tax planning, but in terms of new folks, your HR department can help with the logistics and the operations. They cannot give you advice. They’re not legally allowed to do that. And if you ask the guy or gal in the next cubicle or in the next office what did you choose, you’re not going to get advice that suits you at all. So I think that’s where you start exploring either a robo-advisor or something online and we’ve talked about those in our webinars where you hire a firm like ours that says I want to get started right. I don’t want to have to make mistakes over the next 10 years and then spend 30 years repairing those mistakes.

[00:11:04] Cody Niedermeier: No, I think that’s an awesome kind of intro to just, there are so many more resources out there than people realize. And, you know, our company has tried to be at the forefront of that with pushing out different free things that, you know, to really help people, whether they are clients of ours or not. You know, these things aren’t the things you’re taught in school that, you know, we believe that you definitely should be.

So there are others resources. It’s going out finding them and, you know, kind of starting the process of making the right. But just kind of getting back on track of looking at retirement, and there is a difference in structuring your assets for growth and income. As you’ve grown in your career, you’re kind of looking for more growth. You’re not as much looking at the income side of things, but as you get closer and closer to retirement, you’re starting to plan to use your assets as an income source rather than just a growth source. So just with that being said, when do you, at what stage of life is it more growth than income, which I kind of already touched on and then when should you start trying to transition and kind of, what’s the process of doing that like?

[00:12:08] Eric Brotman: It’s a difficult question to answer in a short period of time. But realistically there are people who are asset accumulators. We refer to them as buyers. There are folks who are asset preservers or holders, and there are asset distributors or sellers.

And at each of those phases, each of those stages, you have to make different kinds of decisions with the way your portfolio and your assets are set up. Accumulators tend to be, if we’re going to use 65 as the rule of thumb and I hate rules of thumb, they fit no one, but nonetheless, if we’re gonna use that as a rule of thumb for this hypothetical, until you’re 55, you’re basically all accumulation all the time. I mean, you still have, you still have that runway. And I would say 10 years prior to your target financial independence date, you need to begin allowing that pendulum to swing. And even if it swings 10%. So that you’re at all accumulation, but then a year into that now you’re nine years from retirement, you’re 90% accumulation, 10% poised for income and so forth. And you gradually get there so that when you get to that financial independence point, you have a 10 year period where you’ll be able to utilize assets for income without touching your principal and without selling anything.

Because what happens is you know, people, people build this nest egg and it’s one big pot of stuff. And then they realize, all right, now we want to take $5,000 a month out or 10,000 or whatever it is. And they just reach into that pot of stuff like it’s like it’s Halloween candy and they just pick whatever they’re picking out and that’s it. That is a total return strategy at its most simple and it’s not necessarily the most effective or efficient the better way to do that is to structure some of your assets so that they’re prepared to pay you now and other assets so they can continue to grow so they can pay you later with grown principal because you know, we haven’t seen inflation in this country in a long time, but it’s, it’s back. It’s in the forefront.

It’s in the conversations on the evening news. And for the generations that have never seen this for the Z’s and the millennials inflation is going to be a, a major wake up call. And for the rest of us, who’ve been. It’s it’s a reminder that, that, that, that is a stealth tax of sorts where your dollar might still be your dollar, but it doesn’t go as far as it used to.

[00:14:33] Cody Niedermeier: And I think that kind of gets us to the retirement. And you, I believe briefly touched on this already, but and shameless plug your book has an entire chapter dedicated to talking about asset structures in retirement. And we have three main ones that we’re going to touch on here in our PowerPoint, but who would the total return strategy be ideal for?

[00:14:58] Eric Brotman: Well, let’s define what it is. First. That total return strategy is that, that one bucket. That’s where everything’s on. Everything’s in one place and you can pull from it. Now, you still want to pull from it strategically and thoughtfully. Not randomly. The total return strategy is really for anyone who can live on less than say 3% of their principal.

Okay. So what does 3% mean? It means if you have a million dollars in your, in your portfolio, a million dollars of working assets, it means you can live on $30,000 a year of that. Well that’s not typical. I mean, there aren’t a lot of families who have that kind of abundance to do it, but for those who do it’s a, it’s a sensational thing.

And a lot of the families that have that either have enormous wealth where they have solid pensions or other income streams that help offset that. But if you can live on less than 3% of your principal, particularly if you’re down around 2%, the odds of you outliving it are so slim assuming you’re building it properly that you don’t have to, you don’t have to make any kind of decisions that are going to create, create illiquidity or anything inflexible. You really can be completely flexible. And a total return strategy says, I don’t care if it’s a capital gain. If it’s if it’s accumulation, if it’s an income payment, if it’s a dividend, it makes no difference. We’re pulling 3% and we can do that forever. And that is absolutely a strategy, but it’s only a strategy for folks who don’t need more than say 3% of their portfolio to live on.

[00:16:30] Cody Niedermeier: Okay. So this is like you said, the extremely flexible strategy. So I guess to build on it you know, what is the asset segregation strategy and you know, who should be using that?

[00:16:42] Eric Brotman: If we were to build a bell curve, Cody, the asset segregation strategy is the one that I would stick in the middle of the curve that would apply to most families we represent. Okay. So there are some on the, on the total return and who have such abundance that it, it almost doesn’t matter how they structure it. And there are some who are close enough to the vest that this won’t work. It would be too, too risky. And I’ll describe what it is, but this is, this is most families who have reached some form of financial independence. And when you hear the word segregation, what that means is it means dividing things up in, in various ways and setting them aside in various ways.

Asset segregation says we’re going to treat different kinds of assets differently based on their use and their timeframe. So for example, if you’re in a position where you need 4% to live on, and you’ve heard the 4% rule, I mean, that’s been talked about on wall street for as long as time and the 4% rule doesn’t work.

It just doesn’t because there are, there are not only the average returns, but then there’s the sequence and series of returns. And you can look at a 4% withdrawal rule and say, well, if your first 10 years are really good in the market, you’re going to be fine. And if the first 10 years are really lousy, you’re in trouble.

And so that’s why it doesn’t work for everybody. And that’s why we segregate these assets. So what that means is now you’re 65 in this example. You need 4% of your money to live on. You have $2 million and you need $80,000 a year, 4%. It means that you need to have enough money in a short term secure bucket, whether that’s cash or short term fixed income instruments. Something reasonably secure that you can live on for the next five years.

That is a magical thing. Because what it means is that the rest of your assets don’t have to have a good year every year because they won’t. Okay. So if you know where your income’s coming from for the next five years, the next bucket is what I would call sort of an intermediate term. It’s year six to 10. It’s it’s money that you don’t need to touch right away. You still want to grow it, but you want to grow it in a way that is reasonably, if not predictable, at least reasonably safe, whatever that means. It means you’re not getting speculative. You’re not being aggressive with that piece of money. And that means if you’ve done this, if you’ve done it right, you have a 10 year runway before you would have to sell anything in a stock portfolio.

So if you’re 65 and you have a five-year bucket to get you to 70 and a five-year bucket to 75, everything else in theory, and this is not investment advice, don’t go do this. But in theory, what it means with this strategy is that everything else could be in accumulation assets, potentially a little more aggressive because you have a 10 year, 10 year window before you have to touch them.

Now what’s the problem with that strategy? The problem is five years from now if you’ve lived by it, you’re out of cash. You have that middle bucket that you now need to turn to cash, and you only have a five-year runway left on stocks. Well, that is problematic. So what really happens because by the way, if you did that for 10 years and you were 75 and had nothing but stocks left, that would be, if it was our advice, it would be malpractice.

But if it was something you did on your own, it would at least be foolish. So the idea of the 10 years is not that you’re actually going to use all 10 years worth of dollars and then be stuck with this stock portfolio. The idea is that when equities have good years, which certainly happens. In 2021 for a lot of people has been a really good year on wall street.

If you have a really good year, it allows you to take excess returns and refill the buckets and restart the clock. Okay, so that if, if at 65 you’ve done this and 65, it’s not a great year for the markets and you use your short-term bucket. Now you have a nine-year window, but at 66, the next year equities have a nice, a nice year. They return excess principal, excess return. You can take some of that, refill the first two buckets and start the clock over now at 67 so you still have a 10 year window.

Now I, I’m not, I’m not going to tell you this is perfect. It’s not I will tell you that, that it is a modification to the 4% rule that I, at least as a professional feel more comfortable with because the traditional 4% rule is mixed with total return and it just, in my opinion, does not work.

[00:21:12] Cody Niedermeier: Okay. I think that’s a completely fair point. And I have this whole image in my head. If we’re pouring a little water out of the first. But then we’re replenishing from the second bucket. And then from the third to the second it’s continuous action that ideally will continue to have everything replenished the entire time.

I, that’s just a visual about my head. I’m not the most normal person, but I like to see things. So I thought you broke that down really, really well. And the last income strategy that I would like to talk about, about what it is and who should use it is the contractual income strategy. So if you wouldn’t mind diving into this one as well, or as well. We’d really appreciate it.

[00:21:51] Eric Brotman: This is the other end of the bell curve. So if the first end of the bell curve is folks who’ve built enough wealth that they can’t spend it all. And that their withdrawal rate is so small that there’ll be fine forever. That’s one end. The middle is the segregation group.

This is now the folks who need more than 4% and in some cases more than five, because really at 5%, you’re really running a great deal of risk depending on your age and health and other factors. These are folks who need more income than their portfolio can create without some assistance from whether it’s an insurance company or some other financial institution.

It means that you need to put or consider putting some kind of guaranteed income. And the word guaranteed is not used lightly and it’s rarely used in the financial industry. And so every lawyer on the planet just heard that word and panicked. But the idea here is that if, if there is contractual. And that can be various types of annuity vehicles or other things.

If it’s used properly, if that income allows you to take, for example, a higher percentage against some of your assets in a way that’s for the rest of your life, it allows you to then take a lower percentage from the rest of your assets to still get back to that 4% number. So here’s what I mean.

Let’s say now we’re in that same situation. We’re at $2 million. But this particular family needs 120,000 to live on. That’s 6%. Well, if you start pulling 6% out of that bucket, you will run out of money. The question is how soon. And if you’re 88, that might be. But if you’re 63, that won’t be fine because the odds of you running out of money are too great and that’s every retirees biggest fear or certainly one of them. So in this case, if you can use an insurance company to create contractual income, for some portion of that 2 million. Not all of it, because that would be a serious problem. If you go too far, you’re too inflexible and there are too many risks, but if you use some of those assets, if you can get some of those assets at 6% or even more, then it allows you a permission slip to spend less or pull less on the other assets.

So you could actually put the rest of the portfolio in an asset segregation strategy. Once you omit that piece, that’s going to be the guaranteed income. So now you need that $120,000. Let’s say you can create 50,000 with some piece of money. Now you only need 70,000. So how do we get that 70,000 into this, into the segregation strategy so we can make sure it continues?

Now you’ve got one piece that’s contractual for life and one piece, that’s got a sustainable withdrawal rate with the potential to continue to grow money and you can keep up with inflation. It’s not perfect. And for folks in this situation, this is not an ideal scenario, but it’s a common scenario. And so there are strategies out there and most of the strategies scare people because you hear horror stories about… first of all, I don’t trust insurance companies, as far as I could punt them.

And, you know, I I’m sure we have folks who work for insurance companies on our webinar and I apologize, it’s not a personal thing. I just don’t trust insurance companies. And so, you know, understanding that they’re a necessary evil and understanding that as long as you have a contract and you follow the rules and you understand how it works, it can be very beneficial for you, but these things are boobytrapped.

They are literally fraught with ways to screw them up and if you do, the cost is unbelievable and it’s not undoable. There’s no mulligans. So this is not something, this is consumer beware. This is not the kind of thing where somebody should run out and just do this. It’s the kind of thing where somebody should get the right professional assistance with it, understand how it works and then use it properly. Because I don’t think there’s any, it’s kind of like if you’re, if you’re in construction, there’s, there’s lots of different tools. Some tools are appropriate for some jobs and some aren’t. It’s not that there’s something wrong with the tool. It’s that it’s the wrong tool for the job. So if this is one of those where you’ve got to make sure you match up the right, the right product or strategy or, or contract with your particular personal situation, and you don’t want to just plug and play and you don’t want to take something off a shelf, you want to design it thoughtfully. In my opinion.

[00:26:19] Cody Niedermeier: And to no surprise, just mentioning the word annuity. We have we have loads of questions coming in, so please keep those questions coming. I’ll be reviewing those as we’re able to based on time at the end. So just keep those coming to the inbox. We have our marketing director, who’s keeping track of them and it’s gonna select a few for us to go over.

[00:26:39] Eric Brotman: Oh, the word annuity brings it makes people think of, of root canals and I don’t blame them. If used improperly they are an absolute disaster. And, and so you really have to know what you’re doing or you can mess them up.

[00:26:52] Cody Niedermeier: Yeah. But I mean, if used correctly, it can be the difference between somebody having their money last and somebody who’s not. And I know in our office, we like to use the term, you know, it’s kind of portfolio insurance versus you get insurance on your life, an idea of getting insurance on your assets, as well as something which this contractual income strategy it’s kind of the idea behind.

[00:27:13] Eric Brotman: Well, and, and, and looking at that, that means that there’s a cost to it.

And the costs are high so if, if it’s going to be an expensive strategy there better sure be a value for it or a reason for it otherwise it’s just money out the window. So it sounds like we have some questions we’ll, we’ll grab them at the end. That’s great.

[00:27:30] Cody Niedermeier: Yeah, no, absolutely. Yeah. Just to, to build on everything. So those were the three strategies that you just went over in broad form. You go into much more detail in your book. But we finally reached the point of, you know, talking about retirement. The three aspects of retirement is the idea of what do I need to do before, during which is, you know, the day I retire, what do I need to be doing? And after which we’re going to work through on these next three slides before we get to those questions. So please, if you could just an overview of, you know, what should I be doing before? Whether it be the idea of looking at debt or possible long-term care, which is another thing that kind of puts a sour taste in everyone’s mouth. It’s not everyone’s most favorite thing to talk about. What are some things that we need to do before retirement as people.

[00:28:25] Eric Brotman: Well, let’s talk about the fun things first, and then we can talk about the things that, that that are a little sobering. Yeah. Th th the fun things first are figuring out where, you know, where you want to live, potentially. The, the, you know, do you want to be close to family?

What are your hobbies? What are your interests? What do you look forward to most? And I encourage people to do more than a bucket list. You know, a bucket list is great, but if you put five things on a bucket list and then you check them off, are you done? Do you have to do another bucket list? So I think it’s more than that. I think it’s having a, it’s having an idea of what you want your life to look like in the next chapter and keeping it meaningful supporting your values, having a vision for what, what that chapter your life will look like. So that’s sort of the fun stuff.

In terms of, in terms of some of the more sobering things. The first thing is if you are hitting financial independence but you still maintain any debt at all, even a mortgage, the time to restructure and potentially refine what you’ve done from a debt standpoint is now because it’s incredibly difficult to borrow money when you don’t have a job, when you don’t have an income, even if you have assets.

It’s a different thing because the first thing they want to know is what’s your income? What are you going to use to pay this back and collaterals good. And, and it’s incredibly helpful. And we believe in establishing collateral, lots of places, but the time to apply for any debt or any access to collateral is while you still have a paycheck.

So there are three different ways to do that other than sort of a mortgage refinance or other things. There are places to go where you can build on or create some of your emergency fund without, without having costs necessarily to do it. So you’ve got your nest egg, you’ve got your cash. You’ve got your investment.

If you’re debt free, which I believe is one of the secrets to the happiest retirement is at least being adverse debt-free. Don’t, don’t go into retirement with two car payments, some credit cards and a student loan for your grandkids. Like just don’t do it because those things become an albatross very quickly.

But if you are in a position where you’re either debt free, or the only debt you have is say a a mortgage that’s favorable The time to get collaterals now and there are three places that most folks can go. One is you can use your home equity and get a home equity line of credit either where you have your mortgage or at your primary bank or at a credit union.

And the reason to do that is that typically there’s no cost to apply for it and no cost to carry it. When you have it, you only pay something if you use it and it’s interest only. And if you use it for things like home repairs, it can even be deductible. The interest can. So I think it’s good to do that while you have a job, because even though you have equity in your home, institutions are less likely to lend to you when you don’t have an income or a predictable income, even if it’s coming from your portfolio.

So a home equity line of credit, even if you have no mortgage, to me is a good tool to have at any stage of your life but particularly when you’re getting close to retirement age. The second is a cash value line or CV lock. Cash value line of credit is a line of credit that you can place on your permanent life insurance, whole life insurance.

For example, that allows you to access that collateral in favorable. Interest only without any kind of application fee or anything else. And because it’s collateralized, it’s generally very easy to get. It’s very easy to use and it only costs you something if you use it. And it’s based on prime somewhere so right now it’s at a low rate. The nice thing about borrowing against your life insurance through a cash value line is that if at any point you need to borrow money in the short run, you can pay it back gradually or however you want to do it. But if you have to borrow money for a longer term and interest rates have gone up, because that’s one of the things that make people nervous about a line of credit is that they’re variable rate, not fixed, and what if, what if runaway inflation comes and we wind up subject to 11% interest instead of three which is a reasonable thing to worry about actually, we’ve seen that certainly in my career. There are there are caps on most of these where the line can’t go higher than a certain amount, and you always have the ability to contact the insurance company and borrow directly.

You could pay the line of credit off with a fixed rate, with a fixed rate line that’s also interest only directly through the insurance company. That’s specified in your policy and so you need to know what that rate is.

And then the third one, we talked about the home equity line and the cash value line. The third one was a securities bank. Whereas, if you have a securities portfolio, you have an investment portfolio, you can structure that to be collateral for working capital for yourself. This is not a margin loan. A margin loan is where people back in the day. And fortunately we don’t see them very much anymore, but people used to use a loan to borrow money, to buy more securities.

It creates leverage on the portfolio. It also creates enormous risk. That is not what I’m suggesting. What I’m suggesting is it becomes access to capital without the need to sell something. Because if you have a million dollar portfolio and I’m not talking IRAs, I’m talking non-qualified joint account with you and your spouse, whatever it is, if you have a million dollar account and you need a hundred thousand dollars for something, for anything. If you have to make a withdrawal, you’re going to have capital gains potentially on those various securities so your cost will actually be higher than just the a hundred thousand dollars. That’ll be a hundred thousand dollars plus whatever the capital gains rate is at that time on whatever you have to sell.

If you use a line of credit, you can access the money with typically a low, but at least a moderate rate of interest without selling anything so that you can time the sale of securities. If you want to use those to pay it off, or you can pay it off with something else. You know, if you’re two years from downsizing, hypothetically, and you need access to capital, you could use a securities backed line or a cash value line, or even the home equity line to, for example, buy your next home a smaller home before you’ve sold the big one. And that scares people but at the end of the day, it’s incredibly easy right now. It’s easy to sell a house. It’s hard to buy one. So what people don’t want to do is they don’t want to sell their house and then realize they’re stuck and they have no place to live. So sometimes it makes sense to buy before you sell so that you know where you’re going.

The problem with that is now you’re carrying potentially two mortgages. So this allows you to leverage your capital in ways that in retirement are helpful. And you have to have these in place, in my opinion, you have to have them in place before you retire so that they’re most favorable.

Second thing you mentioned was, was long-term care. Long-term care is fun to talk about. Let’s talk about being infirm later in life. Long-term care is designed as a, I believe it is designed for two things. One, it’s asset protection and two, it is designed to maintain dignity. Both of which are important. And if you don’t have long-term care and you’re a single person or a widow and your assets get decimated because of assisted living care, maybe that’s okay.

Maybe you say, you know what? I don’t need to leave anything behind. Anyway, I just. As long as it is there in some way, so that you can age with dignity and live your last year or years or whatever it is in a place you would choose rather than a place where you were sent. You know, the, the facilities that are out there for folks who are truly out of money are not places you want to spend the last part of your life.

That’s just a sad reality. So it, it gives you choice. It gives you, it allows you to live in age with dignity. And if you’re married and one of you were to get sick or need extra help, but the other spouse is perfectly healthy you don’t want to bankrupt your husband or wife on your own care and then have them literally being running out of money because of the costs to take care of you while you were both still living.

So I think long-term care is important. I also think you should probably get it in your fifties if you can, rather than waiting until sixties and seventies. Lots of reasons for it. One is cost of course, but the other is wherewithal to pay for it. You know, there are, there are contracts out there where you can get them you know, I th my long-term care is being funded over 20 years after which I’ll have it forever, and I won’t be paying for it anymore. That felt like a good decision, even in my late forties, because it meant that I will presumably have an income during that period of time. I expect to be working that long. You guys can’t get rid of me that soon. But at some point when I do retire, whatever that looks like, it’ll be a bill I don’t have. It’ll be coverage that’s in place and ability to. Now not everybody can afford to do it that way. There are other contracts that you pay for forever. And the challenge there is that most of them don’t have premiums that are guaranteed.

So they go up with the cost of healthcare. So just like I mentioned, when we were talking annuities and talking to some of these other strategies, long-term care is not a pick it up off the shelf and just do it. There’s a whole, a whole variety of ways to structure this and it’s not for everyone. There are people who do not need long-term care insurance either because they have so many assets that it doesn’t matter, or because they have so few assets that it’s almost impossible.

But we talked about that bell curve. The rest of us were in the middle there, who aren’t so independently wealthy that we could just write a check for 15 grand a month for care. And we’re not broke to where we’re going to be wards of the state. The folks in the middle are the ones who really need to look at this and it should be ideally it should be done at least 10, if not 10 to 20 years prior to your financial independence mark.

[00:38:12] Cody Niedermeier: Hm. I think that’s something that a lot of people don’t even want to think about, but it’s something that’s necessary to kind of make sure that you’re set up when you are retired and you know, you’re looking at those next stages,

but I think…

[00:38:25] Eric Brotman: Sorry to interrupt you. Cody. When we, when we talk about something like that, people don’t want to think about it. They don’t want to think about using it. None of us do. And they say, well, why would I buy something I don’t want to use? And so I’ll, I’ll say something. Well, do you insure your car? Yes. Why? You’re not insuring your car in the hopes of having an accident. So you can try it out. You’re insuring your car in case something goes wrong.

And, and it’s a similar conversation. There are also contracts out there that are hybrids that allow you to have other benefits on them, whether it’s an income, whether it’s a death benefit, you know, if I’m blessed to never need long-term care. If I live beautifully until I’m 99 and die in my sleep and never need it, which would be great there’s a death benefit being left behind. So at least the premiums were thrown out window.

[00:39:09] Cody Niedermeier: Yeah. It’s literally, you have to lose to win. Is one of them, one of my

[00:39:13] Eric Brotman: yeah. I’m I don’t want to try my long-term care out. Are you kidding? I want to have it on the shelf and never ever pull it out until until I’m dead. That that’s what I hope will happen.

[00:39:24] Cody Niedermeier: Oh, absolutely. I think that’s what a lot of people hope. But the day has finally come Eric the last day in the office and I am retiring. What do I need to do? What should I be thinking about now that the day that I’ve been working towards as finally come?

[00:39:43] Eric Brotman: Well, and I think some of it is that day and some of it is sort of a 90 day window around that day, but there are decisions that have to be made at retirement based on where you work and how old you are and those things that are critically important and shouldn’t be overlooked. One of them is around health care. One of the reasons people don’t retire early in a lot of cases is because they’re worried about medical insurance. And why health insurance is tied to employment is still beyond me, but it is. And so ultimately the folks who are 65, who are Medicare eligible, don’t have this issue, but if you’re looking to retire and you’re say 62, You’re going to have a period of time, unless you have a working spouse with coverage, you’re going to have a period of time where you must go onto the exchange or go out and get your individually sourced health insurance. And it’s not great. It’s expensive and it’s not great.

Now what are the options there? Well, the, the first one is if you hang in until you’re 63 and a half at 63 and a half, when you, when you leave your employment you can elect Cobra, which is the continuation of benefits that allows you up to 18 months to stay on the company plan on your own nickel. But at least, you know, you have the coverage that you’ve had that you continue to have until Medicare kicks over. Medicare is something that when you are 65, you must apply for Medicare immediately, but only for Part A.

Part a is the piece that has no premium on it, but you must, must, must get it at 65, even if you’re working and don’t need it per se. That’s critically important. Part B, which is, which is the piece where you would, which would replace your health insurance for your, your company. You don’t need until you’re not employed.

So you’ll apply for part B, if you want part D, which is a prescription plan, you’ll do that. If you want to have Medicare supplements, this is a deep discussion. There’s a lot to it, but usually the time to do that is within that 90 day window of true retirement if you’re 65+. Other things you need to elect is if you’re eligible for retiree health insurance or retiree benefits, now’s the time to figure out what your company has provided for you that’s portable. What can you take with? You know, your disability insurance is likely to go away and that’s fine if you’re not working anymore. But can you take the life insurance with you? Do you have long-term care through your employer that’s portable that you can take with you and if so, make sure you do it if it’s appropriate for you to do.

And the last thing is if you’re fortunate enough to have a pension and you know, state and federal employees have the most private employees. But if you’re lucky enough to have a pension, your pension election is something that is a one time do it now you don’t get to do over. So you’d have to consider things like how old are you, how vested are you?

Do the benefits change. If you wait a little while to claim? How does this impact your spouse? If he or she outlives you, or if you outlive them? There’s an usually they’re six, six to eight choices on your pension not including when to start it and they need to be made, right. Because they can only be made once. There’s no, no mulligans can’t do it. So that’s a critically important thing that that usually will be at the same time as retirement. And lastly, when you start talking about what some of those benefits are at your company, you have to make decisions around. Do I leave certain assets with my employer?

Do I do I take some of them with me? Do I do rollovers? Do I want IRAs versus 401ks? What is the right solution for me? There’s pros and cons to everything. W w you know, are you subject to required distributions? If you’re working past 72, when you’re required to take distributions, for example, from IRAs, if you’re a non-owner employee of a company and you have a 401k, you don’t have to take distributions from the 401k while you’re still working.

So if you plan to work to 74, keep your money in the 401k because it will make a difference for you in terms of, of what you’re required to take. You don’t want to take distributions from an IRA while you’re still earning your income, usually. And so the pension elections, the benefit elections, the Medicare and the health insurance, all of that happens right around this time and those, I think are the biggest considerations at that moment.

[00:43:59] Cody Niedermeier: Yeah, no, I couldn’t agree more and we’ve got one more stage to work through. I am retired. You know, what should I be focusing on with the idea of social security coming up? What type of insurance do I need at this point? I know you mentioned disability earlier and you know, maybe that’s not at the top of the list anymore now that we’re in retirement. So what should we be looking for at this moment?

[00:44:23] Eric Brotman: But before we even get to this, I think one of the things that we’ve been thinking about all along is where, where are you going to live? And, and so at this point, if you haven’t already pulled the trigger and made a move, now’s the time to be thinking about that.

Are you going to downsize? Do you want to get out of a single family home with three flights of stairs and get into a condominium? Do you want to be in a continuing care type community where you have your independent living? Do you want to be in an active over 55 community? Do you want to be near the mountains or near the beach or near the city?

Do you want to be near your grandchildren? Are nowhere near your family? Whatever, whatever, whatever makes you happy, but now’s the time. You’re going to make certain elections beyond that. One of them is so security. So presuming social security continues to exist in its present form and I think it will, at least for most folks.

You have to decide when you’re going to claim. If you’re retiring early and you are not working at all, and you have no earned income, you’re eligible to take social security as early as 62. Now doing that comes with some, some challenges. One is that if you decide to go back to work it’s going to be a problem because you can’t earn money over like 13 or $14,000. Whatever the limit is. You can’t earn real money and still have that benefit not reduced. So if you’re contemplating either continuing to work or going back to work until what’s referred to as FRA or full retirement age, don’t take social security early. At full retirement age, you can take your social security and you can earn anything you want and still collect that social security.

Now you’re likely to pay taxes on your social security, which I would argue is paying taxes on your taxes. But I digress. Usually about 85% of it is taxable. When that occurs, you have to decide, do I take it at full retirement age? Which for folks, your age and mine is, is age 67. Or do you wait until 70?

70 is the maximum. So even if you don’t need it, if you’re turning 70 take the social security. There’s zero benefit to wait. In fact, there’s an absolute drawback to waiting because you will given up all of that time. You paid for it. Go get it. I’m deciding between 67 and 70 has a lot to do with your age, your health, your marital status.

There’s a lot. And we go in the book into a great deal of detail about social security offset and what happens when one of you is widowed and how do you time these and who keeps, what benefits and, you know, it’s a moving target, the rules change periodically, but in general, if you were, if you are the primary breadwinner and you have the larger social security and you’re healthy and you’re 70 or 67. Wait until you’re 70, because all you have to do is live to be about 84 years old and you, you break even, or get ahead. So some of us are living to be 107 or beyond. And if that’s true, it’ll make a difference to you to wait until 70. If you’re not the primary breadwinner and you have the smaller social security you can claim at full retirement age so long as your spouse, who is the breadwinner claims at 70, because then you’re going to keep the larger benefit of the two when one of you is widowed and these rules change all the time and they’re too complicated for this. But what I will say is the big decision you need to make after retirement, other than housing is social security.

Then there’s a bunch of little stuff. Some of the insurance stuff is really little at this point. If you have a personal disability policy, but you’re not working, stop paying for it because all it’s doing is protecting your income at that point. And you don’t have any income. If you have life insurance that is term insurance so it’s temporary. If you’ve hit financial independence and you’ve claimed your pension not, not even social security, but your pension, at least, you probably don’t need term insurance anymore. You know, it tends to get more expensive with age and you’re going to outlive it anyway. There are situations where it’s still worth having, and if you’re not healthy, there are reasons why you might want to convert some of that term insurance to something permanent so that you do have it for your heirs down the road.

It depends on your marital status, the age and and situation for your children, your grandchildren, if you want to do some legacy planning and other things. But life insurance, if you have permanent insurance, that’s great. If you have term insurance, this may be the time to consider reducing or dropping it or converting it if, if you’re in that situation.

 And then other little things. You’re going to get discounts on stuff, your auto insurance, once you’re not working, we’ll get less expensive because you’re not commuting to work. So little things that aren’t going to change your life necessarily, but that you can sort of start checking off and looking at. And so I would say there’s, there’s more in the book about that, but the, the little things are far less important than the big ones. And the big ones at that stage in life are where are you going to live? Do you have a health care taken care of, and when do you claim social security?

[00:49:15] Cody Niedermeier: Yeah. Well, I think we we just provided a lot of information to everyone viewing this or listening or, you know, however they’re intaking this information.

And we definitely have some questions and we don’t have all the time in the world, so I definitely want to get to that. But before we do this screen, we actually have a qR code that is on the screen where if you put your camera up to it for any questions that we don’t get to today or anything like that, if you scan this, you can set up a free consultation with one of our lead advisors here at BFG that can help you answer those questions or maybe put you on the right path and see if we can provide you with some value.

So please don’t hesitate with you know, taking a picture of that. And without further ado, I know we got Sara, our marketing director on the call who’s been keeping track of these questions. So I think we have time for one or two Sara, if you’re still on. Awesome.

[00:50:14] Sara Lohse: So back when we were talking about annuities and different types of insurance products Eric was very subtle about his feelings towards insurance agents,

[00:50:27] Eric Brotman: Not agents! Companies, companies,

[00:50:30] Sara Lohse: Companies. How can you tell if your insurance professional is trustworthy and someone you should be working with?

[00:50:38] Eric Brotman: Oh boy. That’s a great question. And, and that’s this, but the problem is this is true of every professional, you know, in any industry. How do you know if the, if the person working on your car or rebuilding your kitchen or your financial advisor, accountant, attorney?

How do you know if they’re, if they’re reputable, if they’re, if they’re solid. I th I think there is no one size fits all here. Part of it is you need to trust your gut. If somebody makes you uncomfortable, or it feels like they’re trying to push you in a direction you don’t want to go or sell you something you don’t want or or, or that everything that they’re offering is off the shelf from their company.

I think that’s cause for alarm. I think your best bet number one is to use people who who work with the folks who you trust. So if you’re, whether that’s a coworker or your mom and dad, or your, you know, your, your other family members, or what have you, working with someone who’s already known to the family or, or known to people known to you, I think is a good thing.

I, I would tell you there’s an entire chapter just dedicated to financial advisors and the book about the kinds of questions to ask them. How do you, how do you begin to tell you know, who’s, who’s maybe right for you. And it doesn’t mean that that some are good and bad. It just means some are gonna be right for you and some aren’t. When we get specific to the insurance agent question a true insurance agent is only paid to sell product. And if they work for a company, they might be paid differently to sell product of their own company. That always made me uncomfortable. So if you’re in that situation, even if you’re in that situation with somebody you think fondly of, maybe get a second opinion anyway. Just say, what do you think of this?

What are the fleas on this dog? And you know, hopefully you’re working with somebody reputable, who’s got your interest in mind and is doing all the right things. And I think the vast majority do, but you do want to avoid running into somebody who’s, who’s, who’s not doing that for you. And so I think the best bet is A, trust your gut.

B, talk to, to the other folks who work with this advisor C, interview a couple of people, get a second opinion if you need it. And ideally make sure that second opinion is from somebody who isn’t a coworker or a co-employee of that same company. It’s a hard question to answer. Thanks for the doozy right up front.

[00:53:04] Sara Lohse: And we have mentioned a few times this book for anyone who doesn’t know about it, or wants to know where the, where to find it. Eric recently released Don’t Retire… Graduate!: Building a Path to Financial Independence and Retirement at Any Age. And that is available in print, Kindle and audio formats on Amazon and wherever else you find your books. Have to plug it. That’s my job.

Now going back to, when we talked about HELOCs, we did get in a question. They actually live in Maryland, which is awesome. They are local. We are in Baltimore county with a HELOC is he, they mentioned a 2% recordation tax for the privilege of borrowing.

What is that? Is that in every state?

[00:53:50] Eric Brotman: Well, every state’s different and there are sometimes fees. Certainly there are fees to record a new mortgage. I have not seen that on lines of credit. I have not seen that either personally or for clients. So there are certainly places where that may exist. I, I am not aware of it existing in Maryland in any way.

We’ve, I’ve, I’ve got a home equity line personally, and it, it costs me absolutely nothing to, to set up. And I believe I believe that as long as you have, particularly, if you already have a mortgage getting a line of credit on that should not create, it’s not changing the title or the deed in any way so I don’t think you’re dealing with that. You’re you are going to settle. You’re going to go to settlement like you do for a mortgage with a title company. Usually, but I don’t think there’s a recordation tax in Maryland for a home equity line. I’ve never seen it before. If, if it’s there, if it’s there, come and get me Mr. Comptroller, because I’m doing it wrong.

[00:54:49] Cody Niedermeier: Yeah. I was about to say Eric, I don’t think I’ve, I’ve heard of that either being,

[00:54:53] Eric Brotman: no, it wouldn’t surprise me if some states do have those kinds of things to the best of my knowledge, ours does not.

[00:54:59] Cody Niedermeier: And Sara, I think we’ve got time for one more going right up to the right up to the end on this one.

[00:55:05] Sara Lohse: All right. I’ll squeeze it in. I’ll make sure it’s extra hard for you guys. Awesome. So before we were talking about account types. And you mentioned HSAs. So those are health savings accounts. They’re used for covering out of pocket medical expenses. How is that a retirement account?

[00:55:29] Eric Brotman: Well, health savings accounts, number one, unlike the old flexible spending accounts, they’re not used it or lose it so you can actually hold money in a health savings account long-term. You can also invest the money, so it’s not just sitting in cash and you’re allowed to contribute until you’re 65. If you’re part of a high deductible health plan.

There there’s a lot about HSA and we don’t have nearly enough time to go into it. I will just say that. I think they’re incredible tax savings vehicles and that if you’re in a high deductible health plan or you have access to one and you can fund an HSA, you ought to look very seriously at it, depending on everybody’s different. Every family is different. All of our medical expenses are different, but if it’s right for you, it could be a very major situation for retirement. And there are two ways to access it later in life. Number one, you can file claims for prior medical expenses any time. So keep a file, keep a accordion file of all of your medical bills for the next 10 years.

Grow the money in an investment plan. And then S solve, you know, claim all of it at once. You can do that. The other thing you can do if you’re past full retirement age is you can actually make a withdrawal from the HSA and it’s the same as making one from an IRA. So it doesn’t have to be for healthcare once you’re of retirement age.

So I hope that helps there’s more at lowtaxbook.com and there’s more on our on our website and in the book about HSAs. I think they’re spectacular.

[00:56:50] Cody Niedermeier: Okay, Sara. Thank you. Thank you for pulling these questions. And I know there were more cause I saw them as well. So if we did not get to your questions, I’m sorry.

But like I said before, that QR code, which was on this slide. Set up a meeting, we’ll be more than happy to meet with you and try to help you in any way that we can. Other than that, this was Eric, our 11th BFG webinar of the year already. And we got one more that’s coming out in December. It’s going to be end of the year right: last minute, money moves to save you on taxes. And that’s December 8th at 11:00 AM where I’m going to be welcoming you back. But I can’t believe it’s already been a year.

[00:57:27] Eric Brotman: Now you you’ve, you’ve gone from being a a webinar neophyte to a, to a polished host. So well done, sir.

[00:57:35] Cody Niedermeier: That’s the biggest compliment you’ve ever given me, but yeah, I wouldn’t expect anything else, but thank you so much for joining us again, Eric.

It is always a treat to have you on. Can’t wait to can’t wait to have you back on December 8th and for all those listeners and viewers. Thank you guys so much for tuning in and hopefully we’ll we’ll catch you on the next one in December. So thanks everyone and hope you have a great day.