Episode Transcript
[00:00:00] Speaker A: Any examples used are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
Welcome to Reyna Retirement. Reyna Reyes has dedicated her career to helping people make smarter financial decisions. Reyna Retirement is all about breaking down complex financial concepts into language you can actually understand.
Now here's the co founder of American Federal Benefits Consultants, Reyna Reyes.
[00:00:40] Speaker B: Top of the morning to you. And we all know that of recent days, pensions or jobs with a pension have kind of gone to the wayside. It used to be the norm, the standard, just the way it was. And then workplaces got a little savvy and they learned and they found out about this thing called the 401k.
That's just a tax code for shove a bunch of money in a bucket and let it sit for a while and then you can take it out as you want to later. The benefit is that it's pre tax, right? You can take tax later, you get a deduction. But the thing is, employers sniffed it out to realize that it costs them a lot less money to only offer a 401k to their employees rather than a pension, which has a very high cost not only to manage but also to pay someone for the rest of their life.
So what ends up happening is many people end up calling me, hey, Raina, I have a 401k. Or rather, I mean, I work as you know, primarily with federal and post employees who have a pension and a tsp 401k, but their spouse is, hey, my spouse has no pension. They only have a 401. So think bucket of money.
Well, how can we structure this? Because I mean, they're going to need a lifetime income too.
And that's always possible to satisfy a type of lifetime income. But I want you to understand a little bit definitionally of the difference between the two because many people say, oh, I'll just annuitize my balance and get a lifetime income. Well, you could. TSP offers annuitization. This is kind of some pictures I've created for them. But the idea of annuitization means I have this bucket of money that I put all this money in for so long and I'm going to trade it for a lifetime income. That is, yeah, I get money forever. But if I've traded my bucket of money or a lifetime income, can I ever grab out of the bucket of money ever again. Negatory, good buddy. If you've annuitized, remember you traded your balance, the stream of income. So you get monthly income, but you ain't got no bucket to pull money from. So what if you need to reroof your house? Well, you might need to finance it. Or you wait until you've saved up enough to pay cash if this was your only source of bucket of money. So we always try to. You may have heard me talk about teeter totter. It's kind of a common theme. I try to balance the different things. We always want a bucket of money, but also the lifetime income. So just annuitization by definition means yes, you get lifetime income, but there is no balance. And once something has been annuitized, if you pass away, how much money does your family get?
That's a goose egg. Because annuitization means I don't have a balance anymore. I can't pull money from it because I exchanged it for an income. And if I pass away from day one, my family receives nothing. This is standard annuitization, lifetime income, no bucket of money. And TSP has made some edits to where they offer people an option to have what they call a period certain, which is essentially 10 years, that you're certain that if you pass away there will be some money to the family even as it's decreasing.
But then after 10 years there's nothing. So but that decreases also what your lifetime income is going to be. So. So again, every teeter has a totter. So that's something to consider because many people call me to say, but Raina, I understood you to and you don't need to look at this anymore. You can look at me.
I understood, Raina, that you have plans and IRAs and options that can pay me an income that I will never outlit. And that's what many people get excited about in the idea of annuitizing their balance. Because lifetime is a key word in lifetime income. Because people are living longer these days and they don't want to outlive their money.
We've heard and watched so many people deal with reverse mortgages and the spend down to get Medicaid or government assistance. And we don't want to be that guy. And it makes sense. So we say, okay, I want to be sure I don't outlive my money.
But we also, because you want it to be sustainable, if you're just grabbing from a bucket for the rest of your life, that bucket probably will not last forever.
So our goal is always in my Experience. When somebody comes to me with a spouse's 401k, okay, we like to reverse engineer that. How much money do we know we need monthly or, or how much money do we believe we'll need monthly?
We can peel off a portion of that 401k to then guarantee a certain dollar amount. And I don't use that word lightly, guarantee.
Do you remember the, the Cajun cook, Justin Wilson? He, he's a very paramount part of my childhood. He wore a blue shirt, red suspenders, and he could measure salt and sugar or whatever perfect teaspoon tablespoon, whatever in the palm of his hands. And he was always drinking red wine and he'd pour it and he would like always give it like extra sloshes of wine in his meals. And he would always say, I guarantee it. So to guarantee something is very important to know that you have that guarantee that you know exactly what that income is going to be and it's going to be for your life.
What else would he say? He would always say, I'm glad for you to see me some more. Like he was super thick accent. I can't do it, but I'm, I'm glad for you to see me some more. So in my, in my lack of humility, I always tell people how glad I am that they get to meet me. So I've taken the tip from, from Justin Wilson. I'm glad for you to save me some up.
But the beauty is, is that we'll be seeing some more of all the people because everybody's living longer. That's the takeaway. And so our goal will be if you don't absolutely know what your lifetime income is going to be or you know that it's going to be less than what you were receiving while you were working, our goal is first find out how much less is it going to be and how much can you make up for it with what you've saved? So it is very important.
Keep saving, keep contributing, get the match.
Let's see what we can do. Because getting a guarantee of lifetime income is a huge, huge thing.
And when you retire, you don't want to be all fingers crossed, oh, I hope I have enough money. I do. We say, okay, we're going to plan for this. This is the dollar amount.
When we turn it on in however many years or whenever we do that, we know exactly what it's going to be. But we haven't used the whole balance. You still have a bucket you can pull from. And even in these lifetime income plans, whatever I use then you're able still to grab out of the balance as long as there's money in the bucket. And if you pass away, the family does get what's left.
So that's the difference between annuitization and using a plan designed for lifetime income that does not annuitize your your balance. This may sound a little bit overly detailed. If you have a 401 and no pension or your spouse does reach out, let's at least review what you got going on and see how the money's going to be. I've had conversations where people don't need the monthly income. They're like where our monthly income is good, great. So it's a nest egg. We can look at it as a nest egg and make plans accordingly. But if we're short $1,000 a month, that can be a substantial insufficiency over a long time period. So reach out. Let's get scheduled. Let's look at what you got going on and make a plan for the future that can be guaranteed. We'll see you soon.
[00:08:50] Speaker A: Thanks for listening to Reyna Retirement With a strong commitment to ethical standards, Raina works hard to find the right solution for each individual or family who reaches out for advice. To contact Reyna directly, call 850-450-6500. That's 850-450-6500. Or to reach the team at American Federal Benefits Consultants, call 1-800-872-8857. That's 1-800-872- 8857. You can also go online to americanfederal.org not affiliated with the United States Government. Opinions expressed are subject to change without notice. These opinions are not intended as investment op advice, nor do they predict future performance of any product. All information provided is believed to be from reliable sources. However, we make no representation or warranty as to the accuracy of any statement. The information is intended to be educational in nature and does not provide a guarantee or specific result. All copyrights and trademarks are the property of their respective owners. American Federal Benefits Consultants is an independent organization, not a government agency or affiliated with the Federal Government or any state government. The terms CSRs, FERs, FELI, and FEHB are all registered trademarks of the UL Management American Federal Benefits Consultants, agents, consultants, or any independent contractors do not provide tax, legal or investment advice and do not engage in the solicitation or sale of securities. Consult with your tax advisor or attorney regarding specific situations.
