Early retirees--

So many people love the idea of retiring early. My father did, I have many former colleagues who did and talk to lots of educator clients who want to. Before taking that decision, we need to consider a few things:

- the average retirement plan has about $104,000 in it

- if someone has the average in their plan and retires early at 62, their monthly payout will be around $427

- at an average 3% inflation rate that $427 whittles the buying power of about $247 in 20 years

- that same $104k left in your retirement plan until age 70 can become a monthly payment of about $780, so if you do retire early, you may want to delay taking any disbursements out until you are required by IRS

- whether you are in the social security system or a pension system, your salary at retirement is estimated at 40% less than when you were working

- if you are part of the TX TRS system, you will not receive cost of living adjustments (COLAs) annually. The last COLA in TX was 8 years ago.

- out of pocket health costs over a lifetime of a couple retiring at age 65 is estimated to be about $300,000+, so earlier retirement could be a bit higher

- TRS Care just made major adjustments in the medical insurance for educator retirees. Early retirees were hit the hardest because when TRS Care was set up over 30 years ago, it was assumed everyone would work until 65. That is not the case these days; many educators look at the Rule of 80 and as soon as they meet that rule, retire. I was one of those

- educators are up in arms about the changes in TRS Care right now. The reason it has to change was that it was set up to be funded for 10 years with the anticipation that the TX legislature would adjust it along the way. That did not happen. 20 years later, the legislature has to look into it and it was $1.4 BILLION in shortfall! Adjustments had to be made and they gave it a start.

- expect more adjustments over the next few years until it either becomes sustainable once again or is discarded and educators no longer have that option--they will be placed in the Medicare system like everyone else

Plan carefully if you want to retire early. Waiting to plan impacts you for the rest of your life. If you need help, give me a call or shoot me an email; we can work out a plan to suits your dreams.

jnutting65@gmail.com

056-207-2486

TX House of Representatives Hearing on Pensions

• In May, I attended this hearing on behalf of my clients in education, below are some of my notes:
  
  • What is the problem with TRS Care? TRS has 1.5 million members currently. TRS Care was begun in 1985 and was funded for 10 years with the idea funding would be updated as needed. It was ignored by the Legislator and Governors until Summer, 2017. The Need: sustainability into the future. The 2017 Summer Session set it up so premiums would rise and increase out-of-pocket with a $700M infusion from the State. They knew then that an additional $200-$400M would be necessary when the next Regular Session meets next year. That number has now grown to $400-$600M.
  
  
  • Why is TRS Care in need of updating? more teachers are taking early retirement (before 62 years of age) than anticipated, healthcare costs have risen, drug costs have risen and people on TRS Care go to emergency rooms for care that should be provided by a much-cheaper UrgentCare center (Emergency room cost are typically 3-5 time the cost of an Urgent Care)
  
  
  • What is TRS doing to help this issue? TRS is encouraging educators to retire at 62 or later because they need more money flowing in longer. The current average for retiring educators is just slightly over 60 years of age. TRS is updating contracts with providers and has canceled others to save money. TRS feels they are to blame for some of the misinformation because during the summer; they failed to communicate fully with retirees about the needs and solutions. That led to some teacher groups reporting on hearsay and that led to some misinformation.
  
  
  • What if the Legislature and Governor had done nothing last summer? No one wanted what would happen if there had been no additional funding by the State, there would have been NO benefit.
  
  
  • FUN FACT: There are 230 thousand people on TRS Care
  
  
  • What were the Other Changes to Offset the Shortfall? creating a new high-deductible plan, increased contribution and offering a more basic minimal plan; one plan that was too expensive to sustain and was done away with (Plan 2).
  
  
  • Some retirees went with the ObamaCare marketplace; what happened to them? Some states do not offer a TRS Care-like plan at all for retirees; of those, some are beginning to form negotiating groups to share costs. Currently, 70% of retirees are Medicare-eligible (meaning 65+ OR, have a disability) and 30% of retirees are non-Medicare eligible (these are our early retirees who are under 65). Hoping to change that ratio of 70/30, TRS offered people a one-time opportunity to return to TRS Care once they went out into the MarketPlace and didn’t like it. RESULT: some came back, especially those who still have dependents because the MarketPlace was too expensive. That was opposite of what TRS expected. 92% of TX Districts are in TRS Care. If 100% were in the system, the negotiating power or TRSCare would be greater.
  
  
  • What happened to the contribution-share by school districts? Many districts reduced their contribution share for each member in order to provide salary increases. Their ratio of contribution was supposed to be at 70/30 (70% from the district, 30% the member). That has changed in certain districts.
  
  
  • What does TRS do about costs? TRS sees the role as trying to accurately assess future costs; they do not want to underestimate.
  
  
  • Personal Observation: I watched individual after individual testify before the House Committee and state what the Committee already knew—premiums are higher and out-of-pocket expenses are higher as well. I watched as several inflated their cases so they became unbelievable, to the point, one Committee member was online to try to prove what the person was saying was accurate only to find out, it was not. That did not look good for us. One person had great difficulty navigating the steps and stated they were unable to walk. In the next breath, that same person told the Committee that TRS and the Legislature itself did not allow retired individuals to substitute. I personally meet many retired teachers who substitute. Both the Committee Chair and the TRS spokesperson stated that was not accurate. A few of those called to testify gave inaccurate numbers which were easily either unbelievable or proved inaccurate when Committee members fact-checked them during the hearing. Those people did not serve us well. I assume, they assume the Committee members are ignorant. That is not the case. They all knew what they were talking about and could pull up the Internet to prove/disprove stats instantly.

Why I Use a Mutual Company for Retirement Savings

For retirement savings, I want my money to be there and I want it to earn as much as possible.

The mutual company is one owned by the policyholders, not stockholders. 

Why is that important to me? 

Because I like the idea that the company is working on my behalf, with its policyholders as the priority, not its stockholders. When a company goes public, they are in a sense borrowing from those who would invest in it to grow. I don't want that obligation to cloud or have undue influence on decisions that affect my retirement funds.

With a mutual company, all the profits are shared by the policyholders are turned back into the company to grow. I like that.

The next time you hear someone say something like: "We work for Main Street, not Wall Street." That is a mutual company trying to show you where their priority is.

I Am Ready to Retire and Have Pre-tax Funds I Won't Need Immediately, What Should I Do?

This is a question that has been coming my way over the past few months and I wanted to take a moment to address it.

If you have a 401(k), 403(b), 401(a) or another pre-tax (it is called Qualified) account, then you have some options. Of course, at retirement you could begin taking some of the funds but if you are like some who don't need the funds to live off of just yet, you can roll those over into an indexed (to protect your principal) IRA that will give you a safe place and often, with a Lifetime Income Guarantee like your pension.

Most indexed products do not have high fees, in fact, some of the ones I use do not have any fee except for the Guaranteed Lifetime Income component. That is a sweet deal: you get safety from the downsides of the market but not leave money on the table as you would with a fixed IRA. AND, if you add the Lifetime Income component (at a small fee), the distributions would last your lifetime even if your money runs out--pretty slick.

Some accounts are set up as single premium (meaning you roll your funds as a one-time deposit into that account). Some accounts allow you to roll over those variable funds into an indexed account and add to the account at whatever interval you choose.

I should add that one of the benefits you get with rolling over your money into something safe is they often come with a bonus for doing so. That is a neat thing to have--free money just for going through the hassle of the paperwork.

Call, text or email me if you need help:

James Nutting
956-207-2486
jnutting@myretirementguru.com

I Have an Existing 401(k) or 403(b) Account From a Previous Job

I've had several clients who have changed careers over the years and have more than one 401(k) or 403(b) account and left them sitting, not knowing exactly what to do with these accounts.

When they ask what they should do with them to protect them, it seems wise to me they should look at these issues: 

1. their current age (client, that is)
2. any termination or surrender fees associated with rolling them over 
3. the vesting period for matching funds should be complete and
4. the type these accounts are in: fixed, variable or indexed to the market

A good way to protect a variable account (meaning the values of these accounts fluctuate with the market) is to roll it over into an indexed account (where the gains to the market are reflected but no losses) and any fixed is usually leaving potential money on the table.

This is a good strategy if the indexed annuity you are rolling them all into has a GLIR (guaranteed lifetime income rider) attached to it. You may save a bundle in fees because the rider typically is small compared to a variable product and if you die early, your spouse gets the same benefit. That guaranteed lifetime income rider provides a very valuable feature--if you outlive the value of your annuity, it continues to pay for as long as you live. Nice.

Always up for a conversation about what your options are, feel free to email or call:

jnutting@myretirementguru.com
956-207-2486 (leave message and I will get back if I am with a client)

Fixed, Indexed and Variable Annuities

I spend a great deal of my time describing the basics of these 3 types of annuities when it comes to retirement planning.

A brief discussion about each helps my clients decide which is best for them; below, I will share what I share with my clients.

Fixed
This is an annuity that provides a fixed rate of return. It remains constant throughout the accumulation phase (growth). It is a slow growing, but none of your money is at risk.

Indexed
This is an annuity that has an interest rate that is tied to the market, but not in the market. Generally, it grows faster than a fixed annuity and most has low or no cost associated with the basic annuity unless you add an optional benefit like a guaranteed lifetime income even if the money runs out. This one will generally follow the growth of the S&P 500 or Russell 1000. Some indexed annuities are guaranteed so you cannot lose your money but you can gain.

Variable
This is an annuity that fluctuates in value based on whatever investment strategy is chosen/used. Your money is at risk when the market goes down and can soar if the market goes up. Fees tend to be higher with this type of annuity and the fees are usually expressed as a percentage so fees grow as your money grows.

My Thoughts--
Fixed annuities tend to leave money on the table, yet they are very safe usually. Variable annuities keep some people awake at night and are best left to those who can handle the risk of losing some or all of their retirement money. Indexed annuities are in the middle; you have safety and still are taking advantage of market growth.

Some of my clients use a 35/65 investing standard. That is, they invest 65% of their retirement funds in fixed or indexed annuities and the balance of 35% in variable annuities. Generally, my clients move their variable funds over to the indexed or fixed arena as they get nearer retirement (rollover).

What is Pre-Tax and How Can It Help Me?

I get this often during my conversations with my newer clients. Some, when they first hear the term cannot wrap their heads around the concept until they see how the numbers work in their favor. Let's take a few minutes to define what pre-tax is and how it helps you.

If you have a retirement savings plan like a 401(k) or a 403(b) account (and others that are considered  "Qualified", a topic for another post), you can contribute to that account BEFORE you are assessed income taxes. The amount you contribute would actually come off of your salary and you do not pay the taxes on that contribution until you retire. It is a generally assumed that most of us will be in a lower tax bracket during our retirement years than we are in our working years. That would mean you would pay a lesser tax on that money during your retirement years because you put it away years earlier and it grew.

An example of how this works that makes the concept a bit more concrete:

Let's say you make $50,000 annually and place 10% of your salary into your retirement plan. That 10% would not be considered income so instead of your tax return reflecting a $50,000 salary, it would show  $45,000 salary. ($50,000 - 10% = $45,000) You would only pay taxes based on the $45,000 and the tax on the 10% or $5,000 would be deferred until you retire.

So, how can this work for you in addition to the tax benefit just described above?

If you are in the 25% tax bracket and contribute $500 per month, with 0 or 1 allowances, you could be putting in your retirement up to $665 per month but only see a $500 reduction in your net pay because of the pre-tax concept.

I do this for my clients all the time because I have a calculator that, when I input data from their payslip, it will show how much of that pre-tax money can be added to their contribution and set aside for their future income, INSTEAD of giving it to the IRS.

Over the course of 12 months, instead of socking away $6,000 ($500 x 12 months), you would actually be putting in $7,980 ($665 x 12 months). How cool is that?

Of course, everyone is unique and the numbers will vary with your income, allowances and tax bracket. I can help you figure out the numbers if you ever need me to. Just ask.

jnutting@myretirementguru.com