RJS 12-13-25

Episode Transcript

Speaker 1 (00:00):
Good morning to all. Craig Schillig here and this is
Safe Money. I'm here every Saturday to talk with our
listeners about financial strategies we use to manage and protect
assets safely. I've been in an insurance agent for over
twenty five years. During that time, I've learned a few
insurance strategies, like using annuities as safe money harbors or

(00:24):
using cash value life insurance to supplement your retirement income.
Just a reminder, you can call our office at five
six three three three two two two zero zero if
you like to schedule an appointment about your individual situation,

(00:44):
or you can email me at Craig at Craigshillig dot com.
And that's my name, cr Aig at cr Aig scchi
l LIG. Today I'd like to talk about estimating your
retirement income and how annuities can play a role in

(01:09):
that regard. First, let's talk about interest rates. The worst
thing clients can do in response to interest rate cuts
is to make drastic asset allocation changes. The Federal Reserve
in October, rate cuts were good news for borrowers, but
they can be bad news for retirees who depend on

(01:31):
cash yields and other fixed income securities. For savers, particularly
those with a significant amount of savings allocated towards cash
and cash like products, it's likely the yields on those
products will decline. Fixed yield investors may already have seen

(01:52):
their yields drop from the September federal reserve cut. The
yields on bank savings accounts and other cash substitutes tend
to be the first assets to respond to changes in
prevailing interest rates. Some cash shields started tightening before the
Feds move, just in anticipation of upcoming or future rate

(02:15):
cuts to minimize the risk of following yields. A mix
of cash accounts, money market funds, and short term duration
debt instruments can help clients meet their liquidity needs, protect
their capital against permanent impairment, and preserve income for an

(02:37):
extended period of time. Some clients may migrate to CDs
or money market funds to help cover twelve months of
living expenses as an emergency fund. Remember that when interest
rates come down, bond yields rise, so your bond portfolio
gets a boost, and when bond yields are less attractive,

(03:02):
that's when your equities usually rise. One concern one current
concern this time around is the FED maybe cutting rates
while inflation remains stubbornly in the three percent arena. This, incidentally,
is a double double edged sword for retirees. While they

(03:24):
might be getting less yield, they usually find some comfort
in the fact that their Social Security payments are tied
to the CPI Consumer Price Index, not the interest rate
movements themselves. They did announce back in October that Social
Security will get a boost of two point eight percent

(03:45):
in twenty twenty six. Also note your part B premium
went up nine percent to two Zho two ninety in
twenty twenty six. So let's talk about s making your
retirement income. You know how important it is to plan
for your retirement, but where do you begin. One of

(04:06):
your first steps should be to estimate how much income
you'll need to fund your retirement. That's not as easy
as it sounds, because retirement planning is not an exact
science science. Your specific needs depend on your goals and
many other factors. You can use your current income as

(04:27):
a starting point. It's common to discuss desired annual retirement
income as a percentage of your current income. Depending on
whom you're talking to, that percentage could be anywhere from
sixty to ninety percent, or even more. The appeal of
this approach lies in its simplicity and the fact that

(04:48):
there's a fairly common sense analysis underlying it. Your current
income sustains your present lifestyle, so taking that income and
reducing it by a specific percent percentage to reflect the
fact that there will be certain expenses you'll no longer
be liable for, such as payroll taxes, will theoretically allow

(05:14):
you to sustain your current lifestyle. The problem with this
approach is that it doesn't account for your specific situation.
If you intend to travel extensively in retirement, for example,
you might easily need one hundred percent or more of
your current income to get by. It's fine to use
a percentage of your current income as a benchmark, but

(05:35):
it's worth going through all your current expenses in detail
and really thinking about how these expenses will change over
time as you transition into retirement. You can project your
retirement expenses. Your annual income during retirement should be enough

(05:55):
or more than enough to meet your retirement expenses. That's
why estimating these expenses is a big piece of the
retirement planning puzzle. But you may have a hard time
identifying all your expenses in projecting how much you'll be
spending in each area, especially if retirement is still far off.

(06:17):
To help you get started, to hear some common retirement expenses. Food, clothing, shelter.
Those are the three that I focus on. Everybody needs
to eat, you gotta have clothes, and you need a
place to live. It doesn't matter if it's rent or
mortgage payments. You'll have property taxes, homeowners insurance, property upkeep

(06:41):
and repairs, utilities, gas, electric water, telephone, Wi Fi, cable TV,
or satellite transportation, car payments. If your car's paid off,
you still have auto insurance, gas maintenance repairs, or if

(07:01):
you live in the city, public transportation. I could even
argue these days, how much would you spend on uber
or lift insurance. There's Medicare, dental, life disability, long term care,
just to name a few healthcare costs not covered by insurance,
your deductibles, your co payments, prescription drugs, out of pocket copays.

(07:27):
Those are big ones. Taxes you have federal, both federal
and state income taxes, capital gains tax don't forget property
taxes as well. If you live in Iowa, licensing for
your car. That's always cheap too. Education, whether you're spending
money on your children's education or your grandkids college expenses. Gifts,

(07:51):
both charitable gifts, churches or your favorite charity or personal gifts.
Savings and investments. Contributions to iras if you're still earning
an income, Contributions to annuities or other investment accounts. Don't
forget cash value life insurance because that's a great place

(08:14):
to deposit money as well. Recreation. How much would you
spend on travel, dining out whatever your hobby is, and
or leisure activities. Care for yourself, care for your parents
or others such as siblings if you're in that arena.

(08:35):
Cost for a nursing home, cost for a home health
aid or a temporary home health worker or other type
of assisted living arrangement, miscellaneous items. Personal grooming. I have
a lot of clients who love to get their nails done.
What about your pets? You guys love to spend money

(08:56):
on your pets, doesn't matter if it's a dog or
a cat. And club memberships, whether it's country club, pickleball,
pick whatever club you're in, there's always a fee for that.
Don't forget that the cost of living will go up
over time. Keep in mind that your retirement expenses may

(09:18):
change from year to year. For example, you may pay
off your home, mortgage or your child's education early in retirement.
Other expenses such as healthcare and insurance may increase I
should say will increase as you age. To protect against
these variables, build a comfortable cushion into your estimates. It's

(09:39):
always best to be conservative. Finally, have a financial professional
help you with your estimate. With your estimates to make
sure they're as accurate and realistic as possible. Decide when
you'll retire. To determine your total retirement needs. You can't
just estimate how much annual income you need. You also

(10:01):
have to estimate how long you'll be retired. Why the
longer your retirement, the more years of income you'll need
to fund it. The link of your retirement will depend
partly on when you plan to retire. This important decision
typically revolves around your personal goals and financial situation. For example,

(10:24):
you may see yourself retiring at fifty to get the
most out of your retirement. Maybe a booming stock market
or a generous earlier retirement package will make that possible.
Although it's great to have the flexibility to choose when
you'll retire, it's important to remember that retiring at fifty
will end up costing you a lot more than if

(10:46):
you're retire today at sixty five or sixty seven. Estimate
your life expectancy. The age of which you retire isn't
the only factor that determines how long you'll be retired.
The other factor is your life span. We all hope
to live to an old age, but a longer life

(11:06):
means that you have even more years of retirement to fund.
You may even run the risk of outliving your savings
and other income sources. To guard against that risk, you'll
need to estimate your life expectancy. You can use government statistics,
life insurance tables, or a life insurance expectancy calculator to

(11:30):
get a reasonable estimate of how long you'll live. Your
life experts base these estimates on your age, gender, race, health, lifestyle, occupation,
and family and medical history. But remember these are just estimates.
There's no way to predict how long you'll actually live.

(11:54):
But with life expectancies on the rise, it's probably best
to assume you'll live longer than you expect identify your
sources of retirement income. Once you have an idea of
your retirement income needs, your next step is to assess
how prepared you already meet those needs. In other words,

(12:14):
what sources of retirement income will be available to you.
Your employer may offer a traditional pension that will pay
you monthly benefits. In addition, you can likely account on
Social Security to provide a portion of your retirement income.
To get an estimate of your Social Security benefits, visit

(12:34):
SSA dot gov. Additional sources of retirement income may include
your four to one K or other retirement plans, iras,
annuities whether they're qualified or non qualified, and other investment vehicles.
The amount of income you receive from these sources will

(12:56):
depend on the amount you invest, the rate of interest
at the rate of investment return, and other factors including taxes. Finally,
if you plan to work during retirement, your job earning
earnings will be another source of income. You know, I
have a lot of clients that retire for a few

(13:17):
years and then they're bored, and then they go back
to work part time, and in some cases they're making
more money then than they were full time. And that's
just sometimes because they retire early and their other friends
haven't retired yet. Make up any income shortfall. If you're lucky,
your expected income sources will be more than enough to

(13:39):
fund even a lengthy retirement. But what if it looks
like you'll come up short. Don't panic. There are probably
steps you can take to bridge the gap. A financial
professional can help you figure out the best way to
do that, but here's a few suggestions. Try to cut
current expenses so you'll have more money to save for
each time reirement. Shift your assets to investments that have

(14:03):
the potential to substantially outpace inflation. But keep in mind
that investments that offer higher potential return may involve greater
risk of loss. Lower your expectations for retirement so you
won't need as much money. No beach house on the riviera,

(14:23):
for example. Work part time during retirement for extra income.
Consider delaying your retirement for a few years longer, just
to cushion your nest eck. New products, technology, access, and
awareness have created a new way of thinking about guaranteed

(14:44):
lifetime income. The time is right for annuities. If you're
on the fence about buying annuities, the industry's cheerleaders say
that there's no better time than now to buy one.
Consumer interest in guaranteed retirement income solutions and annuity sales
have hit record levels thanks to several tailwinds such as

(15:06):
higher interest rates and strong equity markets. According to Limera,
the Windsor, Connecticut based insurance Industry Trade Association, total annuity
sales soared to four hundred and thirty two billion and
twenty twenty four, that's a twelve percent year over year increase,

(15:28):
and the first half of twenty twenty five saw total
annuity sales climbed to a record two hundred and twenty
three billion, that's a three percent year over year gain.
Limeras says sales doubled between twenty twenty and twenty twenty four.
Annuity popularity is attributed to better technology, better access to products,

(15:52):
and more awareness of them. At a time when clients
are trying to navigate uncertain retirement waters, people overall are
choosing to buy annuities because they want peace of mind.
Most retirees learn quickly that retirement incomes a little more
complex than the paycheck many of them received during their

(16:14):
working careers. It's important to manage expenses and liabilities retirement
is an income statement, so meeting expenses is a factor
when considering income. There are a wide range of annuity
products that provide financial security and retirement. Some offer not

(16:35):
just income, but also income for life, which offsets the
risk of living a very long time. They also provide
a buffer for market volatility. Lifetime income products are substitutes
for classic pensions, something that many people in the private

(16:57):
sector no longer have, leading the booming marketplace to sales
or index based annuity products such as fixed indextinuities known
as fias, which provide downside protection. They were created in
twenty ten, have been a key driver for the US market,
with sales reaching sixty five point two billion and twenty

(17:20):
twenty four, a thirty seven percent increase over the prior year.
According to LIMRA, sales have fixed indexinuities in twenty twenty
four totaled one hundred and twenty five point five billion,
up thirty one percent year over year. Retirees have seen
significant increases in the value other portfolios over the last

(17:44):
fifteen years. They're far more concerned about a twenty percent
plus decrease than they are in additional upside potential. They
are happy to settle for a five to eight percent
year in exchange for reducing their chances that they will
lose money. The favorable interest rates also shone a light

(18:07):
on fixed rate deferred annuities, which saw significant growth and
more than doubled the fixed annuity component of the market,
which really allowed individuals to get protection of growth of
their assets. Sales of multi year guaranteed annuities rates thirty
five point two billion in the first quarter, up twenty

(18:29):
point eight percent from the previous quarter, which are seen
as CD replacements and have for some time paid one
point five percent more on average than CDs, thereby making
them attractive alternatives for their safe money features. Fixed index

(18:51):
annuities are as simple as it comes, and they can
be incredibly attractive for someone who's in a middle or
high income tax bracket who has a lot of money
in a taxable account because the growth on fixed annuities
is tax deferred until the money is distributed. Strong equity
markets in twenty twenty three and twenty four were key

(19:15):
to boosting the annuity space, as both years saw US
equity markets return twenty percent or more, and even with
the levels of volatility and uncertainty, this year, we've seen
growth in the equity market and those are strong a
strong value propositions for those for those types of products.

(19:39):
The surge and annuities is also driven by demographics. Four
point four point two million Americans will turn sixty five
this year, which translate to eleven two hundred baby boomers
turning sixty five every day. This is the largest generation
ever reaching retirement. Traditional defined benefit pensions have virtually disappeared.

(20:07):
In nineteen seventy five, seventy percent of Americans had access
to a defined benefit plan. Today that number is down
to twelve percent. So you have this growing cohortive Americans
that are kind of natural consumers of annuities. And while
many annuity buyers are retired or at the age of retirement,

(20:28):
the products appeal to and are bought by a wide
range of consumers. Most industry executives say most annuity buyers
range in age from age fifty to seventy. The prime
age is fifty three and older. It's a good idea
to bring annuities into play at that point because you

(20:50):
have sequence of returns risk as you head into retirement,
into your retirement years. This means if you have a
down market right before or you're going into retirement. That's
a real problem for your current financial plan. The same
goes for down markets rate after you retire. So having

(21:11):
protection from the annuities means that you don't need to
hit the portfolio for income because you've got the annuity
generating strong income now. Also, you can have products with
downside protection where you won't lose money due to market performance.
Younger people who tend to be conservative also by annuities.

(21:33):
That's a great way to get them some kind of
market exposure, even with downside protection, instead of just sitting
in cash or sitting in some CD or fixed income
vehicle fias get conservative investors a little more market exposure,
but in a way that they find palatable. Another innovation

(21:55):
annuity boosters talk about is the confert. This is the
contingent deferred annuity, a product that comes with an insurance overlay,
so the income stream continues after the underlying investments are depleted.
Embedding annuities into other products rather than offering them a
standalone option. You've heard me talk about Congress's proposal to

(22:19):
have default options within your four O one K plants.
Default options like target date strategies with professional asset allocation
processes that adjust the risk and return profile as participants
age have been among the most important innovations in defined
contribution space over the last twenty years. Remember I've said

(22:42):
this before, nobody likes annuities. They like what annuities do.
In my couple future upcoming talks, i'll talk more about
annuities and retirement income. Remember I've rep present a lot
of companies, and there's a lot of different ways you
can use annuities depending on age and what you're looking for.

(23:09):
Using fixed annuities fixed deferred annuity as a CD alternative
is a great way. Personally, I think fifties a little young.
I'd probably it'd probably be better if you're like fifty five,
because remember, once you open an annuity, you can't withdraw
it until fifty nine and a half because there's a
ten percent early withdrawal penalty if you're under age fifty

(23:32):
nine and a half. Having said that, if you need
to park some money so that you know nobody touches
it and it's locked up, a five or ten year
annuity if you're fifty or fifty five isn't a bad
play that way, it'd be out of surrender charge by
the time you turn to age sixty. Now at age sixty,

(23:54):
people in your early sixties are great candidates for both annuities,
and don't forget permanent cash value given in paying life insurance.
The problem with the life insurances that's predicated on your insurability,
so you have to be healthy, you have to be accepted,
so don't forget that. But annuities are still another play

(24:17):
you can use to offset your taxation you're going to
have for required minimum distributions at age seventy three. Don't
forget My monthly virtual meetings regarding Medicare for two different
companies every month are kind of on hold right now.
I shouldn't know more about this in a couple of weeks,

(24:38):
but in one meeting, I'll cover the Medicare supplement plan
with a standalone drug plan. The other meeting, I focus
on Medicare advantage plans known as Medicare parts see, and
I cover the benefits of that platform given all the changes.
I don't have future dates for those meetings at this time,
but I think i'll have a new company to sponsor

(25:00):
a meeting very soon. I'm happy to schedule an individual
meeting at your request. To talk about your individual situation.
You can call our office at five six three three
three two two two zero zero to set up a
schedule a meeting time, whether face to face, virtually or

(25:21):
over the phone. You're also welcome to email me at
Craig at Craigshillig dot com. And that's my name, c
R a I G at c R a I G
s c h I L l I G dot com.
This is Craig Shillig with safe money.