Episode Transcript
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Speaker 1 (00:00):
Welcome to the hidden world of wealth, where secrets of
the affluent become accessible to you. You are listening to
Your Money Matters, the most provocative financial radio show on
the airwaves. You are about to start your educational journey
here on Your Money Matters with your host, Drew Prescott,
(00:22):
President of Prescott Private Wealth and Chartered Retirement Planning Counselor.
Drew will unlock the complexities of the financial landscape with straightforward,
powerful insights. Whether you're planning for retirement, managing in a state,
or looking to grow your wealth. Consider this your exclusive invitation.
Turn up the volume, lean in closer. Let's navigate the
(00:45):
hidden paths of prosperity together. Your financial enlightenment begins now.
Securities all produce a terror Financial Specialists LLC member FINRA
SIPC reservices offered through Setara Investment Advisors LLC. So TERA
firms are under separate ownership from any other named entity.
(01:06):
Four five to one sixth Street, Troy, New York one
two one eight zero.
Speaker 2 (01:27):
Welcome back, everybody. You're listening to Your Money Matters and
I'm your host, Drew Prescott, Chartered Retirement Planning counselor, credited
Wealth management advisor and president of Prescott Private Wealth located
in Troy, New York, and a lifelong student of the markets,
and a guy that has already had two cups of
(01:48):
the good stuff this morning. So nothing pairs better with
talking about income planning than a strong cup of coffee
and a stronger retirement strategy. Now, today's show is going
to hit home for a lot of folks. We're talking
about how to take the money that you've saved, invested,
(02:12):
and sacrificed for and turn it into a reliable paycheck
that doesn't vanish the moment the stock markets gets sniffles.
So if you're nearing retirement or you're already retired, this
show is your wake up call. And if you're already
up and listening with a pen in hand, kudos to you.
(02:35):
You're ahead of the game. And we're going to walk
through how to turn your nest egg into income, why
relying too heavily on the four percent rule can backfire,
what sequence of returns risk is, and why it matters. Additionally,
we're going to cover how tools like annuities, CDs and
(02:59):
bonds and give you peace of mind when the markets
go a little bit squirrely. And don't worry. We'll keep
it light, fun and yes, informative, and I promise you
that you will not need a PhD to follow along,
just a strong desire to protect what you've worked so
hard for. So let's dive in a section here that
(03:24):
I like to call the retirement paycheck. How to take income,
when to take it, and what to watch for. And
here's the truth most people miss. This retirement isn't just
about stopping work. It's about starting a new job. And
your new job is managing income from a bunch of
(03:46):
different sources. Except this time you are the CFO. Your
job is to keep the paychecks coming in without blowing
through the company reserves. And the biggest mental shift and
retirement is this. You no longer have savings for retirement.
(04:07):
You're spending in retirement and that shift, my friends, can
be terrifying without a clear income plan. So let me
paint the picture for you. You've got your four oh
one K, maybe an IRA social Security, and maybe if
you're one of the lucky ones, you have a pension
and possibly even some rental property. But every month you
(04:33):
still need a paycheck. The bills don't stop coming in
just because you turn sixty five and through a retirement party.
Your grocery store doesn't care. Clearly if the market was
up eight hundred points yesterday, if it was down sixteen
hundred points yesterday, they still want your five dollars for eggs.
(04:54):
So here are four critical questions that you must answer
before you start drawing income for yourself. Number one, how
much income do I need each month to live comfortably?
Now when I say that not just to survive, but
to actually enjoy life, to travel, to play golf, and
(05:17):
to spoil the grandchildren. Number two? What are my guaranteed
income sources? Do I have Social Security, pension annuities, rental income?
And which of those can I count on regardless of
market conditions? Now, the third question you want to ask
(05:38):
yourself is how much income can I take from my
investments without risking running out of money? Now you see
this is where most people guess, and guessing, my friend,
is not a retirement plan. You need to know how
much you can safely withdraw without eating into your principle
(05:59):
too quickly. Now, the fourth question is how do I
protect myself from inflation and taxes over time? And if
you don't plan for these two income killers you're just
setting yourself up for a rude awakening in the future,
because inflation may be invisible, but it is absolutely not harmless.
(06:22):
And Uncle Sam doesn't retire just because you do. Now,
a lot of people lean into something that's called the
four percent rule. Now you may have heard of it.
It's this idea that if you withdraw a four percent
of your portfolio each year, you should be able to
make your money last thirty years. Sounds simple, right, Well,
(06:45):
here's the problem. That rule was created in the nineteen
nineties based on historical data when interest rates were higher,
markets were less volatile, and beanie babies were still a
hot and today's world, as you know it, is different.
Interest rates have become unpredictable, markets are more volatile than ever,
(07:09):
and if we're being honest, most people's portfolios can't handle
multiple years of market losses and consistent withdrawals. So this
brings us to one of the most misunderstood risks in retirement,
(07:29):
and that is called sequence of returns risk. So let
me explain in plain English. Sequence of return risk is
the danger of receiving lower or negative returns in retirement
just when you start to pull money out. Well, the results.
(07:50):
You start draining your account while it's already losing value.
And that's like trying to pour water from a bucket
that's not just but has a hole the size of
a dinner plate. So if you're pulling money out while
the market is down, you could be doing significant damage
(08:12):
to yourself. And this is why building a plan that
includes income sources that are protected from market swings, like
annuities or structured CDs can help create a floor of
guaranteed income. That way, if the market crashes, your lifestyle
(08:32):
doesn't have to. So imagine having a paycheck that you
can count on every month no matter what the market does.
It's not just comforting, it's smart. And that's what we
call an income diversification strategy. So think of it like
building a sturdy, three legged stool. So I always hear
(08:54):
that I don't know about you, but three legged doesn't
sound all that's thirty. I like four legged stools. Call
me crazy, but let's go with it, because this is
the term that everyone always uses, is this three legged stool.
The first would be guaranteed income like social Security pensions
(09:18):
or annuities. The second would be flexible income from investments
like your iras or brokerage accounts. And third would be
emergency cash for the uh oh moments in life. Now,
get those three legs in place and you'll have stability
that can weather almost any financial storm. Now, if you're
(09:41):
within five years of retirement and you haven't created a
retirement income plan, this is your moment. Don't wing it,
don't gues Visit PRESCOTTPW dot com and click the button
that says schedule a time. Schedule a fifteen minute retire
income check in with me personally. It's free, it's confidential,
(10:04):
and it could prevent fifteen years of financial stress. All right, Now,
let's lean into this conversation that always seems to stir
up more emotions than pineapple on pizza. And that is
the big a word annuities. Some people would say annuities
(10:31):
are as comforting as a warm blanket on a cold day.
Now to others, they sound like something that your great
aunt bought back in nineteen eighty seven and regretted ever since.
But here's the truth. Folks, love them or hate them,
annuities have one powerful benefit that is hard to ignore.
(10:54):
They help people sleep better at night. So let me
ask you something. If the stock market dropped twenty five
percent tomorrow, would you still feel confident in your retirement
income or would you be adjusting your thermostat, skipping some
(11:15):
dinners and telling the grandkids maybe next Christmas kids. If
you said the latter, well you're not alone. In fact,
a twenty twenty one study by the Alliance for Lifetime
Income found that retirees who had a source of guaranteed
income like a pension or an annuity were significantly less
(11:40):
likely to panic during market downturns. They weren't slashing their
budgets or losing sleep. Why because part of their income
kept showing up like clockwork, regardless of what happened with
the S and P five hundred and it's like having
a Labrador retriever who delivered your retirement paycheck on time
(12:03):
every month, loyal, reliable, and okay, well, maybe slightly less slavery.
But let's pull back the curtain and talk about what
annuities are. We want to talk about how they work
and why, and when used correctly, they can be a
very powerful part of your retirement income strategy. So let's
(12:27):
break down the different types of annuities first. Now, not
all annuities are created equally. Some are as simple and
predictable as a toaster. Now, others are more like a
refrigerator with a built in TV ice dispenser and Wi Fi.
And in other words, they're complicated and potentially expensive if
(12:47):
you do not know what you're doing. So let's simplify it. Well.
We first will look at fixed annuities. A fixed annuity
is similar to a but it's issued by an insurance
company instead of a bank. You give them your money
and they give you a guaranteed interest rate, typically higher
(13:12):
than what your local bank is offering, and your principle
is protected. No surprises, no roller coasters, just steady, predictable growth.
And these are perfect for folks who want safety and
a little growth without market exposure. Now, the next one,
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we're going to glance over this quickly, and then we'll
go into some detail, which is fixed index annuities. Now
in New York State, if you're listening in New York State,
we're very limited in what we have available here. So
some would say that is because New York is very
(13:58):
cautious for US citizens in the insurance products. I would say,
I don't know why they do what they do, because
there are some other states that have wonderful, wonderful products
in this arena, but with US, it's very, very limited
(14:23):
and typically not the greatest offering, just simply due to
the limitations that are put on them in New York State.
So this is where this gets interesting. A fixed index annuity,
it still protects your principle, meaning you can't lose money
due to market declines, but it gives you the opportunity
(14:47):
to earn more based on the performance of a stock
index like the S and P five hundred. So think
of it like playing blackjack, where the worst case scenario
is you don't win, but you never lose your original chips.
So you participate in market ups but not the downs.
(15:07):
And in a volatile world, that's a pretty nice seat
to have at a table. Now let's look at variable annuities.
So these annuities, they give you full exposure to the
markets and your investments, which are called sub accounts. They
can go up or down, just like mutual funds, and
the upside potential is high, but so is the risk. Okay, Now,
(15:34):
variable annuities they usually come with some higher fees and
they're not for the faint of heart or for someone
looking for just guarantees on the account value. Now, just
like you wouldn't go to dinner and order everything on
the menu, you shouldn't throw all of your money into
(15:57):
one type of annuity either. So how much should you
allocate to annuities? Now, again, I never recommend these unless
we do a financial plan and we see exactly if
there's a need and how to use it properly. But
if there is a need, this is one of the
most common questions that we get, and here's our general
(16:22):
rule of thumb. Do not put more than fifty percent
of your investible assets into annuities. Why because while annuities
can offer incredible peace of mind, you still need liquidity,
and you still need the flexibility to handle emergencies, take
advantage of investment opportunities, or just plan live your life
(16:47):
without being penalized for accessing your own money. So think
of annuities like a seat belt. They can protect you
in a crash, but you don't want to wear five
of them at once and forget how to get out
of the car. Because balance is key. So what you
need to understand is the cost. What are you paying for?
(17:10):
So now let's talk about the elephant in the room
on these, which is fees. Yes, annuities come with fees,
but only certain types and only if you don't understand
what you're paying for. So let's break it down. The
first fee that you're always going to see is what
is called mortality and expense fees or M and E. Now,
(17:34):
this is essentially the insurance company's cost for guaranteeing your annuity,
and in a variable annuity, this can range from one
to one and a half percent annually. Then you also
have investment expense ratios. Now, these are the internal costs
of the sub accounts, just like fees inside of mutual funds,
and they usually range between I mean, they can vary.
(17:57):
They can go from point twenty five up to one
and a half percent. But then you have riders as well.
Riders are basically optional features that you can add to
your annuity, like income guarantees or long term care protection
or enhance death benefits, and these usually cost anywhere from
(18:19):
half a percent up to one and a half percent
a year, depending upon the feature. So if you're thinking, well, gosh,
that sounds awfully expensive, well it can be, but consider this,
most of these fees are buying you something that you
cannot get any place else, and that might be guaranteed
(18:40):
income for life. It could be protection against outliving your money,
or downside protection and volatile markets. So it's like paying
a little extra for a car with anti lock brakes,
airbags and line assist. Sure, it's more expensive than a bicycle,
but the value is in the protection that it provides.
So if you're still skeptical, you're not alone. Annuities have
(19:05):
had a rocky reputation over the years, largely due to
being misunderstood, bad sales practices, of course, and poor product fit.
That's why it's important for you to deal with somebody
that puts a financial plan together and is not just
looking to sell you products. But you see, the industry
(19:25):
has come a long way, and today's annuities are more transparent,
they're more flexible, and they're more competitive than they have
ever been. In fact, let me share a couple of
recent articles that are worth checking out. The first one
was from Baron's called Annuities gain ground with advisors as
retirement income tool. Another one by Kiplinger, why annuities might
(19:49):
be the best option for retirees, one from Wall Street
Journal that says annuities can be complex, but they offer protection.
So these aren't fluffed pieces. These are real thought leaders
acknowledging that annuities, when used properly, can be an essential
part of a modern retirement plan. And if you're just
(20:11):
joining us, I just want to say thank you for
tuning in. You're listening to your money matters. I can
be heard here every Sunday at eleven am. I'm the host,
Drew Prescott, chartered Retirement Planning counselor, accredited Wealth Management Advisor
and President at Prescott Private Wealth. Give us a call
at five one eight two zero three one nine eight three.
Check us out online PRESCOTTPW dot com, and certainly go
(20:35):
to media. Follow us on Facebook, YouTube, podcast. We're going
to start to deliver more content more frequently, and if
you subscribe to our YouTube channel currently, we eliminate all
of our old videos and we're going to be dropping
a bomb with fifteen or more videos on there that's
(20:57):
going to go live and you're not going to want
to miss those, and you're going to want to follow
our podcast because we are going to be using our Basically,
what we're going to do is we're going to be
using our social media to drive people to our YouTube
channel and to our podcast. So I don't know how
much longer I'll be on the radio four but in
(21:21):
the event that you enjoy the material that I give you, you're
going to want to follow us because that is going
to be the best source for you to learn from. Okay,
now let me ask you this. Do you have a
guaranteed income plan for retirement? Have you considered how much
(21:43):
risk you're willing to take in a down market? Well,
if you're wondering whether an annuity might fit into your
retirement income strategy, let's take a look together. Visit PRESCOTTPW
dot com and schedule your free income analysis and will
help you explore if an annuity makes sense based on
(22:04):
your goals, your risk tolerance, and your need for income
that you can count on. There's no sales pitch, there's
no pressure, just good honest advice from someone who's seen
what happens without a plan. Now, I want to dive
into structured CDs, some fixed CDs and bonds and where
they fit. So we've talked about getting the paychecks set
(22:28):
up in retirement, and we've talked about annuities and how
they keep the lights on when the markets go dark. Now,
let's talk about something that gets a bad rap for
being boring, but in reality it could be the most
underrated part of a solid retirement strategy, and that's safe money.
(22:48):
You see, there's a reason that safety still matters in retirement,
and at this stage in life, you're not looking to
swing for the fences every time. You want to keep
what you've earned, growing it steadily, and access it when
you need it. Enter the world of fix CDs, structured CDs,
(23:10):
and bonds. But let's start with the basics here. Let's
go with fixed CDs, which is the old, reliable. So
think of fixed CDs like that dependable old pickup truck
that your uncle still drives. It's not flashy, it gets
the job done. But with a fixed CD, you give
the bank your money for a set term, usually anywhere
(23:34):
from six months to five years, and they'll give you
a guaranteed rate of return. So the pros are you've
got guaranteed interest FDIC insured up to applicable limits. They're
simple and easy to understand. Now, the downsides or the
cons to them are that low returns compared to inflation,
(23:55):
the money is locked in, and early withdrawal penalties apply
and there's no flexibility or upside potential. So you see
right now, CD rates have improved, especially after a decade
of microscopic interest, so you might see rates in the
four to five range, depending on term and issuer. Not bad,
(24:17):
but let's not forget the impact of inflation. So if
inflation is running at three percent and your CD is
earning four percent, your real return is closer to one percent.
So who are CDs good for? I typically recommend them
(24:37):
for the ultra conservative investor or someone who knows that
they'll need to take money in twelve to thirty six months,
so think of it as your short term, low drama money.
Then we have some structured CDs, so it's kind of
like the upgraded ride, if you would. And these are
(24:58):
the sportier cousins of fix CDs. They're still safe, they're
still FDIC insured, but instead of a guaranteed interest rate,
your return is linked to the performance of a market
index like an S and P five hundred and nasdak
ADAW something like that. But here's the twist. You don't
get direct market exposure. Instead, your return is based on
(25:21):
a formula, usually with a cap and a participation rate.
So For example, if the index goes up by ten
percent and your participation rate is seventy percent, then you
would earn seven percent. You with me. If the market
goes down, you earn nothing, but you don't lose anything either.
(25:42):
So structured CDs are best for people who want a
chance at higher returns than a fixed CD without taking
on stock market losses. So what are the tax implications
of CDs. Well, both fixed and structured CDs are taxed
annually on interest earned. So even if you don't withdraw it,
(26:03):
that's right, you could owe taxes on money that you
haven't even touched. And for that reason alone, tax efficient
placement matters. These are usually best held in tax deferred
accounts or in situations where you need liquidity and safety.
(26:23):
I should say where in situations where your need for
liquidity and safety outweighs your tax deferral. Okay, now I
want to talk about bonds. So let's shift gears a
little bit and let's talk about bonds the backbone of
the conservative portfolio. But remember, not all bonds are created equal.
(26:45):
So let's walk through the landscape. Here. You have taxable bonds,
and these are your corporate bonds, your US treasuries and
some agency bonds where you loan your money to a
company or the government and in return you get paid interest,
usually twice a year. The pros are predictable income and
(27:09):
higher yields than CDs in some cases. Now, the cons
are you're still subject to market risks because bond prices
fall when interest rates rise. Also, interest is fully taxable.
Now let's let's peel back the onion a little bit more.
Speaker 1 (27:27):
Here.
Speaker 2 (27:29):
We also have tax free bonds, which are municipal bonds.
So these are issued by state and local governments, and
these bonds are popular with retirees that are in higher
tax brackets. Why is that because the interest is federally
tax free, and it may also be state tax free
(27:51):
if you live in the same state that the bond
is issued. So let's say that you're in a thirty
two percent federal tax bracket. A four percent municipal bond
has the same after tax return as a five point
eight eight taxable bond. That's what we call a tax
(28:14):
equivalent yield, and it's a critical factor when you're choosing
between bond types. So the question is who needs bonds? Well,
bonds make sense for almost every retirement plan. So whether
you're building a bond ladder for steady income, using tax
freemmunis to offset high tax exposure, or you're allocating part
(28:36):
of your portfolio to balance market risk, bonds are your
stability anchor. Now they're not exciting and they won't double
your money overnight, but in retirement they provide what many
retirees want most, and that's predictability. So the right mix
is to look at it and say, like, how do
(29:00):
structured CDs and bonds fit together? Well, the answer really
lies in your goals. So what is the need for
short term access and principal protection? Do you need that?
If so, use fixed CDs. Do you want market linked
growth with no downside, Well maybe you consider a structured CD.
(29:23):
And if you need predictable income over ten to thirty years,
maybe you look at bonds. See the trick is matching
the vehicle to the mission. Just like you wouldn't drive
a Ferrari off road. Don't use high yield bonds for
short term cash needs. Create buckets of money that are
based on timelines and purpose and use the right tool
(29:47):
for each job. And if you're just joining us here,
you're listening to your money matters. It can be heard
here every Sunday at eleven am. I'm your host, Drew Prescott,
chartered retirement planning counselor and a credit wealth management advisor
Prescott Private Wealth. Give us a call five one eight
two zero three one nine eight three or visit PRESCOTTPW
(30:07):
dot com. So if you're wondering how much of your
portfolio should be in CDs versus bonds or annuities, let's
talk through it. I would like to sit down with
you and give you an education through a fifteen minute
phone call. I would encourage you to reach out call
five one eight two zero three one nine eight three
(30:29):
and ask for Jessica. She can schedule a time, get
you on my calendar, or just go to Prescott PW
dot comick schedule time. So let's also take a peek
here at yeah, let's yeah, let let's let's do this.
(30:50):
Let's do this, This could be fun. Let's look at
annuities versus CDs. Let's have a tax showdown. How does
that sound? So now it's time to roll up our
sleeves and let's get in the weeds here because this
section could potentially save you thousands of dollars in taxes
(31:10):
over the course of your retirement. So let's imagine two
options here, a CD paying five percent and a non
qualified annuity which is also paying five percent. Now they
look the same on the surface, right, But here's the twist.
The way each is taxed is dramatically different, and the
(31:35):
outcome five years down the road could shock you. So
let's run the numbers. So let's say that you invest
a million dollars into each. Both earn five percent per year.
So with the CD, that is going to be fifty
thousand dollars of interest per year. But here's the kicker.
(31:58):
You owe taxes on that interest every single year, even
if you don't touch it. So if you're in a
twenty four percent tax bracket, that's twelve thousand dollars annually
in taxes, and over five years you would have paid
sixty thousand dollars in taxes and your total account value
(32:24):
is about one point two million dollars. Now let's look
at a non qualified annuity. The same one million dollars invested,
same five percent annual return, but you owe zero taxes
during the accumulation phase. So after five years, your account
(32:47):
has grown to about one million, two hundred seventy six thousand,
two hundred and eighty dollars. Only when you begin to
withdraw do you pay taxes, and only on the gains.
You see, the difference in value after five years is
(33:08):
nearly eighty thousand dollars. And that's not chump change. That's
a vacation, it's a roof, it's a generous gift to
your grandchildren. It's all of those things, and the tax
advantage when it works best. This tax deferral benefit makes
(33:29):
annuities especially attractive for retirees who are over the age
of fifty nine and a half. Why because once you
cross that magic line, that magic age, you can withdraw
without early withdrawal penalties, and that means full flexibility with
a bigger balance. Plus, if you convert that annuity to
(33:53):
a lifetime income stream, the IRS allows you to stretch
that tax liability over many years, reducing your effective tax rate.
So that said CDs have their place. You may need
access to the fund soon. You prefer simplicity over complexity,
(34:15):
and you want FDIC protection and zero moving parts. You see,
CDs are clean, they're simple, and they're great for short
term planning, but for long term tax efficient growth. Annuities
often have the edge. And there's one more thing about CDs,
which is phantom income. And in some cases, structured CDs
(34:39):
can generate something that is called phantom income where the
IRS taxes. You want interest before you actually receive it,
So always read the terms, or better yet, let us
review it with you. So, if you're sitting on CDs
right now and you're wondering if an annuity could boost
your after tax turns, now's the time to find out.
(35:03):
Reach out to me Drew Prescott, and let's talk five
one eight two zero three, one nine eight three five
one eight two zero three one nine eight three, and
we'll run the numbers for your specific case CDs versus
annuities head to head, and the results could surprise you.
So that is a nice overview on CDs and annuities
(35:29):
and bonds. Now, everyone's different. So what I would encourage
you to do is that if you are someone that
has CDs at different banks, you have investment accounts with
different advisors, and things just seem to be scattered all
over the place, I would encourage you to give me
(35:52):
a call. I was meeting with a successful young man
a few weeks back, and he's a business owner and
here's here's one of the challenges that business owners have
with investing, insurance, finances and everything as a whole. But
(36:17):
it's ultimately it boils down to this. It's a lack
of a financial plan, and here's why they are so
busy day in and day out making decisions about their
business and as it relates to family as well. Then
they go to let's say that you go to NESCA
(36:39):
Northeast Subcontractors Association, or you're an attorney, you go to
an estate planning council or something, and you're running around,
you're you're doing the deal for your business. And then
you slow down and you participate in you know, either
get together for a lobbying group. Uh, maybe you do
(37:01):
an association meeting something like that, and all of a
sudden you're getting pitched and the fella next to you says, oh, yeah,
you know, I can help you out with investing. I'm
you know, I've been at a ABC company for ten years,
twenty years, thirty years, forty years, whatever it is, and
(37:25):
I also do business with one of your friends. Well,
this is pretty much the common scenario and what happens
is they really want to say no to doing business
with somebody, but they know that they need to do something,
and so they don't want to end up in a
(37:45):
situation where they didn't plan properly. So life happens. They
stay busy, they do the investment, they buy the life
insurance policy, they do whatever it is that they've been pitched,
and a new gal or a new guy comes along
and hits them up for business again. Again, they want
(38:08):
to say no, but they they still move forward. And
what they're doing is admirable. They're planning, they're trying to
but all of a sudden, these relationships branch out and
they have advisors in five different companies and four different
insurance companies, and an attorney for real estate, and they
(38:32):
might have done a will at one point, and they've
got an accountant that is not strategic in sitting down
and doing planning with them, but just simply does their
returns and shoots down ideas that they bring to them.
And typically we find that that's just because of a
lack of knowledge and a lack of understanding globally what
(38:55):
the person has going on. Well here at Prescott Private, well, well,
my goal is to help you step back from that.
We're working on a very complex financial plan now in
a state plan with a client where his situation and
(39:16):
his wife's situation replicate what I'm explaining here. And he
said to me, Drew, I don't have a plan. I
have no idea what I You know, I know what
I'm doing, but I don't know if what I'm doing
is correct for me and my family. And I had
(39:37):
asked questions about the investing, like, well, you know you're
doing so well with real estate, why why do you
invest in the stock market? What are you hoping to get?
And he said, well, I just you know, it's important
for me to start to take money out of my
day to day and sideline it. And I understand that.
(39:58):
And then I said, well what do you want to
happen with that money? And classic answer is, well, I
don't care. You know, if I could get somewhere between
sixty eight percent for rate of return, that'd be great.
But the next question is why six to eight percent? Well,
(40:18):
because that's a fair rate of return, but what do
you want that? What does that six or eight percent
do for you in your grand picture? He doesn't know
the answer to that, So how do we find out
the answer to that, it's a well structured financial plan.
And I have a team that does our financial planning
(40:41):
for us, which is made up of cfps, CFAs, accountants, attorneys,
and that's that's who does our financial plan. So if
you find yourself that you're a business owner and you've
got a four oh one K and that individual is
(41:05):
helping you with an IRA, but you don't have any plan,
or they've sold your life insurance, or you know, you're
at an association meeting and a guy starts hounding you
to do business and just wants to sell a product, well,
then that's an issue. Call me. I want to come
(41:26):
over and meet with you, or have you at the
office here, whichever is better for you. I understand completely
that as a business owner, you know all day long
you have grenades rolling down the hill at you. And
I can meet you at your office early in the
morning before everything gets ramped up, and we can start
(41:46):
to discuss what you're trying to do. And then I
will have you gather all of your statements, all of
your legal documents and tax returns, and we'll dig into
that for you and create a well constructed plan that
meets your goals and is not designed to just sell
you products. Okay, that is my offer to you, and
(42:12):
I know for a fact that that will bring you
such encouragement and relief that as you are out there
building your business, whether that's building homes and selling them,
building apartments, you know, manufacturing widgets, selling cars, whatever it is,
(42:38):
you're busy, your time is valuable. But currently I know
that you do not have yourself set up in a
way that is the most beneficial for you. If you do, congratulations,
and I'll tell you that maybe you just need a
small tweak. I'll tell you that that's okay. But if
you are somebody that has your your financial picture looks
(43:02):
more like the junk drawer in your kitchen, let me
help you. I could be of tremendous service to you
and your family and your business because we don't just
do individual planning. We also do business planning as well,
whether that's funding for a buy sell agreement, putting together
deferred compensation plan for highly compensated executives. If you're just
(43:23):
tuning in, I'm glad to have you. You're listening to
your money matters. I'm your host. Drew Prescott, Chartered retirement
planning counselor and accredited wealth management advisor at Prescott Private Wealth,
located on Who'sick Street in Troy, New York. The phone
o'm here is five one eight two zero three one
nine eighty three. The website is PRESCOTTPW dot com. Go
(43:44):
have at it, look around, look at the resources, look
at the calculators, listen to old shows, resources, white papers,
you name it, we do it. So anyways, here we are.
We're past. Uh yeah we should be right. Yeah, we're
(44:06):
we're coming out of the tax season for individuals. Okay,
maybe you put yourself on an extension, that's fine too,
but hopefully you've been able to shed that stressful time
of the year. And if you have questions about how
efficient your investments are from a tax perspective, we would
(44:31):
love to help you with that as well. If you're
an individual and you have an old four oh one
K sitting around at your old employer, or you've got
several of them, or you find yourself having several IRA accounts,
let me share with you the value that it could
bring you to consolidate everything into one account. Here at
Prescott Private Wealth and the phone number again five one
(44:53):
eight two zero three, one nine eighty three and let's see. So,
as I said, this is a pre recorded show, and
I am still in Hawaii and coming back here on Monday.
I'm sure I'm looking forward to getting back to work.
(45:14):
And like I said, you know, we've been through a
lot recently. There's hasn't been a shortage of drama in
the markets. But hopefully you're finding what I'm sharing with
you comforting. And I want to leave you with this
in the second the last half of the show here,
(45:36):
which I think is very important, and I want to
share this with you and hopefully you find great value
in this. So if you're a business owner, listen up.
If your children work for your business, you can pay them,
You can deduct their wages as business expenses, and if
structured properly, they may not owe any income tax on
that money. So how young can they be? Everyone always
(45:59):
asks that, and the IRS doesn't set a strict minimum age,
but the work must be age appropriate and legitimate. For
most business owners, it's reasonable to begin employing children around
seven years old or older, especially for tasks like filing
and treading social media content. Hello, gen Z would be
(46:24):
amazing at that right cleaning and organizing, stuffing, mailers, modeling
and promotional materials. And the work must be real. It's
got to be documented and actually performed, and you must
issue a W two. So keep records and pay a
fair wage for the services rendered. Now, how much can
(46:46):
you pay them without income tax? In twenty twenty five,
the standard deduction for a single taxpayer is fourteen thy
six hundred. So that means that if your child earns
less than that amount and has no other income, they
won't owe federal income tax on their wages. And better still,
if your business is a sole proprietorship LLC tax is
(47:09):
a sole prop or a partnership where both partners are
parents of the children of the child, then you're not
even required to withhold Social Security or Medicare taxes FIKA
for children that are under age eighteen. So that's a
huge win. Your business deducts the wages as a business expense,
(47:30):
your child pays no income tax, and there's no payroll
tax owed either. Now, if your business is an s
r C corporation, FIICA must still be withheld, but the
strategy's still worthwhile. Okay, Also, what could you do with
that earned income? Well? Now, Now that your child has
(47:52):
some legitimate earned income, you can put that money to
work using several powerful tools. Number one, a roth ira
for minors. Now, most people think that roth iras are
for retirement, but when it comes to kids, they're an
absolute wealth building powerhouse. And here's why. Contributions to a
roth ira are made with after tax dollars. The earnings
(48:15):
grow tax free, and withdrawals in retirement are also tax free. Now,
you can contribute up to the lesser of the child's
earned income or seven thousand dollars for twenty twenty five limit.
So that means if you're thirteen year old earn six
thousand working for your business, they or you on their
(48:36):
behalf can fund a roth ira with that full amount.
So let's say that six thousand dollars is earned and
an average of eight percent annually and it sits untouched
until sixty That six thousand dollars can turn into over
one hundred and thirty thousand dollars completely tax free. Here
(49:00):
here's the kicker. You're giving them the future freedom while
taking a business deduction today, So you're reducing your own
taxable income while helping fund their future hometown payment, education
or even early retirement. Here's another idea for you. While
(49:22):
roth iras are great for long term wealth, five to
nine plans are excellent for educational related expenses. And these
accounts allow for after tax contributions that grow tax free
and can be withdrawn tax free for qualified educational expenses
like college tuition K through twelve tuition up to ten
(49:44):
thousand per year, apprenticeships, and student loan repayments up to
ten thousand dollars per beneficiary. And as a parent or
a grandparent, you can fund a five to nine plan
with your own dollars even if the child doesn't work
for but if your child earns income, you could fund
(50:05):
a five to nine plan in parallel to provide some flexibility.
So wroth I raise for retirement and five two nines
for education. If you want to supercharge it, you can
front load five years worth of contributions up to ninety
thousand per beneficiaries or one hundred and eighty thousand for
(50:28):
a couple filing jointly in twenty twenty five without triggering
any gift tax, though it does use a part of
your lifetime gift exemption. That's something that you're going to
want to keep in mind. Okay. Now, Another idea is
custodial accounts ugma's utmas. If you want your child to
learn investing basics, consider opening a custodial account. These allow
(50:52):
you to invest on their behalf, and when they reach
the age of majority eighteen or twenty one, depending upon
the state, they get full control. And this is ideal
for teaching financial responsibility, but use with caution because there's
no restriction on what they can do with the money
at that point. And these accounts don't offer tax free growth.
(51:15):
But the first thirteen hundred that's for twenty twenty five
an unearned income is tax free, and the next thirteen
hundred is taxed at the child's rate. So anything above
that is taxed at the parent's rate thanks to the
Kitti tax. So it's important that you understand the Kitti tax.
That's an IRS rule that's designed to prevent parents from
(51:40):
shifting unearned income like interest, dividends and capital gains to
their kids to take advantage of a lower tax bracket. Well,
in twenty twenty five, the first thirteen hundred of unearned
income is tax free. The next thirteen hundred is taxed
at the child's rate, and the amounts that are over
(52:01):
twenty six hundred are taxed at the parent's marginal rate.
But here's the important part. The kitty tax applies only
to unearned income. It does not apply to earned income
like wages from your business. And that's what makes this
strategy so effective. By paying your child a fair wage,
you're giving them real earned income that they can save,
(52:24):
invest and use without triggering kitty tax issues. Now let's
go a little bit further here for a second. Okay,
I hope you find this valuable for all your business
owners out there. You may have heard of some of this,
maybe you didn't. It may be new material, but I
would encourage you to look at this deeper because this
is a way to unlock some hidden wealth for your
(52:46):
children and grandchildren as a matter of fact. So additionally,
you've got business deductions and benefits, so you get the
ability to reduce your taxable income by imploying your child
and funding their accounts. So consider some additional ideas here.
(53:07):
How about an HRA, which is a health reimbursement arrangement.
You know you may be able to reimburse for your
child's medical expenses through certain HRA arrangements if it's structured properly. Additionally,
you may want to look into Section one twenty seven,
which is education assistance plans. So if you're funding college
(53:29):
or job training for an employee child, you may to
doct up to five two hundred and fifty dollars per
year tax free if you have a qualifying program. And
for some high net worth individuals, they create a family
management business to formalize work and pass wealth with efficiencies
(53:51):
through family management companies. So by putting your child on payroll,
contributing to a roth IRA or five two nine, and
teaching them to manage money early, you're doing more than
just funding their future. What you're doing is you're teaching
them how to build on their own. At the same time,
(54:13):
you're reducing your business's taxable income, staying compliant with the
IRS guidelines, and you're creating a meaningful legacy. And if
you want to explore a custom strategy for your family
and your business, let's map out a plan together to
educate your kids, empower their future, and maximize your tax efficiency.
(54:34):
Give me a call here at Prescott Private Wealth. The
phone numbers five one eight, two zero three, one nine
eighty three you're listening to. Drew Prescott, chartered retirement planning counselor,
accredited wealth management advisor and President at Prescott Private Wealth.
Love to sit with you and share learn from you,
(54:55):
to have you share with me what your goals are
and let's see if we can't put together a plan
together that's beneficial for you, your company, and your family.
And again, thank you so much for listening this week.
I appreciate your company and I look forward to speaking
to you next week and until then, May God bless
you and God bless your family.
Speaker 1 (55:16):
Financial decisions don't have to be faced alone. Drew Prescott
at Prescott Private Wealth is here to guide you, whether
it's settling in a state, planning for retirement, or making
your final walk from your career into a well earned rest.
Don't let uncertainty weigh you down. Ask yourself, did I
do this right? Am I missing anything? With Prescott Private Wealth?
The answer is clear, You're on the right path. Visit
(55:37):
us at four or five to one, Who's six Street
in Troy, New York, or online at PRESCOTTPW dot com.
Prescott Private Wealth your partner in navigating life's financial journeys.
Welcome to the hidden world of wealth, where secrets of
the affluent become accessible to you. You are listening to
Your Money Matters, the most provocative financial radio show on
the airwaves. You are about to start your educational journey
here on Your Money Matters with your host, Drew Prescott,
(00:22):
President of Prescott Private Wealth and Chartered Retirement Planning Counselor.
Drew will unlock the complexities of the financial landscape with straightforward,
powerful insights. Whether you're planning for retirement, managing in a state,
or looking to grow your wealth. Consider this your exclusive invitation.
Turn up the volume, lean in closer. Let's navigate the
(00:45):
hidden paths of prosperity together. Your financial enlightenment begins now.
Securities all produce a terror Financial Specialists LLC member FINRA
SIPC reservices offered through Setara Investment Advisors LLC. So TERA
firms are under separate ownership from any other named entity.
(01:06):
Four five to one sixth Street, Troy, New York one
two one eight zero.
Speaker 2 (01:27):
Welcome back, everybody. You're listening to Your Money Matters and
I'm your host, Drew Prescott, Chartered Retirement Planning counselor, credited
Wealth management advisor and president of Prescott Private Wealth located
in Troy, New York, and a lifelong student of the markets,
and a guy that has already had two cups of
(01:48):
the good stuff this morning. So nothing pairs better with
talking about income planning than a strong cup of coffee
and a stronger retirement strategy. Now, today's show is going
to hit home for a lot of folks. We're talking
about how to take the money that you've saved, invested,
(02:12):
and sacrificed for and turn it into a reliable paycheck
that doesn't vanish the moment the stock markets gets sniffles.
So if you're nearing retirement or you're already retired, this
show is your wake up call. And if you're already
up and listening with a pen in hand, kudos to you.
(02:35):
You're ahead of the game. And we're going to walk
through how to turn your nest egg into income, why
relying too heavily on the four percent rule can backfire,
what sequence of returns risk is, and why it matters. Additionally,
we're going to cover how tools like annuities, CDs and
(02:59):
bonds and give you peace of mind when the markets
go a little bit squirrely. And don't worry. We'll keep
it light, fun and yes, informative, and I promise you
that you will not need a PhD to follow along,
just a strong desire to protect what you've worked so
hard for. So let's dive in a section here that
(03:24):
I like to call the retirement paycheck. How to take income,
when to take it, and what to watch for. And
here's the truth most people miss. This retirement isn't just
about stopping work. It's about starting a new job. And
your new job is managing income from a bunch of
(03:46):
different sources. Except this time you are the CFO. Your
job is to keep the paychecks coming in without blowing
through the company reserves. And the biggest mental shift and
retirement is this. You no longer have savings for retirement.
(04:07):
You're spending in retirement and that shift, my friends, can
be terrifying without a clear income plan. So let me
paint the picture for you. You've got your four oh
one K, maybe an IRA social Security, and maybe if
you're one of the lucky ones, you have a pension
and possibly even some rental property. But every month you
(04:33):
still need a paycheck. The bills don't stop coming in
just because you turn sixty five and through a retirement party.
Your grocery store doesn't care. Clearly if the market was
up eight hundred points yesterday, if it was down sixteen
hundred points yesterday, they still want your five dollars for eggs.
(04:54):
So here are four critical questions that you must answer
before you start drawing income for yourself. Number one, how
much income do I need each month to live comfortably?
Now when I say that not just to survive, but
to actually enjoy life, to travel, to play golf, and
(05:17):
to spoil the grandchildren. Number two? What are my guaranteed
income sources? Do I have Social Security, pension annuities, rental income?
And which of those can I count on regardless of
market conditions? Now, the third question you want to ask
(05:38):
yourself is how much income can I take from my
investments without risking running out of money? Now you see
this is where most people guess, and guessing, my friend,
is not a retirement plan. You need to know how
much you can safely withdraw without eating into your principle
(05:59):
too quickly. Now, the fourth question is how do I
protect myself from inflation and taxes over time? And if
you don't plan for these two income killers you're just
setting yourself up for a rude awakening in the future,
because inflation may be invisible, but it is absolutely not harmless.
(06:22):
And Uncle Sam doesn't retire just because you do. Now,
a lot of people lean into something that's called the
four percent rule. Now you may have heard of it.
It's this idea that if you withdraw a four percent
of your portfolio each year, you should be able to
make your money last thirty years. Sounds simple, right, Well,
(06:45):
here's the problem. That rule was created in the nineteen
nineties based on historical data when interest rates were higher,
markets were less volatile, and beanie babies were still a
hot and today's world, as you know it, is different.
Interest rates have become unpredictable, markets are more volatile than ever,
(07:09):
and if we're being honest, most people's portfolios can't handle
multiple years of market losses and consistent withdrawals. So this
brings us to one of the most misunderstood risks in retirement,
(07:29):
and that is called sequence of returns risk. So let
me explain in plain English. Sequence of return risk is
the danger of receiving lower or negative returns in retirement
just when you start to pull money out. Well, the results.
(07:50):
You start draining your account while it's already losing value.
And that's like trying to pour water from a bucket
that's not just but has a hole the size of
a dinner plate. So if you're pulling money out while
the market is down, you could be doing significant damage
(08:12):
to yourself. And this is why building a plan that
includes income sources that are protected from market swings, like
annuities or structured CDs can help create a floor of
guaranteed income. That way, if the market crashes, your lifestyle
(08:32):
doesn't have to. So imagine having a paycheck that you
can count on every month no matter what the market does.
It's not just comforting, it's smart. And that's what we
call an income diversification strategy. So think of it like
building a sturdy, three legged stool. So I always hear
(08:54):
that I don't know about you, but three legged doesn't
sound all that's thirty. I like four legged stools. Call
me crazy, but let's go with it, because this is
the term that everyone always uses, is this three legged stool.
The first would be guaranteed income like social Security pensions
(09:18):
or annuities. The second would be flexible income from investments
like your iras or brokerage accounts. And third would be
emergency cash for the uh oh moments in life. Now,
get those three legs in place and you'll have stability
that can weather almost any financial storm. Now, if you're
(09:41):
within five years of retirement and you haven't created a
retirement income plan, this is your moment. Don't wing it,
don't gues Visit PRESCOTTPW dot com and click the button
that says schedule a time. Schedule a fifteen minute retire
income check in with me personally. It's free, it's confidential,
(10:04):
and it could prevent fifteen years of financial stress. All right, Now,
let's lean into this conversation that always seems to stir
up more emotions than pineapple on pizza. And that is
the big a word annuities. Some people would say annuities
(10:31):
are as comforting as a warm blanket on a cold day.
Now to others, they sound like something that your great
aunt bought back in nineteen eighty seven and regretted ever since.
But here's the truth. Folks, love them or hate them,
annuities have one powerful benefit that is hard to ignore.
(10:54):
They help people sleep better at night. So let me
ask you something. If the stock market dropped twenty five
percent tomorrow, would you still feel confident in your retirement
income or would you be adjusting your thermostat, skipping some
(11:15):
dinners and telling the grandkids maybe next Christmas kids. If
you said the latter, well you're not alone. In fact,
a twenty twenty one study by the Alliance for Lifetime
Income found that retirees who had a source of guaranteed
income like a pension or an annuity were significantly less
(11:40):
likely to panic during market downturns. They weren't slashing their
budgets or losing sleep. Why because part of their income
kept showing up like clockwork, regardless of what happened with
the S and P five hundred and it's like having
a Labrador retriever who delivered your retirement paycheck on time
(12:03):
every month, loyal, reliable, and okay, well, maybe slightly less slavery.
But let's pull back the curtain and talk about what
annuities are. We want to talk about how they work
and why, and when used correctly, they can be a
very powerful part of your retirement income strategy. So let's
(12:27):
break down the different types of annuities first. Now, not
all annuities are created equally. Some are as simple and
predictable as a toaster. Now, others are more like a
refrigerator with a built in TV ice dispenser and Wi Fi.
And in other words, they're complicated and potentially expensive if
(12:47):
you do not know what you're doing. So let's simplify it. Well.
We first will look at fixed annuities. A fixed annuity
is similar to a but it's issued by an insurance
company instead of a bank. You give them your money
and they give you a guaranteed interest rate, typically higher
(13:12):
than what your local bank is offering, and your principle
is protected. No surprises, no roller coasters, just steady, predictable growth.
And these are perfect for folks who want safety and
a little growth without market exposure. Now, the next one,
(13:34):
we're going to glance over this quickly, and then we'll
go into some detail, which is fixed index annuities. Now
in New York State, if you're listening in New York State,
we're very limited in what we have available here. So
some would say that is because New York is very
(13:58):
cautious for US citizens in the insurance products. I would say,
I don't know why they do what they do, because
there are some other states that have wonderful, wonderful products
in this arena, but with US, it's very, very limited
(14:23):
and typically not the greatest offering, just simply due to
the limitations that are put on them in New York State.
So this is where this gets interesting. A fixed index annuity,
it still protects your principle, meaning you can't lose money
due to market declines, but it gives you the opportunity
(14:47):
to earn more based on the performance of a stock
index like the S and P five hundred. So think
of it like playing blackjack, where the worst case scenario
is you don't win, but you never lose your original chips.
So you participate in market ups but not the downs.
(15:07):
And in a volatile world, that's a pretty nice seat
to have at a table. Now let's look at variable annuities.
So these annuities, they give you full exposure to the
markets and your investments, which are called sub accounts. They
can go up or down, just like mutual funds, and
the upside potential is high, but so is the risk. Okay, Now,
(15:34):
variable annuities they usually come with some higher fees and
they're not for the faint of heart or for someone
looking for just guarantees on the account value. Now, just
like you wouldn't go to dinner and order everything on
the menu, you shouldn't throw all of your money into
(15:57):
one type of annuity either. So how much should you
allocate to annuities? Now, again, I never recommend these unless
we do a financial plan and we see exactly if
there's a need and how to use it properly. But
if there is a need, this is one of the
most common questions that we get, and here's our general
(16:22):
rule of thumb. Do not put more than fifty percent
of your investible assets into annuities. Why because while annuities
can offer incredible peace of mind, you still need liquidity,
and you still need the flexibility to handle emergencies, take
advantage of investment opportunities, or just plan live your life
(16:47):
without being penalized for accessing your own money. So think
of annuities like a seat belt. They can protect you
in a crash, but you don't want to wear five
of them at once and forget how to get out
of the car. Because balance is key. So what you
need to understand is the cost. What are you paying for?
(17:10):
So now let's talk about the elephant in the room
on these, which is fees. Yes, annuities come with fees,
but only certain types and only if you don't understand
what you're paying for. So let's break it down. The
first fee that you're always going to see is what
is called mortality and expense fees or M and E. Now,
(17:34):
this is essentially the insurance company's cost for guaranteeing your annuity,
and in a variable annuity, this can range from one
to one and a half percent annually. Then you also
have investment expense ratios. Now, these are the internal costs
of the sub accounts, just like fees inside of mutual funds,
and they usually range between I mean, they can vary.
(17:57):
They can go from point twenty five up to one
and a half percent. But then you have riders as well.
Riders are basically optional features that you can add to
your annuity, like income guarantees or long term care protection
or enhance death benefits, and these usually cost anywhere from
(18:19):
half a percent up to one and a half percent
a year, depending upon the feature. So if you're thinking, well, gosh,
that sounds awfully expensive, well it can be, but consider this,
most of these fees are buying you something that you
cannot get any place else, and that might be guaranteed
(18:40):
income for life. It could be protection against outliving your money,
or downside protection and volatile markets. So it's like paying
a little extra for a car with anti lock brakes,
airbags and line assist. Sure, it's more expensive than a bicycle,
but the value is in the protection that it provides.
So if you're still skeptical, you're not alone. Annuities have
(19:05):
had a rocky reputation over the years, largely due to
being misunderstood, bad sales practices, of course, and poor product fit.
That's why it's important for you to deal with somebody
that puts a financial plan together and is not just
looking to sell you products. But you see, the industry
(19:25):
has come a long way, and today's annuities are more transparent,
they're more flexible, and they're more competitive than they have
ever been. In fact, let me share a couple of
recent articles that are worth checking out. The first one
was from Baron's called Annuities gain ground with advisors as
retirement income tool. Another one by Kiplinger, why annuities might
(19:49):
be the best option for retirees, one from Wall Street
Journal that says annuities can be complex, but they offer protection.
So these aren't fluffed pieces. These are real thought leaders
acknowledging that annuities, when used properly, can be an essential
part of a modern retirement plan. And if you're just
(20:11):
joining us, I just want to say thank you for
tuning in. You're listening to your money matters. I can
be heard here every Sunday at eleven am. I'm the host,
Drew Prescott, chartered Retirement Planning counselor, accredited Wealth Management Advisor
and President at Prescott Private Wealth. Give us a call
at five one eight two zero three one nine eight three.
Check us out online PRESCOTTPW dot com, and certainly go
(20:35):
to media. Follow us on Facebook, YouTube, podcast. We're going
to start to deliver more content more frequently, and if
you subscribe to our YouTube channel currently, we eliminate all
of our old videos and we're going to be dropping
a bomb with fifteen or more videos on there that's
(20:57):
going to go live and you're not going to want
to miss those, and you're going to want to follow
our podcast because we are going to be using our Basically,
what we're going to do is we're going to be
using our social media to drive people to our YouTube
channel and to our podcast. So I don't know how
much longer I'll be on the radio four but in
(21:21):
the event that you enjoy the material that I give you, you're
going to want to follow us because that is going
to be the best source for you to learn from. Okay,
now let me ask you this. Do you have a
guaranteed income plan for retirement? Have you considered how much
(21:43):
risk you're willing to take in a down market? Well,
if you're wondering whether an annuity might fit into your
retirement income strategy, let's take a look together. Visit PRESCOTTPW
dot com and schedule your free income analysis and will
help you explore if an annuity makes sense based on
(22:04):
your goals, your risk tolerance, and your need for income
that you can count on. There's no sales pitch, there's
no pressure, just good honest advice from someone who's seen
what happens without a plan. Now, I want to dive
into structured CDs, some fixed CDs and bonds and where
they fit. So we've talked about getting the paychecks set
(22:28):
up in retirement, and we've talked about annuities and how
they keep the lights on when the markets go dark. Now,
let's talk about something that gets a bad rap for
being boring, but in reality it could be the most
underrated part of a solid retirement strategy, and that's safe money.
(22:48):
You see, there's a reason that safety still matters in retirement,
and at this stage in life, you're not looking to
swing for the fences every time. You want to keep
what you've earned, growing it steadily, and access it when
you need it. Enter the world of fix CDs, structured CDs,
(23:10):
and bonds. But let's start with the basics here. Let's
go with fixed CDs, which is the old, reliable. So
think of fixed CDs like that dependable old pickup truck
that your uncle still drives. It's not flashy, it gets
the job done. But with a fixed CD, you give
the bank your money for a set term, usually anywhere
(23:34):
from six months to five years, and they'll give you
a guaranteed rate of return. So the pros are you've
got guaranteed interest FDIC insured up to applicable limits. They're
simple and easy to understand. Now, the downsides or the
cons to them are that low returns compared to inflation,
(23:55):
the money is locked in, and early withdrawal penalties apply
and there's no flexibility or upside potential. So you see
right now, CD rates have improved, especially after a decade
of microscopic interest, so you might see rates in the
four to five range, depending on term and issuer. Not bad,
(24:17):
but let's not forget the impact of inflation. So if
inflation is running at three percent and your CD is
earning four percent, your real return is closer to one percent.
So who are CDs good for? I typically recommend them
(24:37):
for the ultra conservative investor or someone who knows that
they'll need to take money in twelve to thirty six months,
so think of it as your short term, low drama money.
Then we have some structured CDs, so it's kind of
like the upgraded ride, if you would. And these are
(24:58):
the sportier cousins of fix CDs. They're still safe, they're
still FDIC insured, but instead of a guaranteed interest rate,
your return is linked to the performance of a market
index like an S and P five hundred and nasdak
ADAW something like that. But here's the twist. You don't
get direct market exposure. Instead, your return is based on
(25:21):
a formula, usually with a cap and a participation rate.
So For example, if the index goes up by ten
percent and your participation rate is seventy percent, then you
would earn seven percent. You with me. If the market
goes down, you earn nothing, but you don't lose anything either.
(25:42):
So structured CDs are best for people who want a
chance at higher returns than a fixed CD without taking
on stock market losses. So what are the tax implications
of CDs. Well, both fixed and structured CDs are taxed
annually on interest earned. So even if you don't withdraw it,
(26:03):
that's right, you could owe taxes on money that you
haven't even touched. And for that reason alone, tax efficient
placement matters. These are usually best held in tax deferred
accounts or in situations where you need liquidity and safety.
(26:23):
I should say where in situations where your need for
liquidity and safety outweighs your tax deferral. Okay, now I
want to talk about bonds. So let's shift gears a
little bit and let's talk about bonds the backbone of
the conservative portfolio. But remember, not all bonds are created equal.
(26:45):
So let's walk through the landscape. Here. You have taxable bonds,
and these are your corporate bonds, your US treasuries and
some agency bonds where you loan your money to a
company or the government and in return you get paid interest,
usually twice a year. The pros are predictable income and
(27:09):
higher yields than CDs in some cases. Now, the cons
are you're still subject to market risks because bond prices
fall when interest rates rise. Also, interest is fully taxable.
Now let's let's peel back the onion a little bit more.
Speaker 1 (27:27):
Here.
Speaker 2 (27:29):
We also have tax free bonds, which are municipal bonds.
So these are issued by state and local governments, and
these bonds are popular with retirees that are in higher
tax brackets. Why is that because the interest is federally
tax free, and it may also be state tax free
(27:51):
if you live in the same state that the bond
is issued. So let's say that you're in a thirty
two percent federal tax bracket. A four percent municipal bond
has the same after tax return as a five point
eight eight taxable bond. That's what we call a tax
(28:14):
equivalent yield, and it's a critical factor when you're choosing
between bond types. So the question is who needs bonds? Well,
bonds make sense for almost every retirement plan. So whether
you're building a bond ladder for steady income, using tax
freemmunis to offset high tax exposure, or you're allocating part
(28:36):
of your portfolio to balance market risk, bonds are your
stability anchor. Now they're not exciting and they won't double
your money overnight, but in retirement they provide what many
retirees want most, and that's predictability. So the right mix
is to look at it and say, like, how do
(29:00):
structured CDs and bonds fit together? Well, the answer really
lies in your goals. So what is the need for
short term access and principal protection? Do you need that?
If so, use fixed CDs. Do you want market linked
growth with no downside, Well maybe you consider a structured CD.
(29:23):
And if you need predictable income over ten to thirty years,
maybe you look at bonds. See the trick is matching
the vehicle to the mission. Just like you wouldn't drive
a Ferrari off road. Don't use high yield bonds for
short term cash needs. Create buckets of money that are
based on timelines and purpose and use the right tool
(29:47):
for each job. And if you're just joining us here,
you're listening to your money matters. It can be heard
here every Sunday at eleven am. I'm your host, Drew Prescott,
chartered retirement planning counselor and a credit wealth management advisor
Prescott Private Wealth. Give us a call five one eight
two zero three one nine eight three or visit PRESCOTTPW
(30:07):
dot com. So if you're wondering how much of your
portfolio should be in CDs versus bonds or annuities, let's
talk through it. I would like to sit down with
you and give you an education through a fifteen minute
phone call. I would encourage you to reach out call
five one eight two zero three one nine eight three
(30:29):
and ask for Jessica. She can schedule a time, get
you on my calendar, or just go to Prescott PW
dot comick schedule time. So let's also take a peek
here at yeah, let's yeah, let let's let's do this.
(30:50):
Let's do this, This could be fun. Let's look at
annuities versus CDs. Let's have a tax showdown. How does
that sound? So now it's time to roll up our
sleeves and let's get in the weeds here because this
section could potentially save you thousands of dollars in taxes
(31:10):
over the course of your retirement. So let's imagine two
options here, a CD paying five percent and a non
qualified annuity which is also paying five percent. Now they
look the same on the surface, right, But here's the twist.
The way each is taxed is dramatically different, and the
(31:35):
outcome five years down the road could shock you. So
let's run the numbers. So let's say that you invest
a million dollars into each. Both earn five percent per year.
So with the CD, that is going to be fifty
thousand dollars of interest per year. But here's the kicker.
(31:58):
You owe taxes on that interest every single year, even
if you don't touch it. So if you're in a
twenty four percent tax bracket, that's twelve thousand dollars annually
in taxes, and over five years you would have paid
sixty thousand dollars in taxes and your total account value
(32:24):
is about one point two million dollars. Now let's look
at a non qualified annuity. The same one million dollars invested,
same five percent annual return, but you owe zero taxes
during the accumulation phase. So after five years, your account
(32:47):
has grown to about one million, two hundred seventy six thousand,
two hundred and eighty dollars. Only when you begin to
withdraw do you pay taxes, and only on the gains.
You see, the difference in value after five years is
(33:08):
nearly eighty thousand dollars. And that's not chump change. That's
a vacation, it's a roof, it's a generous gift to
your grandchildren. It's all of those things, and the tax
advantage when it works best. This tax deferral benefit makes
(33:29):
annuities especially attractive for retirees who are over the age
of fifty nine and a half. Why because once you
cross that magic line, that magic age, you can withdraw
without early withdrawal penalties, and that means full flexibility with
a bigger balance. Plus, if you convert that annuity to
(33:53):
a lifetime income stream, the IRS allows you to stretch
that tax liability over many years, reducing your effective tax rate.
So that said CDs have their place. You may need
access to the fund soon. You prefer simplicity over complexity,
(34:15):
and you want FDIC protection and zero moving parts. You see,
CDs are clean, they're simple, and they're great for short
term planning, but for long term tax efficient growth. Annuities
often have the edge. And there's one more thing about CDs,
which is phantom income. And in some cases, structured CDs
(34:39):
can generate something that is called phantom income where the
IRS taxes. You want interest before you actually receive it,
So always read the terms, or better yet, let us
review it with you. So, if you're sitting on CDs
right now and you're wondering if an annuity could boost
your after tax turns, now's the time to find out.
(35:03):
Reach out to me Drew Prescott, and let's talk five
one eight two zero three, one nine eight three five
one eight two zero three one nine eight three, and
we'll run the numbers for your specific case CDs versus
annuities head to head, and the results could surprise you.
So that is a nice overview on CDs and annuities
(35:29):
and bonds. Now, everyone's different. So what I would encourage
you to do is that if you are someone that
has CDs at different banks, you have investment accounts with
different advisors, and things just seem to be scattered all
over the place, I would encourage you to give me
(35:52):
a call. I was meeting with a successful young man
a few weeks back, and he's a business owner and
here's here's one of the challenges that business owners have
with investing, insurance, finances and everything as a whole. But
(36:17):
it's ultimately it boils down to this. It's a lack
of a financial plan, and here's why they are so
busy day in and day out making decisions about their
business and as it relates to family as well. Then
they go to let's say that you go to NESCA
(36:39):
Northeast Subcontractors Association, or you're an attorney, you go to
an estate planning council or something, and you're running around,
you're you're doing the deal for your business. And then
you slow down and you participate in you know, either
get together for a lobbying group. Uh, maybe you do
(37:01):
an association meeting something like that, and all of a
sudden you're getting pitched and the fella next to you says, oh, yeah,
you know, I can help you out with investing. I'm
you know, I've been at a ABC company for ten years,
twenty years, thirty years, forty years, whatever it is, and
(37:25):
I also do business with one of your friends. Well,
this is pretty much the common scenario and what happens
is they really want to say no to doing business
with somebody, but they know that they need to do something,
and so they don't want to end up in a
(37:45):
situation where they didn't plan properly. So life happens. They
stay busy, they do the investment, they buy the life
insurance policy, they do whatever it is that they've been pitched,
and a new gal or a new guy comes along
and hits them up for business again. Again, they want
(38:08):
to say no, but they they still move forward. And
what they're doing is admirable. They're planning, they're trying to
but all of a sudden, these relationships branch out and
they have advisors in five different companies and four different
insurance companies, and an attorney for real estate, and they
(38:32):
might have done a will at one point, and they've
got an accountant that is not strategic in sitting down
and doing planning with them, but just simply does their
returns and shoots down ideas that they bring to them.
And typically we find that that's just because of a
lack of knowledge and a lack of understanding globally what
(38:55):
the person has going on. Well here at Prescott Private, well, well,
my goal is to help you step back from that.
We're working on a very complex financial plan now in
a state plan with a client where his situation and
(39:16):
his wife's situation replicate what I'm explaining here. And he
said to me, Drew, I don't have a plan. I
have no idea what I You know, I know what
I'm doing, but I don't know if what I'm doing
is correct for me and my family. And I had
(39:37):
asked questions about the investing, like, well, you know you're
doing so well with real estate, why why do you
invest in the stock market? What are you hoping to get?
And he said, well, I just you know, it's important
for me to start to take money out of my
day to day and sideline it. And I understand that.
(39:58):
And then I said, well what do you want to
happen with that money? And classic answer is, well, I
don't care. You know, if I could get somewhere between
sixty eight percent for rate of return, that'd be great.
But the next question is why six to eight percent? Well,
(40:18):
because that's a fair rate of return, but what do
you want that? What does that six or eight percent
do for you in your grand picture? He doesn't know
the answer to that, So how do we find out
the answer to that, it's a well structured financial plan.
And I have a team that does our financial planning
(40:41):
for us, which is made up of cfps, CFAs, accountants, attorneys,
and that's that's who does our financial plan. So if
you find yourself that you're a business owner and you've
got a four oh one K and that individual is
(41:05):
helping you with an IRA, but you don't have any plan,
or they've sold your life insurance, or you know, you're
at an association meeting and a guy starts hounding you
to do business and just wants to sell a product, well,
then that's an issue. Call me. I want to come
(41:26):
over and meet with you, or have you at the
office here, whichever is better for you. I understand completely
that as a business owner, you know all day long
you have grenades rolling down the hill at you. And
I can meet you at your office early in the
morning before everything gets ramped up, and we can start
(41:46):
to discuss what you're trying to do. And then I
will have you gather all of your statements, all of
your legal documents and tax returns, and we'll dig into
that for you and create a well constructed plan that
meets your goals and is not designed to just sell
you products. Okay, that is my offer to you, and
(42:12):
I know for a fact that that will bring you
such encouragement and relief that as you are out there
building your business, whether that's building homes and selling them,
building apartments, you know, manufacturing widgets, selling cars, whatever it is,
(42:38):
you're busy, your time is valuable. But currently I know
that you do not have yourself set up in a
way that is the most beneficial for you. If you do, congratulations,
and I'll tell you that maybe you just need a
small tweak. I'll tell you that that's okay. But if
you are somebody that has your your financial picture looks
(43:02):
more like the junk drawer in your kitchen, let me
help you. I could be of tremendous service to you
and your family and your business because we don't just
do individual planning. We also do business planning as well,
whether that's funding for a buy sell agreement, putting together
deferred compensation plan for highly compensated executives. If you're just
(43:23):
tuning in, I'm glad to have you. You're listening to
your money matters. I'm your host. Drew Prescott, Chartered retirement
planning counselor and accredited wealth management advisor at Prescott Private Wealth,
located on Who'sick Street in Troy, New York. The phone
o'm here is five one eight two zero three one
nine eighty three. The website is PRESCOTTPW dot com. Go
(43:44):
have at it, look around, look at the resources, look
at the calculators, listen to old shows, resources, white papers,
you name it, we do it. So anyways, here we are.
We're past. Uh yeah we should be right. Yeah, we're
(44:06):
we're coming out of the tax season for individuals. Okay,
maybe you put yourself on an extension, that's fine too,
but hopefully you've been able to shed that stressful time
of the year. And if you have questions about how
efficient your investments are from a tax perspective, we would
(44:31):
love to help you with that as well. If you're
an individual and you have an old four oh one
K sitting around at your old employer, or you've got
several of them, or you find yourself having several IRA accounts,
let me share with you the value that it could
bring you to consolidate everything into one account. Here at
Prescott Private Wealth and the phone number again five one
(44:53):
eight two zero three, one nine eighty three and let's see. So,
as I said, this is a pre recorded show, and
I am still in Hawaii and coming back here on Monday.
I'm sure I'm looking forward to getting back to work.
(45:14):
And like I said, you know, we've been through a
lot recently. There's hasn't been a shortage of drama in
the markets. But hopefully you're finding what I'm sharing with
you comforting. And I want to leave you with this
in the second the last half of the show here,
(45:36):
which I think is very important, and I want to
share this with you and hopefully you find great value
in this. So if you're a business owner, listen up.
If your children work for your business, you can pay them,
You can deduct their wages as business expenses, and if
structured properly, they may not owe any income tax on
that money. So how young can they be? Everyone always
(45:59):
asks that, and the IRS doesn't set a strict minimum age,
but the work must be age appropriate and legitimate. For
most business owners, it's reasonable to begin employing children around
seven years old or older, especially for tasks like filing
and treading social media content. Hello, gen Z would be
(46:24):
amazing at that right cleaning and organizing, stuffing, mailers, modeling
and promotional materials. And the work must be real. It's
got to be documented and actually performed, and you must
issue a W two. So keep records and pay a
fair wage for the services rendered. Now, how much can
(46:46):
you pay them without income tax? In twenty twenty five,
the standard deduction for a single taxpayer is fourteen thy
six hundred. So that means that if your child earns
less than that amount and has no other income, they
won't owe federal income tax on their wages. And better still,
if your business is a sole proprietorship LLC tax is
(47:09):
a sole prop or a partnership where both partners are
parents of the children of the child, then you're not
even required to withhold Social Security or Medicare taxes FIKA
for children that are under age eighteen. So that's a
huge win. Your business deducts the wages as a business expense,
(47:30):
your child pays no income tax, and there's no payroll
tax owed either. Now, if your business is an s
r C corporation, FIICA must still be withheld, but the
strategy's still worthwhile. Okay, Also, what could you do with
that earned income? Well? Now, Now that your child has
(47:52):
some legitimate earned income, you can put that money to
work using several powerful tools. Number one, a roth ira
for minors. Now, most people think that roth iras are
for retirement, but when it comes to kids, they're an
absolute wealth building powerhouse. And here's why. Contributions to a
roth ira are made with after tax dollars. The earnings
(48:15):
grow tax free, and withdrawals in retirement are also tax free. Now,
you can contribute up to the lesser of the child's
earned income or seven thousand dollars for twenty twenty five limit.
So that means if you're thirteen year old earn six
thousand working for your business, they or you on their
(48:36):
behalf can fund a roth ira with that full amount.
So let's say that six thousand dollars is earned and
an average of eight percent annually and it sits untouched
until sixty That six thousand dollars can turn into over
one hundred and thirty thousand dollars completely tax free. Here
(49:00):
here's the kicker. You're giving them the future freedom while
taking a business deduction today, So you're reducing your own
taxable income while helping fund their future hometown payment, education
or even early retirement. Here's another idea for you. While
(49:22):
roth iras are great for long term wealth, five to
nine plans are excellent for educational related expenses. And these
accounts allow for after tax contributions that grow tax free
and can be withdrawn tax free for qualified educational expenses
like college tuition K through twelve tuition up to ten
(49:44):
thousand per year, apprenticeships, and student loan repayments up to
ten thousand dollars per beneficiary. And as a parent or
a grandparent, you can fund a five to nine plan
with your own dollars even if the child doesn't work
for but if your child earns income, you could fund
(50:05):
a five to nine plan in parallel to provide some flexibility.
So wroth I raise for retirement and five two nines
for education. If you want to supercharge it, you can
front load five years worth of contributions up to ninety
thousand per beneficiaries or one hundred and eighty thousand for
(50:28):
a couple filing jointly in twenty twenty five without triggering
any gift tax, though it does use a part of
your lifetime gift exemption. That's something that you're going to
want to keep in mind. Okay. Now, Another idea is
custodial accounts ugma's utmas. If you want your child to
learn investing basics, consider opening a custodial account. These allow
(50:52):
you to invest on their behalf, and when they reach
the age of majority eighteen or twenty one, depending upon
the state, they get full control. And this is ideal
for teaching financial responsibility, but use with caution because there's
no restriction on what they can do with the money
at that point. And these accounts don't offer tax free growth.
(51:15):
But the first thirteen hundred that's for twenty twenty five
an unearned income is tax free, and the next thirteen
hundred is taxed at the child's rate. So anything above
that is taxed at the parent's rate thanks to the
Kitti tax. So it's important that you understand the Kitti tax.
That's an IRS rule that's designed to prevent parents from
(51:40):
shifting unearned income like interest, dividends and capital gains to
their kids to take advantage of a lower tax bracket. Well,
in twenty twenty five, the first thirteen hundred of unearned
income is tax free. The next thirteen hundred is taxed
at the child's rate, and the amounts that are over
(52:01):
twenty six hundred are taxed at the parent's marginal rate.
But here's the important part. The kitty tax applies only
to unearned income. It does not apply to earned income
like wages from your business. And that's what makes this
strategy so effective. By paying your child a fair wage,
you're giving them real earned income that they can save,
(52:24):
invest and use without triggering kitty tax issues. Now let's
go a little bit further here for a second. Okay,
I hope you find this valuable for all your business
owners out there. You may have heard of some of this,
maybe you didn't. It may be new material, but I
would encourage you to look at this deeper because this
is a way to unlock some hidden wealth for your
(52:46):
children and grandchildren as a matter of fact. So additionally,
you've got business deductions and benefits, so you get the
ability to reduce your taxable income by imploying your child
and funding their accounts. So consider some additional ideas here.
(53:07):
How about an HRA, which is a health reimbursement arrangement.
You know you may be able to reimburse for your
child's medical expenses through certain HRA arrangements if it's structured properly. Additionally,
you may want to look into Section one twenty seven,
which is education assistance plans. So if you're funding college
(53:29):
or job training for an employee child, you may to
doct up to five two hundred and fifty dollars per
year tax free if you have a qualifying program. And
for some high net worth individuals, they create a family
management business to formalize work and pass wealth with efficiencies
(53:51):
through family management companies. So by putting your child on payroll,
contributing to a roth IRA or five two nine, and
teaching them to manage money early, you're doing more than
just funding their future. What you're doing is you're teaching
them how to build on their own. At the same time,
(54:13):
you're reducing your business's taxable income, staying compliant with the
IRS guidelines, and you're creating a meaningful legacy. And if
you want to explore a custom strategy for your family
and your business, let's map out a plan together to
educate your kids, empower their future, and maximize your tax efficiency.
(54:34):
Give me a call here at Prescott Private Wealth. The
phone numbers five one eight, two zero three, one nine
eighty three you're listening to. Drew Prescott, chartered retirement planning counselor,
accredited wealth management advisor and President at Prescott Private Wealth.
Love to sit with you and share learn from you,
(54:55):
to have you share with me what your goals are
and let's see if we can't put together a plan
together that's beneficial for you, your company, and your family.
And again, thank you so much for listening this week.
I appreciate your company and I look forward to speaking
to you next week and until then, May God bless
you and God bless your family.
Speaker 1 (55:16):
Financial decisions don't have to be faced alone. Drew Prescott
at Prescott Private Wealth is here to guide you, whether
it's settling in a state, planning for retirement, or making
your final walk from your career into a well earned rest.
Don't let uncertainty weigh you down. Ask yourself, did I
do this right? Am I missing anything? With Prescott Private Wealth?
The answer is clear, You're on the right path. Visit
(55:37):
us at four or five to one, Who's six Street
in Troy, New York, or online at PRESCOTTPW dot com.
Prescott Private Wealth your partner in navigating life's financial journeys.
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