Ep 28: Understanding Annuities – Variable and Fixed

On This Episode

This is part 2 of our annuity mini-series. We focus on two types of annuities on this episode which are the variable and fixed deferred. John and Nick explain what are significant about each of these and how they may fit into a retirement plan.

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Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Marc Killian: Hey everybody. Welcome into the podcast. Thanks so much for hanging out with us today as we talk investing, finance, and retirement with John and Nick, once again, here on the airwaves with me on Retired Planning Redefined.

 

Marc Killian: We’re going to pick up with our conversation on annuities. We are doing this series, or this session, on annuities and we’re going to talk about fixed deferred annuities, as well as variable annuities today on the show. But before we get into all of that, let’s say hey to the guys. Nick, what’s going on, buddy? How you doing?

 

Nick McDevitt: Good. Good. Just we’re in the new year now and things are off to the races for sure. It’s been a hectic start to the year.

 

Marc Killian: What races? We don’t know, right?

 

Nick McDevitt: Yeah. Yeah, yeah. Yeah, that’s true. Been a hectic start to the year, but looking forward to the new year.

 

Marc Killian: John, how about yourself? You’re doing all right?

 

John Teixeira: Yeah. Doing good, just busy. And like Nick said, it’s been an interesting three weeks to start out the year to say the least.

 

Marc Killian: I don’t know if you guys saw that meme that says, “I’d like to cancel my subscription to 2021. I tried the seven day free trial and I’m not happy with it.”

 

John Teixeira: Yeah.

 

Nick McDevitt: Yeah. I’ve seen ones too where it’s like, “This is week 54 of 2020.

 

Marc Killian: Something like that, yeah. Pretty interesting times that we’re continuing to live in.

 

John Teixeira: Actually, my wife, I got the vaccine, first one, yesterday.

 

Marc Killian: Oh, did she?

 

John Teixeira: She’s a nurse, so she was nervous a little bit, but also excited that she could just not have to think about it once she gets the shot. I think it’s six months to a year, roughly, that they say the immunity from it… To be determined, but I think six months at least [crosstalk 00:01:36].

 

Marc Killian: I hear depending on which company you get it from, it’s a series of shots and they say maybe you might feel bad for a day or two after it. How’d she do?

 

John Teixeira: Not too bad, although last night we were putting one of the kids to bed and she comes in and she’s like, “Hey, where’s your EpiPen?” I’m like, “EpiPen? What do you need that for?” Her throat started feel like it was tightening up, but it went away within 30/40 minutes, so that was it. Honestly, shes doing well and-

 

Marc Killian: Good.

 

John Teixeira: She’s doing good.

 

Marc Killian: Good. Good to hear. Certainly interesting. Obviously, the virus itself affects so many people different ways and then apparently the vaccine does the same. My business partner, his wife’s a nurse and same thing with her. She got the shot a couple of weeks ago and had a really bad headache was her side effect from it, but I think that was about it. So, you just never know how it’s going to affect everybody, so I’m glad to hear she’s doing well and be curious to keep an eye on that, as we move along, how the vaccines and all that stuff’s going.

 

Marc Killian: But for now, like I said, let’s talk about annuities. Let’s get into part two of this. I mentioned at the top of the podcast kickoff, we’re going to talk about two types today: fixed deferred and variable. So let’s start with fixed deferred, guys.

 

John Teixeira: Yeah. So, fixed deferred annuities, recapping what we went through last time, anytime you get into an annuity, you really got to look at the company you’re going with because the guarantees are based on the issuing company and how strong they are. But just go over a fixed deferred annuity.

 

John Teixeira: It’s very simple, similar to a CD issued by a bank, just issued by an insurance company. You have a guaranteed rate. There are some that just give you a minimum interest guarantee where they’ll say your minimum interest is 1%, but it can fluctuate based on some factors. The most popular ones that we typically use are where there’s a multi-year guarantee where it will say, “Over five year period, you’re getting 2.5% or 3% over that five-year period.”

 

John Teixeira: Typically,… I say typically because there’s always some outliers… typically, no fees, again just comparing it to a CD, no fees on it. You’re just getting your 2.5% for that five year period or three year period, whatever you pick. We typically find that these rates are normally a little bit higher than CD rates, so it’s very competitive in that space. “Just looking for something just very simple. Let me just get a fixed rate. I don’t want to worry about any of these other moving parts. I just want a fixed interest rate with no risk.”

 

Nick McDevitt: Yeah. And I would add to that from the perspective of… from a functionality standpoint, as far as how the rates are fixed, there are some similarities with CDs. But it is important to understand that CDs typically have FDIC coverage or insurance because they are issued from a bank up to the limits that the FDIC provides, whereas the guarantees and the CD are going to be from the insurance company.

 

Nick McDevitt: So, we know that that’s a concern that people have when they bring it up or talk about it, so we always like to point that out. And then, on top of that, from the perspective of keeping in mind that annuities, by rule, by default, they have limited access to money until 59-and-a-half or after. So, if it’s money that somebody is using that is a non-retirement account and they’re younger than 59-and-a-half, it’s important to make sure that they remember that rule, that 59-and-a-half rule.

 

Nick McDevitt: But the positive is that it does provide tax deferred growth. In other words, you don’t get a 1099 from the bank or from the insurance company every year on your interest like you would in a non-retirement account if it was in a CD. So, the rates, the taxation, and the protection side of things are some differences between those.

 

John Teixeira: Yeah. And also, and just going back to what we talked about in the first annuity session, there are surrender periods on this. There are surrender charges, which will make them different than CDs. So just, if you need a recap of that, just go to our last podcast and we went through the basics of annuities, which is going to apply really to the fixed, the variable, and the index, which we’ll be going through.

 

Marc Killian: All right. A lot of times when people think about different financial products, we often hear about the three qualities of money where you’re looking for growth, safety, or liquidity. And every different kind of vehicle provides different things. Often, when we think of annuities, we think of maybe the growth and the safety aspect, but without some of that liquidity you guys were talking about.

 

Marc Killian: But again, since there’s different kinds of annuities, you want to check and see really what the pros and cons are going to be for your specific situation. So, a fixed deferred might be something that worked really well for you and your situation, but again, you want to go through that with an advisor. And then, the variable, this tends to get more of the bad rep, I suppose, so break down some of it on the variable annuities for us, guys.

 

Nick McDevitt: Sure. Essentially, what a variable annuity is and what it does is it combines the structure of being able to invest in mutual fund-like investments, where in a variable annuity they’re called sub-accounts. So it combines that with the chassis of an annuity, which provides tax deferred growth on the growth of the account.

 

Nick McDevitt: So, these became a little bit more popular back in the 80s where you would have high-income people that were looking to save additional money; maybe they were maxing out their 401k plans, or their retirement plans at work. They are in a high income, maybe a high income state or just, in general, high federal tax bracket, and so they were looking for additional ways to invest their money and they would use the variable annuity contracts to provide them with that tax deferred growth on the dollars and not get a 1099 each year on their investments. And so, over time, as tax rates changed and really became a little bit more favorable over the last 20 or 30 years, the popularity of the contracts became less than less.

 

Nick McDevitt: And then, what the insurance companies did was they started to add different riders and different guarantees onto these contracts, almost like an additional layer that comes over the top, that provided some additional guarantees to really just incentivize people to use them. And so, John, if you want to talk a little bit about some of those guarantees, and really the reason why many people that really have owned them over the last 10 or 15 years own them?

 

John Teixeira: Yeah. I’ll start with some of the less common ones and we’ll end with probably the most common, and Nick does a good job expanding the income ones. But they have somewhere, basically, your principal’s guaranteed and not so popular anymore, but I’ve seen some contracts where you might get in today and they’ll guarantee your principle payment over a 10 year period.

 

John Teixeira: So example, you put in 100,000, they guarantee you over the next 10 years if the market goes down, you’ll at least walk away with your $100,000, so you get a principal guarantee and they’ll have a term period where they’ll put that guarantee. So example, year nine, your account’s at 80 grand; you put in 100. Once you’re at the 10 year anniversary, they just give you your 100,000 back.

 

John Teixeira: There are some death benefit guarantees to it where we’ve seen some contracts where, again, your principal payment has a death benefit, so if the market drops, you at least get what your principal payment was. And then, there’s actually some riders where the death benefit will increase automatically irregardless of what the market is doing. What’s very popular maybe about 10 years ago was long-term care riders on this where they’d put, if you qualify for long-term care insurance… so, lose two of your six ADL’s… the annuity would kick in some type of income for long-term care expenses. Those have really dwindled down over the last few years because of just the cost for facilities.

 

John Teixeira: Nick, I’m not sure if you see too many of that nowadays. I know I haven’t seen any good ones, but I’ll let you talk on if you’ve seen any good long-term care riders on these contracts.

 

Nick McDevitt: No, I haven’t seen that that much and really the main rider that we see on the different contracts are what are called guaranteed withdrawal benefits or guaranteed income benefits, sometimes referred to as GMIB or GMWB. When we do our classes, we really try to harp on these from the perspective of just explaining how they work. And really, in this sort of venue, this sort of avenue, what we would just recommend to people is that if it sounds familiar that you have a variable annuity, and/or a variable annuity with some sort of income rider that you know guarantees you some income, it’s good to have somebody help you review that contract and make sure that you understand how it works.

 

Nick McDevitt: So essentially, there’s just like anything, there’s both sides, and then the truth is in the middle somewhere. These sorts of contracts, they can be good and, just like anything else, some are better than others. There are some contracts that have really held up over the last decade, 12/15 years, that have been beneficial, even to the extent where insurance companies will offer incentives to the contract owners to essentially try to buy them out because the guarantees are good.

 

Nick McDevitt: So essentially, what happens and just to use an example, let’s say that you have a deposit of $200,000 into the contract and the insurance company is going to go ahead and offer a rider that has a guaranteed appreciation on that initial deposit. Usually, it’s either a simple interest or a compound interest, so that’s important to know. Because some companies might say, “Hey, we offer 7% growth on the rider,” but it’s simple and over time a 5% compound could beat that. So, it’s important to understand how that works.

 

Nick McDevitt: And then, at a certain point in time, they offer a guaranteed withdrawal amount off of that guaranteed appreciation amount. So just to use basic numbers and try to help people understand how it works, let’s say you deposit that 200,000 and over a 10-year period, which is usually the maximum growth period of those riders, that goes ahead and it doubles over the 10 years. So the guaranteed appreciating amount on the rider goes to 400,000 and then maybe they guarantee you a 4% withdrawal rate on that. So, it’s the 4% on the 400,000, so that’d be about 16,000 a year.

 

Nick McDevitt: Normally, the way that those will work is that that 16,000 a year is guaranteed for your lifetime; so even if the underlying account balance goes to zero, the income is guaranteed for your lifetime. Some of them also will offer a guaranteed income for both lives, so if you are a married person, for you and your spouse.

 

Nick McDevitt: So, where people will get a little bit confused is that they may assume that that 400,000 number is their money, is like the real money, and if they wanted to cash out in year 10 or 11, that they can actually cash out that 400,000 number, and that’s usually not the case. Usually, it’s the underlying value, which inevitably because of expenses and things like that is going to be lower. So in this situation, it could be something like 300,000, which is the actual… what we’ll often call real money. So, just like anything else it’s really important to… We really just emphasize and harp on the fact that it’s important to know what you have; it’s important to understand how it works; it’s essential to know how it impacts your overall plan.

 

Nick McDevitt: So with these contracts, we do think that they can be a fit in many people’s plans, especially if maybe there’s not a pension or something like that. So it’s important to understand how they work; make sure that the guarantees that you thought are built into it; and make sure you understand how it factors into your plan. I would say, from the standpoint of pitfalls to avoid where we’ve seen people really get into trouble are if they put too much of their nest egg into it. We typically recommend a maximum of 20 to 25% of investible assets into something like this. If you’re going to do it because of some of the negatives. John, if you want to jump in on just some of the negatives overall, so that people understand the things to look for?

 

John Teixeira: Yeah. Devils are in the details on these things. You just need to understand your limitation to your money in some of this, where some negatives we’ve seen is where someone’s doing their withdrawal benefit and they try to take extra money out, more than what the guaranteed amount that’s on the contract, or what they’re supposed to. It could really mess with how long the money’s going to last at that point, or what your minimum pension benefit’s going to be: your income withdrawal. So that’s something to really understand. That’s why Nick was saying, “You don’t want to put too much into this because if you need access to money, this is not where you want to go.” You almost want to set it up and if you’re going to do the income withdrawal, just forget about it from a accessing standpoint, more than what your income withdrawal is. So, that’s something to be aware of these.

 

John Teixeira: Why these typically get a bad rap and Mark, I know you mentioned at the beginning, it’s really the fees. When you put a income benefit on this, you can look at anywhere from 3 to 4% overall in fees. So there’s a mortality expense fee, [Jim’s 00:15:22] throwing out some averages, could be 0.95%. There’s an admin fee, could be 0.2. The investment you’re going into could range anywhere from 0.3 to 1%, and then the rider itself, which is that guarantee, can range from 0.5 to 1.4.

 

John Teixeira: So you could see that when you start adding all that up, it really makes a big difference, or really adds up a big amount in the fees. Not saying that’s necessarily bad; it’s just important to understand what you’re in and how it works for you.

 

Nick McDevitt: Just to follow up on that, the fees are usually coming out of the performance, not out of the riders, so that’s important to understand. And again, just like anything else, it’s important to understand how things work and how it fits into your overall plan, and just get an analysis on it, and making sure that it’s working how you expect it to.

 

Marc Killian: Yeah, exactly. At the end of the day, we’re doing a little session here on annuities, a couple of episodes on this, but like any financial vehicle, you want to make sure it’s the right fit for you by working with an advisor. You can learn some information and certainly get a good working knowledge. Many folks do not want to understand the complete nuts and bolts, and that’s why they turn to an advisor. But finding the right one for you and the right product for you is paramount really in anything that you do.

 

Marc Killian: So, as always, before you take any action, you should check with a qualified professional like John and Nick at PFG Private Wealth. You can call them at (813) 286-7776; that’s (813) 286-7776; before you take any action. If you’ve got some questions, you can also go to the website: pfgprivatewealth.com. Shoot them an email that way; contact them that way at pfgprivatewealth.com.

 

Marc Killian: Don’t forget to subscribe to the podcast. We’ll be doing another episode on annuities here, coming out very soon. So, subscribe to the podcast on Apple, Google, Spotify, whatever platform you’d like and that way you get new episodes as they come out, as well as can check up on some past episodes. It’s Retirement Planning Redefined. Search that in any of the boxes or any of the apps… excuse me… as you’d like to, whether it’s Apple, which is probably on your phone already. Apple Podcasts or Google Podcasts, already pre-installed on your phone most of the time. Just open up those apps, type in Retirement Planning Redefined. You should be able to find it that way, and that’s another way you can subscribe.

 

Marc Killian: And that’s going to do it for us this week here on the podcast around annuities. Again, we were talking about fixed as well as variable. If you’ve got questions, reach out to John and Nick: (813) 286-7776 for John, for Nick. I’m Mark. We’ll see you next time here on the podcast.

Ep 27: Understanding Annuities – The Basics

On This Episode

There are a lot of strong opinions on annuities. Some people heavily advocate for them, while others claim they are a bad investment. Today John and Nick will break down the basics for us by discussing what an annuity is and some important terms to know.

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More Episodes

Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Speaker 1: Hey everybody. Welcome into the podcast. Thanks for tuning into Retirement Planning Redefined with John and Nick from PFG Private Wealth. We appreciate your time as we’re going to get into understanding annuities, we’re going to do a series on annuities, several podcasts coming up but we’re going to start out with the basics, annuity basics. So, stick around for that, we’re going to get into that in just a second. But first, let me say hi to the guys. What’s going on, Nick? How are you?

 

Nick: Staying pretty good, just waiting for the weather to cool down a little bit here in Florida. We are ready for, I guess what we would consider our winter or fall one.

 

Speaker 1: Do you get fall? Isn’t it just summer, winter?

 

Nick: I feel like when I first moved here, there was some fall back in ’03, ’04, ’05. But the last few years, it feels like it’s just kind of jumped from one to the other. But whatever it is, where it’s not 90 plus and sticky out, I’m ready for it.

 

Speaker 1: Right. Yeah. John, how you doing my friend?

 

John: I’m good, I’m good. I’m with you. I was thinking we’re just chatting about the weather and it’s still 87 here and it feels like 92 and I’m ready for a low 80s and no more humidity.

 

Speaker 1: There you go. Yeah, the humidity can be the bear, that’s for sure. Well, good. I’m glad you guys are doing well since our last time chatting here on the podcast. So, we’ve got a lot to cover, we’re going to try to keep this into our timeframe. We’re trying to keep this into a digestible amount of time for folks here. So, let’s jump in and start talking about annuities, understanding them and again, as I mentioned, we’ll start with the basics.

 

Speaker 1: It’s just really important to understand them because they can offer some things to people, it can be a vehicle that some may find useful. There’s risk reduction, retirement income, tax deferral, death benefits, so let’s just get into some of this stuff. What is an annuity to kind of start off with guys?

 

John: When you break it down, it’s a contract with an insurance company. So, that’s kind of the premise of it all and what that contract, typically, you’re getting some type of guarantee and we’ll dive into that a little later but it could be some type of a principal protection guarantee, income guarantee, death benefit guarantee. So, that’s what you’re looking for. And it’s really important again, kind of going back to understanding it because it is a contract with an insurance company, so you need to understand all the details of it, just because it could come back to bite you. And we’ve seen that happen quite a few times as we’re doing some reviews with clients. They just don’t truly understand how it works because these are pretty complex vehicles and there’s a lot of moving parts.

 

John: So, it’s just important to understand how, going back to the overall plan, how does the tool work with everything else? And then one thing that we, again, being a contract, the guarantees are based on the paying ability of the company that you’re with. So, one of the things that we always kind of look at is what’s the rating of the company you’re going with because if you want to set the contract for some type of guarantee, you want to make sure that they’re going to be around to actually give you that guarantee.

 

Speaker 1: Right, yeah. Yeah. So, Bob’s insurance is not necessarily the best idea, right?

 

Nick: Yeah. And I will say one other thing that we like to preface this sort of conversation with and part of the reason that it is so confusing for people is that there are many different subsets or different types of annuities. And so, oftentimes people have heard the term annuity but they don’t realize all of the different types and that their experience may pertain to one of 10 different types. So, as we get into the differences and kind of the nuances, we’ll kind of joke sometimes in our classes that we almost wish that they were called different things. It’s like saying, “Hey, should I buy a vehicle? Well, do you want a car? Do you want a truck? What are you trying to do? Is gas mileage important to you? Is off-roading important? What is it?” And that same sort of mentality is important when you are talking about it.

 

Speaker 1: Well, you could think about that analogy Nick with and just leave it at cars because many people would just say, “I need to get a new car.” Even when they’re looking at like an SUV or something like that, they don’t really refer to it that way. So yeah, that’s a great way of thinking about that. And we will cover, we we’ll get into, like I said, we’re starting with the basics today but we’ll get into some of the different types, their names, what they are, so on and so forth. So, John gave us kind of what the gist of it is. There’s a couple of phases to think about, what are the phases?

 

Nick: As we get into it and when we’re talking about deferred annuities, there’s essentially what’s called an accumulation phase and a withdrawal phase. So for the accumulation phase, what that is referring to is, between the time that you initiate or deposit money into the annuity and between that starting point and then the period in time in which you start withdrawing money, it’s called the accumulation phase. And that’s important to know because there’s different rules, which we’ll sort of get into but that accumulation phase is important to understand because by itself, an annuity does provide tax-deferred accumulation or tax-deferred growth during that phase.

 

Nick: So, if somebody says an example of that is the easiest way to compare it is, client has $100,000 in a money market account at the bank and they get to collect, when they get interest on that account, they get a 1099 at the end of the year, they pay taxes on the interest in the year that the interest is incurred. In the annuity, in its own chassis, it’s going to provide tax-deferred growth, which means that that growth just compounds without having to pay any taxes on it until the point that you start taking it out. That’s a pretty big deal and could be a really useful tool for higher income earners that are looking to put money in places that are more tax beneficial especially if we do enter into a higher tax bracket, phase, which we may in the next four to eight years.

 

Nick: And then for the withdrawal phase, it is that money starts to come out. So, the first thing that people need to understand is that when you take that money out, if it’s non-qualified or non-IRA money, there is going to be some form of taxation. It’s going to be ordinary income, which means whatever tax bracket they’re in, those withdrawals, as long as they’re part of the gains that have happened in the contract, those earnings are going to come out first and they’re going to be taxed at ordinary income.

 

Nick: So, understanding how that works is kind of an initial importance. There is a term and a methodology of taking out money inside of an annuity via what’s called annuitization. Again, this is one of those things where you wish that they would just come up with words that aren’t confusing, annuity, annuitization, et cetera. So, annuity is basically like a noun, it’s a type of account. Annuitization is an action essentially. Annuitization is when the company liquidates your lump sum of money and starts paying you in it whether it’s a monthly or an annual payment. And one of the benefits of annuitization is that they can actually spread out your gains over a longer period of time and it can be a more tax-efficient way and can guarantee you payments over a certain period of time.

 

Nick: And so, in one of the other future series, we’re going to get into that process a little bit more. But the easiest way for people to think about it is kind of like a pension payment, a fixed amount of money that’s going to be paid out over a certain period of time. And then, there are guaranteed withdrawals and we’ll talk about that a little bit where you can kind of structure how you want to take out withdrawals. So, it is confusing, there’s a lot of moving parts and it’s a good example of why we’re going to have in-depth series on this.

 

Speaker 1: Yeah. That’s a good example of why to work with an advisor as well to help you go through some of these things. And John, there’s definitely caveats that go with it. There’s things you’ll want to know, some big bullet points if you will. Give us a few of those in the basics of an annuity.

 

John: Yeah. Important again, any contract you go into important to understand what the rules are and these are things you want to consider. So, similar to an IRA where there’s that 10% penalty if you withdraw before 15 and a half, annuity has the same scenario. So actually, this just came up with some advisors I was working with and we were doing some planning and the client needed money in a four-year period and really needed to, they wanted to make sure there was some guarantees to it. So, it was discussed of kind of an annuity to provide some type of principal guarantee. But by the time they would need the money, they would have only been 58. So, it was decided, “Hey, this isn’t a good vehicle for you because you can’t touch it ’til 59 and a half due to do that 10% penalty.”

 

John: So again, important when you’re going into anything, just understand the rules because had they put that money into it and then in four years when they needed it, they wouldn’t be able to access it penalty-free. So, just important to understand that one. Another one that we see a lot of people mistake or not understand how it works is the surrender period. Some of these contracts basically, when you give the money to the insurance company, there’s a period of time where you actually can’t get access to all your money full and clear. And this is separate from the 59 and a half but the surrender periods can be as short as three years. So, let’s say you give your money to XYZ insurance company, they give you these guarantees and they tell you, “Okay, for a three-year period though, you can’t get full access to your money. We’re basically keeping it.”

 

John: So, it can be three years and we’ve seen as high as 16. And that’s one of the things you really want to understand what you’re getting into because unfortunately, we’ve seen some people where they’ve gotten to the 16-year period, is that they had no idea they we’re getting into it and they have limited access to their funds. And we’ll go through … There is a piece of money you can get at but you just want to make sure how long has this contract going to be before you can get out of it. And with that is what we call the surrender charge. So, let’s say your surrender period is seven years and in year five, you want to pull out money. Well, there’s actually a descending surrender charge. So in year five, if you decide, “Hey, I can’t do this anymore. I need to get access to my money,” the insurance company might charge 4% of your principal for you to actually get out of the contract.

 

John: So, an example of that would be seven-year contract. First year surrender charge could be 8%, second year would be 7% and so on. So, that’s where you really want to understand exactly, “What’s my surrender period? And if for whatever reason, I need to pull out of this contract early before the surrender period’s up, how much am I going to get charged to do so?” Again, it’s all about reading the fine details in the contract.

 

Nick: And within that, many contracts have a 10% free withdrawal amount that will avoid you having to pay a penalty even that surrender charged during that surrender period but that can be confusing as well. And sometimes, that’s used to oversell or kind of force people into not necessarily force, but convince people to put more money than they feel comfortable with into something like that. But many of them do allow for a 10% withdrawal each year.

 

John: Yeah. So an example of that, so I’m glad you brought that up, Nick is, let’s say you had $100,000 in an annuity and you’re in year three. And you don’t necessarily need to cancel the whole contract but you do need access to some funds, you could pull out. Typically we see a max, they allow up to 10%. We’ve seen some as low as 5%. But in a 10% scenario, you could pull out 10 grand in that year free and clear of any charges. So, that’s important to understand exactly what’s your free withdrawal amount. And then, one thing to understand is once the surrender period is up, so if you’re in a seven-year contract, once that seven years is over, you can move your money wherever you want or you can keep it in the current contract. So, once a surrender period’s up, it’s 100% liquid at that point in time.

 

Nick: And just one other thing on that surrender period, if somebody out there is evaluating them, a good question to ask is whether or not the surrender period is what’s called rolling or not on rolling. So, what that means is that if it is a non-rolling surrender period and it’s a seven-year contract like John explained or kind of detailed, the seven-year period starts when you first deposit the money and it never extends. So, you can make an additional deposit down the road, say in year five and that new deposit does not have its own seven-year surrender period, it only has two years left just like the rest of the money.

 

Nick: So, that can be a really useful tool for somebody that’s trying to sock away some money, make ongoing contributions to it but still maintain access to their money. Whereas a rolling surrender charge period, each deposit has its own seven-year surrender period which can get really squirly and hard to keep track of. So, that’s an important thing to look out for.

 

Speaker 1: And so, you mentioned some of those bullet points there, John, to think about, you mentioned guarantees and the insurance company and so on and so forth. Are there protections in there? A lot of times people wonder what kind of creditor protections are there?

 

Nick: So, creditor protection tends to vary from state to state, which is actually a good kind of segue. So, one thing that people may notice, especially we’re in Florida and we have a lot of people that live in different states, et cetera, or at least part of the time. Insurance companies are regulated state by state. So, even though XYZ insurance company may have contracts in 50 different states, the rules and benefits that they provide in each state can be different. So in Florida, and this is always something where you want to, before you make any major decisions, you want to check in with an attorney, especially in estate planning or asset protection attorney, somebody that really works in that space.

 

Nick: But in the state of Florida, annuities fall into one of the categories that have a level of asset protection via loss, kind of joke that it’s the OJ Simpson rule, why he became a resident here many years back after he was found liable in court for the murders back in the ’90s were because the State of Florida provides asset protection on annuities for their residents. So, that is an area where we’ll have people that are high income earners, maybe physicians, specialists in medicine, things like that, where they’re very worried about asset protection, they may use annuities as a place to put money for growth but also provide them with a level of protection.

 

Speaker 1: Okay. And does that apply to a probate things of that nature in some protections, wills, so on and so forth? Is that caveat also?

 

Nick: So, probate typically is the process of essentially the court system, implementing the direction of a will or your estate and there’s a fee for probate. So, because an annuity is considered an insurance contract, you can actually list the beneficiary in the insurance contract, which will allow that process after a death of the funds to transfer directly to your beneficiaries and avoid them having to go through probate to get those assets, which can be a savings of somewhere from three to 5% of the assets in there. And not only that, it keeps it private instead of a public process, which probate is, but it just is a much cleaner way to be able to leave assets by listing the beneficiaries in the insurance contract, which is the annuity in this case.

 

Speaker 1: Okay. So, let’s talk about some more basics here. We often hear the term riders, make sure you get something with a rider and this has that so on and so forth, different options. John, what’s a rider?

 

John: So, a rider’s basically an additional piece to the contract that you can add, some type of guarantee or some type of benefit. And let me preface it by saying, most riders will have some type of cost associated to it. So, an example of a rider would be like a death benefit. You could put a death benefit rider on the contract where your initial principal payment, that’s your guaranteed death benefit. So, if you were in a, we’re talking about variable annuities, but if you’re in a variable annuity and the market dropped, you put in 100,000 and the market dropped to 80 due to market fluctuation, your death benefit stays at 100 or there could be a rider where the death benefit could potentially increase each year by a guaranteed rate.

 

John: Some other riders could be like a principal guarantee where you can’t lose any of your initial purchase payment amount. And then, the most popular one that we see is a guaranteed income rider, where it will guarantee income throughout the life of the contract similar to, when Nick was talking about what the pension and we’ll dive into this a little bit deeper on how this works in some of our future sessions, but when people are asking questions like, “Hey, what is this rider?” It’s typically some type of benefit or guarantee within the contract. And there is more often than not some type of fee associated with it and it’s important to understand how that fee works and then how the rider works on your contract if you like that type of benefit.

 

Speaker 1: It kind of goes into the factor of, is it worth it or not for that purchase that you’re making for what it is you’re trying to accomplish, right? What you want that vehicle to do for you.

 

John: Yeah and with the annuities, it really all comes down to the guarantees and if that’s what you’re looking for. Are you going to be guaranteed against some type of loss, guaranteed some type of income and is the cost of that guarantee worth it in the annuity contract? And for some people it’s great, it really gives them peace of mind and for other people, they don’t want to pay that extra fee or any type of cost on their money. Anything I missed there, Nick?

 

Nick: No, I would just say the way that you want to view any sort of, really any sort of investment vehicle itself, but especially annuities are through the realm of yourself, your specific situation, your plan. Because there are so many different variations of annuities and there are lots of bad ones and there are a bunch of good ones. Oftentimes, where we see the biggest mistakes made are when people implement a strategy that was good for their friend, their neighbor, their brother, their sister, but not good for them. And so because of that, and because of that decision it’s like, okay, these are bad,” where instead it should have been, well hey, you used the wrong strategy, you used the wrong type, this wasn’t something that made sense for you because X, Y and Z.

 

Nick: So, when you kind of evaluate these sort of things and as you kind of listen through the upcoming sessions and we talk about the positives, the negatives, some of the features and the benefits, et cetera, you really want to look at it through the realm of yourself and your specific situation because your brother, your sister, your neighbor, your friend, they may have different tolerances for risks, for expenses, their income levels may be different, they may have a pension where you don’t. So, every situation is different and I think that gets amplified by a significant amount when it comes to annuities and it’s part of the reason why they’re so often misunderstood.

 

Speaker 1: Well, and like any financial vehicle you already said that you want to make sure what’s the right fit for you. There’s so many vehicles out there, so many different financial products, there’s pros and cons to everything. And so, it’s finding the right balance, the right fit for you. Well, we’re going to wrap this up here in just a second. So, you mentioned, actually John mentioned variables, there’s basically three types. So, what are the three types we will be covering on the future conversations?

 

John: Yeah. So, we’re going to jump into fixed annuities and breaking down those and the pros and cons of variable annuities and then also fixed index annuities. We’re really going to try to do a good job of giving people details so they have the education and the knowledge to have good conversations, whether with their advisor or for themselves to really figure out if it’s the best decision for them.

 

Speaker 1: Makes sense. And so, we’ll finish it off by saying, make sure you subscribe to the podcast if you haven’t done so yet, they’ll also send this out for those folks if you’re getting that already. You can do a couple of things. You can either just go to the website, pfgprivatewealth.com, that is pfgprivatewealth.com or you can type in retirement planning redefined on whatever app you’re using like Apple or Google or Spotify. You can find it on all the most popular apps as well, just type in retirement planning redefined in the search box and you should have that pop up and you can subscribe to it that way.

 

Speaker 1: If you’ve got questions or before you take action, you should always call a qualified professional like John or Nick at PFG Private Wealth. They are financial advisors here in the Tampa Bay area. So, give them a call at (813) 286-7776, it’s (813) 286-7776. And we’ll also address guys that we’ll find a little bit here, it’s just a bias. You kind of alluded to it. People, they hear things and it’s like, “Oh, I don’t even want to talk about them because I know they’re all bad.” So, we’ll also discuss a bit of the biases for them and against them.

 

John: Yeah. So, with the biases, we find a lot of people based on stuff they read and articles and things they’ve listened to, they really come in with a bias, whether for them or against them. And one of the things that we like to just say is say, “You have an open mind and just learn about it and figure out if it works for your plan because if you’re reading an article and it’s telling you that annuities are bad, all the stuff,” and I’ll say like, “Fisher Investments, they’re really dog annuities,” but when you look at it, what they do is asset management. So, their primary focus is getting money, going into stocks, bonds, mutual funds, things like that. So, they’re not really offering annuity so they’re basically, they’re going to be against them.

 

John: And vice versa, we’ve seen some advisors that aren’t actually licensed but they have an insurance license and all they can offer is an annuity. And guess what’s the greatest thing out there? It’s an annuity for you because they can’t do anything else. So, whatever you’re reading, you got to kind of look at it from a perspective of, “Is this person open-minded to it?” And that’s where Nick said it’s really important to look at the tool, the annuity, the pros and cons to it and does that fit with your plan and what your goals are?

 

Speaker 1: Well, that’s a great way to end the podcast this week. Thanks so much for your time here with John and Nick as we were talking about understanding annuities on the podcast. This has been Retirement Planning Redefined. We appreciate your time. Make sure you hit that subscribe button on whatever app you use or reach out to John and Nick at pfgprivatewealth.com and we’ll see you next time.

Ep 26: How To Process A Rollover

On This Episode

Last episode we talked about the different items to take into account if you are thinking about doing a rollover. John and Nick will discuss how to actually process a rollover and some common mistakes to avoid.

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More Episodes

Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Marc: Thanks for tuning in to Retirement Planning Redefined with John and Nick from PFG Private Wealth. We appreciate you tuning back into the podcast. We’re following up with our prior session on rollovers, if it’s right for you, having the conversation and this session is going to be a little bit more about how to kind of go through that. Some of the differences, some of the biggest mistakes sometimes that people might get themselves into when attempting to do this. So we’re going to dive in and get started. We’re just going to just hop right in.

 

Marc: Nick, differences between rollovers and transfers. Let’s just start there, kind of break it down a little bit for us.

 

Nick: Yeah, I would say, the reality is, is that this space from the standpoint or the perspective of the process of taking your money from one place in a retirement account and putting it into another place in a retirement account, the jargon or the terminology gets intermingled quite a bit. And some of those terms that get intermingled are rollovers and transfers, and we’ll talk about it a little bit more, but from the perspective of a direct rollover versus the 60 day rollover.

 

Nick: Just to kind of back up a quick second, when we are discussing or having this conversation we kind of preface it from the standpoint of the money that we’re talking about is money that is held in a retirement plan of either a former employer, so maybe it’s 401(k) or 403(b), and you are looking to move that money elsewhere.

 

Nick: Your options are typically you can take that money and you can do a direct rollover into either traditional individually held of IRA. Or if the funds are Roth funds, you can move it into a individually held Roth IRA. Or if you are employed with a new employer and you are eligible, you have to check with them, you may be able to move the money into the new plan at work and do it that way.

 

Nick: When you are doing that, usually when you are executing kind of this process, it either has to be done via a form, or via a phone call. Some places require a form and we’ve seen a lot of people make mistakes on completing the form correctly, so oftentimes we’ll help clients with it. And then if it’s a phone call, the issue is that you’re dealing with somebody and I will say the level of service probably over the last few years at companies has gotten better, but we still see a lot of mistakes.

 

Nick: Oftentimes you are working with somebody that’s working in a call center and although it is their job, mistakes happen. When you are kind of doing this process, understanding that the terminology of executing a rollover is when you are moving that money from that retirement account into an IRA or a new plan. A transfer is when you have an existing account that is an IRA or a Roth IRA, and you are moving it from one custodian to another custodian.

 

Nick: I’ll use an example just to try to make it a little bit more easily understandable. A direct rollover example is, okay, Mrs. Client, she just got done working at her company and their 401(k) was held at Fidelity. And now Mrs. Client would like to move the money from Fidelity into the IRA that she opened up at Vanguard. She’s able to call up and get the process going of processing that roll over from Fidelity, the 401(k) to the IRA at Vanguard. A transfer is you already have an IRA or somebody already has an IRA. We can say at T. Rowe Price and they have a new IRA, they no longer like T. Rowe Price, they have a new IRA at Fidelity, and they want to move that money from T. Rowe Price to Fidelity. That is a custodian to custodian transfer. And the reason that we mentioned that is because there are some limitations on what are technically rollovers.

 

Nick: John, can you give a little bit of an example of exactly what a 60 day roll over it?

 

John: Yeah. There actually kind of two ways to do it where if it’s coming from a plan. Let’s say if it’s coming to you directly. So John Teixeira gets a check from the plan, I have 60 days to put that into my IRA. Or if let’s say I have money in my IRA, and for whatever reason, I might need the funds and I pull it out, I have 60 days to put it back into the plan, and that would be a kind of a 60 day rollover period.

 

John: Important if you are processing it that way, definitely keep good records. You want to keep the records of when the money was distributed when you received it, and then when you deposit it, because if you ever were audited, you have to prove that the money went back in within 60 days or else everything is taxable.

 

Nick: And the issue with that 60 day rollover and what kind of give an example of kind of one of the most common ways that we’ll see it as a mistake is that you are only eligible to execute I believe it’s one of those per calendar year. Is that correct, John?

 

John: Yeah, that is correct.

 

Nick: So if somebody is making a mistake or even doing it on purpose, if they by mistake execute more than one of those in a year, there’s some pretty significant penalties that are involved in that, and that’s really something that you want to avoid. What we always like to see is the money moving directly from one custodian to the other custodian. And when that happens, the check is made payable from the old custodian to the new custodian. And we’ll kind of talk about that in a little bit more detail, but I wanted to give a kind of a quick example of where we see this mistake happen the most often.

 

Nick: The reality is that the majority of the people that are listening to this with how things are set up currently, they may not run into this too often, but where we have seen this issue come up quite a bit is if they are helping their parents with finances. Maybe their parents are in their 70s or 80s. And oftentimes that age demographic loves CDs and they love chasing rates at banks. And there will be confusion from the standpoint of, hey mom has a CD at BB&T Bank, and the CD is actually inside of an IRA. And she goes into the branch to move the CD from BB&T bank over to Bank of America because Bank of America is offering an extra 0.2%. And so she’s working with the teller at the bank and she says, “Hey, I want to take out my money because I’m moving it to another bank.”

 

Nick: What we’ve seen happen is that teller will sometimes have that check made payable to the client, to mom, in her name. And at that point it’s considered that starts at 60 day window. The reality is that we want that check made payable to the new institution for the benefit of mom. This is where we’ve seen issues kind of pop up and arise where mom might try to do this a couple of times a year. Now she has done more than one 60 day rollover in a year because it was done incorrectly. It wasn’t necessarily her fault and it just creates this total kind of quagmire and tax nightmare.

 

Nick: We always like to kind of bring that up to make sure that people understand that that’s an issue. And again, because the terminology is oftentimes intermingled and not done correctly, having that done the proper way is really important. I know John does a good job of explaining the best way that people can make sure that they execute that properly.

 

John: Thank you, Nick. I do a very good job at explaining that, actually. So I appreciate that. So yeah, just kind of walk you through the process of doing a direct rollover. First step is contacting the investment provider for the retirement plan and you need to determine, can they do this over the phone or is it a form as Nick mentioned earlier? Let’s just assume it’s over the phone and you’re putting your money into, let’s say TD Ameritrade. TD Ameritrade is the custodian, they’re the ones holding the funds. They’re like a Fidelity or Vanguard. So you want to make sure that check is made payable to the custodian, and that way you’re not the one getting the receipt of the funds, it’s the custodian, and that’s the main reason why it doesn’t kind of execute that 60 day rollover kind of window.

 

John: It’s a direct transfer to the custodian and the checks going to be written out to in this example, TD Ameritrade for benefit of you. So if I’m doing it, it’s going to be check’s going to be made out to the TD Ameritrade for Benefit of John Teixeria. Now, once you receive that check, we were going to say it now, do not sign the check, because it’s actually not written out to you, it’s written out to the custodian. We do have some people that will say, “Do I sign it?” Or, “I signed it. What do I do?” Don’t sign it. There’s no need to.

 

John: Once you receive the check, the next step is now it needs to get deposited into your IRA. And if you’re working with an advisor, typically you pass it off to him or her. And if you’re just working directly with an investment company, you’re going to want to go ahead and get it to the investment company and have them deposit into the IRA for you. If you are mailing checks, just some people like to be cautious and kind of make sure it has some type of a tracking number which is something you can request from the retirement provider, not necessarily, but some people just prefer that so they can kind of keep track of where it’s at.

 

Marc: Okay. So obviously there’s a lot that can go into this and there’s mistakes that are going to happen as you just alluded to. So what are some things to maybe avoid, just kind of some simple things to check off for folks?

 

Nick: I would say the first one and we talk about this whole process in the class that we teach. And I have a slide that I bring up and it’s a huge picture of a train fire. The biggest mistake to avoid again, is to do a lump sum distribution when the money’s paid directly to you. That is the number one. And I know we’ve kind of harped on it quite a bit, but it can be confusing because especially on some of the forms that companies use. They say, “Hey, I want to take all my money out, because I’m going to move it to this new place. So that’s a lump sum distribution, right?”

 

Nick: Well, depending upon where it is, that might mean that that money is coming directly to you, which it enters you into that 60 day window, which is what we want to avoid. Making sure that you do a direct rollover versus a lump sum distribution is really important. That’s probably the number one mistake.

 

John: Yeah, and if we see the lump sum, what the 401(k) or whatever, 403(b) provider will have to automatically do. If I were to receive the money directly to me, they would have to withhold 20% automatically. 20% is going to uncle Sam, so that could create an issue if you’re trying to get all your money back into another IRA within 60 days.

 

Marc: Well you mentioned 401(k), and then you said another. I would assume that this is kind of the same for several of those alphabet soups, right? Whether it’s a 403(b) or TSP, is that same kind of process in general?

 

John: Yes. Yeah.

 

Marc: Okay.

 

John: I mean, yeah, exactly. Employer retirement plans, it’s-

 

Marc: Gotcha, okay. Because sometimes people-

 

John: … across the board.

 

Marc: … get confused by that, right. They’ll think, “Oh, well I don’t have a 401(k). I have a 403(b) or whatever.”

 

John: Yeah, 401(k), 403(b), 457-

 

Marc: Right.

 

John: [crosstalk 00:11:41] plans.

 

Marc: Right. Yeah.

 

John: All of them.

 

Marc: All of them. Yeah, the whole alphabet soup. Exactly.

 

John: Yeah.

 

Marc: Nick, any other mistakes to avoid anything too that we might’ve missed as we’re kind of winding down here?

 

Nick: I know it’s come up a couple of times, but sometimes people will worry about timing. From the perspective of there’s… As an example, the last five months really kind of post-Corona market drops, et cetera, et cetera. And people will say, “Hey I’ve lost a bunch of money in my account, is now the time to move it? Should I wait for it to bounce back?” And the reality is that you want to take a broader perspective and look at it from the standpoint of that you’re moving it from market to market. So the goal is to do it as quickly as possible, but the perspective of, hey, should I let this bounce back before I move it? Isn’t necessarily always valid because as long as you’re in a similar allocation and maybe even a better allocation with a higher level of management, the reality is, is your bounce back could be quicker and/or better potentially by making a change the sooner the better. It all depends, but that’s usually a pretty low priority variable in the whole conversation is time.

 

Marc: Okay. All right. Well, there you go, folks. So as always, there could be some moving parts here, it’s not always very too complicated, I suppose, maybe is a good word, but it can be, especially if you’re not focusing. The best way to do it is to avoid some of those mistakes by reaching out and talking with a qualified professional before you take any action, getting some helpful tips, getting some advice, whatever the case might be. But before you take action, reach out to someone who does this on the regular. So call John, call Nick, give them a jingle at (813) 286-7776, that’s (813) 286-7776. When you’re talking about doing a rollover and if it’s right for you, there’s just a lot of questions that they can help you walk through and get you some advice going in the right direction. Also, stop by the website at pfgprivatewealth.com, that is pfgprivatewealth.com.

 

Marc: While you’re there, subscribe to the podcast, Retirement Planning Redefined, you can find them on Apple, Google, Spotify, whatever platform you choose. So there you go, that’s going to do it for the series here on rollovers guys. Thanks for your time as always. I appreciate it. Obviously, there’s so much that goes on in the financial world. It’s good to just do these since you’re not doing classes right now, doing a lot of things online or podcasts. It’s good to go through and kind of get this information out for folks.

 

Nick: Thanks, Marc.

 

John: Thank you.

 

Marc: Appreciate your time. We’ll talk to you next time here on Retirement Planning Redefined with John and Nick of PFG Private Wealth, and we’ll see you next time.

Ep 25: Is A Rollover Right For You?

On This Episode

Company retirement plans can be expensive and many people are considering to rollover their account. But what considerations should be thought about before you take any action? Today John and Nick discuss the fee structures, investment options, and a few more factors when deciding if a rollover is right for you.

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More Episodes

Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Marc Killian: Hey, welcome into the podcast folks. Thanks for tuning in here as we talk about retirement planning redefined with John and Nick from PFG Private Wealth. What’s going on, guys? How you been, Nick? What’s up buddy?

 

Nick: Doing pretty well, doing pretty well. Just kind of getting settled back in over the last couple of weeks. With the lockdown going on as long as it’s been going on, I decided to take a little bit of a road trip. So I drove up north and stayed up north for about six weeks total.

 

Marc Killian: Oh, wow.

 

Nick: Yeah. So it was pretty cool. The virus situation in my hometown is a little bit better, which is Rochester, New York. Once we knew that we weren’t going to be meeting face to face with any clients here anytime soon as the numbers got worse here locally, I decided I needed to take care of my cabin fever and get out of Dodge a little bit.

 

Nick: So I drove up, made some stops. Stopped in Savannah and Pittsburgh on the way up, and then outside of Philadelphia and DC on the way down. Stayed with friends and family and had a good time. It was good to get away.

 

Marc Killian: You couldn’t get any more diverse than saying Savannah and Pittsburgh in the same sentence.

 

Nick: Yes, yes, definitely. But I’ll tell you what, I was pretty impressed with Pittsburgh.

 

Marc Killian: Oh no, it’s actually a nice town. They’ve made a lot of changes. I used to live not far from there, back in the late 70s, early 80s. I was just a kid, but yeah, I’ve definitely made a lot of changes.

 

Nick: Yeah. Yeah, it was my first time there so I’ll be back.

 

Marc Killian: Very cool. Well, nice extended holiday. John, what about you buddy? I know you got the little one there. Did you do anything with the little baby?

 

John: Yeah, so we normally, the last couple of years, we’ve gone up to Pigeon Forge, Gatlinburg area and rented a house there. But this time, after that last drive with a seven month old for 11 hours, I decided I didn’t want to do that again until she was facing front because she doesn’t like being in a car. We decided to change and go to Sanibel Island here in Florida.

 

John: So that was nice, actually. I’m not normally a like sit around the beach type person, but we had nothing to do. So it was about a week of just nothing to do where normally on vacation I’m either going up to Boston where I’m from and I’m seeing a bunch of people and doing all this other stuff, or going to Pigeon Forge and just trying to do as much as we can within a week period. But this time it was actually pretty relaxing where we’d wake up and we wouldn’t figure out our day until about 10, 11:00. It was a change of pace for me, so it was actually pretty nice.

 

Marc Killian: Very cool, yeah. Well, we’re going to talk today about rollovers. Actually, we’re going to do a two part series on rollovers and things to know and think about. But I want to ask you real fast, this kind of bit of an extended vacation, did she put the phone down a little bit? Because I got to say for my wife and I, when we can put the digital leash away for a little bit, you just feel so better. Did you get a chance to do that at all?

 

John: I did at Sanibel and it wasn’t because I wanted to, I was kind of forced to with the service. Where we were at, the service where we stayed, it wasn’t the best. So it kind of forced us to do that, and the wifi was terrible. So, it was nice.

 

Marc Killian: But you wound up saying that you really had actually a great time. I think your words were, “Yeah, I actually really enjoyed it.” So that might’ve been part of it, having that digital lease put away. What about you, Nick? Did you put it down?

 

Nick: So, the first week that I got up to Rochester, I kind of used that as a vacation time and I was a little bit more unplugged. It was really the week of the fourth so it was pretty easy. But then the rest of the time I was still working. It was just that working remote up north versus down here.

 

Marc Killian: That’s okay.

 

Nick: Summertime’s always a little bit slower, so I would take my time in the morning to knock stuff out and definitely used it less than I normally do, which is normally like a 24/7 schedule. So it was good.

 

Marc Killian: I mean, even a week. So that’s my public service announcement to our podcast listeners is even if you can give yourself just a few days from time to time just to put that digital leash away, it does wonders for how you feel. Sometimes we just have to kind of set it down and step away from it. But anyway, I’m glad you guys had a good time. Good, safe, little bit of a holiday break there.

 

Marc Killian: So let’s get back to work and let’s talk about rollovers. As I mentioned a few minutes ago, we’re going to do a two part-er here on some things to know. Deciding on a rollover for your retirement funds, if it’s the right thing for you. That’s pretty much the first step, right John? Determining if it’s in your best interest.

 

John: Yeah. And that will happen. We’re getting a lot of questions right now. “Hey, I have a 401k plan at a previous employer or a job change,” and the question is, “Should I roll it out and what’s the process?” Which next week, Nick will go into details on what the process is.

 

John: There’s definitely some factors that you need to kind of go through. I’ll say one of the main ones is the investment options in your current plan. So, we work with a lot of different people and we’ve seen some plans where it’s really limited as far as what you can go into. They might only have 15 different options and the selections really aren’t that good. We’ve also seen some other plans where there’s 20 or 30 options and there are some good tools within the platform to use.

 

John: So to me, that’s the first step is really evaluating, what am I options within this 401k plan or retirement plan at work? And is it enough for me to be efficient and actually build a quality portfolio? Especially in this kind of volatile time period that we’re in.

 

Nick: If I were to jump on that a little bit from the perspective of not a lot of people realize that really the size of the plan that they are in is the determining factor for what the fee structure is in the funds that they use. So, sometimes they can be in a fund that costs much more inside of the plan than it would even outside of the plan. So there’s a lot of different variables to take into consideration on that investment selection process.

 

Marc Killian: Well, are they limited more so in those types of plans? When you’re talking about that, you mentioned the investment options. A lot of times, I do think people feel that they are a bit more limited, and I know advisors think that. Is that how you see it as well?

 

John: Yeah, you’re limited to what they are for you, and then also some plans actually limit how many exchanges you can do per year. I’d say nowadays, that might be rare, but it’s still out there. So that’s something you want to look into where if you’re thinking about rolling it over, let’s say you go into just an individual retirement account, IRA, really have unlimited investment choices. It’s kind of an open architecture platform and there’s no limitations and you can almost invest in anything you want to. When you have that open architecture plan, that’s where you can really be creative and efficient on your portfolio and making sure that you have the right choices to weather some volatile markets.

 

Marc Killian: Yeah. Well, Nick, you mentioned fees. So let’s dive into that a little bit because often that becomes the case for people. When you get down to all the different nuts and bolts, it’s the fees that they tend to be most interested in.

 

Nick: Yeah. I mean, we find on a pretty consistent basis that when we tally up the aggregate fee that they’re paying inside of the 401k plan and we compare it to what we can do outside of the plan, especially with how prevalent exchange traded funds are these days and with how much lower the costs are, that oftentimes, even if we combine the expenses on the underlying holdings in the portfolios that we manage and add in our investment management fee, they’re coming in either equal or under what they were paying fees before. The fees are now more transparent than they were before because oftentimes, as many have come to find out over the years, they don’t really understand what fees they’re paying in their 401k plans. So many times we’re able to reduce the fee and then add on a much higher level of management, as well as roll in additional services like the planning services, et cetera, et cetera. So, quite often you can get a lot more for the money.

 

John: And to go with that, a lot of people don’t realize within a 401K plan, there’s a lot that goes into it. I mean, there’s the advisor that’s on the plans getting compensated. There’s typically a third party administrator, which basically helps out with the construction of the plan and the filings and stuff like that that gets compensated. The fund company are using. So that’s why we see, just to reference what Nick said, the fees can add up in there as important to understand what type of plan you have and what your fees are.

 

Marc Killian: Yeah, definitely. And is this consolidation of accounts, can that help kind of bring all that into, I guess, better focus?

 

Nick: I would say absolutely. So there’s a couple of things that I’ve seen pretty much on a consistent basis from the standpoint of experience working with clients are that number one, obviously, when you consolidate it’s a little bit easier to have a good grasp on what your overall allocation is from the underlying investments.

 

Nick: But quite frankly, what I would say is the bigger benefit is that when people have their accounts scattered in multiple places, they tend to just be more anxious about their overall situation in general. They feel like they don’t necessarily have a good grip on what they have and what’s going on. They don’t have a full understanding of what their overall strategy is. There’s usually not a plan in place, which is a big indicator of anxiousness and anxiety when it comes to the whole retirement planning conversation. Really what that ends up then leading to are just poor decisions. So, non-coordinated decisions, maybe making a rash decision when we were going through what we were going through a few months ago when the market initially dropped.

 

Nick: So it’s really kind of a trickle down, snowball effect where consolidating accounts, building a plan, having a concise roadmap for where you’re trying to go with how your investments are managed and making sure that they correlate to your overall plan really helps with your decision making process and peace of mind.

 

Marc Killian: If people want to have someone do this for them, they want to kind of delegate that out, what’s some steps to think about? What’s some stuff they should be working towards? Things of that nature.

 

John: Yeah, so all the factors we’ve already gone through is part of that and what we find that when people are near retirement or in retirement, they really don’t want to do it themselves anymore or have to check on it on the 401K platform. So what they’re looking for is to work with an advisor and have them do it for them in retirement so they don’t have to worry about it. It’s just kind of something else where it’s off their to do list and it provides some peace of mind.

 

John: So we’ve seen a lot of that where clients and prospects are… No one’s monitoring this for me and I definitely need some help and I don’t want to do it so I need to hire someone. So that’s another reason to consider rolling it out.

 

Marc Killian: For a lot of people. I talk to guys all across the country, guys and gals, and it seems like the level of service sometimes from the providers or from the companies gets pretty frustrating. I mean, even prior to COVID, same kind of thing, right? You feel as though you got to go through this process and it’s automated a lot of times, or you’re just not getting the answers you want.

 

Nick: Yeah. I would say, because the reality is that inside when the funds are inside of your 401k, it’s still your responsibility and your obligation as the account holder to make any investments, decisions and changes. From the standpoint of needing or requiring any sort of guidance, if you’re calling a 1-800 number and you’re talking to people in a call center, oftentimes those people don’t have a good grasp and understanding of your overall situation. If you have gotten to that point where you’re looking to make those sorts of changes, you’re probably under some sort of stress or duress and having guidance and having somebody that understands what you have going on is a pretty big deal.

 

Nick: We saw that quite evident during the end of quarter one when the market was tanking with COVID and just being able to have conversations with clients, them knowing that, hey, we understand their situation and what’s going on, we understand the longterm planning. And them knowing that, as part of our services and when we’re managing assets for them, the changes that we make inside of a portfolio are proactive. We’re going to automatically make those changes for all of our clients at once versus on a one-to-one, or one off basis, makes for a much more efficient process and a lot more peace of mind.

 

Nick: So it’s a much higher level of service. I mean, sometimes we refer to it as, if you use a sports analogy, going from the minor leagues to the major leagues where it’s just a whole different service level and engagement level, which we think is really, really important, especially as people get closer to or are in retirement.

 

John: Some other things to consider are, we have seen some people get aggravated with the 401k plan moving to a different company where all of a sudden it might’ve been Vanguard and they’re changing to Fidelity and that requires blackout periods and stuff like that. Some people just don’t enjoy that process because now it’s time to really keep track of it.

 

John: Or if you move, it’s your responsibility to tell basically the human resource where you moved to so they could start sending all the notifications to you. So there’s just kind of just some inconveniences with keeping the money yet a retirement plan that you may or may not be aware of.

 

John: I’ve actually seen one plan where they got audited and no one could touch the funds for a couple of months because they were doing an audit investigation of the plan itself. So it’s your money, but at the same time they were auditing so some people’s funds were frozen. They weren’t happy campers for that month period.

 

Marc Killian: I bet not. That definitely can be a pretty frustrating situation. So hopefully that’ll help you out a little bit here, folks on the first part of our series on deciding on rollovers, if it’s the right for your retirement funds. Nick, anything you want to add before we sign off for this week? I know we’re going to talk more about some things next week.

 

Nick: No, I think this was a good overview and I think the reality is that, in our session next week, we’ll get into the details a little bit more of how you actually process these and the things to look out for and that sort of thing.

 

Marc Killian: Fantastic. All right. Well, I’ll tell you what, for that we’re going to sign off then. So if you’ve got questions or concerns, again, about doing a rollover or if it’s right for you, reach out to John and Nick, give them a call at (813) 286-7776. That’s (813) 286-7776, or go to PFGprivatewealth.com. That’s PFGprivatewealth.com.

 

Marc Killian: While you’re there, subscribe to the podcast, click on the podcast page. You can check out past episodes, you can listen to future episodes. You can subscribe to them on various apps that are out there. Or if you’re using Apple, let’s say, just type in retirement planning redefined in the search box and you can also just like it that way. So lots of different ways you can find us, and we certainly appreciate it. We’ll see you next time here on Retirement Planning Redefined. For John and Nick, I’m your host Marc Killian. We’ll talk to you next time.

Ep 24: Importance Of Risk Management & Asset Protection

On This Episode

When it comes to retirement planning, many people focus on filling in an income gap, or making sure they will have enough money to get them through retirement. While this is fundamental to the plan, it’s important to make sure your assets are protected. John and Nick will explain what investment vehicles have some sort of protection and will also give a hypothetical example.

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Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Speaker 1: Hey, everybody. Welcome in to Retirement Planning – Redefined with John and Nick of PFG Private Wealth, serving the Tampa Bay area. Thanks for tuning into the podcast. As we talk investing, finance and retirement, and we’re going to jump in and get started with the conversation. Guys, I hope you’re doing well. We were kind of laughing right before we started the session recording here that John’s been doing some swim lessons with his kids and it’s been going really well. And I wanted to make the joke that Nick, you finally learned how to swim.

 

Nick: Yeah, no, all joking aside, I can swim and swim well, but besides that-

 

John: You’re welcome, Nick. We’ve been doing some Zoom swim lessons [crosstalk 00:00:41].

 

Speaker 1: Zoom tutorials on swimming.

 

Nick: Yeah. I get in the bathtub with goggles and see what happens. But no, I’ve been doing well. Things are starting to slowly get back to normal from the standpoint of, I want to say last week I went out to dinner for the first time at a restaurant outside in a few months, so that was pretty cool. So things are slowly starting to get back to normal, although it’s going to be interesting is some of the numbers seem to spike here, how things will adapt over time, but no complaints, no complaints here.

 

Speaker 1: Yeah, it will be interesting to see as this cluster bang of a year continues to wobble on. So we’re about halfway through 2020 at this point. So we’ve still got a lot to go, so we’ll see how it shakes out. But that’s good. Glad to hear that there’s some good positive spots here and there. So let’s jump into our topic. So let’s review the importance of risk management and asset protection. Let’s just start with a basic overview, Nick.

 

Nick: Yeah. So for those that are listening that have been through our class that we hold at the local colleges, this will sound a little bit familiar, but we’ve had a couple of things pop up with clients and questions from friends and things like that. So we thought it would be a good topic to re-review where oftentimes people get focused on the fun or more exciting aspects of planning, which may be investments or talking about retirement and those sorts of things, but really risk management is a super important part of overall planning because really the objective is to increase your probability for success by reducing your risk. And then ultimately, overall the goal by doing that is to do it while keeping your costs down. So when we go through the planning process with clients, we do review their property and casualty insurance. We’re looking for how their accounts are titled. We’re looking and analyzing things from the standpoint of, “Are we making sure that things are protected?”

 

Nick: So we always like to make sure that people do realize, because it isn’t necessarily something that is top of mind and oftentimes, when you talk to people, the reality is that when they’re shopping out their homeowners insurance, their car insurance, they end up having been with the company for a long period of time. Usually it’s price dependent. So we’ve seen where people made a change to cut costs, six, seven, eight, nine, 10 years ago and now they’re in a completely different financial situation and they haven’t made adjustments to correlate to that from a risk management standpoint. So we just kind of want to walk some people through that.

 

Nick: So one of the first things that we review and talk about and help people to understand are that, there are certain assets that are creditor or protected in the state of Florida. This is something, again, we’re not attorneys, we’re not property and casualty agents, but these are topics that we review. And this is one of the perfect examples of something there where we can provide feedback, give you help, provide you with questions to ask and then help connect you with or you connect with an existing relationship that you have with a property and casualty agent, with an attorney if there are legal documents that need to be involved, that sort of thing. But in the state of Florida, it’s important and many people know that you can declare your primary residence as your homestead.

 

Nick: And there are a lot of protections built into declaring your home a homestead. So many people just focus on the tax benefits and that’s one thing, but really it provides a creditor protection and asset protection for your home. So that’s a big deal. If you own non-qualified annuities and/or have life insurance that has a cash value component to it, those are protected in the state of Florida. Qualified accounts, so in other words, 401k, IRA accounts, those accounts are protected in the state of Florida. One kind of caveat to that where we’ll have some people say, “Well, hey, I’m 60, 70 years old and I’ve got these accounts and my home, why do I need any sort of additional protection?” And one of the things that we like to remind people are that those qualified accounts, you do have to start taking money out at a certain point. And at the time that they go from qualified to non-qualified that becomes something that could be available.

 

Nick: From the aspect of different types of trusts, there are certain types of trusts that can be set up to provide protection for assets that’s absolutely 100% in the realm of working with an attorney. John’s going to talk about one of the misconceptions that a lot of people have when it comes to trusts. And just a basic thing that is important for people to consider, let’s say you own a business and you are not structured as an LLC, you could be putting yourself a little bit of risk from that standpoint.

 

Speaker 1: Yeah. Certainly there’s a lot of pieces in there. So again, homestead, annuities, qualified accounts, LLC, certain trusts, some of these things are the protected assets or at least in Florida. John, what are some of the non protected?

 

John: Yeah. So some of the non-protected assets would be cash accounts or your bank accounts, things like that, CDs, non-qualified investment accounts. Someone might have a brokerage account that they’re just putting money into monthly, or just maybe just put a lump sum in there. Just understand that just because your retirement accounts are invested and you have investments there and they’re [inaudible 00:06:27] protected. If it’s in a nonqualified account with investments, it’s not protected.

 

John: One other thing with the qualified accounts is to understand that there are limits to what is actually protected. So actually an ERISA plan, which is a 401k, 403(b) type plan, it’s typically fully protected, no matter what the amount is and IRA, and this does go up, it used to be a million, and I believe right now it’s about 1.3 million if an IRA is actually credit protected.

 

John: And then a recent rule change in the past few years, inherited IRAs are no longer credit are protected. So it’s important to understand that if you inherit an IRA from somebody, it is not credit protected at all. Something that will come up, Nick mentioned with the homestead where your primary home is credit protected, any secondary home you have is not. So that’s a misconception we see sometimes if you have a rental property, or let’s say your, like a second vacation home, it’s not credit protected. And then with the businesses, if you’re a sole proprietor and you never develop any type of LLC, so example I have a [inaudible 00:07:32], but I’m not LLC, that is not creditor protected. So that’s why it’s important to, if you’re working with an attorney, you want to ask these questions, “Hey, should I create an LLC with the business?” And you definitely want to have them help you draft the documents so they’re done correctly.

 

John: One of the biggest questions we get when we’re doing planning and part of the planning is we look at the estate side of it. We don’t draft any documents, but we are knowledgeable enough to have people ask the right questions and point them in the right direction. But it’s with trusts. A lot of people feel like, “Hey, if I set up a trust, does that protect my assets?” And if it’s a revocable trust, the answer’s no. So a revocable trust basically just get to the meat of it. You still have control of that trust. So you either are owner of it, or you make decisions of it. And basically with that, it’s still considered part of your estate [crosstalk 00:08:22] and for that reason it’s not credit protected.

 

Nick: Yeah. And just for further emphasis on those protections kind of tend to kick in after you pass and the trust stays, but while you’re alive, it’s includable in your estate and it doesn’t provide those protections. And one other caveat or thing to consider think about are for those non-qualified accounts, non-qualified investment accounts or non IRA, if you hold them jointly in the state of Florida using Tenancy by the entirety for those types of accounts, if you hold it with a spouse, so it has to be with a spouse to use that, that does provide some additional level of protection. Although it’s not the same as like a retirement account per se.

 

John: Definitely, as you can tell, it gets confusing. So you definitely want to ask the right questions if you’re wanting to know what is and what isn’t and just asks the right people and adviser will know enough, and attorney would definitely be the best resource.

 

Speaker 1: Yeah. I’m definitely say if you’re working with an advisor, obviously bring the conversation up with them, have them bring the attorney in and so on and so forth. And of course, John and Nick can help you in that arena as well. Now you mentioned property and casualty, so let’s do a quick review of that as well. What are some things to consider?

 

Nick: Sure. So the main types of property and casualty policies that people are going to have are going to be their car insurance, homeowners insurance, and maybe an umbrella policy. So one of the examples that we tend to give from the perspective of a car insurance policy is, really just walking you through a scenario. So when you look at your car insurance policy, you’re going to see that there are limits that are provided, that are referred to liability, and then you will see a designation for what’s called uninsured motorist or UIM.

 

Nick: So the example that we usually use is, let’s say John and I are both driving down the highway and we get into an accident. So we’re both in our late 30s, business owners, our incomes continue to go up. John has a family, I don’t, but if something happens to me, I do have assets going to parents and brother and that sort of thing. So let’s say we’re driving and we get into an accident and because John likes to multitask a lot, he was texting and it’s his fault. So we’re going to blame him. So I have the-

 

John: Wait, wait, wait, full disclosure, I never text and drive. I do multitask, but I do not do that.

 

Speaker 1: Good [inaudible 00:10:57].

 

Nick: That’s good. That’s good. So we get into an accident. I have damages, fairly serious damages and I’m going to go ahead and I’m going to sue him. There’s kind of a negative connotation oftentimes with the whole aspect of suing somebody, which the reason that we use this example is because, here we are, we’re friends, we’re colleagues, in many ways business partners, that sort of thing. But the reality is, is that if there’s damages and mistakes happen and mistakes are made, ultimately my responsibility for me and family is to try to become whole again, from a financial standpoint. So I go ahead, I sue him. The first thing that’s going to be reviewed and looked at are going to be his liability limits. So the liability limits protect him from lawsuit, from somebody else when he is at fault, essentially.

 

Nick: So let’s say he has one of the most common levels of coverage that we see is what’s called like 100/300. So what that means is 100,000 per person in the accident, a total of 300,000 in the vehicle. So in this instance, in this situation, I’m the only person in the vehicle, so the maximum amount of his car insurance company is going to pay out that they’re going to send their lawyers to deal with this lawsuit, the maximum amount that they’re going to pay out is 100,000. If I happen to have other people in the vehicle, that’s where that 300,000 limit would come into play. But let’s say my damages are 250,000 and the most his insurance company is going to pay out as the 100. So, now what? So at that point, what’s going to happen, there’s going to be kind of a different phases. So I’m going to have an attorney. And my attorney is going to look at, “Hey, does John have additional assets that are not protected, like we talked about earlier that are available through suit?”

 

Nick: So that’s something that he’s going to request, some sort of inventory, financial inventory, asset balance sheet via the lawsuit. The other thing that they’re going to look at is, “Hey, Nick, do you have uninsured motorist coverage?” And luckily because I do this sort of thing I have planned ahead and I have uninsured motorist coverage. So what uninsured motorist coverage does is it protects me in the case of having damages that are above and beyond what the person who inflicted the damage has. So in this case, my limits for uninsured motorist, let’s just say there are 250,000, I can essentially sue my own insurance company to fill in that gap, to get me up to that 250,000, so that coverage has protected me.

 

Nick: So the liability limits protect the person at fault against the person having damages and not having enough coverage. So, because we do see people oftentimes outright reject uninsured motorist coverage, and knowing that, especially in the state of Florida, people are often underinsured or uninsured, having uninsured motorist coverage is something that we think is important to have a level of protection.

 

Nick: So the same scenario, I was injured and John had coverage and I had substantially much more significant damages. Let’s say that I was permanently disabled and I wasn’t going to be able to work anymore, so the amount that the amount of protection and coverage that I’m looking for is going to be substantially more than the 100,000 that John has, or even the 250,000 that I have in the uninsured motorists. And that’s where something like an umbrella policy could come into play. So what an umbrella policy will do is, it’s a type of coverage that essentially goes above what you have for the auto coverage.

 

Nick: So an umbrella policy can be both liability and uninsured. So in this example, what we’ll use for the example is we’ll say, “Hey, Nick has an umbrella policy. And because my damages were a million dollars and John’s insurance company has paid out 100,000, my insurance company has paid out 250,000, there’s still a gap of 650,000. Essentially, I can go ahead and sue my insurance company from the standpoint of the umbrella to try to fill in that additional gap. So if John had had an umbrella policy, they would have tried to use that for protection. But in this scenario, me having an umbrella policy and being the one that had the damages really comes to the point of being able to protect me in my assets.

 

Speaker 1: Yeah. And certainly it’s important to review your risk management, your asset protection, because something like an accident can certainly derail retirement plans, it can really wreak a lot of havoc and other things that you had going on as well. There’s countless stories out there along situations like that. So if you’ve got some questions or concerns about this week’s topic, and you need some help, reach out to John and Nick, and of course they can help point you in the right directions for some of the things they don’t do as mentioned earlier. It’s always important to review and have these conversations about all these little assets. It’s not just about income, which obviously that’s super important in retirement, but there’s all these other little facets. So this week we focused on some risk management and asset protection when it comes to some of the things that are protected in Florida, not protected and a bit about the property and casualty as well.

 

Speaker 1: So reach out to them if you’ve got questions on these topics at 813-286-7776, to have a conversation about your own situation, 813-286-7776, or share the information with a friend who might benefit from that well and go to pfgprivatewealth.com to learn more about John and Nick and their practice, pfgprivatewealth.com, a lot of good tools, tips, and resources. You can also click on the podcast page, you’ll see that right at the top. And you can subscribe to us on whatever platform you like to listen to. And we would certainly appreciate it. Guys, thanks so much for your time this week. As always, I appreciate all that you do to help us out here and continue to do a good job with those swimming lessons there John.

 

John: Thanks.

 

Speaker 1: And Nick, maybe one day, you can take the floaties off, you’ll be good.

 

Nick: Hopefully.

 

Speaker 1: All right, guys, have a great week. We’ll talk to you soon. Stay safe, stay sane, and we’ll see you next time here on Retirement Planning – Redefined.