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Solving Your Retirement Puzzle - Part 2

In the final part of this series, Royal Standley walks you through more options for guaranteed retirement income. You will learn about money-savings pension tips, the pros and cons of different annuities, and plenty more!

Episode 25 Transcript

Intro: Royal Standley of Oregon Pacific Financial Advisors, offering securities through United Planner Financial Services member FINRA SIPC, shares his planning approach to help people toward a place where they may be at peace regarding their financial goals. In this dynamic podcast, Royal will share his insights on how to design a retirement plan to help you plan for your future. Now onto the show.  

Aric Johnson: Hello and welcome to Life by Design with Royal Standley of Oregon Pacific Financial Advisors. Last time on the last podcast, if you are not with us, which that would be crazy because this is an amazing podcast, if you weren't with us on the last podcast, we started a discussion about guaranteed forms of income and today is part two of that two-part series and we're going to continue the conversation. Hello Royal. How are you?  

Royal Standley: I'm doing well. Doing well. Excited to get back into this. You know, I think, you know, we say guaranteed forms of income, the eyes kind of roll back into the head, but really what we're talking about is how do you create that month-by-month, paycheck that, you know, we all get used to in our working career. How do you do that when you're not working anymore? And I think fundamentally that's really what we're talking about is how do we replace that? How do we feel comfortable with that? As we move into retirement and no longer working. So I hope to make this as exciting as, as I feel, feel like it should be, but it does sound a little dry as we start to talk about it. 

Aric: Well, Royal, why don't you start off by telling us, kind of use an analogy about legs of a stool. Can you kind of give the audience a, a reminder of what that means.  

Royal: Yeah, absolutely. So as we look to build income for someone in retirement, usually when we're not just using one source of income, at least we hope not. Uh, we're, we're, we're kind of putting together different legs of the stool to kind of form that base for them, that on a monthly basis, uh, they're going to receive income into their bank account each month that they're going to spend on a monthly basis for, you know, utilities, the house payment, travel, etc. And we want to put that together in the most stable fashion possible. So, if there's an issue with one, you know, there's something to fall back on there.  

And what we covered in part one was really two of the most basic ones, the first being Social Security, of course. Uh, most people have an understanding that they're paying into Social Security during their working career. It's really the most common type of income for people in retirement. Um, I think it's utilized way too much as the primary source of income. That's really what we want to get away from I think at this point, is relying so much on Social Security. Uh, the other form that we, we touched on in part one was the Oregon PERS system. And, uh, PERS is a Public Employee Retirement System, uh, which provides a guaranteed stream of income with survivor's benefits, as does Social Security. If that's something you need to select there. Little more complicated than Social Security. Social Security is pretty straight forward. Oregon PERS has a lot of different options. 

And in most States offer some sort of state sponsored pension like this for their public employees. So it might vary a little bit if we're looking at, at CalPERS in California, but definitely something for, uh, usually what we count as the largest employer in the state, which of course is the state. 

Aric: Mm-hmm, mm-hmm. All right. So what are we covering today?  

Royal: So now I think we're, we're, we're gonna kind of fill in the gap here with the other forms of, uh, or the other legs of that stool that we, we add onto there.  

Aric: Mm-hmm. 

Royal: And we're, we're kinda gonna talk about how we're going to utilize all of this. Uh, some things to consider, especially in your working career. Uh, you know, it's always interesting sitting, sitting down with somebody mid-career where they haven't really thought about retirement at all. They haven't thought about their benefits. And, you know, being able to lay out to them, okay, well you've already got 15 years working for the state. It might not be the right time from a retirement planning situation to make a change there. So, we're hopefully trying to educate people so that they can start evaluating their own kind of financial life. Really taking a look at what legs you're building into your stool that you're going to rely on in retirement for your monthly income.  

Aric: Gotcha.  

Royal: So, the first thing that we want to jump into here today is traditional pensions. Traditional pensions were very, very popular, were a very popular form of retirement planning, uh, for employees and companies, uh, you know, 50, 40 years ago. It was really a great way of workers really turning over the responsibility for their retirement to their employers.  

Aric: Yeah.  

Royal: The employer would, would take care of doing all of the funding for the pension. They would take care of doing all the investment management, and also they would be responsible for providing the guarantees. So if you're an employee working for a company that offers a pension, you don't have to really think about retirement at all. Or at least that was the, I think the initial thought that, uh, employers would have is, you know, you come work for us, we're going to give you a pension. I, if you, if you, you know, spend 20, 25, 30 years with us and we're going to take care of everything. It's a great concept. Um, however, the companies began to realize that, hey, sometimes these guarantees, um, are really pretty good. Uh, sometimes it's not as easy as, as we initially thought to invest these funds over the long run.  

Aric: Mm-hmm. 

Royal: And do we really want to have a liability really for the rest of the, uh, of an employee's life, uh, that we're going to continue paying them? So we've really seen pensions disappear. One of the other big things that we've seen that, um, happens is we've seen unions and that collective bargaining power is really somewhat disappeared from the landscape. Uh, unions just aren't as powerful as they once were in the Fifties and Sixties. So with that, uh, we've really seen the number of employees that are actually covered by a company pension like that really drop in into, I think the last number I heard was about a 6 to 7% of workers in the US are actually covered by pensions last time. 

Aric: Wow. 

Royal: So, the other thing was that we, that we see quite often is you might be carrying a pension with you from a previous employer. And, uh, they, they might've already stopped the pension, but there might be some benefit, uh, that's still attached there.  

Aric: Hmmm. 

Royal: So definitely something to kinda keep track of there. Usually you, you'll, you'll get at least an annual mailing if there was a pension that you are eligible for down the road. The other thing that that happens is when you apply for Social Security, Social Security will go out and kind of do a quick kind of review of the landscape of pensions to see if there's anything that might be available for you. Sometimes this creates some confusion there because it might just be a small pension plan with $20 in it and you need to roll that over. But sometimes I've seen that a uncover some sizable retirement benefits. So, when you get that letter and it kind of gives you the breakdown, but what you might be available, it's good to take some time and do some research there with the traditional pension. 

Aric: Yeah, that'd be, that'd be a nice surprise, right? 

Royal: Yeah, it is. You know, I had one client, he, he worked in the same place for probably 30 years, virtually his entire working career. And the thing was, even though he was working in the same place, he had worked for about five different companies. And so we probably went through, I think five or six different old pensions or retirement plans. And he was always coming up, was with something new. Every time he’d come in, he's like, hey, I have this, this old pension. Yeah. Or the, you know, the two years that it was, uh XYZ company before they went out of business and were bought by ABC company.  

Aric: Ha! Gotcha.  

Royal: So, it's always fun to kind of find those types of things, and sometimes they can be pretty substantial nice benefits that you don't really even think of. 

Aric: Yeah.  

Royal: Now, one thing that we see that's quite different oftentimes from PERS or Social Security is most private pensions, they don't have that inflation protection benefit that Social Security or, or uh Oregon PERS will, where there's a cost-of-living adjustment.  

Aric: Oh, okay.  

Royal: Oftentimes what we see is it's going to be a flat dollar amount, and what that means for you as an employee is just kind of realize that your first year of retirement, that's going to be the largest benefit you're going to get because each year, even though the dollar amount is going to stay the same, your purchasing power is going to be reducing because of inflation. 

Aric: Mm-hmm. 

Royal: So the, the other thing that we often see with, with pensions is they do oftentimes offer a survivorship benefit or additional benefits for the spouse. So that's definitely something you want to look into. And I really, truly believe, when you're looking at choosing survivorship options, you really need to sit down with a financial professional, do a financial plan, and really evaluate how best to take these benefits. I've just seen a lot of people really make the mistake of taking that 100% that benefit, that highest level of benefit and just saying, well, we'll be fine.  

Aric: Mm-hmm. 

Royal: If you don't do the correct planning along the way, especially if the employee has an early a death or passes away, kind of, before it's expected to, you can really leave that spouse in a pretty tough position. I was sitting down with a worker who had worked, you know, virtually his, his entire life in a lumber mill. We were talking about his pension. He said, well, I've gotten all my financial advice from all the guys who've retired before me,  

Aric: Uhhh, Uh-oh. 

Royal: And everyone who's retired before me has taken the highest possible benefit and not worried about survivorship. And I was like, okay, great. Let's just kind of walk through this. And he's like, well, they all told me that they're going to be fine with that. And I'm like, that is an absolutely true statement. They are going to be fine. 

Aric: Yes. Absolutely. [laughter] 

Royal: They're going to have the most money during their lifetime, but what happens to the spouse? If that worker passes away after just a few years. They lose all of that protection that the pensions provide. So definitely sit down, look over your options. And in this case, we were, we were able to convince him that his, his spouse, who was also about 10 years younger than him would probably be around a lot longer than he would be. 

Aric: Yeah, absolutely. And that's just it, with that planning, there are so many questions that need to be answered. If it's, if it's a woman that's been working for the company and she has a pension and, and, and a husband, maybe it is best that she takes a full amount cause she's going to outlive him, possibly. But then, you know, I know that part of what you do, uh, Royal is you talk to your folks about, you know, healthcare and, and, and they're kind of family health history and what that, how that might play into their future because you got to take all that stuff into consideration. I just don't, I think a lot of people think of it. I think you're right. It's that kind of emotional, hey, hey, this is looking pretty good. I want to get as much as I possibly can so that we can really enjoy our retirement. Well, that's great, but if three years later you kick the bucket, your wife's not enjoying much.   

Royal: Right, right. So I think most people want to protect their spouse. 

Aric: Yeah.  

Royal: Even though it might mean giving up a little bit there in benefit. Also, it's maybe looking at life insurance to protect that spouse if you pass away before you really thought you might. So that's really kind of the, the basics of pensions. We see a few of these, but oftentimes, you know, I'm probably gonna just, just guess maybe 10% of people that we work with have a pension. And then in many cases, they tend to be smaller dollar amounts because unlike Social Security where you might pay into it, you know, 30, 40 years, it may only have been around for, you know, five-to-six years. Because we have seen a lot of those pensions kind of shut down and change over to kind of more traditional retirement savings vehicles like the 401(k). Something along those lines.  

Aric: Got it.  

Royal: All right, so those are the types of guaranteed income that are really provided by either the government or an employer. This next form, I think is unique because this is a form of guaranteed income that you as an individual can go out and purchase, and that is really by utilizing an annuity through an insurance company. Now, when you, when you think of an insurance company, a lot of times you might think of a life insurance. Life insurance is insurance that's designed to pay your beneficiaries should you die too early.  

Aric: Mm-hmm. 

Royal: An annuity is kind of the, the reverse of that. This is income that's designed to keep paying in case you live too long. And with an annuity, most guaranteed annuities over the course of a lifetime, they're going to be there that entire way. The insurance company is utilizing some of your assets to create this income stream that's going to be guaranteed over your lifetime.  

So, let's just kind of get into some of the basics here 

Aric: All right. 

Royal: And kind of talk through these to get people, I think, at a, an idea of what's available to them. Now, first and foremost, I'm gonna say annuities are not for everybody. Not everyone needs to guarantee income. Sometimes you have enough assets where that's just not a concern, but oftentimes annuities can just provide that extra level of comfort to people where they just don't have to worry about, you know, that paycheck ending one day. 

Aric: Yeah.  

Royal: So the, the most common type of an annuity, that's kind of the, when, when people talk about that guaranteed income stream is what we call a Single Premium Immediate Annuity or a SPIA. In a SPIA, you're basically creating a contract with the insurance company. You're giving them a sum of money, they're going to take that money and based off of where interest rates are and the amount of money you give to the insurance company, they're going to guarantee you a, in most cases, a monthly income stream for the rest of your life or for a specified period of time. So oftentimes what we'll, we'll look at here is utilizing a SPIA, a Single Premium Immediate Annuity as a very simple way of giving a client that pension-like income, where they can just rely on that being deposited each month. So, one of the biggest factors here is if you're taking a life-only SPIA and you know, going back to that pension idea, life only is if you were to pass away after, let's say the first month, you might've given the insurance company, you know, $100,000 you've gotten $400 back in immediate income. If you pass away with a life-only Single Premium Immediate Annuity, you've really given the insurance company a windfall. So that's definitely not what we recommend.  

Aric: Yeah. 

Royal:  A lot of times with the SPIA is you can also say, I want this for the rest of my life, but in case I pass away early, I'd like premium payments to continue for five or 10 years, or I'd like income payments to continue on until the insurance company has paid back everything I gave to them. 

Aric: Hmm.  

Royal: You lose a lot of control with this SPIA, but you're getting a great income guarantee where you just are guaranteed to receive this, and that guarantee is backed up by an insurance company that has those reserves that can protect you.  

Aric: Got it. All right. That's interesting. There's so, there's multiple ways to, to get those assets, whether it's, like you said, I want every dollar that I've given the insurance company, which I'm sure it puts a lot of different types of restrictions or things on it, but then I guess each individual person, married or single, has to think of it for themselves. Can you, if you have, let's say you don't have any, or you don't have a spouse any longer, maybe they've passed. Can you have some of the payments go to your children?  

Royal: Yes. Yes you can. If you have that period certain or refund annuity, you can have those payments, if you were to pass away too soon and go to your, your beneficiaries. 

Aric: Okay. So it's pretty flexible then.  

Royal: Uh, it, it is in that sense. The other way that we can guarantee this is with a deferred annuity. So, we've talked about the immediate annuity, which starts right away. The deferred annuity is more something where you're putting money into a contract with an insurance company, but you're not going to take that additional step of annuitizing. When you annuitize it, you just turn it from an asset into an income stream. 

Aric: Okay.  

Royal: With the deferred annuity, there are a lot of different products out there and I think that's really where you hear a lot of people say negative things about annuities. Because there's so many of them, I think they get miss-sold sometimes, 

Aric: Oh yeah. 

Royal: That you want to be very careful when you're sitting down with someone that they've done the research to make sure that what they're recommending is the best for your personal situation. So as a blanket statement, I don't think everyone should have an annuity, but there could be an annuity for your specific financial situation that can, that makes a lot of sense for that specific, uh, situation. So, a lot of these, uh, annuities that we have come on the market over the last 15 to 20 years, they have something we call living benefits. That living benefit is actually an income guarantee, where they're going to guarantee a certain percentage of income based off of what you put into the contract or how many years you've held the contract, guaranteed for the rest of your life. There's a lot of complexities inside of these, uh, these annuities, but oftentimes what we see is you can guarantee, let's say 5-, 5 ½- 6% depending on the contract, of the amount you to put on deposit, they're guaranteed for the rest of your life or your life or a spouse's life. So, the nice thing there is is you have the flexibility more so than with a SPIA to make changes there. So, if you see that, yeah, I don't need this guarantee anymore, if there's still money left in the contract, you can stop the income and kind of take that income, put it into another investment, if you want.  

With the SPIA, you really lose that ability completely. Because you've really turned that investment into an income stream. Whereas if you have an indexed annuity or a variable annuity, with that living benefit, you still have the flexibility of saying, okay, I want to stop the income and you know, kind of turn this back into an investment of some kind. 

Aric: Gotcha.  

Royal: So lot of, lot more flexibility there with the deferred annuity as far as making changes, being invested in the market and that sort of thing. But if you want that rock solid guarantee that you know you're going to get this money for the rest of your life, the SPIA might be the, uh, the way you look at investing those dollars for the future. 

Aric: All right. What's next?  

Royal: So finally, I think we come to to one of the most common forms of that income stool, and that's simply the money you've accumulated in your IRAs, 401(k)s and non-qualified investment accounts. 

Aric: Mm-hmm. 

Royal: Now, the thing with, with this type of income is you don't have any of the assurances that you might with Social Security or pensions or annuities. But you have the ability to keep that money invested and you have the flexibility of adjusting how much you want to take out on a monthly basis so that you kind of maintain all of that flexibility. With retirement savings, when I sit down with a client, what we're really looking to do is, we're looking to kind of build that, that, that guaranteed income stool using, uh, annuities, pension, Social Security. And then if there's still a need for additional income on top of that, then we're looking at taking a distribution from those retirement savings to kind of make up the difference. Usually we will sit down with a client and kind of help them break out what their expenses are on a monthly basis. Maybe factor in some annual expenses like travel or remodeling the house, that sort of thing. And then we'll use that retirement savings bucket to kind of fill in any gaps that are leftover, once we factored in all that, uh, that guaranteed income.  

Aric: Hmm. 

Royal: There's also the question of, of how do we invest the money inside of those retirement accounts? For some of it, we might be looking to just have that grow with the markets. Other times we might have a very fixed number that we need to reach each month to send out to a client. So, we might be investing more for income. It all depends on the individual and, kind of, what their objectives are for their accounts. Are they trying to maximize what they're spending on a monthly basis or are they trying to make sure that the kids are taken care of when they're gone?  

The main thing that we don't want to do without really getting everyone on board is spending down an account with, without everybody kind of knowing what we're doing. If it is looking like, hey, uh,  to maintain your  lifestyle over, you know, the next 20, 30 years, we're going to have to take your assets down. That's really what, what we're talking about when we talk about spending down an account is taking too much of a distribution so that over time, that account starts to have a risk of going to zero. Now, sometimes we'll look at spending down an account because we know there's other assets available. But with clients who maybe haven't saved enough for retirement, we know there's kind of going to come and date where that account could go to zero or get close to zero. So we want to have those conversations as early as possible so that our clients have the ability to, to kind of make those tougher decisions of, does it make sense for us to downsize? Are there other things that we can do? Should I work an extra year or two to just put us in a better situation for the future? 

So, as we kind of wrap up today, we talked about those guaranteed sources of income. And then finally that retirement savings. So, we want to make sure that people are saving enough in retirement so that they have that flexibility to really lead the life that they want to live for the future.  

Aric: Yeah. Royal, so many of the things that you spoke about today are, there's a lot of moving parts, right? There's a lot of pieces. There's a lot of options. There's lots of different things that need to be dealt with and addressed. Whether it's age, whether it's when you retire, whether it's how many different accounts, what you're holding for real estate, you know, the different the SPIA is and the, all the other acronyms that you threw at me today. That's a lot to take in. And for anybody who's listening, I'm just going to say this: If you are working with an advisor currently and you've had this discussion or they're suggesting things, as far as maybe annuities especially, I don't think it's, I don't think it's wrong or I don't think it's a bad idea and it's definitely not, you know, against a relationship for you to get a second opinion. And Royal, I'm going to ask you, can you, can you take some calls? Can you take some emails from folks that may be need a second opinion on their specific circumstance because this is complicated. 

Royal: Absolutely. You know, if you're not having a like a, at least a cashflow analysis or a financial plan done, I really don't think you should be looking at an annuity with a lifetime income benefit. Because the advisor who's recommended it is really just kind of taking a guess as to as to what you need and how much should go in there. 

Aric: Yeah. 

Royal: Without doing that financial plan, we can't answer that question of how much do we actually need to put into that guaranteed vehicle and how are the other assets going to function to kind of fill in those gaps. So, I completely agree with you there, Aric. A second opinion is, is valuable. If, if you feel like maybe this is the first or second time you're sitting down with an advisor, and he's recommending an investment solution where you're going to tie that money up for the rest of your life, you need to make sure it's a, it's a right solution for you. And that's, that's exactly what we do here at Oregon Pacific Financial Advisors.  

Aric: All right, so how do they reach out to your Royal? 

Royal: Yeah, you can email me at or you can call our office at (541) 772-1116.  

Aric: Great. Thank you Royal. I am going to have to listen to this one a couple times and I was even on it, so there's so much to so much to learn. Again, thank you for your time and audience, thank you for listening to the Life by Design podcast with Royal Standley. 

If you have not subscribed to the podcast yet, please click the Subscribe Now button below. This way, when Royal comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends and family. Again. Thanks for listening today. For everyone at Oregon Pacific Financial Advisors, this is Aric Johnson reminding you to live your best day every day. And we'll see you next time.  

Outro: Thank you for listening to the Life by Design podcast. Click the subscribe button below to be notified when new episodes become available. The views expressed are those of the presenter and may not reflect the views of United Planner Financial Services. Material discussed is meant to provide general information and is not to be construed as specific investment tax or legal advice. Individual needs vary and require consideration of your unique objectives and financial situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.  All annuity guarantees are bassed on the claims paying ability of the issuer.

Advisory services offered through Oregon Pacific Financial Advisors, Inc. Securities offered through United Planner Financial Services of America, member FINRA and SIPC. Oregon Pacific Financial Advisors Inc. and United Planners Financial Services are independent companies. 

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If you have any questions, would like to learn more or are looking for a second opinion, call (541) -772-1116 to schedule or click below to schedule online.

Please note that discussions in these shows are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making financial decisions. The views and opinions expressed are based on current economic and market conditions and are subject to change. All investing involves risk, including the potential for loss of principal. Securities offered through United Planners Financial Services (UP), Member FINRA/SIPC. Advisory Services offered through Oregon Pacific Financial Advisors, Inc. (OPFA). OPFA & UP are independent companies. Neither OPFA nor UP offer tax or legal advice.