Webinars Category: Retirement

How The SECURE Act 2.0 Impacts Your Retirement

Alex Call: Thank you everybody for attending. We’re really looking forward to going over this with everybody. My name is Alex. I am a financial advisor here at Peterson Wealth. And Carson is also a financial advisor, and he will be helping us present.

So, before we jump in, we will be having a Q&A at the end. So, any questions that you have just feel free to put them in the chat or in the question part. And we do have Daniel and Josh manning those questions. So they’ll be able to help answer any of those, and any that they don’t get to, we will be answering in the webinar. And then also we will get back to you with an email or a phone call to make sure that all the questions are answered.

So with that being said, let’s just go ahead and jump right in.

What is The SECURE Act 2.0? (1:02)

So what I want to talk about first is really what is The SECURE Act 2.0. And so really it was part of the consolidated appropriation act of 2023, which was just a really big 1.7 trillion bill that was passed right at the end of the year. And this was a small part of that. And what it stands for, SECURE is for Setting Every Community Up for Retirement. And then the 2.0 part is because this is an extension of The SECURE Act that was passed in 2019.

And what’s the purpose of this act? I really think of it as there’s two purposes. One is encouragement. It’s to encourage people to contribute to their retirement plans. And along with that is access. It’s giving people greater access to retirement plans. And so it’s easier for them to make contributions and save for retirement.

~ Time to fix screen ~

So the purpose is encouragement and access. And so then the next thing is, what are we going to cover today? And so what I will tell you what we are not going to cover is that within this act there are hundreds of minor changes to retirement plans that have happened. Things that are not really going to affect anybody here and that will just be gradually implemented and changed to retirement plans over the upcoming years. We don’t want to talk about that.

What we want to cover are what we feel are really the five most impactful changes for current and soon-to-be retirees. And that’s going to be a combination of retirement catch-up contribution limits, QCDs, RMDs, Required Minimum Distributions. And we’ll go through all of these today.

Transferring a 529 Plan to a Roth IRA (3:37)

But the one that I want to go over first is one that has probably been receiving a little too much attention within the financial media that I have seen at least for what it actually is. And the reason why is because in theory, this sounds awesome.

And that has been able to transfer a 529 plan. And a 529 plan is an education savings account that you can contribute. It’s essentially a vehicle to help you save for college, for kids, grandkids, and so forth. And that you’re able to transfer that into a Roth IRA. It sounds awesome. But there’s a lot of rules and restrictions around it. And so, these rules are first, that the IRA receiving the funds, it must be in the name of the beneficiary of the 529 plan.

The next, the 529 plan, it must have been maintained for 15 years or longer. Meaning it has to have been opened for at least 15 years before you can make those transfers into a Roth IRA. Any contributions to the 529 plan within the last five years are ineligible to be moved to a Roth IRA. And then for the other ones, there’s a maximum lifetime limit of $35,000 that can be moved into an individual’s Roth IRA. There’s also an annual limit. And this annual limit is the contribution limit, that for a Roth IRA, just the normal contribution, limit less any regular contributions that have been made.

For example, today the Roth IRA contribution limit is $6,500. So, if I were to contribute if I were doing this for myself, and were to contribute $3,000 as regular contributions, then the most I could transfer from a 529 plan to a Roth IRA is $3,500. So the most combined is that $6,500 amount.

And then next, the Roth IRA earner, or owner, must have earned income the year of the transfer. Meaning if you’re retired, you’re not going to be able to transfer money from a 529 plan into your Roth IRA because you don’t have earned income because you’re not working anymore.

When and How to Use the 529 to Roth IRA Transfer Option

So those are the six rules. Now if we look at when can we use these, what’s a good time to use these and how does this actually be applicable?

So, the first one is what the intended purpose of it is. And that is for allowing money that was earmarked for educational purposes to be repurposed as retirement savings in the event those funds are not needed for education after all. So, you save money for your child’s education. They don’t use all of their money in their 529 plan whether it maybe they got scholarships, maybe they didn’t go to college, something like that. Now you can repurpose those funds into your Roth IRA, and that’s the intended purpose. But there’s another strategy that could be used for, what I think of it as Legacy Planning.

And essentially what this is, it is giving you the ability to help fund your grandkid’s retirement. And how this would work is the time a child is born, say a grandchild is born, you make a meaningful contribution to a 529 plan for their benefit. And then later, you know 15 years later, the child turns 15, 16 years old, and the account funds in the 529 plan could begin to be moved to a Roth IRA for the child’s benefit. Again, following all of those rules and the amount to the maximum IRA contribution each year and so forth.

And so with proper planning and continued annual transfers, until that $ 35,000 lifetime transfer limit is reached, this child’s, your grandkid’s Roth IRA when they turned 65, that could easily approach about roughly a million dollars. And so, it’s giving you the opportunity to really pre-fund your grandkid’s retirement. Those what I would say would be the two main purposes or strategies to be able to use this for.

So the next thing we want to talk about that Carson will dive into is Required Minimum Distributions.

Required Minimum Distribution Age Changes (8:48)

Carson Johnson: Thank you, Alex. So I’m excited to be here with everybody to talk about these important changes as it pertains to retirement. And specifically, Required Minimum Distributions is probably what many of you have already heard about that was going to change. And so there’s actually two main things about the RMDs that I wanted to talk about.

So first, the biggest change to Required Minimum Distributions is that the age at which you begin Required Minimum Distributions is being pushed back. So to make it a little easier for everybody, I created a table that summarizes those changes that were included in The SECURE Act 2.0.

So for those that were born in 1950 or earlier or those who have already started Required Minimum Distributions, because they reached the age 72, the old RMD age, their age will be age 72. Their Required Minimum Distributions will continue on. SECURE Act 2.0 did not impact those that were already taking Required Minimum Distributions. Those that are born between 1951 and 1959 will begin taking Required Minimum Distributions at age 73. And those born in 1960 or later will start Required Minimum Distributions at age 75.

Now, this is pretty simple, but I want to make a couple of important points here. First, like I mentioned, those who have already turned 72 in 2022 or earlier will continue to take their RMDs as planned. The SECURE Act does not impact those. Those turning 72 in this year will not be required to take their RMDs until 2024. So that they won’t have to take that until they’re age 73. And lastly, those starting in 2033, all Required Minimum Distributions will begin at age 75. So, some really important changes there. It’s a phased-in RMD change.

Now, how does this impact retirement? How does it impact those that are preparing for retirement? There is just a few points I want to make here on this. First, those that are planning on and living on all the Required Minimum Distribution or all of their IRA income, will have a very little impact with this. They’re living off of all the Required Minimum Distribution whether they take that, whether their RMD starts at 72 or 75, they’re going to be living on all of it. It’s going to have very little impact to them.

The RMD age change did not impact Qualified Charitable Distributions, the age at which you can begin that. It’s the tax strategy where you can pull money out of your IRA retirement accounts tax-free, as long as it goes to a qualified charity. That still can continue at age 70 and a half. So, the RMD changes did not impact that.

Ultimately, the biggest thing that this does is that it gives you more time for planning. Particularly, the one strategy in mind that this could be very beneficial is doing Roth conversions where you’re taking money out of your IRA, converting it into a Roth IRA so that it’s now tax-free, and can grow tax-free. And I can see this being beneficial because those that are actively doing these Roth conversions and instead of, you know, having to do conversions until age 72 or 73 may now have more years, a few more years to age 75 or 73, depending on your situation, to do these additional conversions. And that way you can take advantage of those lower tax brackets and better planning there.

Surviving Spouse – Required Minimum Distributions (12:36)

The next big change related to Required Minimum Distributions is it impacts surviving spouses. So before The SECURE Act 2.0, generally surviving spouses, so if a spouse has passed away, the surviving spouse would take their IRA account as their own. And once they start Required Minimum Distributions, it would be based on their age. With The SECURE Act 2.0, you still have that option where you can take your IRA and your deceased spouse’s IRA and roll it over into your own IRA and take RMDs based on your age.

But you also have the option, the surviving spouse, to take Required Minimum Distributions based on your deceased spouse’s age. And so you’re probably thinking, why is that important? It’s mainly important for those that apply where the deceased spouse here is much younger than you. Think about it this way. If your deceased spouse is 65 and you are at RMD age at 73 let’s say, you have the ability to rather than taking your RMD right away because you’ve reached your Required Minimum Distribution age. You may be able to delay that until your deceased spouse would have started Required Minimum Distributions and therefore give you more time again for Roth conversions, or any other tax, or financial planning strategies that you’re working on.

And so, this is a small change, but I think it does make a big impact when it comes to planning. So that’s the two major changes related to the Required Minimum Distributions. I’ll let Alex take over here and talk about how Qualified Charitable Distributions have slightly changed.

Qualified Charitable Distribution Changes (14:24)

Alex Call: So Qualified Charitable Distributions as many of you know, it’s one of our favorite tax planning strategies. As Carson highlighted, it’s the ability to put money, it’s a tax-free transfer, from your IRA to a qualified charity. The big thing here is that there’s really only one change that has happened, and it’s for the better. The annual amount that you can contribute as a QCD is now going to increase with inflation starting in 2024. So, before it capped out at $100,000 and now that will be inflation adjusted.

And so what this means is that we can still do QCDs at age 70 and a half. They still satisfy your Required Minimum Distribution. You’re still only able to do it out of an IRA. You’re not able to do QCDs out of a 401k. And probably most importantly is that it doesn’t look like this strategy is going anywhere. They’ve just improved it and made it better.

Catch-Up Contributions in 401k or IRA (15:38)

The next thing I want to talk about are catch-up contributions. So catch-up contributions are when you turn 50 years old, you are able to contribute more to your 401k, or IRA, or retirement plan. Allowing you to catch up your retirement contributions.

And so, there’s really three main changes that have happened here. The first one is that it is now with your IRA, it is that the catch-up amount for your IRA has been stuck at $1,000 for about the past 10 years. Well, now that $1,000 is going to be inflation adjusted.

The next is there’s going to be an extra catch-up contribution for people between the ages of 60 and 63. The amount on this, we’re not quite sure on. The language used in The Act, it’s a little confusing. And so, we are still waiting for Congress to share some additional information or some clarity on that. But just know that when you turn 60 to 63, you’ll be able to contribute an extra catch-up during that time.

The last one is what I call “rothification” of these catch-up contributions. And what that means is, if you are making over $145,000, then any catch-up contribution to your 401k has to go into a Roth 401k. You’re not able to make a contribution to a traditional 401k.

And so you may be thinking, well what happens if my plan does not offer a Roth if there is no Roth option within my plan? Well, unfortunately, you’re not able to make catch-up contributions if that’s the case. With that said though, a lot of these minor changes that we talked about earlier in The Act go towards making Roth plans more accessible and encouraging more people to set up Roth plans.

So what I would expect and really assume is many if not all 40lks, simple IRAs, and so forth moving forward, will have Roth options. It might take a year or two for the plans to implement, but I would assume that most if not all of them will begin to have Roth options as well.

And now I’m going to turn it over to Carson just so he can highlight a couple of things that were not covered in the plan or in The Act.

What was not covered in The SECURE Act 2.0 (18:36)

Carson Johnson: Thank you, Alex. So when it comes to legislation that’s passed like this. A lot of times many retirees and many, many people are concerned about current tax or financial planning strategies going away or being limited. And so we thought this would be helpful to include a few items that were not impacted, not changed by The SECURE Act 2.0.

The first of which was the elimination or restricting of Roth IRAs or Roth 401ks, that nothing has changed regarding those accounts. And including as part of that, the use of backdoor Roth conversions or mega backdoor Roth contributions, which is a more, a little more complex tax strategies have also not been impacted. So in that, it includes normal Roth conversions. There aren’t any provisions in The SECURE Act 2.0 that addressed those changes.

The age at which you can begin Qualified Charitable Distributions has not changed like Alex has mentioned. It continues to be age 70 and a half. And so, even if your RMD age is pushed back to 75, you’ll still be able to take advantage of this awesome tax strategy once you’ve reached that age.

And then lastly is the clarification on what’s called the 10-year rule that was originally created by the first SECURE Act. And it really only applies to those that inherited IRA accounts from non-spouses. Meaning if you inherited an account from an aunt or an uncle that was already taking Required Minimum Distributions, it was on the original understanding that you had 10 years to be able to pull that money out from that account. You had 10 years to pull all that account money out of that account.

But there might be some additional clarification where you might have to take some Required Minimum Distributions each year within that 10-year window or some other changes that they’re going to come out with. So that clarification has not come out yet. We’re expecting an answer, some additional insight on that later this year or even next year, the beginning of next year. And so we’ll be keeping an eye on that.

But those were some of the four main things that people were worried about that was going to change with this bill that actually was not covered and not changed.

So in summary, like Alex talked about, there is a lot of different things that the bill covered. There was about 4,000 different pages that was included in this bill, but we wanted to cover the most important things that pertains to retirement. We talked about how the 529 transfer rule works to Roth IRAs and how that can be used as a legacy planning tool. We talked about Required Minimum Distributions and how those ages have been pushed back as well as the additional changes for surviving spouses. We talked about the inflation adjustments to Qualified Charitable Distributions and how they will adjust each year for inflation as well as the retirement catch-up contributions. And ultimately what was covered and what was not covered in The SECURE Act 2.0.

So we want to leave you with a couple of questions here today. First, think about how will these changes affect my plan and how can I best plan going forward.

For clients of Peterson Wealth Advisors, reach out to your advisor if you have questions. Be rest assured your advisor will bring these changes up to you if it applies to your situation. But during your spring meeting, feel free to reach out or sooner to see how these changes might apply.

And those that aren’t clients of Peterson Wealth, but would like to know how these changes might impact your retirement and your situation, feel free to reach out to our office and schedule a free consultation. We’d be happy to meet with you and at least point you in the right direction.

So now we’ll leave the rest of the time for questions. We may not be able to get to everybody’s question today. But if we don’t, feel free to send an email to info@petersonwealth.com. We will make sure that one of our Certified Financial Planners will reach out to you and answer your questions. But for now, we’ll leave the rest of the time for you and your questions that you may have.

SECURE Act 2.0 Question and Answer (23:01)

Daniel Ruske: Oh, I didn’t mean to interrupt. Sorry, Alex. I have a question here that Greg wants to know the answer to, are you ready for it?

Alex Call: Yeah.

Daniel Ruske: So it says, is it only the extra catch-up amount that has to go into a Roth, or is it all catch-up contributions now?

Alex Call: It’s a great question and I appreciate that. To get that clarification, it is all catch-up contributions. So once you turn 50, if you’re doing the catch-up, that has to go into a Roth 401k.

Daniel Ruske: Awesome, and then we had some other questions that I know Carson answered by typing, but I’ll read them here for the class. It says, any moved funds from a 401k to an IRA so one can do a Qualified Charitable Distribution?

Carson Johnson: Yeah, so on that one, the answer is yes. So it’s important to remember with this Qualified Charitable Distribution strategy that you can only do that from an IRA retirement account. So QCDs are not eligible and 401k’s or 403b’s or other retirement plans are only eligible from an IRA, and it’s actually pretty easy. If you roll over money from your 401k, you can actually set up an IRA account at Fidelity, Schwab, Vanguard, or any of the major companies. And just roll it over so that money goes from your 401k to your IRA and to be able to do that strategy.

Daniel Ruske: Awesome. A couple more coming in that I think are good. How do you differentiate between a catch-up contribution and a regular contribution?

Alex Call: That’s a great question. We don’t really know how that’s actually going to be applied and that will likely be something that the 401k plan administrator, the one who manages the 401k, will have options and be able to help you differentiate between those two. Between what’s a catch-up and what’s the regular.

Carson Johnson: Generally though, if you haven’t reached your 401k contribution limit, your first contributions will be the 401k or will be the regular contributions. And then once you’ve reached that limit, then that’s when the catch-up contributions kick into place. But every plan is different. So it’s up to like Alex said, the plan administrator there.

Alex Call: Yeah, but Carson just again to reiterate that it will be having the first money in will always be the regular, and then it’s the last money. So let’s say the regulars $20,000 for the year and the catch-up is $4,000. Those numbers aren’t accurate. But for the first $20,000 it is the regular. And then the last $4,000 that you put in would be catch up.

Daniel Ruske: Very good. So Kevin has a question, here’s the question. And make sure to sort this out here. It says, when RMD start, first day of the month following the month turning the required age, or is it April the year following the year you turn the required age, say 73? I’ve heard different definitions of what the actual RMD is required to start.

Carson Johnson: Yeah, great question there. So with Required Minimum Distributions, how it works is generally your first one is due by December of that current calendar year. However, there’s an exception for your very first one. So The SECURE Act did not change this at all actually. So if you’re taking your very first Required Minimum Distribution, let’s say you’re turning 72 in this year, 2023. With the change to The SECURE Act 2.0, you don’t have to take it this year, you can take it in 2024. But because it’s your first RMD, you actually have the ability to wait to take your RMD until April of 2025.

And you can do that if you want. But then the danger with that is that if you wait till April 2025, you’ll have to take that RMD plus the RMD that’s due for 2025 by December of that same year. So essentially, you’re going to have two RMDs due in 2025, in that particular example.

Daniel Ruske: Very good, so I’ll do one last one if that’s okay. So Dave wants to know, it says, a QCD transfers funds to a charity but has no tax advantage in the year the funds transfer such as a donation to a Donor Advised Fund. Is that true?

Alex Call: So with that, to answer the question David, you’re not able to, you don’t get the charitable contribution deduction in that year. But what you are able to do is that the money that you take out of the IRA, instead of you paying taxes on it and then donating it to charity, it just goes directly to charity.

And so it’s a tax-free transfer. So a lot of what we have found is that for about the majority of our clients, that the QCD is more advantageous at 70 and a half than a Donor Advised Fund. But there are always exceptions with that. And for your case, or for anybody else’s, your advisor will be able to let you know if it makes sense to do a Donor Advised Fund instead of a QCD. But for the majority of people, we have found that the QCD is more beneficial.

And then I was going to do, just really quick, we had somebody ask us if we can notify you through email when we find out the details on the amount allowed on the extra catch-up contributions for those between 60 and 63? Absolutely, we’ll go ahead with that. We’ll put a note in that and we’ll send out more of a mass email to our email list for that.

And then Carson, we had one more. So do the Roth earning limits apply to the catch-up contributions now that catch-up needs to go into a Roth 401k?

Carson Johnson: Yeah, so on that, how I understand it, and Alex you can correct me here if I’m wrong, but when it comes to the actual amount that’s contributed that’s counted towards the limit is just your contribution that you make. The earnings that are on those contributions are going to apply to the catch-up contribution there.

Oh, on that one, so that’s a great question. So Alex asked, or talked about a lot of the catch-up contributions for 401k plans, retirement plans, and how if you exceed a certain dollar amount that those catch-up contributions have to go into a Roth 401k. That does not apply to catch-up contributions for IRA accounts.

So you can still earn more than the $145,000 limit and your catch-up contributions, your additional amount that you can make to IRAs, does not have to be Roth it can still be traditional IRA.

Alex Call: That’s good. Well, that’s all the questions that we have. Thank you very much everybody for attending. If you could there will be a really brief survey. If you could fill that out as soon as we end this that would be great. We’re always looking for input of how we can improve, and probably more importantly what it is that you want to learn about so that we can get you the information that you’re wanting to know about.

So, thank you again. And Carson thank you so much for helping.

Carson Johnson: Yeah, you’re welcome. Thanks guys.

How do Rising Rates Impact My Lump-Sum Pension

Mark Whitaker: Well, I think we’re here on the hour. So, we’ll just go ahead and get started. Today, we’re having this Lunch and Learn webinar at Peterson Wealth Advisors. And what I’m hoping today, everyone who’s attending can get a lot of good information. If you are close to retirement and you have a pension or maybe your spouse has a pension, and you’re trying to decide how can I make the best decisions in regards to my pension as I’m preparing for retirement? I’m hoping that from this webinar, you’ll get some good ideas and kind of some high-level thoughts about things that you should consider.

With today’s presentation, I’m thinking that it’ll take maybe 10, 15 minutes for us to get through some of the content that we’ve prepared. And then what I’m really hoping is that we can spend the remainder of, you know for another 15 or 20 minutes or so going over some of your questions.

So, as far as answering and asking questions, within Zoom you can use the Q&A feature. And as you put questions in there, what Carson and I will do is we’ll review those throughout the presentation and we’ll do our best to answer questions that we think are broadly applicable to those who are attending and that we think will have the most value for everybody overall.

If there’s a question that’s maybe a little too specific and we can’t give it a, you know, maybe the answer that it deserves, then what I would prefer to do is maybe you know put a pin in it and come back to that question, maybe follow up with you after the webinar to give you a really good answer to your question.

Also, today since we’re keeping the webinar a little bit shorter about 30 minutes, even if there’s a really good question, but maybe it kind of takes us off topic a little bit, we might have to maybe address that question another time.

So, a couple of housekeeping items that I like to go over. At the end of this webinar, you’ll receive an email with some helpful information. So, if you’d like to contact us to get more information about figuring out what’s the right decision to do with your pension, you can use the link there to schedule a consultation with one of our Certified Financial Planners™.

If you haven’t had a chance to read Scott Peterson’s book, ‘Plan on Living’, the revised edition that recently came out, there’s a link there as well that you can order one or forward to a friend.

In chapter 5 of that book, Scott goes into detail about how to maximize your pension. And so, if you haven’t had a chance to read that, or you know someone that would be helpful for, I encourage you to go ahead and go ahead and request a complimentary copy of that book.

As well, I’d like to let you know that in the upcoming weeks, we’ll have an additional webinar. So in the survey that will also be in that email, if you have any suggestions for us as the topics that you’d like to hear in the future, we love to hear your feedback.

As far as these webinars go, we really want to share information that’s most helpful. So, your feedback is very appreciated.

Jumping into today’s webinar, maybe a quick introduction, my name is Mark Whitaker, a Certified Financial Planner™, and we really specialize in helping retirees maximize their retirement from an income tax saving standpoint so that they can focus on what matters most in retirement.

Joining me today is one of our lead advisors Carson Johnson. He’s also a Certified Financial Planner™ and he’s been with us for a number of years. Before joining Peterson Wealth Advisors, Carson worked for the high-net-worth retirement group of Fidelity Investments. And in that role gained a lot of experience with dealing with retirement plans from companies, pension plans, 401k plans. So, he brings us some additional experience that’s relevant to today’s conversation.

So with that, a quick overview of what we will be addressing. Really quickly, we’re going to touch on just an overview of pension plans and then we’re going to jump right into how do inflation and rising interest rates impact the value of your pension or lump-sum pension option.

And then aside from that, you know, we want to talk about some of the benefits to choosing a lump-sum pension over just a level monthly payment. But then also, really just take a very honest look at you know, maybe are there situations where that doesn’t make sense? And you know, how would you evaluate what’s the best option for yourself?

And then like I said, from there we’ll open it up to questions and hopefully have a good conversation.

Impact of Inflation and Interest Rates on Pensions

So with that, let’s go over pension options. So for today’s discussion as we talk about pensions, we’re going to be, I would say, most of what we’ve prepared today is most relevant to people who have a pension from a company.

So some of the information will be relevant if you have a government pension from your state, or from a school district, or from the federal government. But mostly I think this information will be most helpful if you have a pension from a company.

And to talk about pensions, I’m going to use the example here of our couple. And they’re going to, this is what we’re going to, we’ll use their, this kind of a backdrop to talk about, you know, how pensions work.

So for today’s webinar, we’ve got Sarah and Tom. And Sarah’s retired and she has the option, she can get a monthly payment of $2,000 a month for the rest of her life. It’s guaranteed, and with her pension, there’s no cost-of-living adjustments.

So she’s not getting, you know, like an annual adjustment for inflation like you might get while you’re working, or like you get with Social Security for example.

So what are some of the benefits and what are some of the things you should consider with a guaranteed monthly payment?

Well frankly, I think the number one benefit is that they’re guaranteed. Regardless of what’s happening in the economy or whatever’s happening in the market, you really don’t have to worry about that so much.

There are some little minor caveats there, but your income is guaranteed for the rest of your life no matter how long you live. And frankly, as far as longevity is concerned, I mean, I think that’s probably the biggest benefit.

Another, I’d say significant benefit of a guaranteed monthly pension is it protects. It can protect the retiree from making poor financial decisions from not having an investment plan and maybe squandering their retirement benefit through poor investment decisions. So, that’s another benefit of a guaranteed monthly pension.

Some of the downsides, if you have a pension that does not come with a cost-of-living adjustment, inflation has a significant impact on your pension and you really don’t have a way of keeping up with inflation.

If you’re interested in leaving money to your heirs, leaving money to your children, a monthly pension ends when you pass away. There’s other payment options that can extend for a period of time or for a spouse that often you can choose payment options with a survivor benefit, but you’re not really able to leave a legacy.

So if that’s something that’s important to you, whether it’s to help your children or grandchildren or to give to your church or to other charities, you really don’t have that option. I would say as well, if you choose a monthly pension, another downside here, not only are you unable to leave a legacy, but if you don’t live that long in retirement you may have worked for decades to earn a pension benefit.

And if you were to pass away, maybe five years into retirement, then you know that benefits gone, right? So that’s another potential downside to monthly payments.

And lastly, the loss of tax planning opportunities. It’s another significant thing to consider if you’re looking to choose a monthly payment.

So we’re going to jump right into what are the impacts of inflation on your monthly pension. And Carson, I’m going to go ahead and turn it over to you.

How Does Inflation Impact My Pension? (8:02)

Carson Johnson: Great, thanks Mark. So as we know when you enter retirement, there’s two main risks that retirees face, which one is related to investments which has to deal with more volatility or ups and downs in the market, but the other huge risk is inflation, which also applies to pensions.

As you can see from this chart, you can see if we have, for example, a pension that you start off with $1,520. And if you had the historical average inflation rate of 3% over a 25-year period of time, it decreases the purchasing power or the value of your pension to about $962, which is about a 34% haircut off of the original $1,520 the original pension that you started with.

So inflation is absolutely an important thing to consider when choosing a pension or even a lump-sum option, which we’ll talk about later today.

How do Rising Interest Rates Impact Lump-Sum Pensions? (9:06)

Mark Whitaker: Yeah absolutely, thank you Carson. And I think that’s pretty straightforward, it’s very intuitive. If I have a guaranteed monthly pension and every single year, you know even month to month like we’re experiencing right now, it costs more to buy something than every single year. That pension that I’m getting can buy less and less of the stuff that I want to get.

I had a bit of a surprise. My wife does most of the grocery shopping in our household and I went down to the grocery store to pick up some eggs. And on the way home we wanted to make some chocolate chip cookies and my wife said, “oh, but can you stop by and get some eggs?” Went to the grocery store and had some serious sticker shock remembering being able to get five dozen eggs before what that cost, maybe four or five six dollars and now looking and seeing it above $10 for eggs.

And so, you know with my young family we go through a lot of eggs. So with inflation, you can see that can have a significant impact on your quality of life if you don’t have a plan for that.

Understanding Rising Interest Rates and Lump-Sum Pensions

Now, let’s talk about rising interest rates. So with lump-sum pensions, or I should say with pension plans, you often have, I’m going to say kind of categorically two main kind of payment options.

One is to receive some guaranteed monthly income, and the second is you can trade in that guaranteed paycheck for the rest of your life, for a bucket of money, a lump-sum. Okay, so what’s interesting with pensions is that they guarantee the monthly income amount, but that lump-sum amount is actually variable, it can change and interest rates play a part in that.

So, the way that this is calculated is the company that you worked for will look at interest rates that are available in the market. And actually, the IRS determines what these rates are. They loosely approximate to the yield on a corporate bond.

And so, what happens is as interest rates go up, then the value of your lump-sum pension actually goes down. So for example, let’s say with Tom and Sarah, they have their guaranteed monthly income of $2,000 and they have the choice between retiring, let’s call it the end of 2022.

What we did is we went and looked at the IRS tables for the interest rates that are used to calculate lump-sum pensions. And based off of this number and some other factors, the lump-sum that they’d be entitled to would be about $424,000.

Now let’s say they waited to retire in 2023 and claimed the lump-sum pension at that time. Well because of the change in interest rates that have happened over the last year, the value of their lump-sum pension would have dropped by about $1,000,000, $99,000 and change actually. The reason for this, is that a retiree retiring in 2022, the interest rate that’s used to calculate that lump-sum pension is an interest rate from the previous year.

Usually, it’s an interest rate from 12 months ago or an average interest rate over the last 24 months. And because interest rates were so low in 2021 and 2020, that interest rate that’s used to calculate the lump-sum pension for a retiree today is a lower rate, meaning a larger lump-sum value.

Now, let’s say we fast forward to next year. If you were to retire next year, then those interest rates that are used are going to be based on interest rates that are happening right now. And as we’re all aware interest rates are much higher now than they were last year which would result in a smaller or lower value for your lump-sum pension.

This is essentially how an interest rate impacts your lump-sum pension value.

So, aside from inflation, or I should say aside from interest rate consideration, we want to just kind of briefly cover some of the advantages of lump-sum pensions in general.

Carson Johnson: Yeah, thank you Mark. So lump-sum pension, the decision to make or choose that lump-sum option is very important. There’s a lot of factors to think about when making that decision.

The first advantage of doing a lump-sum option is giving you the flexibility control over that money.

Like Mark said, I think he explained that perfectly, you know, if especially if in your situation you’re aware of that, of a health concern and where you might expect to pass away sooner than what an average of life expectancy. Then it allows you to roll that money over and you have those assets and it gives you the control and flexibility with those assets, what you want to do with them.

The second is the ability to keep up with inflation. Now, there are some pensions that do have a cost-of-living adjustment, and that does help with the inflation, that inflation concern. However, there are a lot of corporate pensions that don’t have those costs of living adjustments.

It doesn’t keep up with inflation and so by doing the lump-sum option you’re able to roll that money over and invest it in inflation, beating investments which we can talk about in more detail. Typically stocks have been the best investment that has been able to do that. And so it allows you to be able to control how inflation impacts you in retirement.

Tax Savings Opportunities with Lump-Sum Pensions

The third thing is saving in taxes. Now, this is a, there’s actually quite a few different ways this can impact you. But just some similar, some examples that you may want to think about.

Taxes, once you’ve chosen, let’s say you decide to go with the guaranteed monthly payment option, pension option. One of the things to keep in mind is once you select that option, there’s really for the most part no going back. You can’t change your pension in the future. Once you’ve selected it, that’s the option you’ve chosen.

And so you receive that monthly income, but what we’ve seen a lot of times in retirement is especially, and down the road where retirees may not be spending as much depending on the situation.

Now, there are health care costs that do tend to go up later on in retirement. But by choosing that lot, the monthly payment option, that is automatic income that shows up on your taxes whether you need that income or not.

And so if your situation changes where you want to maybe not take as much income, that’s not an option when you’re taking it as a monthly income stream.

Other tax strategies to consider, maybe doing Roth conversions where if you have the ability to take some of your IRA money, convert it which is just taxable to you, that might be limited too because you’re choosing a monthly income stream from your pension. Because you have that income, it’s going to be coming no matter what it might limit you to being able to do Roth conversions.

And then one last strategy to think about also is that once you turn age 70 and ½, there’s a strategy that you can do called Qualified Charitable Distributions, which allows you to pull money from an IRA and donate it to a qualified charity tax-free when it normally would have been a taxable event.

And so, you know by taking that monthly income from your pension that shows up on your taxes, that might limit the ability or the value ad that you get from doing those charitable donations as well, because you have this extra income that’s showing up on your taxes.

Any other thoughts there on taxes Mark, that you wanted to mention?

Mark Whitaker: No, I think you hit on the big ones and maybe I’ll just add one extra detail with, you mentioned making charitable contributions with your distributions from a, take a lump-sum pension, you can take money out of your retirement account without recognizing it as income.

There’s an additional tax benefit there where by doing a Qualified Charitable Distribution, it can also reduce the taxes that you pay on your Social Security benefit.

It can also impact your Medicare Part B premiums because it’s reducing the income number that’s used to calculate those other taxes you pay on those other benefits.

And so there’s this very high-level discussion about tax savings. But you’ll just have to take our word for it that the tax savings are significant with some of these strategies. So, you know, that’s all I would add to what you said Carson.

Carson Johnson: Perfect, and then the last thing which we’ve already hit on this is leaving a legacy. You know, there is some power to being able to have that control. Again kind of related to the first point, that control, that ability to control what your ultimate legacy that you leave behind for future heirs that follow you.

Should I Choose a Lump-Sum Pension? (18:37)

Mark Whitaker: Very good, well Carson, maybe we can jump now to just kind of generally, how do you know, maybe you can think of some of the reasons or some of the questions that a retiree might ask themselves whether or not they, let’s say if they have both options. They have a pension-guaranteed monthly income and they have a lump-sum option as well. What are some things that they can consider?

I’ve got some things that I want to talk about as far as having a clear retirement plan, but is there anything else that maybe you’d like to address?

Carson Johnson: Yeah, just I think there’s quite a few factors, but I think health status. Where are you with your current health or is there a history of family health concerns that runs in your family because that can be a determining factor whether you take the lump-sum option or not.

I think taxes, where are you going to fit in a tax bracket? Do you feel like you’ll need all the income from the pension to be able to manage your tax situation?

And then obviously, the current interest rate environment.

Mark Whitaker: Yeah, absolutely, thank you Carson. So, going off of what Carson talked about a minute ago with generally the potential benefits that you can have as a retiree by choosing a lump-sum pension.

There’s what’s implied in that, is that you have a plan. Okay, so we’re talking about potentially saving, you know, using tax planning strategies. We’re talking about leaving a legacy. The potential to earn a rate of return and in order to have an inflation-adjusted income, an income that increases over time.

The benefit potentially of having control and flexibility to decide when and how much income you take as your circumstances change over the course of your retirement.

What’s implied in that is that you actually have a plan, right?

And so, I guess I could just say if you don’t have a plan then taking a lump-sum is probably not a good idea, right? One of the benefits of a guaranteed monthly pension is it can protect you from making a poor decision like we talked about earlier.

So, without a plan, those potential benefits really go away.

So what I’ll go over here briefly is the framework that we use for retirees to help them really capture those benefits that we’ve discussed as they relate to a lump-sum pension.

And if this is a new concept or this is something that doesn’t look familiar to you, again I’ll reference you to our website. We’ve got some videos, other helpful information and you can of course schedule a consultation with a financial planner or request a copy of Scott Peterson’s book where he goes over this, our methodology in detail.

On the screen here what we have, this is what we call the Perennial Income Model. And really what this shows is how we manage investments to make sure that you have an income stream that adjusts for inflation over time that provides predictable and stable income that gives you the ability to have a legacy for your family or for your church or for other charities.

And also provides a framework so that we can do proper tax planning. You can map out your income over time and start looking at strategies that might make sense for your situation.

Investment Strategy

So, for this income plan here, what we’re showing is we have a retired couple let’s say they have a retirement portfolio of $1,000,000 and we’ll say that part of that is made up from, they were able to take the lump-sum pension.

So really what the objective here is to invest this to provide inflation-adjusted income over time. So the way that we do that is we look at various investment portfolios, each one of them designated for five years of a retiree’s lifetime. Each one of these portfolios is invested differently with a different planned rate of return. Income that’s going to be used or taken out early in retirement we use very conservative rates of return.

You can see here that 1% certainly isn’t keeping up with inflation, but that’s what we have to do to protect income that’s coming out in the next couple of months when someone’s about to retire.

But money that won’t be used for decades, we can take advantage of investing in equities, investing in the market, investing in real estate, and get that growth that’s needed in order to provide inflation-adjusted income and have the ability or the potential to leave a legacy for your family.

So, you can see that each month we’re sending out income and every fifth year you can see there’s an increase here in the amount of monthly income.

Now, you’d think that by sending in all this monthly income that the portfolio would be dropping significantly over time. But you can see that because the latter segments are invested in more growth-oriented investments. The portfolio has the potential and the ability to maintain its value over time and it’s really the objective.

So you can see that investing the initial portfolio of $1,000,000, the objective here is at the end of that 30 year, 25 year, that’s what this plan is, to still have $1,000,000.

But then also to have taken out about $1,500,000 in income over time. So maybe just to summarize this, in order to capture the benefits of a lump-sum pension, you really have to have a plan. You have to have a structure and a methodology that’s not just based on using your gut to decide how to invest. It really has to have a structure.

So just maybe, just to sum up, we’ve talked about pensions. We’ve talked about the impact of inflation and interest rates and some of the potential advantages of taking a lump-sum. But really, the key to capturing those benefits is to have a plan. Because without a plan, it frankly would be better to just take that guaranteed monthly income to avoid really making a poor financial decision with your with your lump-sum.

So that’s our presentation in a nutshell. We’ll open it up here for the next five or 10 minutes. We’ll go over some questions and we’ve had a few that have come in. But if you have a question about anything we’ve discussed today, feel free to use the question-and-answer feature and we’ll go from there.

Lump-Sum Pension Question and Answer (25:20)

Carson Johnson: Yeah, and maybe to get us started Mark while it looks like some are typing their questions out, I had a really great question from somebody, that if Mark, if you want to give your thoughts on this especially.

There’s some pension options that do partial lump-sums rather than a full lump-sum especially here in Utah. I know that Utah Retirement Systems is a common one that has the partial lump-sum option. So how does the interest rate environment affect the partial lump-sum option? And maybe you can, if you have any thoughts there Mark.

Mark Whitaker: I do, yeah great question. So, specifically where I’ve seen this, it’s actually a feature of some corporate plans as well. Well, you’re right, I see it a lot here in the state of Utah with the Utah Retirement Systems pension plan.

And with that plan, you can take a 12-month partial lump-sum or a 24-month partial lump-sum. And in short, the way that I’d say is that rising interest rates, my thought would be that yes, it would impact that lump-sum amount. It wouldn’t impact the payment amount.

But for example, if you were to estimate your retirement based on interest rates over the last year, then you could have your monthly income and a partial lump-sum that would be larger. And then the same given, all else being equal, that same retirement the next year that monthly income number would be the same. But that partial lump-sum would be lower because prevailing interest rates would have gone up by then. So those are my thoughts there.

Carson Johnson: Perfect, another question that came in was if I pass away does my pension pass on to my heirs? And if I may Mark, I’ll take that one.

So pensions have a variety of different payment options that you can choose from. The standard, typically what they call is the standard benefit, is a benefit that will last through your, you as the pension, the participant that is receiving the pension, will receive through the course of their lifetime.

But there are also other payment options that are available. So survivor payment options, which you can, sometimes they give you the option to have 100% of your benefit to continue on to your spouse or to another person.

And what it essentially does to your payment, or your benefit pension, is that it reduces your initial starting value of your pension because the pension plan knows that eventually, 100% of that will go to a spouse or an heir.

There’s also other payment options where 50% will pass on to your spouse or heir, 75%. So reviewing your different payment options is absolutely important when to start choosing your pension.

Mark Whitaker: Absolutely, yeah, I think that’s maybe the number one consideration is thinking about your family circumstances.

I have a good question that came in here from one of our attendees about, I think going over to the, I’m going to go back on the slide and we’re going to look at this income plan chart.

So, the question generally is, okay, so at the end of this retirement plan, it’s assumed you would have money invested aggressively. So what happens with a retirement income plan and when you go through a year like we’re experiencing right now in 2022 with the stock market being down, plus or minus 20% over the first half of the year, how would that affect somebody’s lump-sum pension?

And maybe I’ll just jump in and then Carson if you have any thoughts to add here, but you know, it’s almost cliche the saying but there’s no free lunch in investing right?

There’s nothing, you can’t just, if anybody promises you can make higher returns without any risk, then you should probably run away because that’s just how it works.

So, how does that work according to this plan? So, retirees kind of have these two competing needs, investment needs and retirement stability of cash flow for monthly income.

But also, the need to grow your portfolio over time so you can have ever greater monthly income to account for inflation. So, the way that we do this with investing is money that is set aside for the early years of retirement is invested very conservatively, right?

So, for example in the year like this, we have the stock market dropping down 20%. Well, you know, so what’s happening is, clients that have money invested in these latter segments.

It’s getting hit, it’s down 20%, 30% or you know, let’s take the financial crisis, you know down 30%, 40%. These portfolios are invested in the market and they’re down.

But that is the price that has to be paid in order to have those high returns over time that have the chance of overcoming inflation.

It doesn’t impact monthly cash flow because the money that’s invested that’s paying out today is invested conservatively. So, it’s a great question and really, I guess that’s the point of having a plan is you have to be invested in order to overcome inflation, but you have to have a plan to make sure that by so doing you don’t disrupt your current cash flow and retirement. Good question.

Carson Johnson: Perfect.

Mark Whitaker: This is a good follow-up question with this is a great question. So by year 21, now all of your money is invested aggressively. I’ll just put a pin in this, in the book we talk about in detail our process of managing this through time, and in Plan on Living, we discuss the principle of harvesting. So adjusting that risk over time through once you’ve hit your goals for a particular segment.

And in this explanation, this answer doesn’t do the question justice, but I’d encourage you to go to our website. There’s some videos, or request a copy of Plan on Living and that’ll give you a very detailed answer. Great questions.

Carson Johnson: Perfect, another great question Mark here, is the lump-sum amount essentially the net present value of monthly payments based on some actuarial estimate of life expectancy?

Mark Whitaker: I love it, the short answer is yes. And that’s why, so NPV, Net Present Value, you’re saying okay, what is the lump-sum that I would need today to provide a cash flow over time based on some variables. You know a certain duration of time that would be an important variable. The interest rates an important variable.

And so what companies do is, the IRS publishes these monthly interest rates. And so what your company does then is they look at those stated interest rates published by the IRS and then they calculate the life expectancy of the plan participant and so depending then on your gender, man or woman, that has an impact, how old you are when you retire, that has an impact.

And that overlaid with your monthly benefit guaranteed amount and the interest rate that’s available based on the IRS publications, that will determine that Net Present Value or that lump-sum amount. Yep, great question, a little more technical, but those are fun too.

Carson Johnson: Perfect, and then this one’s a little more related to Roth contributions, but the question is, I haven’t retired yet, but my tax person says I should put about $7,000 a year into a Roth IRA. Do you know why they might be saying that?

And if it’s okay Mark, I’ll hop on there and then you can jump in. So one of the biggest things with Roth IRAs is by contributing now and allowing that money to grow over time is tax-free.

And so time is your best friend. And so one of the things I could see your tax person saying is let’s get money into that now so that it grows tax-free over the course of your retirement.

Now, I think there’s other factors to consider there. One may be are you maxing out your current retirement plan contributions, whether to a 401k where you’re getting a match.

Some other consideration may be where are you at in the tax bracket because there might be some benefits and in doing pre-tax dollar contributions, depending on where you fall in the tax bracket rather than contributing to a Roth IRA.

And so there’s a few different factors to consider. We’d happy to go over your options with you, but that’s one big reason why Roth IRAs are advantageous.

Mark Whitaker: Yeah, great answer there. Maybe just touching on some other tax strategies as they relate to Roth accounts. Roth accounts are, they’re very powerful and a great thing to have when you’re in retirement.

One of the benefits, or I should say your tax person saying, should I or should I not make contributions to a Roth IRA, really to do that question justice, if you want the mathematical correct answer, really what has to be done is to look at your income today to calculate your taxes and then to map out your retirement income and compare where your tax brackets will be here, you know at the current state, and in the future.

And then that’s how you can get maybe a more precise answer as to whether or not you should make a Roth contribution or make pre-tax contributions.

And there’s a little more nuance to that because in retirement. You have things like Social Security income that’s taxed a little bit differently. You also have, and it’s not just black and white, if you have other portfolio sources, then that can determine what your actual taxable income is.

And so really to do a good job knowing whether or not you make a Roth contribution or not, you really have to lay that out and have that retirement plan. I guess I’ll say one of the things regarding Roth accounts as they relate to lump-sum pensions.

With a lump-sum pension, you have the ability to do what Carson mentioned earlier, which is doing a Roth conversion. And so let’s say that while you’re working, you’re in a very high tax bracket. Well in that case it would make sense to make contributions to your retirement plan on a pre-tax basis and get that tax deduction.

And then let’s say you shift into retirement and you can live off of other savings for a time.

We have a lot of clients that serve, that do missionary service in their retirement, and maybe don’t need as much income during that time. And those can be times when you can strategically do Roth conversion, meaning taking money out of pre-tax accounts and moving them into Roth accounts.

And because you need less income, you can do that at a lower tax rate. So there’s a lot of planning that can happen here and good stuff.

We’ve got maybe, let’s do one more question and we’ll call it quits for today and go from there.

Carson Johnson: Perfect, last question here, I think it’s really great too.

If I take a lump-sum option, what happens at that point? Does it go into a tax-deferred plan, the Roth IRA? How does that all work?

Mark Whitaker: Yeah, maybe I’ll just answer this briefly. When you take a lump-sum pension option, the standard answer is that the lump-sum amount will go from your defined benefit pension plan over into a traditional IRA account.

The reason for that is that it’s going from kind of a tax-sheltered pre-tax environment into another pre-tax-sheltered environment. So with that lump-sum transfer or that lump-sum rollover, there’s no taxes due at that time.

Now, if you wanted, you know from there you can convert to Roth and that sort of thing. But that’s not the default answer.

So, Carson, I think we’ll leave it there. We’re coming up on about 12, almost on 12:40. There will be a recording available for this webinar and that’ll come out in an email after today.

Like I said, there will be links to request a copy of Plan on Living or to schedule a time with us if you have questions and would like to continue the conversation.

We appreciate your feedback. It’s been a lot of fun to have this webinar with you all today. Let us know if there’s anything else that would be helpful you’d like to have us discuss in the future and have a great day.