FRANKLIN: RETIREMENT ESSENTIALS TRANSCRIPT

CONSUELO MACK: This week on WEALTHTRACK, the new retirement pyramid that’s built to last. Retirement and Social Security guide Mary Beth Franklin takes us on a tour of plans that will last through the ages… next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. No question about it, even the “me generation” baby boomers have to face the facts. They are becoming senior citizens. And that transition is bringing another major reality shift. Increasing numbers of boomers are moving from the accumulation phase of their savings to what’s known as the distribution phase. They have to spend what they have saved, earned and possibly inherited to fund their retirement.

It’s a daunting challenge. There are an estimated 76 million baby boomers in the U.S., born between 1946 and 1964 and now ranging between 69 and 51 years of age. They represent about 25% of the U.S. population and about 68% of them are still in the work forces.

And according to a Gallup poll many of them are reluctant to retire. Nearly half of boomers still working say they don’t expect to retire until they are 66 or older. That compares to the average retirement age of 61 among current retirees. And one in ten boomers predicts they will never retire. Concerns about money play a significant role in boomer’s plans to postpone retirement.

No matter what your personal goals are this new phase requires new thinking and planning. There are few more qualified to advise us than this week’s guest, whom we are delighted to have as a WEALTHTRACK regular. She is Mary Beth Franklin, now a Contributing Editor at InvestmentNews, a leading publication for financial advisors. She is a Certified Financial Planner, an award winning personal finance journalist who has been covering retirement issues for most of her career and is a recognized expert on Social Security. Her latest book is “Maximizing Your Social Security Retirement Benefits” which is a recommendation on WEALTHTRACK’s Bookshelf.

I started the conversation with a basic question. What is the first thing we need to do as we approach retirement?

MARY BETH FRANKLIN: When people are saving for retirement they tend to use these broad rules of thumb. “Gee, I should save 10 or 15 percent of my gross income,” but when you get to the point you’re going to start tapping those investments for income, you need to know what your expenses are and what your sources of income are and how they match up. You know many of us can go through our entire lives with never creating a budget, but at least having a starting point, a plan for retirement is critical. What are your fixed costs in retirement? What are your discretionary costs? Do I have guaranteed or predictable sources of income to at least cover those fixed costs, whether it’s taxes or mortgage, food, insurance. Get those big-ticket items covered, and then the rest of your investments can have a little more flexibility because if you needed to cut back on those discretionary items you could.

CONSUELO MACK: Here we’ve gone through this phase hopefully of saving for retirement and investing, and now it’s all about distributing. It’s called the distribution phase, and it really is all about you know, looking at your investments and not necessarily how’s the portfolio growing every year or what my performance is versus the market, but it really is what kind of income it can generate, right? So that’s the whole new ball game.

MARY BETH FRANKLIN: Exactly, and it’s putting the retirement income puzzle pieces together. We used to talk about the old reliable three-legged stool of retirement security. It was pensions, personal savings and Social Security. Well, pensions unfortunately are history for a lot of people.

CONSUELO MACK: Most people. Right.

MARY BETH FRANKLIN: Personal savings may be inadequate for a lot of people, and Social Security, while extremely important for so many Americans, has some long-term financing problems. So we’ve gone from this nice, solid, three-legged stool to essentially a pogo stick. That’s just not going to work for most people going forward.

CONSUELO MACK: So what’s the pogo stick?

MARY BETH FRANKLIN: Well, the pogo stick is Social Security that’s a little wobbly. So now we need a new image, and I tell people let’s think of retirement security like a pyramid, and the base of that pyramid for most people would be Social Security, and you layer on top of that retirement savings, whether it’s your 401(k), your IRA, your 457, et cetera. On top of that for a lot of people it’s going to be home equity, whether it’s paying off your house and living mortgage free or selling the big house, buying something smaller and banking the difference or maybe even a reverse mortgage. You layer on top of that. For some people it’s continued employment. We’re going to live a very long time. Does it necessarily make sense for everybody to retire at 65 and live 30 more years with no work? Maybe there’s consulting work. There could be part time or seasonal work, and then at the very top of that pyramid, the pinnacle is everything else. It’s your investments. It might be an inheritance. It might be rental income from a rental property. But now’s the hard part. You’ve got this pyramid, and everybody’s pyramid is going to look a little bit different, and then a financial advisor is going to ask you the important question. Are you healthy? Are you married? Are you single?

CONSUELO MACK: Or they should ask you these important questions.

MARY BETH FRANKLIN: They should ask you these questions. Are you supporting an elderly parent? Do you have a boomerang kid in your basement? The answers to all those questions are going to be the result that will create your unique retirement income plan, and it’s going to take a lot of work and, many cases, a lot of help.

CONSUELO MACK: And I was going to say, so it sounds like it’s complicated. How important is getting financial advice?

MARY BETH FRANKLIN: I think it’s critical and it’s also important that you interview several financial planners because this is new to the financial advice community as well. A decade ago they were still all about investment advice, accumulating assets.

CONSUELO MACK: Right, a lot of them were from broker-dealers.

MARY BETH FRANKLIN: Exactly.

CONSUELO MACK: And so they basically ran your investment portfolio.

MARY BETH FRANKLIN: And this is a whole new ball game.

CONSUELO MACK: Right. Now it’s turning that investment portfolio into an income stream that suits your specific individual needs and that’s a tougher problem.

MARY BETH FRANKLIN: How do you pull these other levels like Social Security? When should you claim that? What’s your impact on Medicare? Do you have a retiree health benefit? These are more holistic financial planning questions that are going to be really important to retirees.

CONSUELO MACK: Let’s talk about Social Security which you have turned into a full-time career industry. You’re very much in demand all over the country. And you have some of the magic strategies to maximize Social Security benefits. What are some of the magic strategies?

MARY BETH FRANKLIN: Well, there’s essentially two magic strategies. The first important thing is 66 is the magic age. That means 66 is the current full retirement age benefit. You can claim Social Security benefits before 66, but you can’t do anything fancy. If you want to maximize your benefits with some of these magic strategies, you must wait until 66 to claim. The first magic strategy is called file and suspend. What that says to Social Security is now that I’m full retirement age I want to file for my benefits but hold on.

CONSUELO MACK: Now that I’m 66, full retirement age.

MARY BETH FRANKLIN: Now that I’m 66 I’m filing for my benefits but don’t pay me. Now why would you file and not want your benefits? Well, it’s because for every year I postpone collecting them, they’re going to grow by an extra eight percent per year up until age 70. So that means if I wait until 70 instead of getting 100 percent of my benefits at 66, I get 132 percent. That’s huge.

CONSUELO MACK: Eight percent for four years. And why do you have to file? Why not just wait until 70 to file?

MARY BETH FRANKLIN: Great point. If I do nothing and just collect at 70, I’m still going to get the automatic eight percent a year, but I might want to file and suspend for three reasons. One, I might have a spouse who is entitled to spousal benefits. A spousal benefit is worth half of my benefit, but I have to do something to trigger that spousal benefit. I either have to claim my own benefits or file and suspend. Or as I’m seeing increasingly, I’m seeing older parents in second or third marriages with young families. What so many people do not realize is if a parent is collecting a Social Security benefit and you have a minor dependent child under age 18 in your household …

CONSUELO MACK: It doesn’t have to be your own child. It could be a grandchild or … ?

MARY BETH FRANKLIN: Well, in most cases it’s your biological child, your stepchild.

CONSUELO MACK: Stepchild.

MARY BETH FRANKLIN: Your adopted child and, in rare circumstances, it could be a grandchild, but the idea is if you are collecting a Social Security benefit, the child is entitled to a benefit worth 50 percent of your amount.

CONSUELO MACK: Wow.

MARY BETH FRANKLIN: Which is huge. So let’s say you’re a 66-year-old father who has remarried and now you have a two-year-old. You know you should probably delay until 70 because you’re paying for college in 16 years. So you might want to file and suspend at 66 so your own benefits keep growing but you have now triggered a benefit for your minor child. I like to call that the Viagra College fund. You put that money in a 529 plan and you’ve paid for Harvard. The third reason you might want to file and suspend … and this works particularly well for single people. When you file and suspend, you’ve actually filed for your benefits even though you’re not collecting them. So it acts as an insurance policy. Imagine this. I’m single. I’m 66. I file and suspend. Two years later I’m 68 years old, and I get a terminal medical diagnosis. Well, now longevity is the least of my concerns.

I’m not married so there’s no survivor benefit because there’s no surviving spouse. I could say, because I filed and suspended, “I’ve changed my mind. Please pay me in a lump sum my two years of suspended benefits instead of getting that eight percent delayed retirement credit and going forward. Pay me as if I claimed at 66.” So say I was entitled to a benefit of $2,000 a month. That’s $24,000 a year. I file and suspend at 66. I change my mind at 68. Please pay me $48,000 in a lump sum. That’s a pretty magnificent strategy for a single person.

CONSUELO MACK: It sure is, and you couldn’t get that if you hadn’t filed and suspended at 66?

MARY BETH FRANKLIN: That’s correct because under normal circumstances the maximum retroactive lump sum benefit you can get from Social Security is six months, and it cannot start before your full retirement age of 66, but in this odd case Social Security doesn’t consider this a retroactive benefit because you have filed for benefits even though you didn’t collect them. So you can request a lump sum of your suspended benefits.

CONSUELO MACK: What are some of the biggest mistakes that people make?

MARY BETH FRANKLIN: Oh, I think a lot of people claim at 62 just because they can, perhaps not realizing that their benefits are permanently reduced by 25 percent or more for the rest of their lives, and they also don’t realize that if you claim benefits before your full retirement age and you continue to work and you have earnings from a job, you’re going to give back some of your Social Security benefits, some or even all of them if you earn too much money, and this year too much money is defined as $15,720 a year.

CONSUELO MACK: Wow.

MARY BETH FRANKLIN: Now, they’re not gone forever. If you lose benefits to this earnings cap, they will be restored once you get to your full retirement age, but at the same time you’ve also forfeited the opportunity to engage in these creative claiming strategies. So my number one rule to most people is, if you plan to keep working beyond age 62, don’t claim early. Wait until your magic age of 66. Now there is one other strategy. It works for married couples and in some cases divorced couples. It’s called restricting your claim to spousal benefits. Now this assumes your spouse has already claimed Social Security. You are now 66. You can say to Social Security, “Not that I am full retirement age, I want to restrict my claim to spousal benefits. Don’t pay me mine. Let them keep growing at eight percent a year. Pay me half of my spouse’s benefits.” This is really valuable because for most people whose own benefits are larger than a spousal benefit goes completely to waste. They never get that spousal benefit, but if they use this strategy, they could collect a spousal benefit for up to four years and then at 70 switch to their own benefit that’s now worth 132 percent of their full retirement age amount.

CONSUELO MACK: That is huge then. It really is. Now one of the things as well that I’ve been reading about is that the role of Medicare and paying for Medicare is going to be more and more onerous as time goes on, and that as a matter of fact I read an article I think that you sent me that health care costs will devour Social Security. That’s what the headline was. What’s going on?

MARY BETH FRANKLIN: Well, again a lot of people don’t realize that their Medicare Part B premium which pays for outpatient services is deducted directly from your Social Security check. What people also don’t realize is those Medicare premiums are means tested. In other words, depending on your income, you may be paying more for Medicare Part B premiums for the exact same service, and in some cases you may be paying a whole lot more. Most people are now paying roughly $105 a month, but depending on your income you might be paying $335 per month per person for a married couple.

CONSUELO MACK: And that comes out of your Social Security check.

MARY BETH FRANKLIN: And that comes out of your Social Security check, and I will often get questions from readers saying, “I don’t understand. Why did my Social Security check go down?”

CONSUELO MACK: Go down.

MARY BETH FRANKLIN: And I’d say, “Well, did you collect before full retirement age and you’re working?” “No, no. I’m 66 and my check went down.” Then I’ll say, “Did you income go up?” “Oh, yeah. I sold a vacation house,” or “I liquidated a stock portfolio.” Aha. That’s what happened. Your modified adjusted gross income increased and consequently the amount you’re paying for Medicare went up as well, and it’s been deducted from your Social Security check. There are currently five income brackets that trigger higher Medicare benefits. Starting in 2018 there will still be five brackets, but they’re going to kick in at lower income levels which means more people will be paying higher Medicare premiums. What they don’t realize is it’s going to be based on their 2016 tax return. So this is a time now for people to be looking at their sources of income, and is there anything they can do to move some of their income into a tax-free column that might hold down future Medicare premiums.

CONSUELO MACK: So that’s really important, and we should start doing it now because it’s going to be based on the 2016 tax returns. Right?

MARY BETH FRANKLIN: Right, and it will trigger a higher premium 2018. Now the one thing to keep in mind, this can change on a year-by-year basis, so if you get …

CONSUELO MACK: You mean Congress could change it or …

MARY BETH FRANKLIN: No, that your tax situation and what you pay for Medicare could change on an annual basis. Maybe you have a big income hit one year where your income goes up. Then you’re going to pay a higher Medicare premium, but that doesn’t go on forever if your income goes back to its normal levels.

CONSUELO MACK: I see, and so they’ll keep current with whatever your tax returns are.

MARY BETH FRANKLIN: Exactly.

CONSUELO MACK: So therefore, how do we maximize our Medicare benefits and reduce as much as we can the costs of Medicare?

MARY BETH FRANKLIN: Well, this is where …

CONSUELO MACK: Are there some general rules there as well?

MARY BETH FRANKLIN: … where Medicare and Social Security are so linked at this point, and it all comes down to how do we reduce our taxable retirement income. What’s very interesting in this modified adjusted gross income calculation that triggers Medicare premium, everything counts. Your entire adjusted gross income from your tax return plus any tax-free interest like you might earn from a municipal bond.

CONSUELO MACK: Wow. They’re including tax-free interest.

MARY BETH FRANKLIN: That’s with the modified adjusted gross income, MAGI. It is not the gift of the Magi I guarantee, but there are five sources of retirement income that don’t count in that calculation: distributions from a Roth IRA, distributions from a Health Savings Account, annuities in a non-retirement plan, cash value life insurance and reverse mortgages. I think these tools are going to be utilized more frequently going forward. Another thing is maybe this is a good reason we should think about converting some of our traditional IRAs to a Roth IRA.

CONSUELO MACK: Roth.

MARY BETH FRANKLIN: Now people don’t like the idea of having to pay the tax on the conversion, but don’t do it all at once. Take a little bit each year. Fill up your tax bracket. If you’re in the 25 percent federal income tax bracket and you know there’s five or ten thousand dollars before you hit the top, convert that amount to a Roth IRA that year. You’re still in the same tax bracket, and do it each year and then you will be building up these tax-free sources of income in retirement which means it will hold down your income tax bill and it may also hold down your Medicare premiums.

CONSUELO MACK: So smart, Mary Beth.

MARY BETH FRANKLIN: I learn from the best.

CONSUELO MACK: Great, great tips. All right, let’s talk about other income sources as well. You mentioned reverse mortgages. You mentioned your mortgages. At one point those were definitely a no-no.

MARY BETH FRANKLIN: They were definitely a no-no.

CONSUELO MACK: Make more sense now?

MARY BETH FRANKLIN: They’re probably not the smart choice for your first move, but I think for certain people who are truly house-rich and cash-poor, this can be a good alternative for them. The concern I have is people sometimes get them at too young of an age. You can qualify for a reverse mortgage as early as age 62, but you probably don’t want to be tapping that money then. Again, people’s major concern of retirement is running out of money. Wouldn’t you rather have that be an ace in the hole in your later years in retirement in case you needed it? I think the other thing is we always talk about diversifying our investments as we’re accumulating them, but it’s a whole different mindset to how do we take this lump sum and turn it into a stream of income? Now I know annuities get a really bad rap, and there are some bad ones and some expensive ones, but if your purpose is I want to take some of my assets and create a guaranteed stream of income, there are good ways to do it, and one of the popular ways now is called a Deferred Income Annuity. It’s very straightforward. It’s like buying yourself a personal pension. Take a chunk of money maybe at age 55 and say starting at age 65 or 70 I want an income stream.

CONSUELO MACK: So you can determine when the income stream starts.

MARY BETH FRANKLIN: Exactly.

CONSUELO MACK: All right, and so that’s different than longevity insurance. Right? Longevity insurance starts paying out at 80 or 85? Is that right?

MARY BETH FRANKLIN: Well, longevity insurance is an extreme example of this.

CONSUELO MACK: Of Deferred Income Annuity.

MARY BETH FRANKLIN: Same idea that you invest a chunk of money and it pays off at a later date, but in the case of pure longevity insurance, it usually is much later, say 85, and if you die before 85 …

CONSUELO MACK: You lose it.

MARY BETH FRANKLIN: You and your heirs get nothing. It is the pure roulette wheel of insurance, but if you do live until 85 or beyond if that’s your start date, it’s a big payoff, and this is where we need to find new tools because so many of us are going to be living a lot longer.

CONSUELO MACK: A lot longer.

MARY BETH FRANKLIN: And since we’ve lost these traditional pensions and for many people the only guaranteed form of income is Social Security, maybe you might want to take some of your other assets and add to that guaranteed pot, but having said that, you don’t want to tie up all your money in guarantees. You’re going to be living a long time in retirement. You’re still a long-term investor. You want a chunk of your money still invested in stocks, and in fact there’s some very controversial research that says we always thought traditionally that the older we got, the more we should reduce our exposure to stocks.

CONSUELO MACK: Stock exposure and increase our bond exposure.

MARY BETH FRANKLIN: But now there is a certain theory that if you have your fixed costs in retirement covered with things like an annuity and Social Security or maybe a pension, you might want to be more aggressive in the stock because it’s representing a smaller percentage of your portfolio but it has a chance to win big over the long term.

CONSUELO MACK: An investment for a long-term diversified portfolio. What’s the one thing that we should do in a long-term diversified portfolio do you think?

MARY BETH FRANKLIN: Well, I’m going to say Social Security is like a personal pension. So I don’t care what decision people make. I just want them to make an informed decision, and if they’re married the one thing they should think about is, how do I maximize the survivor benefit for this spouse I leave behind? And the best way to do that is to make sure the higher-earning spouse, the one with the bigger benefit waits as long as possible to collect.

CONSUELO MACK: All right, and you’ve got to start collecting at 70.

MARY BETH FRANKLIN: Right. It makes no sense to delay beyond that because these very generous delayed retirement credits cease at age 70.

CONSUELO MACK: Right, I guess the final thing is as far as your financial advisor, the person who has been advising you in your investments. How equipped are financial advisors now to advise us on this distribution phase?

MARY BETH FRANKLIN: Well, there’s a small but growing segment of the financial advice community that are really becoming retirement income specialists, and over the past decade we could see that these were people that were conversant in things like what’s a good annuity perhaps or what kind of insurance do you need, or even how and when to claim Social Security benefits, but now we are going to see as Baby Boomers will be living for a long time in retirement, they’re going to be looking for additional references. Gee, Mom needs to go into a continuing care retirement community. Can you make a recommendation?

CONSUELO MACK: All right. We’ll leave it there. This is going to be an ongoing conversation with your, Mary Beth Franklin. So thanks so much for joining us once again on WEALTHTRACK.

MARY BETH FRANKLIN: Thank you.

At the close of every WEALTHTRACK we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is consult a financial planner at least once about your retirement plans. As Franklin and others have explained numerous times on WEALTHTRACK retirement is a complex process requiring decisions unique to you and your family that go far beyond an investment portfolio.

You can do it in person or online. You just want to make sure the financial planner is qualified to advise you on the important broader issues. Here are some recommended credentials that all require rigorous training. The most basic one is Certified Financial Planner, or CFP. The ones focused specifically on retirement income are much more recent credentials and therefore far fewer people have them. The Retirement Management Analyst, or RMA was established in 2010, and the Retirement