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Why Tax Planning Starts with Where to Put Your Savings · How to Retire on Time

• 0:00
  Mike: Hey, thanks for joining. Here's a question I was recently asked on my show, How to Retire On Time. Take a look. David, what do we got?
• 0:06
  David: Yeah. All right. So let's look at the question here. How about this? What's better, a thirty year treasury at 5.2% or an annuity?
• 0:16
  And so walk us through this. So a thirty year treasury. So that means I give like, like I buy $50,000 worth of this treasury bond. And then at the end of thirty years, I get my 5.2%. Are they paying me along the way?
• 0:29
  Mike: How does that work? Yeah. So, okay. Let's say you put it let's do let's put in real money. Okay.
• 0:34
  You put a million dollars in a thirty year treasury. We're gonna make this really simple just for argument's sake. So let's assume you buy it at the the at the rate and the moment that it comes to the market.
• 0:43
  David: Okay.
• 0:44
  Mike: Okay. 5.2% means you're gonna get $52,000 every year as a coupon or a payout in theory every year. And it's the United States government. So let's assume that government's not gonna default.
• 0:55
  David: Okay.
• 0:55
  Mike: So you get $52,000 a year.
• 0:59
  David: That's I mean, could live off that. Yeah.
• 1:02
  Mike: Take that 3% rule. Yeah. Right. This is the 5% rule now.
• 1:05
  David: Yeah. Okay.
• 1:06
  Mike: Okay. So that's pretty good. And then at the end of it, you get your million dollars back.
• 1:10
  David: Oh, I see.
• 1:11
  Mike: Right? Because you you're and there's different versions of bonds and different I'm making this really simple for for argument's sake today. And let's say based on your age, you chose to do a fixed indexed annuity.
• 1:24
  David: All right.
• 1:24
  Mike: And did lifetime income. Okay. Million dollars in there. Let's say it's paying out and it's based on your age. So everyone's gonna be different.
• 1:31
  But let's say it's gonna give you like let's say you're you're early to mid sixties. So you get 7.3%. So instead of you making $52,000 of income, $73,000 of income, but the cash value is gonna eventually go down. So by thirty years, there's no death benefit. There's no cash value after thirty years.
• 1:51
  There is one in the first part. So if you died, you get your money back, whatever is left over in the cash. So which one's better? Objectively, if you look at the total ROI, which is very deceptive by the way, but let's just do it anyway. 52,000 a year for thirty years plus your original investment.
• 2:09
  Your total return on investment would you get $2,560,000 out of that. Not bad. Got twice your money out. Yeah. Thank you debt instrument.
• 2:18
  Yeah. On the annuity, if you just looked at that, you'd get 2,190,000. So a little bit less over thirty years. And that's where people say, oh, well that's kind of a rip off, isn't it? It's an incomplete picture.
• 2:31
  David: Yeah. Are you gonna say something about taxes here?
• 2:33
  Mike: No. Okay. That'll further complicate it. But we could. Yeah, we could.
• 2:39
  But the problem with it's not an apples to apples comparison because the index annuity got you more money. $20,000 more, really $21,000 more every year.
• 2:52
  David: Okay. Yeah. Yeah.
• 2:53
  Mike: So if you account for the difference of that, you actually got more money out of the annuity. Because you have to put a million dollars to get 52,000 and then find 21,000 from somewhere else in your portfolio to make this an apples to apples comparison. So net of portfolio and that difference, it's less. If you lived for 30 years, maybe you didn't. And therein lies the nuance of how old are you?
• 3:21
  What's the longevity? What's the pressure on your portfolio at the beginning of your plan? Both of these are road with inflation.
• 3:28
  David: Oh yeah.
• 3:29
  Mike: Okay. So there's it's not fair to have an apples to apples comparison. Notice too, the annuity gives you more money upfront. The bond gives you your money back at the end of it. But they both eroded with inflation.
• 3:44
  A million dollars in thirty years is not worth a million dollars.
• 3:47
  David: Yes. So
• 3:48
  Mike: it'd be interesting to do a further, analysis on even the net of net of inflation return on investment. Yeah. But this is where you gotta start thinking outside the box here a little bit. Because a young person isn't gonna use annuities. They can't.
• 4:05
  It's not a competitive payout.
• 4:07
  David: Right. And then when you say young person, how young are we talking?
• 4:11
  Mike: 55 or younger.
• 4:12
  David: Okay.
• 4:12
  Mike: Not using them. No. Not using them. It's a retirement product.
• 4:16
  David: Alright.
• 4:17
  Mike: So you have to ask yourself that that question, you know, what is the current payout for your age? How long do you think you're gonna live? What's the death benefit? What's the cash growing at? And is it a better deal or not for longevity purposes?
• 4:32
  For your the purpose of your money? For any portfolio stabilization feature. I mean, you could, I guess, put a million dollars in there, take the 7.3 and just reinvest it. Maybe have some income, some reinvestments. I mean, that's an interesting proposition.
• 4:47
  So if you, if you look at the difference, let's say you reinvested the difference there. You'd actually have 2,800,000 total return on your investment from the annuity, as opposed to the 2.56 from the bond. Okay. If you live thirty years. And maybe you don't.
• 5:03
  Yeah. Maybe you live twenty years. So this is the nuance. This is why you don't go to a steak dinner and someone says annuities are God's greatest gift to the retirement planning space. Yeah.
• 5:15
  And put all your money in that. No, please don't. It's a tool in the toolbox that needs to be understood first and picked last. Yeah. Plan first, strategy second, and then the right investments or products.
• 5:31
  One of the classic mistakes I see is when someone puts too much into the annuity and then their income plus their social security is greater than they actually needed in retirement. That's a huge inefficiency.
• 5:42
  David: Because?
• 5:44
  Mike: Why would you put money into a fixed income product like an annuity when you didn't need that much fixed income?
• 5:52
  David: Yes. So instead they could have put it elsewhere and they could have it could go to a legacy cause. It could go to, I don't know, fill in the blank.
• 6:02
  Mike: Yeah. Grow it. Healthcare costs in the future. Get that sucker to Roth. Grow that thing.
• 6:08
  Now you've got a way to self insure for long term care insurance. Okay. And then you talked about taxes. So here's an interesting standpoint. Of that $52,000 you're getting.
• 6:19
  Yeah. You're getting taxed on that sucker.
• 6:21
  David: Yeah. That's kind of where my mind was going. So that's is that ordinary income or is that a Yeah.
• 6:27
  Mike: And then if well, I mean, I there's some nuance of what type of bond you do, but let's just say ordinary income. Okay?
• 6:32
  David: Alright.
• 6:33
  Mike: But then then you've got your annuity. You put it in there. Only part of it is ordinary income. Part of it's basis. So technically it would be more tax efficient.
• 6:45
  David: Oh, yes. Because that payment you're getting, it's only partially being taxed because they're saying you're getting some of your basis back. Those payments.
• 6:53
  Mike: That's a whole section of the tax code that's very complicated. But the idea is you're to get some basis and some, they have to do a calculation for that. And that's how you figure that out. I have found that most people want they want to be told that they're right. They're not concerned about what is right.
• 7:11
  They're concerned about who is right. And they wanna feel like they are smart. And I appreciate the intentions. I appreciate the effort that's put in there. But as a fiduciary, I have to define things as they are and then invite you to proceed based on what is right for you.
• 7:28
  I don't mind if you don't have lifetime income. I don't mind if you wanna avoid bonds. But if you define it inappropriately, I am going to wanna correct that definition first before we make an informed decision, because it's not an informed decision if you're using wrong definitions.