Joseph Drensiz - Retirement Academy

A comprehensive guide to retirement income planning, Social Security, and risk management For experts and beginners

Joseph DeRenzis

RETIREMENT ACADEMY A comprehensive guide to retirement income planning, Social Security, and risk management

For experts and beginners

By Joseph DeRenzis

This book discusses general concepts for retirement income planning and is not intended to provide tax or legal advice.

Individuals are urged to consult with their tax and legal professionals regarding these issues.

The stories and characters in this book are fictional. Each story combines facts and circumstances redacted to highlight the subject matter of each chapter. Facts and circumstances are fictional and do not represent any one client in part or whole. They are included as educational tools. No story should be treated to apply to the reader’s individual circumstances. Always consult with your tax professional, attorney, and advisor before taking any action.

Copyright © 2023 by Magellan Financial and Joseph DeRenzis.

Co-authored and edited by Carol Jean Butler. All rights reserved.

No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law.

Printed in the United States of America First Printing, 2023 Cover and interior design by the Magellan Creative Team.

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This book is dedicated to my family who has stood by me in sickness and health, always giving me the support to pursue my dream of lifelong learning and education.

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TABLE OF CONTENTS Introduction How You Doin’? �����������������������������������������������������������������������������������������������vii Chapter One Understand what You Own: Market Investments, Bank Products, & Life Insurance ��������������������1 Chapter Two 5 Ways to Flunk Out of Retirement ��������������������������������������������������������25 Chapter Three 4 Lessons in Retirement Strategy ����������������������������������������������������������� 41 Chapter Four Earn an “A” with Your Social Security Income ����������������������������������55 Chapter Five 3 Retirement Income Moves to Get to the Head of the Class ��������������������������������������������������������������������73 Chapter Six Paying Taxes: The Seed vs the Harvest ������������������������������������������������89 Final Thoughts ��������������������������������������������������������������������������������������������������105 About the Author �����������������������������������������������������������������������������������������������111 Glossary of Terms ���������������������������������������������������������������������������������������������115

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Introduction

HOW YOU DOIN’?

“The most valuable asset you’ll ever have is your mind and what you put into it.” ~ Brian Tracy

I’ll never forget the couple who came in to see me after inheriting a nice sum of money. Let’s call them the Duncans.

They were in their early 60s and newly retired. For the Duncans, this inheritance was a windfall, valued at just over $600,000. They had lived modest lives before that point, working hard to raise a family and pay off their house. This money meant they could afford a comfortable retirement.

But they started spending it right away, buying their kids cars and apartments without first putting together a retirement strategy.

A happy client of mine referred them to me, and by the time the Duncans came in to see me, they had $480,000 of this money left. So, I broke it down for them and took them through my process. Given their ages, I explained how at least one of them was likely to live on into their 90s, and I showed them how they could get a guaranteed retirement

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income of $2,400 a month.1 That was guaranteed income forever for both of them no matter how long they lived, and it would cover all their basic expenses—utilities, gas for their car, and groceries. There was no risk to their principal, no management fees, and nothing short of a zombie apocalypse that could take this income away.

But they turned it down.

“We don’t want to do that,” they said. “We’d rather just keep things the way they are.”

Well, “the way things are” had them positioned heavily in the stock market. They were pulling out $3,000 a month, which was more than they needed, to help pay for incidental expenses, like the rent on their kid’s apartment. They had already paid off their own house, this was more money than they’d ever had, and they couldn’t imagine how it would ever run out.

Unfortunately, the year was 2007. The month was June.

Nobody knew what would happen next. From October 2007 to February 2009, the S&P 500 index lost 53 percent of its value during the financial crisis now known as the Great Recession.2 Five years later, I got a phone call from the Duncans and they came in to see me again. They showed me their account statement. Mrs. Duncan was crying.

“We should have listened to you,” she said. “Is there Guarantees are backed by the financial strength of the issuing company. The above story is a fictional story using actual figures from sources believed to be reliable. This example is shown for illustrative purposes only. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results similar to those shown.

2 Parker, Kim, and Fry, Richard, More than half of U.S. households have some investment in the stock market, Pew Research Center March 2020 https://www. pewresearch.org/fact-tank/2020/03/25/more-than-half-of-u-s-householdshave-some-investment-in-the-stock-market/ Accessed 11/29/2022.

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anything you can do?”

They had just $29,000 left.

I wanted to help them, but there wasn’t anything I could do.

Later, I learned from the client who had referred them that the Duncans had sold their house. He went back to work as a security guard, and she was cleaning rooms at a hotel. So much for their comfortable retirement.

My favorite New York T-shirt is the one with the tagline, “How you doin’?” I don’t mean that as a pickup line. It’s something I say to my clients all the time (without the New York accent) because I want them to feel comfortable with their retirement strategy. I don’t want them to have to worry about the market, and I want them to know that it’s possible to have income for life, guaranteed.3 So, I ask, “How you doin’?”

My name is Joe DeRenzis and I grew up in Westchester County, New York, where I lived for 30 years. My father was Italian, my mother was Irish, and growing up we said cawfee for coffee and waw-tuh for water. If we wanted to order a pizza, I would go down the street and ask for a pie. If I just wanted some pizza for myself, I would go out and get a slice.

Life is different for me now, living along Florida’s Gulf Coast. For one thing, in Florida, if you ask for a pie, it will be apple. For another, there are a lot of people living here who don’t realize how much trouble they could be in, and I’m not talking about bad pizza.

The financial industry is failing retirees today. Our sources of retirement income have changed, our Social Security program is gasping for breath, and we are living longer. The

3

Guarantees are based on the financial strength of the issuing company.

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life expectancy of a 65-year-old man today is 20 years.4 If you’re retiring early at the age of 62 or 63, that’s more than 20 years. How are you going to make the money last?

In the old days, it was easy. You worked for the same company for 30 years, and at the end of it, you got a pension.

This pension was fully funded, and Social Security back then was strong. Why was it so strong? Because if you retired when you were 65 years old, then by age 67, you were dead! Unless, of course, you drank nothing but caw-fee and waw-tuh.

Now I say this somewhat jokingly, but things today are different. Nowadays, you don’t get a pension, and if you do have one, chances are it’s not fully funded. Most of you have a 401(k) that you’re not being educated about and our Social Security system is hurting. If no changes are made by 2034, your retired worker benefit could be cut by as much as one-third.5 Folks, I’m not going to sugarcoat this stuff for you. I’m from New York where we tell it like it is. For instance, right now, I want to tell you something that will blow you away.

HERE’S SOMETHING YOU’VE NEVER HEARD BEFORE Let’s say you want to retire. What are you going to do?

You’re going to look at your retirement plan.

Well, I’m here to tell you that you don’t have a retirement plan.

Your 401(k), your IRA, your 403(b), or whatever type you have—those are not retirement plans.

They are retirement vehicles. This is where you were told to put your retirement dollars with no education about how Social Security Administration Fact Sheet, 2022, https://www.ssa.gov/news/press/ factsheets/basicfact-alt.pdf Accessed 10/12/2022.

5 Social Security Administration, A SUMMARY OF THE 2022 ANNUAL REPORTS, https:// www.ssa.gov/oact/trsum/ Accessed 11/17/2022.

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these vehicles work.

What were these retirement vehicles designed to replace?

A pension.

What is a pension?

Guaranteed income for the rest of your life with no fees and no risk.

What is a 401(k)?

A collection of investments with risk, fees, and no income for life option.

So, how you doin’?

Do you have a retirement plan?

If you don’t, you need to get one. Soon as you hit age 59 ½, you want to take a portion of this money out of the retirement vehicle and put it somewhere else where you can get guaranteed income for the rest of your life with no risk to your principal and no fees.6 If you want to make sure this money lasts, then you need a plain vanilla retirement strategy that includes a portion set aside for guaranteed lifetime income. You don’t need to surrender all your money; you don’t even have to get out of the market if you don’t want to, but you do need to do something.

The strategy that I put together for the Duncans gave them all the things that a retirement plan should provide: guaranteed, lifetime income for the rest of their lives with no management fees and no risk to their principal. But they said, “No thank you.”

Why didn’t the Duncans say yes? Why did they walk away from this strategy and make the biggest financial mistake of their lives? It wasn’t because the Duncans weren’t smart. It 6

Guarantees are backed by the financial strength of the issuing company.

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wasn’t because they didn’t work hard, save for retirement, or pay off their house. It was one simple thing: Lack of financial education.

ARE YOU BEING SOLD AND TOLD? The other day at a retirement workshop, I was setting up my laptop for the presentation, when a woman who didn’t know me learned what I did for a living. “Oh,” she said knowingly, “This year has been terrible for us financially. I’m down by $32,000 since January.”

I sympathized with her, and she went on to share with me what the original value of her account had been.

“That’s a 26 percent loss,” I said. “Are you okay with that?”

“No, I’m not okay with that,” she replied. “But everybody is down. Everybody is losing money.”

“My clients aren’t.”

“Really?” she said. “Really?”

Really. My clients have never lost a single dollar due to market loss or fluctuations, and I have never lost a single client. This year to date the S&P 500 is down nearly 15 percent, meaning it’s on track for its worst annual return since 2008.7 Even during the year of the worst global financial crisis on record, my clients were not losing their retirement income money.

When I ask them, “How you doin’?” They tell me about their family or the dog, the cruise they went on, or a new project they’ve started. They don’t have to worry about the market because they’ve got a lifetime income.

Do you have lifetime retirement income, or are you Duggan, Wayne, December Stock Market Forecast, Forbes, Dec. 2022, https:// www.forbes.com/advisor/investing/stock-market-outlook-and-forecast/ Accessed 12/9/2022.

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spending down from a retirement vehicle that has you exposed to market volatility?

The biggest mistake I see people making with their money is that they don’t understand what they own. They get put into financial products without knowing what they are buying, or they stay in unhelpful products because they’ve been taught to pay attention to the wrong things.

Are you looking at the rate of return instead of the yield?

Are you looking at tax-deferred instead of tax-free? Do you understanding the rules for working when claiming Social Security?

People tell me, “My broker says I will never run out of money!”

And I reply, “Great! Can you show me where he wrote that down? And where it says this is guaranteed?”

“Oh, he didn’t write that down,” they say. “He just told me.”

And this is why I spend so many hours of so many days getting in front of people to teach them about retirement.

My workshops are a little bit different. The industry standard for an educational seminar is 45 minutes to an hour. My workshops last 90 minutes, and people stay with me. I touch on a ton of stuff, and I don’t coat it with fairy dust. I’m blunt about the facts, and I’m careful about the stories I share because I want people to understand that these decisions have outcomes. You might not feel it for another three or four years, but it will be there.

Why is this happening? Why are folks so starved for knowledge?

Because you are being told and sold instead of being educated about what you own.

You deserve to know what’s what. Right now, as I write this, Retirement Academy xiii

we have been in a bear market since June 2022,8 inflation is on the rise across global economies,9 and more than half of all American workers are worried that they won’t be able to achieve a financially secure retirement.10 People are nervous. If all your money is with a stockbroker or invested in the stock market, then not only are you losing to market volatility, but you’re also paying fees.

If you have never been educated about alternative products that protect your principal with no fees, if nobody is talking to you about taxes, inflation, lifetime income, and the preservation phase of your money, then you need to keep reading because this book has been designed just for you.

WELCOME TO RETIREMENT ACADEMY When I applied to be a teacher in Florida, they asked me, “What do you want to teach?”

And I said, “I don’t think you want me teaching English with this accent.”

For the next 17 years, I taught high school algebra, instructing 8th and 9th-grade boys and girls on the rules behind mathematical formulas, equations, and axioms. At heart, I’m a teacher, and as a financial professional, that’s still what I do.

My goal is simple: education.

I won’t be calling you if you don’t want the help.

For your next lesson, let me tell you a little bit about being Market News, How far will the market correction go? U.S. Bank, November 2022, https://www.usbank.com/investing/financial-perspectives/market-news/is-a-market-correction-coming.html Accessed 11/29/2022.

9 Iacurci, Greg, Here’s the inflation breakdown for September 2022, CNBC, Oct 2022 https://www.cnbc.com/2022/10/13/heres-the-inflation-breakdown-for-september-2022-in-one-chart.html Accessed 11/29/2022.

10 Bond, Tyler, Doonan, Dan, and Kenneally, Kelly, Retirement Insecurity 2021, National Institute on Retirement Security, Feb 2021, https://www.nirsonline.org/wp-content/ uploads/2021/02/FINAL-Retirement-Insecurity-2021-.pdf Accessed 11/29/2022.

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independent. Because I was a teacher, I have worked with teachers and state workers to help them figure out how to choose between taking the lump sum or keeping the state’s pension plan. I have expertise in those areas because I was in that system myself, but I gave up my securities license years ago when I realized the power of alternative products.

And I’ll tell you why.

These alternative products can guarantee that the money you put into them will be there when you need it, safe from market volatility, and safe from sales loads and fees. What I mean is, if you put $500,000 into this product, and the market goes down, the next time you open your statement, you will have $500,000 in there—unless, of course, you took some of the money out yourself. There are penalties to be aware of should you withdraw the money too soon, and those guarantees are based on the financial strength of the issuing company, but these are all things your financial professional should be explaining to you. They should be helping you to choose a company that is strong and established.

Has anybody told you about these products?

Are you aware that they even exist?

I have a problem with brokers in the industry who are throwing around the word fiduciary. This is a term that means that you are supposed to do what’s right for your client. But if that was the case, then every single person who came in to see me currently working with a broker would have a Roth IRA, or at least know about it, and everybody would have a no-market risk, no-fee product that gave them retirement income guarantees.11 But they don’t.

A lot of financial professionals might tell you that they are 11

Guarantees are based on the financial strength of the issuing company.

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fiduciaries, but then they are being told what to sell. Their menu of options will be under the umbrella of one company.

I separated myself from all that a long time ago. I now have the ability to investigate, analyze, and contract from over 40 different companies for literally thousands of different products. Every product is a little bit different with unique aspects that will fit some people’s lifestyles but not others, with strengths and weaknesses that you deserve to know about. So, while it would be nice to just dump the same toppings onto every single pie, I know that not everybody likes pineapple and anchovies. So, I would never do that. Plus, some of you don’t need the whole pie; you only need a slice.

And that’s what true independence means.

I’ve found that having the ability to shop around is what gives the best outcomes for Mr. and Mrs. Retiree. So, from a fiduciary standpoint, being independent is unarguably the best way to go.

But you don’t have to take my word for it.

I wrote this book to help increase your financial IQ so that you can begin to make these financial decisions for yourself.

I will take you through the pros and cons of the different financial opportunities available to you today, the risks inherent in those products, and the tax repercussions that can affect your family’s security. I’m going to tell you like it is, and I won’t use fancy language just to make myself sound smart.

At the end of the day, I want to ask each of you, “How you doin’?” Is what you currently have still working for you? Or is it time to get a true retirement strategy in place?

I won’t be giving out any grades, but each chapter will allow you to do some homework. If you were one of those kids who goofed off in class, this is your chance to redeem yourself.

Of course, the real test will come at some point during your

retirement when you will either know that the income will be there, or it won’t.

The choice is up to you.

- Joe Derenzis, Certified Financial Educational Instructor (CFEI), Certified in Social Security Claiming Strategies (CSSS), and President of JD Financial Solutions

Note: All words in bold denote glossary terms that are defined for your convenience at the back of this book.

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Chapter One

UNDERSTAND WHAT YOU OWN: MARKET INVESTMENTS, BANK PRODUCTS, & LIFE INSURANCE “Any fool can know. The point is to understand.” ~ Albert Einstein

Peter Greene remarried late in life and at age 52, he was a successful doctor making $450,000 a year. He lived with his wife and their five kids in a beach-front property home.

One of those kids had a disability and was confined to a wheelchair. The house had to be outfitted with special ramps and rails, and all the doorknobs had to be lowered. This child also required a physical and occupational therapist. So, even though Peter was earning a substantial salary, the house remodel had significantly increased the family debt load.

Peter came in to see me to learn about his financial opportunities. This right away put him at the head of the class. Today, one in five Americans spend more time planning vacations than they do planning their finances.12 I took one look at Peter’s situation and saw what would happen to his family should something happen to him. I Zehn, Simon, Study: 1 in 5 Americans Spend More Time Planning Vacations vs. Managing Their Money, My Bank Tracker, July 2019, https://www.mybanktracker.com/ open-data/surveys/survey-time-planning-vacations-managing-money-301436 Accessed 12/13/2022.

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educated him about the financial pyramid: the strongest part of the pyramid is the base, and this is where we talk about your options for life insurance.

“Forget it,” Peter said. “I can’t afford it.”

As the saying goes, you can lead a horse to water, but you cannot make them drink.

Unfortunately, and tragically for Peter, he had a heart attack and passed away just months after our meeting. Because his wife lost the $450,000 of annual income, she could no longer afford to make the payments on their newly remodeled home. This devastated the family. She and her five kids had to move back in with her mom, which made things very difficult for the kid in the wheelchair. I never did hear how the mom managed to carry on, but I still think about her.

If we all knew when we were going to die, then financial planning would be a breeze. We’d bring you into the office one week before you kicked the bucket, and I’d write you up a $1 million life insurance policy. Then when you passed away, your family would receive the $1 million death benefit in tax-free money, and you’d feel reassured knowing that everybody would be fine.

But, unfortunately, that’s not how it works.

Instead, we have a financial landscape that has been rapidly evolving over the last 50 years to adjust to the fundamental shift in the retirement system. Not only are you now responsible for saving and investing, but you must also choose from among a greater array of increasingly complex financial products and instruments. This is no easy task.

New research conducted by the FINRA Investor Education Foundation and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business finds that the average saver has “alarmingly low” 2 Joe DeRenzis

levels of financial knowledge.13 The result? Low confidence when making decisions about your retirement assets.

This matters because as you get closer to the time of retirement, your financial goals begin to change. Asset allocation, risk tolerances, and financial needs all undergo a shift, and you need to know how to respond intelligently.

• Do you need life insurance later in life?

• Is there an alternative savings vehicle to the Roth IRA? • What kinds of financial products can you put into a 401(k)?

• What asset allocations are best as your time of retirement nears?

This chapter is here to help you evaluate what you currently own so that you can make informed decisions about whether these financial instruments are still what you need to achieve your goals.

Fast Fact: Investors with low levels of financial knowledge are more likely to exhibit poor investing behavior: diversifying naively, failing to identify dominated funds, and paying higher fees.14

3 PHASES OF YOUR MONEY Have you ever wondered why financial advice about saving for retirement varies so much from one professional to Williams, Angelita, and Rote, Mike, New Research: Many U.S. Investors With Low Financial Literacy Levels Are Ill-Equipped to Manage Personal Finances, Especially Investments, FINRA, October 2019 https://www.finra.org/media-center/newsreleases/2019/many-us-investors-ill-equipped-manage-personal-finances-especially Accessed 12/30/2022.

14 Lin, Judy T. et al, Investors in the United States: The Changing Landscape, FINRA Foundation National Financial Capability Study, December 2022 https://finrafoundation.org/sites/finrafoundation/files/NFCS-Investor-Report-Changing-Landscape. pdf Accessed 12/30/3022.

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another? This can make it difficult to know who to trust or what to believe.

One straightforward way you can wade through the riffraff is to identify what financial phase you’re in and then choose your assets accordingly.

Broadly speaking, every investor who saves for retirement finds themselves going through three financial phases in life. Those three phases are the accumulation phase, the preservation phase, and the distribution phase. What follows is the When, How, and Who of the financial strategies you’ll encounter during these phases and the kinds of professionals who can help guide you.

ACCUMULATION PHASE WHEN: Your accumulation phase begins the day you get your first job, and it can continue well into your 50s and beyond.

During your working years, your focus is on growing and accumulating assets. If you’re disciplined about saving, or if you’ve had the foresight to set up automatic withdrawals, then you’ve probably gotten pretty good at this phase. This is also a good time to build your financial pyramid by setting up a type of life insurance policy that can protect your family’s finances in the event of premature death.

HOW: The accumulation phase benefits from long-term passive investment strategies such as buy-and-hold and dollarcost averaging. Basically, you keep putting away the money, and over time the money grows. Whether the stock market goes up, down, or sideways, as long as you don’t touch this money, your accounts have the potential to move upward, which is exactly the outcome you want.

WHO: For this phase, it’s common to work with a fund manager provided by the HR department of your employer, especially if you have a 401(k) or retirement plan with an 4 Joe DeRenzis

employer match. You might also work with a stockbroker or a broker-dealer for help with the buying and selling of investments. You may even try doing this kind of investing by yourself using online financial services. You are, after all, responsible for making the lion’s share of the contributions.

PRESERVATION PHASE WHEN: Your preservation phase begins anywhere from three to seven years before the day you retire. For people who have mandatory early retirement at the age of 55, this could happen in their late forties. For most people, the preservation phase begins sometime in their 50s, but if you enjoy your job or need to work longer, then you may not enter your preservation phase until your 60s. The wide range of ages is just one of the many reasons why you deserve customized planning advice. The visual in this chapter gives you a picture of when the transitions from one phase to another might begin or end for you.

HOW: During the preservation phase, you no longer want to focus solely on accumulating money. Your attention must shift to strategies that have an emphasis on the safety and preservation of capital. These should be your primary concerns because you don’t have another 20 to 30 years to earn this money all over again. The portion of your savings required for retirement income can be reallocated into a different financial product designed to protect this money from market volatility. Products with guarantees will protect your principal, which is the amount of money you have already accumulated, and guarantees are backed by the financial strength of the issuing company.

You also want to consider diversifying your portfolio from a tax standpoint. This is where tax-free vehicles such as life insurance can be very helpful, particularly if you’re at the peak of your earning years with a salary that disqualifies you Retirement Academy 5

from a Roth account.

WHO: Not all financial professionals have access to products designed to protect and preserve. If the advisor is a stockbroker or broker-dealer representative, then they might only have access to financial products suitable for your accumulation years. Most financial professionals who specialize in retirement planning have access to retirement vehicles suitable for your preservation phase.

DISTRIBUTION PHASE WHEN: Your distribution phase begins on the day your accumulation phase ends. For most people, this happens sometime in their 60s, but some people retire earlier or later. When you enter this phase, your focus changes to distributing, or spending, the money from out of your retirement accounts. You’re no longer putting a portion of each paycheck into your savings; instead, you are taking the money out to spend it for retirement income. This fundamental shift changes everything you thought you knew about how to allocate this money.

HOW: During this phase, you have a lot more things to consider than just growing the money. You’ll also want to consider inflation, how much income you want this money to produce, and how to ensure that this income will continue for your surviving spouse, if you are married.

To ensure that you don’t run out, it’s vital that you take a portion of this money out of the retirement vehicle you’ve been using and put it into something where you can get guaranteed income for the rest of your life with no risk to your principal and no fees.15 WHO: To be successful during the distribution phase requires much more finesse and forethought than the 15

Guarantees are backed by the financial strength of the issuing company.

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strategies used during the accumulation phase. Market risk isn’t the only threat to your savings. It can also be damaged by tax inefficiencies, long-term care catastrophes, and the problem of a required minimum distribution from taxqualified accounts. For this reason, you’ll want to work with a financial professional who specializes in this phase.

Your Three Financial Phases 50

40

60

30 20

P

10

0

70 80

A

D

A - Accumulation

20s, 30s, 40s, 50s, 60s

P - Preservation 40s, 50s, 60s, 70s

90

D - Distribution 60s, 70s,80s, 90+

Source: Magellan Financial

The job of a financial professional preparing you for retirement is to help ensure that your money lasts for the rest of your lifetime. We do this by coordinating your allocation decisions with your retirement timeline. First, we consider income sources, including what you might already have from a pension or Social Security, to identify how much additional income you’ll need to distribute from your savings. Financial professionals who specialize in retirement income also have access to certain income-creation tools best suited to help you transition from one phase into the next. We can also help you utilize life insurance to help diversify your tax landscape and protect your family and spouse from financial ruin.

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Fast Fact: The World Economic Fund reports that the average 65-year-old American will outlive their retirement savings within nine years.16

3 PLACES TO PUT YOUR MONEY Aside from under your mattress or in your wallet, there are basically three places where you can put your money when preparing for retirement: 1. Market investments 2. Bank products 3. Insurance vehicles There is no single best place. Most people will need to utilize assets from all three categories because they each have their advantages and disadvantages. Your financial professional can help you understand the tax treatment, fee structure, and costs associated with the specific types of assets you own. But for a general description, we have a primer here of the three categories, along with the advantages, disadvantages, and protections in place for each type.

Fast Fact: Among mutual fund owners, 38% incorrectly believe they do not pay any mutual fund fees or expenses.17

Wood, Johnny, Retirees will outlive their savings by a decade, World Economic Forum, June 2019. https://www.weforum.org/agenda/2019/06/retirees-will-outlive-their-savings-by-a-decade/. Accessed 12/20/2022.

17 Lin, Judy T. et al, Investors in the United States: The Changing Landscape, FINRA Foundation National Financial Capability Study, December 2022 https://finrafoundation.org/sites/finrafoundation/files/NFCS-Investor-Report-Changing-Landscape. pdf Accessed 12/30/3022.

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MARKET INVESTMENTS Market investments offer opportunities to profit from the future success of a business or entity. Also known as equities or securities, these positions have the potential to go up in value over time, so most people rely on some type of market investments while saving during their accumulation years.

The most common market investments are stocks, bonds, mutual funds, and variable annuities.

A stock is an equity position in a company, named after the size of the company, small, mid, and large, organized according to the sector they do business in, such as healthcare or energy. By purchasing a share of the stock, investors can participate in the gains if the stock goes up in value. If the stock goes down in value, then so does the value of the portfolio.

A bond is a debt investment in which you are financing an activity. You loan money to an entity for a defined period of time in exchange for a fixed amount of interest. Usually thought of as the stable part of your typical portfolio, bonds have an inverse relationship to interest rates. During your retirement years, this can expose you to interest-rate risk if you need to sell early because when you sell a bond before maturity, you may get more or less than you paid for it. If interest rates have declined since the bond was purchased, its value will have increased. Conversely, if rates have risen, its value will have declined.

Mutual funds and exchange-traded funds (ETFs) are professionally managed pools of securities that could include both stocks and bonds. Savers with similar goals combine their resources to benefit from more diversification and lower individual risk.

Variable annuities are a kind of annuity that offers you mutual funds inside an insurance vehicle. This gives you Retirement Academy 9

options for income generation and income protection, but at a cost. You are participating directly in the market so your principal will be subject to market volatility.

The one thing all market investments have in common is that they do not guarantee the principal—or the amount you initially put into the investments. With securities, you share in both the gains and the losses with no guarantee that you will get to keep the principal or the money you earned. For the saver at or nearing retirement, this can be problematic.

While there are no protections to cover loss due to market activity, the Securities Investor Protection Corporation (SIPC) does mandate most registered broker-dealers in the U.S. This protects your accounts from the bankruptcy of the broker-dealer who serves as the custodian of your assets.

Advantages: • Opportunities for market returns.

• Hedges against inflation.

• Income options available.

• Suitable for your accumulation phase.

Disadvantages: • Volatility and uncertainty.

• No principal guarantees.

• Professional management fees, trade costs, and marketing fees.

• May not be suitable for someone in their distribution phase.

Fast Fact: In total, the average fees for a variable annuity are 2.3% of the contract value and can be more than 3% annually for the life of the annuity.18 Silvestrini, Elaine, Annuity Fees and Commissions, Annuity.org, January 2022, https:// www.annuity.org/annuities/fees-and-commissions/ Accessed 11/15/2022.

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BANK PRODUCTS Unlike market investments, bank products do offer principal guarantees. The amount of money you put into the bank is guaranteed to be there when you want to take it out. Bank products are also easy to get into, with most of them costing you nothing in terms of fees or trading costs.

Consumers are also able to earn an amount of interest on their money, but you’re taxed on this interest, and it isn’t usually high enough to help address inflation.

The most common interest-earning bank products are savings accounts, money market accounts, and certificates of deposit, known as bank CDs. Savings accounts are places where you can put your money to earn a bit of interest with the ability to take it out again anytime you choose. You don’t need a financial professional to get into one of these accounts, and there are no fees or trading costs involved.

Money market accounts work the same way—they’re also interest-bearing, but they typically offer a higher rate than your regular savings account. Some money market accounts may have a minimum balance requirement, and interest rates may be tiered, meaning the more money you have in the account, the more interest you stand to earn.

Bank CDs are promissory notes issued by a bank. The interest rate you will earn is fixed in exchange for a period of time where you agree not to spend this money. You can choose the duration, anywhere from a few months to 10 years, with longer durations offering higher guaranteed rates.

As bank products, all funds held under this umbrella are protected by the Federal Deposit Insurance Corporation (FIDIC) for up to $250,000. This means that if the bank is robbed or the economy collapses, you’re still guaranteed to get your money back. Should you choose to invest more than Retirement Academy 11

$250,000 with your bank, there is additional FDIC coverage available. The FDIC not only insures deposits but also holds the nation’s financial systems accountable to certain standards, supervising their soundness and consumer protection.

Advantages: • Immediate or short-term access.

• Interest rate opportunity.

• No volatility or uncertainty.

• Safety with the guarantee of principal.

• FDIC-insured.

Disadvantages: • No opportunity for market gains.

• Subject to inflation risk.

• Minimum balance may be required.

• Earnings are taxed in the year they are earned.

Fast Fact: At a 3% inflation rate, a $60,000 income need today would require over $108,000 in just 20 years.19 INSURANCE VEHICLES Most people when I say “life insurance” think about death.

Why not call it death insurance? They don’t want to think about dying and so, like Peter Greene in our story earlier, they don’t consider adding it to their overall financial plan.

But what if there was a new way to use life insurance?

What if there was a way to use it while you are still living?

In this section I’m going to educate you about your options Donti, Joseph. How Big of a Threat Does Inflation Post to Your Retirement? Kiplinger.

October 3, 2021. https://www.kiplinger.com/retirement/603547/how-big-of-athreat-does-inflation-pose-to-your-retirement Accessed 12/15/2022.

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for life insurance because this is a financial tool with far more flexibility than most people realize.

Just like with your market investments, life insurance should also be chosen based on your financial phase. It can be a vital part of your portfolio during retirement because it addresses several of the concerns that are common for people to have at this stage of life.

• Worried about retirement income for a surviving spouse?

• Looking for an accumulation tool outside of the stock market?

• Apprehensive about rising taxes?

• Wanting to leave a legacy?

• Concerned about long-term care?

Yes, life insurance can help you with all these things! Its benefits extend far into retirement and beyond. This chapter is here to help you increase your knowledge about an asset class that often goes underutilized.

Term Insurance The purpose of a term policy is to cover the big bills in the event of life passing too quickly. They are best suited for people who are in their accumulation phase, and the goal is to get the most amount of insurance for the least amount of money. For as little as $10 a month, you can get a $1 million death benefit that will be paid to your family or a listed beneficiary tax-free. This is the type of policy that would have saved Peter’s family from financial ruin.

A term is the length of time that you are covered. The most common term is 30 years, but 10 and 20-year term policies are also available. These policies stay in force if you keep making the payments, but once the term is over, the coverage ends.

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Term policies cost the same amount every month or year, but what happens once this term is over depends on the type of term policy you have. That’s why I like to educate people about their options. Most people don’t know that you have the choice to continue the policy once the term is over. There are two ways that this can be done. I think of it as bad term versus good term, but for compliance reasons, we will call it unstable term versus stable term.

Unstable Term Insurance An unstable term policy is the type where, at the end of the term, it converts to an ART policy. This stands for annual renewable term insurance. The coverage will continue each year without you needing to reapply or take another medical exam, which is a good thing, but the cost you’ll be paying for this policy goes up dramatically. As people age, they become more expensive to insure because health issues start cropping up. The insurance company assesses the risk of you dying and charges you accordingly, so the cost of the ART policy will go up every year or every few years as you age, and you don’t know what that cost will be from year to year.

This can make the insurance unaffordable at a time when you need the coverage most.

Stable Term Insurance A stable term policy is one that converts to a permanent policy instead of an ART. You still receive continued insurance without the medical exam, but with a permanent policy, the price never changes for the rest of your life. This means you can budget for a stable expense, which is so valuable because right around age 50 is when, statistically speaking, medical issues tend to start arriving. With a stable term policy, you are guaranteed insurability regardless of health conditions, at a stable rate you can predict.

For example, because I’m in the industry and know what 14 Joe DeRenzis

to look for, I purchased this stable kind of term policy when I was in my early 30s. Then, two decades later, I was diagnosed with a rare type of cancer. Even though I am now cancer-free, I am uninsurable forever. But I have this term policy that converted to a permanent policy. Instead of being stuck with an ever-increasing ART policy which would have gone up every year, the cost of my permanent policy will never change. I still have insurance for my family, and my rate will stay the same forever.

Advantages: • A low, regular cost for a large death benefit.

• Affordable insurance for someone just starting out their career.

• Tax-free money for your family.

• No probate.

• No investment or management fees.

• May have the ability to convert to a permanent policy.

Disadvantages: • Coverage may be temporary, based on the length of the contract.

• No building up of cash value to use later in life.

• The older you get, the more expensive the cost, unless you get the type of term insurance that can convert.

Fast Fact: Among parents who have life insurance, 68% of them feel financially secure; only 47% of parents without life insurance feel secure.20

Wood, Stephen; Scanlon, James T.; Leyes, Maggie, 2022 Insurance Barometer Study, LIMRA, April 2022 https://www.limra.com/en/research/research-abstracts-public/2022/2022-insurance-barometer/ Accessed 12/30/2022.

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THE SDLIP In the part of New York where I grew up, we made ordering breakfast simple. If you want a coffee with milk and sugar, you ask for a “regular coffee.” (Or caw-fee.) If you don’t want any milk or sugar, you say, “give me a black coffee.”

We also have the best breakfast special in the world. We call it the BECSPK. All the neighborhood breakfast places advertise for these in the window. They will have a sign that says: BECSPK $2.99. Or now, given inflation, it might say: BECSPK $4.99. But anytime you see the BECSPK special, you know what you will get is a bacon, egg, and cheese on a roll with salt, pepper, and ketchup.

And let me tell you, it’s delicious.

Well, I’ve designed my own life insurance special for people who make too much money to qualify for a Roth account. I always want you to have a source for tax-free funds later in retirement. The Roth is a retirement vehicle that allows you to put away money for retirement by paying the taxes now.

The money grows tax-deferred, and when you take out this money for retirement income, it’s tax-free. You heard me correctly: all the money inside your Roth IRA comes back to you as income that is tax-free, including the gain. This is such a good deal, the IRS puts a limit on how much you can contribute to a Roth, and if you make too much income, then you’re ineligible.

My life insurance special is something that anyone can do regardless of their age, and there are no income or contribution limits. You do have to be relatively healthy to qualify, however. This strategy is something the super-rich use because, if you design it right, it gives you a place to accumulate funds that can later be accessed tax-free in retirement.

I call it the SDLIP: specially designed life insurance policy.

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In simple terms, the SDLIP is a universal life insurance policy that offers death benefits and living benefits by serving as an accumulation tool outside of the stock market.

It works the opposite of term insurance: instead of paying the least amount for the highest death benefit, you are paying the most amount for the highest cash value. What helps your cash value to accumulate is the indexing feature.

These indexing options give you a way to accumulate funds by linking the cash value of your policy to an internal index.

This index seeks to mirror popular stock market indices such as the S&P 500. This can grow your cash value—and best of all, the money accumulates tax-deferred. You don’t have to pay taxes on the growth of this money, and you don’t have to pay taxes when you spend it because you access it as a loan.

You can use this cash value to do anything you want, but because these policies take time to build, its often used to supply additional income in retirement.

The more you fund the policy, the more the build-up of the cash value, but it must be funded in balance with the death benefit. Its main prerogative is to do what good life insurance does: function as a planning tool that provides a tax-free death benefit to your family. But when you design this thing correctly, that’s when things can get exciting.

The SDLIP is most beneficial for someone who wants both a death benefit and an accumulation tool, but please understand that when you link to the stock market, the results are not guaranteed. There are universal life insurance policies that give you a guaranteed rate of return every year—that is an option! But even when linking to the index, you can never lose money in the account due to a market drop. We can look at history to get an idea of how the S&P 500® index has performed—and over the last 30 to 40

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years it has averaged somewhere between 5 to 7 percent.21 So, we have history, but there is no guarantee.

What is guaranteed are the death benefits. For example, let’s say you are putting in $10,000 a year to fund your SDLIP to get a $400,000 death benefit with options for accessing the accumulation value once you retire. Once you sign that paper, if you die the next day, the $400,000 would go to your family or beneficiary tax-free.

With the SDLIP, you can do a combo. Your family gets a death benefit, and you have options for accessing the value of that death benefit while you are still alive. It’s like going to the pizza shop to pick up a pie for your family while also enjoying a slice or two on the way home for yourself.

The goal with the SDLIP is to have life insurance for the rest of your life. This is not a short-term investment, and the fee structure is upfront. If your policy is just getting started, or you lapse in your premium payments, then it may not be able to do what it was designed to do. Make sure you get good advice before getting into one of these policies. As an accumulation tool and potential source of tax-free retirement income, this can be a valuable addition to your portfolio—as long as you understand the advantages and disadvantages.

Advantages: • A tax-free death benefit for your family.

• Access to tax-free retirement money.

• Tax-deferred accumulation.

• Principal protection from market loss.

• Interest credits that are guaranteed to never go below zero.

Information used in the author’s calculations was extracted from Yahoo.com/ finance and should not be deemed a representation of past or future results. Values do not take into consideration investment costs of any kind. Standard and Poor’s 500 index (S&P 500®) is comprised of 500 stocks representing major US industrial sectors. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”).

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Disadvantages: • Requires an amount of discretionary income to properly fund.

• An upfront fee structure with a long-term time horizon.

• Qualification is dependent on good health.

Fast Fact: It’s difficult for consumers to find objective financial information because the industry spends over 400 times more on marketing dollars than federal agencies spend on basic financial education.22 Understand what You Own One of the most confusing things for people when they save for retirement is figuring out what kind of retirement vehicle they have and what kind of financial products they have sitting inside of those vehicles.

As I said in the introduction, your 401(k), 403(b), or IRA are retirement vehicles. They are not retirement plans. It’s up to you to educate yourself about the kinds of investment products sitting inside of those retirement vehicles.

The type of product and the vehicle it’s sitting in will determine your exposure to risk. It will also determine your money’s tax status. For your convenience, we have put together a Financial Pyramid that does a pretty good job of showing you visually where your investments are at in terms of tax status and risk exposure. It’s not a perfect visual— the retirement vehicles are lumped in with the investment products. So please understand this: Just because you have a traditional IRA or 401(k) doesn’t mean you can’t put the money into something else besides Consumer Financial Protection Bureau, Financial Literacy Report, March 2022, https://files.consumerfinance.gov/f/documents/cfpb_financial-literacy-fy-2021_annual-report_2022-03.pdf Accessed 12/30/2022.

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mutual funds. For example, you could have an IRA with indexed funds that have no fees and no risk to your principal.

Most people do not realize that.

Just about any type of investment product can be sitting inside any type of retirement vehicle.

Using this visual, complete the homework assignment to help you better understand what you own.

Source: Magellan Financial

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CHAPTER ONE HOMEWORK: UNDERSTAND WHAT YOU OWN What type of retirement vehicles do you (and your spouse) currently own? Check all that apply:  401(K)

 403(b)

 SEP IRA

 IRA

 Roth IRA

 TRS

 Other

 457(b)

 Don’t Know

What type of investment products do you (and your spouse) currently have sitting inside of your retirement vehicles?  Stocks

 Mutual Funds

 Annuity

 Cryptocurrency

 Bonds

 Money Market Fund

 Indexed Funds

 Bank CDs

 Don’t Know

What type of investment products do you (and your spouse) currently have sitting outside of your retirement vehicles?  Stocks

 Mutual Funds

 Annuity

 Cryptocurrency

 Bonds

 Money Market Fund

 Indexed Funds

 Bank CDs

 Don’t Know

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What are your top three questions about your retirement vehicles and the types of investment products sitting in them?

1.

2.

3.

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