Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Incorporated. A registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus Program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus, brought to you each and every Wednesday morning right here on KROS. Well, this is Nate, I have James joining me today. We were just kind of talking on the way up not too bad of a walkup today here in almost mid-February. I don’t think we say that too often.
James Nelson:
Yeah. Typically, we’re driving up here. Walking up here this time of year is pretty good.
Nate Kreinbrink:
The last couple days of pushing near 40 degree temperatures mounted a lot of the white stuff that was on the ground so, yes, we were able to walk up. And again, looks next 10 days, pretty mild.
James Nelson:
Keep it coming, right?
Nate Kreinbrink:
I know, and I’m kind of joking too on the way up, spring training’s going to be starting here in another week or so, pitchers and catchers report. It’d be nice to turn on the TV and see green grass and the baseball being thrown around a little bit because it is a sign then of spring and then, obviously, summer and the warmer.
James Nelson:
Yeah. Yeah, no doubt. That’ll be fun when that gets started.
Nate Kreinbrink:
But it is an exciting time. We got a lot of the local high schools as far as girls, boys, basketball, wrestling, kind of hitting that tournament action time. I know it’s regular season sometimes turns into a grind but it kind of flips the switch to a new season. Everybody has their chance and it’s kind of win or go home type of attitude and it makes for exciting atmospheres for that. So again, ahead of the girls and boys basketball I know getting started next week. I think wrestling kicks off this week. Want to wish all the area athletes and teams good luck and hopefully we’ll be well represented out in Des Moines again this year.
James Nelson:
Yeah, it’d be nice to see a team or two make it out there.
Nate Kreinbrink:
So today’s program, I know the last time James and I are on we kind of talked a little bit market update, inflation, interest rates, Secure Act, some of the hot news items that have been in there. Today we wanted to bring it back a little bit. We’ve had a lot of meetings, a lot of discussions, a lot of questions from clients, from prospects, from individuals regarding their pension plans at work and not necessarily really understanding exactly what it is their options are as they enter retirement and how to go about filing those. Again, but that is an important decision and a lot of times if people don’t understand they may not get accomplished exactly what it is that they want to do.
James Nelson:
Yeah, and I think it all boils down to a lot of employers just wanting out of the pension business. This low interest rate environment that we’ve been dealing with the last 10 years or so, up until here just recently with rates going up dramatically last year, but up until that point we’ve been at very, very low interest rates and that’s put a ton of pressure on these pension plans so you see a lot more of these offerings where they’re offering a lump sum payout. They’re getting rid of the plans for new employees altogether so pensions are becoming a rare breed these days.
And again, employees are left kind of wondering, okay, how does this affect me or what does this offer look like when the employer sends something out? So a lump sum pension has kind of been the go-to for a lot of companies to just be done with it, send the money out to the employee, and no longer have that liability going forward but there are a lot of factors that come into that decision and it shouldn’t be made quickly. You should really use that as an opportunity to look at your whole financial picture and see what decision really does make sense for me.
Nate Kreinbrink:
Right, and I think as so much as that we discuss and in this industry there really isn’t a one size fits all answer to everybody so, again, it does go into that specific situation. Normally, routine is you’re looking at retiring in the next month or two. You contact your HR department, they send you out a packet, if you are fortunate enough to have a pension, and then you’ll have to go through and elect the different options. As James said, one of them is a lump sum pension. You basically take that whole pension amount, you roll it over to an IRA account, there’s no taxes, that it’s not a taxable event on that, and then you control how that money comes out then going forward.
The other options then, as far as that, are joint life or single life where a monthly paycheck is essentially paid to you. If it’s single life through your life, when you pass away that stops. Or, if you’re married you can pick a joint life where there would be a benefit and different percentages, whether it’s 100%, 75%, 50%, it would be paid out to the beneficiary. And again, understanding if you’re married, health-wise as far as the working spouse and then obviously the beneficiary spouse that you would name, all goes into play when making these decisions. And again, it’s one piece of the overall picture and it’s important to look at that when looking at it and when we put together financial plans how that pension decision fits into that.
James Nelson:
Yeah, and a lot of people see that big number and, yeah, I want it, I just want to take that lump sum and, again, that can make sense in a lot of situations but that’s not the only factor. Taxes is another thing that we really spend a lot of time on. If you do take that lump sum, now not only do you control your own destiny going forward, you’ve got the money, doesn’t really matter what happens to your former employer, the money’s now in your name, but now you can control your tax situation a little bit better.
Versus what Nate just described as far as the monthly payout, that money’s coming whether you want it or not. So if the lump sum option is appealing and maybe you don’t need as much income as what the payout’s showing you, you can control your tax situation a little bit better with that lump sum of money because it’s in an IRA and you only pay tax when money comes out so that’s definitely something to weigh when you’re looking at those options as well.
Nate Kreinbrink:
Right. And again, you look at it and how do you coordinate that decision with other ones and a big decision maker between those two specifically would be if you do have a pension, when to start collecting it. And then, on the flip side of that, when you start collecting your social security benefit, and having a plan between when you make each of those decisions is crucial and it allows you to have a little bit more flexibility as far as trying to maximize one of those. Again, with the social security benefit, you know that that benefit does increase. If you’re past your full retirement age, it increases by 8% every year up until age 70. That’s a pretty big bump every year as far as being able to take advantage of having that flexibility with your pension in order to maybe do a lump sum rollover, maybe have that kind of cash flow and bridge that gap until you delay that social security a little bit. Again, all these different options play in but, again, it’s important that you understand what those options are and how they do fit into your big picture.
James Nelson:
And some people just have concerns about their former employer’s financial situation. Are they going to be able to make payments to me for the next 15, 20, maybe even 30 years? And again, that can be a real concern. There’s been plenty of pension plans that have not made it and they’ve had to be kind of bailed out in one fashion or another so that is a concern and we’ve seen that with the airline companies in the past and some other notable ones where the pension plans aren’t necessarily as solvent as we’d like to see, and taking a lump sum when you can get it is something that runs through a lot of people’s heads so that’s understandable but, again, we want to look at the different options. With interest rates going up those lump sums have gotten a little less attractive in the last year or so but, again, still worth crunching some numbers and figuring out what option is best for your specific situation.
Nate Kreinbrink:
And I think, specifically, we’ve had a couple individuals, again, that had some information they brought in as far as changing to their current plan. As far as decisions to say do I want to put money into the pension plan, do I want to increase my contribution or matching contribution into the 401k part. Again, if you have questions on any of these different options it’s important, again, that you understand what your choice means to you, not just now but, again, 10, 15, 20 years down the road because those are big decisions and they usually send them out to you with a little bit of information and then expect you to make that decision by this deadline and then here you go.
James Nelson:
Yeah. Yeah, exactly. And that landscape has just changed so much. We always say it but we continue to see employers get further and further away from those pension plans. In 10 years, Nate, we’re not going to be talking about pensions too often. It doesn’t seem like there’s many left but you’re right, you’ve got to look at those numbers and the employer kind of wants to lead people one way and when you do have that optionality where you could go that way or you could go another way you need to back into the numbers and take a look at this closely.
Nate Kreinbrink:
Right because, again, we say it all the time, you hopefully only retire once. You want to work with somebody that, again, has been through the block before, that has known and been through the process, knows the steps to do it and, again, can help you through that because it is a big decision. And oftentimes, again, as people get closer to that decision on whether to retire or not there’s a lot of different stuff being thrown at them. Especially, you throw in the changing in insurance, the changing in cash flow, the changing in savings. There’s just a lot of stuff.
And then, let alone the psychological side as far as, okay, I was working, now I’m entering in retirement. You throw all of this together, it’s overwhelming. It is overwhelming when you look at, “Okay, am I making the right decision? I don’t know, I’ve got to get this in.” So boom, I check it and then you basically live with that, and a lot of those decisions are final. Once you make those decisions, after a certain time they’re final, you can’t go back and change so, again, you want to make sure that you get it right.
James Nelson:
Yeah, it’s a done deal. And those pension packets, you’ve seen them, I’ve seen them a hundred times. They’re 25 pages generally and people are like, “Whoa.”
Nate Kreinbrink:
And usually only five of them apply to the people.
James Nelson:
Yeah. “What am I doing here, I need some help.” So yeah, feel free to give us a call and we can certainly help you through that process.
Nate Kreinbrink:
Before we do run out of time today I wanted to mention that every Friday Nelson Corp Wealth Management is wearing jeans for charity. Money raised in the month of February will be donated to the Children’s Discovery Center here in Clinton. James, as always, appreciate you joining me.
James Nelson:
Absolutely.
Nate Kreinbrink:
Nate and James with Nelson Corp Wealth Management bringing you this week’s financial focus. Thanks again for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.