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 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 right here on KROS. Well, this is Nate. I got James joining me today. Another beautiful day out there. We had another very pleasant Easter weekend. Hopefully everybody was able to get outside, open up the windows, get some fresh air. It’s nice seeing the grass green, up buds on the trees, kind of some of the perennial flowers starting to pop up and just I guess the so-called signs of life.
James Nelson:
Yeah.
Nate Kreinbrink:
Just the color’s coming back.
James Nelson:
Yeah, it also makes it nice for practices, right?
Nate Kreinbrink:
Yes, it does, being outside.
James Nelson:
Yeah, you and I both coach some teams and it’s nice to have some decent weather come practice time, so it’s been really nice.
Nate Kreinbrink:
And not having 30 mile an hour wind and just cold, damp, whatever. Yes, it definitely makes it nice. So looks like we’ve got a few more days of this pleasant weather and then maybe backing off that a little bit later on in the weekend into next week. But it’s coming. We’ve waited all winter for this. It’s here. It’s coming, much anticipated.
This time of year also, again, we talked about it a few weeks ago. We had Andy Ferguson with Nelson Corp Tax Solutions on talking a little bit about the tax season, what he’s kind of seeing with some of those. Did want to also give a reminder that next week is the tax deadline, so again, if you have not turned your taxes in to file for 2022, you better get moving on it. Again, be anticipated, if you do turn those in, there is a likely chance that you may be put on the extension list and get that filed for you. Again, look at that. Then also there’s still time to make IRA contributions.
James Nelson:
Yep, yep. IRA contributions kind of go along with the tax deadline so people that are kind of in that boat and may qualify to make a Roth IRA contribution, a traditional IRA contribution, you still have a little time left to make those, but like you said, Nate. You better hustle up because generally speaking, there’s a pretty good amount of volume around that time so if you show up on the last day, there’s no assurance that that deposit’s going to make it in for the prior year contribution. But again, all those things that are worth considering coming up on the tax deadline.
Nate Kreinbrink:
Again, you start looking at this time of year and it seems there’s certain times of the year where we kind of have more frequent questions than what we have other times of the year. One thing as we has been talking as far as that has came up quite frequently at some of our meetings we’ve ran is people understanding their pension that they have through their employer. A lot of times this time of year you’ll see the pension plans running numbers as far as the lump sum amount based off of changes to interest rates and how that impacts that lump sum. But again, you getting those numbers, it’s important to understand how those numbers are calculated to a bit, what your options are, and how you can maybe look to maximize those.
James Nelson:
Yeah, and this didn’t really get much attention until last year since interest rates went up so much. If interest rates are trending downward or just kind of remaining flat, the pension numbers are pretty clearcut, you’re not going to have much variability. But when we have a year, like last year where interest rates went up dramatically, those pension amounts really changed. If you think about it, if interest rates go up like they did in 2022, there’s a lesser lump sum needed to generate that same cash flow. People were finding out, geez, why’d my lump sum pension projections go down so much? It’s because interest rates went up. You’re right, this is kind of the time of year where a lot of those pensions calculate the numbers, they send out those packets to retirees or people nearing retirement, and then people have some decisions to make. Yeah, all important stuff and definitely worth considering in this type of environment.
Nate Kreinbrink:
Well, and two, and again, understanding the lump sum is an option where again, instead of having that pension plan pay you a paycheck every month for the rest of your life, you can say, “Hey, I want to take out my whole pile, my whole amount,” roll that over to an IRA account to another tax deferred account, now you have control over that. A lot of times people look at that and like the flexibility, the liquidity, being able to control that money a little bit more. Some people like looking at it saying, “Hey, I want to have that guaranteed paycheck every single month.” Again, understanding what those options are.
When you choose to get that monthly paycheck from the pension plan with that packet that you get as well, whether they send it out annually with some updated numbers or if you’re near retirement and you requested them to send it to you, it will have different options on there for you to be able to pick, whether it’s a single life annuity where basically it’s going to pay out for your entire life, when you pass away, payments stop. You can add a beneficiary to it, so normally those payments are going to be lower a little bit, but it’s going to continue on with whatever beneficiary that you pick, usually either a 50% payout, a 75% payout, or a 100% percent payout to whatever beneficiary you pick. Now again, those payments are going to be lower because those payments are going to be based off of two lifetimes as opposed to just one like they would with the single life payout.
There’s also other options that are seem to be added with it where it’s a period certain, a lot of times it’s a 10 year certain, where somebody is going to be guaranteed a paycheck for 10 years. Again, you pass away after eight years, somebody’s going to get another two years of payments. You pass away in year 11, payments stop. Again, it’s looking at some of those options and a lot of times people get that packet, they see the numerous pages in there, they start flipping through and they just kind of shut off because they don’t know what to pick, they don’t want to mess it up, they don’t understand it. Again, having somebody being able to go through that with you, understand each payment option, understand what it’ll pay for your lifetime, understand if there is any paid out to a beneficiary lifetime, definitely helps in making that decision.
James Nelson:
Yeah, and it’s also just running the numbers too. Okay, if I pick this strategy versus that strategy, where’s kind of the crossover point and backing into those figures? You’re right, Nate. All these pension packets, it seems to be that there’s more options all the time.
Nate Kreinbrink:
Mm-hmm.
James Nelson:
It used to be pretty simple, like you said, the single life annuity payment, the lump sum, and maybe a 50% or 75% spousal benefit. Well now generally there’s 10 or 12 different options and people need to understand those options before making that important decision because when it’s done and it’s submitted, it’s a done deal so there’s no undoing that or after a year worth of payments, “Oh, I want to change my mind to do something else.” That’s pretty much locked in there and there’s going to be no changes.
The other thing that, going back to what you mentioned, Nate, as far as the lump sum versus the annuity payout, oftentimes people look at the viability of maybe their former employer. “Hey, are they going to be able to make pension payments to me in 20 years if I’m still alive?” type thing and oftentimes that plays into the decision making process too, whether somebody feels confident in that employer or maybe not so much could really sway you one way or another.
Nate Kreinbrink:
Again, it’s looking at all these options, but again, looking at that pension as just one piece to the puzzle.
James Nelson:
Yes.
Nate Kreinbrink:
Again, when we look at putting together a plan and people coming in and asking, “Am I able to retire,” we try to get all these pieces together and make decisions. Coordinating with everything and coordinating any pension option that you may have with any social security benefit that you could have is usually a big part of that. If you take that lump sum pension, maybe we delay social security a little bit, or at least the larger benefit, if you’re married a little bit longer, knowing that we may hit that lump sum pension a little bit harder in the first couple years, but yet that is bridging us that gap to get to us delaying that social security benefit. Now we locked in a social security benefit, now we don’t have to touch that lump sum as much for longer period of years doing it that way.
It also allows us to look at the tax situation too, understanding that we retired, in most cases, your income will go down a little bit in retirement, although a lot of times, not as much as what people think, but there may be some tax opportunities where it gives us a few years to be able to do some planning, do some converting, do some, taking money out of that tax deferred account in those lower tax years, while also getting that benefit of delaying that social security benefit and locking in a larger benefit later on. Again, it’s not just looking at your pension and saying, “Oh, this is what I’m going to do,” not understanding how it’s going to impact everything else. It’s making that decision, but understanding how it all fits together.
James Nelson:
No doubt, and the taxes have to come into play. As advisors, we can’t make strong recommendations unless we know the person’s tax situation, and like you said, the pension plays into that, social security plays into that, any distributions from retirement accounts play into that. All of these things kind of go together and you’ve got to have things coordinated or somebody’s going to end up paying more tax than they really should.
Nate Kreinbrink:
If you get these packets or you’re nearing retirement and you have questions on any of this, how it fits into your situation, give us a call. We’d be happy to kind of lay things all out on the table and kind of show you and kind of push and navigate you through this decision, be happy to help with that. Did want to mention real quick though, before we do run out of time, that every Friday, Nelson Corp. Wealth Management is wearing jeans for charity. Money raised in the month of April will be donated to the Juneteenth Celebration, which is sponsored by Living Peace 365.
James, I appreciate you joining me this morning.
James Nelson:
Absolutely.
Nate Kreinbrink:
Again, Nate and James with Nelson Corp. Wealth Management, bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of Nelson Corp. Wealth Management in Clinton and Davenport. The opinions voiced in the 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 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.