Getting it Right: Irreversible Financial Decisions

Well, glad to have you back on Mr. Stillman's Opus.

Got a good show for you today. John, do you ever do anything, make any decisions that maybe you realize after the fact? I can't go back and change that. I wish I would have done it differently. I think that's going to be the title of my memoir is when I finally get around to writing. Should have done things differently.

The John Stillman story. Right. Exactly.

Surely it can't be that bad. Well, in finance, obviously, you know this, but there are some key things that you have to get right the first time. I know so much of what you do is pretty fluid, right? I mean, you're always evaluating a client's needs and kind of their life situations. And, you know, you can make a lot of changes throughout the course of someone's retirement.

But there are a handful of things that you really need to hone in on and make sure that you have a proper strategy for ahead of time. Yeah. And it's kind of like the old putting the toothpaste back in the tube idea. So I remember when I was a kid hearing a preacher talk about how you can't put the toothpaste back in the tube. And the message was essentially like, once you say something like the words have done damage, you can't take them back, right? You can't put the toothpaste back in the tube.

So, of course, he had the toothbrush and the toothpaste up there at the pulpit and he's like squeezing the toothpaste everywhere and making a big mess and hardy-har-har you can't put it back in the tube. But whatever, I remembered the point here 25 years later, so I guess it was effective. But yes, there are lots of things like that in your financial life. You know, it's like today, like with the internet, you really can't put the toothpaste back in the tube ever in many cases, right? Never forget.

It's like you learn that lesson the hard way a lot of times and it's irreversible there. But with money, we've gone ahead and highlighted four things today. I know there's probably a few more than this that you might mention, and maybe you'll wrap up with a thought or two. But I got four that I think are maybe most important or at least ones that we want to make sure that you're paying attention to now.

So, if you have questions again, you can reach out to Jon afterwards. But I want to hop into Social Security first. I know with the COLA increase now, a lot of people are thinking maybe it's a good idea to go ahead and start it early and take advantage of this increase because it's so significant once again. But Social Security is one thing that you have to make sure that you know why you're claiming it when you are and that you're doing it to maximize your benefits because this truly is one thing that you really can't go back on. Yeah, I've seen a lot of people who have started their Social Security at age 62 simply because they can. That's when they're first eligible and it's the thought process as well. I can have this money now.

I might as well, right? And that's not always the wrong decision. There are times where I have recommended that people should start their Social Security at 62 just depending on their life circumstances. But more often than not, it's going to make sense to wait, put it off to a later age and get more, get a larger monthly benefit whenever you do start it.

Problem is if you started at 62 and then you realize at 65, you know what? I should have waited. Well, too late. There's no undoing that decision. Now there is some weird provision where if you're like eight months in and you want to reverse it, you can pay the money back to Social Security and then, you know, decide to start it later if you want.

I think it has to be within a year of starting your benefit that you can actually undo the decision. But you know, you've got to one, have the cash to actually pay the money back. Two, now you have to deal with the Social Security Administration three times, right? Like normally you would just deal with them once when you want to turn the benefit on. And that, you know, dealing with them usually is excruciating enough just doing it one time. If you're going to do that, then you're going to pay it back and then you're going to start it again later.

Now you've just created all this headache for yourself. So bottom line is just have a plan before you start your Social Security. Really important that you understand the tax implications of it, how it fits into your overall tax picture.

Don't just start it because you can. Yeah, your point about having to pay back that money and having that money, I would assume that most people that are claiming their benefits right at 62 are probably doing that because they want to use that money somewhere. I don't, I would imagine they're not claiming it just to sit in the bank, correct? Right. So they probably don't have a lot of liquid cash laying around to pay it back with.

Not a fun feeling either to have to pay back money. Nobody knows that. So again, something to think about with Social Security. And again, I know this COLA increase has probably got a few extra people thinking about it, right? Yeah. I mean, we had a big increase coming into 2022 and then they're saying the cost of living adjustment going into 2023 is going to be the biggest probably in history. So yes, it is tempting, but you still just need to have a plan. Yep.

All right. I don't know how often you deal with clients that have pensions right now, John, I don't know how many businesses around North Carolina are still holding that practice for their employees, but for those that still do, and it's, you know, as it winds down, I know you still come across some, the option to elect your spousal benefits on your pension, how does this play into it? And why is this irreversible? So this one, unlike Social Security, where if you get a couple months in and decide, Ooh, I made a mistake, I can pay it back. This is like the next day, like you received that first check.

There is no undoing this decision. So you have a pension and often there are like six different options. So you could take just a straight life payout. It's going to pay out as long as I'm alive and no more, or you could do a spousal continuation where I'm gonna get a little bit less, but now it's going to pay out for my entire life or my entire spouse's life, whichever lives the longest. And then there's other little permutations of that, like it'll drop in half once you die and then pay out at half while your spouse is alive.

And so there are all these different things you can elect, but once you pull that trigger, there's no going back. So the most catastrophic example of this that I saw was this was a guy who was retired military and he, I think he'd had like 32 years in the military. So he retires, he takes his military pension and then 10 days later he calls into my radio show and wants to come in and talk about his overall financial picture. So he comes in, he's like, I don't know, I think it was probably late fifties at the time. And he's talking about this pension that he got, which was a big pick. Like he was pretty high up in rank. He was getting like $11,000 a month from his military pension. And again, he just started it like not even two weeks before.

And so we're talking through things. He's, let's say 58, his wife is 11 years younger than him. So she was 47 and he, what he'd done, he'd taken his $11,000 a month with no spousal continuation.

So he's going to start it. He's going to get 11,000 a month when he dies. And statistically he's going to die like 14 years before her, because one women on average live about three years longer anyway, and two he's 11 years older. So statistically she outlives him by 14 years. And for that entire 14 years, she's going to have an income gap to fill of at least $11,000 a month, that income that he used to be getting and she'll no longer be getting it. And so he comes in, he's talking about all this stuff and he's saying, you know what, maybe I should have made a different choice on the military pension. Yeah, you should have.

I wish you'd come in like three weeks ago before you pulled the trigger on that. The way we ended up solving the problem in his case was with a combination of life insurance. So she'd get a payout from that when he passed on, assuming he does go before her. And then some other investments that we were just going to put aside and let those be the slush fund that he'll tap or that she'll tap when he's gone and that pension goes away. So there are ways you can overcome the bad decisions, but it sure would have been easier and less stressful in his case if he'd just taken $9,800 a month instead of $11,000.

Take $9,800 and let it pay out for his wife's lifetime too. That's a great example. And man, that's got to be difficult feeling. And I guess it's a great reminder too that if you do make a mistake and you realize it, don't compound those mistakes, right? Like, okay, it's done. What's done is done, but let's go talk with someone and see what can be done because in many cases, like you just laid out, there are some things that can be done to correct that, or at least to put you in a better position going forward. Even if you do regret maybe a previous decision you had made.

So I love that story. All right. You mentioned life insurance. Let's talk life insurance then. So the first two, I can kind of understand why they're irreversible, but explain to me why like your decision on whether to get life insurance is one that's irreversible. Well, this isn't guaranteed to be irreversible, but if you say, yeah, I should probably have some life insurance in place maybe for income replacement if something happens to you or maybe just for estate planning purposes, like the example I just gave. If you determine that you should get life insurance, go ahead and get it.

Don't drag your feet on that because what happens if you drag your feet for two or three years and in that time you have a cancer diagnosis or you end up with diabetes or something like that. That's either going to make you not insurable at all, or it's going to make the life insurance so expensive that you're going to want to not get it. So I've seen this in a couple of cases where, you know, folks have had cancer. It was pretty minor. They got over it and they're fine. Their health is fine. They're 18 months out.

No big deal. But the life insurance company is still going to make them have a waiting period before they'll insure them because they're too recent of a cancer patient. So there are a lot of things that can happen that, like I said, can either make you uninsurable or make your premiums so high that you might as well be uninsurable.

So it's another example of something that you should talk about. Get some advice of do I need life insurance or not? A lot of times people don't. A lot of times people have life insurance that they've had for years and they needed it for a time. And then I'm saying, look, you don't really need that anymore. Why don't you just stop paying the premiums and save that money? Invest that money instead. But, you know, your kids are grown and done with college and that's what you bought that particular life insurance for in the first place.

So if we don't need it for that application anymore, why do we keep paying for it? So you just need to assess periodically, do I have the right amount of life insurance? Should I scrap it all together? Do I need more than I currently have? Do I need it for a different use than I'm currently using it for? It's just good to stay on top of those things. And I know this is going to be different for everyone, but what age are you typically discussing or should be having the conversation about life insurance? Is there any certain range that you should really kind of be targeting? Really depends on what you're using it for. Right? So if it's income replacement, let's say somebody is the primary breadwinner in the house and we just want to make sure that the family is taken care of if something happens to them.

Okay. Well, that's most important in your thirties, forties, maybe fifties when you still have kids on the payroll and a spouse. Once you're in your sixties, often what we're looking at is either something like military guy where we have to replace his pension because he made a bad choice on that or an estate planning thing where we say, look, you know, the kids are going to have a lot of IRA money that they inherit. That's going to be a big tax time bomb that's going to get passed on to them. What if we take just a little bit of money out of the IRA each year while we're still alive, fund a life insurance policy with that, and then the life insurance policy will pass on tax free to the kids.

So now they've got some tax free dollars to work with in addition to the taxable money. So you can use it for estate planning applications like that. Those conversations usually aren't happening until at least your sixties. So really just depends on the use. All right. Last one here I've got for you for decisions you want to get right. Choosing a retirement date and maybe, maybe this one isn't irreversible in the sense that you can't go back to work. Maybe this is one that you don't want to ever have to reverse. Right. But even so, like, even if you do have to go back, it can be difficult to find a job that you want and make the money that you maybe left the workforce with.

So this is our last one. Well, I think you nailed it in that there is no rule or law that prevents you from going back to work if you realize you retired too early. But man, I can't think of anybody who wants to do that. Now, certainly there are people who have retired and gone back to work, not for financial reasons, but just because they miss being at work.

If you want to do that, that's fine. But, um, for a lot of people who say, well, I'm going to go ahead and retire and I can always go back to work if I have to, I'm racking my brain. I can't actually think of a time where somebody has, you know, let's say retired at 63 and then realize a year later, Oh, you know what? That was too early. And then happily gone back to work.

Right. Like it is if you retire and then you have to go back for financial reasons, like it's the end of the world. Um, so don't put yourself in that position before you pull the trigger and walk away. Just understand what you, what we find for a lot of people is that if we can identify an end date and you know what your walk away day is, it makes your remaining working days that much more palatable because you know that there's an end in mind as opposed to just, Oh, I don't know how long I need to work. I sure hope a 66 is old enough. Well, if we have a definitive end date, you can do almost anything for a year or two years or whatever. Um, or it could be the kind of thing where maybe you'll realize, okay, well I could retire any day and it would work.

We could make it work. I don't really want to retire just yet. Like I don't love my job, but I don't hate it. They paid me enough to, you know, make it worth the headaches. So I'm going to stick around for a while, but boy, it sure is nice to know in the back of my mind I could walk away if I wanted to. That also makes the remaining days more palatable just because you know, all right, I don't have to sit here and take this. I could leave if I want.

Well, you don't have the confidence of knowing that unless you've actually done the work to do the plan and understand what life looks like if you do retire now or in a year or in three years, whatever it is in your situation. So just do the work. And when I say work, you're not doing that much work. We're doing the work. You're answering some questions, right?

And thinking about what you want your life to look like. So reach out if you have questions on any of that and we will figure out how to get you on the right track. Well good stuff, John.

A great breakdown on all these things. And again, you want to have a plan for everything you do, but these are really important in the grand scheme of things. So if you don't have a plan in place for these, again, get in touch with John.

Rosewoodwealthmanagement.com is the website to do so. All right, John. Enjoyed this conversation as always. Look to do it again here in a couple of weeks. Careful with your toothpaste. Can't put it back. You got it. Thanks for listening to Mr. Stillman's Opus. We'll talk to you on the next episode. Carolina Weldstords Doing Business as Rosewood Wealth Management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.