Retirement income planning in the “new normal”


Jamie Hopkins

Director of Retirement Research at Carson Wealth & Finance Professor of Practice in the Heider College of Business at Creighton University


Retirement income planning in the “new normal”

Retirement policy, interest rates and market volatility have made retirement planning more challenging for clients and advisors alike. What are the philosophies, opportunities and challenges you need to be aware of to help your clients navigate decumulation in today’s environment?

In this episode, we’re joined by Jamie Hopkins, Director of Retirement Research at Carson Coaching and co-creator of the Retirement Income Certified Professional (RICP) designation. Jamie discusses the opportunities and challenges associated with creating retirement income in this new environment, including how to help shift the mindset of individuals to adapt to these changes.

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In this episode:

  • The financial advisor’s role of managing emotions around money, not just the money itself
  • Aiding a client’s transition from saver to spender
  • Three philosophies of retirement income: Flooring, systematic withdrawals and bucketing
  • How policy changes have created potential opportunities, even in low-rate environments

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Jamie Hopkins – The coronavirus, the market volatility, the SECURE Act gave advisors the opportunity to go on the offensive, to be proactive, not just defensive and reactive.  There are advisors having a great impact on their current clients and growing their business right now, serving more people because they’re being proactive.

Ben Jones – Welcome to Better Conversations. Better Outcomes. presented by BMO Global Asset Management. I’m Ben Jones. 

Emily Larsen – And I’m Emily Larsen. On this show, we explore the world of wealth advising from every angle, providing actionable ideas designed to improve outcomes for advisors and their clients.  

Disclosure – The views expressed here are those of the participants, and not those of BMO Global Asset Management, its affiliates or subsidiaries.  

Emily Larsen – Individuals are more responsible than ever before for securing their own retirement.  This means not only the accumulation of retirement assets, but also the decumulation or retirement distribution phase.  To complicate matters, record market volatility and several major changes to retirement policy are making retirement planning more challenging for clients and advisors alike.  Our guest today is Professor Jamie Hopkins, managing director of retirement research at Carson Coaching, and co- creator of the RICP, Retirement Income Certified Professional Designation.  He’s here to discuss the opportunities and challenges associated with creating retirement income in this new environment.

Ben Jones – You’ve probably read a number of Jamie’s articles, as he’s a frequent contributor to Forbes and many other media outlets.  He is a great resource for succinct information on complex laws and issues affecting retirement planning.  In fact, last year he published over 100 popular press articles.  Wow.  To level set the conversation, I started off by asking Jamie why the transition from saver to spender is such an important life transition.

Jamie Hopkins – When you look at the macro level, what stared to occur here was that move away from traditional pension plans and defined benefit plans.  Really the retirement income decision was, for the most part, created for them on the employer side.  Now we’ve moved.  Really the onus of this burden has shifted away from the employer, away from the government and over to the individual through 401(k)s and IRAs and these defined contribution plans.  That’s not just here in the United States, but all over the world, is there’s kind of been a move towards that.  The challenge becomes moving away from kind of pooled funding and pooled distributions and individuals and every individual is now running their own personal pension, right.  They need to fund this and make this income last for a really long period of time.  This is really challenging because even in institutions struggled with this.  The best fund managers have struggled with this.  What it causes a lot of people to do was to become ultra conservative to kind of make sure they don’t run out of money.  I think there’s probably not a lot of the systems and processes in place to encourage the best outcomes here yet.  But really what we’ve got to do is what I talk about in my book that I wrote, was re-wire the way people think here.  We actually have to get people to change their mindset from an accumulation mindset of watching a balance go up in their savings and start thinking about the decumulation or retirement income time period. At first, people are like oh yeah, you retire, you do things differently.  But the reality is we actually train you for 30 years in your work force to go in a check your account and make sure it went up.  That’s about all we really care about when we log in, is their money is still there and it went up.  Then we get to retirement, we didn’t train you how to spend down money for the last 30 years.  We only trained you about how to set money aside and hopefully see it go up.  That’s actually a much bigger challenge than on the face it really seems like because we can really only do the things we’ve been trained in and have information on.  We can’t do other things.  I think that there’s a lot there where we have to change this mindset about focusing on a savings or a magic dollar number for accumulation.  And what is the way that we’re actually going to get that cash flow and income during retirement.

Ben Jones – That’s a great point and mindset changes are really hard for people, especially given the status quo bias that we all have as humans.  I’m curious, what are some of the ways that you have seen advisors help shift the mindset for individuals and help train them to this spend down mindset, or decumulation mindset.

Jamie Hopkins – The first thing I would tell you is that there’s really not an accepted or generally accepted way to go about this yet.  Whereas the accumulation side, I’d say the industry has kind of agreed upon hey here’s how we accumulate money and invest it while we’re working, general agreement.  On the decumulation, very broad.  I would say there’s probably four or five things that I really like that I see out there.  I’ll start with the broadest one, and the broadest one is just starting with goal-based planning.  Goal-based planning is one way that actually works very well from behavioral technique standpoint on getting somebody away from the details, getting away from their account balance, but focusing on what are the goals you want to accomplish in retirement.  Then we set up a plan to accomplish those goals.  It becomes less important about the savings and the dollar amounts, but more focused on goal based planning.  Goal based planning, we’ve seen regardless of the finance community or retirement community works.  If you’re an athlete writing down your goals and then creating a plan to go after them works.  If you’re trying to lose weight, writing down your goals, setting up a plan.  It works.  Goal based planning works.  That’s something we kind of stumbled into, I’d say, in the financial world.  But it is something that’s been shown to work across the board.

The second thing is really what I’d say is trying to come up with the story that resonates with clients.  There’s three different philosophies typically to income planning.  I’m kind of a believer that I think all three have value.  We can dive into these further if you want.  But one is I would say more of our analytical clients who, what we’re going to look at is a systematic withdrawal type of approach.  We’re going to come up with a much more analytically driven process to generating retirement income, investing in the markets, and taking strategic distributions from your assets to generate your income.  We also have one that works very well for a certain group of the world, which is what we call a flooring approach, which is safe income.  This has been something that to some degree has been used for many years, which is either go chase yields and CDs and bonds, or I purchase an annuity with my assets to generate that steady stream of income.  That’s really what the large insurance companies have done for long periods of time.  We’ve kind of joked that it was your grandmother’s retirement income plan, which was go buy a bunch of CDs and live off the interest.  That’s the actual plan that people use.

The third one being bucketing.  Bucketing means a lot of different things to a lot of different people.  But in its core, we’re mental counting.  We’ve got different assets set aside for different uses in retirement.  I would say those three philosophies kind of create the core of what advisors use today.  I’m of the opinion that they actually fit different clients better.  I think that advisors and clients can learn something from all three different philosophies.

Ben Jones – We’ll dive into each of these strategies a little bit more later.  But maybe before we jump into that, I am curious, you brought up pension plans and how hard it is to create retirement income.  It’s a challenge that fund managers and pension plans have wrestled with for many years.  Why haven’t individuals or should individuals look at their funded ratios in the same way that pension plans would.  Is this just too complicated?  Why isn’t that one of the three approaches that people use?

Jamie Hopkins – I would say generally speaking, one of the reasons why they can’t quite use the same approach that a fund would use is because funds are able to spread that risk over a broader base of people, right.  With an individual, your risk is a little bit different.  One of the things I tend to describe income planning as, and it’s kind of simplified, is trying to hit a moving target in the wind.  Your target is your specific spending goal.  That’s different for every individual.  Then it’s moving because we actually don’t know how long you will live.  I don’t know if you’re going to live for five years in retirement or 40 years and you retire at 60 and live to 105.  Those are vastly different income needs.  The problem with an individual is I can’t offset that with anyone else’s mortality risk, which we can do inside of annuities and pension plans.  Mortality risk pool to some degree and offset some of that risk.  That creates a very big challenge for individuals is we just do not have a great understanding of longevity yet today.  We’re getting better at that.  We can get some projections based on you, your health, your family health, whether you smoke, and get a better projection so we’re not going in completely blind.  But it’s not perfect.  The other thing is the last piece.  There’s wind.  The wind are a lot of things, but it’s really any of the things that can push us off course over the course of our retirement.  When you think about that, we’ve had three major tax law and policy law changes in a two and a half year period.  That can push you off course.  March of 2020 had about the most volatility we’ve ever seen in a stock market in the history of the market in a month.  That can push you off course.  Something like negative interest rates and low yield interest rates for a very long period of time that can push you off course.  A lot of those things, right, those are the unknown unknowns.  We know that something will happen, but we don’t really know what they are.  But we know that there will be those things that we can’t predict that will come.  I think some of those things are occurring right now.  That’s challenging some of the funding, we said, even for the largest pension plans, even the most sophisticated investors and strategies.  There’s challenges with a prolonged low rate environment where one in three month rates and the US dropped below zero.  There was a time when academics believes negative interest rates from a true lending perspective couldn’t occur because they always said well you can just stick your money in your mattress better than negative, so they can’t exist right.  Then we got them and some international countries and the Fed said oh yeah, that happened elsewhere.  But not in first world, developed financial countries.  Then we got some, I think maybe Germany was first.  Then they said well yeah Germany, but never in the US.  We’re still very different.  Then they said well we’ve looked at them, but we wouldn’t use them.  Now we have them.  That’s the 20-year view of where some of the smartest people out there kind of viewed interest rates.  That’s made funding things like pensions, annuities, retirement income safely very challenging as that yield has continued to drop down.

Emily Larsen – In broad terms, creating retirement income is about matching your client’s personality and the situation with the right philosophy.  Flooring, systematic withdrawals, or bucketing.  Ben and Jamie will return to this interesting idea of the wind that can cause unexpected changes to someone’s retirement plans.  But first, we’re going to do a deep dive into the three retirement philosophies that Jamie described.  Specifically, the type of people that they work best for.

Jamie Hopkins – If you’re an advisor who has a really good 80/20 rule, meaning that often 80% of our clients can be solved with a particular strategy or you serve — 80% look similar.  That’s your target demographic.  I think you could adopt one strategy that serves 80%.  We’ll kind of get to that.  It depends on how the practice is made up.  But if you’re really broad-based practice and your clients don’t look very similar, you could kind of struggle to find that single philosophy or solution that works across the board.  The next piece is unfortunately here, mostly the philosophy used is going to be based off the industry you’re in.  I will address that here in a second too.  When we look at the three, and we’ll just give a quick overview of kind of where the three would fall in — I’ll start with the flooring.  The flooring strategy to me is we’re going to generate safe income to provide for our mandatory, our essential expenses throughout retirement.  Almost everyone has some floor in their retirement income plan because they have Social Security.  We might have additional pension plans and we might go buy annuities or bond ladder or buy CDs and create additional floor, safe reliable income.  Now who does that work very well for?  It works very well for a client that might be risk adverse, right.  It makes perfect sense.  I don’t like risk, I don’t want to be invested in the market, but I want safe, secure retirement income.  Okay, let’s go with the flooring strategy.  Now that being said, who generally uses flooring strategies, they’re typically in the insurance industry.  Why, because you sell the products that solve for flooring.  It’s hey look, I work for an insurance company, love to meet you, come on it.  Hey look, wow, we’ve actually got the plan for you, it’s this annuity.  That tends to be how they’re placed.  Now, that doesn’t mean flooring is a bad strategy, but I would like to see in the future we adopt more strategies for more people.

Now moving up the ladder, at the top end is what most financial advisors would say they use a version of today, which is what we call systematic withdrawal.  Systematic withdrawal is what would be the most well-known version of this would be the 4% rule.  The 4% rule being they have $1M portfolio, 50% in US Large Cap, 50% in US Bonds, and Bill Bengen research in the 1990s said hey, you could withdrawal roughly 4% of that, adjust it each year and not run out of money over 30 years based on historical US data.  There’s a lot of asterisks attached to that research.  People kind of lay the 4% out there like it’s the golden rule of income planning.  But I mean it was kind of a pivotal moment.  It’s been very important just to set a framework.  The framework is hey, if we invest in the market, there is risk.  But in the long run it tends to work out.  But those first couple years, it brought us to sequence of returns risk.  You might average 8% returns, but can only spend 4% because the first couple years are really negative.  That creates, too, some type of systematic withdrawal.  I believe that that strategy works very well for two groups.  One, I would say, is our overfunded.  If we have clients, which a lot of advisors do, that actually are not going to spend down their assets and continue to grow their assets throughout retirement — maybe they have businesses and then sold them, they’ve got a lot of assets — sequence of returns risk doesn’t become that important anymore.  If they can get by with a 2% or 3% withdrawal rate and they can stay heavily invested because that market volatility is not changing their spending or their risk level, well then this is a very good strategy because that’s going to tie to their goal, which is grow their wealth throughout retirement.  The other group would just be maybe a very analytical and just very risk tolerant individuals.  I would probably put myself in that boat, where I kind of have a better understanding probably than average of markets, investments, and that’s where I’m spending my time kind of learning.  I have a very high risk tolerance level, meaning that I’m willing to take on risk and willing to cut back during down market times.  Now third one — I know it’s a lot.

Ben Jones – Well, bucketing is an important one because I hear a lot about it, but it means a lot of different things to a lot of different people.

Jamie Hopkins – What bucketing really means from the highest level is we’re going to sit different buckets of money aside for different uses.  That’s it.  Really what bucketing plays on is the emotional and behavioral aspect of individuals.  There’s a behavioral characteristic that we tend to like to do what we call mental accounting.  Everyone does this.  You have probably somewhere in your house, for most Americans, a jar, a drawer, a bank account that you use for a particular thing and that’s all you use it for.  People used to have the swear jars and the swear jars were used for pizza Friday and that’s it.  You have your vacation fund.  Your vacation fund is set aside, it’s only used for the vacation.  The reality is money should be fungible and we should use our assets to whatever the best use is.  But people don’t act that way.  We set money aside for very specific things.  What bucketing does is actually just recognize that and say look, let’s adhere to that.  Let’s not try to change the way people think, but let’s say hey yes, we’re going to set aside assets for different things.  What bucketing has probably evolved to over the last five years is more of what we call a time segmentation approach, meaning that the buckets of money are based on time horizon.  Now, soon, and later, here’s your secure, safe money for the now, a more mixed investment for the soon coming money, and then our long-term money can be a little bit more aggressive because we’re not touching that.  So market volatility in that bucket is okay because it’s 10 years down the road that we’ll actually need that for income.  I think bucketing works a lot.  I think what we’re going to continue to see is a move for the general population, that 80%, where bucketing really does become one of the go-to advisor planning tools for retirement income.

Ben Jones – It is interesting.  Like my mother is retired and this market volatility, probably if she looked at her account statements often, would cause her to have a lot of anxiety.  But one of the reasons that she doesn’t is that we’ve set aside a couple of years of cash and said if things get bad, this is your living expense money and don’t look at this money that’s invested for the long-term.  It’s amazing how well that mental accounting works in keeping people allocated properly and managing their behavior over the long-term.

Jamie Hopkins – I mean if you talk to the best advisors out there, what they’re going to tell you is a similar story.  They don’t really manage money, they don’t really manage investments, they manage client emotions around money and investments.  They’ll use different words, but that’s really what they do.  Really what we’re trying to keep people from doing is making the worst decisions at the worst times.  It’s not necessarily getting people to the ultimate, optimal solution and most efficient thing possible.  It’s getting people so they can enjoy their life and not have to lose sleep every night over their plan and their financial situation.

Ben Jones – The way that Jamie explains the role of a financial advisor as managing people’s emotions around money is a core theme that we’ve heard in many different flavors over the years from a number of our guests.  Now on the subject of bucketing, I had a few more questions for Jamie about how clients and advisors alike should think about the allocation of their retirement accounts and types.  You still have people out who have  DB plan or  you have Social Security for the majority of people, which you referenced.  And as you’re thinking about this as an advisor, is that something that you should think about separate and distinct in the income planning or is it something that you can kind of take the net present value of and think about it as a bond allocation.

Jamie Hopkins – Yeah.  I’ll give you two piece that.  First one is I absolutely believe that Social Security planning or defined benefit pension plan income needs to be part of the holistic plan.  I don’t believe we should make silo decisions on his because everything integrated.  You make a Social Security claiming decision, impacts your withdraw rate on other assets, it impacts your taxes.  A great way to frame that from a risk perspective is traditional DB plans, especially once the incomes in payout and Social Security is like our safe asset.  If you can do present value calculations of those two to see what that would be, you can figure out the payout rate, you could figure out the return.  There’s a lot of assumptions that go into those things.  Social Security for an average benefit if you do based on life expectancy and interest rates, I’ve seen present value calculations that are both correct depending on the different inputs right from $250,000 up to 2M for the same exact cash flow.  That’s entirely dependent on how long you’re going to live and interest rates.  There’s just so much uncertainty there where you can see 10x difference on something.  But you brought up a good point and annuities, defined benefit plans, Social Security; they actually can be viewed as offsetting the bond portion of an investment portfolio from an income-creation standpoint.  One of my former colleagues and still a good friend of mine, Wade Val, has written and done a lot of research on that, replacing your safe traditional investments with those secure income sources from a retirement income planning standpoint makes sense.  Then Roger Everson, who’s a fairly famous researcher at this point too, has posted research a number of times about just using annuities, which a pension plan or a DB plan would be an annuity, as really considering that as your offset to bonds and bond ladders and that they tend to outperform what a bond or bond ladder can do over the course of time.

Ben Jones – I want to talk about the adaptability of the plan.  So we get the philosophy set and you have a plan to help your client, whether it’s any one of these three philosophies or approaches, how adaptable does that plan need to be, because you did give the analogy of hitting that moving target in the wind.  And like you said, 30 years is a long time.  So how adaptable should the plan because and how should advisors help their clients understand how they might adapt to different situations.

Jamie Hopkins – So this is where I use another wind analogy and then I just realized that I’m blowing a lot of wind.  But we cannot control the direction or how hard wind blows.  But what can we do.  Well, use the sailing analogy.  We can change the direction of our sail.  That’s really the model here for when you think about income planning is we have to kind of plan around the certainty of today but with the uncertainty of the future in mind.  So things are going to change along the way and I think be getting two reliant on one strategy, on one income source, on one type of assumption creates risk.  I sometimes talk about NASA flying to the moon.  So I think the very first time NASA flew to the moon, I asked people how often were they on course.  They were off course over 98% of the time.  However, I think they landed within three or four seconds of when they projected to get there.  Well, why?  Because they planned to be off course 98% of the time.  So they planned for mistakes and uncertainty and by doing that, they just kept making constant adjustments, so they’re a little bit over, a little bit under and that’s really the financial advisory and planning and retirement story is look, things are not going go static from day one of retirement through 30 years, markets and interest rates and public policy risk and coronavirus now.  We never even threw that one into the thing.  Worldwide pandemics, you’ve got to prepare for the uncertainty of worldwide pandemics that now totally fine.  Next time you say that nobody is even going to be like, well, that’s weird, why would you say that?

Ben Jones – That’s a great point, it’s a really good point.  I hadn’t thought of it that way.

Jamie Hopkins – I wrote a CE book one time that I think had 19 different retirement income risks and that wasn’t one of them.  So we do have to just build flexibility into the plan and actually our CEO Ron Carson used to talk about that a lot, just what’s your adaptability quotient as a firm? So it’s actually something he used to tell advisors to measure as part of the coaching program, actually measure your adaptability quotient as a firm.  I think that probably plays true to your planning strategies.

Emily Larsen – It’s true.  Six-months ago, nobody was preparing for retirement with an imminent pandemic in mind.  But the coronavirus is not the only factor of this unique economic environment.  There have been some monumental changes to retirement tax laws in recent times.  From the Tax Cuts and Jobs Act of 2017 to the passage of setting every community up for retirement enhancement or the SECURE Act of 2019, and then in March we had the Coronavirus Aid Release and Economic Security, or CARES Act.  By the way, as long as I’m breaking down the acronyms of our beloved jargon, I should note that in the next segment, Jamie refers to QCDs, which means qualified charitable distributions.  So what planning opportunities have these created?

Ben Jones – My friend Mike Barry last year at the end of the year pointed out to me that even though asset prices we’re up double digits for the year, the ability to generate $1,000 of retirement income over 30 years fell because of the interest rate cuts during the year.  This year we’ve seen not only asset prices drop but we’ve also seen major interest rates cut.  So this low interest rate environment is having some long-term impacts on retirement income planning.  What are the ways or the solutions that advisors should be looking at to help their clients adapt to this type of environment?

Jamie Hopkins – I think there’s a reality we have to point out on the interest rate side.  The interest rates now from what we call low interest rates, I mean, they’ve been “low” for a long time now.  Expectations have started to change along those lines that some return to 4% or 5% interest rate in the short-term is not the expectation much out there anymore.  It’s not the expectation of the Fed, the US Government, international governments.  That expectation I feel like just five years ago felt very different.  That does not mean that that is what’s going to occur.  Because I said five years ago there was a lot of talk getting back to “normal” rates and this goal there.  There is a lot of expectation that this might becoming the new normal for rates.  If you kind of look at rates over the last 60, 70 years, it’s been a steady decline with some ups but at this point if you chart the graph, it’s been on a downward path for a long time.  The challenge that comes with that, there isn’t a magic answer outside of it because of the way the US government plays such a central role with the US dollar and lending and as the kind of secure financial instrument in the world.  It is where the majority of international deals are done in the US dollar still today.  It is the currency of choice internationally.  There’s obviously some risk associated with that but it creates that that’s the goal currency for safe investments in the world and it tends to still be.  So if people are like, oh, interest rates will come down and bond rates are bad, we can’t find good things, there’s not a magic answer to that.  That’s just a true challenge for today.  That’s being said, it doesn’t mean that we just throw up our hands and say we can’t do anything there.  I mean, there are options that do we need a better allocation, as you mentioned, does that mean we take on more risk with our long-term investments, do we diversify into other things like into the insurance world.  The insurance world, again, is tied to the interest rates, so if you used things like a term-based annuity or a fixed indexed annuity, there is an impact on interest rates there.  However, they’re also using some market derivatives on the back end, puts, calls, caller options and they tend to, again, a lot of research is asterisks attached but you can find some higher return in the insurance products that you can get just purely based off of yield from interest rate environment.  That’s an option that’s out there.  I think that we’re going to get better and better and incorporating home equity into our retirement income plans too.  There been, through the market volatility right now, a big increase again just in the short-term on reverse mortgage applications, understanding how do we use home equity strategically in a retirement income plan.  Those that offset some sequence risk, if used accordingly.  There’s been kind of more and more research coming out over the last couple of years on that side, even all the way up to Robert Merton, who’s an MIT Nobel Prize winner talked to me about how important that is to include as kind of the next level of retirement income planning.

Ben Jones – That makes a lot of sense.  Now I know you also have written extensively on the idea of stretching dollars.  So, does some of this have to do with reconciling reality and current spending. I’m just curious.  It’s a tough conversation for advisors to engage in but how does an advisor go about saying, look you’re going to have to stretch these dollars, which means you’re going to have to slow some spending somewhere.

Jamie Hopkins – If you look at the majority of Americans and a lot of clients, you can’t generate more returns than exist.  I can’t generate more interest than interest pays, I can’t generate better returns than the insurance companies can give, and I can’t generate higher market returns, especially over a long-term than the market returns.  So I can’t do any of those things.  But what we can we do, we can absolutely cut back and modify spending.  That is the area that we actually have more control over.  If all we look at your spending and just being efficient, and so that could be charitable giving.  Are they being efficient in charitable givers?  We see if all the time were people have IRAs and they’re standard deduction filers and they’re writing $1,000 or $2,000 of checks in retirement out to their church.  Well, they should be doing a QCD from their IRA.  You just saved them $2,000 of taxable income and 20%, you just saved them $400.  Literally we did everything else the same.  Charity got the same amount of money; it was just being strategic about the way we were spending.  So there’s a lot of things like that, whether it’s Medicare, the home, and there’s a lot of small things, that if we are really looking at a client’s situation, we can improve and it’s much easier to cut costs by 20% than to improve returns by 20%.  When you think about that side, yeah, I can’t improve your returns by 20%.  Very unlikely.  Could I cut your cost by 20%, actually, might not be as challenging as you think.

Ben Jones – Yeah and there’s also alternatives too where people can pick up part-time consulting now.  I think that’s one of the big benefits of the digital economy is that there’s a lot of ways to increase income too without giving up all of your time.

Jamie Hopkins – Yeah, I think the gig economy has really changed that option for a lot of people.  During quarantine it’s a little bit challenging but that has become a bit part of a lot of retirees’ strategic plan.  The other piece is advisors don’t love this but the reality is if you can get clients to work a year longer that might be the biggest impact you ever have on their plan.  The research around working one year longer is tremendous.  That research has been done by Stanford and just kind of looking at, hey, what does one more year look like from a retirement income perspective, pushing off Social Security, pushing off your withdraws, getting income from your employment for one more year has a tremendous impact.  Can we get people to that?  One of the first articles I remember writing from a popular press standpoint was for Investment News and I wrote out this scenario and I said, hey, let’s just assume we can get a client to work one year longer and here’s my recommendation, stop saving for retirement, spend it all on a vacation and will you be in a better spot and the answer is actually yes.  If you’re making $80,000 a year and I took 20 of that and spent it entirely on two weeks of vacation and they worked a year longer, would they be better off than stopping working.  You can actually run that out five years and actually make a good argument that even for the five years leading up to retirement we should this year to avoid burnout to keep them in the workplace an addition year than actually stopping contributions to a retirement plan if we can keep them in the workforce for an additional year actually is the right strategy.

Ben Jones – If you’re unfamiliar with the provisions of the SECURE Act, now is a great time to catch up on the new law by revisiting episode 98 of this podcast with Mike Barry.  We’re going to stick with this theme and I want to make a quick note that when Jamie says RMDs, he’s talking about required minimum distributions, which actually have been suspended this year between the CARES Act on some retirement accounts. There was a big change in the SECURE Act around stretch IRA provisions and I’m curious, has this changed the way that people think about the order of withdrawal of assets and what’s the current thinking on that now.

Jamie Hopkins – The order of withdrawal of assets, there’s kind of general rule of thumb there and I’d say that I guess I still promote that but I’ve always been kind of on the edge of that one.  There’s this notion that you use taxable and then tax deferred and then after tax Roth accounts last.  That’s been a general rule of thumb.  Now, you kind of mix and match depending on where the client falls in each year and there’s software that’s getting better and better on tax efficiency planning. I think the short answer for me is I can eyeball a lot of stuff, I have a master’s in tax, I’m an attorney.  I’ve been filing taxes and doing tax planning for 15 years now.  And I’ve got a good eye for it and a lot of times my assumption is still wrong sometimes.  I’ll look at something, eyeball which one I think is going to be better and it’s wrong.  So I think the challenge with that becomes I think we actually really have to start relying on software in that space moving forward on distributions.  When you bring up the SECURE Act, the one thing I do think the SECURE Act did across the board, if it had its ringing bell or flag or whatever thing it put out in front was, hey, look at Roth IRA, Roth conversions, Roth contributions.  I’ll be very honest, today under the current rules, my personal belief here, and again, my belief is worth about that much is that Roth accounts are better across the board.  I get some pushback on that from time to time but the reality is the Tax Cuts and Jobs Act lowered taxes for most people through 2025.  SECURE Act said, hey inherited accounts need to be distributed within 10 years.  The projection of that is to have huge tax revenue implication generating a lot of tax revenue for the federal government because they’re going to take retirement accounts, distribute them over 10 years.  Who’s passing away an 85-year-old group their leaving the account to a 55-year-old, 55-year-old is at the highest earning years of their life distributing this account if they’re trying to spread out the taxes over 10 years.  Well, what would I rather be leaving it?  Rather leave a Roth IRA that can sit and wait for 10 years, I don’t have to distribute it to try to spread out the taxes, I can let that thing grow for an additional 10 years tax-free.  It’s very hard now to actually overcome that.  It’s without RMDs at age 72 now; there are a lot of benefits on the Roth side.  People hear me say that and they think well that means all my money should be in Roth.  No, what I’m telling is by belief today is that Roth IRAs are better than traditional IRAs.  But my caveat there was – today.  I do not know where Roth treatment could be in next year or in five years or ten years.  What we need is driving back to the term, tax diversification.  We need after tax money, tax deferred money, and Roth money.  Just likes diversification with investments works, diversification with the taxation of our money works because it minimizes the risk of changing tax loss in the future and if there is one thing that you can be sure of, is that the tax laws are going to change again in the future.  Tax laws change every year.  We don’t always have major reform, but they change every year.

Ben Jones – Well, and in this case we had the SECURE Act pass in December and then we passed the CARES Act.  This is the COVID bill and there were a couple of pieces in this related to retirement and retirement income and I’m just curious if you had any opinion on — there was an RMD suspension, 401k loan, Social Security, COVID distribution and some changes to the gifting rules where you can now gift up to 100% of your AGI.  I think even on the smaller level, like $300 you get as almost like a credit above the line.  Tell me, what are the things advisors should be aware of with respect to that law and some of the conversations they should be having with their clients?

Jamie Hopkins – So we’ll run through those pretty quickly.  First and foremost with the CARES Act, with the coronavirus out there, with the SECURE Act in place, you have to start with beneficiary designations.  You’ve got to a review of that, you’ve got to make sure they’re up to date and including our IRA trust, absolutely have to do a review of those.  If you don’t kind of understand the risk associated with them after the SECURE Act and the 10-year provision, I would say look at that.  Moving forward to CARES Act, suspension of those RMDs in 2020, inherited IRAs, 401ks, traditional IRAs, however, important caveat there, defined benefit plans were not suspended from RMDs in 2020.  Traditional DB plans are probably not your concern, but cash balance plans, a lot of them do allow for distributions and people hold them.  So that is a bigger risk, so just be aware of that for 2020.  It’s not a push-off of RMDs, so you don’t have to make them up next year but no more RMDs for 2020.  The coronavirus-related distribution and that ties to larger loan provisions, but essentially saying you could take up to $100,000 out if you or your spouse have been diagnosed with COVID-19 or your work got cut back or you were financially impacted due to the quarantine, you can qualify for this.  The interesting thing about the $100,000 from the coronavirus related distribution is you can actually repay this money over the next three years back to your accounts.  It will be treated as if it was a 60-day rollover in 2020, so it won’t be taxable.  So you’re going to be able to pay this back and then not have it treated as taxable income in 2020, if you don’t do that, the automatic is the taxation will be spread out over the next three years, so 2020, 2021 and 2022.  You can opt to have it all treated in 2020. So there’s a lot of minutia attached to that but it is a good planning vehicle for relief right now.  The last one I’ll hit, I’m not going to go into the Social Security.  That’s the more esoteric deeper dive, conversation on business planning side.  But the charitable giving, definitely review that, QCDs, qualified charitable distribution still allowed this year, but no RMDs to offset from the IRA.  So, do you want to do that this year or should we push that to next year.  Above the line, new, $300 per person, charitable deduction.  So, even for your standard deduction filers, spouses could give $600, get a benefit and this year, allowing up to 100% of adjusted gross income and cash gifts as an itemized deduction to charity.  So, if somebody sells a business and wants to make a very large contribution this year that should be something you look at.  Generally speaking we still don’t want to go all the way up to 100% just from the tax rate perspective it’s not the best strategy but using some of that this year could be a good strategy.

Emily Larsen – If you’re interested in the financial planning software or goal-based planning approach that Jamie mentioned, check out episode 100 of our podcast with Michael Kitces.  Now, we’ve covered a lot of group in this episode from the philosophies of retirement income to the laws and events that are changing the way our clients need to adapt their retirement preparation.  We want to thank Jamie for being generous with his time and providing a lot of actionable advice today, but before we go there’s one idea that underscores all this information, and explains why clients require our guidance when it comes to planning for retirement.  We’ll let Jamie tell you in his own words.

Jamie Hopkins – One of the things I do in-person is I actually hold my thumb out to a crowd and say what’s on the end of there, right, a thumb print, and it’s unique to me and the reality is your tax situation, your retirement income goals, your risk, what you want to accomplish are unique.  That doesn’t mean that broad-based strategies don’t help, but we actually have to get down to the individual.  This is about individuals and people and what they want to accomplish.

Ben Jones – Thank you for listening to Better conversations. Better outcomes. This podcast is presented by BMO Global Asset Management. To access the resources discussed in today’s show, please visit us at

Emily Larsen – We love feedback and would love to hear what you thought about today’s episode. You can send an e-mail to [email protected]

Ben Jones – We really respond.

Emily Larsen – We do!

Ben Jones – If you thought of someone during today’s episode, we would be flattered if you would take a moment and share this podcast with them.  You can listen and subscribe to our show on Apple Podcasts, or whatever your favorite podcast platform is, and of course, we would greatly appreciate it if you would take a moment to review us on that app.  Our podcasts and resources are supported by a very talented team of dedicated professionals at BMO including Pat Bordak, Derek Devereaux.  The show is edited and produced by Jonah Geil-Neufeld and Sam Peers Nitzberg of Puddle Creative.  These are the real people that make the show happen, so thank you, and until next time, I’m Ben Jones.

Emily Larsen – And I’m Emily Larsen. From all of us at BMO Global Asset Management, hoping you have a productive and wonderful week.

Disclosure – The views expressed here are those of the participants, and not those of BMO Global Asset Management, its affiliates, or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy or security. This presentation may contain forward looking statements. Investors are cautioned to not place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only, and does not constitute investment, legal, or tax advice and is not intended as an endorsement of any specific investment product, security or service. Individual investors are to consult with an investment, legal, and/or tax professional about their personal situation. Past performance is not indicative of future results. BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management and trust and custody services. BMO Financial Group is a service mark of Bank of Montreal. Further information can be found at

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Notice to Canadian Residents: The information on this podcast series is not intended to be construed as an offer to sell, or a solicitation to buy or sell any products or services of any kind whatsoever including, without limitation, securities or any other financial instruments in Canada.