Intro: Royal Standley of Oregon Pacific financial advisors offering securities through United planners, financial services member, FINRA SIPC guides, clients with empathy in discovering and reaching their financial goals and creates financial plans for clients so they can live their lives by design. In these episodes, he relates his expert financial insights and discusses timely topics.
Royal strives for excellence and has a passion for sharing his knowledge and supporting. Now onto the show.
Aric Johnson: Hello. Welcome to life by design with Royal Standley of Oregon Pacific Financial Advisors. Royal, how are you doing today?
Royal Standley: I'm doing fantastic. How are you doing?
Aric: Same. I I'm, I'm loving life. It's uh, it's been hot. I know it's been hot in your area. I hope everybody's safe.
Royal: It’s been ridiculous over here.
Aric: Yeah. I'm uh, I'm, I'm, I've noticed that you haven't melted completely and, uh, that you're back at it here to educate us again. And I think we're talking about retirement income sources today, and I can think of three off the top of my head, but I know that you've got more ideas.
Royal: That's right. That's right. We, we've got a few different ideas here that when I'm sitting down with a client and we're looking at putting together the financial plan for them, we start looking at what they have, what options they have for creating retirement income. So we'll kind of start at the moment most basic, which is Social Security that just about everybody has, and then kind of move through that and the way we think about different income sources in retirement and what that looks like and what that means for people. And I think if you're approaching retirement, maybe gives you some perspective on what options you have available and if you're a, you know, a younger listener right now thinking, oh, well, this doesn't apply to me, I really think that this will give you some great ideas of, well, how do I start putting things in place now to produce that income when I am retired?
You know, I think this one really applies to just about everybody. When it comes to thinking about the future, thinking about how you're going to fund your retirement, when you do decide to stop.
Aric: Okay. And I think we all want to be able to decide that for ourselves, right? We want to decide when we stop working. You know, hopefully we don't have to decide I I'm going to stop working when I'm 93, because I have to work until I'm 93 and obviously that's why you present these issues.
So let's dive into it. What's the first source that you want to talk about?
Royal: Yeah. The first one we've talked about this topic quite a bit, I think on this podcast is Social Security. Social Security - just about everyone here in the us has Social Security, unless, you know, you've, you've opted out of it some way. Um, which, which is really probably never a great idea.
If you're married or have been married, we want to make sure that we're sitting down and making sure that we are having the best possible plan for how, how you are going to take Social Security when you get to retirement,
Social Security, just really quick, you can take it as early as 62. For most people who are looking at retirement and not get retired, they probably have a full retirement age of 67. 67 is the age of most people who are getting ready to retire. That's where their full retirement age is based off of. That's not the maximum benefit you can get from, from, uh, Social Security.
In reality, if you decide to defer Social Security all the way out to age 70, um, by deferring to age 70, that is the way to get the highest amount of benefit from Social Security. Yeah. You could conceivably keep deferring past age 70, but the benefit stops going up. So you definitely want to take Social Security at 70 and start getting those at those check you've worked so hard for and paid so much into the system at that point.
The other thing was Social Security that a lot of people don't, maybe don't realize is if you do take Social Security, before your full retirement age, there is an income limit on how much you can earn while you're still working. And I tell people that that's around $19,000 a year is the most you can make without affecting your Social Security benefit. So we just want to make sure that we're doing the planning around that for each individual, because each individual has a different set of circumstances, uh, and variables that are gonna help us make sure that you're getting the most out of your Social Security. In my mind, Social Security is kind of the foundational building block there.
One other piece, a piece of Social Security that a lot of people don't think about until they start taking it is the fact that every year, for the most part, there will be a cost-of-living adjustment added to your Social Security. This is extremely powerful over a 20, 25 30-year retirement, because if you don't have that cost-of-living adjustment, uh, your Social Security benefit would just stay static where it was and not give you any extras to live on. So that constant living adjustment is extremely valuable.
Also the taxation of Social Security, it's a variable tax rate on it, depending on your other income sources coming in. And even if you are kind of at a top income level, only 85% of your Social Security is taxable. So you do get 15% that does come in tax free. So we really want to make sure we're getting the most possible out of Social Security for folks.
Aric: Yeah, absolutely. And like you said, we've spoken about this on podcasts before you laid it out beautifully. I'm not sure what podcast number that is, but any listener that wants more information, go, go research a little bit, look up Royal's other podcasts. He's covered a ton of topics including this one in depth. So go back and listen to that. So what's the next source of income that we want to talk about?
Royal: So the next source that we see quite often is from pensions. I'm going to break this into two different types, types of pensions, kind of the, the standard pension that you get from working for a corporation. And then the one we see most often here in Oregon, which is Oregon PERS. PERS stands for the Public Employee Retirement System that anyone who works for the state of Oregon is going to be eligible for you know, we see a lot of news here about you know, how bad PERS Is doing financially, how underfunded is that sort of thing. And then you read the comparison of Oregon PERS versus all the other 50 states public employee, employee retirements. And it's, it's really doing pretty well in comparison. So even though it, it definitely has its issues still not a bad pension plan and when someone's looking at working in their career, one of the biggest benefits there for working for the state is that PERS system, because it really is pretty powerful.
So in, in the Oregon PERS, there's a few different tiers there. We don't see a lot of people who are still tier one, which is that old system that really had some phenomenal benefits for people. Right now we're seeing a lot of people in tier two, which was kind of that first step down from tier one, getting ready to retire. Tier two is still a pretty, pretty great benefit. all things considered gives you a pension benefit with a lot of different options of how you're going to take that.
So depending on if you're married or if you're trying to kind of make sure that your beneficiaries get the most out of PERS, you have a lot of different options, including you know, survivorships on options for spouses, cashing out a portion of your PERS and really just looking at it to make sure that you're getting the most bang for your buck out of that.
It's really not advisable just to assume I will take whatever option gives me the most income right out the gate, because oftentimes that can be, um, you know, pretty pretty bad, if the unexpected happens, like you pass away early you might leave money on the table that could have gone to your beneficiaries.
Aric: Yeah. Absolutely. Nobody wants that.
Royal: No. No. Now, now the other thing with the Oregon PERS system is, like Social Security, it does have a cost-of-living adjustment. And once again, that is extremely important, you know, keeping pace with that growing rate of inflation is really essential for folks in retirement.
So Social Security and Oregon PERS both have that and really make it you know, pretty valuable when we're comparing different sources of income.
Aric: Got it. All right.
Royal: Now, a standard pension often doesn't have a cost-of-living adjustment. They're just extremely expensive to build into a pension for a company. We don't see many pensions anymore. Not many companies are offering them. So, it's usually more union-type jobs where the union has had a pension in place for years. And, uh, you know, you're still able to qualify for that. So still a valuable source there.
And once again, it's looking at the option for your own individual situation and deciding based off of your kind of family status and what you're trying to accomplish, how best to take that pension.
Now, one thing I just want to touch on and we don't hear a, as much about it, but it is the old pension max strategy. This is an old life insurance strategy where basically you have, usually in this case, a husband who's worked for a, a union for years, takes the highest possible benefit. Doesn't provide any survivorship options for the spouse, but then takes part of that difference and puts that into a life insurance policy. So if anything happens to him, the wife gets the life insurance and is taken care of that way. We saw a lot of this, you know, in the eighties and nineties with a lot more prevalence of pensions out there, plus much higher interest rates in life insurance.
Oftentimes. I'll look at that for clients,it doesn't make a lot of sense. It's actually usually cheaper to take the survivorship option for the spouse in most pensions. But if you've already made that kind of, that option one mistake of just selecting a hundred percent survival benefit adding in a pension max strategy after the fact could be a way of protecting that, that spouse or maybe a second marriage from losing that entire pension option, because if anything happens to you that life insurance can act as an additional buffer and kind of replace most of, if not all of that, lost pension income.
Aric: All right. So you've, you've covered Social Security, right? Uh, which most people are going to qualify for.I would, I would assume most people qualify for that. And then you've spoken about pensions, um, which again, we. I've heard from you and others, that pensions are kind of going by the wayside in a lot of, a lot of cases, there's just not a lot of those left. What would another income source be?
Royal: Well, another great income source that I really like is owning rentals. Oftentimes if you buy a rental early in life you'll get that paid off or close to paid off by the time you do retire and rental income can really act as another source of income and retirement. It could be, you know, anywhere from one property that gives you a few hundred dollars a month to, you know, an entire apartment complex or a mini storage, that is giving you thousands of dollars to work with each month.
There's a lot of pros and cons, number one with just owning a rental property. You know, there's, there's maintenance issues, there's renter issues. There's all kinds of different things there that can, you know, kind of make people say, ah, I don't know if I want to own a rental, I don't know if I want to have that extra work.
But for those that do that, do like that, that real estate, and I have a lot of clients who do, who, who like it, and I'm personally a big fan of it as well. And we do a lot of planning around real estate. It can be a great source of, uh, retirement income.
Aric: Yeah, I think that's fantastic. So what are the, some of the pros and cons?
Royal: Yeah. You know, the pros are You know, you're, you're getting two real sources of, uh, wealth building here. You're getting the rents that you're collecting, but on the back end, which oftentimes you're not really realizing on a monthly basis, is you are getting the appreciation of the property.
You know, most people who own, you know, single family residences as rentals have seen those go up pretty dramatically in the last year or two. But even historically, if we look at the appreciation rate of a real property, you know, it, it adds about 3% per year over the long run to the value of the property. So if you're collecting a nice cashflow from the real estate, plus you're getting kind of this hidden appreciation in the property. It really creates a pretty attractive investment for you.
The other thing is that the tax laws here in the US really incentivize people to own rentals. Because of the ability to write off any expenses, any maintenance you're doing to the property, as well as to depreciate the property, it can really shelter a lot of that income from taxation over, over the years. So we, we like that as well.
The biggest thing I have seen in the past, you know, two years here is with the COVID crisis, all of a sudden things are happening that, uh, we didn't think were possible before. But you know, I think the, the government never fails to surprise us here with their ingenuity, is what happens when the government says people don't have to pay their rent anymore and you can't evict them.
Aric: Mm-hmm.
Royal: Um, that really spooked, I think a lot of the people who own rentals that, that I work with of, well, wait a second. How, how do they have the right to do this now? Obviously, you know, COVID is a, a, hopefully a once in a lifetime thing, but that, that opened the door to allow the government to do it.
So don't be surprised if we see more, kind of, government oversight of this to disallow, make it harder for evictions to happen. We've seen that in California, we've seen it here in Oregon and we just expect that pendulum to keep swinging there to really enhance tenants’, tenants’ rights which make, makes, makes it difficult and sometimes makes looking at rentals much more unattractive than they once were
But we still like them. They're, they're still a great source of rental income in retirement.
Aric: Let me, let me ask you this. Well, uh, just out of curiosity if, if somebody has gotten into rentals and maybe they have, let's say they've got 10, right? 10, 10 units, whatever that is, or 10 homes, let's, let's call it single family homes, and by the time they retire, at least half of them are paid off completely.
Royal: Right.
Aric: So they're generating an income on a monthly basis. Is it your opinion that they should look at selling one or two of those and taking the proceeds and then investing the proceeds or do they just keep having them as rentals for that ongoing income? Because I would think that with the housing market, especially with the way it is right at this moment if they were to sell a couple of them at, at the high price that they're at right now that they could then, you know, invest that money in and do well.
Royal: Yeah, it really depends on the individual situation. You know, so if you have a real estate portfolio like this, the first thing we'd want to look at is what is the rest of your investment portfolio look like? Or the cash you have on hand there?
I've seen a lot of people just sink every single dime back into real estate, which really builds your net worth, but when we have a crisis when we have a 2008, when we have a COVID crisis where you can't evict tenants who aren't paying their rents, but you still have those costs and those mortgages, that can be very scary. So always with rentals, we want to make sure that there's enough reserved there to really protect you and your family from a downturn in real estate.
We don't think those downturns can happen. It's been 15 years almost since the 2008 crisis. We have very short memories. And you know, going into 2006, 2007 - “Real estate never goes down.” That was the mantra. You just buy, keep buying real estate, you know, nothing bad can happen. And then we saw what happened with people who are over-leveraged in real estate.
Aric: Yeah.
Royal: So we just want to make sure that you have a sustainable plan in place. If, if you don't, if you don't have enough reserves, it could make sense to sell one of those properties. Maybe bring down some of those liabilities, maybe put some money into the bank or investments, but we really want to sit down with the individual and look at those specific things that they have going on to make sure that just not taking too much risk one way or the other.
Aric: Yeah. Yep. Absolutely. All right. What else?
Royal: So another one I see quite often, not as much as I once did, but this would be selling property or a business on a note. And what that looks like is you're really acting as the bank to sell your property. You're taking back a note, or in another words a loan, you're getting a fixed interest rate in most cases. and you're going to collect that interest and, and, and principal payment each month, just like you would, if you were a bank.
I've gone through this with the couple sales of businesses through, uh, our, our Family Trust. And let me tell you, it can be a nightmare, especially if you sell a business. Because what'll happen is, is you do have a risk of default. You have a risk there of them not being able to make a go of it, to not make their you know, principal and interest payments, of defaulting on it. And then your options really. Well, I have to go back and take back that business or that piece of property. With a piece of property. It's a little bit easier, you know, it, it will probably be possibly trashed or a lot of deferred maintenance there.
But in the case of a business, oftentimes, if someone runs into that much trouble with it, the value of the business has just been decreased so much that you are basically foreclosing back on the business. But it's going to take a lot of work to build it up and try to get your money back out of it. So I always tell people be very, very careful when selling something on a note and make sure that just like with the, the rental conversation, you have enough other assets to cover you? It can be a good strategy to spread out taxes and get a good interest rate depending on what you're able to get from the borrower
.
But that risk of default is pretty big. So make sure that you can survive without that note income, at least partially if something happens.
The other thing with, with note income is you're getting back a check each month. You know, let's say a thousand dollars a is what you're getting back on the note each month 250 of that is interest 750 of that is principal. The question I always have is how are you going to deal with that principal part of that payment? If you're just living off the interest, you have to find somewhere to put that $750 a principal to get it reinvested. Or if you're just spending the entire thousand dollars, are you okay with really reducing down your net worth by spending that principal as part of your monthly outflow?
Aric: Got it. Okay. Lot to consider there, Royal.
Royal: Yeah. Yeah. I always, I always tell people be very careful when you're getting into the notes business, because you're really giving up quite a bit of control.
Aric: Yeah.
Royal: And the only way you get that control back is kind of the worst-case scenario there of someone not making their, their, their payments and you don't know what you're getting back.
Aric: Yeah. And that's something I've never heard you speak about before, so that was kind of, that's new to me, which I love learning things, but yeah, that, that, boy, I dunno, that's a little scary to me. Maybe I just don't have the, uh, the guts to do that kind of work, but I don't know. That's that's interesting. All right. Are there any other sources of income that you want to discuss today?
Royal: Yeah, absolutely. So the, the, the other form that we often see is a annuities.
Aric: Oh yeah!
Royal: You know, and annuities are an insurance product that basically guarantee you a stream of income for either your lifetime or a specified period. There's 1,000,001, and this is an exaggeration – Compliance don't come after me -
Aric: [Laughter]
Royal: - But there's quite a number of different types of annuities out there, all with different benefits and limitations there. So you want to be really careful there when you're looking at annuities that you're buying the one that's specific for your situation and you have a full understanding of why you're buying it.
There's some, some great benefits you can get from having an annuity and having a guaranteed stream of income. With an annuity, you're usually funding that portion of your investments, you know, so you're going to take $250,000, put it into an annuity, and that's going to add to your guaranteed source of income that will last the rest of your life or the rest of your life and your spouse's life.
There's a lot of different ways of kind of building out an annuity strategy here for guaranteed income. This is where you want to have a good sense of where it fits in your plan. And that's what we do for folks is - if we feel like there's a good reason for someone to own an annuity, we'll really go out there and try to find the absolute best for that situation.
There's this whole idea that all annuities are bad.
Aric: Mm-hmm.
Royal: And I don't agree with that. I'm going to say though, most annuities aren't a great fit for people because unless you're, you're getting a specific benefit from that annuity, there's probably cheaper ways of going about it.
Aric: Okay. Again, something that you've spoken about on many, many, many podcasts. And we say at the end of the show, quite often, this is all individualized, right? So at the end, I know we'll be, you'll be giving your contact information and so people can have this conversation, but there is no such thing as one-size-fits-all for anything that you do because you, you dive into your clients' personal lives to build a plan specifically for them.
So, um, I know that annuities would be the exact same situation. It's gotta be very specific to somebody’s, very specific situation.
Royal: That's right. That's right. And I, and I I'll, I'll see annuities that people have bought over the years from other advisors and just asking them, why, why did you buy this? You know - what are you actually getting here? Very rarely do I get an answer of here, here, here's how it fits into my, my financial plan.
Aric: Mm-hmm. Gotcha.
Royal: Um, that's what we want to do is we want to fit those, those types of solutions directly into your financial plan and show you why it makes sense.
Oftentimes where we look at this is, there's a number of studies that have been done that have looked at the success rate of having some sort of guaranteed-income annuity or you know, immediate annuity built into a financial plan. There's some good research behind that and good studies on that. But we have to make sure that we're utilizing that correctly in all circumstances. And really for someone who has plenty of other guaranteed income sources, like PERS, like rental income, a guaranteed income, probably isn't a need because you already have enough income coming in. We don't want to guarantee and pay extra fees or lower rates of return for something you're just not going to utilize in retirement. And it doesn't make any sense.
Aric: All right. Royal, this has been great. I know that we're getting low on time, but you've got some other stuff you want to cover, right?
Royal: Yeah. Yeah. So the last part of, of this is really well - what happens if you still have an income need? Once you've looked at all of those other sources of income and what happens then is then we start looking at your withdrawals from your investments.
Now some withdrawals you're just required to take like required minimum distributions on IRAs and 401(k)s. That, that's all is built into our plan as something we know that's going to be out there, once somebody turns 72. But really what we look at here is how do we utilize the investments to fill in those income gaps for people and make sure that they're taking out, you know, an appropriate amount, um, that they're not taking out too much and, and we're, we're minimizing the risk of them running out of money.
Oftentimes if we've done all of our planning, right, people are taking out hopefully 3 to 4% from their investments, you know, maybe 5 to 6%, depending on their age and their needs there. And then we can use the investments and those dollars to not necessarily pay for the monthly income need, but instead to use that money for the one-time things like vacations, buying new cars, that pesky new roof, we need to throw on the house every -too often at seems.
So that's what we, we, we like to do that is once we we've gone through those, those kind of more stable sources of income how do we utilize the portfolio to fill in the gaps and pay for those one-time things? And that's really how we step back and start looking at retirement income for folks and design our financial plans around.
Now as we wrap up what I'd like to do is, is obviously, you know, people want a financial plan, they can, you know, email me or call the office. We can sit down and talk about what that, what goes into that. The other thing we can do is we can send you out our worksheet that goes over these different types of income and give people a sense of what, what types of income they're going to have and what that might look like for them in that might just kind of spur on, hey, what, what, what else should I be doing here? Or what else should I be looking at or need to do as I'm getting ready to retire?
Aric: That's perfect. Great. So how do they get that from you?
Royal: Yeah, you can just call the office at (541) 772-1116 or email [email protected].
Aric: All right, Royal, thank you so much for your time today. This was great content. I hope that people do reach out to find out how you can help them build all these different types of income into their, into their plan, uh, you know, to, to maximize their retirement.
Royal:Absolutely. Absolutely.
Aric: All right. Thanks again, Royal. And of course our last thank you always goes to your listening audience. Thank you so much for tuning in and listening to the life by design podcast with Royal Standley. If you have not subscribed to the podcast yet, please click the subscribe now button.
This way when Royal comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends and family. Again, thanks for listening today for everyone at Oregon Pacific financial advisors. This is Aric Johnson reminding you to live your best day. And we'll see you next time.
Outro: Thank you for listening to the Life by Design podcast, click the subscribe button below to be notified when new episodes become available, the views expressed are those of the presenter and may not reflect the views of United planners. Financial services material discussed is meant to provide general information and is not meant to be construed as specific investment tax or legal advice.
Individual needs vary and require consideration of your unique objectives and financial situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning and advisory services offered through Oregon Pacific Financial Advisors, Inc.
Securities offered through United Planners Financial Services of America member FINRA, and SIPC Oregon Pacific Financial Advisors, Inc. And United Planners Financial Services are independent companies.
