Why Tax Planning Starts with Where to Put Your Savings

0:00Hey, thanks for joining. Here's a question I was recently asked on my show How to Retire On Time. Take a look. David, what do we got? Yeah, all right. So let's look at the question here. How about this? What's better, a 30-year treasury at 5.2% or an annuity? And so walk us through this. So a 30-year treasury. So that that means I give like I buy $50,000 worth of of this treasury bond. And then at the end of 30 years, I get my 5.2% or are they paying me along the way? How does that work? Yeah, so okay. Let's say you put it, let's do, let's put in real money. Okay. You put a million dollars in a 30-year treasury. We're going to make this really simple just for arguments sake. So let's assume you buy it at the at the rate and the moment that it comes to the market. Okay. Okay. 5.2% means you're going to get $52,000 every year as a coup on a payout in theory every year. And it's the United States government. So let's assume that the government's not going to default. Okay. So you get $52,000 a year. That's,

1:05I mean, I could play a little off that. Yeah. Take that 3% rule. This is the 5% rule now. Yeah, okay. Okay. So that's pretty good. And then at the end of it, you get your million dollars back. Oh, I see. Right. Because you're that and there's different versions of bonds and different. I'm making this really simple for for arguments sake today. And let's say based on your age, you chose to do a fixed indexed annuity. All right. And did lifetime income. Okay. Million dollars in there. Let's say it's paying out and it's based on your age. So everyone's going to be different. But let's say it's going to give you like, let's say you're you're early to mid 60s. So you get 7.3%. So instead of you making $52,000 of income, $73,000 of income. But the cash value is going to eventually go down. So by 30 years, there's no death benefit. There's no cash value after 30 years. There is one in the first part. So if you died, you get your money back, whatever less is left over in the cash. So which one's better? Objectively, if you look at the

2:06total ROI, which is very deceptive, by the way, but let's just do it anyway. 52,000 a year for 30 years, plus your original investment, you total return on investment. Would you get $2.56 million out of that? Not bad. Got twice your money out. Yeah. Thank you, debt instrument. Yeah. On the annuity, if you just looked at that, you'd get 2.19 million. So a little bit less over 30 years. And that's where people say, oh, well, that's kind of a ripoff, isn't it? It's an incomplete picture. Yeah, are you going to say something about taxes here? No. Okay. That'll further complicate it. But we could. Yeah, we could. The problem with, it's not an apples to apples comparison, because the index newty got you more money, $20,000 more, really, $21,000 more every year. Okay. Yeah. So if you account for the difference of that, you actually got more money out of the annuity, because you have to put a million dollars to get 52,000 and then

3:10find 21,000 from somewhere else in your portfolio to make this an apples to apples comparison. So net of portfolio and that difference, it's less. If you lived for 30 years, maybe you didn't. And therein lies the nuance of how old are you? What's the longevity? What's the pressure on your portfolio at the beginning of your plan? Both of these are road with inflation. Oh, yeah. Okay. So there's, it's not fair to have an apples to apples comparison. Notice too, the annuity gives you more money up front. The bond gives you your money back at the end of it. But they both are wrote with inflation. Million dollars in 30 years is not worth a million dollars. Yes. They'd be interested to do a further analysis on even the net of inflation return on investment. Yeah. But this is where you got to start thinking outside the box here a little bit, because a young person isn't going to use annuities. They can't. It's not a competitive payout.

4:13Right. And then when you say young person, how young are we talking? 55 are younger. Okay. Not using them. No. Not using them. It's a retirement product. All right. So you have to ask yourself that question. What is the current payout for your age? How long do you think you're going to live? What's the deathbed of what's the cash growing at? And is it a better deal or not for longevity purposes for the purpose of your money for any portfolio stabilization feature? I mean, you could put a million dollars in there, take the 7.3 percent and just reinvest it. Maybe have some income, some reinvestments. I mean, that's an interesting proposition. So if you look at the difference, let's say you reinvested the difference there. You'd actually have 2.8 million total return on your investment from the annuity as opposed to the 2.56 from the bond. Okay. If you live 30 years, and maybe you don't, maybe you live 20 years. So this is the nuance. This is why you don't

5:15go to a stake dinner and someone says annuities are God's greatest gift to the retirement planning space and put all your money in that. No, please don't. It's a tool in the toolbox that needs to be understood first and picked last. Plan first, strategy second, and then the right investments are products. One of the classic mistakes I see is when someone puts too much into the annuity and then their income plus or so security is greater than they actually need in retirement. That's a huge inefficiency because why would you put money into a fixed income product like an annuity when you didn't need that much fixed income? Yes. So instead they could have put it elsewhere and they could get good what legacy cause they could go to, I don't know, fill in the blank. Yeah, grow it. Healthcare costs in the future. Get that sucker to Roth, grow that thing. Now you've got a way

6:16to self-insure for long-term care insurance. Okay. And then you talked about taxes. So here's an interesting standpoint. That $52,000 you're getting taxed on that sucker. Yeah, that's kind of where my mind was going. So is that ordinary income or is that yeah. And then if, well, there's some nuance of what type of bond you do, but let's just say ordinary income. But then you've got your annuity. You put it in there. Only part of it is ordinary income, part of its basis. So technically it would be more tax-efficient. Oh, yes, because that payment you're getting, it's only partially being taxed because they're saying you're getting some of your basis back in this payment. That's a whole section of the tax code that's very complicated. But the idea is you're going to get some basis and some, they have to do a calculation for that. And that's how you figure that out. I have found that most people want, they want to be told they're right. They're not concerned about what is right. They're concerned

7:18about who is right. And they want to feel like they are smart. And I appreciate the intentions. I appreciate the effort that's put in there. But as a fiduciary, I have to define things as they are and then invite you to proceed based on what is right for you. I don't mind if you don't have lifetime income. I don't mind if you want to avoid bonds. But if you define it inappropriately, I am going to want to correct that definition first before you make an informed decision, because it's not an informed decision if you're using wrong definitions.