Jason and Emilia discuss questions about planning for retirement.
Below is the full transcript:
Announcer: Welcome back America to Sound Retirement Radio where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition towards retirement. And now, here is your host, Jason Parker!
Jason: America! Welcome back to another round of Sound Retirement Radio, so glad to have your listening ears tuning in to this little program this morning. We hit over 50,000 downloads recently, and that’s a real accomplishment for this radio show. We’ve got people all over the country tuning in. Thank you for sharing the good news with your friends and family, and the people that you care about as they prepare for retirement. You’re listening to Episode 125, and today’s episode, it’s my good fortune to bring Emilia Bernal back on to the program. Emilia, welcome back.
Emilia: Thank you. Hello everyone.
Jason: And this is a neat episode because what we did we sent out, many of you have subscribed to our newsletter, so we now have thousands of people subscribed to the newsletter. We sent out an email to those folks and said, “Hey, if there was just one question that you had about retirement that you wanted answered, what would that look like? What would that question be?” And today, we’re gonna go through some of those questions.
Jason: Before we get into the program though, Emilia, as you know we like to start the morning right by renewing our mind and so one of the best ways, I think we can do that is with a verse. This comes to us from Hebrews 10:35 and 36. “So do not throw away your confidence. You will be richly rewarded. You need to persevere so that when you have done the will of God, you will receive what He’s promised.” All right. And then for those that are gonna be visiting the grandkids, Emilia, we like to give them something fun to share.
Jason: And you got a joke for us this morning.
Emilia: Yes, this is my comedic debut so hopefully it goes well. So my question is, “Why did the Math book look so sad?”
Jason: I don’t know.
Emilia: It’s pretty easy, “Because he had so many problems!” Of course! Don’t we all? That’s why we all look sad, I guess.
Jason: Thank you, Emilia. That’s nice to put that burden of the bad joke on somebody else’s shoulder.
Emilia: Thank you.
Jason: Better skip with your director first impressions.
Jason: All right, so let’s get into some of these questions, I’m excited to address some.
Emilia: Yeah, absolutely. We got some questions come through from our listeners, and so let’s go ahead and start. One of the questions they had was, “Can you explain the 3-bucket retirement plan, how it works and how to manage it during market volatility?”
Jason: Yeah. So a couple of things I want to say about bucketing, and first we should probably set the groundwork because there are different ways. One of the things you’ll hear me say often is that retirement is all about cash flow. It’s your income that will determine your lifestyle in retirement not your net worth. And so you really have a couple of options for how you’re going to create a cash flow plan in retirement. Option number 1 is you do what’s called a withdrawal strategy where you have a diversified portfolio and old rule of thumb used to say don’t take out more than 4% per year, and you should hopefully not run out of money on retirement.
And then one of the other strategies that have been popular is called the flooring strategy. A flooring strategy is where you figure out what your income needs are and then you go, and probably the simplest way to create a flooring strategy, is to just go buy an immediate annuity from an insurance company, which is kind of like buying a pension. You’re buying guaranteed income, so you know you’re gonna have your social security income, maybe a small pension, and then you’re gonna have this annuity income and that creates your floor. It creates your foundation, your base. So that’s one strategy. But this question gets into the bucketing strategy, which in my book is what I talk about, and sometimes I think, you know, in the book, I have an illustration my wife drew, actually. And it shows how you’re diversifying across time, and so instead of just doing a simple withdrawal strategy or doing a flooring strategy, it kinda takes these different elements and it says, “Okay, time is secured in the vault so I did the stock market.” The more time you had, the more risk you can afford to take.
So let’s make sure that we are not taking too much risk with the money that you need in the short term, and that with the money that we don’t need for the longest period of time we can afford to take more risk with that. And it’s very easy for people to visualize, so that’s why I had my wife draw that very simple diagram in the book, but I think sometimes people think a bucket in strategy is only three buckets. And that’s not necessarily the case or four buckets. It could be as many buckets as we need to create in order to make that cash flow plan work, but the simplest idea is that money that you need in the short term you don’t want to take risks with those dollars.
A friend of mine used to say that if you’re taking money out of an account that’s falling in value, it’s almost like being stabbed and giving blood at the same time. You’ve got a really bad situation and you’re making it worse. So really simple principle here is don’t take money out of an account that’s falling in value so what that allows us to do is say, “okay, let’s set aside 3, 4, 5 years of cash and maybe it’s just a high-yield money market account, or a high-yield savings account. You’re not earning a lot of interest on it but that’s supplementing your income, and we’re not in a position where we have to draw money out of that account in retirement.
I think one of the really big concerns are that you know, some people especially people that are getting ready to retire today, they’ve experienced some volatility in their portfolio. I mean we can look back a couple of times just in the last several years, so you know, we can look at the dot com bubble that burst and there was a three-year period of time with less than 500 hundred was down consecutively. And then we had a real doozy in 2008, and right now stock prices based on price earnings are at some of the highest earnings they’ve ever historically been, and now we have a ball market, almost the longest ball market in history. So you know, there’s reasons for people to be concerned about stocks right now especially if they’re getting ready to retire. One of the things that people cud consider because it doesn’t have to be an all or nothing, so some people only like stocks, bonds, mutual funds, ETFs, and then on the insurance side of the equation you’ve got people that only like annuities and insurance contracts.
And I think there’s actually a way to maybe optimize that to use a little bit of both of those types of tools to create a portfolio that’s really designed to help people accomplish what they wanna accomplish in the most efficient way possible. And so I think it’s good to have an open mind to be able to just go out into this world of financial tools to make sure that they’re gonna use the tools that are best for them.
The big concern there is if you buy five years of time with cash and then that second bucket that you’re getting ready to dip into after these five years is over, if that hasn’t performed well, you know, you set these rate of return expectations maybe you’re conservative 3, 4, 5, percent. But if you don’t hit those targets and then you have to start cash flow, all of a sudden you get into a situation where those numbers may not work as well as you had anticipated. And you only get one shot at retirement so if you don’t get it right, the whole thing can blow up on you, and one of the biggest fears people have is outliving their money …
Jason: … Running out of money before they run out of retirement.
Emilia: That is a lot of the questions that came back, I think, that was more of the main concerns, but you were mentioning, I think you were kinda leading into this, but what do you consider to be the most important component of developing a successful plan?
Jason: The most important component two, I would say, two really important components of developing a successful plan, but before I think we should let our listeners know that we’ve got a webinar coming up. What are the dates on that again?
Emilia: That is Wednesday, March 15th at 1:15 pm.
Jason: Wednesday, March 15th at 1:15 pm, and the specific on this one is what should a retirement plan look like if people are getting ready to retire, and they want to develop a good plan beforehand. We’re just gonna take people through the process that I’ve developed to show them things like how to maximize social security and how to integrate that in a year by year cash flow plan, and how to diversify across time, and look at some of the different tools that you can use to create that kind of structure.
Ultimately what we’re hoping is that people have a greater sense of confidence when they have good plan they don’t have to feel like they’re stepping into an abyss, that’s unknown. So I wanna encourage you if you are thinking about retirement, this is a free webinar that people can attend. We’ll give an opportunity for Q&A, so people can ask additional questions at the webinar. We try to record these occasionally we run into some technical difficulties so when available, we’ll make these available of people that sign up even if they can’t be at the live event they can come back and watch the replay.
But getting back to this, consider the most important components of developing a successful retirement plan, you know, again, retirement is your cash flow. It is your income that determines your lifestyle, not your net worth. Another way of saying that is if you don’t have income in retirement, you don’t have a retirement, right? I don’t care what your balance sheet says, I don’t care what your net worth is. You can be worth millions of dollars but if you don’t have income, you’re not gonna be retired very comfortably for very long because it’s your income that determines your lifestyle.
So a good retirement plan has to be made up of two parts. One is cash flow but the second piece to that is how much you spend. You gotta have your budget dialed in. You have to know how much money you spend otherwise, it’s impossible to be able to answer the fear or the question that people have which is, “Have I saved enough to be able to make the numbers work. And I think that’s really what most people want because I get the opportunity to meet with people all over the country via Skype. We do planning today via Skype, we have this opportunity to meet with people, and I’m always asking them, you know. What’s the purpose of this money? What do you want it to accomplish for you?
And most of the time what they say is, “Jason we just want to know that we’re never gonna be a burden to our family physically or financial, that we’ve saved enough, and that we’re gonna be able to have the lifestyle that we wanted in retirement.” And that all comes back to cash flow. Occasionally, we get people that say, “You know, it’s really important that we leave something to our kids or our grandkids” And so we wanna incorporate that type of planning, but I’d say 90% of the time people say, “You know we helped our kids, we put them through college, we gave them money for down payment on the house, we helped them buy cars, we spoiled the grandkids. At this point we just wanna know that we’re gonna be okay.” And so I think that’s what really people want, and a good retirement plan is just to know that they’re gonna be okay. I’ll tell you what they don’t want though, Emilia. They don’t wanna be sold a product from …
Emilia: Very true.
Jason: … somebody that doesn’t care about what it is they’re trying to accomplish, I see that all too often. There’s no plan put in place. People just end up buying mutual funds or annuities, or ETFs, or a managed investment account, and there’s no structure, there’s no plan that … there’s no design around why we’re doing what we’re doing. And so I think having that “why” is very important. And that’s what this webinar is about. It’s to show people what a good plan should look like, so they’ll know if they have that already, and if they don’t that’s what they should get.
Emilia: Yeah, because one of the other big questions that came across was, “How can retirees make sure they have enough income on a month to month basis and to live on through retirement?”. You said income and to me that’s a word that you don’t think of as retirement because you we’re not working anymore. And as far as income, how can they maintain monthly income and …
Jason: Yeah. How can they make sure they have enough income on a month to month basis to be able to live on through retirement? That gets back to this core fear, this core concern. Am I gonna run out of money in retirement? And the answer is we don’t know unless we crunch the numbers. So getting back to this idea of budgeting, if you don’t know where your money is going, it doesn’t matter how much you saved. We have to have a baseline for what the minimum expectations are for you to be able to maintain your standard of living, and I’m not talking about, you know, do I have enough to be able to spend, you know, go on-
Emilia: Travel …
Jason: … a 60-day cruise every couple of months. Those are the extras. I’m talking about do we have enough to be able to maintain our standard of living, pay our property taxes, pay for our health insurance, put, you know, buy food and go out to dinner when you want to go out to dinner. Just the simple things in life. That has to be the foundation. There’s a couple of free tools out there that people can use. One is mid.com, and that’s an app that you can get on your phone or on your computer just to help you track your expenses.
So if you really are committed to just using your debit card for six months or so or I know some of the people we serve they like to use their credit card, and they pay it off every month. They never pay any interest on the thing but they like the rewards miles, the travel rewards. But just be committed to using some form of electronic payment so you can really track every dollar for six months before you retire, and you know this fear that people have. Have I saved enough? Is my money gonna last for retirement? How do I know I’m gonna have enough cash flow? It stems from these uncertainties of not having a plan, and it stems from not really understanding how much they spend because especially for higher net worth people, people who have been successful in life, they’ve always had enough income coming in. They’ve never really had to track it because cash flow has been good.
But once you retire, you don’t have that income anymore. Now it’s a matter of what you have saved is gonna determine whether or not you’re gonna make it, and one of the principles that we’re gonna share, we talked about the commutative principles of Mathematics where sequence of returns doesn’t really matter in an accumulation phase. If anything, when the market goes down it just gives you the ability to dollar cost average by more, but what does change is if the sequence of returns at the time you’re making withdrawals from the portfolio.
I’m just going to show people an example in the retirement, and this is really a light bulb moment for a lot of people when they see what could happen if the rate of return, if the stock market doesn’t perform properly right at the time they’re starting to take these withdrawals. What can kind of impact that could have? And when they understand that, when they see that, they get it. They’re like, “Okay, we gotta have a good cash flow plan. It’s gotta be stable. It’s gotta be consistent.” Depending on people’s comfort with risk will determine these different withdrawal strategies, whether they want to do the withdrawal strategy, the flooring strategy, the bucketing strategy and just what makes more sense for them.
Emilia: It sounds like it’s up to each individual person what they think works best for them. One of the other questions that did come up a lot as well was, “What are your thoughts on long term care insurance and its increasing cost?
Jason: Yeah, that’s an interesting one. First of all, I would say up until this point and still today I’m a proponent of long term care insurance. I think it’s something we have to evaluate consistently, constantly and say, you know, this happens to be a good deal. The reality is that if you end up, right now today, if you were to need six months of care in a nursing home facility that’s gonna be really expensive. You’re probably talking about fifty thousand dollars of cost in Washington state right now. You know eight thousand, nine thousand dollars a month, it could be expensive, yeah. So then you look at long term care insurance premiums you say, “Okay, well, I’m gonna have to pay.”
You know, I bought my policy when I was in my thirties so my premiums are much lower than somebody would that waits until sixty to buy a plan. But let’s say they’re paying five thousand dollars a year for those insurance premiums, you just have to do this kind of break even analysis where you say how many months of care would one of us need in order to pay back all these insurance premiums. And it used to be about six months. It’s probably more like eight, nine, ten months now of care, that in order to make it and pencil out.
So the hard part is that none of us wants to envision ourselves ever needing that type of assistance. We all want to say we eat right, we exercise, we take care of ourselves, I don’t smoke, I don’t drink. You know, I’m never gonna need long term care, the reality is those lifestyle choices of living a better life actually probably increase the probability of you needing long term care because you’re more likely to get to those old ages and just need long term care from the sense of old age frailty. To think that your body’s not gonna change, that your mind’s not gonna change as you get older, you know, I’m guilty of this. At 42, I often times think that I can do things that I used to be able to do when I was 12 years old. For example, I went up to the monkey bars recently with my kids, and they’re swinging across monkey bars, and I remember as a kid, you know, I was like a monkey. I can swing …
Jason: … in this things all day long, and hang from them. I got on those monkey bars and started moving across from it, and I literally felt like my shoulder’s gonna rip out of the sockets as I was going.
Jason: Maybe in my mind I could still do it but my body was saying, “Jason, you’re not twelve years old anymore.”
Emilia: I think we all have those moments no matter how old we are. There’s a time when you’re thinking, “Well, I used to be able to do this.”
Emilia: It just changes. Yeah.
Jason: It changes. We all, you know, that’s the beauty and the sadness of life is that we think it’s gonna be the way that it is today forever. And I tell you things happen. I was just talking to a guy recently. It breaks my heart but he was sharing with me, and it was fun, you know, I’ve had the opportunity to help him plan for retirement, spend a couple a year process. He just retired. They have this big trip planned with their family and grandkids. And I talked to him the other day on the phone, he says, “Jason …” And he’s just getting ready to leave for the trip, he says, “Jason, I was outside working, cutting my tree and I fell out of my ladder, and fractured like three vertebrae.” And his back. It’s like who ever thinks that that’s gonna happen to them. Nobody thinks that’s gonna happen so.
Long term care insurance today, I’m a staunch proponent of it. You gotta shop around, it’s getting harder to find coverage. It’s getting harder to qualify for coverage. The break-even is getting longer for people because premiums are increasing, but the reality is insurance companies are exiting that space. And so anytime an insurance company is exiting the space, it means they’re having a hard time with the underwriting of it. It’s kinda like I think the opportunity probably a couple of years ago was even better to buy insurance than it is today, but I still think …
Let me say one other thing here because I don’t want people to make an emotional decision about insurance. It should be part of a retirement plan, and one of the things you can do when you’re crunching the numbers in a retirement cash flow plan is you can stress test for this. You can say what happens if something like this happens, and how is it gonna impact you? Have you saved enough or should you buy an insurance because some people have saved enough or they don’t need that. They don’t need to incur that long term care insurance expense, and that’s good to know beforehand. Emilia, I wanted to take quick commercial break and we will be right back after this.
Jason: Are you fifty years or older, and have at least five hundred thousand dollars of investible assets? If so, this message may be beneficial for you. Are you confident that you’re gonna be able to retire and not run out of money? Are you concerned about higher inflation, higher taxes and what market volatility will do to your portfolio? If you answered yes to any of these questions, then I encourage you to take advantage of this offer. Jason Parker, the author of “Sound Retirement Planning” and president of Parker Financial is offering a free report titled ” Ten Things to Know About Planning Your Retirement Income” that may provide you with answer to the above questions and much more. Call his office at 1-800-514-5046 to receive your report free of charge. Again, call now at 1-800-514-5046.
Jason: All right Emilia. We’re back, Emilia. Welcome back.
Emilia: Welcome back. So you’ve mentioned a lot social security is a big part of retirement, but do retirees need to be concerned with social security coming to an end or drastically being reduced any time soon?
Jason: Well, the trustees’ report, those security trustees’ report, this is printed right in front of people’s social security report that comes in the mail to them every year as long as they still get it. If they don’t get it in the mail then it’s just a matter of creating an account online to be able to download the pdf or print the pdf, and I encourage the people to do that.
But the trustees’ report says that by the year twenty, I believe it’s 2032 that social security is gonna have to reduce benefits to about 77% of what they’re currently paying out, and that’s across the board. Even if you’ve already started collecting social security, there’s this projected future reduction in benefits that the trustees’ report is stating, and that’s just a matter of … Right now it’s, I think, it’s almost 3 to 1, the number of workers to retirees. But be the year 2032, it’s gonna be a 2 to 1 ratio, so there’s just not as many people paying in to the system. Congress has known about this for a long time, we haven’t seen anybody really take any significant action, although you always hear about it in election times. “Oh, we need to fix social security.”
Jason: And it gets kicked down the road and nobody really does anything about it. So my hope is that there is no reduction because the number of people, the statistic says that forty, it represents 40% of many retirees’ income in retirement, 40% of the retirement income. So if all of a sudden … social security represents 40% of your retirement cash flow and then that cuts significantly, again it’s just one of those things you stress test again.
You say, “Okay, well let’s create a year by year cash flow plan.” Let’s understand how to maximize social security so that you get the most out of that benefit possible. And even though Congress has been tinkering with the rules, there are still opportunity to make sure that that benefit is maximized over your lifetime. In fact, on the website, people can download free chapter from my book that talks about social security planning. And I will tell you that it’s not always the right strategy for everybody to delay taking social security for this delayed retirement credits especially higher net worth people, but in many instances, it can help prolong the life on an investment portfolio by delaying social security.
So as a general rule of thumb, one of the things we talked about is the higher income earners delay is taking social security for a longer period of time, and the lower income earners starts social security earlier is kind of a, you know, if you could give cookie cutter advice on social security, that’s what that would look like. I hope it doesn’t happen right now based on the trustees’ report, they’re saying it’s a possibility and its projected.
Jason: You know, it reminds me of when evacuation orders are given in really bad situation, we just … you know, there’s this dam that was about to break in Orville a couple of weeks ago. I had family that lives down there.
Emilia: Oh wow.
Jason: Yes, I think it’s the biggest largest dam in the United States, and this is big deal, right? They’re just getting flooded, tons of water. The spillway’s broken and looks like this dam is gonna give away. And they ordered this evacuation. I think it’s like a 186,000 people that had to evacuate. I don’t know this for sure but I’m willing to guess that there are some people that said, “I’m not going anywhere. I’m staying right here with my house. That dam’s fine, nothing’s gonna …” Well the good news is nothing happened but if somebody gives you an evacuation order they give you a warning ahead of time, and then if something bad were to happen and you didn’t take action to protect yourself from it, well whose fault is that? So …
Emilia: You mentioned too, there’s the income but there’s also taxes in retirement. So what are some ways that you can help retirees to reduce taxes?
Jason: You know we’re gonna address this on the webinar but I realize, Emilia, that I don’t think we have time in just the rest of this show today. But I do want to encourage people, we have the webinar coming up Wednesday, March 15th. They can sign up at soundretirement.com. Emilia, thanks for being here today.
Emilia: You’re welcome. Thank you.
Announcer: Information and opinions expressed here are believed to be accurate and complete, for general information only and should not be construed as specific tax, legal or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Avenue, Northwest, Silverdale, Washington. For additional information call 1-800-514-5046 or visit usually online at soundretirementplanning.com.