Jason and Emilia answer questions from our listeners, and talk about when more is not enough when it comes to personal wealth.
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 through retirement. Now, here is your host, Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. It is my good fortune to have Emilia Bernal on the program with us this morning. Emilia, welcome back.
Emilia: Thank you. Good morning.
Jason: The title of this show is episode … What did I call it, Emilia?
Emilia: When More is Not Enough.
Jason: What number is it, do you remember?
Jason: 132, When More is Not Enough. One of the great things about doing this program, we’ve got listeners from all over the country, and we recently … Several people have signed up for our newsletter and subscribed to that. We sent out an email, and we just wanted to know what was most important to people as they were getting ready to make this transition into retirement. Many of the responses that we received back were very similar to one another. We kind of cherry picked through some of them and we’ve got some of those questions today. I just thought that, what a great opportunity, because I know if one person asks a question, there is probably a thousand more people with the same question. I thought today we could dive into that, but before we do we’ll like to renew our minds. I’ve got a verse here for us. This one comes to us from Proverbs 13:20. “Walk with the wise and become wise, for a companion of fools suffers harm.” That’s great.
You know, I have the opportunity to coach my son’s basketball team right now, and so I’ve been reading a lot about Coach John Wooden. Some people say, one of the greatest basketball coaches of all time. He used to say that you become the average of the five people you spend the most time with. It kind of reminds me of that verse, is that if you are hanging around with the best … Another way that somebody said it once, he said, “When you go for a walk with somebody, one of two things happens, either you’re going to speed up to walk at their place, or you’re going to slow down to walk at their pace.” It happens subconsciously, you’re not really thinking about it. The people you spend your time with, the people that you go walking with, the five people like John Wooden says, you spend the most time with, you’re going to become the average of those people. If you’re not happy with the results that you’re getting in your life, maybe it’s time to look around and say, am I spending time with the wrong people? Just be very aware of that.
Emilia: That’s some great information. Thank you for sharing.
Jason: Yeah. I like it. I love that verse. I love that verse, and I love how the world has, kind of, consumed it and then re-shared it in different ways. Emilia, we also want to put a smile on people’s faces as they’re getting ready to go see their grandkids maybe this weekend. Do you have a joke for us?
Emilia: I do, and hopefully it’s as funny as I thought it was. What did the stamp say to the envelope?
Jason: I have no idea.
Emilia: Stick with me, we’ll go places.
Jason: I love it. Stick with me, we’ll go places.
All right, let’s dig into some of these listener questions.
Emilia: Yeah. We have some great questions today. First question we’ve received, that would be great to share with our listeners is, “How do you select a financial advisor with the expertise, trust-worthiness and integrity to guide you and optimize your retirement planning?”
Jason: It’s a great question. This is if … Assuming my mum were asking me this question, and she’s in a different State and doesn’t want to work with me, right? Here’s what I would tell her. I’d say, mom, first of all you want to go find somebody that is a fiduciary. Somebody who has a legal obligation to act in your best interest. You would think in the financial services arena, that everyone would have a legal obligation to act in your best interest, and there’s been some legislation recently that’s … Actually it’s not even legislation, it was just a rule. It was a request by the Obama administration, that the DOL, Department of Labor, to go ahead and put in these additional requirements.
It’s supposed to take place in June, for people that are giving advice on retirement accounts, but you would think that people would want somebody that has to act in their best interest with all of their finances. Not just their retirement accounts, but their non-retirement accounts, as well. I would just say, find somebody that operates as a fiduciary. They hold themselves to the highest standard. It’s the same type of relationship you would want when you go to your doctor. You don’t want your doctor making recommendations to you based on how much money they’re going to make. That’s not good medicine.
Jason: Although sometimes I do, kind of question, if you go see a surgeon and their job is surgery, and they’re always looking to perform surgeries, is there a conflict of interest in that relationship? I mean, if my doctor says, “Go consult with a surgeon,” I wonder how often the treatment recommendation is surgery, versus not surgery. I’d be curious to know those numbers.
Emilia: Yeah. That’s a good question, because that’s all they do. Of course they are going to try to … Well, you’re coming to a surgeon, of course we’re going to recommend surgery, kind of thing. Yeah.
Jason: Not necessarily that that’s … I mean, it’s just, they have a certain set of goggles on, right?
Emilia: Yeah. I see what you’re saying.
Jason: I don’t know that there’s necessarily a conflict of interest, but they see the world through surgery. Which brings me to my next point actually, is you want somebody that’s independent. When you’re going to get advice from somebody, you want somebody that doesn’t work for a company necessarily, but they work for you. In my opinion, an independent company is going to be able to serve the people they work for. Their first obligation is to their client, not to the company that they work for. I think having independence is very important. I think it’s important … One of the ways you can tell whether or not you’re working with somebody that’s really interested in your best interest, is that they start with a plan, and that they will create the plan for you before they ask for a commitment for you to move any investments over.
Sometimes what we see in this industry is, people want to give advice on how to diversify a portfolio, or they want to give advice about insurance products to purchase, but they give this advice without the context of a plan. I just don’t understand how you can really give people good advice about the financial tools they should be using if we don’t have the plan as the framework to start from in the first place. I would say, if you don’t … Here’s the deal, a plan means it’s a written plan. It’s a written cash flow plan. It’s not a risk tolerance questionnaire. It’s an actual cash flow plan that shows, here’s exactly how this thing’s going to work. That, to me, seems so logical, but boy, I’d say eight out of ten people that we have the opportunity to talk to, they don’t have anything like that. Now, really, what they have is just a diversification, usually some stocks and bonds.
The next thing, I would say, you want to make sure you’re working with somebody that has all of the licensing you need. There’s this divide, in the financial services space between investment advisors and insurance professionals. The reality is, there are two different areas of your life, the investment side of your life is about accumulating money, for the most part. That’s what it’s designed to do. The insurance side of your life is designed to protect you and protect what you’ve accumulated. If you’re only getting advice from somebody that only works on one of those two sides of the world, I don’t know that you’re going to get a fully comprehensive plan. Of course, we need to be able to grow your money, that’s the investment side, but we also need to protect what you have, and that’s the insurance side.
There are some people out there that just … I see this on both sides, the insurance guys want to throw the investment guys under the bus, and the investment guys want to throw the insurance guys under the bus. I don’t think they’re really … Again, it’s all about ego, it’s all about them, and it’s not really about serving their clients best. I think it’s important, that if you’re going to get a comprehensive plan, that is dealing with both the growth side and the protection side of your life, you need somebody that can give you advice in both of those areas. If it were me, I would be looking for somebody that had the ability to do just that.
Emilia: Yeah. That makes great sense.
Jason: You also want to double-check on the advisor. As an investment advisory firm, we have a disclosure document, that we have to provide to our clients every year. If we ever had a complaint filed against us, we have to disclose those complaints. One of the things people can do, is they can go and they can do a search through places like FINRA, to find out if the professional that they’re working with has any complaints filed against them. You also find out if your advisor has ever filed for bankruptcy. This is all in their disclosure documents. Probably a good rule of thumb … I heard Dave Ramsey say once that, the broker is called a broker because they’re broke. Broker than you.
Emilia: You never know.
Jason: Listen, if you got somebody whose filing for bankruptcy, and they’re not managing their own financial lives well, it’s probably not the best person to be receiving advice from. If they got a bunch of complaints against them, that’s probably a good thing to know to. You just want to do your due diligence when you’re looking at these different professionals to make sure that they’re properly licensed, that they’re independent, that they’re fiduciaries, that they can operate in this entire spectrum of giving financial advice. Advanced designations, I would say, are just … What that indicates … Advanced designation would be like a CFP, or a CFC, or RICP, or CRFA. These are advanced designations. People can go out and they can earn. Really what it says is that, the advisor’s committed to learning. It doesn’t necessarily mean they’re a good guy.
Some of the people that we’ve seen come through our office were working with people that had these advanced designations, but the advisor they were getting was absolutely horrible. They had no plan created, they were taking way too much risk with their investments. It was not good stuff. Just because somebody has an advanced designation, does not make them qualified to give advice. Of course, you have to be able to receive the plan that the person’s created for you, and then be able to evaluate and make sure that the numbers jive, and that it’s really what you’re looking for, and that you ask a lot of questions. These are some of the questions we want people to ask.
The other thing I want to make sure that people understand is that, when you’re looking for a financial advisor to manage your life savings or to help you create a plan, as you’re preparing to transition into retirement that is not an investment strategy. It can be. I mean, an investment strategy can be a part of a good plan, but that’s not solely what we’re trying to accomplish here. It’s not just a risk tolerance questionnaire. How much are you willing to loose in one year, or six months? It’s how all these pieces work together. How does social security work? What’s your budget? How’s inflation going to impact you? What happens if one person dies? How’s long term care going to impact you? There’s a lot of pieces that go into a good plan. Again, unfortunately, that’s not what most people are doing. They’re not planning, they’re just buying products, and they’re buying investment services.
Those are just some of the things, Emilia.
Emilia: Great. Just in that discussion, I wanted to clarify, because this is a question that I have, when you spoke of the fiduciary, and that legislation that was recently passed, is that only applied to retirement accounts?
Emilia: Not to just general financial advisors?
Jason: That’s right. Yeah. It was geared towards retirement accounts, and the advice being given on retirement accounts.
Emilia: Okay. I thought it was all financial advice.
Jason: No. You would think. You would think. Yeah.
Emilia: Okay. Yeah.
One of the next questions we had was, “How do I withdraw my money in the most tax efficient way?” Taxes again. This is a question a lot of people have.
Jason: You know, one of things I hear from people often, they say, “Jason, I don’t mind paying taxes. We live in the greatest country in the world. It’s nice to drive on roads that don’t have potholes, and it’s nice to be able to live in a safe place, where we don’t have this constant threat of terrorism on a daily basis in our country, that we can transact business.” People are willing to pay for that. They’re willing to pay to live in the greatest place in all of the world. But most people say, “Jason, I don’t want to pay more than my fair share in taxes.” Most people don’t really think about the fact that whatever money they’ve accumulated, for the most part, most people’s money is tied up in retirement accounts, which those accounts have never been taxed.
The government owns a portion of your retirement account. That portion could be anywhere from, depending on how much money you’ve saved, anywhere from 10 to 39% of that money may not be yours. It may be going to the government at the time that you’re taking money out of the accounts. One of the things we have to consider is that right now, marginal tax rates are at some of the lowest levels we’ve ever seen in the history of our country. There’s talk about them potentially going lower, which could create some really great tax planning opportunities. When you’re taking money out of an account, here are some general rule thumbs. This doesn’t apply to everybody, but usually your tax free money is the last money I want people to touch in today’s tax environment. That would be like your Roth IRAs.
In many instances, a lot of people that I talk to seem to believe taxes could be going up in the future, because we have a massive national debt, almost $20 Trillion now. We have all 10,000 people a day going into retirement, putting more of a strain on Medicare and social security. It just seems like somebody is going to have to pay the bill at some point. If tax rates are at an all-time low, and we can spend some of that taxable money today, while we’re in low tax rates, to me that seems logical. Again, everybody’s situation is different. You can’t give tax advice on a radio show or a podcast, you really have to look at everybody’s individual situation. That comes back to this idea of having a good advisor, that’s looking at your financial life comprehensively, and they’re understanding the impact that taxes are having when you’re creating cash flow.
Emilia: Great. Thanks.
We’re going to go on to a couple more questions. These next two questions were really similar. The first one was, “Probably determining the amount I’ll need for retirement income,” and, “Do we have enough to enjoy a long and comfortable retirement? Are we on target?”
Jason: Yeah. This gets back to a core question that I always ask everybody when they come into the office, and say, “What’s the purpose of the money? What’s the purpose of it?” You know what, the reason that most people save their money, Emilia, is because they want to be able to retire comfortably. Retirement, really, is all about cash flow. It’s all about your income. The reality is, when people say, “Probably determining the amount I’ll need for retirement income,” I mean, there, they said it, retirement income or, “Do we have enough to enjoy a long and comfortable retirement? Are we on target?” Of course, there’s some general rule of thumb here.
Number one, take a look at your spending, so you got to have a good budget. Understand where your money’s going, but then multiply that by anywhere from 18 to 26. If you take social security into the equation, often times, if you’ve saved 18 times your annual spending, and you also account for what social security’s going to provide for you, that should be enough. You should have saved enough, assuming that you’re following the 4% withdrawal rule. If you’ve got a $1 Million, and you’re earning 4% on that $1 Million, that’s producing $40,000 of income for you. If you’ve saved $1 Million, you’ve probably been a pretty highly compensated person, so you’re probably looking at social security benefits that, at the high end, would be $31,668 for last year. It gets back to how much money you’re spending, more than anything. The title of the show, what did we call it again?
Emilia: When More is Not Enough.
Jason: When More is Not Enough. Getting back to this idea of, have I saved enough? Unfortunately, our entire financial industry is focused on accumulating more, saving more, and getting a higher rate of return on those investments. Everything is focused on that. It’s consume, consume, consume, get a bigger house, bigger house, bigger house. You know, the house that my grandfather built, it had one bathroom in it. They raised three kids in that house, and everybody seemed to make it just fine.
Jason: I mean, I don’t think the house was more than 1,000 square feet. Today we’ve got people building houses of five, six, seven thousand square feet. They’ve got five cars parked in their driveway, and they feel like they don’t have enough because they need more, and more, and more. I get it, it’s the way we’ve been conditioned. The question is, when is more enough? The crazy thing is, I meet with people on both sides of the spectrum. I met with some people recently, and after going through their finances, we found out that they were going to be able to live comfortable just on their social security income. The money they’ve saved is really just for extras. It’s just for the what-if’s that come up in life. I’ve met with other people that have saved millions of dollars, and because their expectations are so high, they’re probably going to have to continue working well into their seventies because they just don’t have enough. That gets back to that question, when is enough, enough? I heard a billionaire answer this once, he said, “Just another billion dollars.”
Emilia: Oh, wow.
Jason: Yeah. I mean, it’s a disease.
Jason: That’s why I think in the Bible, there’s a verse that says; I have learnt to be content. Content, sometimes, I think people mean that’s settling. It’s not settling. It’s just finding joy in where you’re at, in being grateful for what you have. I think a great exercise for people is to go out and buy a journal, stick it on your kitchen table, and when you go down for breakfast in the morning, just write down one thing that you’re grateful for that day. Maybe it’s the fact that you get to live in America, maybe it’s the fact that you have organic eggs that you get to eat for breakfast, or that you’re in a good enough position where you can afford a cup of coffee, or that you’re able to listen to the birds chirping in the morning. Whatever the case is, if you tend to focus more on what you have rather than what you don’t have, life gets a lot better. I know that sounds a little foo foo, but-
Emilia: No. I think that’s great advice. I think everyone should live their life, and to be happy in the moment, and what you have and make the best of it. Yeah.
Jason: Yeah. There’s some general rules of thumb about finances, but unfortunately we can’t fix the disease of not enough. That is a disease, it’s a real problem.
Emilia: Yeah. We are going to go onto our next question here. It’s a little longer, so I’m going to read it out. “How long will I live?” is the question here. “Okay, since you cannot answer that one, how about, how much money will I need to last me?” Then it’s, “Okay, since that is dependent on question number one, how much will I need for healthcare in the future? Okay, there’s three for three that cannot be answered. Well then, what does diversification look like to be ready, for all these other questions that cannot be answered?” Wow.
Jason: Actually, the questions are not as hard to answer as I think people think. Number one, how long will I live? Everybody thinks they’re going to live to 100. I wish that they were. Medicine science technology are getting better, and more and more people are getting older, but just because you have a mom that lived a long time doesn’t mean you’re guaranteed the same thing. We have mortality tables, social security publishes them, you can go to social security and just look at the mortality tables. I think a guy my age right now is expected to live to about age seventy nine and a half. That gives us a starting point. Then we can do some mortality adjustments. We can look at our family and say, wow, our family lived a little bit longer than 79, maybe I should be planning for a little bit longer life expectancy.
There’s a great tool that we make available under the resources tab at Sound Retirement Planning, it’s the very last resource right now on the resources tab. It’s John Hancock’s Life Expectancy Calculator. Insurance companies are in the business of betting whether or not people are going to live a long time, or they’re going to die early. Go to a life insurance company to find out life expectancy. They’ve got a really cool calculator that lets you put in information about your family history and your health habits, and your current condition, to help us get some estimates about life expectancy. Probably not everybody’s going to live to 100, so the problem with planning to live to 100 is, you’re probably end up leaving a lot of money on the table. Somebody once said to me, they said, “Jason, I want my last check to bounce, and I want that check to be to the undertaker.”
Jason: Spend it all.
Jason: The number one is, use the life expectancy calculators that are available. Number two is, how much money do I need? We talked about that. As a general rule of thumb, kind of the cult-followers of the people out there that are, you know, very thrifty, they say, if you want to retire early, say you want to retire at 40, you need about 25 to 26 times what your annual spending is. Not what your annual income is, but what your annual spending is. Let me grab my calculator here real quick. Let’s say, you need $60,000 a year of spending. 26 times is $1,560,000. If you follow that 4% rule, that should get you to where you need to be. The problem with the 26 time rule is that it doesn’t take into consideration social security.
When we factor in that if somebody retired today, and they qualify for the highest social security benefit, that’s $2,639 per month right now. That’s $31,000 a year of social security. Then assuming their spouse qualifies for half of that benefit, so let’s say they stayed at home and they didn’t work, that’d be an additional $15,000 of social security. Combined social security is $47,502. What we find is that, often times if you take social security into the equation of, have I saved enough?, then you really need to save 18 times your annual spending. Social security is going to help supplement a big portion of that. If you need a $120,000 a year of income, and you’ve saved $2,000,000, and you have social security at the maximum level, you’ve probably got enough to be able to spend $10,000 as a rough idea. That’s a general rule of thumb.
Jason: The last one there is, how much do I need for health? Again, this isn’t a big mystery. Fidelity does a study every year. They say in 2015, it was $260,000 that a married couple has to have set aside for healthcare expenses, that does not include long-term care. You have to add another $130,000 to that for long-term care expenses. You’re looking at anywhere from $260,000 to $400,000 of healthcare expenses, that includes things like deductibles and co-pays and those types of things. It can be a big chunk of somebody’s budget. I would actually say a lot of the people that we serve, their biggest expense in retirement is healthcare. Unfortunately, I don’t see that getting any better any time soon.
Emilia: It’s a struggle for a lot of people nowadays too. We-
Jason: You know, it’s a struggle because we’ve been brainwashed that everybody has to have insurance.
Jason: Me and my kids were watching Little House on the Prairie the other day-
Emilia: Love that show.
Jason: They pay the doctors with eggs. I mean, come on, I wonder what my doctor would say if I showed up with a dozen farm fresh eggs. “We don’t have insurance, but here’s some eggs.”
Jason: The insurance companies have brainwashed us that we have to have insurance.
Emilia: That’s a lot of things that are going on.
We have another little question here that came up. It was a simple, “Where to invest after retirement?”
Jason: We’re almost out of time.
Emilia: Are we? Okay.
Jason: Actually, we are out of time. Until next week, Emilia, thank you for joining me here on Sound Retirement Radio.
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 as 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 us online at soundretirementplanning.com.