Jason and Emilia discuss the different ways to create retirement cash flow, and some of the risks you currently face as you prepare 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 through retirement. Now, here is your host Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. So glad to have you tuning back in. It is my good fortune to have Emilia Bernal in the studio with me this morning. Emilia, welcome back.
Jason: Episode 162. This episode is titled.
Emilia: Oh, my Gosh. What is that again? Floor, Buckets and a MOP.
Jason: Floor, Buckets and a MOP.
Emilia: It made me laugh, but I’m just a joke person.
Jason: Let’s get the morning started right, we like to do that two ways around here. First of all, by renewing our mind, this one is just such a great reminder. Galatians 5, 22 “But the fruit of the Spirit is love, joy, peace, forbearance, kindness, goodness, faithfulness, gentleness, and self-control, against such things, there is no law.” Galatians 5, 22 and 23. Man, geez, that’s such a great reminder.
Emilia: Yes, and now for my corny joke.
Jason: Yes, thank you.
Emilia: What did the big furry hat say to the warm wooly scarf?
Jason: The big furry hat, I have no idea.
Emilia: You hang around, while I go on ahead.
Jason: Emilia, that’s funny.
Emilia: I think they’re getting better.
Jason: Thank you. Thank you. It’s always nice to start the morning with a smile.
Emilia: Yes. All right.
Jason: Let’s get into this topic, I’m excited. I wanted to bring something kind of abstract, but it’s very real too. Again, the title is Floor, Buckets and a MOP.
Emilia: Yes. Why are we talking about a Floor, Buckets and a MOP?
Jason: Ultimately, what we’re going to be talking about is the fact that retirement is all about cash flow. There are two primary philosophies in retirement cash flow planning that are very popular with people. I don’t think it has to be an either or, but one concept is called a flooring concept, and then the other one is called a bucketing concept.
Then, we’re going to throw the MOP in there just to keep the floor clean.
Emilia: Clean, I like that.
Jason: There is actually more meaning behind MOP, but we’ll address that here. But, it’s just to take two very popular ideas, an idea of retirement cash flow planning, and start to build a plan that is going to serve people really well as they’re beginning to make this transition into and through retirement.
Emilia: Great. Why do people need to think differently about investing in retirement?
Jason: Emilia, risk becomes very real once you’ve retired. One of the things I love hearing from people is they’ll say “Jason, 2008, the financial crisis came along, and we didn’t make any changes to our portfolio.” I think “Oh, man, thank goodness, these people were so disciplined.”
They said “We just stop opening our statements, we don’t worry about risk.” It’s such a good way to approach it when you have your greatest asset, which is your ability to earn an income. Risk is noise, volatility is noise, during the years where you’re accumulating money.
But, let me just encourage all of our listeners to understand that risk becomes very real when we’re talking about locking in losses. If you’re having to pull money out of a portfolio that’s falling in value, you are no longer dollar-cost averaging in. During the good times, what happens? I should say, the volatile times, it allows discipline investors to buy more stock at cheaper prices, because they stop opening their statements, they keep contributing, they’re buying stock cheaper, and that’s a good thing over the long haul.
But, that’s not what happens in retirement, because they don’t have their income anymore. You’re experiencing, you’re going to experience 30 years of unemployment. Now, what you have is what you have. If you’re pulling money out of this account that’s falling in value, it’s really dangerous.
You’ve got to think of, you’ve got to have your money working different for you, because I guarantee that when you’re not working anymore, when you don’t have the income anymore, and you experience volatility at the same time you’re pulling money out of your investment portfolio, they will, I guarantee, they will think about that risk differently, because it’s meaningful at that point, because it’s no longer noise, now it’s become real risk. I think this can be a dangerous time for people too.
Emilia: That really sticks out to me, just 30 years of unemployment. If that doesn’t kind of get you thinking, I don’t know what will.
Jason: You know, very rarely do I ever have anybody come into my office and say “Jason, I’m so worried about dying with too much money in the bank.”
Emilia: Oh, my God.
Jason: You know, they don’t come and say “I’m worried that we’re going to die with all this extra money.” What they say is “I don’t want to be living under the overpass, eating cat food, depending-” people are funny with the way they describe this, but this is actually what I hear people say to me.
It’s the fear of running out of money, and it’s why we have to have a good defense. We need to understand what the purpose of the money is, and we need to create a structure that’s going to hold up in good times, and bad times.
Emilia: Exactly. Why do you think this is such a dangerous time to retire?
Jason: There’s a lot of reasons. Stocks are at some of the highest prices we’ve ever seen, bonds are at some of the highest prices we’ve ever seen, real estates at some of the highest prices we’ve ever seen. All of these asset classes that people have traditionally used to supplement their income needs in retirement, and at the same time safe money like bank CDs, or fixed annuities, are at some of the lowest levels they’ve ever been.
It’s just, it’s dangerous from the fact that we’ve been through nine years of printing money, quantitative easing, driving up all of these different asset prices to levels that have been, that have never been sustainable in the long run. But, the bigger risk isn’t just the fact that everything is expensive right now. The bigger risk is what the psychology is happening to people in their minds today.
That is people are feeling wealthy, they’re feeling rich. There’s a lot of people that I talk to, they say “Jason, we’ve always been modest, of modest means, we’ve just been good savers, it’s hard to imagine that we have over $1 million saved right now.” They get laud into nine years of a bull market, the second longest bull market in the history of the stock market, and they just start to believe that this is the way it’s always been, and that this is the way it’s always going to be, where we’re in this time, this period of absolute low volatility.
You know what they say? People that don’t study history, are doomed to repeat it. If you don’t understand what has happened in the past beyond just the last 10 year, and you’re making all of your projections based on the fact that you feel kind of wealthy right now because your house has appreciated to some ridiculous level, and stocks and bonds have served you well over the last nine years.
You’re basing your retirement on this most recent set of data that we have, dataset. I’m just telling you, that’s a very dangerous, the biggest danger is that people have been laud in this false sense of security that the stock market just always goes up, and always goes up without really understanding the risk associated. The risk becomes real once they pull that plug on their income.
Emilia: Wow, that’s great. Thank you for sharing that. I just want to take the time to also let our listeners know that if you have questions about taking a look into history, and figuring out where you are in retirement, Jason has a webinar coming up on Thursday, March 22nd, at 5:30 p.m. Pacific Standard Time.
If you’d like to register for that, go to SoundRetirementPlanning.com and you can register for that webinar.
Jason: Emilia, if people don’t understand the gravity of the risk that they’re … the decisions they’re making, then they just don’t get it. They don’t understand the world that we live in. It’s not a bad thing, necessarily, they’re just not people that spend all of their life in personal finance.
Man, it’s really … The other thing is, there’s a lot of people out there, in the academic community, that like to share theories. There’s a lot of people that write articles on all of these different websites, or they do podcasts, where they talk about their theories. They love to listen to Warren Buffett, and Warren Buffett says “Hedge fund managers don’t beat the market, so just buy the S&P 500.”
People aren’t Warren Buffett, they don’t have the resources to draw from that Warren Buffett has. If we were only talking about investing money, that’s one thing, but the reality is this, money has to serve a purpose, and the purpose has to be, in most instances, cash flow. The risk is, if you don’t get it right, you run out of money in retirement.
So you can’t take what Warren Buffett says and translate that into your personal financial well-being, because you don’t have the resources that Warren Buffett has. Warren Buffett, if he experiences a 10% or 20% decline, the guy’s life is not going to … He’s got enough dividends being paid to him from Coca-Cola alone that his life is very good.
But, most people aren’t in Warren Buffett’s shoes. You got to be careful. Yes, his advice is very good for long-term, value-based investors, but we’re not talking about just investing, we’re talking about retirement planning. I can get a little bit fired up here sometimes because there’s a lot of people taking advice from people that have no skin in the game.
As an advisor that works with real people, that has been on this journey with them, it’s a lot different to take an academic approach and say “Well, here’s how things should work.” Versus working with real people and saying “Boy, if we get it wrong, we’re eating cat food under the overpass.” There’s a big responsibility there.
If you don’t feel the weight of the responsibility in the people that are depending on you to get it right, you got to be really careful about the advice that you’re taking, and the advice that people are giving.
When people want to criticize our philosophy, our ideas, taking a conservative approach to making all of this work, it’s probably because they don’t have skin in the game, they don’t understand the consequences of getting it wrong. Because, failure in retirement is much more significant than dying with too much money in the bank.
Emilia: Wow, thank you. Wow.
Jason: Do I sound kind of fired up? That’s [crosstalk 00:10:44].
Emilia: No, it’s great.
Jason: That verse really struck me this morning, because I’ve got to remember, there’s-
Emilia: No, you have a passion behind what you do, and I think that … I hear clients say it all the time, they’re like “This is why we have Jason. This is why we come to Jason. We don’t know the questions to ask, and that’s why it’s good to know somebody, or have somebody on your side,” like you said “that has skin in the game. That knows what they’re talking about.” That’s your focus, retirement, and helping people understand that.
Jason: Well, the reason that, and I don’t know if I’ve ever shared this before, but the reason that I like to share a verse at the beginning of each show is because ultimately, what we want people to have, is clarity, confidence and freedom. I don’t believe you find those things in your money. If there’s not a bigger purpose, then you could really mess this whole thing up.
Clarity, confidence and freedom come from, in my opinion, come from the word, and from your faith, and from our relationship with Jesus, but that’s just-
Emilia: That’s great. That’s great. I’m just going to take us back a little bit here. Me next question is how is experiencing risk and volatility different in retirement than when you are working?
Jason: Yeah. Again, you have a paycheck. I can experience the market, the market can drop 50%, and I don’t care, because I’ve got income, I’ve got my wages, it doesn’t matter to me, I can take a lot of risk.
In fact, for those people out there, that are driving down the road in Seattle this morning, they should be taking a lot of risk, because they need to stop playing a conservative during the go years, right? These are the go-go years. The sun is shining, got to make [inaudible 00:12:16] while the sun’s shining, take some risk with your investments during the years where you have your income, where you don’t have to depend on those investments.
But, once you get to retirement, you got to think about your money different. Now, what you have is what you have, it’s got to support you for possibly 30 years of unemployment. That’s why so many people get this wrong, because they transition into retirement, and they invest their money the same way they did during their accumulation years.
Some of the people that make the biggest mistakes are some of the smartest people I know. It’s oftentimes people who are very sophisticated that mess this up. I like what Mark Twain said, he said “It ain’t what you don’t know that gets you into trouble, it’s what you know for sure that you just ain’t so.”
Unfortunately, I come across people that are very smart, they’ve done really well in their careers, the engineers, the architects, the doctors, the dentists, the programmers, I get to see all these people, I get to hear what’s going through their mind in the way that they think about finance.
Sometimes, they’re making big mistakes, and they don’t want to hear it. It’s hard to work with people who think that they have all of the answers, right? It’s like “Well, if you’ve got it all figured out, why are you coming to talk to me in the first place?” But, I can just see, I can just see the mistakes they’re making, because I’ve seen people make these mistakes before.
You’ve really got to be careful about thinking that you have all the answers, the people that get hurt the most are the people that think they know it all. The people that don’t know anything … anybody that knows something about this world, knows that makes sense to play good defense, and have a good strategy for when the bad times hit.
Warren Buffett says “A rising tide lifts all ships,” then he says “You find out who’s been skinny dipping when the tide goes out.”
Emilia: Yeah, makes sense, absolutely.
Jason: Yeah. It’s easy to be doing well when everybody is doing well. The question is, how are you going to do when things go south?
Emilia: With regard to stock market, can markets trade sideways for a long period of time?
Jason: Yeah. Again, people have been laud into this “Hey, the market goes up, it always goes up, I’m not worried about it.” Let me give people just a little glimpse in the history.
Looking at the S&P 500 index, we can go to 1999 through 2009 that was called the lost decade. There was a 10-year period of time where you made no money in the S&P 500 index. The market went up, and the market went down. But at the end of 10 years, you were flat.
If you retire, and you’re pulling money out of that portfolio, and you’re expecting a 4% average annual return, and that’s not what you experience, because of the ups and downs in the market.
People say “Yeah, but Jason, we had the .com bubble, and we had the financial crisis. That’s never going to happen again.” Then, another example would be the Dow Jones industrial average.
We experience the Great Depression in our country from 1929 to 1954, if you had been invested in the Dow Jones, there was a 25-year period of time where the market traded sideways.
Imagine the Dow Jones are the blue chips, it’s the big companies, and it’s the dividend payers. You say “I’m going to be cautious, and I’m only going to invest in the big companies.” But what if, right when you retire, we experience a 25-year period of time where it takes you just 25 years to get back to even, that’s your whole 30-year retirement. You just messed it up.
Or you say “Okay, Jason, but that was 1929, we’ve got a lot of systems in place, we have social security, we’ve got all these government pensions, that’s never going to happen again.”
Well, what if we look at Japan, they have the Nikkei 225, that’s like investing in the blue chip companies in Japan, and those are the biggest companies within their index. In 1989, October 1st, 1989, the Nikkei was at 38,915. Today, it’s at 21,777.
From 1989 to 2018, it’s not back to even yet. Imagine if you had retired October 1st, 1989 in Japan and said “I’m going to only invest in my country, I’m going to buy the biggest blue chip stocks, because they’re going to be the safest.” That’s a long time.
Emilia: 29 years, right?
Jason: Yeah. It’s a long time to go without making any money. You say “Oh, but that’s Japan. That’s never going to happen in the United States.” Let’s look at, let’s say you retire in 2000.
You were so convinced that technology is the wave of the future, you say “Those Dow Jones, those old dividend payers, I don’t want anything to do with that. The S&P 500, ah, you know. I’m going to go for the future of America, and the future is technology. We’re going to buy the NASDAQ.”
In the year 2000, the NASDAQ was at 5048 on March 10th, 2000. It took until May 29th, 2015 from the peak, all the way, 15 years later it took to get back to even with the NASDAQ, and you’re buying broadly, diversified, you know, if you’re investing in index funds that detracts the NASDAQ, you’ve got a lot of different technologies companies in that mix. It takes you 15 years to get back to even.
The point of the exercise is this. Can you be broadly diversified with the S&P 500, the Dow Jones, the Nikkei, the NASDAQ, and still experience a long period of time where the returns don’t work in your favor?
Jason: Well, history has told us that it’s happened in the past. You better have a good plan for what’s coming in the future.
Emilia: Here comes the plan. Let’s talk about the floor, buckets and the MOP. Why is a floor important?
Jason: Gosh, I love this analogy. I prefer the word foundation than floor, but in the retirement income space, a floor just says “We have to and the most important number that people have to realize is their spending.” Retirement is an exercising cash flow. If you don’t understand your spending, and this is the other area where a lot of smart, successful, high income people mess it up, because they’ve never had to live on a budget, so they don’t really understand how much money they spend.
It is your income that determined your lifestyle, but the income has to match your expenses. A good way of thinking of the floor is to decide what your discretionary expenses are. One of the advancements, enhancements, that we have coming to the retirement budget calculator is we’re going to allow people to tag each of their expenses as either discretionary or non-discretionary.
Non-discretionary expenses are things that you’re just not willing to gamble with. We need to have grocery money every month, and we’re not going to gamble our grocery money. We need to be able to pay the electric bill every month, we’re not going to gamble the electric bill. If you have a mortgage going into retirement, you need to be able to pay.
These are non-negotiables. These expenses have to be paid. To create a floor, what we want to do is understand what percentage of the floor do you want funded.
Some people will go into retirement, let’s say they need $100,000 a year at 70 years old. Between their social security, and their pension, they’re going to have $70,000. They’re 70% funded to their floor, their basic minimum expense requirement. That doesn’t include the dining now, or the travel, or the river cruises through Europe. Those are discretionary expenses. Non-discretionary expenses are $100,000 a year, that’s making sure we can do everything, keep the lights on.
Some people are comfortable having the 70% funded rate. Other people say “I’m not comfortable with that. I want to have more than 70% funded.” That’s where people consider purchasing an annuity from an insurance company to create guaranteed income, because an annuity is the only way you can guarantee cash flow, to get them to the 100% funded mark.
Now, that’s a not 100% funded for inflation for the rest of your life. It’s just saying “Okay, we have $70,000 from social security and pensions. We need $30,000 more. What percentage of my portfolio do I have to annuitize to get me to 100% so that I’m not having to worry about our basic necessities?”
I find people that have a good foundation, a good floor, what it does is a couple of things, it gives them a tremendous amount of confidence, it decreases their worry significantly when the market does get wobbly, and it does go through prolonged periods of downturn.
Having a good foundation that you’re building from. Foundation of retirement is about cash flow, it’s not your rate of return. Just get this whole beating the market thing out of your head, that’s not the reason that you have the money. You don’t have your money, because you’re trying to beat the market, you don’t have the money because you’re trying to get a 10% return, you have the money because you don’t want to be eating cat food under the overpass.
Emilia: I was about to say the same thing. I’m like that. That’s kind of scary.
Jason: I’ll tell you what, cat food is expensive. I don’t even know if that’s a viable option. My wife just bought our cat goat milk, I mean, this cat, she’s spoiled rotten.
Emilia: It’s a lucky cat. The next part of the analogy was the buckets. What do the buckets really represent?
Jason: The buckets represent time. Time is the cure to the volatility. The stock market, the more time you have, the more risk you can afford to take. If you have a good foundation, if you have a good floor, then, we can use these buckets to diversify your money across time based on when you’re going to need that money for. Hopefully, it’s for discretionary expenses, it’s for the travel, it’s for the extra cable that you want to have, it’s maybe for the cellphones, or you know, whatever it is you consider or deem to be discretionary in your life.
Maybe it’s for those RV trips that you want to take, or making extra trips to visit the grandkids, or whatever it the case may be, the buckets represent the time period that we have when we’re going to be drawing money out of those accounts.
The other thing that buckets allows us to do is think strategically about our tax liability, because it can make sense for people if they’ve saved enough, and most people have. My experience has been a lot of the people we work with, they’ve been good savers.
When you’ve saved enough, then you can also think strategically about maybe having some money in tax free buckets, so if we end up in higher tax situation in the future, we have that tax free money to draw from to keep our lifestyle high, and keep Uncle Sam’s hands out of our pocketbooks.
Emilia: Yeah. It looks like now it’s time to throw in the MOP. The MOP.
Emilia: What is the MOP?
Jason: Well, I was out jogging, and I thought “You know, having a floor, having a foundation makes sense. If you’re going to have your nice, brand new floor out there, you got to have a bucket filled with some water to keep that thing spotless, and clean, we’ve got to have a mop to mop the brand new foundation that we just build, right? The floor.”
But I was like “What could MOP stand for?” I just as I was jogging, I was like “Money On Purpose.” MOP, Money On Purpose.
Emilia: I like that.
Jason: One of the hardest questions people have, that I ask frequently, is what’s the purpose of the money? If we don’t know what the purpose of it is, it’s really hard … if we don’t know where we want to go, it’s really hard to create a map, or a direction to get us there.
If I say I’m going to take a road trip, and I don’t know how to get there, and I say “Emilia, give me directions.” She’s going to be like “Well, where do you want to go?” I’m going to “I don’t know, I just want to go.”
Emilia: That makes no sense.
Jason: It doesn’t make any sense, we got to know where we’re going. We got to have a purpose for the money. What is the purpose of it? Why did you save it? Are we trying to leave something to the kids? Most of the time, that’s not the case, most people say “You know, whatever is left, the kids can have. But we just want to make sure we’re never a burden to them.”
I can’t believe we’re out of time. Real quick. When is our webinar again?
Emilia: It is March 22nd, that’s Thursday, March 22nd at 5:30 p.m. Pacific Standard Time.
Jason: If people want to learn more about retirement planning, creating a floor, creating buckets, and having money on purpose, be at the webinar. Thanks so much for being here. Until next week.
Emilia: 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 us online at soundretirementplanning.com.