Jason and Emilia discuss ways to help reduce risks during 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, and Emilia Bernal, welcome back to another round of Sound Retirement Radio.
Emilia: Thank you. Hello, everyone.
Jason: Hello. Hey, so we get these people that really like our show and, specifically, the podcast. They will call in and they’ll say, “You know, we listen to a bunch of these different shows, but yours is the best.”
Emilia: Oh, wow, the best.
Jason: I love it. Hey, thanks out there, listeners, for telling us we’re the best. We love it. But there are some great shows out there. I like it. I enjoy listening to a bunch of these different shows myself. Emilia, we like to get the morning started right two ways. Number one is we want to renew our minds, and then we’ve got a joke. Our verse this morning to renew our mind is 1 Thessalonians 5: 16, 17, and 18, “Rejoice always, pray continually, give thanks in all circumstances, for this is God’s will for you in Christ Jesus.” What a great way to just live a life. Rejoice always, pray continually, and give thanks in all circumstances. Man, that’s good.
Emilia: That is good.
Jason: Now you got a joke for us this morning.
Emilia: I do. Okay. Why don’t cats play poker in the jungle?
Jason: Why don’t cats play poker in the jungle? No idea.
Emilia: Too many cheetahs.
Jason: Oh, Emilia.
Emilia: There’s too many cheetahs.
Jason: I don’t know where you get these things.
Emilia: I don’t either.
Jason: I’m glad you’re responsible for it though, not me anymore.
Emilia: I’ve had people ask me. They say they use my material at home.
Jason: Oh, right. Yeah.
Emilia: I have faith.
Jason: I use your material at home. I can’t wait to share it with my kids. Emilia, we’re on Episode 167, so for our listeners driving down the street this morning in the Seattle area, if you can’t catch the whole show on the radio, remember we archive all these programs online at soundretirementplanning.com. The episode title here is Reducing Retirement Risks.
Emilia: Yes, reducing retirement risks. What risks do we have with housing and how do we mitigate those risks? That’s where we’re going to start today.
Jason: Yeah. I thought this housing would be interesting because it’s really, for many people, it’s one of, if not their single biggest asset. When you have something that’s of value, it’s very important to you, you want to protect that asset. Of course, there’s the things that everybody thinks of, like fire insurance or flood insurance or water damage, or if there’s an earthquake. In our neck of the woods out here in volcano land and earthquake land, a lot of people carry earthquake insurance. Those are, I would say, pretty obvious insurances that most people will carry to protect their house. The other big one that we see a lot of people using is the umbrella liability coverage.
The reason I wanted to talk about their housing risk is it’s not just your house, but it’s also your life. You live in the house, and so you want to make sure you’re safe in the home you’re going to. A couple of years ago, we invested in a security system for our house. Well, I won’t use the name specifically, but we went with one that there’s no wires attached. It’s a completely wireless system, so nobody could come up and cut cords and disable the alarm system that way. We’ve never really had to use it.
But then a couple of years ago, I was talking to a friend of mine and he was sharing with me how one day he walked into his house and he heard some noises upstairs. He was just over in his shop, which is right across from his house. So, he hears these noises, and this particular friend of mine has got guns everywhere. He’s got guns-
Emilia: There you go.
Jason: … coming out of his ears. Yeah. He grabs one of these guns and starts walking upstairs. Well, as he walks upstairs, he walks into the master bedroom and there’s a guy in the master bedroom who jumps out the window and takes off running. Didn’t look like he had stolen anything, but pretty alarming. He called the police out. After that, this friend of mine bought a wireless video security system. I was saying, “You know, I’ve been wanting to get one of those.” Any time there’s a serious crime that happens in the area nowadays, you always say, “Hey, if anybody has any video surveillance, the police would like to review it.”
About two years ago, I went out and I bought these video surveillance cameras, these wireless video surveillance cameras from Costco. You get three cameras, 400 or 500 bucks. I installed them, and what’s really been strange, things that we never would have known about had we not had the video surveillance cameras, all of a sudden we’re starting to see all this weird stuff that’s happening around our house. In fact, maybe I’ll post one of these videos for our listeners to visit the website and see.
One, in particular, kind of freaked us out. We were on vacation over Christmas and all of a sudden, about 10:00 at night, I get this alert on my phone that “Hey, there’s been some motion activated in your front yard.” I look at the camera and sure enough, there’s this guy standing on my driveway, 10:00 at night, kind of peeking his head around, looking around, and wearing a hat. I thought, well, that doesn’t look right. Why would there be somebody standing on my driveway 10:00 at night kind of scoping my house out? We called the police from vacation to have them kind of drive up and down.
We’ve had that happen. There have been several instances that we’ve caught on video, and I consider where we live to be a very safe place, but we’ve had several instances where we have some kids walk up onto the doorstep like they’re going to steal a bike off of the front porch or just some weird things that have happened. We never would have known about these things, because nothing ever actually got stolen, just weird stuff happening, had it not been for those [inaudible 00:06:11] surveillance.
In terms of protecting our family and our house, the two things that I wanted to bring up today that I think people should be thinking about, is some kind of security system that allows it to call the police or the ambulance or the fire department in emergency that’s tied into the smoke alarm detectors to keep you safe. Then also, I know for certain that these video surveillance cameras have deterred some of these criminals, because they will look up and see the camera and then all of a sudden they’ll be like, hey, we got to get out of here. It’s probably saved us quite a bit of money just by having those in the few years we’ve had them.
Emilia: Bet it did. That seems really important now. Everything’s so high-tech and if you have a clear picture of somebody, oh, it’s going to … They’ll come after you and be surprised.
Jason: Criminals are smart. If they see the cameras, they say, “Oh, we don’t want to mess with this place.” They see the sign out in front that says, “Hey, there’s a security system on this house,” they will go to the easiest target.
Emilia: Yeah. We’re talking about security, but what about health? Why is our health a risk and what can people do about their health?
Jason: Well, again, there’s two things I think about when it comes to health. Number one is, especially for people what are retiring, your health is your wealth. Soon as your health is gone, a lot of the dreams that you have probably could potentially disappear with that. If you all of a sudden have doctors’ appointments every week and those doctor appointments are mandatory, the cruises that you’re going to take, the camping trips, the going to visit the grandkids, everything, life gets put on hold when your health deteriorates.
I would say for a lot of people, they’ve been putting life on hold for way too long. They need to live while they can live, because once you lose your health, even if you have all the money you need, you may not be able to live the life that you’ve been blessed with. Of course, with our health, the big concern is a major medical concern that’s going to wipe us out, and so most people carry some type of insurance to protect themselves from a major healthcare event, and we advocate for insurance even though it’s ridiculously expensive. Medicare’s a pretty good deal, but private insurance policies these days are really hard to justify the cost for the value that come along with them. But we’re fans of them, because to think that you could lose everything for one major medical event’s not a good thing. Long-term care, this was an interesting statistic. Fidelity, they do this healthcare cost for retirement every year. They say $280,000 now is what a retired couple’s going to need, not including long-term care costs.
Emilia: That seems high.
Jason: That’s prescriptions and co-pays and doctors’ visits that aren’t covered by insurance, $280,000. It’s one of the biggest expenses people experience in retirement, so one of the tools that we’re big fans of that I think is really underused is the HSA, the health savings account. Now there are requirements for being able to qualify for a health savings account. You have to have a high-deductible plan that is not just a high-deductible plan but is HSA-qualified high-deductible plan.
If you have one of these high-deductible plans, it allows you to make a contribution into the HSA. There’s a maximum. One of the great things about the HSA plans is there are no income limitations like there are with IRAs and Roth IRAs. There are income limitations. Once you’re income gets to a certain point, you don’t get the tax benefit for those anymore. But on the HSA there’s no income limitation, so you can have a lot of income and still make the contribution.
The piece that I think a lot of people miss is … They understand that once they’ve put that money into the HSA … And there’s different types of these medical accounts out there. There’s HRAs and there’s MSAs. I’m not talking about those. I’m talking about HSAs, and HSA is an account that can grow and can continue to accumulate money that you don’t have to spend every year. People realize that those accounts grow tax-free, but what they miss out on is the fact that they also get a tax benefit just like a traditional IRA at the time they fund it. It’s tax-advantage savings at the time that you fund it, and it’s tax-free growth. That’s one way to start setting aside some extra tax-free money for healthcare expenses.
The challenge is once you’re on Medicare, you can’t contribute to those things anymore. Medicare is 65. The key is while you’re young, you’re healthy, if you can afford to have a high-deductible plan, get as much money into those HSA accounts as you can. Too many people are missing out on that tax deduction because they don’t realize that they get a tax deduction for those contributions the same way they would for contributing money to a traditional IRA.
That was on the health insurance fund. The other thing there is long-term care. It’s one of those events that most people don’t think it’s ever going to happen to them, and it’s hard to imagine a life in a nursing home. Most of us, I would say probably would rather not live than have to spend a lot of time in a nursing home. Because of this strong denial, we choose to not think about it, we choose to not prepare for it, we choose to not plan for it. Again, when you’re looking at expenses, it could be $10,000 a month for a long-term care facility. It could wipe out a retirement savings in a hurry, and it’s kind of sad to think that you’ve saved a lifetime of money only to transfer it all to a nursing home at the end of your life, but that’s what happens for a lot of people.
Emilia: Very scary. I know you’re also an advocate for just reminding people that staying active in your age … Like you said, getting a gym membership. A body in motion stays in motion, just trying to stay healthy as long as you can.
Jason: I like that. Yeah.
Jason: Eat right, stay healthy, and be engaged in your community. Yeah, all those little things. Get up and walk around. One of the things I always find interesting … I’m disappointed in Fitbit’s stock, that it’s not doing better because it seems like just about everybody who walks into my office these days is tracking how many steps they’ve taken.
Emilia: Yeah. I hear they’re not very consistent. I’ve heard that. But I think if you’re tracking, it just keeps you in mind, I need to move. I think that’s the benefit.
Jason: 10,000 steps a day.
Emilia: Yeah. My next question, Jason, what is sequence of return risk and why should people think about it and what can they do to mitigate it?
Jason: Yeah. Today’s episode is really to try to address a lot of these risks that people have or that they’re thinking about as they’re preparing for retirement. Sequence of returns is a big one, especially in the world we live in today, because everything’s expensive. Housing’s expensive and interest rates are up, so the question is, is can housing continue to ratchet up the way that it is as interest rates continue to climb? Banks lend on income, not assets. You can afford less house as interest rates move up, so a risk you need to consider is housing. If you’ve been thinking about selling your house, is this a good time to sell while interest rates are still low? Or do you want to wait until interest rates go up? And if they do go up, is that going to suppress or cause housing to stop increasing?
Sequence of return risks specifically, we’ve got stocks trading all-time highs. Interest rates are rising, putting pressure on bonds. Most people understand that kind of the worst case scenario is when you have to start pulling money out of an account that’s potentially also falling in value. The key here is to diversify, which sounds like a no-brainer, but diversification I’m always trying to teach that it’s a two-step process.
First, you diversify your time horizon based on when you need the money, and then you use the appropriate financial tool based on how much time you have. If you’ve got a long period of time, we have 10 years before we know we’re going to have to touch that particular pot of money, we can afford to take more risks with it. But if we have some short-term money where we know that we’re going to need to pull money out every month to help supplement our income, we want that to be relatively safe, secure, and guaranteed. We don’t want to be taking money out of an account that’s falling in value.
Again, diversification, two steps. If sequence of return is a concern for you, just make sure that your time horizon matches up with when you need the money and diversify your time horizon first.
Emilia: Very important. I just want to let our listeners know, if you want to learn more about diversifying and any of the topics that Jason’s discussed, we have a couple of events coming up, actually a few.
Emilia: We have two-
Jason: It’s a busy month.
Emilia: … seminars. Yeah, a busy month. Two seminars coming up. We have the first one on Wednesday, May 16, and the second seminar is on Monday, May 21. You can go to parkerfinancial.com to get more information on those events. Then third, we actually have a webinar where you’re going to be covering this topic and much more on Wednesday, May 23, at 5:30 p.m. You can go to soundretirement.com to sign up for that webinar.
Jason: Sign, yeah. We’ve got soundretirementplanning.com for the webinar.
Jason: Emilia, I wanted to also remind our listeners we did something kind of fun that I call it a retirement readiness quiz or I also … People might think of it as a retirement report card. At parker-financial.net, that’s the firm’s website, on the very front page we’ve got this retirement readiness quiz that people can take, and we give them a letter grade. I think there’s 13 questions that we’ve created to see how ready they are for retirement. Now it goes A, B, C, D, and then what comes after D?
Emilia: I gave it backwards.
Jason: We’re not going to give anybody an F.
Emilia: That’s what I was wondering. If I were to go on there and get an F, I’d just be sad.
Jason: I know. Well, we’ve had a couple of people complete the test, and so we give out Es instead of-
Emilia: Okay. Well, that’s why I’m going with excellent.
Jason: Needs a little effort.
Jason: A little effort into this retirement plan. That’s our retirement readiness quiz that’s available, so if people are wondering, how am I doing on this whole thing? We just got about 13 questions that they can go through and get a feeling for what letter grade they would earn based on our little quiz that we put together.
Emilia: Right. I think I’ll stay away so I don’t end up with an E or A. My next question, Jason, what about investment risks? Why are people concerned about investment risk and what can they do about it?
Jason: Yeah. Again, it’s a scary time. It can be. There’s a lot of volatility. You got people lobbing missiles up into the air and chemical attacks and currency risks and governments that sometimes feel a little wobbly, especially turn on the news at night and get these flashing red ribbons across the screen and people talking in these very serious voices.
Emilia: Scary voices.
Jason: Oh, I know. I know. I think the number-one thing you do is turn off your TV and probably life expectancy would go up significantly and your stress levels would go down significantly. But when it comes to investment risk, of course, there’s a lot of different things we want to think about. First of all, like I said, diversify your time horizon and then your investments. That’s going to help.
Number two, we want you to keep your fees as low as possible, so the things that you can control, make sure that you’re not paying too much money in fees by using low-cost index funds and be broadly diversified across asset classes and sectors. Some people, when it comes to managing and mitigating investment risk, they will, especially in retirement … Because a lot of people on retirement say, “Jason, I’m not trying to hit any home runs at this point in my life. I’m just trying to earn maybe a few points above inflation and not get wiped out in the bad years.”
For those people, they may want to include a tactical component to this overall diversification strategy. Anybody that’s been to any of our webinars know that I teach about strategic and tactical. Strategic is where we use the low-cost index funds and we rebalance to maintain the asset allocation. Tactical is where you can move the cash or various asset classes to try to protect the portfolio or earn a great rate of return, or a better rate of return, I should say. Not a greater return, but … Typically, we would expect our tactical strategic to under-perform, but they’re there to help provide a layer of safety in the event that things get really, really weird. Using a tactical piece could help.
Diversifying an asset class across the entire globe, so not being totally U.S.-based. In fact, there’s some people today that are saying emerging markets look like they have much more upside opportunity than the U.S., just because the U.S. is, from a price to earning standpoint, pretty expensive place. One of the ideas with diversifying is to have some fixed income, so that would be bonds. Now a lot of people would say, “Geez¸ why would I want to own bonds in a rising interest rate environment like we’re in?”
Well, the problem that we have with bonds right now is that most of the return that you’re going to recognize is the yield that’s being provided. If you buy a bond fund today, an ETF or mutual fund that’s paying 2% yield, that’s really the return expectation. The problem, though, is as interest rates rise, depending on the duration of that bond fund, can make those bond funds under-perform. You can actually have losses in those portfolios as a result of a rising interest rate environment, even though you have a little bit of yield.
But still, in a diversified portfolio, if you’re going to own some fixed income, you want to keep your duration short, so keep those bonds relatively short. Then you also want to think high quality. If you think back to the last financial crisis, even corporate, good, high-quality corporate bond funds, some short-term bond funds got hit really hard for about a six-month period of time.
Having overweight treasuries, because treasuries historically have been a flight to safety or using treasury inflation-protected securities or some kind of government agency like Ginnie Maes, something that has an additional guarantee behind it where people from the federal government, that people feel stronger about, sometimes that can help reduce some of that risk. You still have all the interest rate risk, but the reason you would have fixed income in the portfolio is to try to help reduce the shock of the investment risk, the stock risk.
There’s a guy, Roger Ibbotson, and he had Ibbotson Research that he sold to Morningstar some time ago. He came out with a research paper recently talking about using alternative fixed income vehicles. This is kind of controversial, but one of the … In this particular research paper, he’s looking at fixed indexed annuities as an alternative to a traditional fixed income position, because what those contracts do is they link you to equity returns. They usually will cap your gain in some way. Historically, they can have that fixed income type of return characteristics. Anyways, he put out a white paper on those alternatives as a way to maybe diversify your portfolio to de-risk a portfolio instead of just using the traditional bond method that historically is how we’ve always de-risked a portfolio.
You know what I’ll do is I’ll … In the show notes, we can put a link to that white paper if anybody’s interested.
Emilia: Yeah, sure.
Jason: Interested in the academic community. He’s a professor from Yale. Then also buying some insurance to consider supplementing some of your income. When you think about your house, you insure your house, big risk. It’s a big asset. You want to protect it. You think about your health. You know that catastrophic health event could cost you significantly, so you insure your health. Well, if we know that retirement’s all about cash flow and it’s your income that determines your lifestyle in retirement, you can take a portion of your assets and insure the income. Well, some people would say, “Well, of course, I’m going to insure my income because my whole lifestyle depends on my income being able to come in.”
Now, of course, to insure your income means there’s a loss of liquidity, but there’s a trade-off. What’s more important? Do you want to have a consistency and know that you have good income coming in? Or are you willing to gamble with market returns to try to generate the income that you need? There’s not a right answer there, Emilia. Either one’s good. It really just depends on what people are going to be most comfortable with. Some people want to be ultra conservative, and some people are comfortable taking more risk. It’s really whatever makes them feel the best.
Emilia: A lot of great information there. There’s so many different things that you can do and so many tools that you’ve talked about. What about public policy risks? What are public policy risks and how can you prepare for them?
Jason: Well, one that we saw recently was how Congress … Public policy risk is our legislators, our elected officials, changing the rules of the game mid-stream. We saw this with Social Security a couple of years back. We used to have a bunch of these different claiming strategies, and the government comes along and says, nope, can’t do those anymore.
You want to stress-test your plan. Well, first of all, you need to have a plan. Most people don’t have a plan. But stress-test the plan to say, hey, if taxes do go up in the future, what would that look like? Right now, the tax, these low tax rates we have are set to expire in 10 years. Can your portfolio afford those higher tax rates in the future? Social Security does get cut by 25%, could you afford to have enough assets on hand to help supplement that income? You just want to create that plan ahead of time, know that you have a contingency in place in case something bad happens.
What that, Emilia, I notice we are out of time, so until next week, thank you for being here.
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.