Jason and Emilia answer retirement questions from a recent live event.
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 in this morning. It is the season of Christmas. It’s my good fortune to have Emilia Bernal in the studio with me this morning. Emilia, welcome back.
Welcome, everybody. It’s good to be back.
Jason: Oh, man, I bet people were missing you. I know they’ve been missing you.
I’ve missed it actually, too. I was like, oh, it’s been a while since I’ve been on here, and I’m ready.
Jason: My friend, Ben, he’s my son’s basketball coach, and just last night he said, “You know, Emilia, she’s really good.” He said, “It was fun listening to you and Greg, but,” he said, “Emilia, she’s just got such a great voice.”
Oh, that’s awesome. Thank you.
Jason: Yeah, he just said that to me yesterday. Yeah. I’m glad you’re back on here with me, thanks.
Jason: Good to have you back.
Jason: Okay. We’d like to get the morning started right two ways. First of all, let me tell our listeners, this is Episode 187, Your Retirement Questions Answered is the title, and it actually came from a speaking event that I had recently. We had a bunch of questions come in. We said, “Hey, let’s address these questions for our radio listeners, our podcast listeners,” so we’re going to do that today, but before we do, I like to start the morning by renewing our minds and one way that we do that is with a verse. This comes to us from Matthew 16:24. This is one I’ve been thinking a lot about. In fact, the end of our time together, Emilia, I might share a little bit more about this, but this is Jesus. “Then Jesus said to his disciples, “Whoever wants to be my disciple must deny themselves and take up their cross and follow me.”” All right? The other way we like to get the morning started right is with a joke, and you’ve got one of those for us this morning.
I do, and we’re sticking to the Christmas cheer holiday season, so here is your joke for the day. The Gingerbread Man goes to the doctor because his knee is hurting, and the doctor’s response is, “Well, have you tried icing it?”
Jason: Have you tried icing it?
He’s probably all iced up. Yes.
Jason: Oh, yes. The grand-kids and family will like that one. That’s good.
Yes. All right, Jason, so Your Retirement Questions Answered. We always get a lot of questions, and these were a few of the main ones that we picked up from our event that you had this past week, so they started off by asking how do we make sure we have enough money for expenses and fun?
Jason: Hot dog, that’s what this whole retirement thing’s all about. Having enough money for expenses and fun. I think the way that that woman asks that question is just so spot on to the way I think most people feel about this retirement journey that they’re about to head into. I’m reminded that retirement is so simply it’s making sure that your income is equal to or greater than your expenses after taxes, adjusted for inflation. It’s really that simple.
Now, a lot of people that we serve, they want to actually see the numbers and make sure that that’s going to work. They want to make some conservative assumptions about rate of return and inflation. Then, they want to stress test the plan to say what happens if one person dies early? They want some ideas on when should they start social security to get the most out of that or maybe get the most life out of that decision. They want to know what happens if somebody needs long-term care? What happens if the market tanks? Dun, dun, dun, dun, which we’re experiencing right now. The market is very, …
Jason: … very volatile this past week. They just want to know that they’re going to be okay, so that they have enough underline money for expenses and fun. I am so excited. We have, you know, one of the projects over the past year or year and a half now, has been developing … well, actually, it’s been live for about a year and a half. We’ve been developing it for longer than that, but the Retirement Budget Calculator, RetirementBudgetCalculator.com. We added a new module to that, which is the Net Worth Calculator, so now you can put in all of your assets and liabilities and it calculates that, but such an important piece to this is understanding your spending. The only way that we can know if you’ve saved enough is to really understand how much you plan on spending and that’s going to change over time.
The Retirement Budget Calculator is the only tool I know of, the reason I developed it and designed it and built it … it’s the only tool I know of that people have access to where they can actually make projections into the future. They can say, well here’s what my spending is now, but eventually the house is going get paid off, so you can see how your spending changes when the house gets paid off. You can add an inflation factor to different expenses, so if you’re going to have medical expenses that are going to increase at a rate greater than overall inflation, you can plug that in. You can start and stop expenses, you can start and stop income.
We had a person who was interested in the Retirement Budget Calculator recently ask. He said, “Hey, can I model what would happen if Social Security makes good on this warning that they might have to reduce benefits in 2032?” You can.
Jason: You can say, okay, well here’s what my Social Security’s going to be now, but then in the year 2032, have one Social Security payment stop, show the other one starting, so you can see how much income you’d have coming in. Anyways, really excited about the Retirement Budget Calculator. We’re heading into a new year and if people are getting ready to retire, a great exercise would be to really dial in the spending. Really understand what it is and then, maybe even practice living on that spending for a year would be kind of a fun challenge.
Yeah. At this time of year, wouldn’t it even be a nice gift to give to a family member if you know that they’re looking for something like that? You can gift them the Retirement Budget Calculator.
That’s a great idea.
Jason: Remind our listeners, too, we do have a coupon code out there still.
Jason: They get 50% off. They just have to put in the coupon code, Podcast, at the time they’re signing up and then, … but I just love this idea of this women’s question. Do we have enough for expenses and fun? Really, that’s the reason most people have been saving money their entire life as they get ready for this journey into retirement, so they have enough for their expenses and to have fun.
Jason: Live their best life.
I’m ready for some fun, too. The next question we had also was how do you get the best tax write off? That’s been a big tax question [crosstalk 00:06:18].
Jason: Big tax question and really this stems from the tax changes that just took place. Some of the biggest tax cuts in the history of our country. One of the things we’ve been talking to a lot of people about is a lot of people have most of their money tied up in retirement accounts that have never been taxes. We have some of the lowest tax rates in the history of our country, we have a national debt that’s now $21 trillion and growing. The question is, during the next eight years, would this be a good time to strategically start thinking about moving money out of those tax hostile accounts into tax-free accounts. It’s one thing I want people thinking about as a result of the tax change, but the other one has to do with itemizing deductions, itemizing expenses.
It used to be, last year if you were married filing jointly, the standard deduction was about $12,000. Now, it’s $24,000, unless you’re over age 65, then it’s like $26,600. A lot of people aren’t going to need to itemize anymore. Their life is going to be simpler. Their tax return is going to cost less because they won’t need to itemize and a lot of CPAs charge an additional fee based on the schedules that you’re filling out, so they just won’t have to do that itemization anymore because the standard deduction at $26,600 could be a lot higher than what people are typically itemizing.
A couple of people are going to be really affected, people with high property values that pay high property taxes. Those are getting … State and local taxes are getting capped out now at $10,000, so it used to be if you lived in the high-income tax state, you could capture more of that expense. The other one is the standard deduction and the other big one is the loss of the personal exemptions. It used to be we got our $12,000 standard deduction and then $8,100 for married filing joint for our personal exemption. Well, the personal exemption is gone, so when you add those two together, it was about $20,000, but now it’s $26,600 with the new standard deduction if you can’t itemize. Anyways, that was … I think that’s where a lot of the concern is coming from. It’s hard to get into all these details.
Jason: The thing I’d warn people with, with taxes is it’s very unique to them and it’s kind of like your fingerprint, you don’t want to make generalizations about how the tax code is going to affect you, specifically, we’ve been doing analysis for people and we found that some people are going to pay … a lot of people are going to pay less money in taxes under the new tax law. Some people are going to pay a little bit more under the new tax law, but it’s really unique to their specific situation.
Yeah. Doesn’t this lead into a little bit about the next question that people were asking about qualified charitable distributions? Does that also help with any tax?
Jason: Yes. Qualified charitable distributions are now a permanent part of the tax code, so we don’t have to wait until, you know, it was always a last-minute thing in the past. Could we do it or not? It’s only really applicable to people who are over 70 and a half that have to take those required minimum distributions from their IRAs or 401Ks, but it’s such an amazing opportunity for some people to be able to gift directly from their IRA to a qualified charitable organization. The reason it’s such a powerful opportunity is because it satisfies the required minimum distribution, so you follow the IRS rules so you don’t get hit with that 50% tax penalty for not taking it. You satisfy the RMD. Then, it also … so it doesn’t count against your tax return. It’s income that never hits the tax return. You satisfy the RMD, plus you don’t have to count that income on your taxes, plus it’s tax-free money to the charity.
It’s just kind of win/win/win and if you’re a charitably inclined anyways, or we know a lot of people, a lot of people we work with are good tithers, they’re good givers to their church, as long as that’s a qualified charitable organization and you’re over age 70 and a half, it may make a lot more sense to give those dollars from the qualified charitable distribution rather than taking the distribution and then giving otherwise. As we crunch those numbers, for some people that can be a significant difference in the amount of money they pay in taxes.
It’s great to see how.
Jason: Again, a little bit complicated, and …
Jason: I know sometimes when people are driving down the road in Seattle this morning, they’re like, “What is this guy talking about?”
That’s why they need to give us a call and we can clarify, or we’ll talk about their specific situation a little more. Just some great information out there. Leading into another question we had, index annuities, what are your thoughts on that?
Jason: My thoughts are there’s a lot of people out there serving chicken dinners that are trying to sell people index annuity contracts. As a result, everybody’s asking about them. Now, that being said, I don’t think they’re necessarily a bad financial tool and that’s probably going to shock some people because a lot of people in my industry, they hate annuities. They say I hate annuities and I don’t hate anything. I evaluate the different tools that are available and say if it makes sense, let’s look at it. Basically, an index annuity is a contract from an insurance company, but it credits interest based on how the performance of an index and these fixed index annuities, especially, not the variable index annuities, those tend to be very high in fees and still have a lot of volatility with them. The fixed indexed annuities are contracts that they guarantee you’re not going to lose any money if the market’s going down, but they do give you some of the upside potential if the market’s going up.
For some people that are saying, “Geez, I just don’t want to get wiped out in the next big market correction and I’m trying to earn a rate of return a little bit better than a fixed account. I know I’m giving up some upside in order to participate in this thing.” You also say, “This is not where I’m putting all of my money. It’s just a way to diversify a piece of it,” then I think it can make sense for people and those contracts are getting better and better all the time in terms of a client’s ability to access them and making sure that the fees are low. I think it’s something people have to be educated about.
There was a white paper that Roger Ibbotson did. A lot of people know Roger Ibbotson because he’s been in the institutional investment arena for a long time. He is Professor Emeritus from Yale. He did a lot of research early on for investment advisors where one of the reasons that we overweight to small caps stocks now is because of this research that Roger Ibbotson did about the small cap value premium in stock investing, but he came out with a white paper in January 2018 that talked about index annuities as an alternative for retirees to de-risk a portfolio as they’re heading into retirement.
Now, you don’t just have these insurance guys out there selling these products, but you’ve got the academic community coming along saying “Hey, we’re in a zero interest rate environment. You’ve got a financial vehicle that de-risks a portfolio, it’s not correlated, and it gives you a … not correlated to the bond market, but it gives you potentially bond-like returns. Is that a tool that people should be considering?” Roger Ibbotson has this white paper that he wrote and we have to be willing to look at all of the research that’s being done and then make educated decisions about those things.
That’s great. You have to keep learning. Things change all the time, and it’s great to have new information available to you because like you said, you can’t look backwards.
Jason: Yeah, can’t make decisions based on … yeah, only driving your car looking in the rear-view mirror.
I like when you say that, yeah.
Jason: That’s not a good way to drive these days.
No, it’s not.
Jason: Unless you have a self-driving car, then maybe you can get away with it.
Can you imagine when that … I mean, it’s coming. It’s here.
Jason: It’s here now. It’s here.
Yeah, it is. It is, yeah, you’re right.
Jason: Yeah, I know. Not my car, but …
Isn’t it that Google car that just takes pictures, but … yeah. Sticking with some of the numbers questions, though, I don’t know if … What are some withdraw strategies that people can use in retirement as well?
Jason: This gets back, right back into this first lady’s question, which is do we have enough for expenses and fun and how do we structure things now that we’re not going to be contributing to these accounts anymore, but we’re going to be living on them? What’s the best way to start tapping into them? There’s so many different philosophies out there. My wife sent me to buy toothpaste the other day at the store, and I forgot to look and remember what kind of toothpaste we own before we got there. As I stood in the store looking at all of these different options, I was just like, man, if I get the wrong toothpaste and come home with it, she is going to be like, “Why did you get this? That’s not what I wanted. You’ve been brushing your teeth for 40-some years and you can’t remember which toothpaste you’re using?”
It’s just the little things.
Jason: Oh, man, but as I thought about that toothpaste, there’s so many decisions you have to make just about which toothpaste to buy, let alone something as serious as what’s going to be the best strategy for taking money out of these retirement accounts. Different people have different opinions and that’s okay, but ultimately, people have to come to terms with a strategy that makes the most sense for them. You hear things like the 4% withdrawal rule where you just have a balanced portfolio and you try not to take out more than 4% adjusted for inflation every year, over time. Some people are comfortable with that, especially if they’ve over-saved for retirement, but some people, man, that can really feel unsettling and uncomfortable when we’re going through a market like we are right now where we see the market drop 800 points in a day and you’re depending on that money, you’re not adding to it. You’re seeing it going down in value and you’re like, “Oh, man, I hope this 4% rule works.”
Then, you’ve got what we call flooring strategy. Flooring strategy is basically just saying you’re transferring some money to an insurance company, you’re buying an annuity for a portion of your retirement income, and you’re just saying, “Okay, well, I’m going to have Social Security, I’m going to have a pension, then I’m going to go buy this annuity, so I have this base.” I heard a … a guy said to me the other day. He said, “It’s my beer and pizza money.” He said, “I want to know that no matter what happens, I can still go out and get a glass of beer and a slice of pizza and not have to worry about putting groceries or food on the table.”
A flooring strategy basically says, let’s create enough guaranteed income with a portion of our money, so that we at least have our basic expenses covered and then, we take enough risk with the rest of the assets. The problem with that strategy is that it requires you to give up a portion of your portfolio because you’re annuitizing it, you’re turning it into income, but it can work. You just have to recognize that there’s always tradeoffs in all of these different things.
Then, the one that we’re most fond of, the one that I personally think helps the most people have a greater sense of confidence is to diversify your time horizon. See, once you’re retired, time is the one asset that you have less and less of every year as you’re transitioning through retirement. A severe shock to your portfolio, especially in the early years, could be devastating. If we know that the money that we need for income in the short-term isn’t going to be in a safe bucket that we’re pulling out of and then, as we go out in time, we take more risk with the assets. To me, it not only makes a lot of sense logically, it makes a lot of sense from a fee standpoint in terms of helping reduce your overall fee structure. It makes a lot of sense for clients to know exactly where they’re pulling the money from and they’re not pulling money out of an account that can fall in value for those first couple of years of retirement.
Again, you have to have saved enough for it to work, but I just think it’s a beautiful thing when you can structure it that way and that’s my preferred method. We do these webinars all the time, Emilia, where people can plug in. They can go to Sound Retirement Planning, signup. I don’t think we have one coming up until January, but if they want to see what this actually looks like, what a good structure looks like, maybe they’re trying to do it on their own. They can go check that out.
Do we have time for a few more questions or a couple more questions, Jason?
Jason: Let’s try to do one more.
All right. This has kind of been a big question with some recent things from last year, but can you elaborate more on what is a fiduciary? People wanted to know.
Jason: They want to know what fiduciary is. Yeah. A fiduciary is somebody who has a legal obligation to act in your best interest and disclose any conflicts of interest that they have. That’s probably the simplest, easiest way to think of it. They just have to act in your best interest and disclose any conflicts of interest. You would think that everybody in the financial services world would have to have this duty to act in people’s best interest, but that’s just not the case. That’s how we’ve structured our firm. Well, when I started Parker Financial, we started out as fiduciaries because I believe that it is in people’s best interest that we do act in their best interest and that we do disclose any conflicts of interest we have. It’s just very clean.
The other thing is, and it really has to do with how people are compensated in fees I think is what people are mostly worried about, but to find an advisor that will work the way that you want to work. Some people just want to pay a flat, one-time fee to have somebody build a plan for them. Some people want somebody that’s not only going to build a plan, but they’re going to help implement and oversee the plan. Depending on what kind of work you’re looking for, that will determine how you’re going to pay somebody, but ultimately, I think if people work with somebody that has a legal obligation to act in their best interest, they’re going to be held to a high standard. If they mess up, they’re going to be held accountable for it. That’s a good thing.
Great. We’ve answered some of your questions today, but did you have any questions for our listeners, Jason?
Jason: No questions for … Oh, I did. Well a couple as they’re driving down the street …
Jason: … this morning. One is what’s the best Christmas present you’ve ever received? I thought that would be kind of a fun one to think about. The next one to that is what’s the best Christmas present you’ve ever given? Then, one more that I want people thinking about as we start heading into the new year, designing our best life. What would constitute a perfect day for you? We always want people thinking about questions.
Emilia, I wanted to come back to this verse that we had shared originally …
Jason: … which was, “Deny yourself, take up your cross and follow me.” Partly because it’s Christmas, I’m thinking about the birth of Jesus, but I’ve been thinking a lot about that cross. “Take up your cross,” and as I think back in history, when Jesus said this to his disciples, he hadn’t gone to the cross yet. Those guys, when they looked at that cross or when they thought about the cross, before Jesus did his work there, man, it’s one of the ugliest, darkest symbols of all of humanity. In fact, some of the words that I thought of were slavery, oppression, …
Jason: … wretched, putrid, smelled bad. They would leave these guys crucified to fall apart on those crosses. You came into town, you saw a cross on the side of the road, you weren’t thinking, “Oh, good. In a safe place here.” It’s bad news. It represented humility and shame and disgrace and just darkness and death. I could just imagine what those guys were thinking as Jesus said, “Take up your cross,” and he said that before he went to the cross.
As I’ve been thinking about that, every once in a while, I get struck with this idea that the Lord puts a song in my heart and I pick up my guitar and know my three or four chords. Anyways, I was talking to my men’s group about this and I said, “Hey, you know what? The Lord put this song in my heart. I was wondering if you guys would sing it with me?” They said, “Yeah, sure. We’ll sing it.” I wanted to share that song, but real quick, before I do, that’s what the cross meant before Jesus went to it. Now, when people look at that cross, they see hope.
Jason: They see light, they see grace and mercy and joy and love and life. It’s like, man, if Jesus can take the darkest symbol of all… they can take … see, that’s a heavenly sign. If Jesus can take the darkest symbol of all humanity and turn it into something so beautiful, imagine what can happen if people will take up their cross and what Jesus can turn that into. That’s what I thought about, but anyways, here’s this quick song and my friend Keith encouraged me. He said, “Jason, you should share that.”
Yes. Thanks to all for sharing this.
Jason: Well, so this is my guy friends, these guys I meet with once a week singing this with me, so here we go. The song goes like this. (Singing). Come on and sing with me. (Singing).
Jason: Until next week, Emilia.
Announcer: Information 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.