Jason and Emilia discuss the four necessary elements to a good retirement cash flow plan and how listeners can get more information by attending Jason’s Webinar scheduled for Tuesday, August 25th at 5:27pm PST*

1) Spending Plan
2) Maximize Social Security
3) Year by year cash flow planning
4) Diversify your money by time


Below is the radio show transcript:

Speaker 1: 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 Sound Retirement Radio. Thank you so much for making this program one of your top resources for expert retirement advice. My name is Jason Parker. Today’s episode is going to be awesome. If you’re driving down the road, this is episode 060, and the title is Retirement Cash Flow. We’re really going to get in to the specifics and the nuts and bolts and tell you about a special event that we have coming up. I have Emilia Bernal on the show with me this morning. Emilia, welcome.

Emilia: Thank you for having me.

Jason: Emilia, will you please go ahead and say your name properly so that people can hear the right way to pronounce it?

Emilia: Sure. It’s Emilia Bernal.

Jason: Gosh. It sounds so much better when you say it. Thank you.

Emilia: You’re welcome.

Jason: Emilia, we like to get the morning started right. One of the ways that we do that is by renewing our mind. I have a verse here for us this morning. This comes from Ephesians 4:31-32. Here we go. “Get rid of all bitterness, rage, anger, harsh words, and slander, as well as all types of evil behavior. Instead, be kind to each other, tenderhearted, forgiving one another, just as God through Christ has forgiven you.” Gosh, I love that. Then the second thing we want to do is we just want to have a little bit of fun. I know how much our listeners enjoy a joke, so I’ve got a joke here to share. This is a little bit longer than normal, but here you go. Steve was in the hospital on his death bed and the family called Steve’s preacher to be with him in his final moments. As the preacher stood by the bed, Steve’s condition seemed to deteriorate. Steve motioned for somebody to quickly pass him a pen and paper. The preacher quickly got a pen and paper and lovingly handed it to Steve, but, before he had a chance to read the note, Steve died. The preacher, feeling that now wasn’t the right time to read it, put the note in his jacket pocket.

It was at the funeral, while speaking, that the preacher suddenly remembered the note. Reaching deep into his pocket, the preacher said, “You know what? I suddenly remember that right before Steve died, he handed me a note. Knowing Steve, I’m sure it was something inspiring that we can all gain from.” With that introduction, the preacher ripped out the note out of his pocket and the note said, “Hey, you’re standing on my oxygen tube.”

Emilia: No.

Jason: Isn’t that horrible?

Emilia: That was a good one.

Jason: Let’s go ahead and get started with our show today, episode 060, the Retirement Cash Flow.

Emilia: Great. Jason, you have a webinar coming up on Tuesday, August 25th, regarding retirement cash flow. What do you plan to cover, who is the webinar for, and how can they sign up?

Jason: Thank you. First of all, let’s make sure people understand. Some people don’t know the terminology webinar. Really, this is just like an online class. It’s right from the comfort of their home. They can go to their computer. They can register for the event. What we do is it’s going to be a teaching opportunity. We’re going to take people through a step-by-step process exactly how to construct a retirement cash flow plan. I would say that this is probably most relevant and suited for people who have saved at least $500,000 for retirement and are within a couple of years of being ready to retire. That’s where I think we add the most value to people’s lives. If that matches you, listeners, I encourage you. You’re going to want to attend this because this is one of the questions, Emilia, that we get most often from people. They know that they need to start converting their portfolio into a cash flow and move from accumulation mode and into distribution mode. They’re just not sure of the mechanics, how to make that work, the nuts and the bolts of it.

I’m going to actually take people through a step-by-step, the planning process that we do. We’re going to use a hypothetical case design and we’re just going to say, “Okay. Here’s what this should look like.” That’s going to start with, number one, a spending plan. Now, in my book, Sound Retirement Planning, we talk about budgeting. What I found is that the phrase “budgeting” doesn’t sit well with most people because when you think of a budget, most people think of that as cutting back or scaling back. Once you’re in retirement mode, we’re not trying to help people save more money; what we’re trying to help people do is spend as much as they possibly can. Number one is the spending plan. Number two, we’re going to talk about maximizing Social Security benefits. Number three, we’re going to talk about a year-by-year cash flow plan. Then, number four, we’re going to talk about the time segmented diversification strategy or bucketing strategy that a lot of people will refer to it, but, more importantly, how we like to help people implement that kind of a plan once they’re starting this process of getting ready to transition into retirement.

In terms of being able to sign up for the event, it’s super easy. You just go to soundretirementplanning.com. On the right-hand side of the screen, there’s a great, big, yellow box and I think it says, “Register for the Retirement Cash Flow Webinar.” That’s how they can do it. They just put their e-mail in, we’ll send them a link where they’ll log in the day of the event. Like I said, it’s free. We’re probably going to spend about an hour on that program.

Emilia: Sounds great. Before we move on, can you tell us a little bit more about the spending plan?

Jason: Yeah. Again, people don’t like the word “budget”. Benjamin Franklin once said, “Beware of little expenses. A small leak will sink a great ship.” The idea here is not that we want people to cut back on their lifestyle. In fact, if anything, the reason that most people, when we talk to them, we say, “Hey, what’s the purpose of this money? Why do you have it in the first place?” the primary purpose for most people is to be able to have the lifestyle that they currently have and maybe even a better lifestyle, to be able to spend more time with their family and go traveling and just do a lot of the things that they’ve worked so hard for their whole life. I think sometimes the words we use are so important. If we use the word “budget”, people think of that as being held back or constricted in some way. If we tell them it’s a spending plan and we want to help them spend as much of their money as they can, but still have the confidence to know that they’re not going to run out of money in retirement, that just sounds a lot more fun. Let’s create a spending plan. Let’s figure out how we can go spend this money and do the things you always want to do.

Part of that, too, is looking at … In some instances, we meet with folks where they say it’s important that they leave something to their kids or their grandkids. As part of a spending plan, if legacy is an important component to them, then we also want to make sure that we’re not going to spend the kids’ inheritance. My dad has a bumper sticker on the back of his RV that says, “I’ spending my kids’ inheritance,” which, frankly, is the way it should be. People work hard for their money. I think there’s real value that we receive by going out and making it on our own and not just getting a big inheritance at some point.

Emilia: Very true. Step 2 is to maximize Social Security. Tell our listeners more about that.

Jason: This is so important. At one of the speaking events that I was doing recently, I asked people to just close their eyes and remember back to the first home they ever purchased. Then we asked people to share with us how much they paid for those homes. I remember we heard things like $10,000, $15,000, $25,000. It was incredible how much people paid for their first home. My wife and I, our first home was just a little over $100,000, and that wasn’t all that many years ago. Actually, it was quite a few years ago. It’s just time, it seems like it’s flying. The reason I asked the question is because second to buying your home, electing Social Security is one of the most important financial decisions most people will ever make in terms of the financial cost associated with it. For married couples, it could be the difference between an additional $100,000 of lifetime benefits by how they choose to elect those benefits.

You don’t want to mess this up. There’s a lot riding on it. For some people, it could be the difference between having enough money to last the rest of their life or running out of money early. Social Security is incredibly powerful. It’s tax advantaged income. Meaning, in a worst case scenario, only 85 cents of every dollar that you get from Social Security is taxable. It’s tax-efficient. In an environment where taxes could be going up, we want to maximize tax-efficient income. Number two is it’s inflation-adjusted income. It’s tied to the consumer price index for urban wage earners. Every year, if there’s an inflation, we tend to see Social Security increase for people. It helps keep up with the purchasing power ever year. Then the other piece is it has survivor benefits. If one person passes away, the spouse has some benefits there.

Who that’s important for? I think this is really critical because for individuals that are single, there’s not as much that goes into this planning process because then it’s really just looking at life expectancy. For married couples, incredibly important that they get this right. For people that are widowed, incredibly important that they get this right. For people that have been divorced, incredibly important that they get this right because there’s nuances and intricacies in the planning process. One thing I want to point out here, we’ve done a lot of research on this, we’ve had Social Security experts on the program with us from the Social Security administration, but I do want to remind our listeners that we’re not affiliated with the Social Security administration in any way. We’re financial advisers, but we understand the importance of how Social Security plays into a good retirement cash flow plan. We just want to help people make sure that they’re doing that the best way possible for their situation, and everybody’s situation is unique and different.

Emilia: Great. I want to remind our listeners that Jason is hosting an online educational meeting Tuesday, August 25th, starting at 5:27pm. Jason, how can people register for the event and what should they expect?

Jason: Thank you. What do you think about starting at 5:27pm, Pacific Standard Time?

Emilia: I thought that was a little really specific.

Jason: Kind of weird, isn’t it? It’s intentional, too, because I noticed … I don’t play a lot of golf, maybe once or twice a year, but when I do play golf, my tee time is never exactly on the hour or on the half hour. I think one of the reasons for that is when-

Emilia: Someone.

Jason: Yeah, when somebody gives you a time, like 5:27, for some reason, that’s easier for us to remember than 5:30 or 5:00. 5:27pm is the start time. Again, I’ll remind our listeners if they want to just visit soundretirementplanning.com, there’s that big, yellow box on the right-hand side. This is a limited time engagement. The software solution that we use has only so many people that we can handle on this type of an event, and so I really want to encourage people, if they’re getting ready to retire, this is going to be a great tool for them to plug into and say, “Okay. As we’re getting ready to retire, what should a good retirement plan look like? What should a good cash flow plan look like?” because retirement is all about cash flow. Register at the website. Again, this is coming up right around the corner. Tuesday, August 25th, 5:27pm, Pacific Standard Time. I know we have listeners all over the country. That will adjust based on where they’re at. It might be at 8:27, if they’re out on the east coast.

Emilia: Sounds great. The third item we are going to discuss is a year-by-year cash flow. Why is this important?

Jason: I just can’t emphasize enough, and anybody that really specializes in this arena will tell you that retirement is all about cash flow. It’s your income that will determine your lifestyle and retirement, not your balance sheet, not your net worth. Too often, as a financial adviser that specializes in retirement, we see people that come in and, on paper, from a balance sheet standpoint, they look wonderful, several million dollars of assets. The reality is in many instances, a lot of people’s net worth is tied up in their residence, their primary residence or in real estate that’s not producing income for them. It really doesn’t matter how much money you’re worth. What matters is how much income you have coming in. It’s that cash flow, it’s the income that determines your lifestyle. For people’s working lives, say they’ve been working 20, 30, 40 year, and they’ve been getting a paycheck; most people every 2 weeks in most instances. All of a sudden, when you retire, what that means is you’re not getting that paycheck anymore. You might have Social Security, you might have a pension, but the reality is you could end up being retired for as many years as you’ve worked, 20 or 30 years of unemployment. You want to make sure that that money that you’ve saved is going to match up with your goals. When you’re doing retirement cash flow, you need to be considering inflation, for example.

One of the things I want to emphasize here, too, because I really think this is a big mistake, but when people retire, a lot of times, the advice that they’re being given is an asset allocation recommendation. They’re being told to have 60% of their money in stocks and 40% of their money in bonds. That is not a retirement plan; that’s an investment strategy, that’s an asset allocation strategy. Or they’ll be told that they should buy an insurance product or an annuity contract or something of that nature. That is not a retirement plan; that’s an insurance product. All of those things come together to create the plan, but the plan comes … You don’t want to put the cart before the horse. The plan should come before the financial products. What I find most people lack is a true plan. What does the plan look like? This is an opportunity for them to see … Again, we’re going to use a hypothetical example of a married couple and say, “Look, this is what a plan should look like.”

Now when we’re doing that plan, Emilia, we want to take into consideration inflation. We know that their purchasing power is going to … They’re going to lose a purchasing power over time. We know inflation’s always been with us. The Federal Reserve has an inflation target. They want inflation in the economy. We have to be planning on the fact that people are going to need more and more money as they’re transitioning through retirement. We have to look at tax rates. Just the reality is that, in my opinion, I think taxes probably are going to have to go up in the future, but even if we don’t assume that, just to assume taxes are going to stay constant and that people don’t get to spend every dollar that they have coming in. Some of that money is going to go to Uncle Sam.

We need to consider the rate of return on their money. This is a big mistake I see people make because they’ll look at the historical performance of a mutual fund or the stock market and say, “Oh, the stock market does 7% to 10% per year, so we should be projecting the 7% to 10% rate of return.” That’s, I think, a real mistake when it comes to retirement planning. I like to say let’s hope for the best, but plan for the worst. I would be much more comfortable when making projections about future rates of return to use an ultra conservative, say, maybe a 4% rate or return on their money than to assume a 10% rate of return, which I think is planning from more of a worst case scenario, but, again, the last thing we want to do, and I’ve seen this happen, people make projections that are pie in the sky projections; they don’t work out. Ten, fifteen years into retirement, they’re having to look to go back to work because they’re running out of money. It’s a big potential pitfall.

Some of the other things we need to be thinking about in a year-by-year cash flow plan are things like one-off events. Maybe they’re going to need a purchase a new car in retirement, maybe they’re going to have to put a new roof on their house, maybe they’re going to want to take a big trip or spoil the grandkids and take them to Disney Land, and that’s going to cost $5,000, $10,000. Maybe they’re going to want to take the family on a cruise. We need to be thinking about not just how much they need every year, but, as they’re making this transition, what are some of the extras that they want to be doing? Then some of the negatives that we need to be planning for are things like what happens if one spouse dies? Is there going to be enough income for the surviving spouse to be able to continue to live comfortably? What happens if somebody needs long term care and they start heading down that slippery slope of needing some assistance as they transition to retirement?

What a year-by-year cash flow plan does is it looks at all of those different components through different scenarios. It just says if we make conservative assumptions about how much money you’ve saved and these other income sources and you’re spending plan, are the numbers going to work out? Are we even in the ball park? I really hope that people would do that before they retire, not afterwards, because, unfortunately, most people don’t want to have to go back to work after they’ve retired. Sometimes we found, in going through this process, that we have to encourage people to work a little bit longer to be able to make it work, but oftentimes we’re able to show people, yeah, look, you’ve done a good job and this is going to work. You just want to make sure you have a good plan to make sure that you don’t run out of money.

I think that’s one of the biggest fears … 2 biggest fears I hear from people. Number one is that fear of do I have enough? Are we going to run out of money? It doesn’t matter if people have saved $500,000 or $3 million; people have that same concern because people tend to adjust their lifestyle based on the assets that they’ve accumulated. The second concern that most people have, Emilia, is that they’re afraid of making an irreversible financial mistake. Once you’ve retired, what you have is what you have. You’re not earning anymore, so you can’t save your way out of a big mistake. It’s really critical that you shift from asset accumulation mode to asset preservation mode to income planning mode, as you make this transition into retirement. That’s what we’re going to be teaching on the webinar, exactly what that should look like. That’s the piece that so many people are confused about. They say, “Jason, we know we need income from our portfolio, we know we need to transition into this income planning stage of life. How should that look? What does it look like?” I’m really excited to be able to bring this to a larger audience and teach this during the one hour course.

Emilia: Great. This brings us to the last piece of the puzzle. Jason, you call this the time segment diversification, other people call it a bucket list strategy. Can you elaborate on this?

Jason: Yeah. Ultimately, I think the important thing to take away from the last piece that we’re going to share with people is that time is the cure to the volatility of the stock market. The stock market is a great tool for helping us outpace inflation, for being able to participate in the wealth creation of businesses in America. The stock market has always been a volatile place. There has always been bad news. There’s no shortage of bad news today. There are obviously things right now that are probably really weighing in on people’s minds, things like the fact that the cyclically adjusted price-to-earnings of the market is incredibly high on a historical basis and a lot of people are saying that stocks are pretty expensive on a historical basis today. That’s a concern. Another big concern is that interest rates have been driven down into the basement at 0% and the Federal Reserve is talking about interest rates rising soon. Some of the past advice that people have been given in retirement, things like just go buy a big basket of bonds or municipal bonds and live off the interest income, that’s really a challenging thing to do in this financial reality that we live in today.

While the volatility of the stock market is nothing new, I think what has changed or what has to change is how people start to think about the distribution phase of retirement because you can’t just go plonk your money down in a CD earning 5% anymore at the bank. Unfortunately, those just don’t exist. Hopefully, we’re going to start seeing interest rates go up, but time is the cure to the volatility of the stock market. The more time you have, the more risk you can afford to take. The last thing in the world that you want to do once you retire is start pulling money out of an account that’s also falling in value. A friend of mine used to say that doing that is like taking buckets of water and throwing it on a ship that’s already sinking. You’ve got a bad situation and you’re making it worse.

Another visualization that I think is really powerful is imagine that you’ve been stabbed and you’re bleeding and you’re going to go donate blood. You don’t want to donate blood at a time you’re in a bad situation. For a lot of people, their portfolios are finely recovered to the point where they’re even considering retirement now. At the same time, the stock market’s very high, the bond market’s very expensive, and the question becomes how do we do this? If we mess it up, especially in that first couple of years of retirement, if you mess it up and you’re taking money out of an account and, at the same time, you’re experiencing a 20%, 30%, 40% market correction, I’m afraid that may not be sustainable. I just want to go back and, one more time, remind our listeners about the webinar that’s coming up, help paint a picture for them. Emilia, will you remind our listeners of the date and the time when that webinar is going to be?

Emilia: Sure. The webinar is going to take place on Tuesday, August 25th, starting at 5:27pm.

Jason: Tuesday, August 20 …

Emilia: Fifth.

Jason: August 25th at 5:27.

Emilia: 27.

Jason: 5:27pm is your tee time, folks.

Emilia: Don’t forget that.

Jason: I think the bucketing concept, creating … I like to say, the diversification is a 2-step process. First, you diversify your time horizon and then you use the best tool available for the time period that you’re allotted. In other words, money that is short term, the money that we need for income for the first, say, 5 years of retirement or so, we want that money to be safe, secure, and guaranteed. We don’t want to take any risk with that money be the reality is that the market can trade sideways or trade down over a short period of time, like 5 or 10 years. We want to structure a portfolio that puts time on people’s side.

The challenge with that is as you transition into retirement, time is the one asset that people have less and less of as they’re transitioning through. Nobody knows how much time they’re going to have, but if we diversify a portfolio that way, by time first and then use the best financial tool based on the goals and objectives of that particular time period, it just gives people … What I found, it gives them a greater sense of confidence to know the numbers are going to work. It puts less emphasis on having to worry about what’s going to be happening with the stock market, what’s going to be happening with the bond market, because they have a plan in place that says, “This is what this is going to look like, this is how it’s going to work,” and that just really helps people sleep better at night. With that, unfortunately, we’re out of time. If you’re listening, this is episode 060. I hope you’ll visit us online at Sound Retirement Planning and join us for the webinar. Thanks, Emilia.

Emilia: You’re welcome.

Speaker 1: 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.