Jason and Jim Black, CFP, MBA with Absolute Solutions Inc. discuss retirement planning.
Absolute Return Solutions Inc. is a guide through the confusing and economically difficult years that lie ahead in retirement. Our focus is in creating and implementing a retirement plan to help provide income for life that will work to endure the changing market. Wherever possible, we reduce taxes and help ensure that assets pass to the next generation in a tax efficient and smooth manner.
Jim is a Partner at Absolute Return Solutions Inc. with 28 years of experience in the planning, investment and insurance industry and holds a BS in International Finance from Brigham Young University as well as an MBA from Willamette University.
Jim Black is a CERTIFIED FINANCIAL PLANNER™ professional.
The CFP™ mark distinguishes Jim among his peers in the financial service industry as it shows that he has voluntarily met rigorous requirements of education, examination and experiences and abides by the CFP Board’s Standards of Professional Conduct, which includes agreeing to a fiduciary standard of care that places his clients’ interests first.
Jim Black has appeared on the television program “About the Money” on Seattle PBS station KCTS. Jim is the author of the book Happily Ever After. He is currently working on two others, Financial Fables and Glory Days.
To schedule a time to discuss your financial future contact us at email@example.com or call us at (425) 558-3700 today!
To learn more also visit www.absolutereturnsolutions.com
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. Thank you so much for making us your expert resource for retirement advice. As you’re getting ready to retire, transitioning through retirement, we are always looking to bring experts onto this program who we believe can add significant meaningful value to your financial life as you’re preparing for retirement, maybe transitioning into retirement.
You’re listening to Episode 091, and as you know, I like to get the morning started right, and I think one of the best ways we can do that is by renewing our mind, so I have a verse here from Romans 13:7, “Give to everyone what you owe them. If you owe taxes, pay taxes. If revenue, then revenue. If respect, then respect. If honor, then honor.” I thought that was a good one being that we’re in April and it is tax time, so there you have it.
Then I always want to put a smile on your face, maybe give you a joke that you can share with the grandkids. Here’s one if they’re old enough. In grade school, they might get this. “If April showers bring May flowers, what do May flowers bring?” “Pilgrims.” “Mayflowers?” Ah, yes, I know, that’s pretty bad.
Okay, folks, you’re listening to Episode 091. Again, this is Jason Parker. Remember, you can listen to all these programs are archived for you online at SoundRetirementRadio.com, Episode 091. It’s my good fortune to bring Jim Black onto the program. Jim Black is a Certified Financial Planner. He’s one of the partners with a company called Absolute Return Solutions.
Most of our listeners know I’m always trying to learn as much as I can about our industry, which includes taking courses, taking classes, but I’m also rubbing elbows with some of the best advisers in the country and picking their mind about what’s working and what are they doing. When I found out that Jim was right over in the Seattle area, I thought, “What a great resource,” so I thought I’d bring him onto the program and share with our listeners the work that he’s doing over there.
Jim Black, welcome to Sound Retirement Radio.
Jim: Thank you, Jason. A pleasure to be here.
Jason: Absolutely. I just want to start out, because most of the people that listen to this program, Jim, are interested in retirement in some form or fashion. Either they’re just getting ready to retire or they’re already retired. What’s the biggest mistake you see people making as they’re preparing for retirement?
Jim: Oh, wow. Having been watching this now for a number of years, I’ve seen lots of them. Some of the biggest mistakes I see people make, and actually, this market is the one where I think we’re going to see the most of that. The biggest mistake that I see people make going into retirement is they take income from the wrong place. Once they retire, get that last paycheck that they’re ever going to get for the rest of their life, they continue to do things the way they’ve always done, which of course has been successful, but if they take that income from the wrong place, it can change their life forever.
Jason: Wow. An emphasis on cash flow. One of the things you say there in terms of taking income, most people that haven’t retired yet, Jim, they’re still thinking in accumulation terms and growing their money. Why are you concerned about market conditions now or the economic conditions that we’re in right now in terms of the stock market?
Jim: The biggest thing that I see people doing is exactly what you stated, and that is, you know what? During their working years they’re accumulating assets. They’re trying to save those assets for someday, for the day that they travel or that they retire. The problem is once they retire and get that last paycheck, they leave all those assets out there at risk. The market that we’re looking at right now is unpredictable at best. It’s starting to look a little bit like 2008, whether that goes that direction or not I have no idea, but imagine that you just retired and the bulk of your assets are in the market when the market drops 20 or 30%. Retirement all of a sudden is a wish and not a reality.
Jason: Yeah. Boy, we experienced that not too many years ago actually. It can be an unsettling time. How do people protect money when the stock market is going down?
Jim: There’s a lot of different things that people can do to protect their assets. One thing for sure is really take a look at where they are. Most people that we talk to over here have been basically putting money into 401Ks and mutual funds and different things over the course of 20, 30 or even 40 years and never really take a look at where those assets are and what they’re doing. They look at it and go, “Well, it’s done okay,” but during the years when they’re not really watching it because they’re living their life and enjoying their life and they’re going to work every day, they don’t exactly know what’s happening with it. The first thing would really be take a look at where are the assets. Where do you really have them sitting? How much risk are you really exposing them to, and are you aware of some of the things that are out there that, frankly, aren’t being really talked about but can be really great?
Jason: I wanted to talk about maybe some of these different ideas. When it comes to retirement planning, because I know you guys over there in the Seattle side, you believe in planning. That’s what we’re always preaching to people is that they should have a good plan. As you’re thinking about planning, somebody just getting ready to transition into retirement, what should that plan look like? Can you help paint a picture for our listeners?
Jim: That’s a great question, Jason. When I’m looking at a plan, and by the way, for listeners, if you’re talking to somebody or going to talk to somebody, make sure that you’re dealing with somebody who is actually putting together a plan. It’s countless, the times that I’ve seen somebody go, “Yeah, I had this issue and I just bought this product.” Buying a product doesn’t necessarily solve a problem. Sometimes it can help but sometimes it can hurt them as well.
The reality is when you’re looking at creating an income plan, if you’re going, “Okay, I’ve had this income coming from my employer. Now that I’m leaving, what do I need to do?” I look at several pillars that I’m really focusing on when we’re doing an income plan. The first one of course is the income itself. What is the income? How much can you take? What is the amount that you’re going to need to have at risk versus what’s the amount of money that you need to have someplace that’s safe and secure that’s your short-term money.
The next thing we look at is taxes. I happen to believe that taxes are going up. I don’t know what other people are thinking out there, but I look at our Federal government, the way they’re spending money right now, and I believe they have two choices. One choice certainly would be to cut spending. The other is to increase taxes. I’m not sure either side of the aisle is capable of cutting spending, so I’m expecting that taxes are probably going to go up. You’ve got to account for taxes when you’re going forward 20 and 30 years out.
Then it’s the risks. What are the things that could really go wrong? What are the things that could go sideways, whether it’s a long-term care need, whether it’s an early death? What are those issues that really are going to make a change or something that you can’t control once you retire?
Jason: The bottom line for all of our listeners, and I hope you will take this away, is that you need to have a plan, not just an asset allocation, not just a financial product, but an actual plan, and then all those pieces just laid into that.
The other thing you said about taxes there, Jim, that just really struck a chord, and I want to remind our listeners, since it is April, our webinar this month, we’re going to be hosting a webinar on tax strategies specifically for people heading into retirement. There’s little nuances there with the tax code that it’s going to have you thinking differently about taxes and retirement than you are during your accumulation years. Remember, you can visit SoundRetirementPlanning.com. There’s going to be a little button over on the right-hand side if you’d like to join us for that webinar. It’s completely free and it’s just going to be an opportunity to share with you some ideas from a tax planning strategy.
Jim, one of the things that’s been in the headlines a lot lately is this new fiduciary rule that passed. What are your thoughts about the new fiduciary rule and how that’s going to impact the financial planning industry?
Jim: That’s certainly a topic of conversation everywhere lately. It’s taken a long time for it to come out. It came out about a week ago. I think there’s still a lot of confusion about it. The one thing that I am hoping that it will do is that it will force people who are giving advice to retirees or to anybody in the public to make them a fiduciary. Right now I think people don’t realize that the bulk of the people who are giving investment related advice are not fiduciaries.
A fiduciary, of course, by definition is someone who has to put the needs of the client in front of the needs of their company. It’s just not happening. Typically, brokers are not there, or the guy at the bank or this friend that sells you insurance, they sell products but they’re not necessarily fiduciaries. Hopefully, what this new rule will bring out, if nothing else, is a better understanding that if I’m an individual and I’m retiring, I would never, never take advice from anybody who was not a fiduciary, somebody who had their best interests at heart. That’s a huge one. If that rule, and, first of all, we never know what they’re going to look like once they start writing the rules associated with it, but if that rule comes out and it actually forces people who are given investment advice to be fiduciaries, I think that’s going to be a big win for the public.
Jason: Awesome. I couldn’t agree more.
Folks, there’s a reason that people are held to a higher standard. You just want to make sure you’ve got somebody working in your best interest. You would think in our industry that everyone would be required to have that obligation, but not everybody does.
Jim, the next thing I wanted to is transition into annuities. Annuities, for some people that’s a bad word. Some people say you should hate annuities. Some people say you shouldn’t own anything but annuities. What are your thoughts about annuities as people transition into retirement?
Jim: Yeah. Annuities is always a hot button. That’s one that I talk to people about a lot. When it comes to annuities, it’s interesting. Annuities are kind of like people. There are good people and there are bad people, but you don’t necessarily know what that person is, a good person or bad person, until you really get to know them. There are a lot of annuities out there that are frankly terrible. It’s the ones that people hear about because there are some things that go wrong with them. The biggest offender, as far as I’m concerned, is what’s called a variable annuity. That’s the one that the brokers tend to lead with the most, so that’s the one we see the most. Sometimes it’s not what people thought they were getting. That’s what I think is frustrating with that.
A lot of times when people think annuities, they think that this is the one where you give a large amount of money to an insurance company and they then give you an income stream for the rest of your life, and if you die too early, the insurance company gets to keep it. If you live long enough, then you get more money back. That’s what I think a lot of people think of as annuities, but, as I said, they’re like people. There are dozens and dozens and maybe hundreds of different types of annuities, and some of them are, frankly, not worth the paper they’re written on, but there are some others that I have seen out there recently that are just dynamite. They really look very exciting for the public, so it’s really something people ought to be taking a look at.
Jason: Just like anything.
Jim: At least understand … I’m sorry.
Jason: I was just going to say, like anything, stocks, bonds, mutual funds, ETFs. There’s good and bad in everything out there, and so it really just depends on what you’re trying to accomplish. I couldn’t agree more with you.
Jim: That’s true.
Jason: I want to transition into, because I know you’ve written a book, and so that’s a resource, because you guys are doing a lot of education right here in our community as well. Could you share with our listeners maybe if they want to learn more about the work you guys are doing how they find you and then also maybe a little bit about your book and why you wrote that?
Jim: Let me start with the book. The reason I wrote it is we have clients who have referred their friends and neighbors to us from around the country. What I found was that we were writing several different little synopses of the way that we do planning and my particular philosophy in planning. That’s where I got to looking at it. We had assembled a fair number of different examples. You could almost call them white papers. I started looking at them and thought, “Oh, I ought to put it together.” At the same time my father passed away, and so I was working on a lot of this stuff with my mom and helping her through the process, and I realized how little she had really gotten involved and been involved in finances and how little she knew about it.
What I did was I took the book and I wrote it focused specifically on helping her understand and see what the process is. What do you need to do in order to be successful in retirement? Hence, the name of my book is called Happily Ever After. Retirement doesn’t have to be just a fairy tale. The idea was that you don’t have to know anything about finances, and you could pick that book up and know what you need to do, at least generally, to be successful in retirement and really make it your happily ever after.
Jason: Awesome. Thank you for putting together that resource. Then how can people find you online if they want to learn more about the work you’re doing?
Jim: They’re certainly welcome to go to our website, which is a little bit of a tough one. It’s AbsoluteReturnSolutions.com, three separate words all together. Of course we’re in Seattle on the Redmond side, so we’re not on the water side, as it were, where you guys are enjoying the beautiful views out there but over on the East side.
Jason: We don’t have quite as much traffic over on our side either, Jim, but it is … The whole state of Washington is beautiful at this time of year with the sunshine we’ve been seeing.
I want to transition into some of the myths that we hear out there, one of them being the 4% rule. I know that you guys have talked about why the 4% rule could destroy your retirement. Would you take a minute and just talk about that to our listeners?
Jim: Sure. Let me start with what is the 4% rule. I think most people are probably familiar with it, but the 4% rule simply says that if you took all your assets and you put them out there at risk, high risk and medium risk and low risk, that you could withdraw 4% of the assets every year and that income would increase with inflation and you wouldn’t run out of money before you die. Well, that’s what the rule says, but the reality is, listeners ought to Google this. Go and Google the 4% rule. Go, “Four percent debacle,” “Four percent train wreck,” “Four percent disaster,” or whatever you want to do. There is story after story after story of people who tried to follow the 4% rule and frankly didn’t make it through retirement.
The problem is with the 4% rule is it comes from the brokerage side. I started as a stock broker many years ago, and so I’m fairly familiar with the philosophy over there, and it was when someone came in you would take money, almost without exception, it would be high risk and medium risk and low risk, and that’s how you would create these asset allocations, which is pretty typical out there in what’s called “modern portfolio theory,” which is interesting because it was created in the ’50’s. There’s not many things we think of as modern created in the ’50’s.
In either case, the idea of the 4% rule is that you basically keep it out of risk and that you’re going to be okay. Now we’ve seen different variations of that. They said, “Okay, well, now it’s not the 4% rule. We realize that doesn’t work. Let’s do the 3% rule.” Then the 2% rule. The last one I saw was 1.9%. The idea is if you’re having to live on just 1.9% of your assets, the likelihood is it’s going to force you to extend the number of years that you work or take a smaller payout in retirement to make sure that you don’t run out of money.
What the 4% rule totally discounts or doesn’t take into account at all is that if you were to take some of the money and, sure, keep it at risk … Risk is probably necessary and probably important … but take other money and put it someplace where it’s safe and guaranteed, you can actually take a bigger percentage and not run out of money before you die. The 4% rule just doesn’t even think about that because it looks at it strictly from the risk side.
Here’s another kicker. If you’re out there and you’re retiring, do you need to have all of your money at risk? That may be true that risk was very important when you were working, because you were trying to grow those assets, but once you got that last paycheck you’re ever going to get for the rest of your life, I’m not sure that you still need to take as much risk. That’s something that everybody really ought to take a look at when they get to retirement.
Jason: Boy, that is really great, some really great points.
I want to remind our listeners, these programs, if you’re driving down the road this morning and you’re not going to be able to listen to the entire program, you can always go back and listen to the archives online at SoundRetirementPlanning.com. You’re listening to Episode 091. I have Jim Black on the program. He’s a Certified Financial Planner. He’s a partner in a firm called Absolute Return Solutions and does a lot of work helping people plan for retirement.
I also want to remind you that we have our webinar coming up this month. We’re going to be doing a special event on taxes in retirement and some of the things you need to be thinking about from a tax standpoint as you’re preparing for retirement. A lot of my clients say, “Jason, we don’t mind paying our fair share in taxes, but we don’t want to pay more than our fair share in taxes.” Some things you definitely want to be thinking about from a tax standpoint, especially since we’re in the month of April.
Jim, I want to talk about more security, because one of the things that I see a lot of people doing right now is increasing as they transition into retirement, they’re increasing the amount of money they have allocated towards bond mutual funds and bond ETFs with an expectation that that’s going to provide more safety for them. What are your thoughts about that?
Jim: Boy, that’s a real interesting topic right now just because for my entire career … I’ve been doing this now 30 years, and I remember back when the market got shaky, everybody would run to bond funds and that bond funds were the safety … If you think about it, most people think of bonds and bond funds as a very safe place to go. It has been for most of my career. What’s interesting is during that time period, if you remember back, let’s say 30 years ago, what were interest rates back … What was 30 years ago? Yikes. Nineteen eight-six.
Jason: I think my dad was paying 19% on his mortgage back then.
Jim: Yeah. You had mortgages that were almost at 20%. You could get a CD at 12 and 14%, and so it’s happened is as interest rates have fallen now over the course of the last 30 years, there is an inverse relationship between interest rates and bond prices. This is very interesting. As interest rates have come down, it’s actually pushed bond prices up. Bond prices, bond funds, bond ETFs, have really taken advantage of that and done pretty well over the course of the last 30 years.
The problem is the world changed and a lot of people didn’t realize it. I know it took me a while to realize that, hey, once interest rates were bottomed out, basically 1 and 2%, you go, “Okay. Well, if they continue to go lower, then bond funds and bond ETFs will do well,” but when you’re almost at zero I’m not sure that it can go lower. The problem is that if interest rates go up, which I expect they will. I don’t know when or how much, but I expect interest rates are going to go up. When they do, it’s going to have the inverse relationship on bonds and bond funds that it’s had in the past, meaning that instead of bond funds going up, they are actually going to go down.
What’s interesting is it’s mathematical. I’ve had people say, “No, no, no. I’m going to get out of it when it changes.” It changes automatically. As soon as the interest rate changes, then the calculation is done. It’s a mathematical calculation, and so Brian, who’s my partner here in the office, what he’s saying is, and I would tend to agree with this, is that he believes there’s actually more risk in bond mutual funds right now than there is in the stock market, that if interest rates go up, even a fraction, it’s going to cause a loss in those bond mutual funds. It just simply doesn’t matter who’s managing it. It’s mathematical. It’s not about the bond.
Jason: It’s so important because there’s so many people right now, they’re taking some advice that I would say was maybe designed at a time when those interest rates were falling, but they’re allocating 60% of their portfolio to bonds and 40% to equities based on some antiquated idea without any plan. Their broker is putting them into these things. I really want people to think about that before you make that decision.
We’re running out of time here, Jim, and I want to hit on a hot topic, because I know this is important to a lot of people. The question of when to start Social Security. In your opinion, what’s the best time to start Social Security?
Jim: Ten years ago. Obviously, we can’t go back and do that, but the reality is Social Security is changing so dramatically right now. We do calculations for clients on a daily basis, and we’re finding some pretty dramatic things. We’ve actually had situations where of course they made the big change in the rules last, I believe it was November, December of last year, that are basically kicking into effect here in the next week or so, but we’ve actually had people during the course now of the last six months where we’ve given them direction and advice and said, “Here’s what’s going on.” They’ve gone and done it. It’s worked fine. We send somebody else in two weeks later with exactly the same recommendation and Social Security is going, “Oh, no, you can’t do it like that now. Now you’ve got to do it like this.” Even now they’re changing the rules even as we go. They’re refining these rules just beyond the major changes they made just a few months ago.
When it comes to Social Security I look at it and I’m less of a believer than I used to be, I’ve got to be honest. We have had people come in here who have brought back their sheets. It said, “Here’s how much you’re going to get from your Social Security if you continue to make this much,” and year over year they got those basically updates from Social Security. Then they went to file. The amount that they’re actually getting from Social Security is less than the amount that they were going to get four years ago. We’re looking at this.
We called Social Security and said, “What’s going on?” They said, “Oh, yeah, those are just estimates.” What it appears is that the payouts are going down. I’m convinced and this is certainly my own opinion that I believe they’re going to continue to go down. I don’t believe it will be public, and I don’t believe they’re going to make any splash about it, but we used to always do where we would have a spouse file and then a surviving spouse at 70, but I’m really looking at these things and going, “Here’s the projections,” but I’m not a believer like I used to be of waiting till 70. I’m really turning the corner on that and going, “You know what? Maybe we want to get started sooner rather than later.”
One of the advantages that people had who were already drawing Social Security is when Medicare, the cost of Medicare went up last year. There was no increase to Social Security so that those who are already on Social Security did not have to pay that increase …
Jason: Jim, I just realized…
Jim: … that those who were just…
Jason: I’m sorry to cut you off, but I just realized we’re out of time. I wanted to say thank you for being a guest this morning and remind our listeners how they can find you online.
Jim: All right. Thanks for having me. Best of luck.
Jason: Thanks a lot, Jim.
Jim: Good luck with that one.
Jason: Remember, folks, you can visit Jim’s site at … Actually, just visit SoundRetirementPlanning.com. We’ll have the show notes and have a link to his company there. Until next week, this is Jason Parker signing out.
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, it’s 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 NW, Silverdale, Washington. For additional information, call 1-800-514-5046, or visit us online at SoundRetirementPlanning.com.