Jason and Bob discuss building a retirement floor and establishing a strong foundation for retirement.

Article mentioned: www.forbes.com-what is a safety first 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 Sounds Retirement Radio. I’m so appreciative of you. Thank you for being here with us. Thank you for helping to make this program your expert for advice as you’re preparing for and transitioning through retirement, and of course all the good people over here in Kitsap County, Silverdale, Poulsbo, Gig Harbor, the folks that we meet with face to face every day. Some neat things happening around the country: because of Skype and technology, we’ve actually been meeting with folks all around the country these days, from Texas to California, Michigan, and Minnesota, so I’m excited about those relationships as well. Thank you all for being here. You’re listening to episode 92, 092. We archive all of these programs for you. Today’s program is called “The Retirement Floor.” We’re going to have a lot of fun. Before we get going, though, I always like to say, “Let’s start the day right by renewing our mind.” I have a verse here from you. This comes from John 14:27. “Peace I leave with you, my peace I give you. I do not give to you as the world gives. Do not let your hearts be troubled and do not be afraid.” That’s what Jesus said. That’s pretty awesome.

 The other thing is I like to put a smile on your face. I’m going to share with you a joke but before I do, this is a special episode because I have my good friend in the studio with me today, Robert Harkson, certified financial planner and retirement income certified profession. He’s been in the industry a long time. He is going to be the lead now for our Gig Harbor office. He’s going to be helping us serve people down in that neck of the woods. Bob Harkson, welcome to Sound Retirement Radio.

Bob: Thank you, Jason. It’s great to be here.

Jason: We’re excited to have you as part of the team. In fact, the last couple of days I’ve had the opportunity to have you in the office and share with you the philosophy and some of the core principles that we work from. The more time we spend together, the more excited I am about having you be a part of the team and the work that you’re going to be able to do to serve people down especially in the Gig Harbor area so thank you for joining up with us and being a part of the Parker Financial team.

Bob: It’s great to be here. I appreciate the invitation.

Jason: Absolutely. So Bob, I’ve got a joke for you. What do you call a dinosaur with an extensive vocabulary?

Bob: I’ve not a clue.

Jason: A “thee-saurus.” Oh, my sides are killing me. Bob, we want to give our listeners a joke that they can share with their grandkids so there you go.

Bob: Perfect.

Jason: Okay. Bob, the episode today is “Retirement Floor,” and I want to get into that but before I do, I want to remind our listeners that we have a special webinar coming up and I have a date for that. Let me just double check my notes. This is going to be Wednesday, May 18th at 1:15. This is a free event that people can attend. They can register by going to soundretirementplanning.com. Our webinar this month is all about retirement planning so it’s really designed for people who just retired or people who are thinking about retiring in the next year or so and really want to make sure they’re got a good plan in place before they retire. Just a shout out to our listeners, if you haven’t visited one of our webinars, I want to encourage you to do that. Again, you can sign up at soundretirementplanning.com.

 Okay, Bob, so on this topic of “retirement floor,” I think this is really important because when we talk about building a floor into retirement planning, what we are talking about is the foundation. We want to get people a strong foundation, and when it comes to retirement cash flow, because I’ve learned that retirement’s all about income, all about your cash flow, there are some risks that I don’t think are worth taking. One of those has to do with your basic needs, the basic money that you need coming in order to be able to meet your minimum standard, your minimum living requirements. You might want to take risks with things like the extras, maybe “Do you take a vacation or a cruise this year?” but you don’t want to take risks with “Do you have enough money to buy groceries this month?” That, to me, seems crazy.

Bob: Absolutely.

Jason: So you’ve had a lot of experience working as a certified financial planner. What are some of the concerns you hear from people as they’re working to put together a good retirement plan?

Bob: One of the things I run into constantly is that most of the people I meet with don’t have a budget. They don’t have a written budget. They really don’t know where their expenses are. We would start with “let’s put together a budget.” Of course, the budget would come out and there would be a lot of excess in the budget and I’d say “well this sounds like we can do quite a bit with this for other needs,” and they go “oh, no, no, no, we spend it all,” so we have to go back to the drawing board and really talk about expenses and what they really are and all the aspects of how they spend money in their personal lives. Then coming back to “okay, what are the things that are ‘have-to’s,’ and what are the things that are ‘want-to’?”

Jason: Needs versus wants.

Bob: We separate these needs versus wants and you separate those out so you build a core budget that is, worst case scenario, “we can live comfortably on this.”

Jason: When I use that term “retirement floor,” what does that mean to you?  What do you think of?

Bob: “What is the minimum income I need to meet all of my obligations month to month?”

Jason: How much risk do you think would be wise to take with that base … Should people be in a position where, if the stock market doesn’t perform they don’t have the money to be able to buy groceries, buy prescriptions, or pay for healthcare? Is that a wise plan in your opinion?

Bob: Absolutely not. I think where we can get off the beaten trail is to think that we can actually build wealth and the stock market … the stock market is not static. If you look at statistics, the large cap stocks have gone up 10% per year. They don’t go up 10% a year. They may go up 20. They may drop 30. It’s all over the place. It’s critical that the day-to-day needs come out of something that’s guaranteed.

Jason: One of the things that inspired this particular program, for me, this idea of having a retirement floor. Professor Wade Pfau, he teaches at the American College.  I’m sure you’ve taken some of his classes or the CFP designation and what have you. He’s a professor of retirement income. In one of his articles and I’ll include an article to this in the show notes so if any of our listeners are driving down the road this morning and they want to take more of an academic approach.  That’s one of the things I want to touch on today too: the difference between academic view of retirement planning and the practitioner view of retirement planning. Those are really … they do come together, but I think practitioners, people that are working with real people and have had real experience, that’s a lot different than hypothetical maybes, what ifs, and “if it works this way,” that sometimes the academic world brings to the table. Professor Pfau, he says, and I really appreciate this quote, this is a Forbes article that he had written, but he says “In the retirement context, the question to be answered is ‘How to get the most lifetime satisfaction from limited financial resources.'”

 I ask a similar question when we’re doing retirement planning, and that is “What’s the purpose of the money?” I like how he phrases that. How do we get the most lifetime satisfaction? There’s really a balancing act there. If we are too conservative with our estimates, you end up dying with a great big pot of money, and you leave all of the wealth and you don’t ever live your life because you’re so fearful. The flip side is you that you don’t create a good plan to start with. You spend way too much money in the early years. You take way too much risk with the portfolio. Then you end up with nothing at the end and you’re trying to scramble to use reverse mortgages or sell property or whatever the case may be to come up with a base line. You had an opportunity to read this article as well, this “What is a Safety First Retirement Plan?” Do you think it’s a mistake to take a safety mindset when it comes to developing a floor for retirement?

Bob: Absolutely not, particularly now when we see fewer and fewer people have guaranteed pensions. For most of us, it’s going to be social security and whatever we’ve been able to put away in 401Ks, IRAs, 403Bs, and a qualified retirement plan or money outside of retirement plans. It’s really critical that you can take a look at … Number on is looking at longevity as longer than what you think you might live. Given changes in healthcare and things, you want to plan to 95, maybe even age 100. I think the other thing, too, is to have a plan. What I see very often with people is they’ve saved money in these plans and they don’t have a direction into how to distribute it. They make the mistake of “Okay, I have a 401K with company. I’ll roll it to an IRA and I’ll just pull money out as I need it.” Rather than thinking through “What are my most important expenses I have to make and how do I guarantee those? Everything else is negotiable, as they say.” One is having a budget. What are your expenses?

 The other thing is people don’t think enough about “What is retirement?” I’ve had clients come, go into retirement, and go into a depression because they haven’t taken the time to think about “What is it that I want to do? What’s my lifestyle?” Do that, if they’re married with their spouse, then you can come back and take a look at your basic budget and maybe an extended budget based upon other investments in the market.  To answer that question, sometimes retirement just arrives and it’s like “Now what do I do?” or “I want to play golf and fish,” and then after two years, “Now what do I do?”

Jason: …or two months.

Bob: Yeah, or two months. It happens a lot. Thinking that through and planning that is very important.

Jason: Kind of a side note: I’m really excited about some of the opportunities that exist for people because I know we meet with a lot of people that are getting ready for retirement. They’re trying to come up with a good cash flow plan and some of them say “Jason, I’m thinking about working a little bit in retirement to supplement my income.” They’re so many neat opportunities. A good friend of mine was just visiting Palm Desert to get a little bit of sunshine this time of year and he used Uber for the first time. Uber is kind of like a replacement for taxis out there. The gal that picked him up, the Uber driver … this can be kind of a retirement gig for people. It gives them an opportunity to work when they want to work. They have no set schedule. They can drive people around. They can be social.

 I started thinking about that and I was like “Man, I know a lot of retirees that might not mind driving one or two days a week, picking people up, driving them from place to place, and having a little bit of side income.” Maybe they have a little vacation home right on their property or they’ve built a little bungalow and so now they’ve got a little place they can rent out a couple weeks a year and have some additional income. Because of all the technology that’s happening out there, people are being given this opportunity to have some additional income sources but still have the flexibility and lifestyle that I think so many retirees are looking for. That is a neat way for thinking about creating that retirement floor. You brought up social security just minutes ago in terms of building a retirement cash flow plan. As our listeners know, we put a lot of focus and a lot of education into social security, and the difference between a good social security strategy and a bad one for married couples can still be a $50,000 dollar decision, even after the law changed on November 2nd.

 What are some of your thoughts about social security? That statement comes out and says, by the year 2032, social security is worried that they’re only going to be able to pay about 79 or 78 cents on the dollar for every dollar promised. Should people have strong degree of confidence that social security is going to be there for the long haul if they’re just getting ready to retire?

Bob: I would say so. It may change. I think the impact will probably be with the younger generation which would be later retirement dates. Maybe you might see full retirement become, instead of 66 or 67, 70. There’s a lot of things that can be done to fix it if our politicians can sit down and say “Let’0s fix it.” One of the statistics I read was that was astounding is that over 50% of Americans take social security at age 62. I ran into a friend at a conference and he goes “Yeah I took it because I wanted to make sure I could get it while I could.” What he ended up doing is, because his amount was the higher amount, he basically consigned his wife at his death to the amount at 62 rather than at 66 and maybe looking at other alternatives.

 Now, some people have to, but I think having a good strategy and understanding how delayed retirement [inaudible 00:13:14] postponing social security can benefit you, but not just you, can benefit your spouse. I know that my wife was a stay-at-home mom who raised 5 kids, so for me her social security amount will be about half of mine so for me it’s important to delay it because I want a higher amount when I pass away. Thinking through those things and not just jumping on the bandwagon, “I want to get it while I still can,” … I don’t think that’s reasonable, prudent thinking.

Jason: As we know, it’s not just about the benefit that you have for your own lifetime but also that spousal benefit and the survivor benefit that people oftentimes dismiss.

Bob: Absolutely.

Jason: You’ve got a benefit based on your own earnings record. Your spouse has a benefit based on their own earnings record. Then there are spousal benefits that are available to and there are also survivor benefits. It’s inflation adjusted income. It’s tax efficient income. Social security is a wonderful benefit. In fact, at soundretirementplanning.com, one of the things that people can request for free is a free chapter from my book where we give you a chapter on some ideas about maximizing social security. That’s available at any time. People can just visit soundretirementplanning.com and request a free chapter from my book on how to be thinking about social security from a retirement planning standpoint. It’s a really wonderful benefit. There’s a lot of people today that don’t have pensions from employers anymore, but most people have paid into social security, so we want to make sure they get the most out of that benefit. That brings up another important topic, though, that I think we need to talk about. That is: What happens when one person dies? As much as we all like to think we’re going to live to age 100, that’s not going to be the reality for everybody. Without proper planning, Bob, what are some of the consequences for a married couple if they don’t have an understanding of how that could impact their financial lives?

Bob: Depending on your income, every married couple will lose between 1/3 and 1/2 of their social security. For example, in our relationship, because my wife stayed at home, she is eligible for half of my amount at age 66 that I would get at age 66. At the first death, let’s say I pass, her amount goes away and she inherits my amount. She gets the higher of the two.

 I have another example for clients that are both school teachers for 30 years. They both have the same social security amount. When one dies, half of it will go away. The other thing that’s important is to download your social security statement from the social security website because it will tell you what your amounts are, what your amounts would be for disability or death and it would show you what the other spouse would get. Oftentimes, people take social security on their own amount which is much lower at 62 rather than being prudent and looking at all possibilities and then coming up with a strategy. We just impulsively say “Oh, it would be nice to have that income. Let’s just do it.” Then you can’t go back.

Jason: Another thing that you said that can really strike a chord for the geeks of the world out there, the nerds, people like you and me, you used the word “a budget.” I’ve got to tell you, for the free spirits out there, for the people that like to live more spontaneously, Bob, that word just really rubs them the wrong way. I’ve sat down with married couples and we’ve had these conversations. It’s always funny to me that it seems like there’s one person that’s a little but more numbers oriented and there’s one person that’s a little bit more life oriented, I might say.

Bob: They really frustrate each other. Absolutely.

Jason: How do you do that? What are some of the tips you have for coming up with a good … I mean, a good cash flow plan … Of course we’ve got to plan on the money that’s coming in, but, like you said, you’ve got to have a good budget. You’ve got to know how much money it going out every month. What are some of the tips that you give people for the best way to come up with that budget before retirement so they really have a good handle on spending?

Bob: The first one is communication. Talk about it. Oftentimes, it’s like talking about retirement for some people, and you should probably be doing this 3 or 4 years before, it’s like something we don’t want to face because it means we’re facing getting old and facing out mortality. It’s like getting a will done. I’m amazed at how many people don’t have a will and I think it’s because they think that if they do one they’re going to die.

Jason: That’s what my grandmother always said.

Bob: Yeah, “If I do this I’m going to die.”

Jason: You know what? She did a will and she ended up dying about a week later.

Bob: It’s probably because she did it on her death bed. … I think is to talk about it. My wife and I basically have made the agreement that we don’t spend money outside of a certain range and we talk about it. Oftentimes, one partner will dominate that. You’ll see it often, the husband keeps everything close to the chest and then the wife doesn’t really know what’s going on. That’s a mistake. A lot of times, I’ve seen spouses come in right after their spouses dies and there’s a life insurance … They’re just stunned. They don’t know what to do. Talking about those things is just as important as talking about our plans, whether we’re going to go cruise or spend time with the grandkids.

Jason: Yeah.

Bob: Sitting down and saying “What are our expenses?” … Basically, most of us budget by saying “Oh, there’s money left at the end of the month.”

Jason: A couple of practical tips for people: I met with some folks recently, and for an entire year they committed to only using their credit cards. They did this for a couple of reasons.

 Number one … Let me just put a disclaimer out there. These folks, like a lot of the people we work with, are high net worth individuals. They don’t pay interest on these credit cards. They pay them off every month, but they do take advantage of things like the mileage program. They said “Look, let’s just pay everything on the credit card.” What they did is, they went back at the end of the year and they just tallied it all up and they said “Oh, look. We spent $100,000 on the credit card, so that’s probably a good reflection of how much we plan on spending in retirement.” Some people will start discounting retirement cash flow. They’ll say “Well, I won’t be driving to work. I won’t be buying lunch. I won’t need to go to the dry-cleaners. I’m going to reduce my expenses by 20%.” That’s another way some people do it.

 I had a good experience using a software tool call mint.com. You can also get it as an app for your phone. Mint.com gives you the opportunity to track expenses from all of your different sources. My wife and I, we don’t use credit cards but we do use debit cards. We used our debit cards exclusively for about 6 months with mint.com. That way, it was pulling information my her debit card, pulling information from my debit card … and that have us a really good foundation for where the money was going. I’ve gotta tell you, one of my big eye openers there was just how much money our local grocery store was getting; how much I was budgeting for groceries and cleaning supplies and anything you spend at the grocery store. I was really surprised at how much we were spending there versus how much I thought we should be.

Bob: There’s a lot of disparity sometimes. I remember meeting with a couple. They had two young kids. Both were working. They said “We just don’t have much money to put away with retirement.” I said “How do you pay for things?” They said “We do it all on our debit card.” I said “Can we have a couple months’ bank statements?” I did that. They were spending over $400 dollars a month at Starbucks. $400 a month, but there’s no money to set aside for retirement. “But we enjoy our lattes.” I thought, “Gosh. Cut that in half or buy an espresso machine. Yes you can.” It’s a choice that you have to make and many of us …

Jason: $400 a month at Starbucks, man.

Bob: They were getting two drinks a day. I thought, “Yeah, that’s a great treat and wonderful, but let’s look at the consequences 25 years from now. I think it’s thinking in terms of delayed gratification, thinking about what you spend. Our culture is very impulsive. We get bombarded with offers to buy and I think just being disciplined about how you spend money, figuring out ways to save money, looking at your cable bills … “Do I really need all this?”

Jason: “Do I really need cable?” A lot of people are cutting it out altogether and just going to Netflix.

Bob: That’s what we did. There are a lot of ways you can save money by being a careful shopper and asking questions. YouTube is a great place to learn how to do things yourself. One thing you do when you retire is you have more time to possibly do things yourself than you do before you retire because you’re busy.

Jason: Speaking of YouTube, I like YouTube a lot as well. For example, my wife bought a new chandelier recently and she wanted me to hang it. I had a pretty good idea and read through the instruction manual, but I jumped on YouTube real quick. For me to be able to watch a video that Home Depot had put out about how to hang a chandelier made my life so much easier in terms of just being able to watch it. We have some of those resources available for our listeners. If they go to soundretirementplanning.com, they can visit our YouTube channel. We’ve created some of these different videos for people that are looking to create a retirement plan. We’ve got so many resources out there.  You can lead a horse to water, but you can’t force it to drink.

 I just want to remind our listeners again that we do have a webinar coming up. This is a special event. These webinars are not necessarily … sometimes I remember to push to record button and archive them for you. Other times I kind of mess that up. That is Wednesday the 18th, I think I said. Yeah, Wednesday May 18th at 1:15 pm. If you’re thinking about retirement, if you’re going to be retiring, join our webinar and at least get an idea for some of these things like “What should a budget look like? What should we be planning for from a cash flow standpoint? How do we maximize our social security benefits?”

 Understand what goes into a good retirement plan. Make some assumptions, some really conservative assumptions about rate of return on the portfolio, assumptions about inflation. Make some assumptions about “What happens if one person dies early? What happens if one person ends up in long-term care type of position?” Just see some of the ways that you can stress test a portfolio, understanding that diversification is not a retirement plan. Just because you have some money in stocks, 60% stock, 40% bonds, or vice versa, or maybe because you’re using low cost index funds, that is not a retirement plan. Unfortunately, we’re running out of time here, Bob, but this whole idea of probability … Do you have 20 seconds to speak on the probability of retirement outcomes? If somebody has an 80% probability of a good retirement outcome, should that make them feel comfortable?

Bob: Yeah, if you’re within the 80% range. The other option is you may have more or you may run out of money.

Jason: Let me ask you a question. If you got on an airplane and the told you there was an 80% probability the plane was going to land, would you feel good about that decision?

Bob: Absolutely not.

Jason: No. I just think it’s insanity. I think that if you want to give people confidence you have to have a better plan. I think hat by creating a retirement floor you’re doing that. Folks, I realize we are out of time. Bob Harkson, certified financial planner, newest member of our team, thank you for being on the show with me today.

Bob: It was a pleasure.

Announcer: Information and opinions expressed to you are believed to be accurate and complete, are 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 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 risks. 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.