Jason and Bob talk about the risk of spending all your money or leaving too much behind.
Below is the full transcript:
Jason: Welcome back, America, to another round of Sound Retirement Radio. My name is Jason Parker, and it is my good fortune to have Bob Harkson on the program with us this morning. Bob, welcome back.
Bob: It’s great to be here, Jason.
Jason: Certified financial planner. I thought we’d do something a little bit different and have some fun upbeat music as we get going.
Bob: I like it.
Jason: Oh, man. Me, too. We’ve had a little bit of coffee this morning, and I’m excited to bring episode 95 to our listeners. The title is Bounce Your Check to the Undertaker.
Bob: Sounds interesting, Jason.
Jason: All right. All right, Bob. Let’s get going with this thing. Bounce Your Check to the Undertaker, now before we get going, I want to start out a verse to renew our mind. I think that’s a great way to get started in the morning, and this is one I’ve been thinking about a lot lately and we’ll talk a little bit more about this. It’s John 15 verse 12, and this is Jesus speaking. “This is my commandment that you love one another as I have loved you.” What a great verse?
Bob: It is.
Jason: How I mess that one up so often. I mean, that’s pretty straightforward, pretty simple but so often, I want to let sarcasm and being quick-witted, move in, instead of just following this really simple commandment, “This is my commandment that you love another as I have loved you.”
Bob: Yeah, it’s a great to be free not to judge others and to love people unconditionally.
Jason: Then I thought we’d also have a joke because we know people are on their way to see their grandkids and so it’s always fun to put a smile on people’s face. I’ve got a joke for you this morning. Bob, here it is. Have you heard the one about the skunk?
Bob: No. Jason, I haven’t.
Jason: Never mind. It stinks.
Bob: Jason, I agree.
Jason: Never mind. It stinks. All right, Bob. Let’s get into the nuts and bolts, the meat, potatoes of this program today. Episode 95 is Bounce Your Check to the Undertaker.
Bob: Well, Jason, let’s start with, what are a few good questions worth considering about a good retirement?
Jason: That’s a great one. I love a good question, Bob. I found that the people that bring good questions to my life are the ones that have the more influence in my life because people will come to me that proclaim to have all the answers I tend to be pretty skeptical of. I think this is probably a good starting point because if we’re going to create a really good plan, there’s a concept, there’s an idea out there that’s worth considering. The idea is to begin with the end in mind.
From a retirement planning standpoint, we have to think all the way to the end of somebody’s life and then we start from that point. How do we determine whether or not a life has been, a retirement plan has been well lived. For years, Bob, for years, somebody asked me this question a long time ago. They said, Jason, if we’re standing at your funeral and we’re listening or you’re sitting at your own funeral maybe, if that were possible, but you’re listening to people talk about your life, friends and family are getting up in front of the church and they’re just talking about your life. For a long time, the two questions that I thought were really critical and I still think they’re good questions, but I think I’ve come up with two better questions actually, but the two questions I used to think about a lot were, number one, how will you be remembered; and number two, what have you contributed.
Having lost one of my best friends recently, a mentor to me, I think I’ve got a better question. The two better questions are, who did you love and how did they know they were loved. For me, at least, I think those are the two better questions. From a retirement planning standpoint, though, Wade Pfau, professor of retirement income at the American College, phrased a question recently from a retirement planning standpoint. His question is, as we think about retirement planning, how do you get the most lifetime satisfaction out of limited resources. I like that question because when you talk about satisfaction, Bob, let’s about that just for a quick minute, when you hear the word satisfaction, what does that mean to you? When are sometimes in your life when you feel satisfied?
Bob: I think I would use the word contentment, being content, looking back and saying, “I’m glad I did that. I’m glad it went that way.” It’s feeling fulfilled in the action that you took in the past and the result.
Jason: As I think about satisfaction, times when I feel really satisfied are, like, right after I go jogging. I like to run and I feel good after jogging and exercising. I feel satisfied. I just … It’s something that my body yearns and craves and looks forward to. When I go do that, I feel satisfied or I like learning. I feel good after I’ve learned something new, but I feel even better once I get to share some of those things that I’ve learned with folks.
I think another time when I really feel satisfied, Bob, is after spending time with my family. I love spending time with my kids. I love going to little league baseball practice. I like going on vacation with my family, so that’s another time in my life when I really feel a great sense of satisfaction. It’s spending time with people that I care about, so I like learning. I like exercise. I like being with people that I care about. I mean, those are times in my life when I really feel satisfied.
I like the work that we do. I feel satisfied when we put together a plan for people that adds a greater sense of confidence and clarity in their lives and they experience a greater sense of freedom. Any other thoughts from you in terms of satisfaction? What brings a greater sense of satisfaction to your life?
Bob: Well, for me, it’s spending time with the kids and my grandkids. I mean, there’s nothing I’d rather do than be with my grandkids and my kids. I was on vacation or they come over the weekend or we go to their place or we just babysit so that my kids can get some time off as couples. It’s incredible. It’s the most wonderful thing.
Jason: Yeah. I think if we can get people to think about that question, so they ask themselves that question, what brings me a greater sense of satisfaction, because if you start with the end, begin with the end in mind and then work forward, it’s going to make the retirement planning process so much easier because then we know what your priorities are and we can help you achieve those priorities with a greater sense of clarity.
It’s a really great starting point, but it brings me to my next question, which I want to ask you about. We recently … The title of this show is Bounce Your Check to the Undertaker, and the reason for that is we have a client who came in to see us recently who said, “Jason, my perfect scenario is that at the end of my life, the very last check that’s written from my account bounces to my undertaker.” In other words, he spends everything that he’s got, all the way up to the very end and then that last check bounces. What are your thoughts or what are some questions people need to be thinking about with respect to that dilemma or that scenario?
Bob: Well, the question I would ask to someone who is in the process of in retirement, approaching retirement, is which would you prefer, running out of money before you die or death with too much money left over?
Jason: The two other questions people could consider because … I mean, to really line up assets so that they match liabilities that perfectly, and remember, generating retirement income becomes a liability for us in the sense that we have this pool of assets, our liabilities, our income, and we need to make sure that those assets match that liability. Now people don’t think of income as a liability. People think of income as an asset, but when we’re doing retirement planning, our assets are what we’ve accumulated, the money that we have to create a portfolio with. The liability is the income that’s need and that’s what we don’t want to risk.
It’s a really great question that you ask there, which would you prefer? If we can’t get it so perfect that we bounce the check to the undertaker, then the question becomes, would you rather die with too much money left over or would you rather run out of money in retirement? Which way do you think most people would answer that question?
Bob: Well, I think most people would rather not run out of money. I mean, that is a retiree’s greatest fear, running out of money, which would make you then dependent on somebody else.
Jason: Yeah, and I think ultimately, it’s one of the fears people have is, as I speak to people, they say, “Jason, we never want to become a burden to our family either physically or financially.” At the same time, what that could result in is not spending enough money, so if you’re too conservative here, you end up dying with a lot of money. We met some people recently and they said, “Jason, you know,” and this folks, they didn’t have any children and they said, “You know, I think one of my fears would be dying with too much money left over.” That’s also a concern, is that you’ve worked a lifetime. You’ve accumulated these assets, and then you don’t get the most enjoyment out of those resources that you have.
Either way, in a perfect world, we would create a scenario where you bounce the check to the undertaker but that’s probably not going to happen, so then we have to choose from these other two, the lesser of two evils. Like you say, I think most people’s preference would be to maybe die with a little bit left over.
Bob: Absolutely. Well, Jason, what are the two primary schools of thought with respect to retirement planning?
Jason: The two primary schools of thought is … Really, it comes down to two options, and we’ll talk about the one that I personally prefer here, too. You can do what I call safety-first retirement planning. Safety-first retirement planning is saying that I’m not willing to gamble with basic needs or necessities. Safety first is a very conservative approach. The other way is what I call probability planning. Probability planning is based more like on the 4% rule and it’s based on past performance. It makes assumptions about future rates of return on asset classes, and there’s just a lot more unknowns there.
As we think about that in the context of the last question that we just talked about, probability planning would likely be a better way to go if your concern is having too much left over at the end of your life. If you are more comfortable with running out of money potentially in retirement, I would say probability planning is the way to go. If you’re more concerned with making sure that you never run out of money in retirement, then I would say the safety-first approach makes more sense but the problem with that is you may end up leaving more money behind than you had anticipated and maybe not getting the most enjoyment out of all those assets.
There’s no perfect solution, Bob, but we got to choose one course of action and so those are really the two ways we can go. You said something, though, that really struck a chord with me recently. We were talking about the idea of earning a paycheck and we have this human capital, right? We have the ability to go out and earn money during our working years, but as soon as we retire, now we’re talking about potentially 30 years of unemployment. Now you don’t have a paycheck anymore, and you used a phrase the other day. I thought it was really good. How did that go?
Bob: Well, I heard it at a conference and it was turning paychecks into play checks. That goes around the issue of when you retire, you’re not working. You’re not bringing an income. Now you’re depending on social security; if you’re fortunate, a pension, or the assets you have accumulated in retirement accounts, whatever sort that you’ve got. The question is, how do you make sure that you have a paycheck in retirement that won’t run out.
Jason: Or a play check as you-
Bob: Or a play check, yeah. Yeah.
Jason: Maybe we should even think about that in two ways. A paycheck for your basic needs, the money that you absolutely cannot gamble with, you shouldn’t gamble with. That’s, to me … See, that gets back to this whole idea of probability planning and you and I had this conversation the other day. If I told you, you were going to get on an airplane and there was a 90% probability that, that airplane was going to make it to its destination, how good would you feel about that 90%?
Bob: Not great.
Jason: Not good. No. Of course, not. I wouldn’t-
Bob: I wouldn’t feel good if it’s 95%.
Jason: I wouldn’t feel good if it’s 99. At some point, maybe we’re getting to a level of comfort but if there’s a way to create a structure that gives you 100% confidence that your basic needs are going to be solved for on an inflation-adjusted basis, that to me feels a whole lot better than this idea that you have 70, 80, 90 percent probability of making it to the end. I mean, that, to me, is very scary.
That gets back to that 4% rule. One of the challenges I have with the 4% rule that you hear so much in probability planning is based on this academic research that goes back to the mid-1980s that looks at the performance of asset classes. William Bengen, he basically said, “What if you started with a portfolio of 50% stocks and 50% bonds and we back-tested that over different scenarios?” In every prospectus you get on a mutual fund, it says past performance is no guarantee of future results, yet we’re asking people to base their entire retirement plan on this probability that past events are going to be similar going forward, that there’s going to be similar returns with those asset classes going forward.
In this world that we live in today, that may not be the reality. I mean, we’re experiencing a new economic reality, something like we’ve never experienced before yet we are wanting to hope that the return assumptions from those asset classes in the past are going to be the same as they are going forward. To me, that’s just not a risk that’s worth taking. That’s not how you create a greater sense of confidence in your retirement plan, is by having all these unknowns out there. In fact, if you want to have a plan that makes you always questioning whether or not you’re on the right track, then you create a plan that’s based on probability planning. If you don’t want probability planning, create a plan that’s based on safety first.
Bob: Absolutely, and I think they may repeat. Those performances may repeat but they may not, and that’s the … They may not is the part that really concerns most people going into retirement.
Jason: I think it’s important to recognize, too, that both of these retirement planning ideas that we’re talking, whether it’s the safety-first approach or the probability approach, they both have a lot of academic research behind them, right? I mean, we can look at like asset dedication. We can look at time segmentation. Those would be more allocated towards the safety-first approach. We can say, looking back, there’s academic research that … There’s a lot of people in the academic world that would support that type of planning. We can look all the way back to the 1930s. I mean, this is a concept that insurance companies use for creating pensions or annuities for people, is that they use this idea of, how do they structure their resources in such a way that they can produce a pension for people as they transition through retirement.
The same is true with the probability rule. I mean, or the probability plan and there’s a lot of academic folks, people in the academic world, in the financial planning world that can look at research that has been done and say, “Hey, there’s some really good reasons to believe that this is going to work going forward.” Ultimately, people have to make it their own decision for them what’s best. I will tell you this. As a financial adviser that cares about the outcomes, I care about the outcomes. When we create a plan for people, I don’t want to have to be sitting here 20 years from now and say, “Oh, I’m sorry. Our probability didn’t work out.”
Jason: “It really should have based on past performance. Unfortunately, things change and we didn’t hit our goals. Our return expectations were less than expected. I’m sorry, but your plan has failed and now you’ve run out of money.” I mean, I would feel really bad with that. As a financial adviser, I have to create plans that I’m going to feel the best about. I always start that planning process as safety-first approach. If people want to crank up the risk, then that’s their deal. I’ll help them do it any way they want, but it’s not the way that I’m going to sleep best at night from a planning perspective as a financial adviser.
What about you, Bob? I mean, you meet with a lot of people. You’ve been doing this for a long time. You’re a certified financial planner, retirement income certified professional. Which do you feel more comfortable with?
Bob: Well, I would say definitely, you want to make sure that your regular living expenses are covered regardless of what happens. We live in an age where the pension is going away. Fewer and fewer the clients I meet with have pension, so they have to take what they’ve saved for retirement and make sure that they can meet their expenses for the rest of their lives and possibly then build into that some play checks so they can enjoy. I think it’s absolutely critical that we set up a stream of income that is going to be guaranteed for the rest of your life to meet those requirements so you do not run out of money and do not become dependent on your kids or the state or anybody else.
Jason: Yeah. I was listening to a guy recently, one of the folks that came into our office actually. He said something that really struck a chord with me. He said, “On some of these assets, on some of this money, I wanted to know that it’s going to be there for us and can produce income and even if something happens to me, my wife is going to be taken care of and that there’s going to be plenty of cash flow there for us.” “Once we’ve solved for that,” he said, “I don’t mind taking risk with the remainder of the assets but some of this stuff, I just want to know that we’ve got a really solid base to work from.” I think that’s what most people want. Part of the challenge is getting people to think different about their money as they transition through retirement. They’re not in accumulation mode anymore. You’ve got to get out of this idea of matching returns with the market because that is not what retirement is about. Retirement is not about your rate of return. It’s not about your net worth. It’s not about how much money you leave behind. It’s about your cash flow. If you mess the cash flow piece up, all that other stuff goes out the window.
Bob: Well, and in the accumulation mode, particularly a couple of years before retirement, a major shift in the markets can have a major affect on your retirement. It’s amazing how many clients I’ve met with who are just getting ready to retire and their portfolios are very aggressive. I think they know that, and they feel uncomfortable with that. They want to make a change, and I think my advice would be that you’ve got to look at that very, very seriously because when the market’s doing really well, everybody’s kind of giddy and excited about it but what goes up comes down. I think as you approach retirement, it’s really critical that you make that shift.
Jason: We need to transition into talking about volatility but before we do, I want to remind our listeners. We have a really special offer for people right now. Last week, we did a webinar that we recorded called Creating a Sound Retirement Plan. It’s based on concepts and principles that I share in my book, Sound Retirement Planning.
For people that are getting ready to make that transition from a career into retirement, what you want to make sure is you have a good plan, that you’re not just buying products, that you’re not just creating an asset allocation, that you’re not just diversifying, but you actually have a good plan. There’s some really core things we want people to think about as they’re creating that plan. I’ve created this webinar. It’s free for people to attend. If you go to soundretirementplanning.com on the right-hand side of the screen, it will say Webinar Replay. Now the key to this, Bob, is to help people overcome their natural tendency to procrastinate. We are only going to leave that webinar replay up until May 31st. If it’s something you’re interested in, if you’re thinking about retirement, go watch the webinar replay. It’s going to be a very safe way. You can do this at the comfort of your home at midnight when you can’t sleep and you’re trying to figure out how you’re going to make all these numbers work. Go watch the webinar replay. Just make sure you do it before May 31st.
Bob: Well, and to transition from that, let’s talk about the question of volatility. We’ve been watching the markets go up and down. Tell us a little bit about that.
Jason: We are in a time of volatility. Look, we’ve got stock prices that are at some of the highest levels they’ve ever historically been, very high stock prices on a historical basis based on price to earnings. We’ve got bonds that are incredibly expensive. A 10-year treasury is paying less than 2%. I mean, who wants to lock up their money for 10 years and get less than 2%. At the same time, we’ve got interest rates … The fed right is now is talking about potential rate increases in June or July or in the near future. If we see rate increases, we know bond mutual fund holders are really going to get … I mean, those are the people that are looking at potentially a lot of volatility. Bonds have not been a secure place as they have been in the past. We’ve got negative interest rates in Japan, in Europe, so we’ve got these global economies that are just … They can’t seem to eke any growth out of and central bankers are doing everything that they can to try to stimulate some growth. We’ve got a housing market here in the United States that’s getting really hot again. In fact, Bob, I would hate to say it but it’s almost feeling a little bit bubbly to me, at least in our neck of the woods.
Bob: Very much.
Jason: I know that there’s a tendency to maybe this bias to look at your own neighborhood and create assumptions about that. Boy, prices now are not just back to where they were in 2006. They’re actually greater than where they were in 2006, but the thing that doesn’t make a lot sense there is that people’s incomes haven’t increased that much to justify these home prices. The concern, of course, in a rising interest rate environment is housing, is housing still going to be an asset that’s appreciating as interest rates rise? It’s going to put more pressure on that amount of home that people can afford. If you’re buying a house right now, it could be near the top. I mean, we got to be thinking about some of that volatility. What are some of the concerns you have from a volatility standpoint, I mean, as you look out into this economic landscape that we’re looking at?
Bob: Well, you have world events. We have an unstable world politically in certain ways and these events, they’re called black swan events, can have a tremendous impact on the markets, an event in the Middle East caught up with the oil supply, anything, an election. I mean, an election has a huge impact on what happens in the market or depending upon who gets elected or-
Jason: I don’t know about on the market performance specifically, but at least on people’s sense of well-being-
Jason: Especially in an election year like we’re having right now. I mean, I-
Bob: We had a client come in yesterday who say, “I don’t know what whoever’s going to be elected is going to do. I’m nervous.” I mean, she has a great point.
Jason: Yeah. Well, that brings us to our last point on volatility, though, a couple of things … One thing I want to say about there is volatility only matters if you don’t have a good income plan, right?
Jason: If you got a good income plan and you’re confident with that and you know the numbers are going to work, you don’t care if the market’s up or down 50%. The people that care about whether the market’s up or down 50% in a year are the people that don’t have a good income plan because it’s based on probability and the probability because these black swan events or fat tail events is falling apart on them. Darn it, Bob, there is one more thing I wanted to talk about today, which was confidence and having a greater sense of confidence, but I realized that we’re running out of time. I want to encourage our listeners, if they haven’t had a chance to watch the webinar replay, to visit Sound Retirement Planning and plug into that.
Bob Harkson, thank you for-
Bob: Thank you, Jason.
Jason: Another show and for our listeners out there, thank you. We really appreciate hearing from you and wish you the very best.
Announcer: Information and opinions expressed here are believed to be accurate and complete for general information only and should not be construed as specific acts, 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 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.