Jason and Bob answer recent questions about retirement from our community.
Below is the full transcript:
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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’s your host Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. I’m so glad to have your listening ears tuning in this morning. Thank you for making this one of the top podcasts in the iTunes library under the category of retirement. It’s my good fortune to have Mr. Bob Harkson, Certified Financial Planner on the program with me this morning. Bob, welcome back.
Bob: It’s great to be here, Jason.
Jason: This episode is 108 your retirement questions answered. We’ll get to get that in just a minute. But, before we do, I like to start the morning right by renewing our mind. I think one of the best ways we can do that is with the Bible and a specific verse. Here we have it. It’s Romans 1, verse 16: For I’m not ashamed of the gospel, because it is the power of God that brings salvation to everyone who believes, first to the Jew, then to the Gentile. That’s awesome.
The next thing we’re going to do. Bob is willing to put a smile on people’s faces. With all the bad news out there and all this negativity that’s in the world, today we just don’t want to get wrapped up in it, we don’t want to be, that’s not where we want to be for our listeners. We’re going to bring something a little bit fun.
Bob: Absolutely.
Jason: I’ve got a joke here. This retired guy goes to the doctor, Bob, and he says “Doc I ache all over, everywhere I touch it hurts” the doctor surprised then says “Touch your head” the guy touches his head and go “Oh, man, that hurts” doctor says “Touch your elbow” and they guy “Aaah” he just jumps in pain. The doctor is stumped and he says “We need to get this guy in for X-rays” sends him off for x-rays says “I want you back in two days”. Guy comes back and doctor sits him down and says “Sir, I figured out the problem” and the retiree says “Oh, yeah? What’s going on?” He said “you have a broken finger”. Everywhere I touch it hurts, Bob. Everywhere I touch.
Bob: Oh my sides.
Jason: All right. Episode 01×08 Your Retirement questions answered. These come from people that we serve, either through our community right here locally or from folks around the country that have had questions for us. One of the first ones I want to talk about, actually, I want to talk about this gentlemen that asked us a question, he said, and this is kind of how he said, he said “I’m just looking for a number” he said “I want to know if I can retire” let’s start with that one Bob. How do you address the question of I’m looking for a number?
Bob: Well, I think there’s a couple of other sub-questions I would have, one is “how much do you have?” Other one is “What are your other sources of incomes?” If you have a lot of pension income, social security income, you don’t need as much, but if you’re like I am, who’s dependent on social security and my 41k and IRAs, I’ll need more. The other question is “What’s your budget? What are your spending habits? Is your house paid for? Will it be paid for in the future?” I tell people “you know, if you don’t get that part of it right, it’s hard to know if you have enough” and most people underestimate their budgets. So “What do you spend? What do you have saved? And what are your other sources of income that are critical?” I think you want to add to that Jason.
Jason: Well, absolutely. You know, retirement is all about cash flow. I sound like a broken record saying that, but ultimately like you say, it comes down to “Are you going to have the income coming in?” You ask people the question “What’s the purpose of your money” and you hear things like “I don’t ever want to live under the free way overpass eating cat food”, but really what they’re saying is “I want to know that I’m going to have security, I’m going to have some comfort, I’m going to be able to maintain my lifestyle in retirement” and that all has to do with your income.
It’s your income, it’s your cash flow, it’s not your net worth, it’s not your balance sheet that determines your comfort level, it’s the cash flow that you have. Like you said, if you’ve got a good pension and you’ve got a good social security, you’ve got some rental income coming in, you don’t have to have to touch your investments, that’s great. But ultimately, this is a cash flow game, retirement is cash flow. Other way I like to say this is “If you don’t have cash flow, you don’t have retirement.”
Bob: That’s exactly right. Because you got to pay the bills. You got to have the fundamentals.
Jason: But, getting to this guy’s question of “What’s the magic number” as if there were a magic number. Use to be, there was this 4% rule, a lot of financial planners would say “Hey, if you got a million bucks, you can take forty thousand dollars a year and probably it’ll be okay” if our listeners haven’t listen to the interview that I did with Dr. Wade Pfau, who’s actually professor of The American College, he teaches retirement income. A lot of the research he’s doing today, you can go back and listen to this episode, but he says “you know, given where our stocks are, given where bond prices are, a 3% withdrawal rate it’s probably more realistic going forward.”
If you got a million dollars and you take 3%, that’s 30 thousand dollars a year, if you’re going to need more than that, then your magic number is probably not there, but the better way to do this is to actually create the cash flow plan. Look at it on a year to year basis. Bob, we just finished up doing a webinar on retirement planning and I had no idea. We’ve been doing this webinars all year with … Bringing the state plan on in bringing federal employees retirement system, identity theft, all these different people, we hadn’t really done the retirement plan webinar and the response was overwhelming, it was huge. We had so many people sign up.
We just finished one, but we’re going to do another one for next month, because it was such a popular event. If you didn’t get a chance to come to the webinar last month on retirement planning, go to soundretirementplanning.com and there you can register for a webinar where we actually take you and we show you the exact process that we use to help people understand whether or not they have enough to be able to live comfortably in retirement. I think that’s really what people want. They just want that clarity, they want to have the confidence, they don’t want to make a mistake. I think that’s what creating a plan really does for people.
Bob: Yeah. I’d say, you know, oftentimes I had people come in and [inaudible 00:06:18] recession, we had people come in and say “you know, my investments have dropped 40%” and I ask my investment advisor “What do I do?” They said “Don’t worry about it, it’ll be fine” that’s not often comforting for a lot of people. It’s like “Do you want to know a little more specifically where we’re going to be going?” I think that’s why a plan is really critical, so you can look over the span of your expected life time and see where the income is coming from. Then have contingencies, we don’t know if social security is going to have a COLA or the same kind of cost-of-living increase down the road. There’s a lot of things that are still out for grabs. We want to make sure that we have a plan that if these things change, where does the money come from and how do we adapt.
Jason: If you don’t have a plan, it’s kind of like the guy that’s had a little bit too much to drink and he’s walking out of the bar and he’s stumbling from one wall to the next trying to maintain his balance. He just looks horrible and he always bounce from one idea to the next. That’s not what we want for people. We don’t want you drinking too much and stumble around trying to find your way through retirement. We want you to have a good, solid, confident plan that says “In a good time this is the direction that we’re going, but more importantly, when the bad times hit, that’s were the plan becomes invaluable” it becomes your GPS, it becomes your lighthouse in the fog. It says “We made a good plan in the good times, when our emotions weren’t taken over and we can be confident that that plan is going to direct us in the bad times too” and that’s really where a plan comes in handy.
Unfortunately, right now, we’ve been in this bull market that’s been almost 10 years long. I mean, this thing is getting long and the second longest bull market in the history of the stock market, Bob. What happens is, a lot of times people, they don’t the plan, because they start to get into this comfort zone of the market goes up, it always goes up. We need to talk about volatility. Let’s transition, because this is the second question we received, was regarding stock market volatility. People are concerned. We’re seeing the market drop 400 points then it goes up 200 points and then it drops 250 points. Take a minute and just … What are your thoughts on stock market volatility when it comes to retirement planning?
Bob: I would repeat. I think that when we look at our investments, we look at what the stock market is doing, we’ve got to realize that in the last 13 months we’ve had drops of 2000 points. That’s pretty significant, that’s a little more than the correction and then it seems to bounce back. But, volatility means that there’s uncertainty. Uncertainty simple means the market doesn’t quite know where to go. You just said Jason, the fact that we’ve had this incredibly long bull market, what tends to happen after long bull market, there’s a correction. It’ll tend to be longer and last longer … The market could have some significant drops. The question really is “How do we address that in our plan?”
How do we address stock market volatility? How do we make sure that the money that we’re going to pull out when we retire isn’t when the market is really down.
Jason: I think you hit a really important point there, because volatility is good, that’s the way the market works, it’s always been a volatile place and we get compensated for the risk that we take. At least, that’s what we hope, if we’re not getting compensated for the risk, why are we doing it in the first place. The whole idea behind modern portfolio, it there is, that the rational investors only going to take on more risk if they’re going to be compensated for the risk. There’s a lot of people that would argue that modern portfolio theory is broken and behavioral economics comes into play. They say that most investors aren’t rational anyways, because we’re emotional creatures. I’m reading a book right now by Dr. James Cloonan, he started a group called American Association of Individual Investor, back in the 1970s. He’s new books it’s a … I’ve kind of got the pre-released copy right now, I won’t go into it too much. But we’re going to actually have him on as a guest for the official book launch.
But he talks about there being a difference between volatility and risk. I think he really nails it, because the reality is, volatility and risk are not necessarily the same thing, even though that’s how standard deviation works in terms of looking at the swings of volatility and using that to define risk. But the reality is if you’ve got 15-20 years on your time, you’re not concerned about volatility, you’ve got human capital, you’re working, you’re saving, you shouldn’t be worried about market fluctuations, I mean, come on, unless you’re planning on using the money in the next 12 to 24 months. Risk comes into play significantly different as soon as you make the decision to retire, because now your human capital is done. I will tell you this, once you retire, it is hard to go back to work. I don’t think most people want to have to do that, absolutely not. There’s something psychologically that happens.
Imagine you have a high school senior in your house, they graduate from high school their senior year, then find out the next year that they have to go back to high school for two more years. How’s that going to go over in your family?
Bob: All I can tell you is that I have a recurring nightmare of having to go back to college. Missing my finals and all those things. Yeah, it’s not.
Jason: You don’t want to go back and do it, no. Once you’ve close the door, you want the door to remain closed. You don’t want to go back and have to go back to work. What changes in retirement is that now, volatility means something different. Because if you’re having to pull money out of the portfolio at the same time the market’s down, now we’ve got a risk issue. Now that does potentially become a problem. Because if we end up in this sustained market that’s going down. We’ve seen this happen in the past, this is not like make-believe fiction, there is from the year 2000 to 2010 with the S&P 500, they call that the lost decade, you didn’t really make any money, the market went up and then went down, it went up and it then went down.
For 10 year period of time you were flat. What if you’re pulling money out of a portfolio that’s behaving that way and that’s the risk. Sequence of returns, that is the risk that retirees face. That’s really what need to be addressed and that’s what having a good plan does, especially if you do at the way that we do. Which very few people do. We’ll talk about this in our webinar next month. But this idea of diversify your money across time.
Bob: Very critical. Because you’ve got to make sure that the money you need in the near term, is going to be there. What happens is we get greedy “well, the market keeps going up, if I put it in something that’s secure and doesn’t earn much, I might lose out” but, if you look at the other side, you could really lose out if the value of your investments drop 30, 40 or 50% and you have to pull it out. It has devastating impact on your portfolios. People who are really aggressive in the market because we didn’t see a recession coming and it just going to go up, then you retire and your portfolio’s down 50% and you’re having to pull money out. First you’re pulling four, then pulling eight, you can’t sustain that. It’s very important to have a plan.
Jason: Yeah, my friend Eric, he came up with this visual that I think is really good. He said “pulling money out of an account that’s falling in value is like being stabbed and going to donate blood at the same time, you’ve got a bad situation and you’re choosing to make it worse and that’s what we want to avoid” that’s where diversifying your time horizon, when you need the money, it sounds so simple, you would think everybody would do it this way. I’m still … Maybe if this podcast catches on to more people we’ll get to have more people the greater sense of confidence as they’re preparing for and transitioning through retirement.
Let’s transition to the next question which came up, it was alternative investments. Specifically, this gentleman, when I ask him about this, he mentioned private placements, he mentioned master limited partnerships, he mentioned non-traded REITs, he said not traditional stock markets, not things like mutual funds or ETFs, but some of these non-traditional investments. I asked him a specific question, I said “Why are you looking at those?” He said “To be more diversified”. Let’s talk about some of these alternative investments, Bob. What are you seeing out there? Why do you think there’s such a drought to them, especially right now?
Bob: Lot of them promise great returns. For example, lot of people got into gas oil leases, North Dakota. Well, what happened?
Jason: I’ll tell you what happened, oil hits 48 dollars a barrel and all of a sudden nobody’s making any money on those.
Bob: Exactly. Those promises can’t be kept. But I had a client come in who was a retired pastor and somebody put him in a REIT and he’s looking at it and because of what it’s invested in, the returns have dropped, but it’s only worth about half of what he paid for. It’s not liquid, it’s only worth what somebody is willing to pay for and you have to go to a third party to liquidate it. You have to be cautious, if you have a high net worth, it may be appropriate for what you do. But, there’s risk and the risk is lack of liquidity, it can’t be liquidated, you can’t … If you need more money than what it’s earning and paying out, the only thing is the promises in those contracts that made are dependent upon the return of your money a lot of different variable and it’s not something that you can go out and sell if you have to. That’s the caution.
Jason: Here’s a good red flag, here’s way for people to quickly identify some of this stuff. I mean, what we’re talking about, this can’t be legitimate investments, but at the same time, when we see fraud take place it usually is being disguised as one of these legitimate investments. Very rarely do you see fraud taking place in a mutual fund. But, when it comes to private placements or non-traded REITs, or master limited partnerships, this is where, all of a sudden, people will create these bogus structures that look like those and then they end up in those Ponzi schemes you hear about.
People still today are getting involved in these things and I don’t understand but … Red flag, right now we’ve got 10 year treasury’s paying less than 2%, I think the last time I looked it was like 1.6% and 30 year treasury’s paying less than 2.5% I think it was about 2.2% last time I looked on 30 year treasuries. That’s what safe money is paying, you got to lock up your money for 30 years to get less than 2.5%. If somebody comes along and they’re telling you that they’ve got a great, and really, I think one of the reasons these alternative investments are being so heavily purchased today is because people are taking on a lot more risk, because they are tired of not seeing their money grow, so they’re saying “Well, there’s got to be something out there.” Some of these alternative investments promised to pay 6%, 7%, 9% per year interest, at least that’s how people understand that they work, they think “Oh, I’m going to get 9% per year.”
I’ll never forget one year, years and years ago, I was driving down the road and these people had put up this billboard that said “You can earn 12% safely on your money” I remember thinking of that, I remember thinking “What in the world is going on there, 12%?” This is at a time where interest rate you could get maybe 3 or something. Turns out, a couple of years later, that turned out to be a fraudulent deal, people lost a lot of money in it, because it wasn’t real, folks. If it sounds too good to be true, how does it go, Bob?
Bob: It isn’t. The higher the return, usually, almost always, the higher the risk. It’s a different situation if you have a lot of money and if you lose that portion you’re okay, but if you take on a huge chunk of your retirement, to earn 7, 8, 9% and then they have to cut that back to 5% and you can’t sell it, you’re in a world of hurt.
Jason: What if it goes under, I mean, that’s the other thing. I’ve seen people where they’ve lost … I mean, when they’ve lost big, usually is in these alternative investments. Just be careful. The other thing that we see a lot of is the gold sellers, selling gold is not as regulated as securities, the securities world. You’ve got everybody and their brother out there trying to sell you gold and I think the only people really making money are the people that are buying and selling the gold on those things.
Bob: Yeah. The rates of return over a long haul of gold are not good and it’s a commodity, it’s very volatile. When people tend to want to get into gold, is when the economy is not doing well, they’re scared, they buy it at a high and then they get, you know. It was about 1900 dollars an ounce, it’s what about 1300, 1250 now?
Jason: Yeah. Gold is very speculative. It’s almost like going to the casino and putting money on black or red. You have nothing that’s producing income, you have no corporate structure that’s producing results, that has a product or service that they’re selling. It’s just a bet. The reason that people are buying into the bet, is because of this 19, almost 20 trillion dollar debt that we’ve accumulated and people are saying “Hey, this whole house of cards is going to come crumbling down and when it does I’m going to have my gold, I’m going to be out there bargaining with my gold for your food” and you know what, I can’t eat your gold.
Bob: Right. You better have a way to protect yourself when you’re carrying that gold.
Jason: Yeah. You know what I want? I don’t want gold, I want seeds for my garden, I want gasoline for my generator, I want clean water to drink and I want to a gun so I can go hunting for my food and some ammunition for that gun and I’m going to be able to protect my family, I don’t want your stinking gold, keep your gold out of my house. If this economic collapse comes to all these doomsdayers are talking about. I don’t think that’s going to happen, I don’t think we’re in a doomsday situation. Some people have been stuck in doomsday for the last 30 years, they’ve been predicting the end of the world. Some people are very successful with that messaging.
Bob: I always keep in mind that negative news makes good news, makes profitable news for networks and broadcasters. That’s what they’ll tend to focus on, that there’s something that’ll shock you or try to pull you in. There’s bad news sometimes, but the point is you have to filter through that.
Jason: We were also asked recently, here another question from somebody we met with, they said “we’re looking for more long term security and how much of our money should be safe versus at risk?” The concern there, one of the concerns had to do with stock market volatility and the other concern was inflation. This is a really, I think, a legitimate concern. Bob, go ahead and share with us your thoughts this idea safe versus risk, inflation versus stock risk.
Bob: I would say in general, it depends on how much money you have and how dependent you’ll be on those funds for income in the future. If you’re high network you can probably afford to take a little more risk, because you may never spend the money, it’s for the next generation. But if it’s what is going to pay your bills for the rest of your life or pay for any health care incidents down the road, then I think we look at it … The other thing is we want to make sure that risk, like we said, is … The cure for volatility in the market is time, when are you going to use the money? If it’s money you may not need for 10 to 15 years, you can afford to take more risk, because overtime, it gives time for the market to recoup. But if it’s that money you going to need a near term, you can’t afford to take that risk, because a large drop will put a huge hole in your retirement.
Diversification is not only over what kind of investment you have, but is over time, diversify over time.
Jason: That’s such a great point. Yeah. Two step diversification that we’re always talking about. First you diversify your time horizon based on when you need those assets, depends on the amount of risk that we take and the other thing that we run into often, are people who have these really amazing pensions. People who work for state governments, federal governments, sometimes airline pilots, even though airline pilots tend to be a little bit …
Bob: There were some rough years in the airline industry.
Jason: … Skeptical about those pensions. We see a lot of teachers with great pensions, a lot of folks who retire from the military have wonderful pensions. All of a sudden, if you have this really great guaranteed cash flow and as long as the federal government doesn’t fail or the municipality or the state doesn’t fail, then maybe you do have the ability to take more risks with those investments, because we have to look at that cash flow that’s being produced from that guaranteed income stream. We could look at social security that way. Social security is a great …
Bob: Absolutely. It’s a pension.
Jason: Yeah. If all of your expenses are covered with your social security income alone, and that’s inflation adjusted income, it’s tax efficient income. Then, all of a sudden, we can take a lot more risk with a portfolio. One of the other questions that we had, kind of along the same lines of safe versus risk. One last think I’ll say before we transition off of that. I only like to recommend … I mean, this is depending on everybody’s situation, we want to help them do it the way they want, if they want all of their money safe, then all of their money should be safe. If they want all of their money risk, then it should all be at risk. That’s not my call, that’s whoever … our clients call.
In a perfect world, if we only had to put enough money into a safe position to know from a cash flow standpoint that they going to be okay. Then, that leaves us the opportunity to take more risk to try to outpace inflation and earn a greater rate of return. All comes back to that cash flow question. One of the other questions I want to get to just really quickly, actually, I don’t think we’re going to be able to, but it’s a good one. This particular gal said “Do I have enough to fill the gap from the time that I retire” because she’s going to retire early “until her social security kicks in at age of 67” that’s a good question. We were talking about the gap, filling the gap, making sure you’ve got that cash flow. Unfortunately bob, we’re out of time, until next week. This is Jason Parker signing out and …
Bob: Bob Harkson signing out too.
Jason: Thanks Bob.
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, 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.
