Jason and Bob discuss building a retirement cash flow plan on a solid foundation.

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. I was just sitting here getting on Mr. Bob Harkson, in the studio with me, telling him to keep his face up to the microphone and I start out not even talking into this thing. Bob, welcome back.

Bob: Hey, it’s great to be here again.

Jason: On this beautiful day, well, kind of blustery, but still nice. We’re on episode 111, and the title of this show is “Build Your House on the Rock.” Before we get into the show, the program, we should start by renewing our mind. I’ve got a verse here for us. This actually comes to us, Bob, from Matthew 7:24 through 27.

“Therefore, everyone who hears these words of mine, and puts them into practice, is like a wise man who built his house on the rock. The rain came down, the streams rose, and the winds blew and beat against that house. Yet, it did not fall, because it had its foundation on the rock. But everyone who hears these words of mine and does not put them into practice is like a foolish man who built his house on sand. The rain came down, the streams rose, and the winds blew and beat against that house, and it fell with a great crash.”

Bob: That’s pretty cool.

Jason: A lot of applications to that. So simple, yet so profound. One of the things about Jesus’ teaching, it’s just rock solid. Bob …

Bob: Well, I had a question for you, Jason. It was a good one, too. You have the …

Jason: Wait a second! Wait a second! We’ve got to give our listeners a joke before we get into this financial mumbo-jumbo.

Bob: You’re going to ask me to tell it?

Jason: Yeah.

Bob: Okay. What do you call a cow with no left legs?

Jason: What, Bob?

Bob: Lean beef.

Jason: All right, maybe we should have just passed on that.

Bob: I think we probably should have. That was bad.

Jason: All right, so this idea of ‘build your house on the rock.’ We’re going to be talking about income flooring, building a strong foundation. Let’s get into it. Before we do, kind of in the headlines right now, we just saw that a tax return from Donald Trump was discovered, back in 1995. Everybody is really excited about this, almost billion dollar loss that Mr. Trump took back in the mid-1990s. What are your thoughts about that, Bob?

Bob: Well, you get a loss carry-over when you have a loss in the business. Now, I don’t know the details of the circumstances, I do know that a lot of big American corporations haven’t paid taxes for a long time because they had huge losses when the Great Recession … I would say that maybe there needs to be a change in the law so people pay some sort of minimum, but it is what it is.

Jason: Yeah. Boy, I tell you, it takes a lot of guts and a lot of risk … Now, this isn’t to say I’m exactly the biggest fan of Donald Trump. I’ll just say that right now. It takes a lot of guts to be a business owner.

Bob: Absolutely.

Jason: You go out, and you provide goods and services that add value to peoples’ lives. That’s a scary position to be in a spot where you take a loss on any business, let alone a billion dollar loss, and then be able to recover from that, to not let that just send you to working for somebody else, or getting a government job, or throwing in the towel and saying “Hey, I can’t do this stuff anymore.”

I have to say, I have a lot of respect and admiration for business owners in general because with most of the jobs, most of the work force in America comes from small business owners. It’s these people that are willing to step out and do something that is really … adds value to peoples’ lives. We all can’t work for the federal government or the state government. If everybody works for the government, nobody’s paying taxes. Nobody’s creating revenue. Nobody’s creating gross domestic product. Thank goodness that we have people that are willing to take risks and be in a position where they can lose.

Bob: Yeah.

Jason: That’s a scary place.

Bob: Yeah.

Jason: Where there’s great reward, there’s great risk for loss.

Bob: Yeah, and sometimes it takes several attempts. Some of the greatest businesses were built by people who actually failed.

Jason: Yeah.

Bob: They had to start over again, but they learned.

Jason: This is going to be a tough election. You’ve got two candidates that are very controversial, and ultimately, I think what people are going to be voting for with this one … because from a character standpoint, you look at the character of both of these people and you say, “I don’t really … ” I don’t know about you, but from a value standpoint, I don’t really align myself with either one of these individuals. I think what’s going to happen for a lot of people is they’re just going to have to vote more along party lines. Which party do they believe is going to best represent them? I don’t think people are voting based on who they most recognize themselves with. Both of these candidates just are not stellar candidates. Hard to believe that in America, we get down to two people, and this is the best that America can put forward, really.

Bob: I heard a radio commentator this morning say, “You know, maybe the two top guys should step down, let the vice presidents run against each other for president. They’re better choices.” I think a lot of people are not voting for somebody, they’re voting against somebody.

Jason: Yeah.

Bob: That’s a first, where that’s a predominant theme.

Jason: Yeah. I was just thinking back, as a kid, when Ronald Reagan was first running for president and how exciting a time that was, and what a class act he was.

Bob: Yeah.

Jason: Just solid reputation, well spoken, could just connect with people in a very simple, down-to-earth way … Didn’t have to be ugly, or nasty, or call people names. What a …

Bob: He was consistent. He treated people that way in private, never raised his voice, never got angry. I have a friend who’s on the … probably the more liberal side of the spectrum, who read his memoirs, and said, “I have the greatest respect for him.” He had cross appeal.

Jason: Yeah.

Bob: To America. Guess we need somebody like that.

Jason: Well, here we are. Coming up, the last couple of weeks, I’m sure nobody wants to hear anything more about it, but the reality is, these elections are going to have a big impact on the future of America.

Bob: They will.

Jason: That’s why I believe people are probably going to vote with the party that they believe best represents.

Bob: Yeah.

Jason: Not necessarily the person, and that’s where I’m headed with this whole thing, is which party do I find myself aligned with.

Bob: Yeah.

Jason: More so than the person. All right, so building an income floor, let’s get into that whole topic and get off this politics thing.

Bob: Well, Jason, you have the retirement income certified professional designation. Tell me a little bit about the concept of income flooring that’s very predominant in that certification.

Jason: Yeah. Well, it gets back to this core concept that retirement’s all about cash flow. It’s your income that’s going to determine your lifestyle in retirement. Really, there’s several different schools of thought on how you go about creating a retirement cash flow plan a retirement income plan. I would say one of the most … popular is this idea of creating a floor. To create a floor, you got to have a budget. You got to know how much money you’re spending. Let’s say you need $6,000 a month, and you’re going to have maybe $3,000 a month coming from Social Security.

Well, Social Security creates somewhat of a foundation or a floor for you. Then you say, “Okay, I’ve got that gap. I’ve got that $3,000 gap between what my Social Security floor is, and the income that I need.” A lot of people like to do that with as much security as possible, because one of the big risks that people face is … Especially right now where we’re in a bull market, the second longest bull market in the history of the stock market … Is right when they retire, they’re having to pull money out of an account that’s potentially falling in value. When you think about a retirement income floor, there’s several ways you could create that floor. You could ladder CDs. You could ladder bonds. You could diversify your money across time, create different segments of your money. You could use something like an annuity contract that’s going to pay a guaranteed cash flow. Speaking of annuities, we have our webinar coming up. What day is that, again, that we’re doing?

Bob: October 12th.

Jason: Wednesday, October 12th, 1:15.

Bob: 1:15.

Jason: Yup, you can sign up online at SoundRetirementPlanning.com. Even if you can’t be there for the live event, we encourage you to sign up so that you have access to the replay, because we’ll be sure to email people out the replay afterwards. The title of that is going to be “Annuities: The Good, The Bad, and the Ugly,” because that is something that a lot of people are looking into. Annuities could be changing here in the near future with some of the new laws and regulations have come out.

Bob: Absolutely.

Jason: People may not have as much access to those as they have in the past, based on the new Department of Labor ruling that’s going to be going into effect here shortly.

Bob: Yeah, yeah.

Jason: Bob, what are your thoughts? You’re a certified financial planner. You help a lot of people with this. One of the ways that people can build a retirement cash flow plan is with a retirement income floor. One of the ways is the … probably the more traditional way, the way most people think about it, is just taking a certain withdraw rate from a portfolio. Maybe you’ll talk on that, and then talk about the differences between a retirement flooring idea, versus a withdrawal rate strategy.

Bob: Well, a withdrawal rate strategy simply says you take your portfolio, you put a spigot faucet it in, you just take out 4% a year. Unfortunately, people who started retirement 2009 got hit really hard, because their portfolios were down. Some of them by half, and that really hurts when you’re taking money out early. Of course, those … All these things that say, “Historically, over time, you’ll be fine.” The problem is, that’s looking back. We won’t know how the people who retired 2009 are going to do until they’re 80, 85.

Jason: Now, but isn’t that what a Monte Carlo analysis does for people? Is it says, “Yeah, these are historical looking back numbers,” but with Monte Carlo analysis, you could make some assumptions about future rates of return, maybe depress or shrink those rates of return a little bit. Do the same Monte Carlo analysis and then say “What are the chances … or probability of success going forward under a different economic scenario?”

Bob: Well, first of all, one of the Monte Carlo analyses that I’ve used in the past gives you a 95% certainty, which means a 5% uncertainty. It will give you a range. You might say, “Well, there’s a 90% chance that you won’t run out of money, and you’ll have a lot of money. But there’s a 10% chance you could run out of money early in retirement.” Is that a secure income? I don’t think so, because there’s a 10% chance, or a 20% chance, or whatever the chances are based on that analysis.

Jason: This is such a radical, different way of thinking than it used to be. So many people, up until just maybe in the last 10, 15 years, so many people, they retired, they had a pension, and they had Social Security. They didn’t have to think about any of this retirement income flooring.

Bob: No.

Jason: Or retirement withdrawal strategy, because they were living comfortably. We have clients like that that have great pensions, have great guaranteed income. They have a retirement income floor. What that allows them to do is be a lot more aggressive with the money that’s in their investment accounts. They say, “Hey, I’m probably never going to need this. Why would I be conservative with these assets? It’s money that I’m never going to need.”

Bob: Absolutely. The one trick on retirement accounts is that at age … The year you turn 70 and a half, you’re required to take out money. It’s not like you can necessarily keep everything in one retirement pool IRA, and then just say “I’ll just let it grow forever,” because you’re going to have to pull money out. The challenge becomes the amount you have to take out is based upon what the value of account was at the last day of the prior year.

Jason: So December 31st of last year.

Bob: First, yup.

Jason: Determines the value of the account, and it’s that value that will determine how much you have to pull out.

Bob: Exactly, so let’s say the market did really well and ended a year really well, and then when you take your required minimum distribution, it’s down 15%.

Jason: There’s that old saying, “Sell in May, and go away.” The market tends to get wobbly.

Bob: Yeah.

Jason: About midway through the year, historically. Not always, but historically. If you were to say you take your required minimum distribution in June, it has to be based on the December 31st value. The point that you’re making, Bob, is that the market could be down significantly during that period of time.

Bob: Absolutely. It hurts you. You’re taking out on a basis … You’re taking out shares at a lower value, which really hurts in the long run. One of the strategies could be is you take your IRA and split it into two. One of them, you have a guaranteed source of income that there’s no risk to principle, that you’re taking fixed payments.

Jason: You’d take and use an annuity contract for that bucket of money. Are you thinking annuity? Are you thinking a [inaudible 00:13:21] ladder? What are you thinking there?

Bob: Take your pick. Some annuity contracts will have guaranteed income over your lifetime. You have to be careful, because if you annuitize a annuity, then you can’t take the aggregate of two IRAs, and that’s the important thing to remember is the IRS lets you say if you have two IRAs, you can take all the required minimum distribution from one. Or, if you have three, you can take them all from one. The strategy is … the goal is to get as much out of the one that has fixed guaranteed income, to let the other one grow and not pull money or wait to pull money out.

Jason: Yeah, that brings up a great reminder. I don’t know if our listeners caught that, but you can’t annuitize your required minimum distribution. I made this mistake, and ended up … We had to back pedal, and it was … ugly, because if you assume that you can take one of your IRAs and annuitize it, and that amount of money that’s coming in is enough … You look at the amount of income that’s coming in from the annuity contract. You think, “Well, that’s enough to satisfy my RMD.” That’s not the way the IRS looks at those.

Bob: Yeah.

Jason: They say that’s a separate pot of money, and it doesn’t count towards the RMD after that first year. The first year, you’re okay, but getting into year two … Fortunately, we caught that before it really derailed a couple of folks, but it’s one of those things that’s a easy mistake to make. You think you’re taking out enough money, and then you realize that it’s not in line with the IRS rules.

Bob: Exactly.

Jason: You got to be careful with those requirements. The other thing that come up was with the 401k aggregation. Talk about that for a minute.

Bob: Well, if you have a 401k or 403b, or 457, or any one of those flavors of retirement accounts, they each have to have their separate RMD. That’s why we really encourage people to roll your retirement accounts into a traditional IRA. If it’s a qualified retirement plan, because then you’re in control of it, not necessarily your former employer. The second reason is then you can choose to split them and take the required minimum distributions from one and not the other.

Jason: The problem becomes if, … and we’ve seen this happen where people, they keep their money in a 401k plan, and then they also have an IRA, maybe they have several IRAs. They have to take a required minimum distribution from the IRA accounts, but they also have to calculate and take a separate required minimum distribution from the 401k. Whereas if they just consolidate, put everything into an IRA so they don’t have that separate 401k out there anymore, now it just … They just have to take one RMD instead of having to pull money out of a bunch of different accounts.

Bob: Right, or you could split it into two and take the strategy of one is the guaranteed no risk or low risk income, and the other one is…

Jason: Now, when you say ‘guaranteed,’ though, you can’t annuitize, from a…

Bob: Right.

Jason: If we’re talking about guarantees, the only way you can guarantee income is through an annuity contract. You can’t guarantee income from a bond, because bonds can fail.

Bob: Exactly.

Jason: You can’t guarantee income from a dividend paying stock.

Bob: Yup.

Jason: Because stocks can fail. You can’t guarantee income from a limited partnership, or a real estate investment trust, or any of these other income producing … I guess you could guarantee income from a bank CD, because …

Bob: Yeah, or a money market, which is basically just removing a principle. That can work for some folks, because it allows you to leave the rest to grow. I don’t recommend it, but that is a possibility. There are also some annuity products that have guaranteed lifetime withdrawal income benefits that will keep paying, even if technically the money has all been spent out of the account. They just continue paying through your whole life.

Jason: Well, that’s why we’re doing this webinar coming up on October 12th, all about annuities, because that is one strategy that people use for creating a guaranteed retirement income floor. They’ll take a portion of the money and say, “Hey, we’re going to set this aside. This is for cash flow.” Annuities, like everything, Bob, they have advantages and disadvantages. There are some that are good, and some that are bad, and some that are just outright ugly. In this upcoming webinar, what we’re going to try to do is educate our community. We don’t want people to be sold an annuity contract. If they’re going to buy an annuity contract, we want them to be intentional, to go out into the marketplace, to buy a contract that’s going to satisfy whatever it is they’re trying to accomplish. Usually people buy an annuity contract for one of two reasons. They’re either looking for more income, or they’re looking for a greater … Some sort of safety.

Bob: Right.

Jason: Or, underlying guarantee that the insurance companies bring you to the table, because all annuity contracts are issues by insurance companies. I think that’s an important thing to recognize as well.

Bob: Exactly. Well, and keep in mind something very, very important. Excuse me, and that is that … What we’re suggesting may not leave you with the largest estate when you die, but that’s not the goal. The goal is to make sure that you’re income needs are met for your whole life. In other words, we always encourage retirees, focus on making sure that your needs are met, and the surviving spouse’s needs are met, as opposed to saying, “I’m going to leave a huge legacy.” Then, maybe with trying to do that, you run the risk of running out of money because of volatility in the markets.

Jason: Congress just … They’re always messing with the rules, and a lot of people aren’t paying real close attention to this, Bob. One of the things they just did was they made some provisions regarding deferred income annuities and retirement accounts.

Bob: Yeah.

Jason: That can help people for a couple of reasons. One, because of the required minimum distribution situation that we were talking about, but the other one, because there’s some guaranteed cash flow there. You want to take a minute and just big picture overview what is a deferred income annuity, a DIA, instead of a SPIA. A SPIA would be a single premium immediate annuity, a DIA would be a deferred income annuity.

Bob: Well, basically … They’re also called longevity annuities, and the purpose of those … You take a lump sum of money and then you could get a guaranteed payout at some point in your life. That payout can be for you, your life, or you and your spouse’s life, so you’re guaranteed income. One of the values of that is that it’s not liquid, which means if you take that lump sum, the only person who could recover it would be the beneficiary, and that would be … If before it turns into an income stream for life.

Now, there are a lot of different flavors of these things, but the point is that you set money out in the future. Let’s say you put money in when you’re 65, and you’re allowed to take 25% of your IRA …

Jason: Up to a maximum.

Bob: Or up to a maximum of $125,000, and set it out, maybe for a payment 15 years [ago 00:19:43]. Now, the goal of the federal government was so people don’t run out of money. Where you have to be really careful is if you take … if you do too much, you can’t get that back. You can’t. It’s not liquid, therefore you could run out of money early. You have to plan very carefully, but because the best that the beneficiary gets is a cash value, that allows the annuity company to pay some pretty good payouts later on and actually really bolster your guaranteed income of your lives.

Jason: Which strategy, because basically what we’re talking about with that is a way to create a safety net for yourself. One of the biggest concerns I think people have is outliving their money in retirement.

Bob: Yeah.

Jason: Is the “Have I saved enough?” The government created this new way to help alleviate that concern for people, because people are living longer. What was the statistic? 25% of people are going to … of a married couple are going to make it to at least age 92? Was that?

Bob: Yeah. If you make it to age 65, about 25% will live to age 92. Keep this in mind. We talk to people all the time. People will say, “Well, my grandfather died when he was 75, so I’m going to die when I’m 82.”

You look at them and you go, “Are you sure? Because if you don’t, the consequences are severe.” We encourage people to plan through age 95, or to age 100, just to be absolutely sure because we don’t know what medical advances … The human genome projects, disease, cure for disease … It’s a geometric slope up. Longevity is becoming more and more of an issue, that your money doesn’t run out as you get older.

Jason: As you think about creating a cash flow plan, a retirement income floor, if you will, how does somebody know whether or not they’re going to be better suited with more … like the withdrawal strategy, like a 3 or 4% … withdrawal strategy from a basket of securities, stocks, and bonds? Or, if they’re probably they should be thinking more like the annuity contracts for guaranteed income. How does somebody decide which way they should go? Like we’ve talked about, there’s a lot of different ways to create these types of income floors.

Bob: Well, you want to take a look at what your income needs are, and then you subtract what your guaranteed income floor, whether it’s Social Security, Social Security and a pension. If you’re a federal employee, you may only have a pension and a small social security. Then, say the difference, we want to make sure is covered with guaranteed income.

Now, if you have a lot of assets, yeah, you could take 3 to 4%, because you may never run out of money, particularly if you control your spending. That’s the key, because most people underestimate their … But we’ll sit and do planning all the time, and people regularly underestimate their budget by 20%, because they don’t track their expenses, and they’re working it out in their head. You want to get that straight. What are our basic expenses, the things that are important to us that need to be covered? How do we maintain that adjusted for inflation, a reasonable inflation rate over our lifespan? Then, you make the decision based … So if you only need $100,000 a year, and you’ve got 5 million dollars in the bank, yeah, you don’t really need to do the income flooring. But, it can still help you because you’re not pulling money out of the market at the wrong time.

Jason: Yeah.

Bob: Because of required minimum distributions.

Jason: Yeah, I think part of it just gets down to plain old “How comfortable are you with risk?”

Bob: Absolutely right.

Jason: Because there are some people that are really comfortable. They can see the market in their portfolio drop 30, 40% in a year, say “Eh, I’m not … It doesn’t really affect me.”

Bob: Yup, “It’s going to come back.”

Jason: Yeah, and it’s easy to say that when you’re still working, you’re not drawing money out of the portfolio. It gets a little bit more … People become a little bit more unsteady when they’re having to pull money out of an account that’s falling in value like that. Whether or not you want to use an annuity, I think one of the core concepts that we always talk about is diversifying across time, which is time is the cure to the volatility of the stock market. Even if you just want to use more of a bucketing strategy, a laddering strategy where you have some money that’s short term, maybe cash for a couple of years, and then you have a conservative portfolio that allows the … It’s buying you time. Then you have another third bucket out there that’s even maybe a little bit more aggressive, so with each segment of time, you’re taking a little bit more risk. If you’re not really an annuity kind of person.

Bob: Yeah.

Jason: That would be a good alternative. Ultimately, like you said, retirement’s all about cash flow. Bob, I just realized we’re out of time!

Bob: All right.

Jason: Until next week.

Bob:  Have a great week.

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, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance-related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, and 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