Jason and Emilia discuss seven steps to creating a sound retirement plan.

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. And now, here is your host, Jason Parker.

Jason: America, welcome back to another round of Sound Retirement Radio, so glad to have you on the program, maybe you know it’s the Sound Retirement Planning, that’s the name of the book. We’ve been doing this thing, this radio show now for eight years and it’s also been available as a podcast. I just want to thank all of our listeners for making it a great show. I love hearing from you folks around the country and I’m excited to be here today. Amelia, welcome back.

Emilia: Thank you. Good to be back.

Jason: Emilia Bernal in the studio with us. The episode today is episode 138, Seven Steps to a Sound Retirement Plan. Before we get started, I like to begin the morning right by renewing our mind. I have a verse here from Galatians 5:22 and 23. It says, “But the fruit of the spirit is love, joy, peace, forbearance, kindness, goodness, faithfulness, gentleness, and self-control. Against such things there is no law.” That’s so good. And then Amelia, you had a joke for us this morning.

Emilia: I do. I think I’m gonna become a comedian one day. I’m pretty good. So, here we go. What is brown, has a head, a tail, and no legs?

Jason: I don’t know. What?

Emilia: A penny. Yeah.

Jason: You know, my friend Dean, who was my mentor and Dean passed away last year, but one of his favorite jokes that his grandkids told him, I thought this is where we were going with that one for a minute. One of his grandkids said, “Hey, grampa, what’s brown and sticky?”

Emilia: Brown and sticky. Well, … what’s that, I don’t know.

Jason: It’s a stick.

Emilia: Oh my gosh.

Jason: That was one of Dean’s-

Emilia: Stick.

Jason: One of his favorite jokes. He thought that was so funny.

Emilia: That is pretty cute.

Jason: Okay. Let’s jump into the show. Episode 138, Seven Steps to a Sound Retirement Plan. I’m just gonna go ahead and touch on all seven first, Amelia and then we’ll dig into each one in a little bit more depth.

 The first step is hire a financial advisor. Step two is develop an income plan. Step three is to stress-test the plan. Step four is tax minimization. Step five is asset protection. Step six is a risk review. Step seven is an emergency fund liquidity.

Emilia: All right. Well, lets get started with step one, high a financial advisor. Why should someone hire an advisor and what should they look for?

Jason: This may seem a little bit self-serving, all right, because I’m an advisor and this is what I do. It’s the most important part, in my opinion, because the reality is, most people out there only retire once. They only do this one time, unless they kind of mess it up and having to go back to work. Whereas, an advisor, and doesn’t have to be us, it could be anybody out there that specializes in retirement planning. Advisors have helped hundreds of people make the transition.

 I think about my roof that’s being done right now. The guys that are doing my roof, when I had a couple of different bids come in, but one of the reasons I went with the guys that I chose is because they’ve been in the community for a long time and they got a lot of experience. This isn’t the first roof they’ve ever done. Now, the different between them putting up the roof and me putting up the roof, I’ve never put a roof on a house before. I’m gonna make a lot of mistakes that first roof.

 You can sidestep a lot of mistakes if you will just hire somebody that can guide you, that can maybe be thinking about some of the things that they’re not thinking about. So, we don’t need to spend a lot of time on this, but I think most people would be better served to find an advisor that could help them make that transition.

Emilia: Absolutely. Step two is, develop an income plan. Why focus on income?

Jason: That’s great, but I just realized, I forgot to answer an important part of your question about hiring a financial advisor, which is, what should people look for? I wanna encourage people to find a fiduciary, somebody that has a legal obligation to act in their best interest. The financial advisor, when you have a plan, it should be an actual written plan. It’s not just something that are in people’s heads, it’s not these, you know, a quick calculator that they pull up on their computer, and they say, “Oh yeah, you should be fine.”

 It should be an actual written plan. You want somebody that has a legal obligation to act in your best interest, not just for your retirement money, but for all of your money. I mean, that just makes sense to me. People should expect to pay a fee to have that plan created. If people are working for free, then, … I mean, there’s no such thing as free. Right?

Emilia: You kinda get what you paid for.

Jason: Well, you get what you pay for, but, there’s probably some other incentive that’s motivating them. Fee-based fiduciary, that’s gonna create a plan, is one, a big important step there. Okay, sorry about that.

Emilia: No, no, that’s-

Jason: Question number two or step number two.

Emilia: Step number two, develop an income plan. Why focus on income?

Jason: Income. Income. Income. Income. Because, if you don’t have income, you don’t have retirement. Retirement is an exercise in spending. We are no longer in accumulation mode when we get into retirement. We’re not trying to save more money. What you have is what you have. We’re transitioning into a period of life where you’ve gotta take your assets and in most cases, people retiring today, don’t have pensions like their parents did.

 Unlike the good old days, where you could just take all your money and stick it in a municipal bond fund and have tax-free income coming into you, interest rates are so dismal today, that strategy’s just not gonna work. People have to be thinking about, how do you transition from accumulating money into the distribution phase of your life, and if you enter into retirement, you quit your job, but your money keeps working for you the way that it was when you were working. Boy, that could just be a mistake.

 There’s a lot of different philosophies about what that could look like, what an income plan should look like. My opinion is, and we should let our listeners know, we just did a webinar on this and the replay is available right now. If people are more visual learners, which, is that’s how I learn. Heather and I were just having this conversation the other day. She loves to read. She wants bullet points and she likes to read through material. I need to see it. I need somebody to show me it and I need to them to verbally walk me through what the process looks like, and then I get it. I learn better that way.

 We created the webinar so that people can actually see what this planning process should look like. So, they can have benchmark and say, “Okay, here’s what we’re doing versus otherwise.” That’s available on the website.

Emilia: Yes.

Jason: It’s just that little box over on the right hand side of the screen that says, “Click here to watch the webinar replay.” So you can see Sound Retirement Planning. From a philosophy standpoint, some people talk about the 4% rule. It’s kind of a total return approach to investment withdrawals. Some people talk about the bucketing or the laddering time segmentation, re-diversify your money across time, which is what I’m the biggest proponent of. Because, I think just from a physiological standpoint, you’re not gonna be as worried about stock market fluctuations if you know that you have money set aside short-term that’s safe. Then, the money that we don’t have to touch for the longest period of time, is where we can afford to take the most risk with a portfolio.

Emilia: Sounds great. We’re moving on to step three, which is, stress-test the plan. What had caused a retirement plan to fail?

Jason: All kinds of things. It’s a scary place to be, especially in the world today. We’ve got the stock market that’s just been going gang busters. Just about everybody I talk to today, seems to be a little bit nervous about that really. I mean, people are saying, “Jesus, can this keep going on the way that it is?”

 The solution used to be that, if you’re worried about stocks, you’d put more money in bonds, but interest rates are on the rise, and everybody knows, if you buy bonds and interest rates go up and you have to sell your bond before maturity, that you could end up taking a loss. The old rule of thumb was, when you retire, just put more money in bonds and less money in stocks, that might not be very good advice in a forward looking retirement plan. I mean, it probably works great if we’re basing it on what’s happened over the last 30 years, but what if the last 30 years doesn’t repeat itself?

 Wayne Gretzky, one of the greatest hockey players of all time said that he focused on going to where the hockey puck was going to be, not where it had been. That kinda makes sense when you think about hockey. Well, the same thing with retirement planning, you wanna be thinking forward, not driving your car looking in your rear view mirror. It’s a bad way to drive, unless you’re going backwards.

Emilia: It’s true.

Jason: We don’t wanna go backwards in retirement plan. Some of the things you need to be stress-testing for, of course, inflation. If you’re too conservation, if you take all of your money and you stick it in a safe account, we know that the Federal Reserve wants inflation and inflation will eat your lunch. Your dollars are designed to have less purchasing power tomorrow, compared to what they have today.

 Milton Friedman once said, “The only real way to combat inflation is to live a really good life right now.” Live in a nice house and have nice art on your walls, and just realize that the purchasing power of the money you have right now, you can’t buy as much in the future.

 I remember when I was in high school, I wanted a Jeep Wrangler. I went down and I looked at this brand new … this thing was bright yellow-

 It just happens to be the one that was on the lot. At the time, it was like $10,000. I remember thinking, “Wow, $10,000.” I was busing tables at a Mexican food restaurant, there’s no way I could afford $10,000. Of course, I didn’t buy it. You go look at that same Jeep Wrangler today, if you could find a brand new Jeep Wrangler for 10,000 bucks,-

Emilia: Oh gosh.

Jason: Oh man, you’d be, yeah, it’s like going back to the future, you know, getting into your DeLorean.

Emilia: That is a lot. Were there anymore-

Jason: Yes. I’m sorry.

Emilia: Sorry. I just wanted to make sure that, before I move on, but, yeah.

Jason: I started thinking about Back to the Future there. The DeLorean.

Emilia: I think you should go out now, now that you can see like, I wanna see you in a big, bright yellow Jeep Wrangler.

Jason: Inflation’s a big one. Stock market risk is a big one. Stock market volatility. Even if you’re diversified using index funds or actively managed funds, or something, you still have this potential to experience volatility in your portfolio. You’ve got bond risk. You’ve got the risk of one person dying, you know, especially for married couples, so we gotta be thinking about what that could look like.

 You’ve got the risk of Social Security potentially being reduced in the future. That shows up on our Social Security statement every year. It’s not that we’re trying to be bearers of bad news here, but, the trustee’s report says, in 2032, Social Security may need a reduction in order to be able to keep paying benefits to everybody, so, we need to be thinking about that.

 We need to be thinking about what happens if you don’t die, but you start down that slippery slope of needing long-term care. We can stress-test against all these different scenarios, so that when you stress-test, what it allows you know is, are we okay or should we be considering maybe insurance for some of these scenarios like, should you be considering life insurance or long-term care insurance. You know, if inflation is modest, how’s that gonna work? You just really wanna be thinking about all the different things that could make your plan be vulnerable to the point … The risk that people are really concerned about … There’s two pieces, Amelia.

 One is, they don’t want to die with too much money in the bank for the most part. I mean, because then, what you’ve done is, you’ve saved all this money and you haven’t really lived your life fully because you’ve been so fearful of what’s going on that you kinda just scrape by. I see people like that.

 The flip side is, you’re not aware of the risks, you spend too much, the stock market doesn’t perform as expected, and then you run out of money before you run out of retirement. I think that’s probably the bigger concern for most people. Those are the primary risks I think most people are thinking about.

Emilia: Yeah. I think that’s why you saying, having a plan in place will keep that balance. You’ll know what to expect and when things can change. That’s good. Moving on to step four, tax minimization. Why are taxes important to a retirement plan?

Jason: A couple of reasons. First of all, most people’s savings today, because again, people don’t have pensions like they used to for a large part, unless you worked as a teacher for the state or for the Federal Government. I mean, most companies today, don’t offer pension plans anymore. Those are kind of a thing of the past.

 That means that people are gonna have to depend on the money in their retirement accounts, their 401K, their 403B, their IRAs, their TSPs, all this money that they’ve never paid taxes on, it’s been growing tax deferred, but now, all of a sudden, they’re getting ready to transition into retirement, it’s probably, they probably got a big pot of money sitting there. Just to recognize that when that money comes back out, a portion of it gets to go to Uncle Sam. It’s not all their money.

 Depending on their tax bracket, whether it’s 10, 15, 25, 28, 33, 35, 39% of that money, depending on how much, you know, what their income situations gonna look like, won’t be theirs. It’s not their money. That’s kinda hard to imagine, but if you have a $1,000,000, 250,000 of it, if you’re in 25% tax bracket, belongs to Uncle Sam. Most people say, “Jason, we live in the greatest country in the world, I don’t mind paying my fair share in taxes, I don’t want to pay more than my fair share in taxes.”

 We’re in this tax environment right now, where marginal income tax rates are some of the lowest levels they’ve been in the history of our country. At the same time, we have 10,000 baby boomers retiring every single day, that are putting more and more of a strain on some of these programs, like Medicare and Social Security, which happen to be some of the largest budgeted items. Not to mention things like Medicaid, which is state and federally funded welfare. There’s a lot of people who haven’t save any money for retirement and there’s a lot of people on those programs. Disabilities a big issue now.

 As people, as I think logical people look out into this tax environment, this tax world that we’ve created for ourselves and they look at all these promises the government’s made. We’ve got the Affordable Care Act, it’s all over the map. Nobody in Congress seems to be willing to do anything or figure out a solution on what to do there. That’s causing, you know, the government, you and me, we are the government, right? We have to fund all of these programs that have been promised, and so, a lot of people are saying how’s that gonna happen unless we see a tax increase of some sort. Are we gonna be able to grow our way out of this and just by seeing revenues increasing?

 Most people think that there’s probably gonna have to be a little bit of tax increases for some people and maybe also, some reduced benefits for some people. There’s already means testing for Medicare, where, once your income gets to a certain point with Medicare, you have to pay more money for your Medicare premiums then other people do. It wouldn’t be hard to think that will continue. I mean, there’s no reason to think it wouldn’t continue at this point.

Emilia: Yeah. When you talk about taxes, it always reminds me, you always tell people too, that if you wanna pay more taxes for those people out there, don’t you always say like, you can actually pay more if they wanna be that nice and help us out of this hole we’re in.

Jason: Well, taxes are a funny thing. I mean, again, most people don’t mind paying taxes, because we do live in a wonderful country. At the same time, people don’t want to pay more money in taxes than they need to and those retirement accounts have never been taxed. If we’re in these all-time low tax rates right now, is there an opportunity to be thinking about maybe converting some of the funds that you have from traditional accounts over to Roths or just starting to think strategically about when we’re gonna take this distributions and from which accounts, to help supplement the income.

 Taxes are very, very important. It can really be a big dip and make a big difference. The one thing I’d say about taxes though is, that should not be peoples motivating number one priority. Number one priority is, make sure you have a good plan, make sure you’re gonna have enough income to last the rest of your life. Then, if we can do some tax optimization in there as a result of the planning without blowing up your retirement, then, you consider that as kind of a little added bonus. A little cherry on top.

Emilia: That’s good. Yeah. We want to move on to the next step, which is step five, asset protection. Why is protecting assets important?

Jason: Well, again, most people haven’t been in asset protection mode at this point. You know, most people are in accumulation mode. They’re not worried about protecting what they have. The difference is, what you have, once you pull that plug and you no longer have the ability to earn money, because you’ve given up your job, now, what you have has gotta last. What assets you have, they have to be optimized.

 Today, more so than ever, we’ve got a lot of people … You know, we had Dr. Wade Pfau on the program recently and he was from one of the instructors of the American College in the Retirement Income course. He talks about how a lot of people are considering tools like reversed mortgages today. A lot of people have a lot of equity tied up in their home. In many cases, that’s one of their biggest assets. They don’t necessarily want to move out of the house, so they’re saying, “How can we tap into that home equity? When’s the right time to tap into it, if at all.” Or, maybe the better solution is to consider selling the house, downsizing, simplifying, and … But, all of your assets need to be considered.

 In my book, Sound Retirement Planning, I have a chapter where I interviewed two different estate planning attorneys. If people haven’t read my book, I think that would be a great chapter for them to read. To think about some of the … not just the financial decisions that need to be made, but some of the legal documents you wanna have in place to make sure that you’re protecting your assets, you’re protecting your family, and you’re protecting your choices, and you’re protecting the flexibility that you’re gonna be able to have and how things happen as your life continues.

Emilia: Sounds great. Moving on to step six, risk review. What happens if you take on too much risk in retirement?

Jason: I’ve seen this play out. I’ve seen it in real people’s lives, where they didn’t really understand the risk that they we’re taking. As a result, while they were making projections based on some good academic ideas, when everything doesn’t work exactly as the way they were hoping for, it can end up in a position where taking too much risk can really hurt and it can be bad news. It could cause people to go back to work and it could cause people to run out of money too early.

 You wanna know that before the bad times hit, right? You don’t wanna wait until you see your investments drop 20, 30, 40% in a six month period of time and then say, “Oh, I need to make a change now.” That’s the wrong time to be thinking … then, it’s too late. Going through a risk review is not just about your money, but that’s a big piece of it, because everybody’s relying on their savings to make it last.

 It’s also looking at things like, what happens if a spouse dies? How much Social Security are we gonna have that point? Should we select a survivor benefit on the pension? What happens if somebody needs long-term care? I mean, a risk review is looking at all of those different pieces. All of the different things that could happen.

 It’s especially important right now, because we’ve seen record amounts of money flowing into the stock market and stocks specifically. Investors don’t have a very good track record historically of picking the right time to be in stocks and the right time to be in bonds. If you look back at the trends, there’s usually a lot of money flowing into stocks right towards the top of the market. We’ve seen a lot of money flowing into stocks. If people haven’t had the opportunity to have their portfolio reviewed, that’s a very important element.

 I wanna remind our listeners that we have the webinar replay available. So, some people, it helps them to hear this, other people are like me, are better to see it and see what a good plan looks like. Amelia, would you remind them where they can go?

Emilia: Yes. The webinar replay is on soundretirementplanning.com on the right hand side and you’ll just click webinar replay and you’ll get a lot of the great information that Jason’s reviewed today. If you have any questions, again, give us a call. And again, that’s soundretirementplanning.com.

 I think we have one more step that we wanted to cover. That’s step seven, emergency fund liquidity.

Jason: Absolutely. Emergency fund liquidity. You have to understand that life is not gonna happen exactly the way you think it’s going to. You wanna make sure you have plenty of assets on hand to cover those unexpected things. In fact, a lot of the retirees that I talked to, they will tell me that, well, they had a good plan, things come up that they just we’re thinking about. A daughter gets divorced, grandkids moving back into the house, somebody’s health changes unexpectedly. A car that they thought was gonna last for 10 more years, all of a sudden it goes bad and they have to buy a new car and just little things. Hot water heaters go out, dishwashers need to be replaced.

 All these little things that come up that are gonna require you to be able to access your money and be able to cover those expenses, so, you have to have a contingency plan in place. You know, just a little bit of extra liquidity off to the side to say, “Okay, well, here’s everything I’ve planned for, but what about the things I haven’t planned for?” As a general rule of thumb, from an emergency fund standpoint, three months of monthly spending cash is the minimum that we like to see people have. If they’re spending $6,000, then we’d wanna see $18,000 just in the bank and in the checking or savings account of some sort.

 I prefer, when possible, to see six months of savings, so that would be at 6,000 a month, $36,000, just in a checking or savings account as that emergency fund. You definitely wanna make sure you have access to your money at the time that you need it. There are financial tools out there today that can lock your money up, where you don’t have as much liquidity. I think a lot of people think of an annuity as one way to could lock your money up. You may not be able to get your money when you need it.

 Some of these alternative vehicles like, Master Limited Partnerships, or non-traded. Sometimes there can be limited liquidity in some of those vehicles. And then, just the liquidity of the funds that you’re in. Sometimes you can run into a situation with certain funds like ETFs. If they’re thinly traded, you wanna make sure there’s an opportunity for you to be able to sell the position if you need to sell it. Sometimes liquidity can be an issue on certain funds, so you wanna always understand what your liquidity options are.

 If you have plenty of money in the bank, just as, you know, checking or savings, I think most people would be okay if they have six months cash on hand to cover any unforeseen emergencies or just, maybe it’s not an emergency, it’s just life happens and something changes.

 I just wanna recap and mention all seven steps. Step one, hire financial advisor because they have real-world experience. In many instances, they’ve helped a lot of people. They might help you sidestep some of the risks. Step two, develop an income plan. Maximize Social Security and diversify across time, and understand how cash flow’s gonna work. Retirement is a cash flow exercise. It’s about spending.

 Step three is, stress-test your plan. You wanna make sure that you’re thinking about the things that could disrupt the plan and cause it to fail. Step four is tax minimization. Pay your fair share, but don’t pay a penny more than your fair share. Step five is asset protection. Understand how do you protect what it is you have and read the chapter in my book where I interview the two estate planning attorneys.

 Step six is do a risk review. Not just on from a planning standpoint, but also from an investment portfolio. Understand stress-test the portfolio. You know, if we see another financial crisis, if we see a bear market hit, what kind of impact would that have on your portfolio? Step seven is emergency fund liquidity. Make sure you have enough cash on hand to be able to cover the what ifs and the things you’re not thinking about.

 Amelia, we are out of time. Thank you for being here today.

Emilia: Thank you.

Announcer: Information and opinions expressed here are believed to be accurate and complete. For general information only and should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, it’s representatives, or its affiliates, have no liability for investment decisions or other actions take or made by you, based on the information provided in this program.

 All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm, located at 9057 Washington Avenue North West, Silverdale, Washington. For additional information call 1-800-514-5046 or visit us online at soundretirementplanning.com.