Jason and Emilia discuss the 5 key areas for 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 tuning in, and it is my good fortune. It’s been to too long. Emilia Bernal’s back in here with me.

Emilia: Yes. It’s good to be back.

Jason: Emilia, everybody, I know they’re waiting for your joke, but before we get there we have to share some good news and it’s the way that we renew our mind. I’m studying this Book of Ephesians right now, so this verse comes to us from Ephesians 1 verses 15 and 16. “For this reason, ever since I heard about your faith in the Lord Jesus and your love for all God’s people, I have not stopped giving thanks for you, remembering you in my prayers.” That’s really cool. Now you have a joke for us.

Emilia: I do. School’s coming to an end for a lot of kids, so I thought this was a little appropriate for the time, but here’s my joke. Why did the boy come home with a wet report card?

Jason: Why did he?

Emilia: It was below “C” level.

Jason: If either of my kids came home with a report card below “C” level, it wouldn’t just be the report card [inaudible 00:01:25].

Emilia: We’d be in tears. Maybe that’s why it got wet, he was in tears.

Jason: My kids are good students. They care deeply about their grades, which really makes me and their mom proud. We’re very proud of our kids, and we haven’t had the report cards delivered to us yet, but it usually costs us a little bit of money. We pay our kids. The way we do that is for every A and B that they get, we give them a little perk, a little bonus. If they get a C, we take back some of the money. The C hurts a lot more than the bonus for the A’s and B’s.

Emilia: So not just not getting anything, it’s taking something you already have.

Jason: But fortunately, they make out pretty good at report card time.

Emilia: They are good kids. That’s great. So we are on episode 172 today, and we are covering five key areas for a sound retirement plan.

Jason: Five key areas, yes. I’m excited to get into this. Now before we do these five key areas for a sound retirement plan, I want to let our listeners know that we have, for those tech geeks out there, people like me that love technology, Amazon has the Amazon Alexa, and we are now an official skill on Amazon Alexa. So if you say, “Alexa, enable Sound Retirement Radio” on your device, we’re going to be enabled and all of these programs will be available right from the Alexa device. That’s kind of cool.

Emilia: Just find us everywhere now.

Jason: I know.

Emilia: So with the five key areas for a sound retirement plan, you’re always talking about income.

Jason: Income, income, income. Emilia, is it possible to have retirement without income?

Emilia: No.

Jason: I mean, you hear me saying this all the time. Retirement is an exercise in cash flow. It’s making sure that you have the income that you need to support your lifestyle. If you don’t have income, you don’t have retirement. It’s as simple as that. So one of the things I’ve learned from working with people over the years is that they generally don’t want to gamble with their income needs. We’ve got to have a baseline, some kind of floor established for how much income do we need to be able to make our basic living expenses. Once you have that established, then it frees you up to be able to take a lot more risk with the rest of the assets because we know that when it comes to the stock market, the stock market goes up and down, that’s very normal, but the risk is if you’re taking money out of that portfolio to supplement your income in a down market, that could have really significant, severe consequences. So as people are developing an income plan, we want to maximize social security, step one.

Jason: Most people have paid into social security, we want to get as much money back out of that program as possible. It’s tax efficient income, it’s inflation adjusted income. There’s survivor benefits, there’s spousal benefits, and when you’re doing social security planning, you cannot make that decision in a bubble. You can’t just say, “Hey, I’m going to start it at 62, or I’m going to start it at full retirement age, or I’m going to delay it ’till age 70.” Unless you understand how social security works into a year by year retirement cash flow plan. That’s the piece that most people don’t have. So retirement is all about …

Emilia: Cash flow.

Jason: Income, yeah. Cash flow and income, right. So I don’t know how you go into retirement without having a plan that explains how those income sources are going to work. Yet, 80% of the people that I meet, whether they’re folks, some of these good folks that call in from around the country or people right here in our own community, 80% of people have no written plan that helps them evaluate that on a year by year basis. It’s crazy to me. I’ll never forget, several years ago I went to hear Dr. Daniel Amen speak. He runs the Amen Clinics, and he developed technology to be able to actually take a picture of people’s brains so that he could diagnose what was going on inside of their mind so he could see with a picture if there was something that was out of alignment, out of wack with your brain. And I’ll never forget when he said, “I just don’t understand how people can diagnose what’s going on with their brain without having a picture of it first.” That’s why he’s so passionate about this. You can watch YouTube videos on him today. He has Ted Talks out there that you can watch.

Jason: But I thought about the same thing with retirement. How in the world can you plan to transition into retirement without having a plan? How can you do that without taking a snapshot, taking an x-ray of how all this works? When you’re creating income, there’s a couple of things you need to be thinking about. Number one is inflation. The Federal Reserve has an inflation target. They want to see inflation at a minimum of at least 2%, and so we know that our dollars are going to have less purchasing power in the future as a result of this inflation. So that means you’re going to need more and more dollars every year you transition through retirement. Now, that’s the inflation target. We could look at something like medical expenses and say, “Jeez, those have been going up at a rate.” It seems much higher than this 2% inflation target that the Federal Reserve has, so we have to be thinking about inflation.

Jason: Then, once we create this baseline income plan, we have to start stress testing it. We have to say, what happens if one spouse dies? What happens if somebody needs long-term care? What happens if there’s a poor sequence of returns in the stock market right when the market tanks, or right when they retire, the market tanks right when they start pulling money out that portfolio. We need to stress test against those different scenarios so that we’re not in crisis management mode. The thing that we want to avoid by having a good income plan is avoiding having to be in crisis management mode, and then make emotional mistakes because we didn’t have the plan in the first place.

Emilia: Lots of great information there, Jason. So I just want to share with our listeners, Jason’s talking those five key components, but if you want to start working on your plan, we want to invite you to our webinar. It’s scheduled for next Wednesday, June 20th, at 5:30 PM, and you can go to soundretirementplanning.com and click on the right hand side there. There should be a window there so you can register for that webinar, and you’ll get more information on this income planning.

Jason: Yeah, income planning. Actually, we’re going to cover all five of these areas. But the reason I started doing these, Emilia, these webinars, is because a lot of people don’t know what a good retirement income plan should look like. Sometimes what they’ll end up with is just a basic 4% rule, or they’ll go to one of these big brokerage houses and just end up with this 60 page printed report that is really generic. It’s not tailored to them, so I figured if we can help people show them exactly what a good plan looks like. Then, they’ll have a baseline to work from. So that’s what we’re doing, that’s why we’re having the webinar, so it should be exciting.

Emilia: The next key component we’re going to talk about for this sound retirement plan is investment planning. That’s a huge part.

Jason: Huge. Actually, you know, I was thinking let’s just quickly give everybody all five of the areas that we’re going to be covering, and then we’ll dive deep into each one of these.

Emilia: Okay so we started with income planning. Then we have investment planning, tax planning, healthcare planning, and legacy planning.

Jason: That’s right. Okay, so we’ll start to dig into investment planning here. The first thing that you need to understand about investments is that they go up and down in value. I read a book several years ago called 20000 Days And Counting by Robert Smith. One of the things he talked about that 20000th day when he turned 20000 days old, sounds pretty old doesn’t it? 20000 days old. But I did the math and I found that if you have lived to be age 65, you’ve lived 23725 days. What’s interesting is that if you look at a male age 65, life expectancy is about 6205 more days beyond age 65. So it makes sense when you’re young and you’re working and your biggest asset is really your ability to earn an income, that you can take a lot of risk with the investments. You can be kind of sloppy and not really have a good plan because as long as you’re sticking money in, your dollar cost averaging, the market goes up, the market goes down, you don’t really care what’s happening because you’ve got good income. It’s a really wonderful way to invest for the future.

Jason: But when you are retired, now what you have is what you have and you’ve given up your number one asset, which is your ability to earn income, because most people when they retire they don’t want to go back to work. So now what you have has got to last the rest of your life. So the way that our economy is structured today is most people don’t have a pension, they don’t have guaranteed income. Most people have social security, and that’s the only guaranteed income they have. So then we have to look at all the different income sources, so they can have rental income. Are we going to be taking withdrawals out of the portfolio? What’s a sustainable withdrawal rate? The research that was done back in 1992 originally said that as long as you weren’t taking more than 4% out of an investment portfolio, you should be able to not run out of money in retirement, depending on the asset mix. So maybe if you’re like 60% stock, 40% bonds and you were rebalancing that portfolio.

Jason: Some of the recent academic research says 3% may be more sustainable in an economic environment like we’re in today where stocks are trading at all time highs, and bonds are starting to get hit as interest rates are going up, which I’ve been talking to people about for a long time, but now it’s happening. So what you want to do is you want to understand the risk of the portfolio. You want to stress test it. You want to understand, again, you want to try to do this before the bad times hit so that you can make adjustments. I heard somebody say once the reason that God created the rear view mirror very small and the windshield very big is because he wants you to focus on where you’re going, not on where you’ve been. I think that’s true with investment management. We don’t want to just … All of the prospectuses say past performance is no guarantee of future results.

Jason: We don’t want to drive our investment portfolio by only looking in the rear view mirror. Well how has this mutual fund performed in the past? And then assume that that’s going to happen going forward. That’s really a faulty way of investing, especially when it comes to retirement. Number one is do that risk assessment. Understand how much risk you’re taking in your investment portfolio. Number two, there’s a few things that you have a little bit more control over. You have no control over what the stock market does, but we do have some control over fees, and we can influence taxes. So when it comes to fees, I found that a lot of people just really don’t have any idea what they’re paying in fees.

Jason: I’ll never forget, well just recently actually, I went to the grocery store and I was standing looking at buying some more cream. I like to put cream in my coffee, and the organic cream was about $2 more than the non-organic cream. Depending on my mood, depending on how much cash I have in my wallet that day kind of determines which one of those two I’ll buy. But I have the information that I need to be able to make an educated decision, right? I can look at the more expensive one, I can look at the less expensive one, and then I can decide which one I want. Some days I buy the more expensive one, and sometimes I buy the cheaper one, just depending on my mood and how much I end up having to pay my kids for their grades when their report cards come. But what a lot of people are doing is they’re making investment decisions without any idea of what they’re paying in fees. So one of the things that we have the ability to do is help people understand what that fee structure is. There’s always going to be some kind of fee, so you’re not going to get out of fees, but you should at least know what they are.

Jason: And unfortunately, there hasn’t been a lot of visibility in this arena. Partly because not everybody in the investment world has a legal obligation, a fiduciary responsibility to act in their clients’ best interest. While that had been a rule that had been proposed, it looks like it’s not going to go through now. I would say it’s even more important than ever that you find somebody that operates as a fiduciary so that you know that they have the highest legal standard to act in your best interest to help you do things the way that they need to be done. Now the next one is once you create the investment portfolio, then you need to have some volatility control.  Volatility in the educational events we do, we talk about standard deviation. But the bottom line here, without getting into a really complicated, confusing discussion, is just understand that the tighter that we can get those returns from year to year, the better people are going to sleep at night. It’s probably the easiest way to think about it. If we have big fluctuations from really big negative returns to really high positive returns, or we have small fluctuations from maybe moderate losses to moderate gains.

Jason: I find that most people can weather that mentally and emotionally better than they can the big swing. So we need to construct a portfolio in a way where we’re thinking about volatility. And then we need to understand that not all investments are created equal. So depending on your risk tolerance, depending on what the purpose of the money is, depending on the time horizon that you have to work with, depending on how liquid you need that money to be, all these different factors come into making decisions about which investments you use, and the key to this is making sure you’re using the right investment tool and the right time horizon. So based on when you need the money. You don’t want to be taking money out of an account that has high risk. So in a perfect world, we would create a structure. If you think about this as buckets, or ladders if you will.

Jason: The first bucket is going to be relatively safe because that’s where we’re going to have to be pulling money out of early in retirement. And then the longer the time horizon you have, the more risk you can afford to take. That’s exactly what I’m going to help show people in the webinar that we have coming up, is how you create this type of structure. What day is the webinar again?

Emilia: Next Wednesday, June 20th.

Jason: Wednesday, June 20th.

Emilia: 5:30 PM.

Jason: Pacific Standard Time.

Emilia: Pacific Standard Time.

Jason: So our friends on the east coast, 8:30 at night.

Emilia: Right before bed.

Jason: Sweet dreams.

Emilia: See if you’re ready to retire. Well yeah, so the next component we wanted to go over also, it’s been a hot topic. Taxes, tax planning. How is that component going to play out with their plan here?

Jason: Yeah, taxes are so important for a number of reasons. Number one, our national debt’s an all-time high. It’s $21 trillion, and it’s going up. So the congressional budget office said that while this new tax reform that went through is really going to help most people pay less money in taxes, it means that we’re still spending more than we bring in in our country, so that debt is going to continue to grow. So that’s a big issue. The next piece is it’s not about how much income you have coming in, it’s about how much you actually get to keep. So you’ve got to look at things like your IRA money. If you’ve got $1 million in that IRA, 25% of it may not belong to you. 25%, maybe 30% of that money belongs to Uncle Sam, if you think about the taxes that are going to have to be paid on it. So you need to understand that not every dollar is your dollar as you’re pulling money out of those accounts.

Jason: The other thing is that taxes are on sale right now. So the way that that law, that new tax law went into effect was that it’s good for 10 years. So these really low tax rates we have given people the opportunity for the next 10 years if they’re going to be doing strategic tax planning, if they’re going to be considering things like taking money out of tax hostile accounts and transitioning them over to tax free accounts, this is a good time to be thinking about doing that type of planning because for the next little bit, taxes are on sale. Unless congress acts 10 years from now, taxes will be going up. That’s the way the law was written. It’s a sunset provision.

Emilia: [inaudible 00:18:11] and then the next big thing I think a lot of our clients all deal with as they are getting ready for retirement is health planning. That seems to be a big cost for most of them, right?

Jason: It’s huge. Fidelity did a study recently. They said $285000 is how much a retired couple needs to be planning on paying in health care expenses in retirement. That doesn’t include long-term care expenses. That’s just things like deductibles and insurance premiums and doctor’s visits and normal out of pocket expenses. If you think about that, $285000, that’s a lot of money. There’s a lot of people that don’t even have that much saved for retirement, so how in the world are they ever going to get over that retirement finish line? But health insurance is a big one. One of the things we hear people say all the time is, they’ll say, “I never want to become a burden to my family physically or financially.” They’ve experienced this, a lot of people have experienced what it’s like to have a loved one go through a long term care event where they either end up with home care or assisted living or nursing home. They see people with MS and Parkinson’s disease and Alzheimer’s and dementia, and all these horrible things that if you live long enough, cancer, that’s a big one.

Jason: But if you live long enough, something’s probably going to catch up with you eventually, and so you need to have a plan in place for how you’re going to not just deal with it emotionally, not just how the family’s going to deal with it, but also how you’re going to pay for it. So one of the things we found is some of these hybrid type of long-term care strategies now, these are insurance contracts, but for people that don’t like paying the annual premiums, especially higher net worth folks like the idea of being able to take a lump sum, set that money aside. Oftentimes, these contracts are built on a life insurance chassis, so you put money into a life insurance product, but then this life insurance also allows you to take money out of that account to pay for long-term care expenses. So if you end up not using the money, you’ve got life insurance, it ends up going to your estate.

Jason: But if you do end up needing long-term care, then you’ve leveraged your dollars up. So we find that to be a topic of great interest these days, is how are we going to pay for long-term care? Are we going to self-insure, are we going to move in with the kids, are we going to buy a traditional long-term care insurance, are we going to do one of these asset based long-term care policies that exist today? That’s definitely something we want people thinking about.

Emilia: Yeah, very important. Just our last component for the day today was our legacy, the legacy that our clients want to leave behind is a big part of their plan as well.

Jason: Yeah, and I love the idea. Somebody said once, “It’s better to give with a warm hand than a cold hand.” I love the idea of people giving while they’re alive, and maybe that’s not giving money, maybe it’s giving experiences, maybe it’s giving time. We have a lot of clients that take their kids on vacations, take them on cruises, and have these amazing experiences with them. I think that’s much more valuable than just leaving a bunch of money at the end of your life. But we do need to be thinking about legacy planning because many of the people that we serve have saved more money than they’re actually going to spend in retirement. They want to make sure that those assets are going to transition to the next generation, and again, that Uncle Sam may get a portion of that but they just want to structure it in a way where they’re paying their fair share in taxes but not more than their fair share in taxes.

Jason: Having a good legacy plan means that you’re thinking about things like your will, power of attorney, living well. All of those estate documents. In many cases, people that we serve will use a revocable living trust to retitle assets so that they maintain more privacy and control of assets. Some of the families that we serve, many indeed, actually have special needs, a family member with special needs, and so they need to be thinking about establishing some type of special needs trust in retirement. But the key there is you want to have a plan. Again, you don’t want to be in crisis management mode. You need to be thinking about how all of these pieces work together and that’s the purpose of our upcoming webinar. We’re going to be talking about incomes, income planning. We’re going to be talking about investments, we’re going to be talking about insurance, we’re going to be talking about estate planning. All of these different pieces coming together to optimize people’s financial lives as they’re getting ready to make one of the biggest financial decisions of their life, which is transition into retirement.

Emilia: So if you’re just tuning in, one more reminder. Jason’s webinar is next Wednesday, June 20th at 5:30 PM Pacific Standard Time, and you can go to soundretirementplanning.com and register for that webinar today.

Jason: This has been episode number 172. We’re talking about the five key areas of your financial life as you’re preparing to retire. Having a good income plan, having a good investment plan, having a tax plan, making sure that you’ve taken in consideration health care planning, and that you understand the legacy component and everything that needs to be in good order in order to make all of that work. Amelia, I can’t overemphasize. I’ll never forget back in 2008, some folks came into my office and they were over 70 years old, and before the financial crisis hit, they had about a million dollars. They were retired, and life was going really good. That financial crisis hit, and their advisor at the time had said, “Hey, you guys should be able to take out $40000 a year and be okay.” By the time they came into my office, that million dollars was now worth about $500000.

Jason: They had lost about 50% of their money in less than a year’s period of time, and they still needed that $40000 to make the income work, and now that withdrawal rate went from a 4% withdrawal rate to an 8% withdrawal rate. That is a scary time, it’s a scary place for people to be, and I think if you create the structure right, if you have the different segments set up, the different pots of money so that you’re not having to worry about pulling money out of an account that’s falling in value, you’re just going to have a lot more confidence that the numbers are going to work and you’re going to be less fearful, you’re going to have more confidence, and hopefully you’re not going to make an emotional decision when that happens. With that, I realize we’re out of time.

Emilia: All right, thank you Jason.

Jason: 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, 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 claim’s [inaudible 00:25:14] of the company. Investing involves risks. 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.