Power Up Wealth podcast – Magic of Lifetime Income Planning – Episode 40 transcript:
Sharla Jessop 0:00
Your retirement income can be impacted by so many factors. It’s hard to keep track of them all. I’m Sharla Jessop, President of Smedley Financial Services. Today, my friend and colleague, Parker Thompson will explain the complexities of income planning and retirement, and how to prepare for some of the challenges.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Parker, it’s good to have you with us today.
Parker Thompson 0:52
Thanks for having me on.
Sharla Jessop 0:53
Parker is a member of the Wealth Management team at Smedley Financial. And he spends a great deal of time preparing and reviewing retirement income plans. Parker, you recently shared an experience you had when joining an advisor meeting with a client. Share that with us.
Parker Thompson 1:09
It’s the reason that I wrote the article kind of the inspiration behind it. On this occasion, we had been referred to one of our other clients, his son, has expressed interest in seeing what we did and what our services were, what we offered. We just we went into the meeting, and we met with this prospective client. And we were not planning on talking about the 401k that he had had with the company that he worked with his entire life. He just had some excess income that he was wondering where he want to invest it, and what to do with it and how to kind of mitigate his risk. But throughout the conversation, we started to present some options for him. And we got into the Lifetime Income Plan. And what we do with our clients when they go into retirement, or they’re near retirement, and how we implement this strategy or plan for them. And what his reaction was, towards the end of the conversation was, he was so surprised, his reaction was, is this true? This is great! Why doesn’t everyone do this? Why doesn’t everyone know about this? And Mikal and I kind of chuckled a little bit and said you know that’s the reaction that we like to hear. But then it got me thinking for this article. Why doesn’t everyone know about it? And what are the benefits? What are the pros and cons? What is per se, the magic of Lifetime Income Plan, or the Lifetime Income planning strategy, which is what we do for these clients?
Sharla Jessop 2:32
Well, what exactly is a Lifetime Income Plan?
Parker Thompson 2:35
I think to put it very, very simply, it is a strategy that we deploy for our retirees with their nest egg, per se. So their full amount of money where we want to protect their income. Because when you go into retirement, you start to take out from your assets, right, you need distributions, and you need to take income for your years in retirement. And it’s a strategy for us to put money in different buckets or areas per se with different types of risk to match when they’re going to take that money out. So the money that they’re going to take out sooner in retirement right the next one to five years, we want to have more conservative, and so it’s less at risk to the markets. And they can pull on it when they need to. And it’s more liquid, whereas the money that they’re not going to pull from until later in retirement 20-30 years into it, right towards the end of retirement, we want that to be in a more aggressive or growth mindset allocation where they can actually take advantage of the markets, right, and the growth that would happen in those many, many years. So it’s that balancing act where we want to mitigate some of the risk for them early on in retirement, give them the lifestyle that they would like in retirement with the income that they need, and basically answer the question am I going to make it? Am I going to have enough in retirement? That’s what we’d like to answer with this strategy.
Sharla Jessop 3:54
And that’s a big concern for so many people who are getting close to retirement. And I think it’s also important to know that it isn’t a one size fits all type of a strategy. It really is based on each individual’s values, goals, their income needs, their risk tolerance, because then when you say we want maybe the money that’s going to be out long term to be for more aggressive, well, that doesn’t mean it has to be aggressively invested, it’s just going to be invested more aggressively than or most conservative money, but it still reaches their risk tolerance. What are some of the challenges people face and why would they need a lifetime income plan?
Parker Thompson 4:29
It really is based on these people’s values, right? What they want to get and what they need in retirement. Some of the things that most people just want answered, right are like I said, am I going to be okay, am I going to be secure? Is my am I going to run out of money? And they have certain reasons for worrying about these things because they’ve either seen a loved one go through it or someone even closer, you know, maybe themselves have started to kind of go down this path, but essentially, some of the risks that they’re looking at are okay, what if the more market doesn’t return the way that I think it’s going to. Alright, it’s.
Sharla Jessop 5:04
You mean it’s not going to make seven or six percent every year from here on out.
Parker Thompson 5:07
Right? That’s, I mean, we like to do our projections based off that because it’s simple math, right. But the market, as we know, doesn’t move in a straight line. It’d be nice if it was just a great curve upwards, right. And it just continually went upwards in a straight line. But we know that that’s not the case, right? It’s very up and down. A lot of people refer to it as a roller coaster, rightfully so. But it starts to look really jagged and rocky and just up and down. And so you don’t really know what to expect from the market. No one has a crystal ball, and you’re not sure where things are gonna go right at any given day, or any given year. But one thing this does is help to basically flatten out that risk, or to at least help someone know that even if the market goes down, they’re still okay, right, their nest egg or their safety hasn’t been blown up by the market.
Sharla Jessop 5:57
What about things like inflation? Is that something that’s encompassed in a Lifetime Income Plan?
Parker Thompson 6:04
Yeah, it accounts for any inflation. And it accounts for not only just one inflation number throughout the entire process, but changing inflation, right, that inflation can go up and down as well, too, as we’ve experienced in the last year or so. Right?
Sharla Jessop 6:19
Definitely.
Parker Thompson 6:20
So it not only do markets go up and down but inflation does, too, is what we found out. And that’s what the plan accounts for as well, too.
Sharla Jessop 6:27
There are so many other little risks that oftentimes people really don’t tune into them or think about them. What about longevity risk?
Parker Thompson 6:35
I think this is one of the biggest things is when people obviously people are more concerned about you know, will my money last, right, because people are living longer, retiring longer. It’s, you know, used to just think, okay, I go retire for 10-15 years, no, people are living a lot longer. So 25-30 years. Will your money last? And part of the reason why we we want to have better returns over the years or part of why we want to protect what you’re taking income from now is so that we’re not touching the income that’s going to prolong you later in retirement. If you take, you know, a lot of money in early years, when there’s not as good returns, that can negatively affect you. And it can be harder to get back to that that nest egg amount that you started with, or to grow on top of that if you’ve taken out during bad years. So in this case, if we’re doing it the right way. And if you’re implementing the strategy, that money that you’ve left and not had to touch, and just let it grow, it will prolong you and in your later years of retirement.
Sharla Jessop 7:35
That makes sense. And you know, we say later years of retirement. A married couple, age 65 has a 50% chance that one of them’s gonna live into their 90s. That’s a long time to plan for. You really have to be frugal, and especially if people are retiring you know, in their early 60s, they’re going to be in retirement 30 years, just as many years as they were working.
Parker Thompson 7:56
Yeah, it’s something that as people were retiring earlier, and we have these innovations in health and in science, people are gonna live longer. The IRS usually predicts people till 95, right. I think a lot of people chuckle at that and laugh, and I’ll never make it, but we see it every day. There’s people that make it, they make it a lot longer than they think.
Sharla Jessop 8:16
We have many more clients in their 90s now than we did 28 years ago, when I started, you know, the numbers have just increased exponentially. What about emotional risk?
Parker Thompson 8:27
I really think that it’s, it’s an advantage to just know that someone is watching it for you, right? Because if you are left to your own devices, we just know, inherently we’re all human. When we see the market going down, we think that it’s always going to go down, right, and when it’s up, we’re happy. But the down years feel a lot worse than the up years feel good. And that’s just a simple way to put it. So this is a way to know that I’m on track. I’m on plan. My plan or my distribution strategy, this lifetime income plan, it accounts for these down years. And so I don’t need to get caught up in the if I’m going to make it. No, this is all part of the plan. And it’s baked in, it’s worked in, we’ve calculated the numbers. I’m going to be okay. And I think that does a lot to help people to just breathe easy. Sleep easy at night.
Sharla Jessop 9:10
Especially when we’re going through emotional times like we’ve had for the last three years. You know, the strongest person emotionally certainly has even questioned their investment strategy over the last three years I’m certain.
Parker Thompson 9:21
There are a lot of opinions, you know, left and right. And so to be able to know that you’re, you’re on a tried and true program. Right, you’re on a tried and true method that helps you to know that what you’re hearing left and right is is kind of hearsay, right? You have evidential proof that the plan that you’re on the lifetime strategy that you’re that you’re working through, is going to pull you through.
Sharla Jessop 9:43
And one of the things that makes it work is it’s not just one time, it’s not a click and it’s done plan. You’re monitoring these plans, you know, ongoing, they’re being monitored every six months. Things are changing in life. You don’t get to retirement and then it’s just a smooth sail going forward. A lot of things change during retirement. And so that’s why it’s so important to review it consistently. Talk to me about spending in retirement and how that impacts the plan.
Parker Thompson 10:08
Man, do I wish that it was just a one click button, right, it’d be a lot less work for us on our end. We continually monitor and because we know that things spending in retirement changes and it fluctuates as well too. Anyone who’s owned a home knows that every time the roof comes up, it seems like comes up too quick, right. And all of a sudden, you need to take out 20 or 30 grand to fix your roof. Retirees, they need the income, right? Fixed Income. If your fixed income or your pensions that are starting to go away, they’re not going to be there, you need money out of your portfolio for your income needs. And then when unexpected things come up, right, your car breaks down. Like I said, the roof needs to be fixed or something breaks, the AC breaks in your house. And that stuff is always unexpected. But where do you turn to? We’ve also accounted for those bigger expenses, right? Just in general, looking over the years, we know that people don’t usually plan for these things. It’s not it’s hard to plan for it. So you don’t know what’s going to happen. But when you have that plan in place, and you know that this this cost, this big cost is accounted for, it’s usually a lot easier to take that money out to get it done.
Sharla Jessop 11:12
Also, I think sometimes in retirement, people feel like it’s vacation every day is vacation. And the spending increases significantly. And pretty soon the plan is in jeopardy. That’s why monitoring it so often helps keep that under control. So it doesn’t implode the plan.
Parker Thompson 11:30
It helps for us to look at it. And sometimes we have to say cut back. And sometimes we have to say hey, you can spend more but it depends on how that person goes into retirement. Right. Some people want to pull more in their early years of retirement because they want to travel, see the things that they haven’t been able to see in the world. And others are in their later years of retirement and they’re just trying to make it by but yeah, us monitoring it, we always check it right and say, are we still on track? Can we still pull the same amount? Do we need to cut back? Or can you increase more? Have the markets been good? Or have you been good with your spending, but it’s a balance, because you want to be able to spend your retirement and enjoy your retirement, but you also want to make it you know, the whole way you don’t want to end up, you know, with no money for the last 10-15 years of retirement.
Sharla Jessop 12:11
Right. And matter of fact, I don’t know how someone goes into retirement without a plan and has confidence that they’re going to be okay, you know, there’s no guarantees, even a lifetime income plan doesn’t give you a guarantee, because there’s so many different factors. But what it does give you is maybe some confidence that you’re on track.
Parker Thompson 12:29
Yeah, yeah, it’s just that it’s a plan that we set in place, right. And it’s a two part thing we work with the clients and the clients work with us. And we kind of take it, we tackle it as a team, and make sure that everything is going to plan at least as much as we can, on our end.
Sharla Jessop 12:44
A lot of people have as they get closer to retirement, they’ve been saving over the years in IRAs and other things. But generally, they’ve been saving in retirement plans like 401k’s or company sponsored plans. Can you do a lifetime income plan in a 401k type plan?
Parker Thompson 13:00
To my knowledge I don’t know a single 401k that has been able to implement the lifetime income plan because of how in depth it goes and because of the monitoring aspect of it, it’s hard to just do it in a 401k. And usually they don’t have people on staff that will monitor and put it into place for you. The way that we do it setting up different buckets or areas or accounts to put it into, that takes time and that takes energy. And you have to have a staff or an advisor on your side to do that for you. So 401k’s, to my knowledge, have a hard time implementing this.
Sharla Jessop 13:30
Right most 401k’s now have a wide variety of investment options. They’re very competitive in that regard, as far as having access to different investments, but what they don’t allow is for you to set up different pockets of money, conservative, moderate, aggressive, and then take a distribution just from a conservative. When you take a distribution from a 401k, it comes out of everything across the board. So you aren’t really able to manage the risk the same way.
Parker Thompson 13:56
Right.
Sharla Jessop 13:56
Understandable.
Parker Thompson 13:57
Yeah. And usually it’s, you’re working with an advisor and they kind of set you up to just here’s your allocation and go forward with that and they don’t change as often. They’re not looking at it or monitoring it. A lot of time it’s self directed. Alright, so you’re left to your own devices. Well, how you know, what kind of allegation should I have? And should it be aggressive or more conservative? It’s kind of a guessing game at that point.
Sharla Jessop 14:18
I can see the value of sitting with an advisor to review an update and implement a lifetime income plan.
Parker Thompson 14:24
Yes, yeah. Always have an advisor on your side when when you’re doing this plan.
Sharla Jessop 14:27
Good advice. Parker, thank you.
Parker Thompson 14:29
Thank you.
Shane Thomas 14:35
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
