JF1938: How To Make The Transition Into Retirement As Smooth As Possible with Jason Parker
Jason has helped many people with their retirement planning, a good number of his clients have been real estate investors. Jason helps them evaluate their portfolios and decide if selling or keeping is the better idea for them. He also has his own real estate experience to share with us. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“The most important number that everyone needs to understand is how much you spend” – Jason Parker
Jason Parker Real Estate Background:
- Host of Sound Retirement Radio, inventor of https://retirementbudgetcalculator.com/
- Financial advisor with a focus on retirement planning
- Based in Seattle, Washington
- Say hi to him at https://retirementbudgetcalculator.com/
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jason Parker. How are you doing, Jason?
Jason Parker: Hey, Joe. I’m doing great. Thank you for having me as a guest.
Joe Fairless: Yeah, my pleasure, and looking forward to our conversation. A little bit about Jason – he’s the host of Sound Retirement Radio, and he’s the inventor of RetirementBudgetCalculator.com. He’s a financial advisor with a focus on retirement planning. Based in Seattle, WA. He has some real estate experience as well. First, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Jason Parker: Oh, yeah. Joe, I just love the work that we do. Our focus is completely on helping people make this transition into retirement, and then keeping them retired once they do retire. That’s what we do professionally. On the personal side of things, I’ve been married to my wife for 23 years; she was my high school sweetheart. We’ve got two amazing kids, and I love playing paintball with my son on the weekends; my daughter is super into dance, so I love going to those performances… And life is just really good right now.
Joe Fairless: I know earlier before we started recording you mentioned you have real estate experience… Tell us about that.
Jason Parker: Yeah, real estate experience from a lot of different perspectives. First and foremost, I get the opportunity to actually walk life with a lot of people, and a lot of the people we serve have done really good in real estate over the years. Oftentimes, at some point in retirement they’re looking at whether or not they should keep an investment property, or should they sell an investment property.
For example, we had some folks come in recently, they had been investing in real estate for many years, and somebody approached them and offered to buy this piece of real estate that they had. And they came to me and they said “Jason, should we do this?” It’s like I always do it, because one of the things I’ve learned is retirement is all about cashflow. I’m evaluating everything from a cashflow basis. And when we did the analysis for them, what we determined was that based on the asset price, they were recognizing about a 12% cashflow on that asset… Plus, they had the appreciation of the asset continuing to appreciate, plus the income was inflation-adjusted, because they were able to increase their rents every year based on the leases that they had.
So when we looked at all those pieces, they were coming to me and they were saying “Jason, if we sell this building, we need to keep this cashflow going.” I said “Boy, 12% cashflow and keep your assets growing at the same time – that’s gonna be pretty tough to do.” So after having that conversation, they decided that it was better to keep the real estate, not accept the offer, and continue to enjoy that cashflow to help support their retirement lifestyle. So that was one example of working with somebody.
Sometimes when people get up into their late 70s, early 80s – I’ve met with a lot of people that have several rental properties – and sometimes you guys in the real estate business, and I’m sure you’re not this way, Joe, but some people make it sound like it’s not a job, there’s no work associated with it… I’ve found that that’s not the case. Usually, if you’re gonna be an active owner and you’re not gonna be outsourcing the property management, there’s time and there’s energy and there’s cost associated with that.
So for a lot of people, when they get up into those older years, they’re just trying to simplify their life… So even though the retirement is producing a really nice cashflow for them, they just don’t want the headaches of having to deal with the remodels after somebody moves out, or the tenants that stop paying, and some of those little nuances you have to deal with when you’re actually owning individual properties.
But overall, real estate over a long period of time can be a wonderful investment. I don’t know how old you are, but I’m what they call a Gen X-er, I’m 44 years old, and my experience with real estate – at least on the second primary residence that we bought – we bought our last house in 2006, right at the top of the real estate market… So I know what it’s like to buy real estate and then watch the value decline and take more than ten years to get back to even. So as long as your time horizon is long enough and you’re okay with a lack of liquidity, I like real estate as a wealth accumulation tool and also as a retirement cashflow tool.
Joe Fairless: I know you have some experience investing in real estate personally. Can you talk about that?
Jason Parker: Yeah, personally I had this decision to make – we recently bought a new house, which sometimes I think maybe we’re at the top of a real estate market again out here in the Seattle area, because prices have just gone bonkers… But I had to make a decision. Do I want to sell this house that I’ve lived in for the last 13 years, or do I want to hold on to it and turn it into a rental property?
So I went through my normal analysis, I said “Okay, how much cashflow am I gonna have? What’s the net cashflow after all of the expenses?” and then I looked at the amount of cash that I would receive from selling the house, and I just said “What rate of return would I need to earn to match that net income?” And I was surprised to see that I only needed to earn about 3% on my money to equal the same amount of net cashflow, so net after taxes and maintenance and all these other things.
Of course, I’ve got a house that’s appreciating, and I’ve got a loan that’s being paid off, and I’ve got inflation-adjusted income, so all of those pieces need to go into the decision matrix. But for me, what it really came down was “Do I really have the capacity to take on another project?” Because if we hire a property manager that’s charging us 10%, that’s gonna eat into the net cashflow, and then the reason I’m holding on to that thing is for capital appreciation and future cashflow, as the mortgage gets paid off.
And owning three different businesses, my wife and I – we just decided that we didn’t have the capacity to really do a good job of taking on another business… Even though some of my friends have made a lot of money in real estate over the years, we just got irons in the fire that I decided for us we would rather just cash it out.
The other thing is – real estate prices, because they have gone up so significantly, you do have to question where the top of the market is. I know the Federal Reserve started slashing interest rates again, which is probably gonna help juice the real estate market a little bit, but… Prices are pretty high again.
The other piece to that, Joe, when buying our next house — I don’t look at your primary residence as an investment, I look at it as a place to live. And like Robert Kiyosaki teaches in his book Rich Dad, Poor Dad, the house you live in, your primary residence, falls on the liability side of your balance sheet, not as an asset.
Joe Fairless: Yup.
Jason Parker: And I totally agree with that. Our kids are getting bigger, our house seemed like it just was shrinking, coming in on us, so we needed to buy a new house just for the sake of lifestyle… I really don’t see it as an investment decision, more just a place to live, for my primary residence.
So that’s a little bit about real estate from a personal standpoint, in terms of “Do we keep a house or do we turn it into a rental property?”
Joe Fairless: Yeah, the thought process that you go through and the analysis is very interesting, because I know there’s a lot of Best Ever listeners out there who have to go through that process — or not have to, they get to go through that process… Because they put themselves in that situation to go through that process, where they have an opportunity where they can sell, make money, or should they hold on to it.
You mentioned that you look at “What rate of return would I need to match the net cashflow?” Can you get into some specifics of the inputs that you have in that calculation, so that if a listener is going through this process on their side right now, they know what to take into account?
Jason Parker: Yeah. So when I’m doing planning, whether it’s retirement cashflow planning, or evaluating real estate or whatever, I always like to say “Let’s hope for the best and plan for the worst.” So I make really conservative assumptions. And part of that, again, is my experience with real estate; we bought our last house in 2006, so while real estate has certainly been a good investment over a long period of time, if you look at the appreciation on my house from 2006 till the time we sold it last week, it has averaged only about 2.5% per year when you take into consideration the Great Recession, and then having to recover from that. So, again, I just don’t see my house as being an investment.
But some of the inputs that I used – first of all, I had to assume that my house value was gonna continue to appreciate, so I just used a 2% annual appreciation rate on the value of the asset. Then I had to look at the cashflow. So I looked at the gross cashflow that we would have coming in, and I looked at the mortgage, and there was a positive. It would give me positive cashflow day one. And to be conservative, I assumed that my cashflow from the rental would only be increasing at 1% per year.
Now, the other piece I had to look at was not just the amount of gross cashflow I was gonna receive, but the amount of net cashflow I was gonna receive after making some adjustments for things like repairs, and people moving out, and potentially having a month or two where the house is sitting empty. So I assumed that my rents would increase by 1% per year – and this number is probably not high enough; I assumed my taxes and insurance would only increase at 1% per year. And the reality is, in my area in the last year alone I think we saw our taxes adjusted for all the little nuances, and levies, and this and that – they actually increased about 10%. So 1% probably wasn’t high enough.
Then I look at the annual cashflow, and I back out — now, a friend of mine who’s a professional real estate investor, he says “Jason, when you have a rental property, you only need to plan on about $100/month for repairs.” But again, I like to err on the side of just being cautious, and I know that if I go out and buy a new refrigerator today, that could cost me $1,200 right there; or putting a new carpet in the house after somebody moves out – that could be $3,500. So to be conservative, instead of assuming $100/month for what-ifs that come up, I assumed $200/month for maintenance, and those types of costs.
And at the end of the day, I came up with a net cashflow, that was, again, gonna be me about a 3% net cashflow when you factor in all those different components – when I see 3% net cashflow, that’s based on the assumption that if I sold the house, I’d get this lump sum of money… So my question was “What do I have to earn on that money in order to meet the same net cashflow?” And I’ve got the number here; let me tell you what that was… Net cashflow and equity is only 2.39%. So I only had to earn 2.39% on that lump sum of money that I would receive to match the same net cashflow that I would be receiving from the rental property.
But that doesn’t tell the whole story, because you’ve got a loan that’s being paid down, and you’ve got an asset that’s appreciating. But from just a purely cashflow standpoint, 2.39% return is not hard in today’s environment. Last time I looked at high-yield savings accounts I think they were paying better than 2%.
Joe Fairless: You mentioned at the beginning you help people make the transition into retirement and help them stay into retirement… So I’m taking a step back, by the way, from what we were just talking about. Taking a step back, talking about that, what are some things that you ask people during those initial conversations to learn more about what they’re looking to do?
Jason Parker: Probably the two most important questions I ask them – number one, what’s the purpose of your money? Why do you have it? And then number two, I always ask them “If we could accomplish only one thing by spending a couple of hours together, what’s the most important thing you’d get out of our time together?” And I’ll share with you what I hear most commonly from people.
When I ask them what’s the purpose of their money, most people will say “Jason, we just wanna be able to maintain the same standard of living that we’ve grown accustomed to. We don’t ever wanna become a burden to our family, physically or financially.” They’ll say that they’re much more conservative as they’re making this transition into retirement, so they don’t wanna get wiped out if there’s another Great Recession that occurs.
Joe Fairless: Yup.
Jason Parker: So that’s what I mostly hear. A lot of times people will say “We’re not overly concerned about leaving anything to our kids.” They’ll say “We helped them with college, and buy them cars, and down payments for their first house… If there’s anything left, that’s icing on the cake, but we’re not really trying to make sure that our kids are wealthy when we pass away.” Now, some people do; for some people that’s really important. But most people, I would say, not so much.
Joe Fairless: Okay.
Jason Parker: The second part to that is I ask them the question “If we could accomplish only one thing by spending some time together?”, what I usually hear there is people say “Jason, we just wanna know that we’re gonna be okay.” Or they’ll say “We wanna know if we’ve saved enough. Can we actually make this transition into retirement?” So the biggest financial decision of your entire financial life, a bigger decision than buying a house, which is a big decision for a lot of people… And what most people have is they have investments, they have asset allocation, diversification, low fees in financial products, but I would say 80% of the people we meet with have no actual plan for how all of those things are gonna work together to help them make this transition into retirement, to help them do what they wanna do, which is just have a good life, and be able to travel, and visit the grandkids, and not have to worry based on what’s going on in the world around them.
Joe Fairless: And what’s wrong with having the asset allocation, making cashflow on whatever their investments are, but not having a formalized plan, if that cashflow is achieving their financial goals?
Jason Parker: Well, a lot of people don’t know the answer to that. They don’t know if the cashflow they have is gonna achieve their financial goals. A lot of times when people are retiring, and even people that have really good cashflow, but today a lot of times all they have is social security, maybe a small rental property or two… So it’s vague to them; it’s not clear. And nobody’s ever taken the time to actually construct the plan, to show them how it’s gonna work, year by year, as they’re transitioning into retirement.
So there’s certainly nothing wrong with it, but I would just say — I wrote a book a couple years ago called Sound Retirement Planning, and the tagline to my book is “Clarity, Confidence, and Freedom.” Clarity comes from knowing what’s most important in your life, who’s most important in your life. Confidence comes from being able to crunch some numbers, make some conservative projections, and know that you’re gonna be okay even if things get really ugly in the economy. And ultimately, when you have clarity of purpose and you have confidence that the numbers are gonna work, then what you get to experience is freedom. And I think that’s really what people want – either freedom from something, or freedom to do something. Maybe it’s freedom of time, where they don’t want that alarm clock waking them up at zero dark thirty anymore. Or maybe it’s freedom to spend more time with the grandkids, because they see them growing up, but they don’t wanna be that absent grandparent.
So whatever the priorities are, having a plan is what gives them confidence. So you can do it without a plan, but you may not have the confidence that you’re looking for to know that you’re gonna be okay.
And then some of the little tweaks along the way. Some people know that they’re okay financially, but they have no strategy for how to reduce taxes, either now or in the future. So for some people it’s just making sure that the loose ends are tied up, and that they’re thinking about all of these different pieces.
Joe Fairless: And I don’t know what percentage of the times, but I’m certain that a certain percentage of the times you have to be the bearer of reality, which probably translates into bad news to them about their financial picture, and where they want to be versus where they’re at currently… How do you approach those conversations, if that is a scenario that you’ve come across?
Jason Parker: Delicately… You’re right, those are hard conversations to have, because a lot of times when people come to us they really have this strong desire for whatever the reason — either there was a health event, or something changed at work, or they have a new boss that they just can’t work with anymore… So when I have to sit with them and we evaluate everything and we say “Hey, you’re gonna need to work a couple more years”, they need to hear it, because that’s our job as a fiduciary, is to not tell them what they wanna hear, but tell them what they need to hear.
We just try to encourage them and point them in the right direction, and say “Here are the tweaks/adjustments you can make.” Oftentimes people aren’t too far off. Sometimes it’s having a discussion about maybe retiring from one career that’s very stressful and requires a lot of hours, and having a second, encore career in retirement.
I just met with a woman the other day – she knows she’s gonna need to make some income, and she loves animals, and she found out that she can be a pet sitter and a dog walker, and have an extra $500 to $1,000/month of income coming in. And knowing that she can do something that she loves to do, and it’s gonna produce just that extra little bit of cashflow for her – it really made all the difference.
Or one gentleman I talked to – he’s driving for Uber now in retirement. Not just picking people up, but delivering meals through Uber. So the great thing about the world that we live in today is there’s a lot of opportunities to figure out how to do things different if the traditional path into retirement isn’t gonna work. And for a lot of people out there, unfortunately — a lot of people just haven’t saved enough, so they’re gonna have to look at some of these encore careers.
Joe Fairless: What else that we haven’t talked about do you think we should talk about as it relates to this topic?
Jason Parker: Well, the most important number that everybody needs to understand is how much you spend. It doesn’t matter how much money you’ve accumulated, if you don’t understand the spending piece, it’s impossible to be able to answer the question of “Have we saved enough?” And unfortunately, the people that are most guilty of not understanding their spending are the people that have the highest incomes. So for us, when we meet with people that are doctors, dentists, engineers, pilots, people that are making several hundred thousand dollars a year of income, and because their income has been high, and it’s been high for a long time, they don’t really have to track where every dollar is going. And sometimes they’re shocked and surprised when we sit down to put the numbers together, to recognize that they may not have saved enough.
I met with one gentleman, he had saved more than 10 million dollars, which for most people you’d think “Oh, I could live on 10 million easily”, but when we sat down to understand expenses, his costs were more than 600k/year. And if you’re spending 600k/year and you’re gonna have 35 years of retirement, all of a sudden you have the same worry that the guy that has saved 500k for retirement has, and he’s trying to figure out if he can spend 30k or 40k out of that retirement account. It’s the same concern, of “Have we saved enough? Are we gonna run out of money?”
So understanding your spending is the most important number, and that’s why I developed some software called the Retirement Budget Calculator, to help people really dial that in before they make this transition.
Joe Fairless: Based on your experience as a financial advisor, as well as someone who advises real estate investors, and you also have some investing experience from a real estate standpoint, what is your best advice ever for real estate investors?
Jason Parker: The best advice ever is to understand the cashflow. And I would also say that the times that I’ve seen people get hurt the worst in real estate is when they get overleveraged in one asset class; that they’re not diversified. Then the other piece to that is — I’ll never forget, I had a gentleman on my podcast who got involved with some real estate investments where he was a partial owner, a very small fractional owner in some deals, and didn’t do his due diligence on those, and they blew up on him… So like every investment, you have to do your due diligence, you have to trust, but verify, and then I would just say make sure that you are properly diversified across both liquid and investments that are less liquid… Real estate being something I consider to be less liquid of an investment.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Roud?
Jason Parker: Let’s do it, brother.
Joe Fairless: First, a quick word from our Best Ever partners.
Joe Fairless: Alright, Jason, what’s the most challenging part of your job?
Jason Parker: You know, I love what I do. Warren Buffet once said “If you do something you love, you’ll never work a day in your life.” Plus, I tend to be an optimist, so it’s hard for me to find things that are challenging.
Joe Fairless: Liking something is different from being challenged.
Jason Parker: That’s true, and I tend to embrace challenge. I would say — geez, a thing that challenges me the most… Well, when you’re doing retirement planning for people and you’re dealing with something like the stock market, that is irrational, to say the least – that can be challenging. It can be challenging to help people stay on course when we have a good plan and their emotions start to get the best of them; that could be challenging. So… That’s a good question.
Joe Fairless: What’s a mistake you’ve made in business?
Jason Parker: One of my biggest mistakes – when my first book was originally published, I did not research the trademark of the title…
Joe Fairless: [laughs]
Jason Parker: And about a year after my book was on the shelves, I got a letter from a law firm that represented one of the largest investment companies in the country, telling me to cease and desist, and I had to unpublish my book… It was really painful. But it actually turned out really good, so there’s a silver lining. I gave the book a new title, I added 40% new content, we republished it, and it was on the republishing that the book made it to a number one bestseller on Amazon in Personal Finance. And the first edition of the book was — hardly anybody ever read it. So had it not been for that trial that came my way, I don’t know that I ever would have republished the books. So it ended up good, but it sure felt painful at the time.
Joe Fairless: Best ever way you like to give back to the community?
Jason Parker: My church. I think my church is making a significant difference in people’s lives right here locally, and I think that that relationship with Jesus is what really changes hearts and helps us have a better world while we’re here.
Joe Fairless: And how can the Best Ever listeners learn more about you?
Jason Parker: The podcast I do is called Sound Retirement Radio. My book is called Sound Retirement Planning. That’s always a good starting point. The website is SoundRetirementPlanning.com. And like I say, RetirementBudgetCalculator.com is the software as a service that we’ve built. And we do have a special coupon code for your listeners; there’s a price to pay – $54 is the one-time fee right now to buy the retirement budget calculator, but if they use the coupon code “podcast” when signing up, they’ll get 50% off and it’ll only be a one-time fee of $27 to sign up for the calculator.
Joe Fairless: Awesome. Well, Jason, thank you for being on the show. I love talking to professionals who aren’t exclusively focused in real estate, but have some real estate perspective that’s relevant, especially given your consultations with your clients. I think it’s just really interesting to get different perspectives on the show… So thank you for that, just sharing your thoughts, as well as talking through some questions that you ask your clients during the initial meetings. It’s [unintelligible [00:24:30].12] what’s the purpose of your money, I would take a little bit to answer that question if you would have asked me point blank, because I wouldn’t have an immediate answer. So it’s some things to think about too, for any Best Ever listeners who want to really think about why they are doing what they’re doing and what’s the purpose of the money that they’re accumulating.
So thanks for being on the show, Jason. I hope you have a best ever day, and we’ll talk to you again soon.
Jason Parker: Thanks so much, Joe. Take care.Follow Me: