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April 8, 2019 5:00 pm
Plan to fail. When planning matters radio along with my lovely wife. I think that anyone always good to have you along with us on the ride here on planning matters radio. This is the program where we challenge the status quo in the talking heads on what it truly takes to bill for achieve and maintain your financial success throughout your lifetime. We strive to help our clients protect their paychecks through all walks of life.
One of the big things that we help people do is make that transition into retirement. Now you think I'm going to be retired. I'm no longer going to have a paycheck absolutely right. But it doesn't mean you're not going to need an income so with your retirement accounts that portfolio that you've built up that 401(k) that IRA. The number one job of those dollars is to help you re-create that paycheck and hopefully not run out of your ability to create that paycheck throughout the duration of your life soap on today's program. We are talking about some of the age-old wisdom. Some of the accepted ways that Wall Street says that you should generate retirement income to talk about the pros and cons. The potential problems with that and some solutions to make that retirement paycheck little bit more consistent and predictable.
If you got any questions.
If you'd like to review and evaluate your plan. You are welcome to give us a call. We always extend the opportunity for radio show listeners to have a complementary initial review and consultation will even help design and outline a plan for you including a written retirement income plan as part of the conversation today on the program and part of what we do in that initial review and strategy session. Just give a call 800-338-5944. If you'd like to take advantage of that valuable offer 800-338-5944. You can also just text genius 255588 soap guest before we determine how much of a paycheck were to need in retirement. We need to think about what we want retirement to be about what you want retirement to be about to be on a sandy beach somewhere. So every day you envision waking up on a sandy beach beach with the piņa colada in my hand, absolutely 100%, but you should know this year my wonderful husband ran on defendants maybe another. The listening audience knows a little bit more about you. I am a water 80 sun and water, and I'm fine.
So what you do to fill your day you wake up you got your sandy beach. You got your piņa colada what what are the daily activities one probably spent the money on that piņa colada right right okay so you know your $10 into the day. What was the rest of the day consists of what you have to do now about any other activities. I mean you you do that for a week for two weeks for it for a month.
Do you get bored are you need to do other things. What you want me to say because the answer is no. Well a lot of times people like you don't really have a clearly defined outline of what the day to day activity is going to be like the my new ship. I mean we get into routine retirement is exciting. It's a great idea that we can wake up and we can do what we want we could sit on the beach all day. If we wanted to we can have a couple glasses maybe three or four I might need a cancer policy if it needs to be long, but we fall into a routine right and and the retirement routines a little bit different than the wake up go to work and spend eight hours a day nine hours a day earning a paycheck.
Now were filling that time with things. Typically that cost money and don't make money, and so the way that Wall Street has designed a lot of people's retirement plans is that you only need 70 to 80% of your income. Once you retire. Do you spend more money Amber when you're working or when you're not working when I'm not working right and so I would like to challenge that way of thinking that this is one of the status quo's that we talk about challenging at the beginning of the program. What I have seen in 15 years of helping people make the transition to retirement is that in less they are saving 30 to 40% of their income off the top and only bringing home 60 or 70% of their income during their working career. You're probably going to need more than 70% of your income to retire comfortably and happily and do the things that more free time allows you to do otherwise. Retirement might get pretty boring.
I mean for for your example here first have to buy a beach house. I really need to be near the water for all that's happened so there's an expense right there. The lights are going to have to be on theirs and have to be food and a lot of money to beach cruiser. Okay, we need a car, a vehicle of some type to Chris to be just a beach cruiser. Okay ethical will do okay bike okay but you have to make trips to the grocery store.
I'm sure I'm thinking like some of our listeners, though I'm thinking in that minimalist kind of way, which is probably a good thing because things get more expensive over time. But my point is that the routine costs don't go away right. Maybe your employers helping you pay for health insurance. Well, yet Medicare is going to help you pay for health insurance.
After 65 but there's still the routine cost of doctor visits, preventative care medicines. The light still need to be on the car still has to have insurance on it may be some repairs. Maybe a car payment it if you don't have a paid off house then you got a mortgage. Maybe if you do have a paid off house you're looking to buy a vacation spot that that the beach or on the water so there's another payment. The payments don't go away magically once you retire you don't magically no longer need an income use.
You suddenly no longer have an income and so were going to have to figure out a way for your assets to replace that need for income and maybe were not doing quite as much saving for retirement because now we are in retirement. But again that's part of that maybe 30% of your income that you were not bringing home that you were living without so we still need to replace almost 100% in my opinion of your net take-home income what you actually brought home in order for you to maintain your standard of living in your lifestyle after you retire now in order to do that we have to have built up some assets we have to understand our Social Security options we have to maximize what we can get from Social Security and we have to create a retirement income plant for about 30 years.
The income that has been projected to be reliable in retirement has been based on a theory that theories been called the 4% rule Amber. Can you guess at how much income the 4% rule says you should be able to take Lenny get 4% your your your spot on. So let's break that down into into real numbers. If we have saved a million-dollar portfolio that's saying that we should be able to generate $40,000 a year of income and what the rest of the 4% rule says it should be able to and hopefully not run out of income over 30 years now.
If we been able to save $1 million. Do you think 40,000 years and a cover for expenses. Probably not Peter right we need to be able to pay takeout the words should be and hopefully and make it you will definitely not run out of income and we probably need to find a way to raise that income a little bit now that's a problem because the Wharton school of business, the American College for retirement income planning done studies they been cited in the Wall Street Journal and Forbes and MorningStar saying that cash flow rate actually needs to come down probably actually closer to 2%. If you Google new 4% rule. You can find study after study article after article saying the 4% rule no longer applies. It's too high and and so now with that million-dollar portfolio were only able to generate $20,000 a year is not real attractive to a lot of retirees who want to buy more than $20,000 orthopedic lies in the years not beach house will cost way more than that. Sorry honey right and so we need to figure out how to translate and transfer this lump sum that we've saved and accumulated into a maximum amount of income that is sustainable throughout retirement and again the way that most Wall Street plans work have been based on this 4% rule. But the 4% rule always left room for failure. A probability of doubt and accepted rate of running out of money. If you go to Vanguard pretty famous shop for do-it-yourself investors right they they offer a lot of calculators on their site, they got a good one.
A retirement calculator.
If you run the numbers on this 4% rule plug-in. I got $1 million. I want to make it last for 30 years. I've got a traditional 6040 mix of stocks and bonds in my portfolio the button run the calculator and it says you got a 10% chance of running out of money. 110 you enter into retirement. Are you willing to take it one in 10 chance that by the end retirement your in poverty you're completely out of money and and so one and 10. I mean, we've got to prevent the fact that we are the one in 10 but the other nine still have to worry that they are that one in 10 right so there's a little low level of confidence. There that we are avoiding the possibility of running out of money was not the 4% rule. That's the problem. Okay, it's the model being used to generate the income the 4% rule was accepted in the mid-90s and a guy named William Bingen came up with this 4% theory. After doing studies and and research we know what was going on the mid-90s the stock market was moving much higher.
It was in the middle of one of the greatest bull runs in stock market history, you know what the interest rates were that were available in the mid-90s. Interest rates were higher, yet much higher than they are today. We were in a 1% interest rate environment back in the mid-90s you could go get a CD that was paying 456% so the old way that people wanted to think about retirement income was protect the principal and live off the interest will you could do that when CDs of the bank were paying for 56%. Rates of return. It was easy to follow the 4% rule. At that point in time and not run out of money, but conditions of changed. The market is more volatile today than it was in the mid-90s we seen a couple major corrections. At one point in 2018. The market was down more than 15% interest rates are much lower and I got a couple interesting charts here. Let's say that we did have that million dollars and we were trying to generate $40,000 a year of income. Following that 4% rule and this MathWorks by the way to matter what the amount just do it proportionally. This this works on $10. This works on hundred thousand dollars.
This works on $10 million if we have a lump sum will will call it for a nice easy math $1 million and were trying to generate a 4% cash flow $40,000 a year if were only earning 1% in a bank style safe account were trying to protect the principal and live off the interest the money runs out in 28 years were taken 40,000 a year on million dollars as is shrinking because were taken out more than it's growing by and were out of money in 28 years. If we include inflation into that 40,000, and increase that by historical 3% inflation were out of money. About 26 years. Even if we bump the interest rate up. Let's say we found some super CD paying 4% interest.
If we include inflation, the money still runs out in about 28 years, so that'll protect the principal by keeping it in a savings account just doesn't work anymore so Amber what people do they shoot for higher returns, they turn to the stock market right but that's got its own inherent problems and issues because for chasing higher returns were also risking losses and so what happens in a year like 2018, whereby the end of the year the markets down more than 15% and then we still need our 4% cash flow. We lost 19% right. That's almost 5 years worth of income that's disappeared. One, because we spent it, and for more because the market took away and so it's problematic on one one side. On one end of the spectrum that we got these low interest rates and then on the other end of the spectrum were chasing higher interest rates and we got market volatility to worry about market losses could eat away at our retirement portfolio does any that negate the need for income. Of course not right know none of that's going negate the need for income. So what are some of the ways that we can get our dollars to generate some income. We can rely on growth. Hopefully the market goes up and we take the gains off the top. We can invest in stocks that produce a dividend and this is sort of the same thing as a stock owner, you are actually an owner part of the company.
For instance, if I buy a share of Apple where I buy a share of Coca-Cola. I I am a part owner of that company. I get voting rights. I get to in part, tell the company what to do now.
My one little share of stock. My one little vote is in no way can swing the majority, but I do have a say as an owner of the company you want the value of the company to go up a.k.a. the stock price to rise, but as an owner of the company. You also expect a share of the profits of the company.
That's what dividends are.
So when you own a stock you hope that the share price rises. But wow, you're an owner of the company. They also pay their owners. What are called dividends, which is an income part of the profit of the company so that's another way in and we can put together great dividend producing portfolios are you can put money in bonds bonds are a loan to an entity. For instance, if the city of Greenville or the city of New Bern is trying to create new infrastructure and and build roads and schools they might issue a bond.
What a bond is, is that investors can actually front them the money they can they can loan them the money to make those improvements will those municipalities are going to pay that back. But along the way while they hold the money there to pay you and interest that the yield on bonds.
That's a pretty good way of creating income. However, there is some risk that if you need your money in the meantime if if I want my money that I've loaned them back. I gotta actually take less than what I loaned them so there's a little bit of the liquidity risk. There is also an interest rate risk if suddenly Greenville decides that hey we can borrow money at a cheaper rate. They might pay me back and then go borrow it from somebody else, which leaves me my capital but not the income that I was I was counting on how you can put money into savings, but we Artie talked about the low interest rates. You can put money into real estate. Maybe get some rental income put money into annuities. They offer a lifetime income.
I think that this is actually one of the best ways to create income from a finite amount of money and be able to relax, knowing that I will never run out with an annuity. You've got a contractual guarantee for a lifetime income payment based off of a finite amount of money.
So if I've got my million dollars. I can turn that into a guaranteed lifetime income for myself and for my spouse you you get it to if I die Amber as right and if both of us happen to die early. Whatever is left in that pot would go on to our beneficiaries to our son. We can we can control that we don't ever give up control of that asset that we created the income with but here's the kicker in a bank account or a brokerage account. If we spend enough to bring that account value down to zero. That's it. You were out of inheritance were out of lump sum and were out of income with the guarantees offered through a lifetime income annuity. When you reach a zero balance. That's a whole new type of profit for you because they continue to pay you in income and so a lot of retirees nowadays are finding these attractive I hear a lot of financial pundits saying that they hate annuities and you should too, and their proponents for putting all of your money at risk in the market yet there's a lot of danger there and maybe an annuity is not going to give you 100% of the upside. If the market goes up, but you can avoid the losses if the market goes down, you don't have to take on that risk in retirement.
Are you looking to be real risky. Are you looking to continue rolling the dice are you looking to ride a roller coaster or do you want on a nice peaceful journey that you can relax on with my piņa colada right yeah I heard I heard somebody talking about how they had recently gone on a white water rafting adventure and how they had a guy the guide was in the boat so that you know when they hit the roof rapids.
The boat didn't overturn. They knew what to do. They knew what side the paddle on and that they were the guide for your retirement adventure and I'm thinking well you know in retirement. I'm not sure I want to go white water rafting. I think I'd rather sit in the canoe on a Lake Placid with my fishing pole healthcare right and and so the rapids are like the stock market. Yes, adrenaline. It's fun, there's, there's the opportunity for gains but there's also the potential to capsize the boat and go over the worst moment and Murphy's Law states that you know what can go wrong will and usually it happens at the worst time the annuities on the other hand are about stability there about serenity there about being a little bit more stable and predictable in nature. Again, if the market takes a dive. If we have another 2008, or even if we have another 2018 of the euro to lose principal and once you start taking that income. Here's the real benefit you can't outlive you take a finite amount of money and you create a theoretical lifetime amount of income unlimited as long as you're alive if you set it up for joint life income as long as you and your spouse are alive there some specific annuities available right now that will even continue to pay that income out to children or grandchildren.
You can earmark a date. If you've if you've got an account that you want to pass on what you want you want your loved ones you want your grandchildren to remember you on on their birthdays were on your birthday or maybe a special date. You can set it up to pay them to send them a check with your name on it. On that date for the rest of their lives. So a lot of our listeners are probably thinking well I don't have enough money to start an annuity. I do not have an million dollars.
Peter, what is the smallest amount that you usually see people starting with you can start an annuity with as little as is 5000 now 5000 isn't going to pay out a great deal of money when you stretch it out over your lifetime, but the nice thing about annuities is with that million dollars in the market going back to that 4% rule that we talked about that million dollars, according to the 4% rule will generate $40,000 for you and hopefully it should not run out of its ability to reset 40,000 over the course of your lifetime. Many of the annuities offer a higher cash flow rate. So instead of the million dollars that you need to generate 40.
What if we can get you a 6% cash flow rate now.
You only need 666,000 generate the same $40,000 a year if we can increase the cash flow and guarantee that it will last your lifetime you actually need less money to start with, and so a lot of people are saying.
What I don't have nearly enough to retire. I I'm not can be able to afford it because I don't have the million. I've only got 300 400,000. But once you add in the Social Security which we can help you review and analyze them and maximize how much income you get from there and then we add in a higher cash flow that's sustainable this guaranteed you for life from these lifetime income annuities that do just what they say we can often times get people a lot more income than they ever imagined they be able to count depend on throughout retirement and that's why it's so important to sit down with an advisor. If you are interested in exploring any annuity option stocks or bonds, options, pick up the phone and give us a call 1-800-338-5944. That's 1-800-338-5944. You can design these specifically for your needs. I mean there's there's hundreds of companies that offer all different chassis of this different nuts and bolts that will help you accomplish your goals. Let's say you don't really need a whole lot of additional income. But you got that IRA account in the governments requiring you to begin taking income there actually specific annuities available that will take the net amount you have. Let's call it your hundred thousand dollar IRA there requiring you to take out 4% was for Seyfert for easy math and your you have to pay tax on that money. So your only left after you take out the $4000 pay Uncle Sam you only left with $3000.
There are specific annuities that will give you an upfront bonus of 25% to replenish that to be passed on in the inner legacy in after-tax money. There are annuities out there that give you an upfront 22% bonus for the purpose of your own lifetime income so in layman's terms what you're saying is I can actually, in theory, put money into an annuity and immediately have way more money than I had when I stuck it in the absolutely let let's say you've got $100,000. How does that hundred thousand sound turning into hundred and $10,000 for the purpose of income. Day one or hundred and $22,000. You don't have to worry about the market, you know it's it's not something that is in it for maybe it immediately turns into more income producing capital for and when they calculate that cash flow.
Whether it's 5% or 6%.
Whatever payout rate they're going to offer you there basing it not on the hundred thousand that you put in, but the hundred and 10,000 that turned into day one, or the hundred and 22,000 that turned into plus you still have the opportunity for that amount to grow. If the market goes up, the market goes down again.
You don't lose anything. But if the market goes up, you get to share in the gains of the market and there's some annuities right now that offer what's called a participation rate. So you've got a floor you got. You've got a baseline that you will not lose money market could go down 50% and you still have 100% of all your money, but if the market goes up you've got a 50% participation rate. So you get 50% of the gains of the market in good years. Market goes up 10%, you just got five market goes down 10% you didn't lose anything and if you if you backtrack and look over the course of the last 15 to 20 years avoiding the losses you don't need to get all of the gains to end up in the same spot right and so these are attractive tools and yes there are downsides to them. There are disadvantages.
I hear a lot will annuities are so complicated. They're really not that complicated. You know what a mutual fund is complicated, I would. I would bet less than 5% of investors who have their money in a mutual fund truly understand the inner workings of that mutual fund have read the prospectus know what stocks that mutual fund holds you is not complicated about a mutual fund is it I want to sell it. If I want to get out of it I can do it that day. The problem is I only get out the value that day and if the mutual fund lost 15% the day before. I only get out what's left of my money right what's complicated about annuities is sometimes getting out of them.
A lot of them are longer-term right money only does four things. Remember it can grow it can be safe. It can be liquid work and provide an income. But it's a terrible multitasker can't can't do all of right with annuities we are sacrificing a bit of that liquidity. So, what an annuity says is if I put in that hundred thousand dollars.
I can't get all of my hundred thousand dollars back now like I could probably get like 90% of the back $90,000 and that would be completely my choice to give up the other 10% in order to get out what I need, but that's why you don't put all of your money into an annuity and was never the place for 100% of all of your money and usually people don't need 100% of all of their money. They allow for some liquidity. You can get out up to 10% penalty free, but if you wanted. For some reason the to go a different direction. If you are Jason returns elsewhere and you wanted all of your money back.
Usually there's some kind of liquidity charge surrender charge, but you got the guarantee that you won't lose money if the market goes down, you got in some cases guarantees that your income value will continue to rise while you're deferring it and it's a certain point time the future you do have the ability to take all of your money back out if you so choose. Along the way you're protecting yourself from losses you're able to participate in some gains in the market and when you decide you do need to replace that paycheck and turn on an income it will provide an income for life that you cannot outlive hit a zero balance in a brokerage account and ask your broker for another check it a zero balance in a bank account and ask the teller for another check what I call that bank robbery right there there to call the cops on hit a zero balance in a lifetime payout annuity and you hit a different tier of profit. This is now return on investment return of income to you that is not offered anywhere else, and it specifically addresses this question of how much income can my lump sum generally for me hopefully enough to buy beach house and a piņa colada.
You can set it up so you can buy few piņa colada's a week. Yes, I'll remember you said that now again annuities are just one way that you can create income in retirement from your assets.
The bottom line is that were all going to need an income in retirement and what we have seen is that there are many ways to structure that plan. If you'd like to look at a a brokerage portfolio and IRA investment account and annuity to understand how to and how these tools can help you or all of those things sounded foreign to you and you have no clue where to start.
Give us a call would be happy to talk to you would be happy to walk you through it helping you maximize your Social Security understanding the options that you have available there, and integrating that into your total plan for how your savings can generate you a livable wage and income throughout retirement.
You can depend on that you can count on as being reliable, give us a call 800-338-5944.
That's 800-338-5944. You can also text genius 255-5888 on your mobile device to be in touch or theory to find Rich on planning. That's how it's spelled pronounced Rochon, but if you'd like a copy of my new book, understanding your investment options give us a call will set up a time to to meet in and look over your investment portfolio your retirement accounts and I will certainly provide you with a copy of understanding your investment options. It's the most important book you will read this year. You have to see the cover to get that joke anyway. We look forward to hearing from you soon. I am Peter Rochon, along with my wife, Amber shot and we appreciate you tuning into today's program and we look forward to helping you protect your paycheck through all walks of life in your job in your career and after in retirement.
Give us a call 800-338-5944 visit us firstname.lastname@example.org my family is planning the content of this radio show is clients are partly quarterly people as a product may result regarding