Retirement Income: Buckets of Money

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This is the Truth Network. Welcome to Finishing Well, brought to you by cardinalguide.com, with certified financial planner, Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now, let's get started with Finishing Well. So, Finishing Well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors, and Hans Scheil, CFP, sell insurance. This show does not offer investment products or investment advice.

Welcome to Finishing Well. Today's show, I think you're going to like this title, is Retirement Income Buckets of Money. I mean, who would want some buckets of money? And I think you're really going to enjoy Hans' wisdom today here, as I couldn't help but think, as I was listening to the buckets of money strategy, I was thinking about, you know, Joseph. And as Pharaoh told him his dream about the sick cows and the fat cows and all these things getting swallowed, you know, God gave Joseph the wisdom to store grain, which really, when you think about just go to 10,000 feet above the situation, here is a phenomenal famine that's coming over the land. And God is not only going to meet the needs of his people, you know, Joseph and his family, he's going to meet the needs of the Egyptians through the wisdom that he gives Joseph in what is an upcoming crisis.

And interestingly, also gives Pharaoh the wisdom to understand that Joseph had that information. So as we look at our retirement and you think, wow, I'm not going to have this source of income that I've had my whole life. And so it looks like there could be a famine headed your way, but the good news is Hans is here with buckets of money. Or at least strategies for buckets of money, right?

Yeah. And it just, when the buckets of money comes into play is when you're, we're using annuities and frequently we just have two buckets of money. We're going to have one bucket of money, which is just some cash that's invested. Both of them are IRAs or 401ks, or it's just money sitting somewhere that we have the ultimate flexibility to make withdrawals.

And that's going to be our short-term money. You know, so if we need 5,000 a month, like these people might need for about a year, we just got the flexibility to just make a withdrawal from this account. We don't have to deal with surrender penalties or the company coming back and saying they've already invested in it for such and such a term. So the first bucket is going to be something which has complete liquidity and withdrawal flexibility.

Fees, difficulty, times, we've got none of that dealing with. Then the second bucket is going to be an annuity. And the annuity, as you know with annuities, you need to leave that money there for a while. I mean, annuities are not a good place to buy and then turn around in six months and say, I want my money back, or I even want some of my money back.

I mean, they have ways to do that. But the reality is, if you're buying an annuity, especially if you're buying it from me, it's for a long-term purpose. And so by the time we just have these two buckets, what we're going to do is we're going to take income from the first bucket as soon as we need it, with complete flexibility, and then that bucket is eventually going to run out.

But we want that to be several years from now. And then when the second bucket gets some growth on it, or it bakes for a while, and now it has an income that you can start, that second bucket is going to come with a guarantee once you start income that that income will never stop until you die. And in this case, the case I'm using as an example for this show, that's two people, a husband and a wife, it's going to continue, income's going to continue once they start it, as long as one of them's alive.

So the income stops at the second death. So interestingly, I guess it was President Roosevelt was the originator for many of us, and the idea of having buckets of money, that Social Security itself is an annuity. And so actually, you've been putting money into a bucket of money your whole life ever since you went to work, thanks to President Roosevelt and all those who've supported Social Security ever since.

You're absolutely right. And so as that money has been banking in there, I've always liked that term that you use, and drawing interest and all that. It is, in fact, you know, it's— It is an annuity because it comes with a guarantee that once you start it, that income will not stop until you're gone.

Right. And if you have a spouse, and your check was larger, even after you die, they're going to keep paying that income to your spouse. Yeah, if you want some like fun playing with your buckets of money, like just print your, go to, what is it, socialsecurity.gov. SSA.gov, yeah. SSA.gov, print your statement, okay? And you'll see they have it, every last penny that you put into your bucket of money, okay?

You and your employer. Now, just take your Social Security benefit, say at age 68 or whatever year you choose, and multiply that over about 10 years, and you're going to find out that you're going to get more money, a lot more money. Chances are, if you live 10 years after your Social Security, then you put into it.

I mean, it was a heck of a strategy, and that same idea is kind of what you're talking about here with this family. Well, it's absolutely because—so your IRA or 401k money is intended to be a supplement to Social Security. So in the example I just brought out, a lot of times the simple plans are just two buckets of money. It's the money you can get at, and we're going to use short-term for income, that we're going to take a lot out of that, and we've got flexibility because we know we've got bucket number two, which is an annuity that's allowed to bake for a while that's going to grow. But in my example, then there's the third bucket, because these people have more than they need, so we put that in the third annuity, which doesn't have a guarantee of income, but it's got like maximum accumulation, which is much better than bucket number two. So we're just apportioning the money for a purpose of an overall strategy, and when you really think about it, there's a fourth bucket at play here, which is Social Security. And the Social Security is—I mean, a lot of folks, they look at Social Security, and when I start talking to somebody who's 50, oh, is it going to be there when I'm there? Is it this?

Is it that? And nobody really says, I got this awesome program that is going to be there, and it's going to pay me a lot of money. And this is where you brought up the statement, is if you go look at your statement and just really say, well, let's just pretend for a minute that I'm actually going to get that, which I feel like you are, okay? I mean, and just look how awesome it is, because once it starts, it's not going to stop. I mean, when you read about these people that pass away at 108 or 106, just imagine if they started their Social Security at 65, how much they got paid over their lifetime.

It's huge. And none of us know how long we're going to live. We think we do, but Social Security is just going to keep sending you checks. So they really—what the Social Security does is it alleviates the longevity risk or the fact that you might live longer than you think you're going to live, and it makes sure that you're still collecting a check at that point. The annuity does exactly the same thing. In bucket number two in our story, by leaving the money there in our example for five years, and then we can already tell the guy that this generates on the man and the lady $24,000 a year for the rest of your life. Well, if one of them lives to 103, they're still going to be sending that $2,000 a month if they take it monthly in the 103rd year, and they'll be collecting their Social Security check. So now if they die at 84, well, I guess they're not going to be getting anything past 84. So you know, the downside of having something that covers longevity risk is, you know, you're not going to get anything after your heirs aren't going to get anything after you die. Well, but the beautiful thing about the annuity is, if I'm understanding, and this is always my opportunity to see if I know what I'm talking about, that is that if you had not used the original money that you put into an annuity, right, let's say you would put $200,000 into this annuity and you died two years later. You have beneficiaries. Oh, yeah. Well, then the money is going to be paid to the beneficiary. Right. Even in this example. But if you start the $24,000 a year in the fifth year, sixth year, the end of the fifth year, and then you collect that from, in this guy's case, from 65 to 84 and then die, you've used up your money.

The only difference is, if she's still alive, then she keeps getting it because it has to have them both gone. But the whole point here is, is if you pass away early, the annuity wasn't as good and as sweet as it was if you live a long time. But that's all a risk assumed by the insurance company. And so our concept that we're doing here is, is people look at their IRA or their 401k as a whole and they look at it and they say, I got this much. And then they're watching it go up and down.

They're all nervous. And that's where these people were about it going down. Can I retire?

Can I this? They come up with crazy numbers like seven, 8%. This lady was talking like earning 7% should just be a slam dunk.

So that means I can earn 7%, deduct 7% every year and we can go on forever. Still have a principle. I mean, she didn't really articulate it that way, but that's kind of the underlying principle. And it's so far off.

It's nuts. Okay. But I mean, people look at that. So I had to get that out of her head and that's not the strategy we're going to use. So then all we simply did with them is we took their bucket of money, which was one big, big bucket, and we divided it into three smaller buckets, approximately the same size. And then we're using them for different things and to get different promises.

Right. So you're listening to Finishing Well with certified financial planner, Han Shyle. Today's show is retirement income, buckets of money, like the whole concept of a lot of people's concern in retirement, that famine that's coming like Joseph faced is that they're going to outlive their money.

Well, that's the beautiful thing if you listen to Finishing Well today, because we have no intention of you running out of money. And fortunately, God has given us wisdom through a lot of people over the years to show us how we can do this. And it's all in Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, which is there at cardinalguide.com, as well as a whole website that goes into all these different things. But, you know, there specifically is Hans' email address. And he would love to hear from you if you wanted the whole book or you had a specific question. By all means, it's there. But there's also some other stuff I want to tell you real quickly that's at that website.

Okay. They have this phenomenal YouTube channel, which just get actually they're in the 100,000s of hits of all these people that are getting Hans' information. So if you want to see the whiteboard experience that Hans does, where he goes through some of these things and shows you mathematically how these things work out, you know, all those videos there on, believe me, retirement income, all the things we talk about on Finishing Well, as well as podcasts of previous shows and, you know, charts and all sorts of wonderful things that you can find out from cardinalguide.com.

So when we come back, we'll be doing a whole lot more on buckets of money. Hans and I would love to take our show on the road to your church, Sunday school, Christian or civic room. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, veterans aid and attendance, IRAs, social security, Medicare, and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday school, Christian or civic group. Contact Hans at cardinalguide.com.

That's cardinalguide.com. Well, welcome back to Finishing Well with certified financial planner, Hans Scheil. Today's show is on retirement income, specifically buckets of money, as sort of a strategy, not unlike Joseph taught on how to live through famine. And, you know, the idea is a lot of folks think that retirement could be a famine because they don't have the income that they're used to, but the good news is we've got strategies and really this is some beautiful stuff, this whole concept. But we want to, you know, kind of take you in, put some flesh on this story a little bit of these people and kind of their situation.

Yeah. I mean, so for starters, when the case was brought to me before I met the lady and then met her husband, I was looking at a 401k statement with $880,000 in it. And then these guys are saying they're down in this small town and they used to be in New York and then the guy's in the tree business or something in terms of cutting them down. You know, they weren't real clear, my people on everything.

The slave was already a customer. And so I had a lot of questions that I just want to find out who people are. I mean, why do you have 880 grand, which is a lot of money for the people we just described.

I don't want to ask them that bluntly. So what I learned is he used to do his landscaping business for a very rich man for a number of years and both in Florida and New York. And he's through doing that, but this guy set up a 401k for all, you know, what he'd call the help. And these people contributed to it properly. And I don't know, a few years ago, they had about four or 500 grand in there, which had to be doing something right. And then she started getting involved in this thinking about retirement. And then what she did is she made it as aggressive as she possibly could.

I'm not sure I would have recommended that at the time, but it turned out to be a lucky bet. And the four to 500 became 800 and something. And just between the time when I finally met him on the phone, the 880 had become 940. And what I experienced her is even more nervous about the 940 than she was the 80 because she was just convinced this is all going to crash and it's all going to whatever. And I'm just listening, man. I ain't doing any talking. And she was very worried about big losses in the market and even told me what happened in 2007, you know, and what happened in 1987 and what happened in 2000. They don't want it happening to them. And I'm thinking, well, why are you so invested so aggressively if you're worried about that? And then it's more, well, that's why we're talking to you. Okay.

Real good. But what's all this money for? So it's he can retire. Well, then she launches into taking 900 grand, a little bit more than that, and just applying percentages to the whole thing, which a lot of people do this. And they start saying, well, when I retire, you know, if I can earn this amount, then there's an if there, but if I can earn this amount and then I can just, we can live off of that.

And then at the end of every year, there'll be just as much as we started the year after we spend the earnings. How does that sound for a plan? And, you know, my answer to that is not very good. Okay. What about social security? And I didn't anymore get that out, but she's telling me, well, he's only 60. And so, you know, he can't get it for a while.

Okay. But a while is just 18 months. And then she had already started her social security back when she bought her Medicare supplement at 65. And hers is like 388 a month. And then when I was explaining, well, he might want to start his social security at 62, because you'll be 66 in so many months, you'll be at full retirement. Anyhow, the long and the short of it is I figured out that they could get 3,800 a month.

That's when they started listening to me. When we started, I said, you're going to be able to start drawing 3,800 a month in a year and a half. Excuse me, 38,000 a year is a lot of money to somebody that only needs 5,000 a month to live, which I think she overstated that. And so what we're talking about on the show here is we just expanded their – So we just considered a plan by using the buckets. So we took the 900 grand, 900 plus, which by the way, by the time we got to selling them what we were going to sell them, it had already gone down to about 915.

So they had already lost 25 grand just in the couple weeks. And we got all that worked out and we divided their money into three buckets. So one bucket is short term, so he could retire tomorrow. And we can just make withdrawals out of that until he's 61 and 62. And then we'll make much smaller withdrawals out of that until he's at 62 until his annuity in bucket number two is five years old.

And then – because we're going to start – we've already started that now. And then five years from now, we got a guaranteed $24,000 a year for life. And we won't have near drawn down bucket number one. And then bucket number three is just their excess money. So we put that in an annuity that was – that is designed for maximum accumulation that just has a withdrawal feature so they can use that to protect against inflation, if they have some expenditures, if they have expenditures later in life. And so that's the three bucket strategy. And I think what you talked about is – what you added is really their fourth bucket is that Social Security check, which is, you know, $3,800 a month.

That ain't going away. And that's going to adjust for inflation itself. So once we went through all of that, just the three bucket strategy is nothing different than taking a big, large 50-gallon drum and just breaking it into some smaller drums or maybe some 15-gallon drums and just having one with four. Which is, you know, when you look at Joseph and the, you know, Pharaoh, you know, he was saying, well, you're going to have seven good years. And during these seven years, we want to take some of this and put it back aside so that we'll have, you know – and it was just a strategy. Sure. And so, you know, this is part of what we do to set up our original annuities, which was our Social Security.

And here we go. But, you know, all of us don't have $960,000 or – Well, yeah. I could have done the same strategy for them if they had $320,000. They wouldn't have that third bucket of the whatever-we-want-it-to-be bucket. And then they don't really need the $24,000 starting in the sixth year.

That would be fine for them if it was $1,000 or $12,000 or it was an additional $1,000 a month guaranteed. So this can be done, this bucket strategy, with much smaller amounts of money supplementing Social Security. And most people that are implementing these are not 60 and 65. A lot of them are a little closer to retirement or they're already drawn Social Security.

So I just use this because it's sticking out of my mind. And these people were just shocked because we're preserving their principle. These people are going to die with a lot of money. And they're going to have the security of knowing that that money's there. When they get to be 70 and a half, they can start doing QCDs and giving some of this money away to God, to the church.

If somebody is sitting there and they've got an IRA, right, even at 220 or whatever the situation is, it's a good idea to sit down and go, okay, well, how is my money going to provide for my needs clear through so that essentially we don't outlive our money? We might take 120 and put it in the same kind of annuity they bought for bucket number two. And with 120 grand for two people, or it might be one person, but either one, we can guarantee a number of starting income in the sixth year. You can do that on any amount, but it's going to be pretty good off of 120. And then we can look at it and say, what's it going to be if we wait eight years?

Is it going to be even more? So I'm just making simple math. And then we could leave 100 in a bucket that has maximum flexibility for withdrawals so that if we needed to start drawing out that amount by the month now, say it was 1,000 a month, and we're not going to get real good earnings on this 100,000 because we've got to keep it kind of liquid, but we can get some earnings. And then if we start drawing out 1,000 a month, we've got 100 months before we got to tap the annuity to get 1,000 a month. Right. And plus you have the other bucket of money, say the roof, all of a sudden.

Or in my case, the septic tank pump decides it's too long for its life or whatever, and it needed to go right now. And now I need $2,000. That's part of that strategy. It's built in that there's going to be money in the case of a crisis. Well, and I'll tell you what we're going to do with that $100,000 safe money is we're going to probably move 10,000 a year over into a Roth. And the tax effect for that of people that don't have a high income anyhow, it's almost nothing to do these conversions. That's 10,000 is a slam dunk. And then when they do have this roof, they won't even have to pay taxes because they'll make the withdrawals out of the Roth.

Sorry. Yeah. Now that I'm 65, and for those of us that are still working, right, I mean, that's a great bucket to begin to fill. Because if you're still working, right, and you can go now with the Roth IRA, with your after tax money, make deposits up to $6,000 a year, right? And you're creating a bucket that you've got total access to, but at the same time, you know, is still, you know, you're able to invest it.

Yeah. And so this strategy is just multiple things. It's also with annuities. I mean, annuities are going to get you a guarantee of principle.

They're going to get you a guarantee that your income is never going to stop until you die. But they're also, you got to leave the money there for a while. They're not liquid.

They're not very liquid. So the whole concept is as soon as I write somebody an annuity, I'm looking to diversify away from it to just give them this other bucket, which has very easy liquidity. Right. Where they can get their hands on the money. So, you know, again, the strategy is beautiful from a standpoint of, you know, whether it was Dave Ramsey or whoever you listen to, that you've got an emergency fund, you've got an income strategy throughout, you're not going to outlive your money. And essentially, you know, be able to take care of your family. So, you know, one of those seven worries that we've talked about so many times there at the cardinalguide.com is, you know, retirement income. And so many folks are concerned that they'll outlive their money. Well, they're just our strategies if... Absolutely, they're strategies. And taxes are involved in all of this.

I didn't really talk about it much, but the whole idea is these people aren't going to pay very much in taxes. Yeah. And it's definitely part of all that, which is, again, another one of the tabs at cardinalguide.com. So again, the book is The Complete Cardinal Guide to Planning for and Living Retirement. All you have to do is cardinalguide.com. And you can contact Tom's there as well as, again, what we talked about, the videos and the podcasts, all sorts of resources available at cardinalguide.com. Thanks again, Hans. Thank you. such as social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement, and the workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com, cardinalguide.com. This is the Truth Network.