If you fail to plan, plan to fail. We want you to plan for success. Welcome to Planning for Success. Welcome to Planning for Success.
Welcome to Planning for Success Welcome to Planning for Success. Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success Welcome to Planning for Success In retirement, just because you retire, it does not mean that you suddenly don't need an income. It means that you suddenly don't have an income. You need to create that income from your assets. You have a lump sum, but you need an income.
In the middle, bridging the gap, is your retirement income plan, is your spending plan. Lump allocation is a specific type of income planning structure where you set aside specific assets so you can determine how much income a specific lump sum can create for you. In general, investors without an income plan don't know how much their portfolio will be able to produce for them for a living income. Companies without a specific income plan don't understand which accounts to pull from, in what order, to be as efficient as possible, and to optimize withdrawals.
We want to know which accounts to pull from, when to pull from them, how to use them. We want to know how much a specific lump sum, a specific investment amount, is going to be able to generate for us an income. That's why you really need to first and foremost acknowledge the need for income in retirement. Income has always been the base for your financial success and progress. Very few people have an investment plan without first having an income plan. You may not realize it, but your income plan was setting the alarm clock.
It was getting up, it was showing up to work, it was working the hours, putting in the time, trading your time for money, that money comes in the form of an income, and it allows you to begin your investment plan. Over time, that investment plan grows as a result of your income plan, and you don't really ever want to touch that investment plan. We've been psychologically trained, economically and psychologically trained, not to touch our investment plan. We will do just about anything not to touch the investment plan. We'll work extra hours, we'll get a second job in dire straits in times of emergency need. Maybe we'll dip into that investment plan, but we try not to with all effort. However, we've been also trained that at retirement, okay, it's time to walk away from the paycheck, and now suddenly it's okay to just begin dipping into that investment plan, in fact, without any real plan for how to maintain our ability to dip into the investment plan.
We're just going to start suddenly reversing the flow of money, I'm going to take money out and it's going to be just fine. That's what Wall Street, that's what the financial models want to tell us. However, without that specific plan, without the math behind it, it's not. So we really need to define the income gap. Now what is the income gap? This is math.
This is a mathematical process, this is where you may want to jot down a few notes, and you can do this real quick, back of the napkin math. Many investors make the mistake of planning for retirement based on that lump sum or based on their age. Those are arbitrary numbers though. Just because you have a million dollars does not necessarily mean that you are ready and prepared for retirement. Just because you turn 65 does not mean necessarily that you're ready and prepared for retirement. This is backwards, it can lead to uncertainty.
So let's reverse engineer this process, let's turn it back around and flip it the right way. We need to figure out how to replace that income first. To retire optimally, your primary focus should be on defining and then filling your need for income and the income gap. And again, this is a process that we walk through with our clients. If you would like to go through this, if you would like to have that optimized retirement plan, a snapshot of where you are currently, we'll discuss, we'll define, we'll write down the specific goals that you have for your financial future, we'll make recommendations on action items, a timeline for when you should be executing them. All of that is free, that's complimentary, no cost, no obligation.
Give us a call at 919-300-5886. But most plans that focus on the lump sum and returns are plans where somebody feels that they have enough, they hope they have enough, they believe they have enough, they think they have enough. That's not certainty. I would rather know, I know that this income allocation plan is going to generate for me X amount of dollars. It boils down to understanding your retirement outlook and down to being based on math. It boils down to being based on math, not hypothetical projections. So we want to define that income gap.
So here's the math. I encourage my clients and those that are looking to get some definition on what their financial future looks like to do what I call the look back budget. And if they are not keeping a budget, or even if they are in fact, I encourage them to pull the last 6 to 12 months worth of bank statements.
I'd really like to see 12. You don't have to comb through every dollar that you spend. Right on the front cover there's four numbers. There's credits, debits, beginning balance, ending balance. The beginning balance is how much you started the month with, the credits is how much went in. That's your paycheck, that's your income, that's your sources of income. The debits is how much you've spent that month and that's the number we need to look at. Pull that number, the debits.
Write that down. January, February, March, April, May, June, all the year, 12 months worth of debits. That is how much life costs you. That's your after tax net that you need to support the lifestyle that you are used to. So we write that down, we get a tally, we average that, we see what the swing is.
They're not all going to be the same. Some months are going to be double what other months are. Maybe you're paying for all the Christmas gifts in November and December or maybe you're paying them all off in January.
Maybe you take a good family vacation in July. But then there's going to be some lean months as well where you're holding back, you're saving a little bit. Get the average spending and take note of the swing because that's going to be important as well. We'll start with your average spending money, your average monthly spending. So you review the bank statements to get that. Then you must subtract from that number any sources of guaranteed monthly income that you don't have to pull from your personal assets. So when I say sources of guaranteed monthly income, what comes to mind? Well that would be social security. We all want to be able to account and rely on that.
We can talk about the questions of that and how you feel about that during the process. If you're lucky enough to have a pension, that also can be calculated into that. There's a few other things that could be considered here, rentals, partnerships, buyouts.
But these need to be pretty certain and reliable. So social security and pensions is usually what we're talking about when we discuss guaranteed monthly income that you don't have to generate from your portfolio. You don't have to pull down from your net worth. Then you take your average monthly spending that we got from the bank statements. You subtract those sources of guaranteed monthly income and what you have left is your monthly income gap. That is how much your portfolio is going to need to generate for you consistently, reliably, dependably throughout retirement and we probably need to adjust for inflation, but we'll talk about a few other factors. You take that monthly income gap, you multiply it by 12, that's your annual income gap. You might want to multiply that by your anticipated tax rate.
So if you feel like you're going to be in a 20% tax environment, we need 25% more money. We need to divide by four and multiply by five to figure out what your gross income needs to be and that gives you your annual gross distribution that's required. That's one year of reliance on your portfolio and then we divide by our cash flow rate. So if we want to rely on the Wall Street model, the 4% rule, the 4% rule has been around for about 30 years, almost 30 years. It was incepted in the mid 1990s when the stock market was on a boom, when interest rates were much higher. It was designed by a guy named William Bengan and it's been relied upon by Wall Street forecasting and Wall Street models for retirement for quite some time. Now recent studies from those that study retirement and study the markets and study cash flow have said that the 4% rule is probably actually too high if you want a reasonable probability of success.
They're saying that actually that leaves more room for doubt than most retirees are comfortable. It leaves about a 10% probability of failure and in this case failure is running out of money in retirement, a 10% probability. Now if the weatherman says you've got a 10% chance of rain today, I may feel comfortable leaving my house without my umbrella but if my financial model for retirement when I walk away from that paycheck says that hey you've got a 10% probability of running out of money into the future, I'm doing all I can to figure out why that is and how to avoid it. And so again we can talk about, we can discuss the merits of that 4% rule but for the purpose of this calculation, let's just say that that is an appropriate cash flow rate because there are ways to generate 4% cash flow pretty reliably and consistently. So you divide your annual need for income by that cash flow rate. So if we had a need for $40,000 of income, the same, the opposite of this, the reciprocal is to multiply by 25 if we are doing a 4% cash flow rate.
And so we would need a million dollars, that's the 4% rule. This is the approximate lump sum that you'll need for your retirement. This is your retirement number, this is how to figure that out.
Now if you're short from this, we need to figure out how to get there. If you're over and above this, hey we've just identified discretionary assets that are available for what ifs down the road, they're available for healthcare, they're available for inflation, they're available for legacy, that's where we want to be. We want to have calculated that retirement number and we want to have identified extra assets that are there as our security blanket. That is a confident retirement.
That is the formula for a confident retirement. But there are factors, there are variables that we need to consider. We need to consider taxation. Could that change into the future?
A lot of people are worried about that right now. We're talking with a lot of people about how to control your tax liability and if you are saving for retirement or if you've got a dollar in a tax deferred account, you need to be paying attention to the opportunity right now that we have to better control our future taxes. And by the way, if you've got a larger lump sum saved for your retirement, then you've got a larger potential problem and mistake. We don't just have a proportional tax system. We've got a progressive tax system. So the larger your account balance, the more costly ignoring this issue ultimately is going to be for you. So taxation. Let's talk about that.
Pick up the phone, give us a call, 919-300-5886, 919-300-5886. We need to consider inflation, how much our price is going to go up into the future. We need to consider and define an acceptable cash flow rate.
Our anticipated rate of return, healthcare, discretionary spending, the market volatility, sequence of returns risk, all of those things. But the goal is to arrive at a conclusion about have you saved enough? Have you saved enough to retire? How much do you need to further build your savings if you're creating an appropriate income for the lifestyle that you are used to?
Are you protecting that lifestyle? And how much do you have left over in assets for available investment? Planning and your legacy planning. So we do need to talk about that cash flow or withdrawal rate. Withdrawal rate is different than rate of return.
Let me say that again. Your withdrawal rate, your income rate, your cash flow rate is different than your rate of return. I've seen people say, well, my investment plan has averaged 8% return over the course of my career. Shouldn't I be able to generate an 8% cash flow? Why is it so low at 4%?
Why do they say that's dangerous? They are not the same. The rate of return is an average of what has occurred over a typically longer period of time. And I can give you an example here.
And again, this might be one you want to write down if you're doing that, take some notes. But here's an example of a three year period with an average rate of return of 10%. So let's see what happens. We have $100,000. The very first year, our rate of return is 60%. So now we've got $160,000. The following year, we have a negative year, negative 50%.
So the 160,000 turns to 80,000. The next year, the third year, we have a 20% rate of return, 20% on 80,000, we have $96,000. So we had plus 60, minus 50, that's 10, plus 20, that's 30 divided by 3, that's a 10% average rate of return over that three year period. We started with 100,000, we're left with 96. We had an average 10% rate of return over that three year period. We started with 100,000, we're left with 96. That is why the cash flow rate, the withdrawal rate is not the same as the average rate of return on your investment portfolio.
They behave differently. And also that cash flow rate, that needs to be much more consistent and reliable. And if during that same scenario, we had been pulling 4% cash flow each year from that $100,000, we had been pulling $4,000 each year, we would not even have 96, we'd have significantly less than that. So we need to make sure that we understand what the cash flow or withdrawal rate is. And one way to look at that, I mean, if you've got a pension or a social security, is talking about the equivalent portfolio value.
I go over this exercise a lot with folks. They say, hey, I've got this pension, it is going to be paying me $40,000 a year, or I've got social security, it's going to be paying me $40,000 a year. What does that equate to? What amount of lump sum is that worth to you? And when we're making the decision on, do you take a pension and a lump sum, or do you take the income, this is one of the things that we need to go through, equivalent portfolio value. Again, we use that 4% rule and try to figure out, well, if you're guaranteed $40,000 a year from your pension, what does that mean that lump sum would need to be? Well, $40,000 would need to be a million. That's the 4% rule. Income allocation, again, very different than asset allocation.
If you'd like to go through this process, give us a call. We'd love to hear from you, 919-300-5886, 919-300-5886, and then we help to find the assets that can optimize the cash flow rate, that can optimize the durability, the predictability of the income that you can count and rely on into and throughout retirement. Focusing on the lump sum has increased the likelihood of financial anxiety and retirement failure.
Let's just call it what it is. We have been in an experiment with these 401Ks where we have focused on the lump sum. We have focused on building that lump sum.
We have focused on the rate of return for the lump sum. If you go back a generation, people focused on income. If I work until I'm 62, my company is going to pay me $4,000 a month. If I work for 30 years in a certain career, my company, my employer is going to pay me $5,000 a month, whatever the amount was.
It was discussed in a different language. They talked about income and they were much more secure in their financial outlook in retirement. Today we focus on that lump sum and we have doubt and worry and concern about running out of money.
Focusing on the lump sum has increased the likelihood of financial anxiety and retirement failure. Let's take a moment and focus on income. You have always, first and foremost, had an income allocation.
While you're working, it's the fact that you show up to work. That is your income plan. How we work, there are four things that we do with our money, with our income. We pay taxes, we pay bills, we spend it, buy stuff, have fun, give, travel. That's all in the spend it category or we save it or invest it. At the end of the day, once we've done all four of those things, the only thing that we have left is number four, what we've saved. When we pay taxes, we pay bills, or we spend, that dollar is gone forever.
That's no longer our money. Only what we have saved do we still have or invest it. We have to use that savings to reproduce our ability to do those first three things when the paycheck stops. We've got to take what we've saved and use that to pay taxes, pay bills, and spend for retirement. What portion of your savings did you save in order to be able to pay taxes, pay bills, and spend? Probably most all of it. If anything's left over, you'll give it away.
You'll create a legacy. Income allocation specifically is designed to recreate your paycheck. This is how you turn your savings into retirement.
Why do we need an income allocation? Well, because markets fluctuate. Bills don't. My bills stay about the same from month to month, whereas the market could be up 15%, down 15% from month to month, from year to year. Account balances tend to fall over time. I know on the day that you retire, that money's going to last you forever, but 10 years later, 15 years later, 20 years later, a lot of people have a very different feeling when they look at that bucket of money and see that it's starting to run dry. You start to live a different lifestyle when that happens. You start to live a just-in-case retirement, a reserved retirement, not a fulfilled, full lifestyle.
The cost of living increases over time. Asset allocation has proven to fail for these factors. The diversified portfolio does not cover these needs.
The 4% rule has proven to fail for these factors. Even if the 4% rule did still hold true, income allocation allows you to produce a higher, more sustainable, more stable income that will last for life. We really need to look at that spending plan. How do we address the risks? How do we create the retirement spending plan? You must get a plan in place.
You must have a plan to support your financial life. In order to make the most progress possible, we offer the opportunity for that optimized retirement plan. At Rishon Planning, we help savers and investors better determine their outcome and make their goals reality. Specifically, if you would like to learn how to retire or you want to learn how to pay less in taxes and keep more of your money, if you'd like that optimized retirement plan, go to our website, richonplanning.com, or give us a call, 919-300-5886, 919-300-5886. On the website, richonplanning.com, you can request a free copy of my book, Understanding Your Investment Options, and either way you go, through calling or through the website, get in touch with us and we do offer the opportunity for a complimentary review and plan design.
You can get a free financial and retirement plan, a free retirement spending plan, a free optimized retirement plan, taking a look at the fees you're paying, the risks you're taking, the taxes that you'll be liable for, trying to control all of those things, trying to maximize available sources of lifetime income, both from social security and pensions, the guaranteed side, and from your portfolio. Get that plan in your hands, help to improve your financial outlook, help to make the most of your financial future, and live through retirement with more confidence that that plan is there and in place and will be there to support you. And then review and update the plan on an ongoing basis. We always encourage that as well for all of our clients. We check in at least once a year on a regular basis to assess benchmarks, to assess progress, to set new goals and benchmarks for the coming year, and that is also an important part of your planning process and progress. Give us a call at 919-300-5886, visit online on the website, richonplanning.com, rishonplanning.com. We look forward to hearing from you soon. All the best for your financial success.
This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax, or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brooks' Own Capital Management, a registered investment advisor. Piduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.
Whisper: medium.en / 2023-12-07 09:17:54 / 2023-12-07 09:28:28 / 11