20 Planning Matters Radio - RichOnPlanning - 2950 - 4 PERCENT

If you fail to plan, plan to fail.

How do you want your future to look? We want you to plan for success. Welcome to Planning Matters Radio. And hello and welcome into another edition of Planning Matters Radio. I am Peter Rachan, president and founder of Rachan Planning. And along with me, my lovely wife.

Amber Rachan, back in your radios again this wonderful Saturday morning. It's 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 and the talking heads on what it truly takes to build 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, hey, 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 401k, that IRA. The number one job of those dollars is to help you recreate that paycheck and hopefully not run out of your ability to create that paycheck throughout the duration of your life. So 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. We're going to talk about the pros and cons, the potential problems with that, and some solutions to make that retirement paycheck a little bit more consistent and predictable. If you've got any questions, if you'd like to review and evaluate your plan, you're welcome to give us a call. We always extend the opportunity for Radio Show listeners to have a complimentary initial review and consultation. We'll even help design and outline a plan for you, including a written retirement income plan.

It's 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 to 555-888. So, Amber, I guess before we determine how much of a paycheck we're going to need in retirement, we need to think about what we want retirement to be about. What do you want retirement to be about? I want to be on a sandy beach somewhere. So every day you envision waking up on a sandy beach? A sandy beach with a pina colada in my hand, absolutely 100%, but you should know this. You're my wonderful husband, right?

And maybe now the listening audience knows a little bit more about you. I am a water baby. Sun and water and I'm fine. So what do you do to fill your day? You wake up, you got your sandy beach, you've got your pina colada.

What are the daily activities? Well, I'm probably going to spend some money on that pina colada, right? Right. Okay. So now you're $10 into the day. What's the rest of the day consist of?

What if I have two pina coladas? All right. And how about any other activities? I mean, you do that for a week, for two weeks, for a month. Do you get bored? Are you going to need to do other things? What do 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 minutia. I mean, we get into a 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 that beach all day if we wanted to. We could have a couple pina coladas, maybe three or four.

I might need a cancer policy if I sit on that beach too long. But we fall into a routine, right? And the retirement routine is 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 we're 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'll only need 70 to 80 percent 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. This is one of the status quos 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 unless they are saving 30 to 40 percent of their income off the top and only bringing home 60 or 70 percent of their income during their working career, you're probably going to need more than 70 percent 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 your example here, first, we're going to have to buy a beach house, right? We're going to need to be near the water for all that to happen. So there's an expense right there. The lights are going to have to be on.

There's going to have to be food and pina colada. I need a beach cruiser. OK. We need a car, a vehicle of some type to cruise the beach. Just a beach cruiser. OK. A bicycle will do. Oh, a bike. OK. But you're going to have to make trips to the grocery store. I'm sure I'm thinking like some of our listeners, though.

I'm thinking in a 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 employer is helping you pay for health insurance. Well, yeah, 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 lights still need to be on. The car still has to have insurance on it. Maybe some repairs, maybe a car payment. If you don't have a paid off house, then you've got a mortgage.

Maybe if you do have a paid off house, you're looking to buy a vacation spot at 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.

You suddenly no longer have an income. And so we're going to have to figure out a way for your assets to replace that need for income. And maybe we're 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 and 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 plan.

For about 30 years, the income that has been projected to be reliable in retirement has been based on a theory. And that theory has been called the 4% rule. Amber, can you guess at how much income the 4% rule says you should be able to take? Let me guess, 4%. You're spot on.

Woo, I'm good today. So let's break that down 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 is it should be able to and hopefully not run out of income over 30 years. Now, if we've been able to save a million dollars, do you think $40,000 a year is going to cover it for our expenses?

Probably not, Peter. Right. We need to be able to, A, take out 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 have done studies. They've been cited in the Wall Street Journal and Forbes and Morningstar saying that that cash flow rate actually needs to come down. It's 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 so now with that million dollar portfolio, we're only able to generate $20,000 a year. That's not real attractive to a lot of retirees who want to buy more than $20,000 worth of pina coladas in a year. My 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, an accepted rate of running out of money. And if you go to Vanguard, a pretty famous shop for do-it-yourself investors. They offer a lot of tools, calculators on their site. They've got a good one, a retirement calculator. If you run the numbers on this 4% rule, you plug in, I've got a million dollars.

I want to make it last for 30 years. I've got a traditional 60-40 mix of stocks and bonds in my portfolio. Hit the button, run the calculator, and it says you've got a 10% chance of running out of money. One in ten. You enter into retirement. Are you willing to take a one in ten chance that by the end of retirement you're in poverty?

You're completely out of money? And so one in ten, I mean, we've got to prevent the fact that we are the one in ten, but the other nine still have to worry that they are that one in ten, right? So there's a low level of confidence there that we are avoiding the possibility of running out of money. Well, it's not the 4% rule that's the problem, okay? It's the model being used to generate the income. The 4% rule was incepted in the mid-90s.

A guy named William Bengen came up with this 4% theory after doing studies and research. Well, you know what was going on in 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. Do you know what the interest rates were that were available in the mid-90s? Interest rates were higher.

Yeah, much higher than they are today. I mean, we're in a 1% interest rate environment. Back in the mid-90s, you could go get a CD that was paying 4%, 5%, 6%. So the old way that people wanted to think about retirement income was protect the principal and live off the interest. Well, you could do that when CDs at the bank were paying 4%, 5%, 6% rates of return.

It was easy to follow the 4% rule at that point in time and not run out of money. But conditions have changed. The market is more volatile today than it was in the mid-90s.

We've seen a couple major corrections. At one point in 2018, the market was down more than 15%. Interest rates are much lower.

And I've got a couple interesting charts here. Let's say that we did have that $1 million and we were trying to generate $40,000 a year of income following that 4% rule. And this math works, by the way, no matter what the amount.

Just do it proportionally. This works on $10. This works on $100,000. This works on $10 million. If we have a lump sum, we'll call it for nice easy math $1 million, and we're trying to generate a 4% cash flow, $40,000 a year, if we're only earning 1% in a bank-style safe account where we're trying to protect the principal and live off the interest, the money runs out in 28 years. We're taking $40,000 a year, our million dollars is shrinking because we're taking out more than it's growing by, and we're out of money in 28 years. If we include inflation into that $40,000 and increase that by a historical 3% inflation, we're out of money in 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 old protect the principal by keeping it in a savings account just doesn't work anymore.

So Amber, what do 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 if we're chasing higher returns, we're also risking losses. And so what happens in a year like 2018 where by the end of the year the market's down more than 15% and then we still need our 4% cash flow? Well, we've lost 19%, right? That's almost five years' worth of income that's disappeared.

One because we spent it and four more because the market took it away. And so it's problematic on one side, on one end of the spectrum, that we've got these low interest rates. And then on the other end of the spectrum, we're chasing higher interest rates and we've got market volatility to worry about.

Market losses could eat away at our retirement portfolio. Does any of that negate the need for income? Of course not.

Right, no. None of that's going to negate the need for income. So what are some of the ways that we can get our dollars to generate us some income? Well, we can rely on growth. You know, 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 of part of the company. For instance, if I buy a share of Apple or I buy a share of Coca-Cola, 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 going to 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, aka the stock price to rise. But as an owner of a company, you also expect a share of the profits of the company. And that's what dividends are. So when you own a stock, you hope that the share price rises. But while 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, and we can put together great dividend-producing portfolios. 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 build roads and schools, they might issue a bond. What a bond is is that investors can actually front them the money. They can loan them the money to make those improvements. Well, those municipalities are going to pay that back, but along the way, while they hold the money, they're going to pay you an interest. So that's a 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 I want my money that I've loaned them back, I've got to actually take less than what I loaned them. So there's a little bit of a liquidity risk there. There's 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 counting on. You can put money into savings, but we already talked about the low interest rates. You can put money into real estate, maybe get some rental income. You can put money into annuities. They offer a lifetime income, and 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'll 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 get it, too, if I die, Amber. And if both of us happen to die early, whatever's left in that pot would go on to our beneficiaries, to our son. We can control that. We don't ever give up control of that asset that we've 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. We're out of inheritance.

We're out of lump sum, and we're out of income. With the guarantees offered through a lifetime income annuity, when you reach zero balance, that's a whole new type of profit for you because they continue to pay you an 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 they're proponents for putting all of your money at risk in the market. 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 a nice peaceful journey that you can relax on?

With my pina colada. Right. Yeah, I heard somebody talking about how they had recently gone on a white water rafting adventure and how they had a guide. The guide was in the boat so that when they hit the rough rapids, the boat didn't overturn.

They knew what to do. They knew what side to paddle on and that they were the guide for your retirement adventure. And I'm thinking, well, in retirement, I'm not sure I want to go white water rafting.

I think I'd rather sit in a canoe on Lake Placid with my fishing pole out there, right? And so the rapids are like the stock market. Yeah, it's adrenaline.

It's fun. There's the opportunity for gains, but there's also the potential to capsize the boat and go over at the worst moment. And Murphy's Law states that what can go wrong will and usually it happens at the worst time. The annuities, on the other hand, are about stability. They're about serenity.

They're 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, you're not going to lose principle. And once you start taking that income, here's the real benefit.

You can't outlive it. 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 are 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 got an account that you want to pass on, but you want your loved ones, you want your grandchildren to remember you on their birthdays or 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 a million dollars, Peter.

What is the smallest amount that you usually see people starting with? You can start an annuity with as little as $5,000. Now, you know, $5,000 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 produce that 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? Well, now you only need $666,000 to 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, well, I don't have nearly enough to retire. I'm not going to be able to afford it because I don't have the million. I've only got 300,000, 400,000. But once you add in the Social Security, which we can help you review and analyze and maximize how much income you get from there, and then we add in a higher cash flow that's sustainable, that's guaranteed to you for life, from these lifetime income annuities that do just what they say, we can oftentimes get people a lot more income than they ever imagined that they'd be able to count and 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 options, 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 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've got that IRA account and the government's requiring you to begin taking income. There are actually specific annuities available that will take the net amount. You have, let's call it your $100,000 IRA.

They're requiring you to take out 4%, let's just say for easy math, and you have to pay tax on that money, so you're only left after you take out the $4,000 and pay Uncle Sam, you're only left with $3,000. There are specific annuities that will give you an upfront bonus of 25% to replenish that to be passed on in a 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 could actually, in theory, put money into an annuity and immediately have way more money than I had when I stuck it in there.

Absolutely. Let's say you've got $100,000. How does that $100,000 sound turning into $110,000 for the purpose of income day one, or $122,000? You don't have to worry about the market.

It's not something that is an if or a maybe. It immediately turns into more income-producing capital for you. And when they calculate that cash flow, whether it's 5% or 6%, whatever payout rate they're going to offer you, they're basing it not on the $100,000 that you put in, but the $110,000 that it turned into day one, or the $122,000 that it turned into. Plus, you still have the opportunity for that amount to grow if the market goes up. If 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 are some annuities right now that offer what's called a participation rate.

So you've got a floor. You've got a baseline that you will not lose money. The 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. The market goes up 10%, you just got five. The market goes down 10%, you didn't lose anything. And 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, well, annuities are so complicated.

They're really not that complicated. You know, a mutual fund is complicated. 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 know what's not complicated about a mutual fund is if 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, or it can provide an income. But it's a terrible multitasker.

Can't do all of them. Right. With annuities, we are sacrificing a bit of that liquidity. So what an annuity says is if I put in that $100,000, day one I can't get all of my $100,000 back. Now, I could probably get like 90% of it 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. You know, it's 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 to go a different direction, if you were chasing returns elsewhere, and you wanted all of your money back, usually there is some kind of liquidity charge, surrender charge. But you've got the guarantee that you won't lose money if the market goes down. You've got, in some cases, guarantees that your income value will continue to rise while you're deferring it. And at a certain point in time in 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. Hit a zero balance in a bank account and ask the teller for another check. You know what they call that? Bank robbery. Right?

They're going to call the cops on you. Hit a zero balance in a lifetime payout annuity and you've 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 generate for me? Hopefully enough to buy a beach house and a pina colada. You can set it up so you can buy a few pina coladas 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 we're 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 brokerage portfolio, an IRA investment account, an annuity to understand how to and how these tools can help you. Or if all of those things sounded foreign to you and you have no clue where to start. Give us a call. We'd be happy to talk to you. We'd 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 that 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 to 555-888 on your mobile device to be in touch. Or ask Siri. To find Rich on Planning.

That's how it's spelled, pronounced Rishon. But if you'd like a copy of my new book, Understanding Your Investment Options, give us a call. We'll set up a time to meet 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'll read this year.

You'll have to see the cover to get that joke. Anyway, we look forward to hearing from you soon. I am Peter Rishon along with my wife Amber Rishon. And we appreciate you tuning in to 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 online at richonplanning.com. And from our family to yours, we look forward to hearing from you soon or talking with you next week.

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