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February 5, 2021 7:00 pm
You fail to plan, plan to fail. We want you to plan more since planning matters radio hello again and into another edition matter on I am Sean, CEO of Rochon planning local independent dysuria advisor, author of understanding your investment options Dave Ramsey Smart investor roadmaster registered financial consultant. All of that to say that we are to talk about money and finance on Facebook, Graham, and specifically talking about your environment number many many years ago, now it's really been probably about 10 years ago when they had the commercials on TV numbers floating over people's heads and line was what's your retirement number and everybody had a big number floating over their head.
It was like alien six 2,000,002 as large numbers but how do we know what that number is how do we figure out that while it is a process you can figure it out. No how much you need to retire or when you're ready to retire or how much. Bottom line is, how much income can you generate in retirement and know that it's there know that it's dependable know that you can count and rely on it and so today when we talk about calculating your retirement number, income allocation is a system and a process for calculating for and generating the amount of income you will need in retirement and it's a systematic method of structuring specific plan to address retirement's greatest risk, which is running out of money answering the question, how much do I need to retire. So even if running out of money is not your top concern. You probably still strive to be as efficient as you possibly can with your money. Leveraging your money and income allocation.
Having a spending plan a specific written retirement income plan can help with that tremendously and it can help identify what's left over to continue treating as investment capital to continue treating as growth money. The growth money is not going to be the same as the income money can't be treated the same because money is a terrible multitasker.
Money can do. Essentially four things for us. It can grow it can be safe. It can be liquid or can provide an income and really you could pick two of those with any one dollar is what's important to you, so money in the bank is about safety and liquidity. If you got an emergency, you know it's there.
You know you can get your hands on it but it's not growing too much as it and if you taken income from it of any substantial amount, then eventually you're going to draw your account balance down money in the stock market is about growth and liquidity you you want that money to grow but it is not safe and again if you try to produce an income from it.
The stock market fluctuates and that income therefore can either fluctuate or it can again run the risk of drawing the account balance down and running out of money.
Money in CDs, money in bonds, money and annuities money in real estate. These are things where you don't have immediate liquidity you have said I probably don't need my money for a certain period of time and if you do need that money now for an emergency.
Your you're probably going to get less than what you deposited. That's the nature of those things, they are more about safety and or growth or income. One of the other two you get to pick which one is important to you.
So if you got a piece of real estate you can collect the rent, or you can allow your equity to grow or you can reinvest back into real estate. If you got bonds you can take the yield the income or you can reinvest that capital with annuities you can allow them to defer or you can start to begin to draw down in and taken income so you choose their what's important to you.
So all that to say that you need to understand your investment options and you need to understand how to calculate your retirement number if you'd like to go through that process.
If you'd like to see how that's done. If you'd like to know am I ready to retire. How much do I need to retire.
When will I be ready to retire.
All of that is part of the income planning process retirement spending plan. Income allocation is part of the optimize retirement plan we put together for our clients and and savers and investors were serious about their planning at Rochon plan, and if you'd like to get that plan put together phone give us a call 919300588691930058860 on the program today going to discuss how to calculate retirement number. The reasons for implementing that income allocation strategy to solve for your retirement number what the risks are that it specifically helps you to address and will describe how income allocation. How that portion of your plan should be structured and again by having that income allocation. It allows you to define how much is left over discretionary money that you can do all the things that you envision retirement to be about or you can continue to invest or can be your security blanket for what if's in the future, or can create that legacy for your family, your love ones your your charities or organizations something that you care about and not everybody feels like they are going to leave behind a legacy. But if you have that retirement spending plan. If you have that income allocation. Your odds are significantly increased, that you will in fact leave something behind so will cover calculating that retirement number identifying the income gap. What is equivalent portfolio value will talk about withdrawal rates and why that's been discussed in and argued about so much in an why there's such a debate on what is a safe withdrawal rate talk about Sequent sequence risk will talk about how income allocation is different than asset allocation. So stay tuned. As always, lots of important information coming your way.
I've got my cup of coffee. I hope you got yours or your your relax somewhere.
If you are driving. Feel free to take some notes on this because were to be going over some math so first and foremost in 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 and 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. Income 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. So in, 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, retirees without a specific income plan don't understand which accounts to pull from and what order to be as efficient as possible and to optimize withdrawals so 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 force in income and and that's why you really need to first and foremost acknowledge the need for income in retirement income has always been the basis 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 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 didn't we been cycle Nama glee train economically and psychologically trained not to touch our investment plan will do just about anything not to touch the investment plan will work extra hours will get a second job in in dire straits, and in times of emergency need. Maybe will dip into that investment plan but we try not to with with all effort. However, we've been also trained that has 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 were just a start suddenly reversing the flow of money to take money out and it's gonna be just fine as 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 know what is the income gap. This is Matt this is a mathematical process is where you may 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 are those are arbitrary numbers though.
Just because you have $1 million 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 will 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 like to have that optimize retirement plan.
A snapshot of where you are currently will discuss will define will write down the specific goals that you have for your financial future will make recommendations on action items a timeline for when you should be executing them all that is free. That's complementary no cost, no obligation give us a call 919-300-5886 919-300-5886 but most plans that focus on the lump-sum and returns our plans where somebody feels that they have enough they 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 and and down to being based on math, it boils down to being based on math, not hypothetical projection, so we wanted to find 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 beginning balances how much started the month with the credits is how much went in. That's your paycheck that your income that's are sources of 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 cost you that your after-tax net that you need to support the lifestyle that you are you stupid so we write that down. We get a tally we we average that we see what the swing is there not all going to be the same. Some months are going to be double what other months are midyear you're paying for all the Christmas gifts in in November and in 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 be some lean months as well warriors you're holding back your saving a little bit. Get the average spending and take note of the swing because that's going to be important as well, but will start with your average spending money your 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 when I would be Social Security.
We all want to be able to count rely on that we can talk about the questions of of that and how you feel about that during the process.
If you're lucky enough to have a pension that also can can be calculated and 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 were talking about when we discussed 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.
We probably need to adjust for inflation, but will talk about a few other factors you take that monthly income gap, you multiply it by 12 that 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. We need to divide by or in multiply by five to figure out what your gross income needs to be.
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 accepted in the mid-1990s when the stock market was was on a boom when interest rates were much higher.
It was designed by a guy named William Mangan 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 reasonable probability of success. They are saying that at actually, that leaves more 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 10% probability of the weatherman says you 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 how you 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 we can talk about.
We can discuss the merits of that 4% rule before 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. Is this the reciprocal is to multiply by 25 if we if we are doing a 4% cash flow rate and so we would need $1 million. That's 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 hate. We've just identified discretionary assets that are available for what-ifs down the road there available for healthcare there available for inflation there 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's the formula for a confident retirement. But there are factors there are variables that we need to consider need to consider taxation. Could that change in the future. A lot of people are worried about that right now were 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 the tax-deferred account you needs to be paying attention to the opportunity right now that we have, to better control our future taxes and by the way, if you got a larger lump sum save for your retirement then you got a larger potential problem and mistake. We don't just have a proportional tax system. We 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 are prices going to go up in 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 of you saved enough to retire. How much you need to further build your savings if you're creating 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 are available. Investment spending in 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 we say that again your withdrawal rate your income rate your cash flow rate is different than your rate of return.
I have seen people say, well, my investment plan has averaged 8% return over the course of of my career should not be able to generate an 8% cash flow.
Why is it so low of 4% why they say that's dangerous. They are not the same that 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 a 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 are rate of return is 60%.
So now we got $160,000.
The following year. We have a negative year -50%.
So the hundred and 60,000 turns to 80,000 that in the next year the third year we have a 20% rate of return 20% on 80,000 we have $96,000. So we had +60-50.
That's 10+ 2030÷3 that's a 10% average rate of return over that three year period. We started with 100,000 were left with 96 we had an average 10% rate of return of that three year period. We started with 100,000 were 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 hundred thousand dollars.
We had been pulling $4000 each year we would not even have 96 we 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 Social Security is talking about the equivalent portfolio value. I go over this exercise a lot with folks they say hey I got this pension is going to be paying me $40,000 a year or I got Social Security is going to be paying me $40,000 a year.
What does that equate to like what what amount of lump sum is that worth to you and when were making the decision on do you take a pension, a lump sum or you take the income. This is one of the things that we need to go through equivalent portfolio value again.
We use that for percent 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 would need to be $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. 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 is just call it what it is we have been in the next spirit with these 401(k)s 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 $4000 a month if I work for 30 years in a certain career. My my company my employers going to pay me $5000 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.
So let's take a moment 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. And while we work. There are four things that we do with our money with our income to pay taxes we pay bills we spend it out by stuff.
Have fun give travel, that's all.
And then spend it category or we save it or invest. And 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. We pay taxes we pay bills, or we spend that dollar is gone forever. That's, that's no longer our money only what we have saved.
Do we still have were invested and 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. So what portion of your savings that you save in order to be able to pay taxes, pay bills and and spend probably most all of it, and if anything is left over. You give it away.
You create a legacy, but income allocation specifically is designed to re-create your paycheck. This is how you turn your savings into retirement and why do we need an income allocation well because markets fluctuate bills don't my bills stay about the same from month to month.
Where is the market could be up 15%, down 15% from month to month from year to year account balances tends to fall over time. I know on the day that you retire, that money is 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 started to run dry. You start to live a different lifestyle. When that happens, you start to live a just in case. Retirement a reserve 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 and so we really need to look at that spending plan. How do we address the risks.
How do we create retirement spending plan. Well, you must get a a plan in place. You must have a plan to support your financial life, and in order to make the most progress possible. We offer the opportunity for that optimize retirement plan at Rochon plan. We help savers and investors better determine their outcome and make their goals reality.
Specifically, if you would like to learn how to retire where you want to learn how to pay less in taxes and keep more of your money if you like that optimize retirement plan, go to our website rich on planning.com Rochon planning.com or give us a call 919-300-5886 919-300-5886 on the website Rochon planning.com you can request a free copy of my book.
Understanding your investment options and either way you go through calling her through the website. I get in touch with us and we do offer the opportunity for a complementary review and plan design. You can get a free financial and retirement plan a free retirement spending plan a free optimized retirement plan taken a look at the fees you're paying the risks you take in the taxes that will be liable for trying to control all of those things try 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.
They are 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 919-300-5886 visit on line on the website rich on planning.com Rochon planning.com look forward to hear from you soon. All the best for your financial success since been planning matters radio the content of this radio show is provided for informational is not a solicitation or recommendation of any investment strategy you are encouraged to think investment tax or legal advice from an independent professional advisor. Any investment and/or investment strategies mentioned involve risk and possible loss of principal binary services offered through virtual capital management is a registered investment advisor. Fiduciary duty extends only to investment advisory advice but does not extend to other activities such as insurance or broker-dealer services advisory clients are charged a quarterly fever as a commandment belligerent product pay a commission which may result in a conflict of interest regarding compensation