we all look forward to retirement it's the time to sit back relax and enjoy the fruits of our labor unfortunately whatever aspirations we may have for our golden years can quickly turn into a nightmare if we make certain mistakes when planning for this phase of life these mistakes are surprisingly common and tend to lead to financial stress and regret with a big impact on quality of life some of these mistakes are 1. not planning for retirement two retiring too soon three relying too heavily on Social Security 4. underestimating health care costs 5. failing to save enough for retirement six taking on too much debt seven not maintaining strong relationships if you want to learn more about these mistakes and how to avoid them subscribe to the channel a new video is coming soon and you won't want to miss it.Read More
When you hear about retirement planning some
pretty big numbers get thrown around. But the reality is that most people don't have one or two
million dollars set aside. So let's look at what it's like to retire with $500,000 and what we'll
do is start with some calculations and give you tips on how you can run these numbers for yourself
with your own details. Then we'll go through some strategies that can help you make that money last.
Five hundred thousand dollars is sufficient to retire on for a lot of people and a lot of people
do it with less.
Now, more is certainly better but it ultimately comes down to your individual
circumstances for example the amount you spend is a big factor and that's going to depend on a
couple of different things it might just be your lifestyle but where you live also has an impact
on your expenses any income sources that come into your household are also important so if you
have a pension plus Social Security (full Social Security benefits) then that's certainly helpful
if you have multiple sources of income coming into the household that doesn't hurt and luck also
plays a role in all of this so it might have to do with what do the markets do right after you retire
are they strong or do they crash? Or what type of health care events come up what conditions do you
have now and what might arise during retirement? All of these things together are going to affect
what your spending looks like to keep things simple we're going to use some averages from the
BLS the latest data available is roughly $48,000 per year that a household over age 65 spends
but ultimately this needs to be useful for you, so you can take the concepts that we talk about
in this video and then overlay your own numbers into the calculators that you're going to have
access to, and that way you can get a decent idea of what your retirement might look like.
helpful to know that your spending can change over time during retirement for example some people
talk about the go-go the slow-go and the no-go years. So your go-go years are right after you
stop working you're young and healthy and you're eager to go out and do all of those things you've
dreamed about doing but you might start slowing down some and eventually you get to a point where
you don't want to sit on an airplane for eight hours and your health care costs start to rise
as you spend less on leisure and entertainment. Another big piece of all this is any retirement
income that you get so that's Social Security or pensions and Social Security is a big piece of
retirement income for a lot of people in the u.s so we're going to lean on that as we go through
this if you have roughly $500,000 saved for retirement then we're going to assume that you get
a bit more than the average here because you've had the earnings and the work history to help you
save some money your age also affects how much you get from Social Security, so that can impact
your plan you really want to do some analysis and make some decisions keeping in mind that you
may have beneficiaries who might take over your Social Security benefit.
By the way, I'm Justin
Pritchard, I help people plan for retirement and invest for the future. So, in the description
below, you're going to find some resources on this topic, and I'll include some links to calculators
that you can use to run your own numbers. So we'll start with a single person example
and then get into a couple, and these are over simplified examples but the important thing is to
paint the picture of how things might unfold and show you how you can run some of these numbers
yourself. We looked at some of those statistics on spending and if you're going to retire with
$500,000 in assets unless you have some really great retirement income you're probably not going
to be on the high end of those statistics so we'll assume somebody here spending about 45 thousand
dollars per year going to get 2 000 a month of Social Security income so we'll put those
numbers into our handy calculator here 45 000 of spending or income we're going to ignore
taxes for right now but we'll get to that later and she gets 2 000 a month in Social Security that
leaves 21 000 that she's going to need to withdraw from savings each year now you can play with an
inflation rate and of course inflation is higher right now the question is will it remain high
for the rest of your life for the next 30 years or something that would be interesting if it did
so I'm just going to go with this for right now and one year away from retirement let's
say five and a half percent returns both before and during retirement and 25 years
of life maybe 30 years of life if we look at the calculations there this person needs about
457 000 so depending on how much she has if you already had 500,000 you might be all set however
again this is an oversimplification so we have ignored taxes let's assume that all of that money
is in a pre-tax retirement account you're going to have to pay some income taxes when you take
withdrawals so one way to look at that is just to increase again this is an oversimplification but
you might say let's call it 50 000 and assume roughly 5 000 in taxes each year and what might
that mean well that might mean you need an extra 65 000 above the 500 000 you're thinking of
another issue is that this assumes flat returns each year and the fact is that you're never going
to get exactly five and a half percent some years you'll get five, some years you'll get six, some
years you'll lose money, some years you'll earn more, but they typically don't go in a straight
line so we have to wonder what would happen if you have bad timing for example if there's a
big market crash right at the beginning of your retirement.
To help paint a richer picture
of that let's look at a financial planning program that's a little bit more robust so this
is saying that she might have roughly a 50-50 chance of success and I've got some tricks to
improve that but just for starters that's more or less a coin toss so what does that mean
if there's a 50% chance of success this is a Monte Carlo analysis and so what happens is
we might say that you get a thousand different hands of cards.
Some of those are really good
those might be the ones up here that leave you with a lot of money at the end of your retirement
or the end of your life some of them are really bad and you would run out of money early and in
roughly 50% of these cases you end up just making it you're probably not going to get the best luck
as you go into retirement and hopefully you don't get the worst luck but we want to be able to
account for a number of different ranges here so that if things are kind of bad or pretty bad that
you have a decent chance of making it so what can we do to improve those chances of success one way
is to adjust spending so if you're flexible then you can reduce what you spend in years when things
are really bad or you might even look at something like the retirement spending smile which is based
on some research from David Blanchett which says that retirees might spend it roughly inflation
minus one percent now this has her with a 100% chance of success which i don't like nothing
is 100% certain i wish it would stop at 99% but just by making that little adjustment this
has dramatically improved the chances but it's not something you can do on one of those basic
online calculators just to look at a little bit more detail on how this might unfold by the way
this doesn't perfectly match what we looked at in the basic online calculator but
it's close enough for our purposes so they have about five hundred thousand dollars
here she's going to work for one more year then that income stops she's going to wait until age
70 to take Social Security so there are a couple years there with zero income and then a partial
year then that full Social Security benefit kicks in of course it's inflation adjusted so
it's actually higher out in the year 2029 those expenses are right around 45 000 when she stops
working and there's that five thousand dollars of taxes due so in these first couple of years
when she has no income she's going to be taking pretty big withdrawals to support her spending
but once that Social Security income kicks in then she can take much smaller distributions and
that tax bill is going to come down and we can take a look at that if we look at what her tax
rate might be this is an effective tax rate so this takes into account any deductions that you've
taken, uh, typically people pay surprisingly low taxes especially if you're at this asset level
in retirement roughly $500,000 in savings if you have a couple of million you're going to be
in higher tax brackets especially later in life once you start taking those required minimum
distributions but at this stage and with this asset level the tax rates can be surprisingly low
for some people so that was our single example and now we can look at a couple but I'm not going
to go through all of those steps again they've got two sources of income coming in so that makes
it a lot easier to support higher spending levels so let's jump over to the quick calculator just to
see how that looks so they wanted 50 000 of income or spending they've got 35 000 of Social Security
coming into the household so that's only 15 000 they need to generate out of their assets let's
throw on a little bit extra just for some taxes and other things so we'll keep all of the other
assumptions the same and it's a 30-year retirement here they can also make do with less than 500 000
again ignoring some taxes and bad timing and other things that might pop up as surprises but with
a really simplified calculation they're at least kind of in the ballpark with about 500 000
in assets of course it's important to plan for one person's death and that might happen
sooner or later so you want to look at how that might affect the household as you're doing
these ballpark calculations another thing you can do is look at a withdrawal rate again it's an
oversimplification but it's a way to kind of take your temperature and just see if things look way
out of whack or if they look more or less okay so in this case we've got them pulling 20 700 out
of their assets and that's based on let's call it $500,000 of assets so if we divide that we get
4.14 percent is the withdrawal rate that these people are taking the great debate is always
going to be what is the right withdrawal rate so the anchor point for a lot of people
has been a four percent withdrawal rate otherwise known as the four percent rule which
is a bad name for it it's really more of a four percent research finding and that's based on some
research done long ago to try and figure out what is the maximum amount that people could withdraw
in really bad situations with historical data and pretty simplified portfolios that happened to be
four percent now if you look at that and you use a more diverse portfolio it could potentially
be higher however a lot of people will say that given today's environment with low interest rates
and wherever the market is a lot of people think that four percent is too high this is something
that people can quibble about for hours on end so I'm not going to try and tell you what is your
correct withdrawal rate i actually prefer to do more detailed calculations like with the financial
planning program i tend to find that that's more helpful but it is often useful to figure out if
you're looking at a six percent withdrawal rate you might want to make sure that you have a
backup in place or you have a good reason for withdrawing a lot versus a one or two percent
withdrawal rate you have to wonder if you are selling yourself short once again any flexibility
you have in retirement is extremely valuable so if you're able to change your spending in response to
how the markets do if you are running out of money more quickly than anticipated then that is super
helpful and maybe you can retire sooner or maybe you can start with a higher withdrawal rate versus
if everything is rigid and you're running pretty thin then you want to go with a lower withdrawal
rate because you don't have a lot of cushion to adjust to life surprises so just for reference
here we're looking at some data from JP Morgan, their research on withdrawal rates and different
portfolios and when might you have a relatively high level of confidence when should you be more
concerned and they give you a rough idea what I like about this is it doesn't just point at one
number it gives you some ranges and you can say well I'm comfortable with certain ranges I'm good
with green i don't like anything less than dark green or you can say I'm willing to dip into some
yellow because i want to retire sooner and I'm willing to take chances and especially maybe i can
make adjustments if things aren't going well so what about taxes we said we talked more about that
and taxes are important this is going to reduce the amount of money you have for spending you need
to budget if you're going to be taking withdrawals from pre-tax retirement accounts because some
of that money needs to go to the IRS the amount you actually pay is going to depend on a number of
different things and again if it's all in pre-tax accounts you're going to have a relatively higher
tax burden versus if that money is in Roth IRAs and you satisfy all the requirements to get
tax-free income so there could even be some opportunities to do planning before you retire or
before you start taking social security benefits and there might be ways to reduce the amount
you pay in taxes Roth conversions are an obvious example of that now since we're talking about
taxes it's time for a friendly reminder that this is just a short video it's not individualized
advice it's not enough for you to make some really big detailed decisions on the rest of your life
so please check with some experts work with a tax advisor financial planner and triple check those
calculations if you're doing all of this yourself because we don't want you to run out of money
early now this is just an oversimplified example of what things might look like to help you
visualize what the tax impact is so at this point the person is taking social security
we've got that single person example again she gets 24 000 a year in social security so
that means she only needs to pull out 21 000 from those pre-tax retirement accounts for
ignoring state income tax and other factors her tax burden is relatively small however it
still takes a bite out of things and so if she was thinking she has 45 000 of income that
social security plus the withdrawals what ends up happening is she has slightly less
so she needs to either make up the difference or pull out additional funds a lot of people ask
about living off the interest or just not dipping into the savings but spending the earnings and
the dividends that come off of their investments i get where that comes from perhaps you want to keep
some money around for a health care event or maybe you want to give assets to the next generation
or to your favorite charity certainly makes sense the reality unfortunately is that for people who
have about 500 000 saved for retirement is that those people are typically going to have to spend
from their assets so what's important is that you make sure you don't run out of money before you
run out of life that goes back to some of those planning questions and looking at a withdrawal
rate that is going to make it likely at least that you don't run out of money and remember that
if you do run out of money you might still have some social security income and other resources
available but we really want you to be comfortable and have assets to draw on for the rest of your
life a couple of ways you can improve your chances are you can explore different products i don't
sell annuities and they can certainly be misused but an immediate annuity for example can pay you
income for the rest of your life and it's pretty simple and inexpensive you certainly don't want
to put all of your money into something like that but it could help if you are driven by a need
for security other techniques like buckets or time segmentation could also help you improve
your chances there are a lot of different ways to go about this it just depends what feels right
for you and if you're fortunate enough to own a home and have some equity in it then that may
be available for you down the road to help cover some needs if some surprises come up so as
you're figuring all of this out what can you do to improve your chances of success there are a
lot of moving parts but that means there are a lot of opportunities to make little adjustments that
can improve your chances remember those retirement spending strategies so that's the go go slow
go and no go years where you might reduce your spending by a certain amount as you go through
each phase or that retirement spending smile which goes slightly slower than inflation but you
might want to have certain categories of spending that go faster than general inflation like health
care expenses and in the category of least popular solutions there is working longer now this could
be something that helps you continue to save money and if you're able to maybe spend more on the
things you love then maybe you can keep working not a lot of people want to do this but it is
really powerful that's because it shortens the number of years that you take withdrawals plus
it can help your social security or your pension benefit or both because you've got more years of
earning possibly higher earnings and you tend to claim at a later age which typically helps your
benefit the drawback of that one I don't need to tell you is that you have to keep working longer
but even one year or a partial year can make a big difference and take your time as you evaluate
social security and other decisions like that because when you claim can have a big impact
on what your income looks like and it can also open up opportunities like leaving some of those
lower income years to make Roth conversions and you certainly want to remember inflation and
health care surprises as you go through all of this because those can have surprising impact
on things and health care is something that it's kind of crazy we go into retirement we don't know
how long it'll last we don't know what health care issues will come up so it's really difficult to
predict but those costs can really add up if you get into let's say an Alzheimer's and memory care
type situations so just think about those things even though it's not fun think about what might
happen if those situations were to arise.
So I hope you found this helpful. If you did, please
leave a quick thumbs up, thank you, and take care.
so you're getting close to retirement and the question is when should you take Social Security should you take it at 62 should you take it at 67. it's kind of like the old Chicken and the Egg discussion which came first well in this video I'm going to show you some circumstances where it might make sense for you to take it at 62 but I'm also going to show you why it might make sense to wait until 67.
[Music] hi I'm Troy sharp CEO of Oak Harvest Financial Group certified financial planner professional host of the retirement income show and also a certified tax specialist when it comes to Social Security there's usually two types of people we come across the first one says Troy when I retire no matter what I'm taking social security and the other truly has questions when does it make sense should I defer Social Security longer because I've heard that that makes a lot of sense well the truth of the matter is your circumstances your individual circumstances dictate when you should take Social Security and those circumstances today may very well be different when you get to be Social Security age so I want to cover some of those situations that may change your timing for when you elect Social Security and I also want you to know how that impacts you long term as far as your financial security how much money you have how much income you have before we continue if you'd like to support the channel just hit that subscribe button share this video with a friend or family member or comment down below so let's take a look at John and Jane they're both 61 they come in they say Troy you know what we're tired of working we really are thinking about retiring and we know we can take Social Security next year at 62.
Does that make sense should we do that so this is a case study but John and Jane right now both making about seventy five thousand dollars per year so the first thing we're going to do is look at can John and Jane retire at age 62. now we have to pick a mortality date here so we start in this example at age 90. now one spouse could pass away before another spouse so we can always move these sliders back and forth and that would impact the probabilities and the right choice for taking social security but for now we're going to plug these in both spouses live into age 90 can they retire at age 62. we have to look at some goals here too because the the decision of when to take Social Security should not be made in a vacuum just because you get more from Social Security if you defer it longer does not mean that you should always simply defer Social Security longer there are some big things we need to understand first when do you want to retire how long are you going to live how many assets have you accumulated how much money do you have how much do you want to spend in retirement because that is a big determinant of how long your money will last and also when you should take Social Security so we have to first and foremost realize that the decision of when we elect Social Security each spouse has to be made within the context of the other parameters within retirement now for John and Jane here they want to spend a baseline income of about fifty thousand dollars per year but they're healthy and they're active they're retiring young the target date here is 62.
They want to spend an additional 60 000 in what we call the Go-Go years so a total of a hundred and ten thousand dollars for the first 10 years of retirement so from 62 to 72. after that 10th year they want to reduce the spending but they're still planning on being a little bit active going out to eat spending time with friends probably kids kids grandkids Etc they're going to reduce the total spending to from from the go go of 60 to 25 so 50 plus 25 is 75 000 all adjusted for inflation for another eight years here I'm just kind of randomly putting some numbers in of what we usually see when we sit with clients when we go through the income planning discussion and what retirement success looks like to you and this is something common to what we may see in this situation so 110 000 for the first 10 years of retirement then 75 000 for years 12 through 20 and then all of that goes away except the Baseline spending of about fifty thousand dollars a year and of course that's adjusted upwards for inflation 20 years from now that's going to be close to about a hundred thousand in today's dollars as far as purchasing power of that 50.
Now I like to start the analysis at age 67 so full retirement age so when we start to look at these parameters of when it makes sense that the Baseline I like to start at is 67. so in this scenario John has thirty six thousand dollars or three thousand a month at full retirement age of 67 if he waits that long Jane will have thirty thousand dollars in retirement benefits at full retirement age we call it fra for short if she waits until age 67. okay I told you there were four big things there we've already covered two of them how long they expect to live age 90 how much they want to spend we went through that go go spending plan now how much have they saved because these are the things that we have to look at in context of making the decision of what makes the most sense regarding the age to start social security for both spouses so in this example we have 250 000 inside James 4 1K John has about 700 000 inside his 401k and they've managed to save about fifty thousand dollars outside of retirement accounts for a total investable asset level of 1 million bucks now I'd like to point this out as well they have a five hundred thousand dollar home no mortgage so that's kind of always in our back pocket if we need to tap that home equity line possibly a reverse mortgage or if we want to sell and downsize generate a little additional cash for the Investment Portfolio or to spend it's always nice to know that we have that option okay so remember I said I like to start the Social Security analysis when deciding between taking it a 62 or 67 or anytime in between or even later I like to start the Baseline at 67 to kind of see where we are and how everything plays out so I'm going to hit the magic button and based on the Go-Go spending period retiring at 61 taking social security at 67 having one million dollars in assets by the way not assuming that the home is sold we just know that's in our back pocket but it's not used to fund any goals a couple things I want to point out here first 81 probability of success that means out of a thousand different simulations assuming all these different market returns across all these years and I want to also point out this is not using uh back tested data this is using assumptions and forecast moving forward for the current economic environment that's very important to understand so 81 is not a hundred percent but is it good enough to retire yeah absolutely as long as we stayed connected to what was going on in our plan as far as how our portfolio is doing how much income we're spending the economic environment all of these various factors we would just want to monitor it a bit more closely to make sure that we weren't going down from 81 but the second thing I want to point out here is look at the kind of the trajectory so these are a thousand different simulations here and the thing that sticks out to me is taking social security at 67 and spending that amount of money we see in in literally all of these simulations that the the portfolio balance this is what this represents so we're starting at a million on the y-axis here you see it's 2 million three million and then on the x-axis it's going out years 2025 2030 2035 but in almost all of these simulations the account balances are depreciating so that tells me immediately that I want to have a conversation with you that that if we defer Social Security until 67 would you be comfortable seeing your account balances spend down because from my experience When people's account balances are spending down in retirement even though they know they have a much higher guaranteed income from Social Security people get nervous and when you get nervous in retirement especially during a recession you can make bad decisions and bad decisions are typically the one thing that can really throw your retirement off track if we allow our emotions to dictate our actions we can blow an entire plan up in the best plan out there will get blown up from bad decisions typically driven from emotional feelings behaviors Etc okay now we're going to take a look at Social Security at 62 versus age 67 and we're also we're going to look at age 70.
So what we have up here is is full retirement age both taking it 62 both taking it at 70 and then one spouse at 70 one spouse at 67. we're going to look at the probability nothing's changed except when we take Social Security okay so the the what we just looked at the current 82 percent the reason this is one percent higher than the 81 is another simulation has run but we're right in that range I want to point this out here so this is interesting the age 62 of both spouses take it at 62. it's very very close to the full retirement age probability so when we're doing a statistical analysis of all these different variables to me there's not a ton of difference between 79 and 82 81 somewhere in that range these are very very similar now when we look over here at age 70 this is the one I want you to kind of really let soak in and understand why so we have a couple that wants to retire early but they also have a pretty big spending goal in mind because they want to enjoy retirement they want to spend it together they want to travel spend time with the kids that 110 I think was the goal 110 000 during that first 10 years of retirement in the Go-Go years this means we do have to draw down the assets we need to be comfortable with that but we also need a plan on where that income is coming from how we're going to protect some of the assets but also we want to make sure that these other decisions are being made correctly as well so 62 and 67 very similar but if if they were to just follow the the most recent article they read on CNBC that says you should defer your Social Security as long as possible and they waited until age 70 yes they would have significantly higher annual income but they will have spent down the portfolio to such an extent that that might be all they have so big difference here between taking it at 70 versus 62 or 67.
Now your situation is completely different I'm not telling you to not take it at 70 because for a whole lot of our clients that is the right thing to do mathematically the other side of that coin is mathematically is not always the right answer working with clients for many years I know that emotionally if we put a plan together and this is a conversation we'd have with you if we put a plan together that had you deferring Social Security longer but your account balances were declining in value not because the market was going down just because you were spending from my experience that would be very difficult for a lot of people to continue to spend the amount of money that they have been spending and still feel comfortable that they're going to be okay for the long run so this is why staying connected to the plan and having ongoing conversations and making sure you're attending your reviews and and and make sure that you understand where you're at I also want to to briefly just talk about the dynamic spending concept things change in retirement things change in the markets things change in the economy so when we're having these types of discussions if we're not comfortable you have to communicate that because we can pivot we can go in a different direction for some of you it may make sense to take it at age 62.
for some of you it may make sense to take it at age 67 and others age 70. but make sure you understand that this plan of yours it is a living breathing organism it needs water it needs sunlight it needs to be paid attention to and things are going to change pay attention to your your emotions how you're really feeling about your account balances is that impacting your spending decisions are you having trouble sleeping at night if so that's a conversation that that you need to have with your advisor but all of these different pieces working together from my experience that's how you have a higher probability of success in retirement and also sleep better at night [Music] foreign [Music].Read More
[Music] welcome to the market call show where we discuss what's happening in the markets and the impact on your Investments tune in every Thursday on Apple podcast Google play Spotify or wherever you listen to podcasts hi Wade how are you doing I'm doing great thanks for having me on the show you know I'm so happy to have you here if you're in the retirement income planning business or if you're a financial advisor or a money manager somehow managing money in the space for retirement income planning everybody has heard your name you've been around in this field for a long time and as I was looking through your uh resume from various sources it's like okay well what are we going to exclude you know there's because there's so many things that you have done but I thought I would just kind of just fill in for viewers that don't know you a little bit about you um you know you're an active researcher and educator about retirement income strategies you know you do a lot of speaking I know you're going to be speaking here in Denver uh pretty soon uh you are a professor are you still a professor of retirement income at the American College of financial services I am currently yes and the director of Retirement Research for McLean asset management and in-stream uh you did your PhD in economics from Princeton and you did interestingly you did a dissertation on Social Security reform which we hopefully we'll talk a little bit about later uh you're also a fellow CFA Charter holder like myself um and you've got lots of AD you know accolades and some great books in particular one that I really like that you've done is a retirement planning guidebook uh 2021 uh and then you have that safety first retirement planning how much can I spend in retirement etc etc you've done some stuff on reverse mortgages The Unwanted stepchild that actually is a useful tool for many people yet not quite known by many so uh with that said I I was just curious tell me a little bit about your background where did you grow up so uh well I was born outside of Detroit I lived there until I was 15 moved to Iowa after that my my mother is originally from Southwest Iowa so I graduated high school in Des Moines Iowa and then went to the University of Iowa after that so pretty much midwesterner lived a number of different places afterwards including New Jersey Pennsylvania Tokyo Japan for 10 years and then now I live in Texas you live in Texas now yeah actually these pictures behind me and all are all the places I've lived over the years so it's so so you so you grew up in Detroit mostly it sounds like but moved all traveled a lot um how did you go from you know studying what did you study Finance initially when you were in college in undergrad economics and finance economics okay so how did you go from economics and finance to just being so focused it seems like you're focused on retirement income planning well yeah I mean uh financial planning as an academic field is still pretty new and even I entered the PHD program uh in 1999 and actually Texas Tech University started the First Financial Planning PhD program in the year 2000 so it wasn't even an option at that time but academic economics is very mathematical and theoretical and I was always looking for ways to apply to more real world type activities and that's ultimately how I made my way into financial planning indirectly you mentioned the my dissertation on Social Security reform that was testing how in the early 2000s there was a proposal to create personal retirement accounts to carve out part of the Social Security tax and put that into like a 401k style account and I was simulating how that might perform and ultimately that's the same sort of thing I've made my career on at this point which is just writing computer programs to test how different retirement strategies perform in looking for ways to get more efficiency out of one's asset base for retirement now that was during the bush 2 Administration if I remember correctly wasn't it and so and uh what were your findings in that what was your general thesis or not thesis but your general conclusion well at the time what I determined was that it could be made to work but it wasn't obviously a better approach and now in hindsight I realize more and more that there's so little in the way of protected lifetime income that carving out more of Social Security which is that inflation-adjusted protected lifetime income and exposing that to the market as well uh probably would lead to worse outcomes for many people than we do need some risk-fooled income and so now that traditional pensions are going away Social Security is one of the last holdouts and so it probably wouldn't be the best idea to private or not privatize but uh create personal the defined contribution 401K style accounts out of those Social Security contributions very interesting and we'll we'll touch a little bit more I have a lot a few questions on Social Security uh in general um you know from a macro perspective and also a micro perspective personally for uh people so um one of the things that I really like about what you've done is that you kind of take more of a approach that I'm kind of used to like more of an asset liability management approach when you think about funding ratios rather than the traditional way that you hear financial planners talk about it I really like your overall framework and one of the things that I I think is very helpful is your retirement income style protocol your resubm Matrix can you explain a little bit uh to the viewers about your ideas there and and what how that helps an individual determine their overall approach to how they should tackle their retirement income plan yeah absolutely and that's really one of the the confusing aspects of retirement income is there are different strategies that people can use and unfortunately just there's a lot of disagreement and arguments about one strategy is better than all the others and and by what I mean by that is you have What I Call Total return which is just a you build an Investment Portfolio and you take distributions from it throughout retirement you have different bucketing or time segmentation strategies and then you also have strategies that will focus more on having protected lifetime income through annuities or other tools to cover your Basics before you start investing on top of that and they're all viable strategies at the end of the day and that's an important point that Advocates of Investments only don't appreciate how powerful the risk pooling that annuities can do to offer more income how that is competitive with anything that the stock market might do and so people really have options about what they're most comfortable with and that's what the retirement income style awareness is about developing a questionnaire to help guide people in the direction as a starting point which of these different retirement strategies resonates best with your personal Outlook and preferences you may not ultimately choose the the strategy coming out of that but at least it gives you a starting point to say okay it seems like I might look here first as a way to build my retirement strategy and ultimately if that helps me connect to a strategy that resonates and that I can stick with through thick and thin in retirement that can help give a better outcome because they're all viable strategies but where a strategy doesn't work is if you're not comfortable with it and you don't stick with it and you you bail on it during a market downturn or something like that that that's what the retirement income style awareness is really designed to do is just provide that initial talking point on which kind of approach might work best for me to to think about as a starting point yeah I like that because what it's doing is it's basically more holistically looking at how you would can solve the problem and typically you'll find advisory firms that will will overweight if you will one over the other they're like I'm a Time segment guy or I I hate annuities it's all Total return annuities are a scam or uh you know I will never buy an annuity or uh you know Etc et cetera and risk pooling is is something that's really important but it's also very complicated and I think that's why a lot of people have shunned annuities and annuities have changed a lot over the years um and you know coming from my background you know which is more of a total return approach that's great if you have a lot of money but in in other cases you know I think that you can you can you can look at the problem from a optimal way of doing it or you can look at the problem from a way that's actually going to get implemented and work and what I like about Risa is it's practical pretty much all the stuff that you're doing is practical it's not completely theoretical one problem though with that is that you can have somebody who has a safety first for example mindset but their situation is such that if they have a Safety First with 100 of their Capital that they're very unlikely to be successful can you can you expound a little bit upon how you would think about that in terms of giving advice to people in that scenario yeah so that scenario is probably more they do have a safety first mindset but they've been pigeonholed into a total return strategy but they're ultimately not comfortable with the stock market and therefore maybe most of their Holdings are in cash or in bonds which doesn't support a whole lot of spending power and that's you kind of there's three basic ways you could fund a retirement spending goal the first is just with bonds or with cash not really offering much yield on top of that and then to try to spend more than that the um the probability base perspective is invest in the stock market and the stock should outperform bonds and that should allow you to spend more throughout retirement the safety first approach is more now let's build a floor of protected lifetime income that then brings in with an annuity the the risk pooling the the support to the long-lived helps provide more spending power than bonds alone as well and people have that option and it's when the safety first person gets pushed into a total returns probability based strategy and just doesn't invest in the stock market they're ultimately left with bonds which which is the least efficient way to fund a retirement spending goal over an unknown lifetime very true and you know I guess a lot of people did take that approach probably when I first got in this business 20 over 20 years ago there was a lot of people that were doing that who were retired back where the municipal bonds were paying it was it was conducive the market was conducive for that we had high interest rates that were in the long-term secular decline so you had capital appreciation from those bonds he also had reasonably good uh tax-free interest yields that were working for people and inflation was falling um and so now we potentially could be in the opposite inflation Rising who knows how yields are going to work themselves out but um it when you're looking at this um you you bring up this concept of some of the retirement risks and and you have like these uh longevity sequence of returns spending shocks Etc of of the risks that you're seeing out there which one would you say has had the largest impact negative impact on people that they really need to solve for you know longevity sequence of returns spending shocks and surprises well longevity in a way it's the overarching risk of retirement and it's misnamed because it's a good thing it's if you live a long time it's just as an economist will point out that the longer you live the more expensive your retirement becomes just because every year you live you have to fund your expenses for that year so the cost of retirement grows with the length of retirement and then it's when you live a long time not only is there that issue that you're having to fund your budget but then there's just more time for all those other types of risks to become a problem as well with the macroeconomic environment with changing public policy with inflation even a lower inflation rate still is slowly eating away at the purchasing power of assets and then the spending shocks are things like big Health Care bills helping adult family members having to support a long-term care need to to pay for care due to declining cognitive or physical abilities and so forth and so so it's really that longevity is if you don't have longevity there's not really time for the other risk to disrupt your retirement too much and that's why longevity usually gets listed as the primary risk of retirement interesting I hadn't thought about that so a lot of the other risks are kind of correlated to the longevity element um so so really tackling that that that could be one of the biggest parts of all the surrounding risks around that you you talk a little bit in your book a retirement planning guidebook you talk about quantifying goals and assessing preparedness and I I had mentioned before that I like that you're taking your approach more like a Alm or asset liability management type of of an approach which basically that's what it is um and uh and I don't think the average person thinks about it that way they tend to think about it as like I have so much money and I'll be able to with draw so much from it sometimes there's unrealistic expectations about it but one of the common things that I've seen is that most people are not spending the time they need to do on budgeting really to actually even come up with a number or help come up with a number of what your present value of assets need to be to be prepared do you have any kind of practical tips for people and their advisors on how they can actually think about and execute a good budget not only just you know come up with one but actually implement it well now that technology can really help with that and so if people are comfortable with some of the the different websites or software that Aggregates all of your different expenses different credit cards and so forth into one Excel spreadsheet that's a very easy way to to start budgeting now for people who mostly pay in cash that can be a lot more complicated these days I don't use a lot of cash so I just simply when in the rare case that I have an ATM withdrawal I'll just kind of call that a household expense for that time period and not worry about breaking that down much more but uh when you start having those credit cards or debit card type expenses now the the software may not categorize them in the way you desire and so I usually try to not more frequently than once a month but maybe once a month once a quarter download the expenses while I can still remember well enough if I have to change some of these categories and so forth to then be able to keep track of all my expenses and know exactly then pretty much to the scent almost what I spent that year and then to start thinking about well were there any anomalies of course there's always going to be anomalies and to make sure you budget in that sort of thing but that really once you have a few years of expenses down and once you think about bigger Big Ticket items like car purchases and things that can really give you a foundation to start projecting ahead at what your expenses may be in the future as well and then then you have a way to start thinking about well how much do I need to fund those expenses and that's the whole idea of that asset liability matching do I have the resources necessary to fund your expenses are just your liabilities and do you have the resources to be able to fund that with a level of confidence that you feel comfortable with hmm interesting so I I had a meeting with a client actually who was forced into early retirement and a former engineer and keeps meticulous records has for years and uh he gave us the actual numbers for the last three years and I I figured out what the compounded rate was and it was a lot higher than the inflation rate reported by the bl by the government so um I I think there's some disconnect there between you know how we model and reality um you know uh when you look at financial planning software and you look at the assumptions that are the number of assumptions that are involved in the financial software and you know even if you're not taking Point estimates if you're doing Monte Carlo or whatever stochastic process it's very difficult to come up with a robust plan so I'd like I'd like for you to give me some and I know this is kind of a big general question do you have any general tips to people who are doing this modeling on how and for and for clients actually for for individuals and how they can make their retirement more robust to be able to deal with all the changes that can happen in the world like you said public policy changes Market changes Etc yeah you will have to revisit things over time and and as you get new information about your spending make revisions to the budgeting but uh it's still just a matter of when you're like round up your expenses or be conservative with some of your projections there's some categories that are challenging as well like healthcare and when someone switches to MediCare at age 65 that could lead to an entirely different set of health care expenses and with all your expenses on Health Care in the past you might have to completely upend that and and and do a reset there so it is challenging but if you're trying to build in conservative projections the default is usually whatever you believe your expenses will be you just adjust that for inflation every year and most people don't really do that they tend their expenses don't tend to necessarily keep up with inflation over time now that can get complicated but the way I describe it in the retirement planning guidebook is you'll have one particular budget through ajd and then you'll have another lower expense budget after ajd but also building in what if there's a long-term care event and so forth how much additional Reserve assets would I like to have set aside for out-of-pocket expenses that sort of thing and then it's not going to be perfect and it's going to need revised over time but I think you can start to get fairly confident like I've sort of done these exercises I'm still far away from the retirement date and of course I may be wrong but I I think at this point I have a sense of what my expenditures will be or what they can be at least uh over the longer term Horizon of course subject to new technologies new inventions everything else that can happen uh that would change your expenses but at least roughly speaking I think you can start to figure these things out yeah um I guess I'm coming from a practitioner who's been doing it for you know 25 years and seeing the the the conventional wisdom by the best experts at each point in time and looking at how people have actually fared without advice and what I've found consistently is that changes in in particular with government policy has led to uh sub-optimal choices for people who are trying to optimize to the typical cfp advice so and let me let me uh back that up a little bit with with uh some some examples um education planning what was optimal has changed in my career probably four or five times um let me just put it this way I I have put more emphasis in tax diversification and diversification and stuff in how you do things now because what if you if you over optimize in these scenarios it's sub-optimal does that make sense right if like if you designed everything to handle one particular public policy and then it changes on you like right now Roth IRAs or Roth accounts are incredibly attractive to have Assets in but something could change it could just be not that they might necessarily ever tax a Roth distribution but they could add a required minimum distributions or they could count it in the modified adjusted gross income measures used to calculate taxes on Social Security benefits or to calculate higher medicare premiums and so forth and so if something like that happened and you'd been doing all these Roth conversions to get everything into the Roth account yeah that would be overdoing it and subjecting you to that particular risk so I do think tax diversification is is quite important so that you still have flexibility and options because the the uncertainty is the rules will change and we see that every couple of years we just in late December 2022 secure act 2.2.0 came out and that has changed a number of different public policy matters related to retirement income it's gonna and that will continue to happen over time so so be flexible and part of that is just not overdoing things making sure you stay Diversified with with how you're approaching planning yeah in today's environment what we see a lot is is people that have taken the advice of Max 401K uh you'll get a lot of tax deferred and and what's happening is is they're coming to retirement with a large very large 401K plans and things like that and then they just get nailed in taxes and in fact I'm finding a lot of people pay more taxes when they're retired than they did in some cases than when they were not retired um and uh and and it becomes an issue it becomes a real issue then they have estate planning issues and things like that so um uh I just I'm glad that you said that about the the tax diversification I think more than ever especially given our our current you know country's economic condition there's a lot there's we're going to have lots of changes and they could be very large changes uh in particular if you considered quote unquote rich um so I'm sorry I put my little uh two cents in there but getting back to your book uh you have this concept of the retirement income optimization map um again going back to the assets and liabilities and all of that and when you're you when you're you talk about optimizing that's that's why I brought up the the concept of optimizing I I think there's optimizing within ranges one of the concepts that I've kind of looked at and you talked about you talk about different people's retirement styles um one of the issues that you can look at is like matching the duration of your expected liabilities up for a certain period of time so let's say you have a certain percentage of your portfolios in a total return portfolio and then and then another percent that you're you're cash matching or your duration matching matching for one to five years or whatever uh I think some people call that time segmentation you can call it many different things if forget about psychology and how somebody feels if you are just a rational investor a rational person what would you say the optimal length of time is on average for somebody retiring 65 say to cash match or to duration match uh you know their near-term expenses at one year is it five years is it 10 years I know that's a a loaded question but if you forget about forget about psychology and just go pure rational mm-hmm well pure rational the the total return investing approach which has less emphasis on trying to duration match uh can work and also if you then use a an income protection or wrist wrap type strategy you you have that income floor in place that is lifetime so it's already kind of duration matched to your liability so time segmentation is certainly a viable strategy in terms of my personal preferences it's my least favorite strategy so the whole behavioral point about time segmentation is if I have five years of expenses in in cash or other fixed income assets I don't have to worry about a market downturn because I feel confident that the market will recover within five years and I'll be fine and that that story that's a behavioral story and it just doesn't resonate with me personally I I can understand it resonates with others but it doesn't resonate with me personally and therefore I don't necessarily think about what sort of like front end buffer you need in place too to somehow be rational or optimal also that's where something like a reverse mortgage can fit in in a really interesting manner because if you set up the growing line of credit on a reverse mortgage that can be the the type of contingency fund that you can draw from so that you don't necessarily need to have as much cash or other assets sitting on the sidelines to fulfill that role so I would look more at some other of course you need some some cash but I tend to say less rather than more and maybe look at some other options as well about how to have that liquid contingency fund that's great so so basically the in in the guaranteed income sources plus plus reverse mortgage could uh provide a buffer provide a floor so that you could have uh less cash and and you're generally getting a higher expected rate of return on the annuity than fixed income securities and your at at least at the present time a reverse mortgage line of credit grows at a faster rate than the cash which can be used tax-free when you need the money uh so you can see that Evolution that Carol davinsky is one of the famous planners and researchers in this area and in the 1980s he talked about the five-year Mantra which was have five years of expenses in cash now cash you create drag on you're not able to get as high of potential returns with the money you have in cash so he gradually lowered that down to two years in cash and then when he came across reverse mortgages and in subsequent research and and descriptions he talked about having six months of cash alongside a reverse mortgage growing line of credit so I think that's an example of I I think something like that sounds pretty reasonable that's that's that's that's really helpful so and I want to Circle back to reverse mortgages here but before we do if you don't mind I'd like to talk a little bit more about social security uh so we're kind of getting into the realm of the the guaranteed side of things not the total return side of things um or or I more more knowable income sources um I was just looking at the kind of the statistics right now total debt in the United States is really huge um we're running very large deficits project to be like 2 trillion we have a Pago system right now in Social Security and even if we taxed it's been argued by many people even if we taxed every billionaire 100 that would barely make a dent in our current situation so we have huge unfunded liabilities off balance sheet uh type unfunded liabilities how can we really expect Social Security to keep up with inflation and will it be there for quote unquote you know what I'm saying well it will need reforms it's very unlikely to Simply disappear for my own personal planning I I assume I'll get 75 percent of my presently legislated benefits but for people who are younger as well further away from their their 60s uh the social security statement they receive assumes the zero percent average wage growth as well as zero percent inflation and the reality is there's probably going to be a positive real wage growth over time so you're presently legislative benefit could be a lot higher than what your social security statement is implying and therefore when you offset a benefit cut with the uh the wage growth that can be expected over time you may not have that much less in terms of what you're going to plug into your financial plan but yeah I certainly we don't know how the reforms will shake out but if nothing is done sometime in the 2030s Congress would have to legislate a benefit cut and to keep the system so that enough payroll contributions are coming in to cover exist current benefits that cut would have to be somewhere in the ballpark of 20 to 25 percent so I just simply assume I'll get 75 percent of my presently legislated benefit as part of my financial plan is is it fee Is it feasible feasible to actually get Social Security in a funded situation or is it gonna is it most likely going to stay Pago in your if you had a crystal ball oh it yeah it's always been pay-as-you-go and right so the buildup of the trust fund was an effort to just build up some reserves in anticipation of the changing demographics where there's more and more retirees relative to the workers paying contributions uh they try to keep Social Security funded over the 75-year time Horizon and so it's never permanently funded but yeah with a 25 20 to 25 percent benefit cut that would be sufficient to get the system to be expected funding funded fully over the subsequent 75-year time Horizon that's that's really helpful um thinking about it that way in terms of just potentially a 25 less is a reasonable way to look at it I think um the that part of it's not so hard what's harder to understand or to get a grasp on is whether or not that's going to be what that means in real terms for for a retiree um if we continue on a certain path and inflation is is in a different scenario in the future how how do you think about scenario when or inflation when you're when you would set up a plan or a retirement plan what how would you what kind of what kind of uh of Monte Carlos if you will would you put on on your inflation expectation so I do well I tend to just try to think of everything in today's dollars so that the inflation's factored out of it but I the way I think about long-term inflation is the markets tell us what they expect inflation to be if you just look at the difference between a treasury bond and then a tips treasury inflation protected security with the same maturity uh the difference between those two is what the markets expect inflation to be in if they thought it would be different they would invest in one or the other to get that aligned inflation is coming down now and even over the next five years at this point markets are only factoring in an average inflation rate of about 2.1 to 2.3 percent so it seems like markets really expect inflation to come over to come under control even over 30 years right now the markets are building in about a 2.3 percent average inflation rate which is below historical numbers and in terms of if I'm building a Monte Carlo simulation right now I'd to be a little more conservative there I'd base it around a two and a half percent inflation rate with historical volatility and inflation is around four percent so so you're basically an average of 2.4 or 2.5 and then uh standard deviation is like four basically okay so uh that that sounds reasonable um I I guess what is interesting about that is I guess if you assume that we have typical real rates of return for different asset classes that that all works itself out if you put it in present value terms um but if that's not the case and and it should stay that way ultimately it should stay that way but you could have major moves in markets in people's uh time Horizon when they retire which leads us to sequence of returns conversation uh when people retire you can have these you can have these big shifts in markets things things are rough right when somebody retires uh we uh remember I told you about that engineer we had a conversation with forced into early retirement right when the market topped uh the good news is is he had two types of annuities that worked out perfectly for him in the sequence return can you explain sequence return risk for listeners and and what it means and how to you know strategies to mitigate that a little bit more and just one quick last comment on the inflation too like if you thought when I said these low inflation numbers that that's ridiculous inflation would be much higher well then you'd benefit from investing in tips because they'll provide you a real yield plus whatever inflation ends up being and so they'll perform better if inflation is higher and they've already discounted that that was one of the best performing uh fixed income markets uh in the last couple years so but anyhow but but yeah a sequence of returns risks so that's it whenever you have cash flows going in or out of a portfolio the order of returns matters and it's when you start spending in retirement that it matters a lot more so it's like the market could do fine on average over the next 30 Years but if the market goes down at the start of my retirement I'm not having to sell more and more shares to meet my spending needs and sell a bigger percentage of what's left to meet my spending needs such that when the market subsequently recovers my portfolio doesn't get to enjoy that recovery and so it can dig a hole for the portfolio and the the average return could be pretty high but if you get a bad sequence of market returns right at the start of retirement it can really disrupt that retirement and lead to an implied much lower average rate of return than what the overall markets were doing over your retirement Horizon yeah so and in terms of actually uh let's say you're coming up on retirement so this is a common scenario you're retiring in 10 years or five years what should an investor be thinking about doing to transition from that accumulation to distribution phase to kind of mitigate that sequence of return risk so when people start thinking about retirement I think that's where the first step take that retirement income style awareness to get a sense of what sort of retirement strategy might work for you because that's where you then have um different options if you're more of a total return investor that's the whole logic of the target date fund and so forth is just start lowering your stock allocation but still investing in a diversified portfolio as part of that transition into retirement if your time segmentation the easiest way to think about the transition is instead of holding those Bond mutual funds you start exchanging those in for holding individual bonds to maturity like if I'm 10 years before retirement every year for the next 10 years I could start buying a 10-year bond and then when I get to my retirement date I have the next 10 years of expenses covered through these maturing bonds if you have more of an income protection or risk draft strategy the the options would then to be thinking about well if I have an income gap I'm trying to fill where after I account for Social Security or any pensions I'd really like to have more reliable income to meet some basic expenses well you could start looking at purchasing annuities that would turn on income around your projected retirement date as a way to have that transition into retirement and so they're all viable options and it's just a matter of taking the the route that you feel most comfortable with very good that's really really helpful um now I I guess at least is a little bit into the what I would call the traditionally unloved unwanted stepchildren annuities and reverse mortgages uh you know they've gotten a bad a bad rap for so long but they're so useful in in as tools I would say probably the reverse mortgage is the least understood and uh and and one very helpful um tool I think maybe because of just the history of them and how they used to be structured versus how they're structured now um can you give me a sense about how to think about reverse mortgages for people is it only for people who are you know can barely get their their plan together with their assets or or does this also work for people who have a cushion but they should still do a reverse mortgage more yeah I mean the conventional wisdom a lot of times is that the reverse mortgage is a last resort consideration after everything else has failed and maybe then just a way to Kick the Can down the road a little bit but ultimately that retirement wasn't necessarily sustainable since about 2012 that really the focus of the kind of research retirement planning financial planning type research was looking at how reverse mortgages can be used as part of a responsible retirement plan and so it's not that a lot of advisors may just think the reverse mortgage is only for someone who's run out of options but but that's really not the idea it's we have different assets and it's back to that real map the retirement income optimization how do we position those assets to fund our goals and the reverse mortgage provides a lot of flexibility about how to incorporate our home equity asset to help fund our retirement plan and it can lead to a lot more efficient outcomes than just simply say leaving the home sitting on the sidelines and saying well I've got the home if I have long-term care needs I'll sell my home to fund the long-term care something like that otherwise I'll just leave the home as a legacy asset for my beneficiaries there's much more efficient ways to incorporate home equity into a retirement plan and that's what the whole discussion around reverse mortgages is how can I I use a reverse mortgage to help build a more efficient retirement plan and not as a last resort but as part of a responsible well-funded retirement plan it's just another Diversified tool to a source of source of of assets that you can use that's not just sitting there I just had a conversation with a client yesterday that is about to retire in a few years and uh that is exactly what he said that other property that I have in that other State uh I'm just gonna keep that as a that'll be my I'll sell it if I need to you know there was a conversation about health care contingency and um uh long-term care and things like that and that was his rationale um and and in discussions with clients there has been a a ton of resistance you've been really good at putting out information that shows why it makes sense to have it as a potential use so can you explain a little bit about the the line of credit portion of it and how that how use how that could be advantageous yeah and it really it goes back to this idea of sequence of returns risk and if you look at a reverse mortgage in isolation it may look expensive or whatever else but it's how does it fit into the plan and by reducing pressure on the Investments it can help lay the foundation for a better outcome and the the growing line of credit is one of the most misunderstood aspects of the reverse mortgage and I think it was partly unintentional and it may sound too good to be true in a way it probably is and we saw in in October 2017 the government put some limitations on the growing line of credits so it was incredibly powerful before then it still quite powerful not as powerful as before for new uh anyone who opened a reverse mortgage before October 2017 was protected to have those Provisions in place for the entire life alone but if you wait and then after October 2017 you still have the growing line of credit it's not as powerful but but the idea is I believe the government assumed people would open reverse mortgages because they want to tap into the funds but financial planners realized with the variable rate not with a fixed rate but with a variable rate home equity conversion mortgage you do have to keep a minimal loan balance of say 50 to 100 dollars but otherwise the rest can be left as a line of credit and that line of credit grows at the same way the loan balance would grow and so you can understand why if you borrow money the what the loan balance will grow over time well it just happens to be the case that the kind of neat planning trick is if you open the reverse mortgage and 99 of it is in the line of credit the line of credit is growing over time at the same rate that the loan balance would have been growing and ultimately this improves the odds dramatically of having a lot more access to funds over time if you open it sooner and let the line of credit grow versus just waiting to open it at the time you might actually want to start spending from it yeah how has it been limited uh limited versus the way it used to be what what are the limitations well they increased the initial mortgage insurance premium which is not directly to the line of credit but then every every so often used to be more frequently we're now getting overdue at this point with it's been over five years but they revised the tables that determine the principal limit factors of what percentage of the home value can you borrow and so as part of that 2017 change they uh lowered the the borrowing percentages and also they lowered I mean this this part's a good thing but they lowered the ongoing mortgage insurance premium that would cause the loan balance to grow at a slower rate but it also in turn caused the line of credit to grow at a slower rate so it before that change I was running simulations where if you opened a reverse mortgage at age 62 there was like a 50 chance that within 20 years the line of credit could be worth more than the home and that's no longer the case it's still there's still a probability that the line of credit could grow to be worth more than the home but it's not nearly as dramatic as what I was Finding before the rule change that's very interesting because the line of credit growth rate is tied to interest rates and home prices have somewhat of an inverse relationship to interest rates to some degree but it's basically positively skewed so it's not it's hard to know but uh uh but yeah that's that is a great planning tip and it's interesting because we have had a lot of friction with this discussion with uh clients uh mentioning to them because they just have it in their head that I'm going to lose my home and I'm going to there's all these things that can go wrong and then you have to explain it's a big education process and of course they are required to do education as well no we don't sell reverse mortgages but we always you know if we if we you know we mention it to people as a source and you know having it there makes a lot of sense uh and and the same thing with the annuities um you know I have a love hate relationship with annuities but I'm becoming to love them more and let me tell you why before it was all commission driven you know and we're fiduciaries we don't do commission stuff now with the Advent of finally the insurance companies have really gotten to the point where there's at least enough of them now doing products that make sense with the guarantees I mean there was always companies out for a long time there's companies out there like Americas Etc that had just pure plain vanilla uh va's variable annuities that had just lowered your expenses and maybe eliminated a surrender or something but the guarantees is where the real there were folks too much on tax deferral and not enough on guarantees what were the guarantees is really really what we're really looking for here uh and the only way you could even get them you guarantees would be if you did a commissionable product so we'd be handing you know we would be referring people to Insurance guys who were selling commissionable products and then sometimes you don't know what's going to happen after that happens uh with that client so now thank God we have uh we're in a scenario now where the where the financial industry has finally caught up to what needed to happen with annuities yeah the only annuities yeah yeah the only annuities and there's it still has a lot more to be done it's it's you shouldn't be overlooked and I think what happens one of the reasons that I think they're so helpful uh for people is that risk tolerance is time variant people say their risk tolerance is X and then as soon as you have a market decline then their risk tolerance is all all of a sudden why which is more conservative and and uh these annuities can help people psychologically overcome that right you can always look to something that is either staying equal or growing and you can also have growing income streams during the Gap we see that a lot there's a gap between uh when they get Social Security and when they retire and it kind of fills that Gap and it's funny when I was when I was I actually had my assistant who's also a CPA excuse about my financial planning system I had to read this book first and she uh she said it sounded like like you uh were like in the room with him uh because there's so much stuff in here that you and I agree with it's amazing uh before not even knowing you so and I think it might have to do more with the approach of taking things more from uh your academic background and your CFA background it gives you a different perspective than what kind of the traditional financial planners had who had come more from a sales background and now what's happening is is we have uh the whole industry is now moving in the I think moving in the right direction and I think you've been a big uh reason why that's happening so I I really want to thank you for that all your work is really making a difference I want to talk a little bit about Medicare if we can and health insurance this is probably one of the most the hardest part is the medical the medical discussions in some ways um people don't want to think about long-term care people don't want to think about health costs I was looking at some of the statistics you know long-term care statistics is how much it costs it's a big number how would you how would you model the contingency planning you know for let's just start with long-term care how would you model that would you model it as a present value number or would you try to put it as a as something that's over time how how would you how do you approach that yeah actually so I did try to make the retirement planning guidebook as comprehensive as possible and and so I as part of that developed a long-term care calculator and the the basic logic of it is develop a scenario that you would feel comfortable that if you could fund that scenario uh you'll feel like okay things things will work out whether that's three years in a nursing home whatever the case may be but develop that scenario where you're saying okay at age 90 I will spend the next three years in a nursing home right now in the United States the average cost for a semi-private room in a nursing home is a little bit under a hundred thousand dollars I'll say in today's dollars a hundred thousand dollars a year but then I'm gonna plug in the the math gets complicated but you've got what's the inflation rate in long-term care what's the overall inflation rate and then back to this whole idea of the asset liability matching like what's the investment return discount rate you're comfortable assuming as well and also recognizing that if I do go into a nursing home I don't have to also fund my entire budget of a like if I thought I was going to spend 80 000 a year well I'm not going to be going on any sort of trips I don't have to go to restaurants or anything uh a lot of my other expenses would reduce not not 100 but they would reduce so plug it in what I think is a reasonable reduction to the rest of my budget and then you get calculated a present value of here's how much money I'd have to have set aside as a reserve asset to feel comfortable that I would be able to fund this long-term care need and and be able to have a successful retirement and for people who are worried about and who may be paying out of pocket for long-term care that could be several hundred thousand dollars to be blunted on average that's what it comes out to I actually had a coffee with a gentleman and he said uh what is it just tell me what the number is I said well it depends on your age he says no just tell me what the number I said it's roughly about 300 000 roughly on average it could be more it could be less uh you know uh okay and and there's there's there's different ways you can fund it right you can do long-term care insurance uh traditional Standalone you could do um you know life insurance policies that have embedded features you could do if you can't like qualify for um you know you know get a policy you can maybe get it embedded in an annuity of some sort you can sell fund um so it's not an easy thing that you can uh solve it with a quick answer um but but it's important to have in a plan and I and I like the fact that that uh you've emphasized that a lot in your work um it's just it's just great that that people are thinking about it from that perspective I want to switch gears a little bit um and talk a little bit about tax efficiency uh you know taxes are such a huge part of the impact of a plan and there's so many different angles to it and and the tax rules change so much um I'll tell you one of the challenges that I have asset location the concept of balancing you know where you put a certain asset according to us is tax efficiency versus keeping an asset allocation in line right up you know operationally keeping it in line with the objectives and then as money is being spent taking it from the right place it's a challenge even with excellent software and then sometimes I'm finding that it doesn't actually work out as planned so can you can you give me some practical tips on how to deal with asset location well the the basic logic of asset location but yeah I mean in practice it gets incredibly complicated as you're spending from these accounts to think about also rebalancing and making sure you're keeping the right asset allocation between stocks and bonds and the NASA location is where do you keep these things but generally just is a basic guideline your taxable brokerage accounts of course you want some cash there for your liquidity but otherwise that's your most tax efficient stock Investments so if you own stock index funds and so forth the on a relative basis they're most likely to be best off in your taxable account because a lot more of their returns will be those long-term capital gains that get the preferential tax treatment then with like your tax deferred IRAs and 401ks that's more of a place where less tax efficiency so bonds and so forth maybe lower returning type asset classes and then for your Roth accounts the Roth IRA and so forth that's where less tax efficient but higher expected return type asset classes could go the Emerging Market funds and small cap value and that sort of thing and that does also work with distribution ordering as well because the Roth will be what you tend to spend last and so also having these uh riskier asset classes that may have more growth prospects over the long term that can be a good place to set them aside since you're not likely to be spending from those accounts until later in retirement okay yeah it I think for a lot of people it's a little bit of a daunting thing and in practice it can be with contingencies and things like that can be hard to to do correctly and keep managed and I know there's good news is there's good software now that that helps with that um as far as tax efficiency the other you mentioned the order of withdrawals I mean traditionally you know you have the you know your traditional order of withdrawal that you would you would uh do in in the past a lot a lot of recommendations has been you know you want to take from your taxable accounts first right let those tax-free tax deferred accounts grow and then and then you start taking from those other sources but you make a really good point that that's not always the best thing to draw that taxable account down too fast can you expand upon that a little bit well the yeah the the basic tax efficient distribution is spent down taxable assets than tax deferred like IRAs and then tax exempt like Roth against last but you you can do better and so the the better approach is to have a blend of taxable and tax deferred until the taxable account depletes and then a blend of tax deferred and tax exempt after that and as part of that blend you can do rock conversions to in the short term pay higher taxes if that can better position you to pay less taxes over the long term and to have a higher Legacy value from assets over the long term yeah and then getting more specific than that it's there's no you really got to run the the individual numbers on a case-by-case basis but generally there's the opportunities to sustain your assets for much longer by having a more tax efficient distribution strategy that digs into that taxable plus tax deferred and then later tax deferred plus tax exempt exactly and and that's why it's important while you when you're an accumulation phase make sure you have some tax diversification if you can yeah have Assets in all those different types of accounts yeah so that you're not nailed so bad uh later on uh and then there's a lot of complexities that can happen with happen that we see quite a bit with concentrated stock positions and things like that which is probably outside the scope what we're talking about today so um and lastly here last last topic here non-financial aspects of retirement this is a huge huge huge thing uh it's funny it was the last towards the end of your book and I'm glad that you talked about it uh because uh there's I can't tell you how many times um you know you see people think that they're going to be happy sitting on the beach and then they they do that and they're miserable uh or or spouses that wind up hating each other for some reason can you tell can you give us some ideas about um like what should people be doing like say they're five years into retiring or ten years into retirement retirement What should people be thinking about doing to kind of get their their overall lifestyle satisfactory when they actually do retire yeah and and that's this is in some ways more important than any other Financial stuff because with the finances it's easier to adapt but work does so many things in a person's life it's not just that it provides a salary and you need a way to replace all the other aspects of work such as structure to the day camaraderie feeling part of a team feeling like you're creating value for a society all these different aspects that you need to be able to replace with something that gives you motivation to wake up in the morning in retirement and so to say simply it's not the best starting scenario if you retire because you hate your job you want to be able not to retire away from something but to be able to retire to something you want to have and it gives you purpose and passion and meaning to give you the motivation to wake up and and have something be active each day because in all too many cases people just they start doing passive things like watching too much television or surfing the internet too much and that can lead to a really miserable and unsatisfactory retirement wow that's huge that's interesting have something to retire to so uh and and start figuring that out sooner rather than later right not don't wait till the very end and go yeah what am I doing uh and sitting there staring at your wife or your husband yeah that's the idea that there's all these things you you want to get done but you just think well when I retire then I'll have more time to do it well if it's something you've been holding off on doing for the past 40 years it's not likely that just having more time in retirement is what you need you may just simply either not be interested if it's a hobby like oh I want to go back to playing the guitar or something if you're waiting for retirement to do that sort of thing there you go that retiring may not be enough and then people might start feeling bad that you no longer have the excuse and that's where if that sort of bad feeling compounds it can create a spiral like a downward spiral where people just become less engaged and less positive and it can even impact Health which then in turn makes it harder to be engaged and involved and and can lead to downward spirals it's really important to try to avoid that and as part of that not waiting for retirement to to consider all these other aspects of your life outside of work but making sure you're nurturing relationships and having hobbies and having things outside of work so that it will then be easier to transition into the retirement yeah that's great so is there anything as we close here is there anything that you're really excited about that you're working on right now that you want to share or is there at all right now I am just trying to get the updates done for the retirement planning guidebook and where we're doing the best we can to build out that retirement income Styles ideas uh something that people can benefit from and uh the other main research area is with the tax planning as well that I think this will be a Hot Topic and I've already done a lot of work in that area but it is such a complicated area that just trying to push forward as well about like Roth conversion strategies and and how to best Implement those in a most of the work in that area just assumes a fixed rate of return and with the reality of not fixed rates of Returns on your Investment Portfolio that also dramatically complicates some of those tax planning decisions so I'm continuing to push ahead in those areas interesting so more stochastic modeling in your future yes stochastic modeling and now you're probably going to be uh that Technology's got to be in there somewhere too any plans uh that you want to announce or share with new technology that you're going to be coming out with or software programs or anything like that or I mean I just have this Vision in my head if I were you I'd be doing something like that but I mean I'm just saying yeah don't Envision creating tax planning software but uh the retirement income style awareness that's where I'm putting on my efforts in terms of having software and that's an easier problem than the tax planning problem definitely yeah there's a lot of changes always yeah you'll be coding to your uh blue in the face all your staff would be so uh the uh it's interesting I I I'm actually going to be diving into that that profiling software that you have um I had a conversation yesterday about that so that's very good so where would people uh would you like people to send you see learn more about you um anything that you're up to oh yeah uh so my website retirementresearcher.com all one word retirement researcher and if you go there you can sign up every Saturday morning we send out an email with different articles and things and then my retirement planning guidebook is on Amazon or any other major book retailer and also I do have a podcast as well they're retire with style podcast with Alex mergia who's my a co-co-researcher and and co-founder of the retirement income style awareness excellent all right Wade thank you so much appreciate you coming on it's been a pleasure thank you the information in this podcast is informational and General in nature and does not take into consideration the listeners personal circumstances therefore it is not intended to be a substitute for specific individualized Financial legal or tax advice to determine which strategies or Investments may be suitable for you consult the appropriate qualified professional prior to making a final decision wealthnet Investments is a registered investment advisor advisory services are only offered to clients or prospective clients where wealthnet Investments and as representatives are properly licensed or exempt from licensure [Music] foreignRead More
You pay attention at school, you study hard,
get a good job, work diligently throughout your career all so that one day you can kick
back and enjoy a nice pleasant retirement. That’s the story anyway. But it’s not one that always lives up to
reality. There are countless stories of people with
good jobs, and diligent savings patterns still needing to work well into their twilight years.
This is to say nothing of people that unfortunately
never have the privileges of higher education or a stable career. Recent reports have found that less than 30%
of American workers are on track to retire at all, and even fewer think they will have
a comfortable retirement and they might be right. I know you didn’t want to hear this, but
there are a few BIG factors at play in the world today that are going to act to keep
most younger generations in the workforce indefinitely. This is all before considering the major hiccup
that the covid 19 pandemic has been. A global event that has actually worked to
widen the gap between younger generations with fewer assets and more precarious employment,
versus older generations which tend to be more secure. Now you might think you are different, you
contribute to your 401k, save diligently, subscribe to How Money Works and even invest
regularly into the stock market. Well that’s all great, but I might still
have some bad news for you. There are lot’s of issues at play here… Housing, the stock market and a series of
broader economic conditions which might threaten the general assumptions we make about indefinite
So it’s time to learn how money work’s
to find out why we will all be on that grind until we are 120 years old. So the obvious first culprit is housing. Affording a home has become a major challenge
for most workers in the USA. I know this problem is nothing new, but there
ARE still a few very important factors that people don’t consider. Even very high-income earners that graduate
top universities and go into fields like banking or big tech tend to be moving to equally high
cost of living areas like New York, Chicago, or San Francisco. Pew research recently reported that a majority
of young adults between the ages of 18 and 30 are now living at home with their parents.
The median age of a first home buyer in 2019
was a 34 and experts agree it’s almost inevitable that figure will be pushed even higher by
the pandemic. What’s more is that young buyers tend to
be purchasing smaller dwellings like apartments and townhouses rather than traditional free
standing family homes. Not because they don’t want to, but because
they can’t afford it. This is a real issue because as most financially
secure people will tell you their house is their biggest asset. This doesn’t just mean it’s the asset
that they own that’s worth the most money either. Owning a house means that you don’t have
rental expenses and even if you are paying a mortgage those payments will at least partially
be building equity in the home itself.
What’s more is that once that mortgage is
paid off you have somewhere to live with very little ongoing costs. Retiring with a home, means that even modest
retirement savings or a pension can go a very long way when compared to someone who will
need to stretch those payments to cover rent. If a homeowner is running low on cash in retirement
it could be a simple as downsizing their family home, a luxury not possible for someone who
hasn’t fully paid off their home, or doesn’t own one at all. Now let’s be generous and take this median
age of 34 to buy a first home, stick a 30 year mortgage on top of it, and suddenly even
this generous assumption of a regular young worker is in their mid 60’s still paying
off a home loan. This is assuming that this person never upgrades
their home, or renovates, or does anything to increase their mortgage from the original
one they take out over thirty years.
The particularly morbid amongst you might
think, well the boomers have to die and leave us their homes eventually right? And… well… yeah I guess so as unpleasant
as that may be it is a reality. The problem is this will likely only exarcerbate
the issue. We saw this in our video on why family fortunes
disappear, inheritance’s that could actually fund a retirement tend to go to people that
are already pretty old and wealthy themselves. Now again the unaffordable housing issue is
a debate as old as modern capitalism, but maybe this isn’t an issue anyway, maybe
you are still unconcerned because you have plans to fun your retirement even without
a house to call you own, well ok, let’s put those plans to the test… The stock market is the other major vehicle
by witch people fund their retirment.
Even fixed income pension funds ultimately
rely on the growth of these markets to provide incomes to their members in retirement, but
this assumption of endless returns may be under threat. To understand why consider a simple example. 10 lumberjacks are working at a sawmill that
creates frames for residential homes. At the moment the lumberjacks are only using
basic hand tools, but if they all work hard and nobody slacks off they will meet their
quotas. One particularly astute lumberjack takes a
portion of his paycheque and over time uses it to fund research into motorized tool’s. His money was well spent because he eventually
invents the table saw. He then saves up a bit more of his money to
buy the materials needed to built 9 copies of his new contraption. He then gives these 9 table saws to his colleagues
who had previously been using those hand tools. This boosts their productivity enough that
they can still meet their quota even if the first lumberjack doesn’t show up to work
This is what we call capital investment, and
it’s how (at least in theory) we can sustainably fund peoples retirements. The same amount of frames are made, the other
9 lumberjacks don’t need to work longer and harder, and the first lumberjack has been
properly rewarded for his creation with a nice cushy retirement. Of course this is a very crude example but
in reality most people do the same thing just through the medium of the stock market. Companies raise money and then use that money
to purchase capital equipment which will allow their worker to effectively and efficiently
produce goods and services for the economy.
But lets go back to our oversimplified example. Problems start to arise when more of these
lumberjacks get the same bright idea. One might invest into a forklift to make the
work of nine men possible with just eight, and then another might do the same with nail
guns to make the work of the remaining 8 men possible with just seven and so and so on… But every time this happens it get’s a fair
bit harder to find that next thing. Eventually you are going to need an almost
fully automated production line and even then you are probably going to want at least one
worker there to oversea this operation. Every human you take out of the equation and
replace with a piece of capital becomes more and more expensive, especially when compared
to some other alternative investments. Let’s say lumberjack 5 will need to invest
Millions of dollars into a robotic arm in order to effectively retire while still ensuring
the quota of the lumbermill is met.
He might just say it, what I’ll do instead
is just buy the factory and require the remaining four workers to work an extra 10 hours a week
to pick up my slack while I go and retire. Now this guy sounds like an____, but just
think, how many hours a week are you working in your job just to cover your rent? This investment into non productive assets
(as in assets that don’t actually assist in adding value) is a major hurdle. Now the classic example of a non-productive
asset is something like gold, bitcoins, pokemon cards and of course real estate.
Now real estate is weird because unlike these
other non-productive assets it does produce income without needing to be sold. It does this through rent. Investing into real estate has been a particularly
attractive investment for a lot of people which does two things, it increases the price
of real estate, causing more of this issue we saw in the first part of this video, but
it takes away from investments into the types of productive assets that CAN sustainably
fund retirements. There is one other problem beyond this as
well… the overinflation of ALL asset markets. Let’s look at our original example of those
table saws. They were machines that made cut up pieces
of wood, lets say they can chop up 20 pieces each a day. Now let’s replace those table saws with
shares, these are effectively machines for making money in the form of dividends.
Lets say each share makes 20 dollars a day. In both examples the lumberjack would need
to own 9 of each to be able to fund their retirement, 180 pieces of wood would replace
their job at the lumber mill, and 180 dollars a day would replace their income, so either
works just fine. Now counterintuitively problems arise when
these assets become more expensive. Most people think stocks getting more expensive
is a good thing, and it is … for the people that already own them… Imagine each share was trading for $10,000… Saving up $90,000 is a pretty tall order for
a lumberjack on $180 per day but it is certainly possible over a working career.
Now imagine those same shares were trading
for $100,000 while still paying the same $20 daily dividend. If you already owned these shares you would
be feeling great because your on paper net worth has grown handsomely, but our lumberjack
now has to buy $900,000 worth of shares to fund his retirement, which is just no realistically
possible within his working career. Now this might sound like a farfetched example
but it isn’t! it’s exactly what is happening today. To see this let’s look at the price to earning’s
ratio of the s&p 500 (a collection of the 500 largest public companies in America). Historically it has hovered around a multiple
of 15, this means that on average it would take the earning on these shares 15 years
to pay for the share itself. Today, that multiple is sitting just under
50 years, which is the second highest it’s been in history, falling only behind late
2008, which as you all know was a time of widespread economic prosperity In plain English this means people are going
to either need to invest 3 times as much to fund their retirement’s ooorrrr rely on
the next biggest idiot to buy their shares off them in retirement for a 100 times multiple,
200 times multiple, 1,000 time multiple… which BTW certain investor are already doing
for some stocks.
Now you might say, oh well shares aren’t
like table saws with fixed outputs. These dividends can and likely will increase
in the future, right? And sure, that’s almost guaranteed, buuuuttt
it’s still unlikely we will ever see widespread PE ratio’s under 20 again for 2 reasons. 1. if a company DOES start paying out a consistently
high dividend relative to it’s market price, well then investors will buy it which will
push up the price, meaning that it won’t a great deal anymore.
Market forces are a bitch. The second reason is a bit more complicated,
but it’s one that has some leading economists genuinely concerned… Robert J Gordan is an American economist who
published this paper with the National Bureau of Economic Research. Is US Economic Growth Over? Faltering Innovation Confronts The Six Headwinds. It’s a fantastic paper that is surprisingly
readable even to people without a strong economic background. But spoiler alert, Gordon basically argues
that the past 200 years of innovation and economic growth were more or a exception rather
than the rule that we should continue to expect indefinitely into the future. Limitless growth in a finite world… you
do the maths. Gordon basically argues that this generation
is the 5th lumberjack, all the easy innovations that drastically improve productivity have
already been made, and even gradual improvements from here on out will either be very expensive,
or just rent seeking in nature. Working more to shift value around in new
and creative way’s more so than working to actually create any. If this rather bleak outlook wasn’t enough
Gordan argued that this would coincide with what he described as the 6 economic headwinds.
These are forces that will act to slow growth
in economies around the world for at least the next 100 years. These headwinds are, The loss of the demographic dividend – Basically
the economy saw a huge boost when women started to move into the workforce between the 1960’s
and the 1990’s. Now most women in developed countries work
a professional career similar to their male counterparts but that’s just the status
We aren’t ever going to be able to double
the workforce again, unless well… you know… we make people work later and later in their
lives. The second headwind is the loss in educational
attainment particularly in the USA. Education is becoming more expensive, less
comprehensive and increasingly irrelevant to the requirements of the modern work force. A 3 year degree simply does not mean as much
as it did 50 years ago, not to an individual or to the economy as a whole. The third headwind is rising inequality, a
touchy subject at the best of times, but Gordan was surprisingly pragmatic about his approach
to the issue. The paper noted that incomes were on average
increasing by around 1.3 percent per year. But that growth was heavily focused in the
top 1%, the remaining 99 percent only actually saw income growth of around 0.75% year over
year. Not even enough to keep up with inflation. That means that if this trend continues it
will be inevitable that larger and larger pools of workers simply won’t have the financial
means to save for retirement.
However if you are in the top 1% congratulations,
you can say nananana your video title is wrong in the comments section. The fourth headwind is the impact of globalisation. Now in theory globalisation should make everybody
wealthier, and on “average” it does, but averages have outliers, and those outliers
in this case will be national workforces that have historically enjoyed high incomes relative
to the rest of the world, like say say probably YOU watching. The other side of this equation is that it
should equalise global wages, meaning it is great for people in countries that have typically
had low incomes compared to the global average, oh and of course the business owners that
can profit from the pool’s of cheap labor along the way. The fifth headwind is energy and the environment.
The growth of the past century was driven
by fossil fuels. A cheap, easily transportable incredibly efficient
source of energy that could power everything from automobiles to jetliners. But of course they are a finite resource that
have come at a cost. This cost will now be paid by younger generations
either in the form of environmental regulations that slow down industrial output, or from
complete environmental collapse that will also slow down production. The final headwind is debt. Household debt, government debt, corporate
debt, it’s all been growing steadily over the years and eventually this needs to be
paid back, this is ultimately going to result in the requirement for more income or less
spending. For the government producing more income is
easy, they just tax more, but for individuals and businesses the only option they might
have is spending less. If someone is already running on a tight budget
then those regular contributions to a retirement account might be what ends up getting sacrificed. Gordon did present a likely outcome to alleviate
this sixth issue for all parties, and you might be able to guess what it is.
Yup, push back retirement ages… Now if this has all been a bit bleak for you
and you still think you are going to make millions overnight then good on you, I will
have to work harder at crushing your spirit next time. But until then you should learn what to do
with your overnight fortune by watching our video on exactly what you should do if you
suddenly make a lot of money. Of course step one will always be to like
and subscribe to keep on learning how money works..
we all look forward to retirement it's the time to sit back relax and enjoy the fruits of our labor unfortunately whatever aspirations we may have for our golden years can quickly turn into a nightmare if we make certain mistakes when planning for this phase of life these mistakes are surprisingly common and tend to lead to financial stress and regret with a big impact on quality of life some of these mistakes are 1. not planning for retirement two retiring too soon three relying too heavily on Social Security 4. underestimating health care costs 5. failing to save enough for retirement six taking on too much debt seven not maintaining strong relationships if you want to learn more about these mistakes and how to avoid them subscribe to the channel a new video is coming soon and you won't want to miss it.Read More
Intro to Is Retirement Enough to Live in America? How long one million would last in retirement by region Cost of living is after social security The city where one million will last the longest States with no income tax Cost of living in Austin City where 1 million would last the shortest in retirement Retirement Savings warning Important factor with retirement planning.Read More
When you listen to regarding retired life preparing some.
The fact is that most individuals wear'' t have one or 2. Let'' s look at what it ' s like to retire with $500,000 and what we''
with your very own information. After that we'' ll go via some strategies that can aid you make that cash last..
Five hundred thousand bucks suffices to retire on for a great deal of people as well as a great deal of people.
do it with less. Currently, more is certainly far better yet it ultimately comes down to your individual.
circumstances for instance the quantity you invest is a large variable as well as that'' s mosting likely to depend on a.
number of various points it could just be your way of life however where you live additionally has an effect.
on your costs any type of earnings resources that come right into your household are likewise vital so if you.
have a pension plan plus Social Safety (full Social Safety benefits) then that'' s absolutely valuable
. if you have numerous incomes coming into the family that doesn'' t hurt and luck likewise.
contributes in all of this so it could need to do with what do the marketplaces do right after you retire.
are they strong or do they collapse? Or what kind of healthcare events come up what problems do you.
have now as well as what might develop during retirement? All of these things with each other are mosting likely to impact.
what your investing appears like to keep things easy we'' re going to utilize some standards from the.
BLS the current data offered is about $48,000 each year that a house over age 65 spends.
Eventually this requires to be beneficial for you, so you can take the principles that we speak about.
in this video and after that overlay your own numbers right into the calculators that you'' re going to have. access to, which method you can obtain a decent idea of what your retirement could look
like.It ' s additionally.
practical to understand that your costs can change over time during retired life for instance some individuals.
talk about the go-go the slow-go as well as the no-go years. So your go-go years are right after you.
quit working you'' re young and healthy as well as you'' re eager to head out and do every one of those things you''
ve. dreamed concerning doing but you may start slowing down some as well as at some point you reach a factor where.
you wear'' t intend to rest on an aircraft for eight hrs and also your wellness care prices start to increase.
as you invest less on recreation and amusement. One more large item of all this is any kind of retired life.
earnings that you get so that'' s Social Security or pensions as well as Social Security is a large piece of.
retirement revenue for a lot of individuals in the u.s so we'' re mosting likely to lean on that as we experience.
this if you have about $500,000 conserved for retirement then we'' re mosting likely to think that you get.
a bit much more than the standard right here since you'' ve had the incomes and the job background to aid you.
save some cash your age additionally influences how much you obtain from Social Security, so that can affect.
your plan you truly desire to do some analysis and also make some decisions remembering that you.
might have recipients who may take over your Social Security benefit.By the method, I
' m Justin.
Pritchard, I assist people prepare for retired life as well as spend for the future. So, in the summary.
below, you'' re mosting likely to find some resources on this topic, and I'' ll include some links to calculators.
that you can make use of to run your own numbers. We'' ll beginning with a solitary person example.
and after that get involved in a pair, as well as these are over simplified instances however the vital point is to.
repaint the photo of exactly how things may unravel as well as reveal you exactly how you can run a few of these numbers.
yourself.We looked at a few of those data on investing and also if you ' re going to retire with.$'500,000 in assets unless you have some actually excellent retirement earnings you ' re most likely not going. to be on the high end of those stats so we ' ll presume someone here spending concerning 45'thousand. dollars each year going to obtain 2 000 a month of Social Safety and security revenue so we ' ll placed those. numbers right into our useful calculator here 45 000 of spending or revenue we ' re going to neglect. tax obligations for right currently however we ' ll get to that later on as well as she obtains 2 000 a month in Social Safety that. leaves 21 000 that she ' s mosting likely to require to take out from savings every year now you can play with an.
rising cost of living price and also obviously inflation is greater right currently the concern is will certainly it remain high. for the rest of your life
for the following three decades or something that would certainly be fascinating if it did. I ' m simply going to go with this for right now and one year away from retirement let ' s. state five as well as a half percent returns both before and during'retired life as well as 25 years. of life perhaps 30 years of life if we consider the estimations there this person requires around. 457 000 so depending on exactly how much she has if you already had 500,000 you may be all established nevertheless. again this is an oversimplification so we have actually ignored taxes let ' s assume that every one of that cash. remains in a pre-tax pension you ' re mosting likely to have to pay some income taxes when you take. withdrawals so one means to look at that is just to boost once again this is an oversimplification however. you may say allow ' s call it 50 000 and also think about 5 000 in taxes each year and what might. that indicate well that may indicate you require an extra 65 000 above the 500 000 you ' re thinking about. an additional problem is that this thinks flat returns annually as well as'the reality is that you ' re never going. to obtain precisely five and also a half percent some years you ' ll get 5, some years you ' ll get six, some. years you'' ll lose cash
, some years you ' ll earn extra, yet they normally put on ' t go in a straight. line so we need to wonder what would certainly take place if you have poor timing for instance if there ' s a. big market collision right at the beginning of your retirement.To assistance repaint a richer image. of that let ' s look at an economic planning program that ' s a bit much more durable so this. is claiming that she may have about a 50-50 possibility of success and I ' ve obtained some techniques to. enhance that yet just for starters that ' s a lot more or less
a coin throw so what does that mean. if there ' s a 50% chance of success this is a Monte Carlo analysis therefore what happens is. we might state that you get a thousand different hands of cards'. Some of those are really good. those might be the ones up below that'leave you with a lot of cash at the end of your retired life. or the end of your life several of them are really bad and you would run out of money
very early and also in. about 50 %of these cases you finish up simply making it you ' re probably not going to obtain the very best good luck. as you go right into retired life and also hopefully you put on ' t obtain the worst luck however we wish to have the ability to. represent a number of different varieties right here to make sure that if things are type of bad or pretty negative that. you have a decent chance'of making it so what can we do to improve those chances of success one way. is to adjust costs so if you ' re versatile then you can reduce what you spend in years
when points. are actually poor or you might also take a look at something like the retired life costs smile which is based. on some study from David Blanchett which claims that retired people might spend it roughly inflation.
here she ' s mosting likely to benefit another year then that earnings stops she ' s going to wait until age.
70 to take Social Protection so there are a pair years there with absolutely no revenue and afterwards a
partial. year then that complete Social Safety advantage kicks in obviously it ' s inflation adjusted
so'. it ' s actually greater out in the year 2029 those expenses are best around 45 000 when she'stops. functioning and there ' s that 5 thousand dollars of tax obligations due so in these initial couple of years. when she has no revenue she ' s mosting likely to be taking pretty big withdrawals to support her investing. however once that Social Safety and security earnings kicks in after that she can take a lot smaller sized circulations as well as.
that tax obligation expense is going to come down and also we can take a look at that if we take a look at what her tax. rate could be this is an effective tax obligation rate so this considers any kind of deductions that you ' ve. taken, uh, typically individuals pay surprisingly low taxes especially if you ' re at this possession degree. in retired life approximately$ 500,000 in cost savings if you have a number of million you ' re mosting likely to be. in greater tax obligation brackets especially later in life when you begin
taking those called for minimum. circulations however at this stage and with this asset degree the tax prices can be surprisingly reduced. for some individuals so that was our solitary example as well as currently we can look at a couple however I ' m not going. to experience all of those steps once more they ' ve got 2 incomes
being available in to ensure that makes. it a whole lot simpler to sustain higher spending degrees so allow ' s jump over to the quick calculator simply to. see how that looks so they desired 50 000 of income or investing they ' ve obtained 35 000 of Social Protection. coming right into the family to ensure that ' s just 15 000 they need to create out of their assets allow ' s. toss on a little bit additional just for some tax obligations and various other things so we ' ll keep every one of the various other. assumptions the exact same as well as it ' s a 30-year retired life here they can additionally make do with less than 500 000. once again neglecting some tax obligations and poor timing and also other things that might turn up as shocks yet with. an actually streamlined estimation they ' re at least kind of in the ballpark with concerning 500 000.
withdrawal price you need to wonder if you are selling on your own short as soon as again any kind of versatility. you have in retirement is very valuable so if you ' re able to alter your'investing in reaction to. just how the markets do if you are lacking cash more promptly than prepared for after that that is extremely. handy and also possibly you can retire sooner or possibly you can begin with a greater withdrawal rate versus. if every little thing is rigid and you ' re running rather slim after that you wish to select a reduced withdrawal. price since you put on ' t have a great deal of padding to adjust to life shocks so simply for recommendation. below we ' re looking at some information from JP Morgan, their research on withdrawal prices and also various. profiles as well as when may you have a relatively high degree of self-confidence when need to you be a lot more. worried and also'they give you an approximation what I such as regarding this is it doesn ' t just point at one. number it offers you some ranges and you can claim well I ' m comfy with
particular varieties I ' m great. with environment-friendly i wear ' t like anything less than dark green or you can claim I ' m going to dip into some. yellow because i desire to retire quicker and I ' m eager to take chances as well as especially perhaps
i can. make adjustments if things aren ' t going well so what about taxes we stated we chatted much more concerning that. and also tax obligations are essential this is mosting likely to minimize the amount of cash you have for costs you need. that indicates she only requires to draw out 21 000 from those pre-tax retired life accounts for. ignoring state revenue tax obligation and various other variables her tax burden is reasonably little however it. still takes a bite out of points therefore if she was thinking she has 45'000 of income that. social protection plus the withdrawals what ends up occurring is she has a little much less. She needs to either make up the difference or pull out added funds a great deal of individuals ask. regarding living off the rate of interest or just not dipping right into the savings yet investing the revenues as well as. the rewards that come off of their financial investments i get where that originates from probably you want to keep. some money around for a health and wellness treatment event or possibly you desire to offer assets to the future generation. or to your favored charity definitely makes good sense the truth regrettably is that for people who. have regarding 500 000 saved for retirement is that those people are usually mosting likely to have to invest. from their possessions so what ' s vital is that you make certain you put on ' t lacked cash prior to you. lacked life that goes back to some of those
planning inquiries as well as looking at a withdrawal. rate that is mosting likely to make it likely at least that you don ' t lacked cash as well as remember that. if you do run out of cash you might still have some social safety earnings and other sources. readily available however we truly desire you to be comfortable and also have assets to make use of for the remainder of your. life a couple of means you can enhance your possibilities are you can discover various products i put on ' t. market annuities and also they can certainly be mistreated yet an instant annuity as an example can pay you. earnings for the remainder of your life as well as it ' s pretty basic as well as low-cost you definitely don ' t want. to place all of your money right into something like that but it can assist if you are driven by a need. for security various other strategies like buckets or time segmentation might likewise aid you enhance. Your opportunities there are a whole lot of various ways to go about this it simply depends what really feels. for you and if you ' re lucky sufficient to own a residence and have some equity in it then that may. be available for you later on to help cover some requirements if some surprises turn up so as. you ' re figuring every one of this out what can you do to boost your opportunities of success there are a. great deal of moving parts however that indicates there are a lot of opportunities to make little modifications that.
can improve your opportunities keep in mind those retirement costs methods to make sure that ' s the go go sluggish. go and no go years where you may lower your spending by a specific amount as you go through. each phase or that retired life costs
smile which goes slightly slower than inflation but you. might intend to have specific groups of spending that go much faster than
basic rising cost of living like health and wellness. care expenditures as well as in the group of least prominent remedies there is working much longer now this could. be something that aids you remain to save money as well as if you ' re able to maybe spend extra on the. points you like then perhaps you can maintain functioning not a lot of people wish to do this but it is. truly effective that ' s due to the fact that it shortens the number of years that you take withdrawals plus.
it can assist your social safety or your pension plan benefit or both since you ' ve got more years of.
gaining perhaps higher profits and also you often tend to assert at a later age which normally assists your. profit the disadvantage of that I wear ' t need to tell you is that you need to maintain working longer. Also one year or a partial year can'make a big difference
and as well as your time as you evaluate. social protection and also various other decisions like that due to the fact that when you assert can have a huge influence. on what your revenue appears like as well as it can also open chances like leaving some of those. lower earnings years to make Roth conversions and you certainly wish to keep in mind rising cost of living as well as. If you did, please.
Looking even further into the future, the nature of job might well alter completely; maybe in 500 years, having to function to make a living won ' t be a point any longer, or possibly we ' ll have a brand-new financial system where nobody ends up doing a work they dislike out of necessity– or possibly not.It ' s simply as well very early to understand, or to stress regarding having to work for life. The delayed-aging scenario was simulated in 2 different variations: one in which the qualification ages for retirement as well as elderly health care insurance coverage weren ' t changed, as well as one with a “solution”, in which they were slightly raised by a pair of years.This is not unreasonable: the delayed-aging scenario assumed that the elderly people ' s wellness was overall much better than in the status-quo situation; they were “a little less senior”, if you will, in spite of their real age, so they might work for a little bit longer. If you ' d like to come to be a Lifespan Hero, browse through lifespan.io/ hero, as well as if you ' d like to find out more concerning aging and also renewal while having a little fun with it as well, go to youtube.com/lifespanio as well as subscribe.Read More
They'' re making specific presumptions about just how much your earnings grew over time, however you can upgrade that and also you can say, You recognize what, in this year I didn'' t job for a couple of years, and then in that year, I had a really good year of earnings.Ultimately you can make this personalized, closer to your reality, allow'' s presume you ' re going to get this 23000 or so, and also we increase that by 12 months, so your total revenue for the year is around 28000, if that'' s the case, the amount you ' re going to require to withdraw up per year is around 22000. Once again, none of this guarantees that everything will work completely, however this is a means to what your numbers might look like, it might additionally be wise to triple check those numbers with a monetary expert or with other sources, as well as you can even run that by with a rule of thumb.So if you '
re familiar with the 4% policy, which is a poor name for it, because it'' s not a policy it ' s a research study searching for and nobody actually follows it flawlessly, yet we can say based on that, is it reasonable to anticipate that you could take withdrawals over 30 years? You ' ve obtained a revenue of 50000, it comes from Social Security and also withdrawals, let ' s simply think that all of that money is in a pre tax retired life account, so you sanctuary ' t done any type of Roth, and all of that money may add to your taxed earnings.Read More