How will you know how much you need to retire? Victor encourages you to ignore the outside noises telling you there is some sort of magic amount of money you need to retire. Your retirement fund should revolve around your lifestyle, not the recommendation of someone on TV who does not know you.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA®) and Certified Financial Planner™ professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
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Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host, Victor Medina, an estate planning and elder law attorney and certified financial planner.
Victor J. Medina: Hey, everybody. Welcome back to Make It Last. I’m your host Victor Medina. I’m so glad that you can join us this Wednesday morning for another fun edition as we will travel down the road of legal and financial retirement planning.
We’ve got a great topic for you here for you today. We’re going to be talking about why you may not need as much to retire as you’re being told. I remember, I was watching one of the episodes of America’s favorite financial sweetheart, Suze Orman, and she said that you need five million dollars to retire.
I thought to myself, “There’s no possible way that she’s right.” I can’t believe that we’re sharing that kind of information. Whatever it is that you’re being told that you need to save, I don’t know how to know where that number is correct, right? We don’t really know whether a million dollars is right, $5 million is right. Do you need more than that? Can you retire on less?
It’s a really good question to ask because, if you’re thinking about retiring, you’re not sure whether or not you have saved enough money to do so, you might defer the million‑dollar rule of thumb, but I’m here to tell you that you might want to avoid that for just a second.
I’ve met many people who can retire, have retired, and are living successfully in retirement all while having a portfolio that has substantially less than a million dollars. How are you going to know what it is that you need? I want to talk to you about that today.
Before we jump into the topic, I want to remind you, if you were listening on the radio, one of the things that we do is we simulcast this show as a podcast. We know that we’ve got a number of podcast subscribers out there. The metrics kind of let us know that a bunch of you do listen on the podcast.
If you don’t want to listen to us right as we’re broadcasting at 11:00 AM, one of the things you can do is subscribe to the podcast. You can go to Apple iTunes, or you can go to makeitlastradio.com. Just throw those four words together and you can either stream or subscribe to that.
That way every episode will get delivered to your device. At the same time, if you ever want to go back and listen to any of the other episodes that we’ve done in the past, you can do that as well.
I’m super excited because, for those people that are on the podcast version of it, in the next week or so you’re going to see a new logo arrive around the subscription. When you click on it, it’s going to have a new logo around it. We’re in the process of finalizing it, and I’m super excited about it.
What we’ve had for a long while is this blue square. It’s got the words going across, and there’s a gradient of a metallic thing going on there. It always has reminded me what would happen if the Terminator had a podcast. He would have something like that. It’s like, [Austrian accent] “I’m going to make you last.”
Whatever it is, it’s going to bring it all the way across that screen like that with a gradient. I thought, well that’s my logo. I’m the terminator of financial and legal retirement planning. [laughs] I’m excited. This one’s a little bit better. It’s got a little more stylistic to it.
We’re just about finalizing it. When we do, we’re going to put it into the feed and the feed will automatically update it. I hope that you like it. If you do, you just drop me a line and say, “Hey, I like the new logo,” so I’m excited.
Actually a whole part of how we’re consolidating a lot of the branding around the things that we do…For instance, the financial company that I’ve been running for the last years or so, been a while, but it had a logo and it had a name, and that’s being updated as well.
It used to be called Private Client Capital Group. We are going to be known, going forward, as Palante Wealth. Palante Wealth Advisors is…For me, it’s a call back to my heritage.
When we started the law firm…I say “we” because it’s a big team effort here. When I started the law firm 15 years ago, one of the things I wanted is I wanted to call out to my heritage. I’m Puerto Rican descent. I wanted something that spoke to that.
What we did is we created a logo around the state tree of Puerto Rico. That’s called a Flamboyan tree. The word flamboyan, loosely translated, is on fire. The tree blooms’ is a beautiful orange color. We had this red‑orange thing going on that was in the tree.
What we did around the financial side with the company called Private Client Capital Group, when we named that, it was fine. It was a placeholder for the time. It spoke to what we wanted to do. We are working on the private client side, but the logo wasn’t quite what we wanted.
It did draw on one element that’s going to continue. One of the distinguishing features of an old Spanish Fort that is in Old San Juan, called El Morro, is a Guard Tower. That Guard Tower is very, very famous. You see it in pictures. You see it depicted in artists who work in there.
This Guard Tower jets out over the ocean. By the way, if you’ve ever been to go visit that area, what you’ll learn and what you know ‑‑ but if you haven’t visit it yet, what you should know ‑‑ is that the entrance to get to that is super narrow, really, really short, and tight.
When you’re inside of that, because you can go and visit it, it’s almost claustrophobic, how tiny it is. All I can think of is the centuries that were set up to sit there and have to just look out on the ocean, just endless ocean. Just have to keep staring at that over and over again and the tiny, tiny headquarters.
What came out of that was that there was an area that had a phrase around it. It’s Devil’s Peak or something like that. What would happen is that people who were stationed there would disappear. They’d go missing.
Of course, what we think happens now, is that the people who were just too lonely and too tired of being sentries, jumped. [laughs] Just jumped into the ocean, swam away, and found a new life. That was the equivalent of the devil coming and taking them away. Of course, the devil story was to put the fear of God into anybody that was out there, but I think people just jumped.
Anyway, that guard tower is going to continue on the new logo, and we’re going to draw on some of the colors of what we’ve had. The name of the financial firm, Palante, is also a call to my heritage because it is a contraction. We used two words that, when they’re contracted together, sound like Palante.
What it means is the sentiment to be moving forward or the sentiment to be going onward. It’s a form of a rallying cry.
I really enjoyed the positive aspects of using that name to signify our financial services. That we were people that were going to be forward‑looking in the way that we did our planning. That we were going to be charging forward, helping our clients. I just really thought that it resonated well for the direction that we wanted the firm to go.
The colors start to get drawn together and maybe we’ll post some of that going forward. You will soon be able to get on to a website for Palante Wealth Advisors and see all of that. It’s all tied to the fact that there’s a new logo coming out for the radio. When that comes out, I’d love to hear your thoughts about it. I am excited for that.
All right, listen. Back to the topic for today. To retire or not retire. That’s the question. The first question you might ask is whether or not you have enough to retire. I think that’s probably a very logical start. The question is, how do you know? What method should you be using in order to feel comfortable with the decision?
After all, the choice that you’re making to leave your career and a lifestyle that you’ve likely become accustomed to over the last 30 or more years, it’s a huge, huge decision.
If you have done research on Google, which seems to take the place for any professional advice these days…You don’t ask a financial advisor for financial advice. You don’t ask a lawyer for legal advice. You do ask Google, and Google always spit out an answer. That’s the nice thing about Google. You ask a question. It will return a response for you.
If you do that, you will at least find an article, or 10, that says that the number is a million dollars. If you’re starting there, you’re going to be working towards getting a million dollars.
I’ll tell you that in my opinion, there’s no rule of thumb that is universal or that works for everyone. I’ve helped plenty of people retire and feel good about the decision with less than a million dollars saved. We’ve seen plenty of people who needed more than a million dollars to work.
I just had a meeting earlier this week with a client and we went over her finances. One of the things that we were looking at is, what is it going to take to get into retirement? What are we going to have to do for this client to be successful?
The client had one particular need. They had an expense, a line item that, for them, had to be available in retirement. Beyond that, there wasn’t a ton else. We needed to make sure that we were able to make that line item happen.
It is a bit of an indulgence, but it was an indulgence that she enjoyed. She was going to gain a lot of benefit in retirement emotionally from being able to meet that. She just wanted to make that happen.
What we did in order to be able to craft that retirement for her was show her how it was going to happen. It just so happened that she was starting out with about a million dollars.
The question became, for her, was a million dollars going to be enough? She’d already made the decision to retire. She may be about six months into the retirement decision. The question was, is it going to be enough? That was her concern.
What we discovered is that for her, her lifestyle, the way that she was setting things up, a million dollars is actually more than enough. She would be very comfortable in retirement with having had less than a million dollars.
On the other end of the spectrum, I’ve got my parents. In counseling my parents through retirement, it turns out that they needed almost no money in retirement to retire. Now, their circumstances are very different.
Those of you that listen are familiar with my parents. You know that they’re school teachers, and they had big, huge pensions that were coming out. 70 percent over the last three years. Huge in comparison to what Social Security is, and huge in comparison to the fact that nobody really even gets a pension any longer.
For them, they were going to have tremendously positive cash flow. Their retirement nest egg to retire, they didn’t need hardly anything to make that happen. This concept of a million dollars or so is one that has been batted around for a long time.
What I’ve seen is that, as the mentioning of this cycle thing that happens, more people mention that that’s the number, then most people understand that that’s the number that you need.
For years, I saw a million dollars and it’s been out there, just disseminated everywhere. Then, something changed. I’m not really sure when it occurred. Part of it is that we’ve had a really strong set of economic returns over the last nine years.
Until the last few months in December of 2018, record returns. Somewhere in the middle of that people started to say that you needed more than a million dollars in most cases. The articles would conclude that you needed more than a million dollars.
Then, my friend, Suze Orman ‑‑ actually she’s not my friend, but it doesn’t matter ‑‑ came out [laughs] saying that you probably need $5 million or maybe more. It just struck me as being something that just didn’t sound right.
Beyond that, not that I didn’t understand the number, I understand the way numbers work, I knew that the number was wrong. It didn’t sound to me like the right advice to be giving. I was trying to figure out where it was coming from, how it was that we needed to be increasing that number.
The best thing that I came up with ‑‑ and it’s only a theory ‑‑ my theory is that the majority of people in the financial world make their money as long as you are continuing to save money and add to the portfolio that they’re managing for you. That’s their gig.
All I could think of was it turns out that getting to a million dollars has become easier over these years and more and more people are getting there. How can we frighten people to be thinking that they need to be doing something new and different with their money?
What if we tell them that a million dollars is not enough? What if we tell them that actually what they need is five times that amount? What are they going to do? They’re going to freak out.
They’re going to freak way, way out because they know, first of all, that they don’t have it. Second of all, they know that they probably can’t get there. That’s going to cause a lot of emotional upheaval, and we can sell to people with emotional upheaval. If I have them frightened, I can sell to them. I think that’s what’s going on.
My goal today is to give you the tools to help you ignore outside noise, so to speak. You shouldn’t listen to any show or read any article and automatically assume that you can’t retire as soon as you had hoped or in a lifestyle that you wanted to.
While any article that talks about how much you need to save in order to retire probably does have some well represented information and resources, in terms of the way that they’ve done their math. You probably want to temper your emotion when it comes to that, and try to…It’s small doses, like ice cream ‑‑ a little bit.
Little bit if you want to listen to financial news. I’m going to read this stuff. We shouldn’t be trying to consume all of this stuff like it’s going to give us all of the right answers.
Today, what I’m going to do is I’m going to walk you through what I think is the right way to determine…Maybe a better way to say it is the best way to make a really educated guess as to whether or not you have enough to retire.
By the way, if you want help with this, if the goal for you is to get assistance on this, and make sure that not only you have a professional’s opinion on whether or not you have enough to retire but then also professional guidance, professionally‑managed guidance on that going forward, then you can reach out to us.
You can give us a call and you can start to engage with our process to see whether or not we’re going to be a great fit, whether we can answer those questions. You do that by calling our office at 609‑8180‑0068. You let us know that you want help with retirement planning, and we’ll start the conversation.
Victor: What I’m going to do right now is I’m going to take a quick break and then go to commercial. When we come back, I’m going to start talking to you about what right number to focus on is and some of the other things that I think are important for you to be able to make the best educated guess as to whether or not you have enough to get through retirement.
Stick with us, we’ll be back after this quick break.
Victor: Hey, everybody. Welcome back to Make It Last. Today, we’re going to be talking about why you may not need as much as you think to retire.
My point for here is really trying to give you the information that you need that will help you block out most of the noise that’s out there so that you can focus on what we think are the right decision‑making parts for you determining whether or not you have enough to retire, and making that as the best educated guess. It’s really hard to know for sure.
The first thing that I want to talk about is the right number to focus on. As I said before, today’s show is going to center around this idea that’s been around for a while that, if you don’t have at least a million dollars saved for retirement, then you better not retire.
Honestly, it makes sense to me, as I’m sure it does to you, that anyone would want a first look to the amount of money that they have in their portfolio as the best gauge about whether they can, in fact, retire.
When you get to the point of retirement where you are no longer making any more money, you know that you’re going to have to draw on that money in retirement in order to make it last, make it to go all the way.
If you start looking at those balances and you start first focusing on what you have in the bank, so to speak, to live on in a retirement, it’s probably a good first place to go.
I also want to offer you a different approach. It’s not to discredit how important it is to save and build your nest egg. You’re not going to hear that from me. It is super important for you to be saving for retirement. The size of that nest egg is going to determine the choices that you have in retirement.
If you have more there, saved, you’re going to have better chance to make it through retirement. That math is not difficult. It is important to save as much as possible. I’ve said this before on other shows, but one of most important numbers in order to determine your success in retirement is your savings rate.
That savings rate, as a percentage of your income, is actually more important than the income that you’re making. It is more important necessarily than the amount that you have saved, what’s in the nest egg.
What the savings rate does is it identifies the percentage of your income that you are willing to live on. A good starting point is thinking about a savings rate of at least 15 percent. The higher you get that number, the better your chances are in retirement because it’s going to force two things to happen mathematically.
First, you are going to learn to live on less. That will help you have a smaller draw on your retirement funds in order to make it through retirement. The second component of it is that, by saving more and more and more of your income, keeping it at that 15 percent where maybe even having it grow higher, you’ll have a bigger base to draw off of.
It runs a see‑saw in both directions. It tilts the scales in your favor when you learn to live on less, and you’re accumulating a higher balance. Again, it’s really important to save money and build your nest egg.
Certainly, there are some people that are going to need at least a million dollars or more to retire and live comfortably for a long time. I think that the number that most people focus on is the wrong number to worry about out of the gates. Rather than worrying about how much money that you have saved, you should start focusing and worrying about how much money you’re planning on spending.
Let’s take this a little bit further. When you’re working and living your normal day‑to‑day life, you build a lifestyle that is almost solely built on cash flow, meaning that it’s based on how much money you’re making and bringing home from your paycheck. Then you can determine how much you can spend on everything that your life revolves around.
For example, if you wanted to live lavishly but you don’t have enough money coming home every two weeks from your regular paycheck, then you’re probably out of luck. You are not booking the cruises that are on the luxury yachts if, in fact, there’s no money there for you to be doing that that’s left over from your paycheck.
That cash flow in your working years determines that lifestyle. You’re going to be forced to develop a lifestyle that is more frugal. Otherwise, you’re going to see yourself in debt. I will say that there are people that live that way. There’s a lifestyle that they want and it doesn’t matter that there’s more month at the end of the month and there is money.
They’re still going to go out and go after it. That will cause them, very quickly, to get into debt. It is difficult for them to manage that because, as the debt starts to accumulate, it snowballs and that lifestyle just absolutely devastates their financial life, in the short term as well as the long term.
If you know that sound planning is going to give you the best opportunity to not live a life that is full of living in debt, that’s what you do on your day‑to‑day basis. If that’s how you end up managing your cash flow while you are working, why are you going to treat retirement any different?
You’re still going to be spending money. That money is going to need to come out on a regular basis. You’re going to be paying bills and living a fairly normal and predictable monthly cash flow based life.
At the beginning of the month, you’re going to have things that you need to regularly be doing. You’ve got to go to the grocery store. You have to pay your property taxes. You have to pay for lights and gas.
There are all of these things that are all parts of a very typical life that are going to continue when you hit into your retirement. Nothing’s really changed. You should be treating your planning post‑retirement like the way you’re treating your planning pre‑retirement.
How much are your bills going to run every month? How much do you spend on fun stuff? How much money do you plan to have for those unpredictable expenses and other things like vacation? How are you going to earn those out?
Does this at all sound familiar to the way that you should be living your life while you’re still working? What are the bills? What’s my savings account? What’s my cushion? How much do I have in emergency savings?
Those are all parts of living good cash flow lives. Being good stewards over that while you were working. We’re you expecting that exactly the same thing is going to happen once you get into retirement.
Again, you really want to be thinking about that in the terms of how are you going to have money to on in your retirement?
There’s one method that you could use to assess where you stand. Since I want you to focus on your income needs and your cash flow first, I want you to ignore the size of your portfolio for just a second.
Here’s a process that I think you could follow that will help you look at your portfolio size. Only this time, armed with more knowledge as to what that portfolio needs to support throughout retirement.
The first step is a rigorous budgeting exercise. I’ll begin with saying that I know that people don’t like worrying about budgeting. They hate the idea. There have been so many studies on this, and people absolutely hate the idea of budgeting. I understand why.
First of all, if I introduce this concept in retirement planning and they’ve never done it while they’ve been living…when they were working, excuse me. They’ve always been living. [laughs] If they haven’t been doing it while they were working and they weren’t living on a budget, it is so hard to get people to put their minds around that.
For the most part, the clients that we work with have always made more money than they spent. They were always able to organically save. This is you.
If you were always making plenty of money, and there was always money left at the end of the month, and you were always saving, it would grow and then you’d move it over, the idea of budgeting is probably really hard for you to wrap your head around. Both the concept how to do it, but also the reason to do it. You probably have a hard time thinking through that.
I will be the first one to say that I struggle with this sometimes. I struggle with it because, as a business owner, the money that I have is often just a function of what money’s been coming into the office.
There was times early in my career where my cash flow was completely determined by the success of the firm at that moment. There was a direct line. There was a direct line to the amount of clients that had come to the money that I had to spend, that Victor had available.
The budgeting exercise was useless for me because, if there weren’t enough clients coming in, then I didn’t have any money. Didn’t matter what my budget said. I’d be making a new budget every month.
As the practice matured, as the businesses matured and we were able to get over the hump of worrying where the next dollar was going to be coming in, it got both, not only easier but more important to be budgeting on a regular basis because, again, there may be unpredictability about who might be coming in at any point and time.
We wanted to be smart about how we put the budget together because there were going to be obligations that we had to meet, both at the business level and then me personally. Those were obligations.
We’ve grown into a rhythm of this budgeting that is, in fact, very healthy. It’s only been born with some time and more maturity. If you’ve never had to do that, then it’s going to be really hard for you to see the need to do budgeting in the first place.
You’re not going to look at your life and say, “Hey, I need to set aside time trying to figure out what dollars are coming in, which one’s gonna go out and the size of the stuff that’s going to be going out,” because you never had that need. What I’m here to tell you is, you’re going to have that need in retirement.
The thing that was the cash flow that made it so easy is gone away. Even if you’re looking at your portfolio saying, “Well, there’s a ton of money that’s in there,” it would really be unwise to not be thoughtful about budgeting and the way that you were setting all of this up. If you start to draw too much too quickly, there’s no way to replenish that.
Instead of having a very steady and even lifestyle across retirement, you’re going to be bouncing all over the place. You might be too lavish in the beginning, you might have some [indecipherable 27:26] of austerity, you ratchet it back, your account goes up, then you just draw more again, then you kick it back again.
There’s just too much influx with that kind of structure for you not to benefit from the budgeting.
How to do it. I want you to focus on the basics first. What is it going to cost for you simply to pay the bills. That’s in caps right there, PAY THE BILLS. Things like a mortgage if you’ve got one, or your electric bill. It’s going to go beyond that. How about your cellphone plan?
By the way, some of you in retirement should be a little ashamed of yourself because you’re still on your kid’s cell phone plan. I have grandma on my cell phone plan. Look, I’m not going to tell grandma she can’t be on the cell phone plan, but she doesn’t have to worry about that expense in retirement. Somebody is covering that for her. [laughs] Anyway, cell phone plan.
How about the cleaning service? Are you going to keep that up? How much is that going to cost you? Groceries? If you want to get technical, and you should get technical with this, I’m going to give you another layer to budget that you probably haven’t done in the past. You may have categories of expenses and many times, when you look at that, those expenses can be there or not there.
There are expenses that are permanent and there are expenses that are not. They’re both basics in here, but groceries are permanent and a cleaning service is not. You may want to categorize these further and sub‑categorize them into essentially permanent and non‑permanent expenses. Step one is a rigorous budgeting exercise.
Step two is I want you to think long and hard about what you’re going to do for fun. It’s time to remember one thing about retirement. In retirement, every day is Saturday. If you worked Monday through Friday throughout your career, then you likely didn’t spend a whole lot of money during the week, but when you hit Saturday, it was a different story.
That’s my life. I don’t spend a ton Monday through Friday, but, when Saturday hits, we got to go to Target. We’ve got to go to Bed Bath & Beyond. We’ve got to do our major grocery shopping. There’s time that when we need to go get sheets, because the old sheets are all torn through and it’s time to get a new set of sheets. Saturday is spend day. That’s what Saturday is.
Imagine now that, in retirement, every day is going to be like Saturday. You couldn’t go golfing at Tuesday at 10:00 in the morning when you were working, but what’s stopping you now? You get the idea, right? You need to determine and overestimate on these things what you’re going to be hoping to spend on a monthly or average basis for all things fun and discretionary.
Are you going to golf? Are you going to travel? Are you going to volunteer? Are you going to go on a tour? Are you going to be a member of a club somewhere and participate in that? Are you going to spend time with your grandkids? More importantly, what is all of this leisure going to cost you?
As you start to quantify this, you want all of those numbers in place so that, as you get through the discretionary part, you have an idea of how much you’re going to need to spend.
Step one was a rigorous budgeting exercise. Step two is starting to look at your discretionary expenses, but you can’t stop there.
Your next step is to consider inflation over time. Don’t forget, without a doubt, that everything that you’re doing now and the money that you’re spending on it is going to cost you more as time goes by. It’s a given, but it’s not often considered by those in a retirement planning scenario.
As they’re looking at that budgeting, they’re just coming up with a number that they’re going to have to spend every month. Then, looking at that and not adjusting for what is the time value of money or the fact that money is going to be worth less in the future, that you’re going to buy less with the same money.
$50,000 a year today is not going to be the same as $50,000 a year 20 years from now, not even as much as 10 years from now. After you have considered inflation, now, finally, your portfolio comes in and you can calculate a withdrawal rate. You should have a very technically determined monthly cash flow the way that you calculated it in steps one through three.
Let’s say that you determined that you want to have the ability to spend $6,000 a month to cover both basics and your fun expenses. You take that and you multiple it by 12, because there’s 12 months in a year, and you’re going to get $72,000.
From that $72,000, you need to subtract your guaranteed income paychecks. These are going to be things that are not going to come from your nest egg, but they’re going to be things like a Social Security check or a pension check.
Let’s say that in retirement entitlement, you’ve got an annual income of $40,000, so you start with 72 and 40 is going to come out on a guaranteed basis. The number that is left over is $32,000 and what we would call an “annual income gap.”
When you have that number, that number is the more important number than the amount of money that you have in the portfolio. The reason that is so is that that number will determine the sufficiency of your portfolio.
That’s why it’s more important than your total portfolio, because if you start calculating the rest of this and you determine that you don’t have enough, you’ve got some hard decisions that you need to make.
The only thing you can really do, since you can’t increase the amount of the portfolio, is to shrink the amount of the income gap smaller. You need to calculate what people are going to call a safe withdrawal rate.
In my example, let’s say that someone has $850,000, not quite a million. If you take the 32,000 and you divide it into the 850,000, you get 3.7. I believe, this is just my opinion, that if your withdrawal rate is 4.5 percent or below, you should be able to set up a secure and reliable retirement.
The final step in this is risk tolerance. I would argue that when I help clients set up their plan for withdrawing on that income gap, the risk tolerance that they have takes a huge role. Someone that has a higher withdrawal rate might require a higher risk tolerance to support the pressure of the withdrawal.
Where somebody with a lower withdrawal rate, can usually invest a little bit more conservatively. There’s a hypothetical example that I’ve been providing just to illustrate only. It doesn’t represent a real‑life scenario and it should not be construed as advice designed to meet the particular need of any individual’s scenario.
As you jumble all of this stuff together, remember that you need as much information as you can possibly gather, so that you can figure out whether or not you actually have enough to retire. It has little to do with that balance number in your account that you’re staring at, wondering if that’s enough. There’s additional work that you need to go into it.
Victor: What we’re going to do is we’re going to take a quick break, but when I come back, I’m going to talk about the variables. As much as you may have been setting this up to be what we are doing, you’ve nailed it. In fact, there are going to be variables. There are going to be things that knock you off of your planning course and we need to account for that.
We’re going to do that when we come back from this quick break.
Victor: Hey, everybody. Welcome back to Make It Last. We’ve been talking about, today, how you’re going to figure out whether or not you have enough to retire, and why you may not need as much as you think. We took time in the previous segment to think about assessing where you stand. I gave you five steps to do that.
You’re going to do a budgeting exercise for your necessary expenses. You’re going to start to think about what you want to do for fun, and how you’re going to pay for that. You’re going to build in inflation over time. You’re going to calculate a withdrawal rate.
Then you’re going to make an assessment on your risk tolerance to make sure that those two things jive and that they make sense together, but it’s not just as simple as doing that because you still need to consider how variables are going to, and likely will, affect your long‑term success.
I wish it was easy. I wish it was straightforward because if we knew when we were going to pass away, and which unpredictable things would cost us exactly how much money, we could just add that stuff to the exercise I took you through, and you’d be done. You would have factored it in.
We know that life is going to be different. All of those things that I said that you need to know are all uncertain. You don’t know when you’re going to be passing away. You don’t know which of the unpredictable things that could occur are going to occur, if any of them, and you don’t know what they’re going to cost.
I’m going to bring you back to your algebra days. You’re going to have three variables in there. We’re going to call them A, B, and C. You have a whole bunch of numbers in the equation. Those numbers, as you calculated relative to your portfolio, are going to give you a go/no go thing. Except, I’ve got variables in there. I’ve got variable A. I’ve got variable B. I’ve got variable C.
Here’s the thing. Unlike the math problems that your teacher gave you that were created to be solved, we cannot solve for A, B and C in these scenarios. We can’t figure those out. Let’s think through some of what these things are going to be.
You may have unpredictable medical expenses. In other words, as you get older, you’ve got your Medicare. You might have gotten a supplemental policy to cover some of the gaps that are in that. You might have the supplemental. Then, you might have a long term care event.
You might get diagnosed with Alzheimer’s. You may break a hip and need somebody in your home to help you do the things that are the activities of daily living. That’s an unpredictable medical expense.
You can’t tell when that’s going to happen. You can’t tell which are the ones that are out there you’re going to get hit with. You can’t figure out how much it’s going to cost. You can’t determine that.
You might have unpredictable home maintenance. Just recently, we had a massive windstorm. I don’t know if you know this, it’s made me nervous when I moved into my house. Those evergreens that are around there, they have super shallow roots.
What that means is that when they get wet and heavy and when wind starts to blow, those suckers tumble pretty quickly. My next door neighbor, a few doors down, a good friend of the family, had this happen where one of those trees fell over and took out her garage. Gone.
She had been making accommodations for some improvements that she wanted in the house. She was going to redo the kitchen. She’s going to expand the master suite area. She had an unpredictable home maintenance event to the tune of a few tens of thousands of dollars. That was variable B. There it is.
In addition to that, you might be helping a family member out. That child that you successfully launched might have something happen to them where they’ve got to return home and you got to help them.
There may be tax burdens that come up. Things that you didn’t account for with the sale of a property or faster withdrawals out of that. By the way, some of these may be linked together if you start to take more withdrawals out of your IRA. It increase your taxable income.
You’re going to increase your Medicare premium that you have to pay, which is going to reduce the amount of Social Security that gets deposited into your account, which is going to cause you to have a greater withdrawal rate on your portfolio.
Here’s one that you cannot control. It could be nasty in the future. Nasty. How about above average inflation? You went back in that first exercise and you calculated the amount of inflation as you expected to be able to pay. What if you’re wrong? What if inflation is much higher?
You can’t predict when in retirement it goes up. You can’t predict how much it goes by. That’s a variable in the future.
Here’s another one for you married people. You don’t think about it as a financial variable. Sorry to be putting in that kind of context for you. How about the death of a spouse? The loss of a spouse is often a variable in the financial planning. By the way, the variable probably tends to have more negative financial impact than positive.
I know it’s a little cold to think about it this way, but follow me.
If a spouse passes away, your need is going to be reduced a little bit because you don’t have as many people consuming groceries or food and things like that. It’s going to go down a little bit, but the loss of the Social Security, the loss of any of their income benefits might be in there. That’s actually going to have a bigger impact.
Here’s one that almost nobody sees coming. It’s going to change your filing status. You’re going to be going from filing married to filing single. That alone is going to cause you to have less money that’s available. It’s going to be a variable that’s again related to the tax burden that we were talking about.
By the way, it could still be related to your healthcare needs because you were managing well when there were two of you, but when one of you passes away you may have a higher health care need.
Any of these can alter the equation. You can attempt to plan for it. The best way to do so may be just to over plan on the amount of monthly income you’re going to need on a regular basis to always make sure you have more income coming in than you’ll ever need.
Then, when there’s enough money built up there, you’re going to hope that there’s going to be enough to handle these unpredictable variables, but you’re going to figure these out. What are you supposed to do at the end of this?
If you were a salesman for a living, but at home you were planning on adding to your home, maybe a third car garage or a sun room. Would you do the addition yourself, or would you consult with a contractor who built homes for a living?
I have some personal experience with this. When it came down for me to move into the house that I’m in now, we had an older home. We have an older home, still have the home. It was built in 1878. That older home needed a ton of renovation.
It wasn’t even going to happen, a chance in the world, that I was going to do this on my own. That part of it didn’t come into it. I knew I was going to be using a contractor to help, but here’s the thing. I wasn’t just going to use any contractor that built homes for a living.
I was going to use a contractor that was used to working on older homes, that they knew what was going to be coming up as challenges because they’ve seen those challenges over and over again in the course of the homes that they have built.
What’s important is not only that they knew the challenges that they might see, but that they had developed a skill set to allow them to work around the challenges that they have never encountered. We had one.
We started taking down every wall that was in the house because we had to rerun plumbing. We had to rerun electrical. I’m sorry, asbestos in the plaster in some of the walls. We needed to do some asbestos remediation. We were peeling back the layers of this onion and we got to this wall that separated the kitchen from a bathroom that was on the other side.
What we discovered is that the contractor who had installed a bathroom in that area had essentially notched out a part of a load‑bearing beam that had caused the wall to sag and cause the floor upstairs to sag.
Now, if I had had a contractor that was just used to building homes, brand new homes on clean platforms, if that’s the person that I had used, they would have encountered that problem and not known what to do. They probably would have come up with a solution that was super expensive and not right for my home.
It would have cost too much versus the fix that we wanted, but I had a contractor who knew how to deal with older homes. We specially selected this individual just to make sure that we could deal with these kinds of circumstances. What did we do in that case?
It turns out that the first thing that we did is we sandwiched the studs that had been sagging with plywood. That was going to stop it from moving anymore.
Then, because the floor upstairs had sagged down, we needed to be able to build that back up again. What we did is we made a little furrowing strips. Those furrowing strips allowed us to build the floor back up so that it was level when we put some plywood on top of it.
The solution was elegant. It was perfectly tailored for what our needs were. It was because I was working with a specialized contractor that all they did was help with these older homes.
The same thing needs to be said for your financial planning and retirement. I would be saying that even if you already have an advisor, if you are in a scenario where you need to do this planning, I don’t think that you should be planning it on your own.
If you already knew that and you say, “Well, I’m gonna use my guy or my gal to help me.” I don’t think you just use a general contractor for that. You need to be using somebody who specializes in the area of retirement.
I would ask the next set of following questions about your current relationship before you sought out a retirement planning expert. Let’s really figure out if they know their stuff. Ready? You might want to write this down.
Ask yourself the following ‑‑ Have I ever asked my current financial advisor how they would handle my situation if I retire and what did they say? Does my financial advisor handle only retirement‑aged individuals, or do they try to be all things to all people, or they just focus on people that are not retirement people for what they do?
That’s two questions, so far. Question number three. What kind of process does my financial advisor or advisory group have to help their clients plan for retirement? What’s step one, step two? What do they focus on?
The next question, question number four. Are they knowledgeable in all areas of retirement and income planning? Do they know about taxes? Do they understand the impact to Medicare? Do they understand how to generate income from assets? Do they know about time bucketing, horizons on investments? Do they know all of that stuff? Am I certain of that?
The fifth question is do they have access to all retirement vehicles or products, or do they only sell the products that their company offers? This one is going to seem misleading. You’re going to believe that, because these people ended up offering you different stocks and bonds, that they can offer you every kind of investment vehicle possible.
Here’s the thing. Unless they are truly independent, if they are…Truly independent means that they are not employed by anybody with a big name that advertises on TV or could advertise on TV. If they’re working for one of the Merrills, Morgan Stanleys, Edward Jones, UPSs, Wells Fargo, then it means that they, in fact, are not independent.
If they’re not independent, then it means, by definition, that they don’t have access to all the retirement vehicles and products. They are, by definition, going to be able to sell only the products that their company offers and instructs them ‑‑ instructs them ‑‑ to sell.
You’ve heard me in the past get up on my soapbox. My soapbox is 15 feet tall and all it says up and down the soapbox, is, “Work with a fiduciary,” because the majority of people that are out in the financial world are not fiduciaries. They are there to sell you what their company has told them to sell you and not work in your best interest to help you plan for retirement.
You absolutely need somebody who is independent, and then has the rest of the stuff that we’ve talked about ‑‑ that knowledge and expertise in the retirement planning world. All of that stuff is what you can get to afterwards once you’ve met that initial amount of being a fiduciary.
At the end of the day, you owe it to yourself and your family to have a retirement income specialist dealing with this final phase of your financial life. We have been over this in the past. Retirement cannot and should not be done half‑heartedly.
What’s my suggestion at the end? Call somebody like us to go over your goals and objectives. Perhaps people who do what we do can help you shed light on whether or not you can retire right now or not.
Don’t procrastinate. You’ve been working and saving for all of these years to know whether or not you can do retirement, to be safe there. If your goal is to retire and you’re just simply not sure whether or not you have enough or you need guidance, then allow somebody like us to help.
If it is us, you can call us at 609‑818‑0068, schedule an appointment to come in, and sit down with somebody on our team to go through our retirement mapping process, what we’re going to handle, but get this done with somebody that specializes in this area.
Otherwise, if this has been a good show for you, the only thing I ask you to do is share it with a friend. Tell somebody about it. Soon, they’re going to have an awesome logo to look at. You’re going to be able to say, “Hey, go check out that awesome logo at Make It Last show.”
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Otherwise, I want to thank you for joining us on this show. We’re real excited. We’ve got a bunch of stuff coming up for clients. By the way, if you were a client of ours, you’d be invited to an upcoming screening that we have coming up of the “Captain Marvel” movie. That’s going to be coming up in a week or so.
We’ve got some other events that are in there. We really do encourage you to engage with us, find us out in the community, and come see a talk that we have. We’ve got a bunch of those coming up in March.
Victor: Maybe next week, over the show, I’ll let you know where they are. It’s been fantastic having you with us here today. I really appreciate your spending some of your time to learn more about the planning things that you need to know to get through retirement, both from a legal and financial platform.
This has been Make It Last, where we help you keep your legal ducks in a row and your financial nest egg secure. We’ll catch you next week. Goodbye.
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