Protect Yourself From Running Out of Money in Retirement

the one thing that I've seen like if you could say out of all 10 things the external factors the internal factors if there's you mentioned that it might need a combination of multiple to actually cause someone to run out of money I know one of them that has caused people I've watched it draw people's portfolios down to zero that by itself I know I keep coming back to that but like that's the only one out of all 10 that I've seen that one by itself draw people down to zero interesting yeah which is spooky all right Zack call is back president of capita Financial work thank you for being back here because your videos have been so well received and your information is so great so we have some other topics that we really want to address with retirees and personally for those who are not necessarily to retirement yet what can we do now to kind of prepare for ourselves so before we go too crazy into this a lot of channels or videos will save the meat for later about what it's all about to get the watch time up just tell us right now what do we need to expect from this episode sure especially since we'll probably go for a while right yeah um okay today we're talking about withdrawal planning retirement income strategy structuring your wealth so that you can avoid the major risks in retirement and the the main thing you need to understand here is that there are some external factors you cannot control there are some internal factors of which you are in complete control and then there are way are strategies for structuring your retirement income and they really only boil down to what I call now and later money or multi-stream strategy so we'll get that's the order in which we're going to go through this today um the key thing that people need to walk away and understand is that you cannot control the external factors you can't decide how much inflation will be you can't decide what the government's going to do with your tax rates other than your voting right you can't you really have very little control over these these first five external risks or factors and the reality is they're not going to make or break your situation either um people are really really afraid of markets of inflation of taxes and the reality is those usually don't um make people run out of money I've never met anybody that ran out of money because taxes were too high I absolutely met a lot of people who have run out of money because they can't control how much money they're giving to their kids and so that's that middle section of what are the internal decisionmaking uh situations that you get into not the external risks but your own like what's in your power that is impacting your ability to have enough money throughout retirement and and and then also making sure that you hit your goals so it might not be the risk of running out it might be the risk of not enjoying life enough and you end up dying with too much money so that's all that's all in that middle category of what's within your control so in other words get to the me at the end I'm going to tell you I wouldn't stress I wouldn't overly stress about the external risks things like investment um performance you know if you're doing you know doing well it's going to be fine you know and you don't need to stress entirely about markets as much or taxes or inflation like yes you needed really thought out strategy to manage those external risks but your biggest risk is yourself in many ways like those internal factors are such are so much uh more impactful to to the question of I run out of money and so we'll talk about those as well and then lastly it's just a knowledge thing where you may structure the portfolio in a way you think is a bucket approach or a now and later money approach but the way that you actually take the money out is not working in other words I know countless people who sell stocks after they're down just because they're on an automatic monthly withdrawal that takes money out of the portfolio proportionately so it's a mistake that people make without even knowing that they're making and many people will go their entire retirement and pass away and never know that they even made a mistake so it's it's something that we want to at least expose the issue and provide what we believe to be a superior option this is so interesting when you phrase that this kind of clicked in my head because it was like the external factors it seems like if you turn on the TV or you watch YouTube videos or whatever it is it's so focused on hey your taxes are going to go up and out of control the Market's so volatile everything is good or bad or whatever else it is I rarely hear hey don't spend so much like stop buying things in terms of like because all of the marketing and ads and the consumer Market of where we live I mean it just it is what it is and then the last part in my mind is almost one of those things where it's like it's over my head I almost personally bury my head in the St sand like you guys take care of it for me so it's interesting to as you were talking through those of just theet around it all the the problem yeah you're right the problem is that even on this last category advisers are not doing it necessarily the best so I'm just just throwing it out there like you might say oh this is over my head but I actually think the consumer needs to understand the structure of what's being proposed to them because the structure itself is sometimes wrong yeah so if you can if you can improve the structure at least understand how the structure is going to pan out so I'm being kind of vague but the point is don't sell Investments at a loss every month on your automatic withdrawal like that's what I'm trying to get at here we're going to explain how to avoid that but I can't tell you I mean most retirement income plans either over limit your access by going too heavy on the insurance side and locking up your money forever to guarantee you that you'll never lose money ever or on the other side they're a diversified portfolio where they sell growth assets every single month for their cash flow and I think both of those are a mistake and there has to be a way to solve for that and there is there there are ways to do it where you're not experiencing either of those mistakes um there's there's a huge benefit in flexibility and access and the ability to change your mind about how much money you spend or how how you spend your money in general or who you give your money to and when you lock it all up those those rights are taken away from you and then also on the other side there has to be a way to not sell Investments at a loss every month so anyway we'll get we'll get into that but the external factors are for sure scary so let's just take take the take a step before we jump into that too quick I do want to note because of past videos and stuff this is not Financial advice for individuals right like we're going to talk about these Concepts as a whole kind of functionally how they all work but uh as we dive into the demographics of people who watch this we were talking about this a little bit we have people who are 18 years old all the way up to 106y Old watch I cannot believe that 106 year old watched our other video so the age range here is hugely different and then also the assets that people have some are just starting their careers others have multip multiple millions of dollars so don't take this as Financial advice reach out to a financial adviser if you have questions around this specifically for you if you're that 106y old like good for you because I'm 39 and Eric's teaching me about YouTube and you're 106 and you're on YouTube consuming that's just fantastic she's like I know her personally we did a video with her she's amazing she's she's in great shape that'll be a different conversation she exercises every day awesome okay so take us through the external factors what what do we got to worry about yeah and I guess the the point I wanted to First make was um I don't want to be dismissive of these external factors because they're not they're not minute it's not like it's a it's it's not something you can ignore and we'll go through each one and I also want people who are feeling the fear associated with with government decision- making taxes um policy around inflation like those are all really big that's a big deal so I'm not saying they're not a big deal they're just not as much in your control yeah so that's the point is what's within your control and what's not so as we go through this we'll just hit them so longevity that meaning you live so long you're the 106y old gal that you're talking about that that you live so long that you just live longer than you expected and you planned for your money to basically run out in your 90s but you lived another 16 years good for her um that is that is longevity risk it's it is I'm going to say something it's kind of sad but I just think people don't live as long as they as they model out in the um in the retirement income planning tools and Analysis we always model out the the most conservative situation so a financial planner is going to model out what if you live really long what if you live to 90 95 100 where you know a lot of people end up passing away in their 70s and 80s and so you have to think about that when you think about longevity you also have to think about if you're married it's actually a really high the probability of one of you making it to your 90s is really high imagine you flip a coin and before you get two chances to flip a coin and before you you flip it either time you have to place a bet on whether or not you're going to get a heads once it doesn't matter it's just get ahe heads once between the two flips well that that probability is actually pretty decent you've got two shots at it right yeah um if you if you only have one shot at it it's 50/50 that's easy but two shots at it the probability is not 50/50 it's actually a lot higher that you you get that opportunity so the point is the same with somebody making it into their 90s if you're a couple the odds of one of you making it there is actually pretty high and so you have to think about longevity that way um but oddly enough one of my biggest concerns is that people people worry about running out of money so much that they don't live a life um that they could have in the meantime so we'll talk about that later too but that's longevity um Investments is the next one and what we mean by Investments is poor investment decision-making not um volatility of the overall Market I'm talking about like you put all your money into one investment and it went belly up that that investment decision making or for example you sell after the market drops and you lock in losses that you never make back um those types of investment decisions or you put it all in a in in some really ill liquid thing that is a private investment that ends up you know going under I mean there there's a lot of different ideas or All in One stock publicly I mean you get the idea but that that's more of like investment failure not investment volatility yeah um then so that's item too is just investment risk let's call it okay item three is probably the most complicated for us to try to explain but it's also probably the one that matters the most to people and it is the fact that there's normal volatility in Investments anybody who builds a reasonably Diversified portfolio will have some ups and downs in that portfolio the the next risk is called sequence of returns and all it is is those ups and downs are going to happen did the Downs happen early in retirement for you in the middle or at the end if the Downs happen at the end it is not a big deal yeah if the Downs happen in the middle I mean if we divide your retirement a 30-year retirement into three decades if it's in the second or third decade that a time like the 2008 real estate crisis happens it it's not fun and you're not you're not like sleeping well at night but it doesn't really cause you to run out of money yeah if it happens in the first decade and you are overly exposed to it that is a massive problem so it's the order and and a way to best describe this is and and you know me I'm kind of a math nerd so I I like to explain things with numbers but um but I did see this play out in 2008 when people were retiring in 2007 and 2008 and at that time I worked at a previous employer and my job was to help oversee their investment strategy and they started taking maybe a four or a 5% withdrawal from the portfolio and then the markets dropped and their portfolios went down in some cases 20 25% because the market went down 50% right and and they weren't all invested in the stock market but the portfolios went down pretty substantially well then a 25% reduction in the portfolio if I still maintain the same withdrawal um percentage means that I need to take them cut their expenses from the portfolio their withdrawals by about 25% as well so you know imagine you're taking out $20,000 from the portfolio and I'm now telling you okay you can only take um $115,000 a year from the portfolio uh that's that's a big deal especially if it was $2,000 a month and now it's $1,500 a month you know and and life's not getting cheaper you know so anyway that that's difficult and that was hard and a lot of people don't change their expenses so then what that means is selling more of the portfolio while it's down and that's the sequence of return that's the story that I saw play out in 2007 8 and N quite a bit but the math um like why is this why does this matter so let's say you have a $100,000 portfolio yeah and you you get a 10% return a positive return well now it's 110,000 then you get a 10% loss well it's 110,000 10% of that is 11,000 ,000 so now you're down to $999,000 so you started with 100 10% gain 10% loss 999,000 finish so what if we flip the returns we start we go -10 then positive 10 same idea start with 100,000 -10 we're down to 90 right because we lose $10,000 we get a 10% return well you started with 990,000 a 10% return is is only going to give you $99,000 back up and again we're back to $999,000 so if you watched the last video about Roth and traditional I don't know I feel like I'm this weird guy that does this thing I'm like look at all this fancy math it doesn't matter but but the point I'm trying to make here is that you could pick any set of returns in any order and if there's no cash flow in or out of the portfolio the end dollar amount will be the same as long as the portfolio experiences the exact same returns in in whatever order you want yeah and that's confusing to people at times so the the reason I mentioned that is because like you could throw in a 20% gain a 5% loss and then a 5% loss and a 20% gain same scenario you end up with the same dollar amount now here's what matters if you start introducing any cash flow in or out of the portfolio all of a sudden it changes the game entirely so if you have a 10% gain and then you take a withdrawal well a lot of that withdrawal is just icing on the cake was the growth right versus if you start with a 10% loss and then you take money out well now you're not only taking your principle you're taking it off a smaller balance you're kind of cutting it down and then now the next year's growth that I'm talking about like um a $100,000 portfolio and if you take out $1,000 after a loss well that ,000 doesn't get the growth and you're going to end up with a different balance so anyway this up for people to see that too yeah and and reality is is $11,000 maybe I'll I'll change this really quick and that way you can you can use that as as the um as the example but because most people are not withdrawing 1% of the portfolio um but basically I put in a $5,000 withdrawal and the end balance is $1,000 different yeah that's not a huge deal to have your balance be 1 thou or 1% different between the two scenarios it is a big deal when it's only two years though and it's 1% different because if we we we have another table where we're talking about sequence where it really matters this really blew my mind the first time I saw it yeah cuz I never understood no one had explained it to me until you guys did and I was just like whoa that's and we planners geek out about this um so just so you know this is why when we run an an analysis of whether or not someone's going to run out of money they want a straight answer of like am I or am I not it's like well I have to run a thousand scenarios and then throw the market returns in all kinds of crazy orders compare that against historical returns of your portfolio the way we're structuring it and then and then we give you this funny number we're like well it's probably 90% probability that you will be fine and 10% that you won't and that's not true either we'll get into that but um but anyway people want a hard answer and this is the reason it's difficult is because um we ran so this is 25 years and I think this study may have been a Fidelity one I can't remember um but this is a chart produced by some else not us but um 25 years and if you go through a port um a sequence of returns where the gains are at the beginning that portfolio starts at 100,000 you're withdrawing I think it was it was 5,000 so 5% withdrawal and and by the way the average return is 6.2% in both scenarios yeah but the early gain ends with $25,000 left over so you started with 100 withdrew 5% per year and then you you die with 20 $5,000 it's fantastic great um okay the same Returns the same market conditions just in a different order and you start with 100,000 and you run out in year 18 yeah you never get to year 25 and it's because the losses happened early so this is I know we we paused this was only item three out of our five it's the one that people probably misunderstand the most and need to understand because it dictates how you structure a portfolio more than it anything else well and you mentioned it's an external Factor right like when you decide to retire you can't predict the next 25 years you can't predict the next 5 or 10 I think the psychology of money talks about this a lot of those who chose to retire in 2008 have a much different life than those who chose to retire 10 years later right so it's just it's it's pretty wild there does this come into the play this was kind of big news all over the place with the Dave Ramsey saying you should re take out a certain percentage does this kind of tie into that at all yeah it does and and we're going to talk a little bit about a mistake I think that he he spoke and and said but before that I mean no one has done more for the individual within a financial crisis than Dave Ramsey's tough love so let's just like give him some credit for what he's done um a lot of financial advisers and wealth managers don't really focus on the on the people who are in trouble financially because there's not a lot of opportunity to take them on as a customer so I mean Kudos did Dave Ramsey for for really targeting the masses that need the help giving them some tough love and and part of that part of his approach is tough love so sometimes he says things that may seem a little radical so he came out and said that you should be getting a 12% portfolio return and inflation if it's at 4% you should be able to take out 8% per year the problem with that is it only works if the return is constant and exactly 12% every year it doesn't work if the 12% is comprised of a - 255 a positive 4 ne3 positive 18 you know if you if you have that type of volatility and by the way to get a 12% rate of return you need to subject yourself to a decent amount of volatility um because you know the stock market longterm has been between 10 and 12 and so the stock market long-term experiences about a 14.6% drop every year so that's something to be I mean just buckle up folks like that's that's part of the game but it is positive most years so it's one of those situations where if if you went to the um if you went to Vegas and you there was one blackjack table that had 70 plus% odds of walking away winning obviously it's not I mean the house has a slight Advantage there right but if you had a 70 plus perc Advantage like I would quit my job and I would sit at the table constantly and every time I lost I'd be like it doesn't matter I'm going to win 70% of the time I'll just stay here I just don't bet the whole Farm on one hand and I'll be fine and that is the stock market it's just harder to conceptualize that way but the point is that that back to Dave Ramsey's comment to get a 12% rate of return you have to be okay temporarily losing money and you might be emotionally okay with it like maybe maybe you just got nerves of Steel and you're the you're the you're the individual that the risk tolerance is 110 out of 100 you know maybe that's the way you feel about it well it doesn't really matter how you feel if your money doesn't have enough time to wait so there's a difference between your risk capacity and your risk tolerance yeah and young people it it's all the same they have a high capacity and so it's like the younger you are the portfolio should be more based on your tolerance the older you you are the portfolio should be based more on your capacity because you again you might be really tolerant but if you have to take money out of the portfolio to live it doesn't matter how you felt about it the market the you still pulled money out when the market was down because you lived on it yeah so anyway that the problem we run into is is that you go back to studies done years ago and they say okay well what is the percentage you can take out if you were to live 30 years and just let's just let's mark all of the all of the different 30-year periods over you know hundreds of years what is the percentage you could take and never have to worry about running out of money and the consensus came back through studies and it's been debated over and over again that 4% is the number so if you've heard the 4% rule that's what they're talking about they're saying we're going to go back and look at every 30-year window and if you were to take 4% and then increase it with inflation over time you'll be fine in a moderate growth or moderate portfolio usually they're modeling in like a port folio of 60% stocks 40 bonds so here you have somebody saying well you should earn 10 or 12% return 4% inflation take out eight every year and then you have a a bunch of um researchers and people in the industry saying the rule is 4% and I remember hearing rumors that it it you know investment returns with with Bond rates being lower than they were in the 80s you know you really should be looking at three or three and a half% and actually think they're as bad on the other side that there is a middle ground here there are definitely ways to take more than 4% from a portfolio but once again going back to your comment about everything's different if I'm talking to somebody who's 75 years old the 4% rule is worthless they don't have nearly the time that they have to make that money last right but if we're talking to somebody retiring at 55 then they're they're going to need to withdraw a lot less okay so it's all personalized right so that was that was a long like explanation of sequence of returns again hand it to to Ramsey and his team for everything they've done for the folks in financial crisis I don't agree with the idea of withdrawing 8% I think it's too risky um even like the best ways to model it with multi-stream income and and now in later money that we'll talk about later I just can't seem I can't see it working very well for most people for a 30-year period yeah and and this isn't the whole point of this one but maybe you could address too because it was really quick and it wasn't played in most of the stuff where I think it was Rachel his daughter who was saying like well what if you don't make a 12% what if you make a 10 and then he's like well 4% take that out for inflation and then take six and so yeah how is that still problematic of taking that is that tying into this sequence of returns as well I like that Strate I like that concept um most people are not willing to adjust their spending like that yeah that makes sense but I I actually very much respect that in fact I have found that that's one of the best ways to increase the initial withdrawal percentage so in other words if you don't like the 4% rule then you should it you you can make a trade-off you can say okay I can start spending way more than 4% if in the future I'm willing to adapt it down the 4% rule is designed for somebody who's kind of like hopping in an airplane putting it on autopilot and sitting in the back and there's no pilot up front now if you're willing to make adjustments along the flight path then you can start with a higher percentage than four gotcha so yeah so that and what Rachel I don't know is that her name maybe I think so okay what she's talking about there is the the the mid-flight adjustment yeah if that if that can be done then you can start with a much higher withdrawal percentage I guess my question is I usually don't go as high as eight when things are really good I don't like to take the entire growth of the portfolio because if you leave a little bit of of the growth as a buffer that means you can still with draw when you actually lose so I guess my question in that scenario is what would they do when the market goes down 25% and their portfolio goes down 10 or 15 or 20 then would they would they deposit money cuz that math you know inflation at 4% minus you are you going to deposit 24% into the portfolio you know what I mean like that's where I'd start to wonder maybe they would just completely stop spending for some retirement income situations that might be fine if you have a pension Social Security and you're with from your account are just icing on the cake that might work for you but if all you have is your withdrawals from the portfolio it's really hard to just live on nothing for a year yeah well that was that was an awesome breakdown of sequence of returns there I hope so it's a it's a weird it's a weird concept to try to understand um let's keep going though so the other one is inflation and this one is this is number four external factors that you don't have real control over you got it good good summary um inflation is a scary one um it has been a non-issue for almost 101 15 years until this last year or so when we finally saw numbers in the 8 to 9% range over a 12-month period U but we've been modeling in inflation of two or three or sometimes more um percent in terms of how much our expense is going to go up and we just haven't seen that we've seen it at near zero to one and two for the last decade in change which is has been interesting now we finally saw an eight or a 9% which some people take that and say see it's going to be awful it's going to be eight or % forever um there's a there's a recency bias in that like we think what's happened recently is what will happen forever um if you look yeah it was 8 or % recently but if we take the average of that 8 or % over the last 12 months plus you know 15 years of near zero then the average is actually fairly fairly low for a while I do think inflation is coming um I do we all feel it right now um Goldman just actually put out a their projection on on overall markets and their projections so it's right now I don't know when people will be watching this but it's December in 2023 yeah and they put out their their overall projections and they feel as though the government has done a good job to um Stave off more inflation by keeping rates as high as they have and they actually talked about a potential for government next year to be able to decrease rates a little bit and so that's they talked positively not not like super optimistically but positively about about things so in other words that that's a a quick explanation of inflation and it is an issue it matters and specifically Co so I'm just going to talk about some there's inflation and then there's your withdrawal inflation not the same number explain okay so let's say somebody has has $100,000 worth of expenses and most people have social security income but for for the sake of keeping math easy we're going to pretend they don't okay all they have is $100,000 of expenses and they are going to take all $100,000 from their investment portfolios and that's all they have so if inflation is let's say we model out 2 and a half% then next year they need to take out 102,5 right because of 2 and A5 inflation growth okay that's that's about as simple as it comes where the actual inflation on expenses matched The increased withdrawal you needed to take from your portfolio Okay but what if somebody has the same situation what if they have $100,000 of expenses but they have social security income for um let's say they have social security income for $50,000 between the couple yeah and then they also have a pension of $40,000 like a pension that doesn't go go up with inflation at all Social Security does get cost of living adjustments but we never model in that they'll be as kind to keep up with inflation with that right so we'll model in a really low number on that but that their expenses are going up faster and their pensions not going up at all okay so they have $90,000 of income that's not climbing let's say you model out 2 and a half% inflation on the expenses so we know it went from 100 to 102 right 102 and a half thousand and their 990,000 of income maybe went up to 91 or 92 so they they are not climbing their fixed income is not climbing very fast their total income or total expenses are going up by inflation so the gap between the two is getting bigger faster yeah so their actual rate at which they have to increase their withdrawals from their portfolio might be four five 6 7 8% when inflation is only two or three so that's a weird concept again weird math and we run into this all the time and it's one of the reasons I actually struggle and get frustrated with a lot of financial planning software because a lot of the software will either oversimplify it and they will say all right inflation's two so the withdrawals will go up by two everything's going up by two it's like well no first of all I want their fixed income to not go up because some of it doesn't and their withdrawals are we need to model out like a four or five% increase on how much they're taking from their portfolios to keep up with a 2% overall inflation anyway so the tools so inflation is not just like the external factor it's are you actually modeling out the right retirement income picture because your withdrawal inflation might be higher than actual inflation interesting yeah it's a weird weird situation that we run into okay and then the last one is dramatic changes in taxes so this is a hot button here you you you not kidding uh we did the Roth and traditional video and I feel like this was probably the biggest like tax rates are absolutely going up and and by the way we agree like let's just I just want to deflect a few arrows watch a little bit further in that video we're with you uh we do think tax rates are going up the point was like what do you think will happen and that should help you make your decision around that but we're with you um tax rates are likely to go up a lot of people who make two three $400,000 a year in retir M only show $100 to $200,000 sorry I let me start I said that wrong you're looking at me like you knew um but two or three or $400,000 working yeah they often times only only show one or2 200,000 in retirement so although the tax rates for each bracket may go up you may drop a couple brackets yeah and so your tax rate may go down so it's not as it's not as simple as to say tax the government will increase tax rates therefore I will pay more in taxes right because you may drop drop brackets so that's that's part of the tricky part now once you're in retirement usually you don't you don't um change brackets too frequently you start to to find a Groove and you end up in that bracket for the most part and the reality is there are so many voters in the bottom three tax brackets you know in the 10% right now 12 and 22 after 2025 it'll be 10 and 25 so those are those that's a change meaning yes we know tax rates are going up in 2026 they're for sure going up and I think a lot of people in the comments are saying oh they're going through the roof and the reality is that's true the top tax bracket was 90% back you know decades ago I mean can you imagine thinking like if I earn another dollar I have to pay 90 cents of it away in taxes federally then your state on top of that it wasn't it's not worth it anymore so the point is that was the top bracket those first three brackets you're somewhat insulated you're you're you're a big voting population you're not going to be put in a spot where you have to um I just don't think you're you're at as much risk as somebody in the next three tax brackets I think that's an important distinction to make though is that again taxes are always harped on for better or worse or whatever in in media outlets and so it's that that marginal tax thing is isn't important yeah and most retirees end up in the bottom three tax brackets yeah you you end up kind of like let's talk about just the company that you're in in that bottom three tax brackets you've got young couples absolutely struggling to to pay for homes and you know you may have a mortgage that's $500 to $1,000 but their mortgage is four grand for the same house you know like they're they are struggling and you're in the same boat as them from a tax standpoint from like when you look at your 1040 it looks the same as theirs in terms of how wealthy or how well off you are I think um I think the government can't really hit you too hard or else they hit a lot of really really struggling families and then they have upheaval in the voting yeah anyway well that's great does that cover it looks like the five reasons that are external factors that you would run out of money is there anything else you would want other than summarizing them would suiz for us okay because there's a lot so we talked about longevity risk you just live a really long time and good for you and we talked about investment decision risk and that's just you put it all in one thing or you put it in something poor and it just didn't perform well then the third one is also investment related but it's you didn't do anything wrong the market just moved up and down at the wrong time for you that sequence of returns risk that's the one we spent a lot of time on and then um inflation so that was number four how fast are things getting more expensive for you and based on your composition of your other income is your withdrawal inflation a lot higher than actual inflation or is it pretty close to actual inflation and then number five is taxes a dramatic change in taxes all five of these are factors all five of these should be managed all five of these are important most of these aren't going to make you run out of money yeah well and it seems like as you go through those if one of them happens the odds of one of those happening to a degree where it will just ruin you doesn't seem super high but if multiple of those happen all at once then things start to get a B crazy talk about taxes if you're in the the second or third tax bracket and the fact that tax rates tax rates rise destroys your retirement it just destroyed the retirement of millions of Americans at the same time yeah like you you can't imagine how terrible that would be for governments and for politicians so like there's that to your point like it's there's probably not one of these that's going to absolutely ruin you except for that you pick a really really risky investment and it just fails but that goes back to that is within your control right let's get to that what are the what are the things I guess the mistakes that people could make that are in their control that will cause them to lose money yeah okay so the first one is actually not to cause them to lose money right so we have five things the mistakes they could make most of them most people are more concerned about running out of money than dying with too much right so that's why we end up talking about that more however uh and if you actually drill down to what people care about most people will say here's my priority list don't want to run out of money I want it to H I want to have enough that if I end up in a long-term care situation or end of life expenses are pretty heavy for the last year or two of my life like I want to have enough money there to cover that some people will insure against that or they basically say I'm self-insured because I have enough money for that so we're talking about just building up nest eggs and having enough money right so we'll talk about it that way so don't want to run out want to have enough that if that if I get to the end of the life I don't want my kids to be burdened or if I don't have kids I I need to have enough to make take care of myself and then after that usually they basically say I'd like to bounce my last check as I lay down in the coffin like that's what they're that's what they're hoping for right um very you know there are some people who have this other instead of that third priority they're saying I'd like to also pass on money to my kids or you know there's there's a two two different schools of thoughts there some people will say I want to make sure each of my kids get a million dollar or each each of my kids get $100,000 and they're very passionate about that but most people it's an afterthought they say I need to make sure I have enough I need to make sure that that I'm independent all the way through the end of my life and if the kids get something great I don't really care yeah um they're fine and in many cases they'll joke they're making way more money than I ever did and and there and and I will tell them and you know what they're going to spend your money a lot faster than you ever did too so don't stress too much about that um but anyway the point is I guess it's the two philosophies of have something left over or die with nothing yeah and the reality is if we could predict everything perfectly a lot of people would actually choose to die with nothing because we can't predict your life expectancy and markets and a whole bunch of factors it's good to have a buffer yeah so they usually will die with something so the the point is the problem the mistake one is you live for the future too much that you end up dying with so much money that that we look back and think gosh I really wish they would have enjoyed their their life a little bit more for the for and and you know the irony in all of this is we have the we call the go- go years the slowo years and the noo years if we're dividing that that 30 year period into three decades your first decade is the go- go middle decade is slowo and then last decade as a noo so the high the irony in all of this and the part that I I feel for retirees is because the first decade is the one that has the highest sequence of returns risk the highest risk of markets performing poorly and how impacting your your retirement it's also the go- go year so it's when you have the best health yeah so it's almost like oh that's the year we want to spend the most but mathematically it's the year that if you spend the most creates the biggest risk on running out so there's a balance to be found there but um but I do think a lot of people die with much money well this was an interesting concept that was brought I keep referring to the psychology of money because I really like that book but Morgan H is amazing the way that he can connect with people on on uh the way people feel and think about money and the way money actually works is is unreal and so people don't know about it it's Morgan howel's book the psychology of money that that you've read keep going well and he talks about when when you were born and when you experienced those things so people who are born or lived through the Great Depression or maybe their parents lived through the Great Depression and now you're telling them hey be optimistic about the stock market when they lived through the worst like it's hard it's hard psychologically to tell people to do that and to not Penny pinch and not to not save everything for the worst case scenario then you get the people that were the last 20 years or so where everything was positive like everything's going great pretty much zero inflation or very little inflation stock markets doing great to tell them like hey hold on a little bit like back off is is hard psychologically yeah we don't know how to conceptualize what those folks went through because they went through more than a decade of nonpositive um Dow Jones like the Dow Jones being under under its high so meaning it came down and didn't reach that new high point for more than I was about I think it was about a decade yeah I don't think we understand how that how that works like that's hard for us to conceptualize I mean can you imagine um being 10 years later most people give up on an investment in one or two or three years if it's not positive not a decade to 15 years right we don't understand quite how that felt that's and so and so we talk about like this is a mistake for living for the future too much but I I just want to say like empathetically we can see that of like yeah makes sense why people think this but here's kind of why that's yeah and times are different as well um there are certain things in place with markets and the fed and and you can see the action in how they control the the money supply and interest rate policy and fed fund rates you know between Banks I mean there's so many things going on there and data is so much better now I mean imagine how they found out about the health and strength of the economy in the 30s they're not getting I mean there's so much data now available I'm not saying that that's good or bad I'm just saying it's it it is a tool that allows our government to step in and and put guardrails in kind of like you know the bumper and the the lanes at the bowling alley it keeps us out of the gutter a little bit better nice um okay so living for the future can be a problem it's probably a lesser problem for a lot of people they're like I'm much more concerned about running out of money so let's move on to that one um I just want to point out that there are some people and and maybe real quick it's oftentimes the people who overs saved throughout their career as well they psychologically struggle it feels like a one-way Street my father-in-law jokes about this where it's like the accounts are supposed to be a one-way Street you put money in and then all of a sudden you have to then flip the switch and feel okay about taking money back out that was a sin for the last 30 years to take any money out of your savings and now all the sudden I mean these people suffered in order to ensure that that one-way Street continued going in One Direction Ramen and beans exactly and then all of a sudden now you're telling me to take it out to pay for a flight like that I lived on Ramen and beans and you're I'm paying for a flight anyway you get the idea um overspending okay so this is the exact opposite scenario mhm not understanding your limits and overspending would you say this is more common than the first one we just talked about people having a problem overspending than saving too much yeah um in the accumulators for sure yeah in the retirees I don't I don't think so so like this is hard because I'm I'm talking about what I see which is my clients yeah our clients oftentimes underspend I think they actually could and I'm I'm saying on average right we have 2,300 households and we do have clients that overspend and we counsel them and help them understand the limits of what what's going to happen if they continue but yeah um that's I would say that's probably 3 to 5% okay the rest are the rest are probably under spending a little bit interesting Now flip the switch though um 30-year-olds there we are probably overspending and not not saving enough yeah yeah so yeah that's that's a problem but let's just move on cuz the lack of discipline on this is just knowing your boundaries and by the way um we we have a different approach to this we think that we should be telling people how much they should spend in retirement most financial planners ask the client how much do you want to spend in retirement and they say I'd like to have $10,000 a month or $8,000 a month and then they start building up like okay well you have this much in Social Security you have this much in a pension and here's your income gap and darn it your your account's not big enough for that and then they tell them you can't retire I think that's a mistake yeah I think it's not it's not that you can't retire it's you can retire today with x amount of income or you can retire tomorrow or next year with this amount of income you can retire in five years with this amount of income it's it's not can you retire it's how much income can you retire on yeah yeah that's I think that's a different it's a different framing I think it helps people feel more confident in their retirement decision too well if you anchor to like hey I would love to have $50,000 a month in retirement and then this psychological disappointment of well you're nowhere near that isn't that funny we we see people who are glad to live on $9,000 or $8,000 or $66,000 a month and but we as the experts are asking them to come up with a number and they arbitrarily pull 10 sounds great yeah and then the end of the conversation turns into sorry you can't do it yeah that's it it's like well you could have and they're fine with six seven or eight anyway you get the idea okay overspending the next problem is is much more related to family and its kids and this is hard I'm seeing this cuz my daughter's starting to drive and I'm thinking through like well well I'm paying for the car the insurance the the gas at what point do I make her pay for gas at what point do I make her pay for insurance and at what point do I make her buy her own car and I don't I don't know yet she's my oldest but I see a lot well this helps you I'm 35 and I just got our first cell phone plan with me and my wife we were on parent plans oh is it so and a lot of this was cuz our parents are like no no no like just stay it's cheaper for us to have this rather than to have two people on one but 35 years old finally finally cut so okay so it's not very long till it shifts because I'm 39 and my parents are now on my plan oh there you go comes full full circle great um yeah so I yeah anyway so then I don't know exactly when you when you transition the responsibility of certain expenses to kids I haven't gotten there yet but what I do know is that when you have kids in their 30s and 40s and you are still supplying like regular living I'm not saying you shouldn't spend money on your kids in fact I think most of my clients should take their kids on more vacations and go do fun stuff and and create memories and experiences with their money more than they do um but if you are sustaining their lives and and to the detriment of your own retirement safety there's a problem there and that happens more frequently than than we hope yeah do you see any common things around that is that rent is that I don't know is that just kind of like a stipend or an allowance almost they there common things that you see these parents pulling out of their investment portfolios to give to their kids because the kids maybe are in a tough spot whether that's their own decisions or external factors um I'm honestly I don't I'm going to give you what I see the most but I don't know if I have a great answer because I I think I'd probably do the same thing in their situation but often times it's a kid who gets divorced and they have they have kids and my goodness those grandkids have a soft spot in Grandma and Grandpa's heart and so they're like I'm not going to let my grandkids suffer I mean I don't really care about my kids but I'm not going to let my grandkids suffer and so then they end up um either paying rent or self phone bills or cars or things like that that to make sure that the grandkids are in a good spot gotta um and it's divorce is brutal and I'm not saying that you should avoid it if if you need to that's that's that's your life and your situation but I'm just saying financially um for a lot of people especially a non-breed winner spouse getting divorced and have still having the same expenses can be extremely difficult and and divorce attorneys can be really difficult so those are but those are things outside of your control I mean your kids are going to date and marry who they they think is the best option and we're not doing arranged marriages so I guess it's out of your control yeah but that's a big one that makes sense the other one is just um it's just parents not willing to let their kids suffer and and learn from their own situation and once again I'm really really hoping I don't come across like condescending because I'm I'm behind you and I have this feeling I'm going to get there and I'm going to do the exact same thing that you're doing Maybe uh but but understand it's a big risk oh and it seems like just my perception right of taking care of the kids' needs when they don't have it versus the kids wants when they don't necessarily have it there are two kind of different things right like if the kids can't do it that's one thing if the kids don't want to do it it might be a different thing yeah and I've heard different people handle it differently like for example I've had parent I've had clients say I'm not going to pay your rent but if you need to come live with me for a little while that's okay yeah and that's a that's not as expensive your utilities and your food cost are going to go up when they move in um that's not as expensive my father-in-law is like the most detailed person I've ever met trackx his Investment Portfolio every day we moved in with them for eight months in between when we got out of a house and got into a new one while we were looking and he is the nicest guy in the world but between him and my wife they had an arrangement where they calculated the difference in utility costs and food bill and things like that so we were paying him for the the difference I just think that's I just I love him to death for all of that just resonates with me but um anyway kids it it is difficult to watch them suffer' got kind of like the first one living for the future is a little bit of a fear-based thing the second one was a little bit of a lack of discipline this seems like a love like you you genuinely love someone boundaries boundaries love and boundaries yeah which are hard to differentiate yeah interesting the fourth one we're actually going to spend probably the last third of our conversation today on which is the structure of your portfolio the structure of your income and how you decide to set that up so maybe we we don't go into too much detail but it's the don't sell stocks when it's down type of thought process yeah um and then this last one we talked about like just not having a good understanding of the Ripple effects of your decisions like are you making decisions that you think are good but you don't understand the the third or second and third level of what happens when I go down this path um that's kind of vague and and that's well I think I can help with this because in our conversations is kind of kind of came up of I have a family member who has been in real estate their entire life and they sold a property in retirement and now there are things that have happened because of the cell and the way it was structured that have Ripple effects not just through taxes but also now we get into medicare premiums and we have all of these other Downstream effects from that one experience yeah and and I was a little bit hesitant on this one to include it as as another issue because like even that's not the end of the world you know you hope that you're paying taxes that means you're making money so like if if you end up selling some asset that that causes you taxes I don't want you to pay more than you have to but if you're never paying taxes that probably means you're not making money and that's a problem too that's probably a bigger problem you're doing something illegal yeah good point good point we're just assuming everyone's doing things legally um and then the medicare premiums those can be extremely difficult because they're they're big but it's only for a year year yeah you know what I mean if if your income spikes and then drops back down you two years later your premiums will Spike and then drop back down so you it's temporary it's what I'm saying is it's not the reason you're running out of money yeah I will tell you like the one thing that I've seen like if you could say out of all 10 things the external factors the internal factors if there's you mentioned that it might need a combination of multiple to actually cause someone to run out of money I know one of them that has caused people I've watched it draw people portfolios down to zero it's the adult children problem yeah that by itself I know I keep coming back to that but like that's the only one out of all 10 that I've seen that one by itself draw people down to zero interesting yeah which is spooky because there's nothing these people won't do for their kids and grandchildren um but it's it's you're on an airplane the air pressure goes down you've got to keep get your own mask on first before you work on your kids and anyway well well so we've gone over kind of watch out items right like externally you can't control this five things you shouldn't do that you can control now what what other things can we do in a more positive light to kind of hedge our bets against all of this yeah if you can't choose when you're born to get the right sequence of returns then you can choose to structure your your retirement income in a way where some of it is is targeting for each risk so so in other words the concepts of I don't want to run out of money and I might live a really long time there are Insurance options like annuities pensions or or taking only the interest from bonds and things like that that can last for your entire lifetime and then the idea of sequence of returns you can um structure the portfolio so some of it has zero loss potential when the market goes down so what I thought would be best is maybe we just go through I I wrote an article um specifically on withdrawing from portfolios called withdrawal strategy are you okay if we put this in description totally um it's part of a series called money in mind Terry Flint was the lead on a program called the Live Well program with a large Hospital in Utah and when she retired we contracted with her to say okay we'd like you to teach people about like the mental transition into retirement because you just went through it and you spent your entire career on helping people live mentally well yeah and I'll do seven articles on the financial side of transitioning into retirement you do seven articles on the mental side and those come together into a series we called money in mind and it's about a 60-page book but each article is two or three pages and this one is just withdrawal strategy so the withdrawal strategy ideas the very end it talks about two different types of strategies that pretty much any investment being pitched to you I would would if I was a consumer I would first segment it into one of these two categories is it a now and later approach or is it a multistream approach so we need to Define what that means but I'm hopefully giving you the the framework so now you can have a clear conversation with your financial professional yeah to know what am I being told to do here yeah yeah so in in a now and later approach imagine taking investments in dollars and putting them in a single file line and I'm going to spend the one at the beginning of the line and then I'll go on to the next one in line and the next one in line does that mean when it runs out or just in general order when it runs out okay yeah um and then so it's now money and then we've got later money over here and the later money will eventually become the now money but it it has to come through the line and we hope that the later money grows enough that it creates a new later money bucket at the back end right right and then the multistream approach is I'm going to still segment into a couple different strategies but all those strategies pay me income today and forever so that's a different approach right like instead of a single file line it's almost like I've got three or four lines and they're more horizontal that way and all of them are paying me maybe different rates maybe in different ways but they all pay me now and they're scheduled to not run out of money they're scheduled to last until I die yeah that tell me if I'm off base with this because now I'm thinking of like entrepreneurial business income right so you kind of have your W2 income and a retirement 401K whatever you want to call it and that seems like it's the now money versus the later money and then you also have sort of like if I created a bunch of side hustles that all pay me $22,000 a month forever that's kind of the multistream where I'm not reliant on one because when that one goes down I still have several others that are still got is that MH that's just where my brain went when you started describing yep no that's absolutely right um that's a reason that's a great way of conceptualizing it uh let's talk about specifics so the tricky part let's talk about stocks for a second okay dividend stocks have typically not grown as fast as high growth low dividend stocks so you take the top five to 10 stocks in the US Stock Market right now and you end up with names like like Microsoft and Google and apple and Nvidia and these names that are high growing but they're not the dividend payers that companies like Johnson and Johnson and some of the banks and other utilities are right those so it an example would be so I played football in high school just because my friends were there and that's where or else I was going to sit at home by myself right and but I'm a smaller person if you put me on the line as a lineman we lose every game absolutely cuz they would come right through me every time but I was Shifty and Speedy and afraid of people so I would run and get away from people really quickly right so you put they actually ended up playing me as a quarterback and then and we had wide receivers and and you have running backs and you have a fullback so these body types need to be different in order to be efficient with the whole team if you made an entire team of little shift afraid people like me you would lose if you made an entire team of linemen you would lose the point is when you do a multi stream you do if you're not careful you run the risk of making an entire team of linemen because they're not fast enough on the growth years to keep up with inflation but they're doing a real good job of producing current income so I think that there's some Merit in the now and later strategies because you unlock the high growth dollars you can can actually say I don't need income from you go for growth keep up with inflation help me in 10 years yeah and then the near-term money you can say like listen I don't need growth from you I need you to work hard and give me current income and it's the idea of positioning on a field same idea of positioning money in time gotcha so I do I probably lean more towards the now and later money but I actually like an idea of of mixing the two together but the point is you're talking to a financial professional and they're saying you should buy this annuity it has a a really high growth rate and it also has income guaranteed for life well those two things are really hard to achieve that it's like again you're trying to make a team of linemen or a team of skinny small afraid people and and so those two things are really hard to achieve in one um so either you like let's just go back to the 4% rule if we go there are lots of different types of annuities out there lots of different types of insurance the most most common and the oldest sorry let me start over the oldest not the most commonly used today but the oldest is like a pension you give your money to an insurance company and you'll never see that balance again but then they promise to pay you a monthly benefit for the rest of your life that's a very straightforward income annuity that will pay you a lot higher than 4% so the question is well why wouldn't everybody if 4% is the maximum withdrawal why doesn't everybody just go buy these annuities that'll pay you maybe six or 7% cash flow rates and just call it good this would be so much easier and no risk of Market loss right yeah so I I don't mind doing that with a portion of the wealth but the problem is you don't have enough keeping up with inflation now you could put a cost of living adjustment on that annuity it'll reduce it down a little bit as to how much they'll pay out but then you're going up at a very fixed rate and maybe inflation is really high like and maybe we experience 7 8 9% for many years well then you didn't predict that so this goes back to flexibility I'm not trying to say don't do an annuity like that I'm just trying to say there's a benefit in diversification in how you get your income too yeah okay so so let's talk through um you want me to go through some examples like just or or we need to probably wrap up before too long but I think it would be helpful to go through examples in each I would appreciate examples in each Ruby would as well okay I bet they can't hear the dog by the way these so precise um anyway so now and later money um a bond ladder or a CD ladder you could set up a portfolio to say I'm putting in and we see this all the time you have a let's say somebody needs $2,000 a month you could take $240,000 and put it into a bond portfolio where one tenth of it matures every single year and so that's that's now and later because you're actually using the principle up if you decided I'm only going to take the interest on the bond ladder or Bond portfolio that's multistream gotcha different approach same Investments right but we see a bond ladder or a CD ladder working great because you know exactly what's going to happen it's going to mature you're going to take that $24,000 every year and you're going to set it up to pay out 2,000 a month and then the next year the next one matures and you just keep going and then at some point during the decade you need to decide we need to take some chips off the table from the later money and create the next next tranch of safe safer money so that's one option is there a lot of effort in that Bond or CD model like do I have to go out every year and buy a certain number of bonds or what functionally does that look like is that something where I could rely on you like hey go do this for me yeah we do that we do that I try not to on your channel pitch our services too much but we do that we do that um we we definitely do that bonds bond trading is complex but not not um I would say the most advanced diyers absolutely can trade bonds because I'm not Advanced and so as you're explaining that of like okay you're going to have this percentage on these years and you're going to build this Bond Li my mind was like whoa yeah that's fair that's a little much for me to do that's fair you can so what normally happens is you buy the the whole ladder at once okay so you you're not like constantly like what's the next opportunity I got to buy it's you're buying the entire ladder and scheduling out the maturities for the next decade then the difficult part becomes managing it so that will that will distribute some cash and in that scenario I gave you know you're getting a bunch of interest and a maturity of 24,000 a year you're not going to need all that cash so what are you going to do with the excess cash are you going to buy another Bond at the tail end are you going to and then bonds sometimes get called sometimes things change sometimes the rating of the bond changes and you don't feel comfortable with it anymore so you sell it and you buy a different issuer so and sometimes you buy two bonds at each rung they call them rungs in a ladder it's a bond ladder so sometimes you buy two bonds instead of just one to limit your issuer risk as well so that's that's it can be a little bit tricky and maybe that's another episode where you can dive into these different things into even more diff detail but i' be totally fine with that um that'd be great so an an easier option that we've seen people use is a fixed index annuity same exact concept you can use a fixed index annuity for that um an I in general get a bad R and rightfully so in some cases some of them have fees of 3 four 5% and promise you the world promise you that you'll grow fast and that you'll give get a lot of income and and it just doesn't work um so the but but some annuities work pretty well a fixed indexed annuity could be little cost and they they make money by having your portfolio go up by only a certain amount so they make money and how they give you interest credits M um if if you buy a fixed index annuity the word fixed in that means that you typically are not going to lose any money when the market goes down so so let me just give you three things about this account type typically and I'm saying typically because there's so many flavors of these but the ones we've used in the past don't go down when the market goes down you probably are going to earn somewhere between two and 5% growth when markets on average um but I have seen some of them return in the teens but that's only like crazy situations in wonderful years like 2019 and anyway um but not going to go down when markets go down probably going to earn a bond-like return so 2 3 four 5 6% and that's your trade-off you're not going to make as much as stocks but you don't lose when the market goes down yeah and then the third thing is they allow typically allow a 10% withdrawal so that's where you could take that whole concept of the bond ladder and simplify it dropping it into an account like that and then you could still take out that $24,000 a year without having to worry about maturities it's just one big account it doesn't go down in value you're getting bond-like returns and little there's less flexibility though like if you take more than 10% they'll charge you a surrender penalty so a bond ladder there's no surrender penalty you just trade it yeah but there's Market risk so if you trade it before maturity on a bond ladder you may actually take a tiny bit of a loss if interest rates have changed or gone up so there there's pros and cons to all of these but these are all now and later IES this is we're still within that now and later um category another option is a fixed rate annuity so instead of fixed index index they're like they compare against markets and they'll give you a portion of the growth of the market a fixed rate it's it's not variable on the upside it's just we're going to pay you 5% yeah and that and that feels like a CD so if you make if the market makes 15 they're just kind of taking that 10% is that what I'm such a great comment um let's go back to fixed index annuity that is what people think about fixed index annuities the the insurance company's not buying stocks yeah even though they're just calculating your return off of what the stocks do but they're not buying stocks they're buying a bond portfolio and then they're buying options to make it so that they can pay what they promised to pay if stocks do well so they basically say okay we can buy this huge Bond portfolio with these maturities and we can make this much money let say they can make 6% or something like that yeah then they may say well on average we need to be careful that we can buy the options we need so that and our option expense is in maybe another 1% so we're losing 1% of the of it it's going to cost us a total of 7% or you know what I mean so they get the idea the interest plus the option Premium cost and what they expect to pay out to customers if markets do well or on average based on you know all of that and they have really smart people that figure out how to set those caps and spreads in a way that make it so they end up making a percent or two in the end so that's how that works out some people think like oh they're keeping all the growth it's like they never even even invested in stocks they just buy a conservative portfolio and then they buy option premiums and make sure that they can cover it but this other option we're talking about fixed rate that's even more straightforward because they it's not variable based on how markets do it's like a CD it's okay you're going to get this percentage they don't even they don't even think about what markets did okay yeah it's just just like a CD MH um and then the other option would be more of like you don't want to handle individual bonds like bond funds and exchange traded funds you could buy a bond fund or two or three or 10 you know however you decide to structure that I don't I don't think you need that many you could buy a couple bond funds and say I'm just going to spend from this bond fund portfolio the downside to that is you are subjecting yourself to everyone else's Behavior because we're all pulling our money together in this fund and if everybody freaks out about bonds and sells them you will lose money okay and and so there's risk there right so then if you own the individual bonds I don't care like if I own if I own 10 individual bonds maturing at 10 different years you can go and sell all your bonds all you want I don't care I'm I'm just going to hold tail maturity it won't affect me but if the two of us pull together in a fund and then you end up selling your bonds because you're stressed about Bond markets or you think rates are going to go up and you're maybe more of an opportunistic Trader and I'm just doing it for safety and income we have different goals so I'm not judging you for trading I'm just saying that impacted me if I'm in a fund that makes sense so that but that's an option that's an option as well sounds like you don't really have control over the people going into that bond fund or is that something where I can say hey Zach you my wife somebody else we trust let's go in on this it's it's no it's thousands and thousands of people that you have no idea who they are it's just whoever happens to own the fund through that that sponsor yeah so there's there's no okay so those are the main now and later strategies and when you set up money I mean if you look at the markets the probability of the stock market being positive after five seven nine years is extremely high mhm because it goes back to that like sitting at the table at the blackjack table if it's if it's positive most years if we just look at one year if we stretch that out to three years and five years and you look at like 20e periods and even 10 and 20 year periods on Diversified portfolios it's really hard to have a negative return over a decade to two decades yeah it happens very rarely in in a decade period but it's really really hard so the point is if you do now and later money you can spend down the the first trunch first section in the single file line being pretty confident that the money you're not touching for 10 years is going to grow yeah that makes sense and and think about numbers too there's a rule of 72 divide divide by 72 and you'll figure out um well how much so in other words let's say you want to double your money in 10 years 7.2% rate of return will do it so that's not that high you would think 7.2 on a growth portfolio is pretty reasonable you could potentially double your money in a decade yeah on the on the later money mhm right 7.2 is a bit much to ask on super super conservative low volatility money yeah okay so let's move on unless you have any other questions let's go to multistream I don't think so yeah let's go to multistream okay so um I mentioned a pension like annuity a traditional like you put money in and insurance company takes it and then they promise to pay a certain amount per month huge Advantage here if you're hoping to um spend more of your money and you're okay forgoing A little bit of the death benefits and things like that you can actually set up death benefits on those pension like annuities you can say whatever I don't get back of my $200,000 I put in I want that to go to my kids that's called a cash refund I mean there are options to set those things up are there trade-offs for that though like are you giving stuff up to get that benefit of it yeah they'll just reduce the monthly payment to you yeah yeah so they yeah it's it's it's like a it's just like like any insurance quote you go in and say I want it I want it to pay for at least 10 years called a period certain I want it to pay even if I die or I want it a cash refund or I want it single life or I want it joint life for my spouse and me together all of those things will impact what the insurance company's willing to pay you on a monthly basis gotcha um and I think the biggest downside to this is you're locking your money up for Life yeah and that's a pretty big deal however the upside to this is if you were thinking like can only spend 4% well there's an opportunity too to like build a multi-stream strategy for what is considered like your essential expenses and then maybe on top of that doing now and later money on on what you can VAR in your more discretionary expenses so if you know like I have to have four $4,000 a month but my Social Security only adds up to 3,000 you might say it's okay for me to sacrifice some of my overall net worth to guarantee I have another $1,000 a month for the rest of my life that that has some Merit and and that has some value and giving the flexibility tradeoff yeah well it's so interesting not just this conversation but in we go to the Medicare side too because that's where I live that peace of mind that people can get is worth something right so yeah you may not be getting everything all of the potential returns or the big massive gains but some people are willing to trade that off for just the security and the knowledge that I'm okay I've got these fixed things covered so again we're going to have different people watching this in terms of their mindset of risk C oh they're going to destroy us in the comments we've already established this right perfect I cried three times last time I just the one that mentioned my hair was the one that hurt the most it was like my hair looked like I just woke up which they're not wrong but I'm just but but leave it out this is a financial thing um so there you make a really good point there's peace of mind but there's and there's also the idea of if having that stability allows your risk Tolerance on the rest of your assets to elevate then it's not just a peace of mind thing it might actually be a mathematical Improvement for you yeah which is interesting to think about too um so behavior and and all of this comes into play for sure okay so we talked a little bit about annuities like I talked about the fixed index annuity or other annuities you can add what's called a rider and I don't know why they call it a rider it rides along I guess think of it that way um but it's a it's a feature that you throw on top of it and usually at an additional cost so they may say okay we'll give you this this insurance product that has this growth potential and if you want we will promise to pay out x% we'll promise to pay out 5% of the highest value that it's reached um for the rest of your life once you start that income stream in exchange for that we're going to charge 1% fee on it and so there's there's a Rider you can add to those um I've done those in the past I felt like they work in some cases um some in some companies will say we won't charge you any fee on it we'll just make you wait for a decade in the product before you can initiate it you're paying with time yeah in that scenario right you talked about like locking up your money it seems like that kind of locks it down for something you can't Right Touch for a bit uh and normally those you can touch you can take the 10% out but then it affects the income benefit so there's those trade-offs and I'm a big fan of like you know markets have done great if you have time so maybe let's be careful about how much we lock up yeah for long term that way but going back to the income Rider it works and it works really well um if somebody has a really hard time like I want the guaranteed income I do not want to give up my principal in a straight income annuity MH and that is a little bit of a of a middle ground for them okay um okay so then we talked about Bond ladders or Bond portfolios if you set up a bond portfolio and you say I am leaving the principle and every time uh a bond matures I'm going to take that Bond maturity and I'm going to throw it at the back end and buy the next rung in the ladder the next um Year's worth so if you have a 10-year bond ladder and as they mature you just keep rolling it and all you do is spend the interest off of it well that should be a perpetually running investment for you right because the maturities keep going to the tail end and you just take the interest so I would put that method of using a bond portfolio in the multistream bucket whereas if you're going to spend the maturities I would put that in the now and later type of portfolio yeah so it's the same investment so you can't be like bonds are now and later or bonds are multistream it's it's the structure of your income that you need to be aware of and I mean if a if a if an adviser tells you I'm going to buy this Bond ladder for you and it's going to produce your income well my next question is wait wait are we just spending the interest or are we spending the maturities as well if we're spending the maturities what's the plan after we've used all of it if we're just spending the interest that's a lot of it'll take more money because it's interest only yeah so that then sacrifices how much I can put in the later category to grow and be higher risk and so that helps people understand how to ask the next question um dividend paying stocks this is usually the person who hates bonds they just hate bonds they just have the hardest time is there a reason to hate bonds because they don't grow much yeah uh they hate bonds because there's a difference between owning something and lending someone money okay they'd rather own something okay they don't grow they'd rather own something and they hate annuities because insurance carriers pay the agents a commission and so that's okay too um and and for brightfully so some annuities are just awful they are really bad so anyway so are some stocks and so are some BS feel like you have a lot of uh feelings about those um you know I just I just get a lot of question about all this and I take a different approach like I don't think any of it is is perfect and I don't think any of it is is necessarily it there's no category that's evil just like there's no category of person that's bad do you know what I mean there are individuals that are not great and they're individuals that are fantastic and it's this goes the same way in each category of of investment yeah bad stocks and good stocks bad bonds and good bonds bad insurance and good insurance um let's go back though to people who don't like bonds and insurance they love the idea of their investment producing them income with a potential for 5 to 10% growth on top of that got it and that that's fair but the dividend rate is typically 2 to 3% and if they pay a higher dividend than that they're probably a lower growth stock it's it's not super common to have a stock like the ones I mentioned earlier in Tech and high growth that have had incredible rates of return but also pay a five or six or 7% dividend if you stretch for a five or six or 7% dividend you're typically going to be in a more stable established business that's chosen to pay cash out of the business to the shareholders instead of retain the excess cash and invest in new buildings new employees new business lines new growth and so there's this trade-off of well if they're paying you the cash how can they grow as fast as another business that's taking that cash and reinvesting it got it yeah so um that's the downside but the upside is you actually do have a higher growth potential than bonds and annuities you have a little more volatility for sure um but you and you also have a lower dividend rate so 2 3 4% probably if you still want growth you know anyway there's those the balance and trade-off on that there's always a trade-off right and then wish we could have it all lastly or well I guess not lastly but um SEC two more real estate investment trusts master limited partnership other income F focused funds I these this is where like I really don't like to go into a ton of detail here because I think your listeners are are like not asking for these complex of Investments but there are let's just say there are portfolios designed to produce income like real estate pooled Investments that's what REITs are MH real estate investment trusts and they're designed to produce income and they can be fantastic here's my only caution against that is um REITs pay commissions some of them pay commissions like insurance pays commissions so sometimes you have you you may not know why your financial professional is like I really think you need to have a lot of real estate exposure and so you know what I mean it's like I think that that the Real Estate Investment Trust industry is not I mean they're not dumb it's a smart thing to incentivize people to to sell your product but as a consumer you should understand the the financial incentives behind your the Investments yeah and and a lot of real estate investment trusts are fairly IL liquid you may or may not be able to get money back out of them may be on a quarterly basis and and part of the trade-offs there is is that and the commission will go to the agent the broker that gave it to you I'm not saying that it's bad some of them have been fantastic like higher cash flow rates because you trade off you give give away liquidity you take on some concentration risk and typically you'll get a higher potentially a higher cash flow rate on it gotcha so that could be worth it master limited Partnerships um that's just another structure that we see a lot of oil and gas Investments and things like that in there once again these are all just kind of the extra stuff but all of them are multistream the concept is not this thing's going to mature at a certain time or we're going to spend down the principle they're they're more designed to create cash flow for you to then spend yeah throughout your life and then I guess the last thing is I'm going to to throw out this is like the head in sand approach we talked earlier and I think maybe we wrap up here I don't know you Eric I'm Eric approach just um this is the I'm going to sell stocks when they lose money approach great let's let's rename it then don't don't so this is not the Eric approach I don't want my name t that um when you have a portfolio that has stocks and bonds and 15 different funds in your retirement account you think you have a bucket approach which kind of do have a bucket approach to investment Investments you don't have a bucket approach to income there's a difference there this is not now and later money like I see a lot of people that leave their money in their old 401K plans and they structure it this way and then they set up a monthly withdrawal from it and the default method is sell if they're taking out 5% of the portfolio throughout the year they will sell 5% from each of the funds within the portfolio yeah so during 2020 the market dropped 30% in like 29 days after after we all went home during the covid time and the month of March and April those those portfolios anybody who was on that approach you have a diversified portfolio of funds and you're taking proportionately from all of them you're selling stocks at a loss yeah and then the later that year the market did okay and then the next year it did great um and if you could have just not sold stocks when they were down you would have made a lot more back and that is Shifting more of your withdrawals to other Investments that are not stocks is that the idea behind this yeah I mean if you had a now and later approach or a multistream approach either way you're not selling stocks when they're down because on the now strategy you're not investing the money in the next one two five eight years maybe yeah you're not investing any of that in stocks CU that's volatile and you can't afford the volatility because you don't have time yeah and then on the multistream approach you've designed each one to create income so you're not having to sell the Investments at a loss to to um to produce that income this this brought up a question for me and and again this isn't me trying to pit your services at all it's just this is where my mind is going is that let's say I have a 401k from an employer and it's got a whatever the amount is I've retired and instead of having that 4wh andk managed in that way is that something where you do take that to a financial adviser and then the adviser is going to take that chunk of money and put it in a way where what you're talking about here now where it's not just a 5% withdrawal from each of these you're going to manage that in a little bit different way or someone wants to do it themselves they can do it themselves and I'm all about like because if somebody's made it this far in the episode they may be very DIY let's just throw that out there so I'm going to teach you how to do it and then if if you're like I don't want to do that for sure my team will talk to you with 14 advisers all busy doing this every single day um okay the hard part about this is as a wealth manager it is it is you have to always be in a very defensible position at any moment is to exactly what you're doing with someone else's money M you can do things with your own money that you cannot do with other people's money right so you have to be in a very defensible position and I think a lot of financial advisers struggle to let the overall allocation drift because what happens every time every year that you spend down the conservative portion of the portfolio you changed the overall asset allocation not on purpose mhm but your portfolio started maybe at 7030 70% growth and 30% conservative but you spent down over 2 years 10% of the portfolio maybe right and the growth money also grew during that time maybe you actually didn't spend it down because this grew and it offset but the point is your portfolio now looks 8020 instead of 7030 and financial professionals struggle with that they have a hard time being comfortable with the fact that my my client's portfolio is more aggressive than it was last year and if I constantly get too active in fixing that then that's just the same as selling stocks every month to produce the withdrawals you know what I mean so what I'm saying is in execution if you're a DIY person you have to get a little bit comfortable with the uncomfortable portion of letting your portfolio get a little bit aggressive and then less frequently this is multi-year periods maybe 2 3 four 5 year periods you come back and say hey markets are way higher than they were 5 years ago when we set this up and I think it's time to take some chips off the table they could still go up more and in fact expect them to go up more but this is part of the risk management decision I'm not doing this every month and selling stocks at a loss when you're when you're taking money out but if we wait long enough we are now 9010 or we're now 8020 and we should be closer to 60/40 Let's basically take a chunk of the growth and put it in in the front of the line yeah and and I don't think of it by the way very often in terms of percentages I'm just trying to talk like other people do and other financial advisers do I think of it in terms of years if you want are more risk tolerant you might only feel like you need to set aside three four five years worth of income and you can go growth with the rest if you're really nervous set aside 7 89 10 years worth of income go growth with the rest and then that's your rule it's not a percentage anymore yeah when you were young think percentages when you get older think how many years of a war chest do I need and then you just backfill the war chest whenever markets are up if markets are down for a year or two or three you're going to get uncomfortable but that's part of dealing with down markets and your War chest is going to get down to maybe only two years worth of cash if it's a really bad Market or two years worth of a conservative if it's a really bad Market but after they come back we'll carve off a piece and put five more years there ready to go for the next for the next drop that's awesome that was a cool way of explaining that yeah anyway that's that's my strong opinion is that I think people the bottom line do not sell Investments that are volatile when markets are down yeah find a way to do it the other summary is multistream now and later that's how you understand what your financial professional is recommending to you and then the other I guess the last things that we've gone over are don't over overly stress about external factors you can see how all these all these approaches can can mitigate that risk a little bit none of those risks are going to destroy you um your own spending may your kids may but that's that's maybe that's okay to you because you love them that much yeah well this is awesome and I know this is at the end so not as many people will hear this but um I was thinking through my experience I have a fear of looking stupid right so there's a lot of topics or things where I'm not the most handyman person so I had some sprinklers go out this last year so I go to the sprinkler store and there is a reason for me telling this I go to the sprinkler store and I'm like hey my pump went out and so they start asking me questions and I don't I don't know the I don't even know where to start right like what is this defibrillator decoupler like they're using words where I don't know and so I felt so dumb and the person talking to me made me continue to feel that way like just their reactions were like how can you not know this you're an idiot and I'm not arguing with them but it it wasn't the greatest experience so we see that on the Medicare side all the time of people are afraid to come to us because they don't want to look like they don't know these answers to something as complex as Medicare I think the same thing happens with these Financial conversations right you start talking about all these things that we've talked about and people are afraid of like you know I don't know what this means and I don't want them to think that I don't know what this means and what I love about not just you do a great job your team does a great job capita is great we have other partners that are great if finding a financial adviser that can take these complex topics boil them down into kind of bite-sized chunks that Mak sense in a way that we can understand them you used a football analogy because you know I like sports and so it's like oh that makes sense but but I never feel stupid around you and I and I hope that other people whoever you're working with I hope you don't ever feel like you're afraid to ask certain questions because you don't want to look stupid because the only way we can learn is to expose ourselves in a way that hey I don't know something and it's not wrong that you don't know something you've spent your entire life learning and and growing in this knowledge base where mine has been in other places and so I appreciate you taking the time to break it down this way um because I think it helps lower the barriers and if they aren't working with you if they want to do it themselves or they have an adviser that they that they know and they respect and they trust now they're armed to go into that conversation not feeling as apprehensive or nervous or oh I don't know what I'm talking about they can come in there like oh and now I understand high level what's happening here and that can help shape that conversation if you have a client coming to you with at least that base knowledge it I think it would make that conversation more efficient for everybody for sure sure for sure I think it it helps but yeah I hope to give people the framework where they don't need to be a financial expert when I talk to my advisers oftentimes I we we'll talk about the concept of we're not trying to teach the client to be a financial adviser yeah we're just trying to help them understand their decisions and the options the pros and the cons and to move on with their life into what they want to do and use money as a tool to create their happiness or their goals or their safety whatever it is that they care about but that's super nice of you to say I of course love this my only problem is being long-winded not my only problem one of my biggest problems is is how long these go well it helps you flesh it out a little bit and and we're going to we have links in the description to the charts that we're using everything that we've used um and then Zach your podcast of the financial call is fantastic so we'll link to that as well did you finish up the seasons we're close um you're going to laugh at this because we had a lot of people find the financial call on YouTube and subscribe after our last video but we don't post anything to YouTube because we're not as smart as you are and we did not see that as being beneficial a couple years ago when we started doing this so if you're listening this far and you really really want to understand I have eight seasons of different topics this like income planning is a whole season and we did five or six episodes within each season Investments tax charitable giving business owners Social Security each of these are seasons they are on things like apple podcast Spotify all the places that your listeners don't like to go and someday I'll get more on YouTube but it was a hugee mistake huge oversight but this is not my world well as a commenter said they just we referenced this earlier we had a comment where they were like oh your hair is perfect and you're just this specimen and you're handsome than the other guy oh it just looks like you woke up but I think that's the biggest mistake is people can't see you they got to be able to see this we really didn't like video we hided or we hid sorry excuse me we hid uh apparently can't talk either but anyway this is fun I appreciate you doing it I appreciate you having me okay [Music] awesome

Channel: The Retirement Nerds

Views: 280,279

Keywords: helping adult children, don't run out of money during retirement, retirement planning, retirement, retirement income, personal finance, financial planning, retirement savings, retire, saving for retirement, running out of money, retirement planning at 60, 4% rule, financial independence, 401k, retirement fear, financial independence retire early, how much do i need to retire, dave ramsey, dave ramsey rant, dave ramsey 4% rule, dave ramsey withdrawal rate

Id: flCDgSy25e0

Length: 94min 0sec (5640 seconds)

Published: Fri Dec 15 2023