Retire with Confidence: Tackling Your Biggest Fears

In this empowering episode of The Complete Wealth Management Podcast, we delve deep into the heart of retirement planning, providing you with actionable strategies to alleviate your biggest retirement concerns. Hosted by Dave Alison, a seasoned certified financial planner, and joined by esteemed guest Conrad Levesque, CFP, CPA and David Roth, CFP, EA, both experienced retirement planners, this episode promises to be a beacon of guidance in the often murky waters of financial security.

As retirement looms on the horizon, fears about financial stability, healthcare costs, and the uncertainty of the future can cast a shadow over what should be a golden period of life. However, armed with the right knowledge and proactive measures, you can transform those fears into confidence and assurance.

Throughout this insightful discussion, the team at Alison Wealth will explore a myriad of topics, including turning assets into retirement income, strategic investment approaches to safeguard your nest egg, and savvy tips for navigating the complexities of healthcare in retirement.

Moreover, they delve into the psychological aspects of retirement planning, addressing common anxieties and offering practical advice on how to cultivate a mindset of abundance and security.

Whether you're nearing retirement age or just beginning your journey towards financial independence, this episode is an invaluable resource that will equip you with the tools and strategies needed to eliminate your biggest retirement concerns and pave the way for a fulfilling and prosperous future. Tune in now and embark on the path to a worry-free retirement!

The information provided in this presentation is not intended to be individual investment advice or legal advice.  The information provided is for informational and training purposes only.

Investment advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). For a detailed discussion of PCA and its investment advisory fees, see the firm’s Form ADV and Form CRS on file with the SEC at www.adviserinfo.sec.gov. The views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.

Transcript

Speaker 1: 0:00

Can you see the red dot? Now I can. I see three red dots. I think we're good to go three red dots means we're live.

Speaker 2: 0:07

Well, let's jump on into it. Happy Friday everyone. We are here, live, and we want to talk about Retirement in this podcast episode. So, conrad, you had a great kind of recommendation for us to Jump into some of the common retirement fears. You know things that we hear from clients as they're thinking about retirement, approaching retirement, need our help in planning, and we'll talk about how to overcome them in today's episode. Awesome.

Speaker 3: 0:38

I'm looking forward to it.

Speaker 2: 0:39

Great. Well, let's get rolling into it. All right, so what we're gonna talk about here is some common retirement fears and how to overcome them. I know, conrad, this is something that you shared, you wanted to, you know, throw out as a topic today. So let's, let's jump on into things. Let's talk about some of the things we hear from clients. When we talk about some of the concerns, the challenges, the fears, you know, hypothetically, if there is something that kept them up at night about retirement, what that could be, what a what do you guys hear from clients when they're approaching us and we need and help structuring their retirement?

Speaker 3: 1:23

I think the first one is what the heck am I gonna do with all this time? Right, there's this fear and I've had this conversation. My dad and I have had it I don't know probably 30, 30 different times in the last month and and he's, he's on that verge of retiring, but he's and he says to me, well, what am I gonna do? I was like I don't know, play golf, find a hobby, start a charity, like, do something right, identify what your passion is.

Speaker 3: 1:51

But I think it goes back to you know, you go to, you grow up, you hit 18, you go to college. Let's say it takes five years to go through college. You're 23 when you get out and you get a job and you work full-time. Nine to five, right, a lot of people, for 40 years, 45 years, right. And so at the end of 45 years that you get the proverbial golden watch and they say Thank you very much, like here's your nine to five back, like, what do you do? So I think that's it's important to start building hobbies or just identify, identifying what you'd like to do outside of work, well before retirement, but but so that you have something that you know you're gonna do in retirement. I think the worst thing you can do is get to that point and then stay in bed all day.

Speaker 2: 2:41

Yeah, it's amazing how quick your mind and your body deteriorate. You know, and and I was talking with one of our clients who is still working, but they're approaching retirement in the next year or so and the owner of their company had sold the business after you know, kind of building this family business over the last 60, 70 years, and he was in his mid 70s and, like, he literally cashed out for a billion dollars, so money was not an issue. Right and Within about a year and a half of selling the business, his health massively deteriorated. He had a stroke and ended up passing away. And I think the reality of that is, for 50, 60 years, his whole identity, his purpose, what got him up in the morning was work, right, it was building this company, it was Continuing to do all the things that he was doing and so like. When he exited out of the company Even though, of course, I think any of us would be quite happy with a billion dollar exit Um, he really lost that identity.

Speaker 2: 3:55

And so to your point, conrad, I think, as you're preparing for or thinking about your own retirement, it's not just about the financial aspect of it, it's about what you're gonna do day in and day out. And you know, one of the phrases I always like to you know kind of lead with is you know, maybe it's not necessarily Retirement, maybe you've now just earned to the right to have a work, optional lifestyle, and so you know, there's a lot of things like I know I asked my like what would I do if I didn't have to work, if I was in a financial advisor doing this stuff? And like, hey, I might go work on a fishing charter for one or two days a week or something like that, just to keep me moving and to keep me going. And so I think you're so right and kind of thinking about you know what you're gonna do day in and day out.

Speaker 3: 4:46

Yeah, absolutely.

Speaker 2: 4:47

Dave.

Speaker 3: 4:47

I hope we don't find you on the TV show. Deadly is catch. Anytime soon, though, yeah.

Speaker 2: 4:52

That's not really my style, but I'm more in the sunshine on a nice calm day, not battling the bearing sea and 30 foot waves, but, um, you know, I even just getting down to hobbies. You know, in a prior episode we interviewed the pierces, great clients of ours, who retired early, and you know their passion was they took up sailing and that's obviously a very physical and engaging activity, kind of sailing, navigating the world, keeping your mind sharp. You know Jane was sharing that, she was starting to learn different languages. Again, it doesn't mean you have to necessarily go to work or become a crabber out in the bearing sea, but it's just doing stuff that's gonna occupy your time. Keep your mental acuity, you know, just just stay sharp.

Speaker 3: 5:39

Right, yeah, absolutely.

Speaker 1: 5:40

Yeah, and I know a couple people from the arts field who they retire and they get back into music or Crafting or mosaic work and it's really great to see all that that come out.

Speaker 2: 5:52

Yeah, 100%, 100%. So what else what you know? Obviously we can't prescribe how everybody needs to fill their time. I think you know the one thing to know is, when you do retire, every day is a Saturday and so, to your point, you need to, you know, have something to get out there and do. But what are some of the other kind of fears or concerns that you guys hear about?

Speaker 3: 6:13

Yeah, I think I think kind of the, the next, I'll call it one or two. They really work together Running out of money and ultimately a lot of people look at it as it's gonna cost me so much for health insurance or health care. I'm there's a fear of running out of money because of that.

Speaker 3: 6:31

Right and and so I hear that all the time. In fact, I met with a client just just about a week ago and Even though we showed him there's a plan that he can retire today and granted, we don't want any major major issues to occur, but we laid out a plan that gets him to to a hundred and five and he still looked at me and said I have this fear of running out of money and so unpacking that and understanding, you know, I think, when we, when we had that long talk, ultimately laying out the bucket plan helped ease that fear. But again, if you have that fear and you've built up that assumption, every little thing is gonna cause some, some unease, and so understanding or starting early To identify some of those pain points or some of those fears, I think gives you more time to to alleviate those just through a process like the bucket plan or leveraging an advisor.

Speaker 2: 7:31

Yeah, definitely. I mean, if you think about running out of money, one of the the the biggest issues going into retirement that that kind of paralyzes people from living, you know, their dream retirement and kind of getting the fulfillment out of retirement that they deserve is that they live what I call this what if retirement? Right, they're actually scared to spend their money in Retirement because of all the what ifs. What if I do live till a hundred? What if I have a big health care event later on in life? And so you know that's a big part of being prepared and having a plan. Like, none of us know exactly how long we're gonna live. None of us know if we're gonna have a catastrophic extended care event in retirement. But you could have a plan in place and that could mitigate some of those risks. I'll give you two examples. Like If you are so fearful about running out of money in retirement, there are ways that you could structure your retirement assets to provide Guaranteed lifetime income. Right, it's called an annuity offered by an insurance company. Now we know for many of us, when we retire we're gonna have social security. That's a form of guaranteed lifetime annuity. Social security is gonna pay Until the day we pass away. Maybe some people are fortunate enough to have a pension. A pension is guaranteed lifetime Income that's gonna pay out for as long as you're alive. And what's quite interesting is, of all the people that I've been able to help retire over the years, the ones who seem to be the happiest are the ones who have the highest amounts of Guaranteed lifetime income. Right, it's maybe the the person that worked for the government or the school teacher that is now retired and they have a huge amount of guaranteed lifetime income because they don't have to worry about, well, what happens if the stock market crashes 20 or 30 percent. They know exactly what they have, what they can spend, and they can go consume that money. They can travel, they can take the trips. They don't live that what if retirement? And so one of the things that somebody could do if they truly are scared of running out Of money is they can buy an annuity.

Speaker 2: 10:08

Now I hear from people on occasion that will say well, I've heard annuities have a bunch of costs associated with them, or if I die Early, the insurance company keeps all the money, and there are certain annuities that are higher in cost. Maybe they have more benefits. There are annuities that, if you pass away, the insurance company keeps all the money. But there's also annuities that could pay you a lifetime income and, if you were to pass away, your beneficiaries Receive the entire balance. There's just a trade-off, and so you know, what I always share is what you need to evaluate and Conrad to your point earlier of working with a financial professional or somebody on our team, for example is what are the trade-offs like? What are you gaining by putting money into a lifetime Income annuity and what are you losing by putting money into the lifetime income annuity? Maybe you're gaining the peace of mind that you know all of your basic living expenses are going to be met For as long as you're alive, whether you live till 80, 90, 100 or 120. But on the flip side, maybe you're trading off some of the upside that the stock market could have brought about if we continue to be in a bull market. But that's a very personal decision that somebody needs to kind of just weigh the pros and the cons in the trade-offs associated with Something like that. But I just kind of want to conclude by saying, like, if that is something that is a big Concern of yours, if that's something that's keeping you up at night running out of money, for example in retirement. There are solutions that you could put in place that completely eliminate that concern, absolutely so.

Speaker 2: 12:03

The other one you mentioned is health care. Um, yeah, health care. Certainly. I know you and I and David were just talking about this for a client this morning that you know they they're kind of fed up, they don't want to work anymore, they're going to be retiring, they're going to be turning 64 this year and, as we know, medicare does not kick in until you're 65. So medicare is health insurance that's available for individuals who are retired. It covers, you know, part a is your general hospitalization if you're in the hospital. Medicare part b Generally covers, like your doctors and things like that. And then typically a retiree has to buy a medicare supplement or a a gap policy to cover all of the rest. And Once somebody turns age 65, medicare is quite reasonably priced. But until then, if you're not covered by employer health care, it can be quite expensive, right, guys? Yeah.

Speaker 3: 13:08

I mean, think about it right. We, a lot of times we have what we don't even realize is a large subsidy coming from our employer. Well then you know, great, you can extend your coverage for 18 months through Cobra, but you pick up the full cost when you look at your W-2 at the end of the year. You can go down and see what the cost of employer-paid health insurance is, and a lot of times that's $15,000, $20,000 that now you're going to have to plan for in terms of that gap to get into Medicare. So you know, and understanding what the options are, a lot of people think I can only get it from my employer. Well, you know, there are ways to get it outside of your employer. The Affordable Care Act opened up the exchange for people that can go and get an individual health policy as well. So there are options out there. Understanding the cost is a different story, right, and really planning for that gap from a cash flow need.

Speaker 2: 14:08

I want to talk about kind of tax and income planning, david, with you on that for kind of health insurance, because I know you've helped a lot of our clients navigate this. But before we do that, I mean the baseline is, if you know you're going to be retiring early let's say I'm able to retire at 63, and I know I'm going to have a two-year gap until I'm eligible for Medicare Well, we want to make sure we do is have airmarked in your financial plan a healthcare bridge. And so if we know your marketplace, health coverage is going to be $20,000 a year out of pocket and we know that there's going to be, let's say, three years before Medicare kicks on, we're going to want to make sure we have about $60,000 allocated in that soon bucket to be able to make sure we have the cash flow to pay your premiums for that health insurance in your financial plan. And so, again, medicare and building that bridge, or medical insurance planning and building that bridge is really, really important to think about.

Speaker 2: 15:20

And honestly, I hear from clients all the time I want to go ahead and retire early, which is great, and they neglect to think about those high costs of health insurance and then sometimes that prohibits them from actually doing it. But, conrad, you mentioned earlier ACA and the marketplace. That's essentially where somebody would go for private health insurance, right? If they're not covered under their company plan and they're not eligible for Medicare. At this point, david, talk a little bit about for our clients that have retired early, the cost of coverage is dependent on your income, right?

Speaker 1: 16:03

Yeah, and it's exactly what you said. The cost of the coverage is going to be dependent on your income and the way it is is you're going to get a subsidy for your health insurance coverage, but the maximum that you should pay is going to be 8.5% of your adjusted gross income. So, again for simple numbers, if you make $100,000, your health insurance should be around $8,500. And it could go up if your income goes increases or again, if your income goes down, the amount could decrease. But just to give a real life example, what we see, even with some of our higher net worth clients, in the years that they are transitioning to retirement they don't have an income, so their AGI could substantially drop. They could be making a substantial amount, but then in the year of retirement they could be making under $100,000 just because, again, the income's not there. So it's always something to consider and look at if it makes sense to go to the marketplace for a plan.

Speaker 2: 17:10

Yeah, and just a couple examples of that. To think through strategically how you might be able to reduce the cost of your health care if you do retire early is having tax diversification of your assets. So, for example, if you spent your entire career saving in a pre-tax 401k or IRA or 403B a qualified retirement plan and then let's say you're fortunate enough to be able to retire at age 62, and there's going to be that three-year period before you're eligible for Medicare, we're going to have to secure your health insurance through the marketplace. Now, if we have to take all of your supplemental retirement income out of a pre-tax retirement account like an IRA or 401k, that's all going to be taxable income to you as we're taking those distributions. But if you were able to strategically accumulate some non-qualified or after-tax money in a brokerage account or a trust account or some Roth IRA money, then in those early years we might be able to take your income out of those after-tax or tax-free sources which ultimately would substantially bring down your AGI, which would substantially bring down your cost of health insurance. And so one of the things that we really look deep on is, if you're going to be retiring before age 65, we want to figure out how to build the most tax-efficient retirement income distribution plan for you. And that's not just income taxes Income taxes are certainly a big component of it but it's also looking at the big picture of these things like healthcare, and it's again where our approach is very different than a lot of other financial advisors out there and how we focus on holistic wealth management.

Speaker 2: 19:14

It's not just managing your portfolio for the greatest investment rate of return. It's not just managing your income to try to minimize taxes. It's looking at how all of these things work together because, again, every dollar we can save you for healthcare costs could be a dollar that you can go spend on an extra vacation or taking the grandkids out to dinner. So again, this is kind of where having a team of experts like we are coming together to look at all of these different areas could make a big impact. Now, conrad, you work with a ton of business owners. So let's say that one of the two spouses is going to retire early, but the other spouse maybe still has some part-time self-employment income, maybe like a Schedule C type of business.

Speaker 2: 20:06

Are there any things that we could potentially think about from a tax savings perspective or securing health insurance for the family, knowing that one of them has a business.

Speaker 3: 20:21

Absolutely. Yeah, there's a number of different options here, you know. The one that really comes to mind is pretty simple. Let's say we have a business owner that has you know, they're a single member LLC. They report their income on a schedule C on their personal return. We have the ability to really put that person as the primary on an insurance policy, and even covering the spouse will qualify and that actually qualifies for the self-employed health insurance deduction, which is different than your health insurance itemized deduction. Now, the difference between the two is pretty distinct. Self-employed health insurance deduction is actually treated as an adjustment to your income. It's technically an above the line deduction. That means if you have $100,000 of income in $10,000 of self-employed health insurance deduction, your AGI is $90,000. On the flip side, if you have to do that through your W-2 employer, those costs are actually subject to itemized deduction limitations. Right? So you have a number of tiers that you have to hit. Currently, if you don't spend more than 7.5% of your adjusted gross income on health and related expenses, you get no benefit from.

Speaker 2: 21:46

Right. We hardly see tax returns anymore where people are actually getting itemized deduction write-offs for health insurance because that hurdle is so high. But to your point, if you're self-employed, that hurdle kind of goes away Absolutely.

Speaker 3: 22:00

Absolutely. Yeah, I mean to put it mildly. Right, I had a baby and I also had shoulder surgery this past year and I still didn't meet that qualification Right. So all of those things happening one year, I still didn't qualify for the itemized deduction portion. So the other options would include some different structures, right? So structurally your business must change.

Speaker 3: 22:28

But you could create what's called a health reimbursement arrangement or a qualified self-employment health reimbursement arrangement. I know that's a mouthful, but the long and short of it is, if you have somebody that you hire, including a family member, that then is the primary on an insurance policy, you can reimburse up to certain limits of that policy without having that be taxable to the recipient. But it is technically a deduction for the business, so it's treated much like the self-employed health insurance deduction, meaning it reduces the income. It just does it on the front end for the business as well. So there are some options there for business owners outside of normal routes that you could go, but those are two really good, easy ones that most, if not all, business owners should be taking advantage of today.

Speaker 2: 23:25

Yeah, the HRA is such a great option and just such a great way to kind of structure some savings. So, again, all of this being said is, the purpose of this is that if you are going to have these larger new expenses it could be health insurance, it could be additional out-of-pocket health care costs there's ways to think about and structure it. Whether you're a business owner and maybe we can classify some of those as qualified business expenses to save some money on taxes or whether you're just a traditional retiree, maybe there's ways we can think about how to construct your retirement income to maximize the benefits you get through the health care marketplace and what your out-of-pocket expenses are. But either way, there's options to take a look at. And then, last but not least, when we talk about health care is hopefully much later on in life, there's a chance that you have some sort of extended care event, long-term care, the things that even once you are on Medicare, medicare does not cover. Medicare doesn't cover the nursing home. Nobody wants to go into a nursing home. Most of us would want to be able to have an extended care event in our own house, where maybe we have to have a nurse come out to the house to provide a specialized care. Medicare doesn't cover that.

Speaker 2: 24:55

And so, again, a lot of people think about long-term care insurance. And many people are scared to even think about long-term care insurance because they've heard how expensive it could be. And don't get me wrong, it could be expensive. But you have to ask yourself what's the greater expense of paying the premium for a long-term care policy or paying all of the cost of care out of pocket if you do have that extended care event. And so, again, it's just weighing the tradeoffs and seeing what your personal situation could look like when you think about how to cover the cost of that care.

Speaker 2: 25:41

And again, with long-term care, I think a lot of people have shied away from looking into it because they say, yeah, but what if I never need it? What if I never go into a nursing home? What if I never have an extended care event? Now, I paid all those years in and if I don't use it, I lose it, I die in my sleep, I have a heart attack and I never need long-term care. I wasted all that money. And so there's also policies available these days where, if you don't use it, that money gets returned back to your family. So just some things to think about when it comes to health care planning, whether it's on the front end of Medicare having to get private marketplace insurance or whether it's on the backside of things that Medicare doesn't cover. Dr Justin, Marchegiani.

Speaker 1: 26:29

Absolutely, dr Justin Marchegiani. Yes, dr Justin Marchegiani. Yeah, dr Justin Marchegiani.

Speaker 2: 26:31

So let's kinda you know, shift to. One of the other big things we hear about quite frequently from people getting ready to retire is how do I turn my assets into income right, like I've got to age 65 or 67 or 62 or shoot? We've had clients at 49 that have been fortunate enough to be able to retire, but they've, they're now getting ready to retire and they have their number a million dollars, three million dollars, 10 million dollars, whatever that number is, it's basically a pile of cash. It's not just cash, but it's cash. It's stocks, it's bonds, it's mutual funds, it's ETFs, it's 401k money. How do they actually go about starting to turn these assets into an income stream that they can go and use to buy their groceries?

Speaker 3: 27:25

Dr Justin Marchegiani, yeah, Dr Justin Marchegiani, dave, I so in full disclosure. I saw this article on Kipplergercom and I spread this one and from the top of my lungs I was screaming the soon bucket, the soon bucket, the soon bucket, right. And this is just. You couldn't have teed it up any better to talk about why the soon bucket is so important for retirees, for accumulators, really for everyone, but really, in this context, for retirees. You know they go into the article talking about the sequence of returns risk. And for those that don't know about the sequence of returns risk, it's, in short, right, if you have, you know, some early let's call it 10-year track record, and the early years you have positive returns, middle years are neutral and last years are negative. If you take that sequence and flip it and have zero distributions, you end up with the same result after 10 years. But when you add in distributions, the years that you start with positive returns, you have a positive number. At the end of that 10 years, the years that you start with negative returns, there's a major, major difference and oftentimes it could be closer to zero than anybody wants.

Speaker 3: 28:44

And so what we look at is the soon bucket. Is really that in between, where this is the the portion of assets are slowing down. Right, we don't you don't go on a highway trip and take an immediate right off the interstate. No, we need an off-ramp. Right, and this is treated as that off-ramp where we take a portion of assets and say we need to really retain these and protect these so that they can provide income in the early years of retirement. So the assets that are continuing to grow, that may experience volatility, have time to rebuild and continue to grow. Right? The average 9% return of S&P doesn't mean it's 9% every year. It just means that the average over time equals 9%, right?

Speaker 2: 29:30

Yeah, if it was 9% every year, it'd be quite easy to develop a retirement income plan right, get 9%, and as long as you spend some number under 9%, you're in good shape. But the problem is that if you're spending 7% of your money and the stock market goes down 20% now you're burning the candle at both ends and that's going to cause you to deplete your account balances a lot quicker. And so when we think about building a retirement income distribution plan, when we think about taking this pile of money and creating cash flow, there's three ways you can do it, and there's only three ways you can do it, and not every way is right for every single person. It depends on what type of retirement you want.

Speaker 2: 30:21

The first way is the conventional way I think a lot of people have historically thought about retirement, which is they live off of the yield of their portfolio. So let's say I have a million dollars of retirement assets. I don't want to see my million dollars get eaten into, I just want to live off of the gains. And so let's say that my portfolio can generate 3.5% per year of dividends and interest. Well, that tells me I could live off of $35,000 from that million dollar portfolio.

Speaker 2: 31:05

Now the reality of it is most people don't have enough money saved up to be able to just live on dividends and interest, right Like for somebody that is amassed a million dollars of retirement assets 35 grand might not be enough. Now you could make the argument that in some years there's also going to be capital appreciation. So if the interest or the income off of that portfolio is 3.5%, maybe the market goes up another 5% and you can peel off some capital gains too. But as we all know, when you're invested in things like stocks, they are going to generally pick off dividend income. Hopefully there's going to be capital appreciation, but what else could happen in any given year to that stock portfolio?

Speaker 4: 31:58

They could go down.

Speaker 2: 31:59

They could go down right.

Speaker 2: 32:01

And again they can lose value and so there's no guarantees that we can pull off capital appreciation. And I know for a lot of our clients and David, I know you know we've talked about this in many meetings with clients is they don't want to have to sacrifice their lifestyle in any given year just because the stock market is down. Like David, if we called some of our clients and said, hey, I know you were thinking about taking that phenomenal trip to Europe this year, but the market's down, can you guys, you know, take a road trip to the Panhandle in Florida instead? Like I don't think they'd be very happy with us.

Speaker 1: 32:40

No, that would not be ideal, so again.

Speaker 2: 32:43

You know thinking about generating portfolio income. Of course the yield approach is one way to do it. And we have some clients, you know, they have 10, 15, 20, 30 million dollars and, quite honestly, they can live off of dividends and interest from their portfolio. But for most people out there, they need to not only consume the yield but they are going to have to tap into some principle also. Other clients also. They don't want to just live on interest, they want to tap into their principle because they're not worried about dying with this big benefit for their beneficiaries, right, they want to consume this money and enjoy it for themselves.

Speaker 2: 33:27

And so the other way is to establish what we call a drawdown approach, where we're drawing down both principle and interest in earning. And so, Conrad, this is that concept that you mentioned of like establishing a soon bucket. So if we were designing a plan for a client and we determined that, outside of their social security, they were going to need another $65,000 a year to live off of, so let's say their social security is 40 grand, they need another $65,000. That gets them to about $105,000 a year of total retirement income. In that soon bucket, David, about how much would we want to think about putting in something that's going to be invested for growth to help offset inflation it's just invested conservatively so that it can generate that reliable income and kind of that drawdown phase Like if you had maybe a more aggressive investor about how much would be in that soon bucket, or if you had a more conservative investor, how much might be in that soon bucket if they needed around 65 grand a year to tap into their assets.

Speaker 1: 34:46

Yeah, and again it's going to depend. We've been talking with different clients and they have different appetites for how much they want to put in their soon bucket. But if you're on the more conservative side, you might want to load that up for a 10-year time horizon. So if it's $65,000 a year you need, you might need $650,000 to fill that gap just to get you through those 10 years. And that's not even accounting for inflation or anything else.

Speaker 2: 35:11

So $650,000 there and that basically would say, all right, we've pretty much secured a 10-15 year time horizon in your soon bucket Because, again, that $650,000 is going to be invested for growth. It's going to earn money over that 10-15 year time period and what that does is it allows us to take $65,000 a year out every year to go spend without having to worry about really what's going on in the stock market. Now, let's say, a client had $1.65 million of total assets. If they have $650,000 in the soon bucket and we're drawing that down, that means they have another million out in the later bucket for long-term growth and eventually, maybe 10, 15, 16 years into the future, that soon bucket is going to be depleting down. But what are we going to do, conrad?

Speaker 3: 36:12

Well, I mean and this is where, when you have good years, right, let's think about that example of sequence of returns when the market is up, let's harvest those gains and move them into the soon bucket. Right. When the market is down, let's let the market come back right, let's let the portfolio rebuild and get into a positive position. That by giving us 10 years, we have a time horizon. We can actually now for the proverbial time in the market. Right, we're just timing it, not for top-end growth or bottom-end buying. It's opportunistic when we move funds from a higher growth portfolio to a more income-style portfolio.

Speaker 2: 36:56

Exactly. You know, I like to go to Vegas every year ago with one of our clients, as you guys know, and the way I like to think about it is like if I'm sitting at the blackjack table gambling and I win a bunch of money, I take what I started with off the table and I put it in my pocket and now I'm just playing with house money and I think of the bucket plan kind of very similarly. It's like let's take our income money off the table from massive stock market risk so that again we can have a reliable, sustainable income stream that later bucket. We're going to be kind of betting on the long-term growth of the stock market. It's going to have its ups and downs, but when we find that we've gone through a winning streak maybe, like we have the last 10 years we want to peel off some gains and reload our soon bucket back up. And so what's really unique about this philosophy and strategy is it can really be tailored to the individual.

Speaker 2: 37:57

So I was just emailing and you guys were both on the email chain with one of our clients last night and over the last couple of days.

Speaker 2: 38:03

He's getting ready to retire. They are fortunate enough to have a very large pension. They will also have social security, so right out of the gate they're going to have $100,000 to $150,000 a year of guaranteed income, on top of all of the retirement assets that they've built up, which are several millions of dollars as well. And so in their situation he has much more of an appetite to keep more of his money in the later bucket. He only wants about three to four years in the soon bucket, basically to be able to provide his supplemental income in any big years that the market is down. But again, his appetite for growth is much greater than maybe somebody else who doesn't have that same kind of mentality of wanting more of their money out in the later bucket and less having reliability and guarantees in the soon bucket. And again, it's maybe a lot because he already has such a large source of guaranteed lifetime income via that $150,000 pension and social security.

Speaker 3: 39:22

Right, and that reminds me, circling back to what we talked about earlier. You mentioned creating an income stream, you know, through the utilization of, potentially, an annuity, and maybe this is where understanding how that could fit and guarantee an income.

Speaker 3: 39:39

maybe you have less of your portfolio in the soon bucket because that's in place, right? It doesn't have to be a pension, it could be some other vehicle, but I think that's the tailoring it to each and every client and understanding the moving parts and how they work together is that, in my opinion, the true power of the bucket plan and really the true power of how we serve clients.

Speaker 2: 40:04

It is. I just kind of to recap. I mentioned there's three ways to generate retirement income. One is the portfolio yield. Unless you're ultra high net worth, that's probably not going to be the only solution for you. The other approach is a drawdown solution, where we're doing something like three, four, five, 10 years worth of income in that soon bucket and we're drawing it down. The last one is lifetime income. This is where you are turning over a lump sum of your retirement assets to an insurance company. You're purchasing an annuity that is contractually going to give you, or you and your spouse, a lifetime guaranteed income stream. For example, let's say that I'm 65 years old and my spouse is 65 years old and I give the insurance company $100,000, I might get back $6,000 a year of guaranteed income for as long as I'm alive. Now you could do the simple math and say okay, I gave them $100,000, they're going to give me back $6,000 a year If I live 20 years, that's $120,000 that I got back. I gave them $100,000, I get back $120,000. That's if I were to live till age 85, one of the two of us. What if I live till 95? Now I get $6,000 a year for 30 years. My internal rate of return just went up. Your internal rate of return on a lifetime income annuity is determined by you how long you live it really protects and is that longevity insurance.

Speaker 2: 41:57

What we've seen with many clients is that we all go through three phases of retirement. We go through what I call the go-go years, the slo-go years and the no-go years. I have a little section of this on our website under retirement, the go-go years are when we're younger, we're healthy, we can be active and we want to go spend more of our retirement assets. Let's say I'm retiring at 65, I'm probably going to be more active from 65 to 75 than I will be from 75 to 85, and certainly from 85 to 95. That's those go-go years, slo-go years and no-go years.

Speaker 2: 42:46

Maybe I realize I need $40,000 a year on top of my social security just for my basic standard of living, whether I'm in the go-go years, the slo-go years or the no-go years. Maybe we purchase an annuity to guarantee $40,000 a year On top of that. Maybe I actually want $100,000 a year during my go-go years. That other $60,000 in addition to my annuity income is going to come from my portfolio. Maybe I get to my slo-go years and now I don't need $100,000 because I'm not traveling all over the world as much Now. Maybe. I only need $75,000. So $40,000 is coming from my guaranteed annuity. The other $35,000 is coming from my portfolio. And then, last but not least, we enter our no-go years and I have my $40,000 guaranteed income annuity. I have my social security, and then we're just supplementing anything above and beyond that from the portfolio that we need, and so that's one great way to kind of think about these life phases of retirement and how to structure a retirement income distribution plan that could align with your goals and objectives.

Speaker 2: 44:15

I love it. Well, I think that gives us a good place. Again, I know this is stuff we do all day long. I mean, one of the things that I love about retirement income planning is that there are no two identical plans.

Speaker 2: 44:27

Everybody's retirement is a little bit different. Right, you might have an approach where you want to die with zero. When your family writes that check to the funeral home, it bounces. You want to spend every dollar you have enjoying retirement. Maybe your retirement plan is you want to be able to enjoy as much as you can, but you also have a legacy planning intent. You want to be able to leave the kids and grandkids some money behind. Maybe you've accumulated a bunch of money in your primary house, in your real estate, and you need to figure out how to tap into that housing wealth to be able to support your retirement. There's just so many different things to think about and I think our perspective, as always, is to educate, to be able to share tradeoffs associated with all these decisions and really to craft a customized retirement income plan that meets your goals and objectives. And I know you guys do such a great job at that with our clients also. So any closing comments on just concerns or priorities people have as they go into retirement Conrad or David.

Speaker 3: 45:37

Yeah, I think you know and I'll sing this from the rooftops till the day I die the sooner you start, the less fear you're going to feel at the time that you retire. Right, and I say that for my clients that are in their 20s right, start saving now. Clients that are in their 30s and 40s, start saving now, start planning now. And certainly, in talking about this stuff, the sooner we can start, the better off we'll all be. But leveraging help right, just find somebody you trust, come up with a plan that worked for you, identify the things that you really like and don't like and get a plan in place.

Speaker 1: 46:21

Yeah, and I would say just to add to that you know we're talking about things that people are fearful about in retirement, one thing you always want to look at are these fears real or are they not? And that's why it's important to work with a professional, because all these things that we're talking about, we've seen clients who are very fearful and they're scared of it. Some of them it's not real. Some of it they're completely fine. Others we have to have a quite frank talk and say, no, this is a problem. And so that's why it is important to work with a professional, because while we're saying these are fears, these are fears and things that might actually become an issue if your situation is such that you don't have enough funds. But if you do, you can model it out, you can ease your mind as long as you're working with somebody and you have a good plan.

Speaker 2: 47:15

Yeah, that's great. Planning is key with I mean think about you. Most people spend more time planning their annual vacation than they do their retirement, and so this is what we're here for. Hopefully you found this episode helpful. If you have any questions, please reach out to us and appreciate your time joining us. David and Conrad, thanks for having us.

Speaker 4: 47:37

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