In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the question many retirees and pre-retirees ask: "How much money do I need saved to spend $10,000 per month in retirement?" This is a highly specific question that requires a tailored approach to retirement planning. Radon and Murs reverse engineer this scenario to illustrate how to plan effectively, considering factors like budgeting on Social Security, inflation, and market volatility. They share insights into how their firm uses personalized retirement planning to provide peace of mind and ensure you can retire comfortably without worrying about running out of money.

Listen in to learn about the importance of understanding rules of thumb, like the 4% rule for retirement, while also acknowledging their limitations. Radon and Murs explain the concept of sequence of returns risk and how strategies like dividing assets into growth and safety buckets can help mitigate risks. They also emphasize the need to factor in inflation and longevity when determining whether your retirement savings are sufficient for your desired lifestyle.

In this episode, find out:

·      The relevance of the 4% rule and its application to budgeting on Social Security.

·      How inflation and market volatility impact retirement income strategies.

·      Why personalized retirement planning is essential for financial security.

·      The role of growth and safety buckets in combating sequence of returns risk.

·      What to consider when deciding to retire and ensuring a smooth transition.

Tweetable Quotes:

·      “Retirement planning isn’t about simple math—it’s about creating a personalized strategy that gives you peace of mind.” – Radon Stancil

·      “Sequence of returns risk can derail a retirement plan, but strategies like safety and growth buckets provide stability and confidence.” – Murs Tariq

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Welcome everyone to Secure Your Retirement podcast. Today, Merc and I have a topic that all people want to know is, and do I have enough money? And a lot of times people ask that question really from this context, how much money do I need in order to retire? And we get that all the time. Well, that question makes us always go back and say, well, it's very relative. How much money are you spending? Because that changes the dynamic in a lot of different ways. So I always tell people, I've got clients who have $500,000 and they have a fantastic retirement because they don't spend much outside of whatever they're getting between social security and pensions. So they're never going to run out of money. They're not even touching their 500,000. Now I've got some other clients that might have three or $4 million and their portfolio or their outcome could have a little bit of question to it if they take as much money as they say they're going to take as they're leading up to retirement.

So we have to be very careful how we ask that question. So what we thought we would do today is reverse engineer the question. So now we're going to say, if I want to spend $10,000 a month, how much money do I need? Very specific. Now we've got something we can work with. A person tells us, Hey, I want to spend $10,000 a month. So that would lead us to then let's reverse engineer this and start breaking it down. Now, to give you context for this hypothetical family that we're going to break down, we're going to say that this is a couple, and again, we're making math easy here just because we're on a podcast, we're going to assume that they are both getting social security and that they are each getting $3,000 a month. So they're getting from Social Security $6,000 a month, but they want 10,000, right?

So we've got a little shortfall there, and this is kind of like financial planning, retirement planning for us, what we do every single day, this exact scenario, this exact thing. What describing is something we deal with every single day in our practice. So I think that what we do is it doesn't matter to be honest with you. When somebody comes up and says, do you want to know my budget? What are we spending money on? Honestly, it doesn't matter. If you know what you need in order to live and you say $10,000, we're never going to break that down into what categories it's going in. We will ask certain things like is a part of that a mortgage? And the reason why we'll ask that is because a mortgage is fixed and we don't have to worry about inflation. So if a person says, I need $10,000 a month and my mortgage is $2,000, my principal and interest for that, well then we're not going to inflate that 2000, the 8,000 we're going to inflate to keep up with inflation. That's just a quick example. So now what we can do is this, start to break this down a little bit. Murs, we've got our baseline here. They need 10,000, they're getting 6,000 from social security. Where do we go from here?

So if they want 10,006 is coming in from social security every single month, well that leaves us with a deficit of four that we have to start thinking about in a few different ways. One, where are we going to take money from? How are we going to continue to grow this money as we draw it? And then there's also going to be taxation and things that we need to think about there as well. For the purpose of this exercise though, we're going to answer the question of, well, how do you even start to come up with the idea of how much money do I need to have banked to generate that $4,000 a month for a considerable period of time? We're talking 20, 30, 40 years depending on when you retire. And there's also inflationary issues that we have to deal with and think through inflation for the last or four years or so.

Pandemic and post pandemic has been rather difficult to navigate for a lot of people. So you want to make sure that you have a plan in place that can react when we have inflationary environments like we do that we are still currently in. So the first thing, one or one of the rules of thumbs out there that I'm sure many of us have heard of maybe don't fully understand, but it's a rule of thumb. That's the biggest thing I want to get across here is that it's not the answer. It's a guide to help you kind of start thinking about what the answer is. And that's the 4% rule. The 4% rule came around ages and ages ago around how do I come up with a withdrawal strategy? And the rule is that you try your best not to take more than 4% of your assets in a calendar year.

So an easy example, if I have a million dollars in the bank in my investment accounts, 4% of a million is $40,000. That's kind of the number that I have to live off of for that year. So 40,000, divide that by 12, whatever that math comes to, that's my monthly usable amount every single month for that calendar year. And then the next year, let's say we took out the 40,000 and then maybe we had a good market year and somehow it grew back to a million or maybe even 1,000,001. And then you do 4% of that and you continue to do that 4% rule. And the main backing of this rule is that, well, if we're only taking 4% and we look at historically on how money grows, particularly in the stock market, if we have six, 7% rates of return on our money and we're taking out 4% every year, well simple math and logic would say, if I'm making more than I'm taking out, I should be able to maintain my assets.

But there are going to be periods of time here where we will have decisions to make. Let's say the market fell 20 or 30%, 38% like it did in 2008 or 50% across the 2000, 2002 debacle. That's where the 4% rule has been challenged a little bit and is it still valid? All that to say is there are rules of thumbs out there and we need to understand them and we can use them absolutely for consideration. But let's go back to the main question. If I want to generate 10,000 a month for my retirement spending, six is coming in from social security between the two, the couple. So we have a $4,000 a month deficit, we just back into the math. And so the answer under the 4% rule is that you would need to have a portfolio of about 1.2 million to reliably generate that 48,000 a year or 4,000 a month.

So that's the number 1.2 million. Now there because of that argument to the 4% rule, it's also been dropped and some would make a very strong case for 3% or three and a half percent. So if we go with 3.5%, again, all we're doing is backing into the math and saying, how much do I need to have to withdraw that 3.5%? It comes to 1.4 million, not 1.2 million. And that's going to hopefully as a rule of thumb, generate us that 4,000 a month or 48,000 a year that we need to supplement social security and to live the life that we want to start out living in retirement at that 10,000 a month.

So we've kind of gotten through the baseline here, and as you're listening to this, if you're super technical, you're going to start to say, well, is this net after taxes or is this, where are we at in this? And all of those are great questions. We didn't really set that up. We didn't say, did the person say they wanted net 10,000 or did they say they want gross 10,000? So for the purpose of this conversation, we're going to say they wanted $10,000. Now we do need to think about taxes because all those numbers that Murs just went through, very different answer. If the person says, I want a net 10,000, right? Because now why is that a different number? Well, I've got to pay taxes if I'm pulling, especially from an IRA. Now if I'm pulling from an investment account, my taxation on that investment account is very different than the taxation on an IRA.

Why is that? Well, if I've got an investment account, I might have a lot of long-term capital gains that are lower taxed, have lower taxes on them than if I take it money out of an IRA where I've got it all as ordinary income to where it tax like ordinary income. So I really want to think about where am I pulling my money from? Some of our clients have done a wonderful job of converting their traditional IRA to Roth IRA. That means they have no tax on those distributions. So the whole thing here would change if we were building this plan out. Let's pretend that the person's got some money that they've got coming from their social security. Like we said, they need that other $4,000 and let's say that 2000 of that money is coming from their brokerage account, not IRA one thousand's coming from their traditional IRA and 1000 is coming from the Roth.

Total different math. So as you can just hear us talking about this, it's kind of probably coming up in your mind, wait a minute, this is more than just doing simple math. We need to do a plan. And that's one of the things that we will talk about here in a little bit. Now, the other part of this equation that we've got to think about and put into practice is if I need 10,000 today in either category, however we're doing the math, I need to figure for inflation if I want to live the same way as I live today. Now we have always ran for years, our inflation factor at 3% and we do that based on a hundred year average. There's going to be years in there where it's higher, there's going to be years in there where it's lower. And so let's get into that.

What we think inflation it should be or is going to be for this right now, we're just going to say we need to figure for inflation, alright? And then we can talk individually about what that inflation factor should be, but we need to make sure that we're kind of at least thinking about it. Now, another way to think about it is this way somebody might retire earlier in life, let's say 60, 62, something like that, 65, and they go, I'm going to spend more now while I'm younger traveling than what I'm going to do when I'm older. So they say, I don't need to keep up with the $10,000 run rate in this example because I'm okay to let it pair back a little bit. I'm not going to travel as much. That's really basically saying I'm dealing with inflation. I'm spending a little bit more now and I'm going to spend less in the future. Now we've got to go into our next topic, which is around market volatility, and I think you're going to handle that.

Yeah. So there's always risks to any plan that are put together, whether it's inflation returns. Another big risk is going to be managing market volatility. So that's kind of what I alluded to earlier in that scenario of, Hey, I've got a million in my investment accounts and I'm taking 4%, which is 40,000, but what happens? What do I do in the year where the s and p falls 30%, right? And my million now is 700004% of 700,000 is 28,000. I need 40,000 to live the life that I want to live as an annual number, but now 4% of 700,000 has become 28,000. I've got a decision to make. Am I going to take my withdrawal rate up, IE ignore the 4% rule and take the 40,000 that I want? Or am I going to cut my budget and am I going to live off of the 28?

Because that is the 4% rule. So we want to manage that. We want to try to avoid, there's this technical term in our world called sequence of returns risk. And that's what I was just describing is that especially when you walk into retirement, right? Think about it. When you were younger and you first started saving and your 10,000 became 50,000, your 50,000 became a hundred thousand over time and that continued to grow and you went through a period of two of times where it did lose 10%, it did lose 20%, but you're still working, you're still 28, 20 years away from retirement. And so you probably weren't all that concerned. The idea being that, hey, I've got time, I'm still earning, I'm still saving. It's going to come back at some point. But when we walk into retirement and we're a couple years away from having no income, no earned income, no W2, no salary, none of that, all it is is what we have to work with.

The last thing we want is to walk into retirement, ready to withdraw on our money, and we walk into a 20% sell off in the market and all of our money is exposed to that. So that's what sequence of returns risk. If we are drawing on a down asset, in particular in the beginning years of retirement, it makes it next to impossible to recover or get back to a break even. So if I have a million bucks and that 2022 is a great case in point, by the way, the s and p fell right around 20%. So I've got a million bucks and it fell 20% over a 12 month period. So just imagine every month it's falling one and a half for percent or something like that. But on top of that, you're taking your 4,000 a month to live the life that you want to live.

So you can start to see how our withdrawals plus the market falling, starts to snowball on us. And now our withdrawal rate became rather large because of the market falling at the same time that we're withdrawing. So that's a big thing that we want to avoid. And we've come up with a great strategy, I believe, to address sequence of returns risk, which if you've listened to us before, if you've talked to any of our clients, we talk heavily in this concept of the growth bucket and the safety bucket and the one liner on each of those. The growth bucket is our risk money. That's our market money. It's going to go up and down and that's going to usually make the most money, but we need to give it time to do that. That's the stock market. The safety bucket is our safe money. It's principle protected.

It's going to earn somewhere in that four to 7% rate of return bond, like return the key though it's principle protected. So if we're drawing on our safety bucket, we know we're getting that 4,000 a month from that bucket. We know we're never worried about the market being down 30, 40, 50% from this bucket. If it is down, our risk money was affected by that, but we're not drawing on that. And that's what reduces or combats this idea of sequence of returns risk, which is a long thing that one major one that we have to plan for. The other is longevity. People are living longer and longer. And so when we're building out our plans, we do want to look at longevity in the family. We do want to build a plan that people are comfortable with. We also want to usually not spend every single dollar by the age of 90 or 95 or 100 because there's a lot of things in between over the next 30 years that we have to plan for that we just don't know yet.

Alright, so that really takes us to really the breakdown here, which is, as you can tell, there's a lot of different moving parts. We believe everybody should have their own personalized, very clear strategy and plan, and we try to put all those things together for our clients. In fact, we created what we call our peace of mind pathway. And if you think about it, we're on a path trying to get ourselves all the way to peace of mind. There's all these moving parts. How do we organize them? How do we get them so that they actually make sense? And so we have a structured approach to how we walk our clients through this. That structured approach is going to help them to be able to see exactly how they get to where they want to get to, all the different moving parts, how they fit together with the investment plan, the tax plan, the income plan, the healthcare plan, the estate plan, all of that packaged together so that they don't have to worry about any one aspect of this and they can just go and live their retirement and have fun and focus on the things that they know are more important to them, which is usually their family and reaching some of the goals they have worked so hard for.