If a broker has told you that you need to accumulate several million dollars in stock market investments then withdraw three or four percent annually, you need to read this. We have created a different way to plan for retirement.
We’ve been doing retirement planning for awhile, and several of our fiduciary retirement advisors started their careers as commissioned stockbrokers creating allocation pie charts and selling stocks, bonds, and mutual funds. We are intimately familiar with the world of big-name brokers and bankers because we’ve lived it. We know what’s broken about their methodology and why, in our professional opinion, it shouldn’t be used for retirement planning.
Instead, we have developed our own proprietary process for creating comprehensive, custom retirement plans for each client. Our plans show you, via spreadsheet, exactly how to retire and year-by-year, month-by-month precisely how your retirement will lay out.
How much money do you need to retire?
This is probably the number one question we get. The answer is different for everyone, because everyone has a different lifestyle, unique needs, and goals. If you’re seven to ten years away from retirement, you might not need several million dollars saved. You might have enough right now. It’s amazing how many people come into our office and find out they could have retired already. Are you one of those people who lives for work? If not, you might be excited to find out that work has become optional for you. Financial freedom is what it’s all about.
With the proper retirement planning strategy, “how to retire” becomes less about some magic “number” and more about distribution and cash flow planning—detailing how much money you will have to live on every month without running out.
So, how do you retire? Let’s explore how we’ve done this for hundreds of individuals and couples throughout the West.
Map out your retirement up to age 100.
“How to retire” starts with solid math. First, you need to take a look at all the income you will have once you stop getting a regular paycheck. This income includes Social Security (optimized for the highest possible lifetime benefit based on your situation), pensions, real estate rental income, etc.
Then, you need a solid budget, outlining how much money you will require for your living expenses, as well as fun activities you want to do. Since you’re not going to have to go to work every day, you’ll may spend more money on eating out, entertainment, and travel—at least at first.
Finally, you need a solid retirement distribution/income plan to cover each part of your retirement — like the first five years, the next five years, and the next ten years after that, when you might slow down a little bit — all the way up to age 100, so you can feel confident you won’t run out of money.
By the way, running out of money is the number one fear of retirees. Studies show they fear it even more than death. That’s why we run the numbers up to age 100 or beyond.
Account for income taxes.
The distribution of your retirement assets—with the goal of minimizing taxation—is critical. Just saying “withdraw four percent” every year creates confusion and potential retirement failure. Withdraw how much from each of which accounts? What if the market drops? What about income taxes?
We have found that most retirees don’t realize how much income taxes will affect their finances if a lot of their retirement money is held in tax-deferred accounts like 401(k)s or traditional IRAs. Income taxes can take a huge bite out of your retirement savings if you don’t plan ahead. Why?
Because Required Minimum Distributions (RMDs) begin at age 70.5, when you will have to start taking money out of these accounts and paying income taxes on the money withdrawn, whether you need the money or not. The tax laws are complex, too, and there are no grace periods. You have to calculate percentages carefully and withdraw the correct amount of money out of the correct accounts by midnight of each December 31st or be subject to a 50% penalty on top of taxes owed.
We have specific calculations to see if we can use tax strategies for you early-on to reduce income taxes for you over the long-term. Not accounting for taxation may be one of the biggest downfalls of the stockbroker pie chart being used in retirement.
That along with the fact that you could lose all your money if it’s all at risk in the market—even if the bulk of your money is held in purportedly “safe” bond funds.
Beware of bond funds, which are not “safe.”
Somehow, bonds have become synonymous with bond funds in common financial lexicon, but they are not. Withdrawing money from fluctuating accounts held in the volatile stock market is a recipe for retirement failure, like we saw in 2008.
Bond funds are not “safe” and historically drop in value just like stocks and other mutual funds during downturns. Having to take money out of falling accounts to live on in retirement increases your losses similar to compound interest in reverse. We saw this in 2008, when the great recession wiped out retirement accounts for millions of Americans, who were holding the bulk of their money in bond funds.
Plan for cost-of-living increases, healthcare costs, and the potential need for long-term care.
There many risks you face in retirement and ways to address each and every one. The banker/broker pie chart and 4% Rule don’t address any of these risks. We do, because we specialize in retirement planning. We will go through the dozens of risks and find ways to mitigate them as an important part of your individual retirement plan.
As true fiduciaries, legally bound to look out for your best interests, we’ll even help you with tax-advantaged wealth transfer and estate planning, not to mention allocating an emergency fund you can tap into if something comes up.
How to retire: The distribution/retirement income plan.
The bottom line when it comes to “how to retire” is this: you need to take into account your current age and your target retirement age, the optimal way for you to start taking Social Security as well as other income streams like pensions, and put together a retirement income and distribution plan that factors in your expected expenses as well as regular cost-of-living increases and taxation.
You need to know, mathematically, down to the month, net of tax, how much you can spend for as long as you live.
This is really the only way you can know exactly when you can retire and how to retire with as little risk and as much understanding and confidence as possible—because your personal retirement plan has been mapped out with mathematical precision.
