Loading summary
Transcript4 lines
- [00:00]
A
Its Bryan Preston, the Money Guy, restoring order to your financial chaos. Retirement, investing, taxes. You've got financial questions, he's got financial answers. It's Brian Preston, the Money Guy.
- [00:16]
B
Welcome to the Money Guy Show. I'm your host, Bryan Preston. And what we're going to be talking about today is creating a retirement withdrawal plan. Now wait a minute, my young listeners, stop. Do not tune out just because I'm talking about creating a withdrawal plan for retirement. Because several things you've got to think about here. First of all, retirement impacts us all. We are all going to retire at some point in our life. And if you're not retiring or in that phase of your life where you're thinking about retiring, you probably have family members. Maybe it's your parents, maybe it's your grandparents, maybe it's an aunt and uncle. And I've got to tell you, if you're one of these people listening to a financial podcast and listening to the Money Guy show, you're probably the type of guy that has the aptitude. You're the person that has the aptitude that you probably have friends, family, everybody in the world coming to you to ask financial questions. And as we've got this aging population, all the baby boomers getting close to retirement, you're going to have people asking a question. So you might as well stay here, sit, pat, tune in and listen and learn a little bit how you can maybe have a few more tools in that tool belt of yours to answer financial questions and make yourself look good. So, so I hope I can talk my young listeners into hanging in there and listening to us as well. I do want to go over real briefly. This is the Money Guy Show. I'm your host, Brian Preston. By day, I am a fee only wealth manager. I am a certified public accountant, a certified financial planner, and a personal financial specialist, which means I am a CPA that does do financial planning according to the aicpa. I started this podcast just trying to provide some insight, help you make the right financial decisions. And it has kind of just exploded. This whole medium of doing podcasts, podcasting has really taken off. As you can see when you go to itunes or some of the other places, you see that the big corporations have kind of taken over. And there's only a few of us small mom and pops that are still hanging in there with prominent location on itunes as well as some of the other podcast sites. And I hope we can keep it there. But you guys are a big part of that. Your great comments that you all put on itunes as well, as the great comments you all put on other sites has helped keep our names out there and I want to give you a huge, huge thank you. And it's also your emails. You can email the show@brianoneyguy.com actually, let me give you the old email address because that address is probably going to be functional in about a week, but it's not there yet. Brian B r I a noneyguy.net use that address for another week or so because as I mentioned in the last show, we have acquired moneyguy.com the domain name, and we're in the process of transferring all that over. We've also got a brand new website that we're finally working out the kinks. And then last thing, the Wealth Report, the paid newsletter, just because you don't see it on the front page, it has not gone away. And everybody who's paid their subscription fees, don't worry, we just got them in from the printer. They're going out today or tomorrow. So that is all happening. And we're also going to have some great opportunities for other people to sign up for the Wealth Report print newsletter. We're even going to have a PDF version that's going to be available very shortly, hopefully in the next two weeks. But getting back on topic here, we are talking about creating a retirement withdrawal plan. And I think this is so, so important because a lot of you have written me and said, hey, Brian, I know you focus a lot of your information on the younger listener, but how about us older guys that are getting closer to retirement? We kind of need to know, do we have enough? Have we done what we need to truly have that American dream of retiring and playing golf, traveling, doing all the fun stuff that comes with it, or are we going to be eating potatoes every night? These are the decisions that you have. And I think it's time we kind of approached and discussed this situation. And I've got a real quick and dirty method for you to calculate if you've saved enough money. And then we're going to get into the numbers to actually see the support. Why this rule of thumb or this great example that you can this quick and dirty way that you can calculate things, if this does work out for you, how there is some science behind where this rule of thumb comes from. So I get asked all the time from prospects, from clients, from people out and about when I'm talking to friends and family and they say, Brian, have I saved enough or how much am I going to know that I need to save to know I'm at the end point, to know what my ultimate goal is for saving for retirement. This goes back, I'll tell you, even for younger people. I had one of my doctor clients who's a younger doctor, he's in his mid-30s. He said, Brian, I know I want to retire at this certain age. How much money do I need to have? So I said, well, how much are you comfortable living off of? Do you think you'll need in retirement? I said, base it off today's dollars. Then he told me that number and then we went out there and inflated it for inflation at 3% inflation. Then we figured out how much money, using this rule of thumb that I'm about to share with you, he would need to save, and that's how much he's now going to be saving. We figured out what his monthly investment plan needs to be based upon this simple rule of thumb that you can really easily use. It's called the 5% rule. And this is so simple, it's really crazy. And you can take into an account inflation if you want to, if you've got a number of years to retire. But if you're getting close to retirement, you don't have to inflate that number. You can just basically take how much money you're going to need a year to live off of and then divide it by 5% or 05. So if you take your calculator, if you know you're going to need $50,000 a year to live off of, you type in 50,000 divided by, and then type in 05 or 5%. And you'll see that you've got to have saved up a million dollars to generate $50,000 a year. If you need $100,000, you take 100,000 divided by 05 and you're going to need 2 million. If it's 200,000, you can do the math. This is pretty simple. It's $4 million. Now, I know a lot of you are probably sitting out there going, oh my goodness, Brian, that is a lot of money for just not a ton of income. I thought for sure that if I save up a million dollars, I'm going to be able to live off a lot more than $50,000. And that is possibly true because remember, this assumption is pretty much paying you this money forever, at least on a 30 year period is what we're trying to guarantee that you're going to be okay for 30 years. And it's also set up to be very conservative. I'm sure many of you have heard about the 5% rule, but if you haven't, I think it's a good thing that you can go out there and figure out if you're at least in the ballpark of knowing if you've saved enough money for retirement that you can go out there and do it. But you do have to know that a very Conservative Number of 5% at least is going to get you close enough that you can figure out through some research that I'm about to share with you because there's a great article that I've linked on my show notes. If you go to moneyguy.net and look at our show notes, I've got a great article that's actually pretty technical that's put out there by a gentleman by the name of William. I'm probably going to slaughter William's name, but William Benjin It's B E N G E N. It's Bengen William Bingen. He's a cfp. He actually practices, I think in Colorado, actually in California. Sorry about that William, but he actually practices out in California. He's a financial planner himself and this is his thing is he has been doing research for a number of years on what's a healthy withdrawal rate, which is essentially what when you divide by 5%, you're basically saying a withdrawal rate of 5%. There's some science behind that and I'm going to get into that in a minute. But I wanted to give you just kind of the quick and dirty of that calculation. Now you do have to remember when you're using something like a 5% rule of thumb, you have to know that you if we got into a prolonged bear market, this calculation would probably not work out great. But you can lean on this calculation if we have just a traditional cycle of markets, meaning that traditional cycle is typically six to eight years where you'll have a number of years where it's positive, but you might have two or three years where it is down as the bear market comes in and we hit recessions and so forth of what can come. But if we got into a depression era or anything like that, then it might derail some of this. But we haven't fortunately had anything like that since the 20s, so you can expect that number would hold up quite well as long as we had traditional historical market performance. A diversified portfolio, which I've tried to help you guys with that with past topics and then a moderate risk level, you're probably going to be okay with this type of portfolio. Now I've provided you, like I said, with some quick and dirty figures. And let's talk a little bit about what William has put together with some of these articles because I really think he's done a great job. And what it helps you out. If you go out there and look at this, it's going to tell you because maybe you don't need 30 years worth of retirement income, maybe your life expectancy or maybe you're just at the age where you only need 10 years of income from the assets you're considering. Well, you have a lot different variables that go into your equation and you might be able to pull out even more money. And I've got some stats in a minute I'm going to share with you from Williams Research that kind of shed some light on that. So it's very, very interesting. So you might be able to go above 5% or maybe you're so conservative you're one of those guys that just doesn't want to have a lot of risk with your investment portfolio. You don't like to spread your assets out or you want to leave a lot of money to your kids. Maybe you have a legacy that you want to leave behind to your children and make sure that they have some wealth that you pass down to them. Well, then you can't. You need to have a more conservative type of withdrawal rate. Maybe you need to go down to 3 to 4%. I know there's quite a few of you out there that are numbers lovers and you like to read the numbers and kind of immerse yourself in understanding the research. And that's why I did put those links out there. If you go to our website, that's moneyguy.net, soon to be moneyguy.com and you can see the two articles. The first one is from the Financial Planning Journal. It's called baking a withdrawal plan layer cake for your retirement clients by William Bingen, cfp. And then there's also a financial planning perspective that's also done by the FPA that is based upon William's work titled conserving your portfolio in retirement. If you click on both of these things, you'll see some very exciting research that's out there. And I've got some six little tidbits that I pulled from it. But I did want to jump into the numbers a little bit. I thought it was quite interesting. Let me let you hear some of these stats that I found just going through here and giving you kind of the executive summary of this article is that if you look at if you read the report, you're going to notice a few quick things. The first one I jotted down was 4.15%. Assuming a 30 year time horizon is perhaps the ideal withdrawal rate when using a portfolio made up of only two asset classes. With 65% invested in large company stocks and 37% invested in intermediate term government bonds and which is rebalanced at the end of each calendar year. Now, what is a large company stock, as you all probably heard me talk about on the asset allocation shows, that's usually there's not many of those companies, that's U.S. stocks, companies that are really $12 billion in size or greater in market cap. There's not too many of those. We're primarily talking about like the Home Depots, the Walmarts, the General. They're all household names. You're very familiar with them. So 64% in very large companies and then the other 37% in these intermediate term government bonds, which as you can imagine are probably some of the safest bonds out there. Now, by adding a third asset class like 17.5% into small company stocks and what is a small company stock? It's a company that is less than $2 billion in market capitalization size and then 42% in large company stocks and 40% in government bonds, you can increase your withdrawal rate to 4.4%. I thought that was quite interesting. It shows the power of diversification. You know, you add a little more, a few more asset classes, sure you take on a little bit more risk by bringing in the small cap, but you also, you know, if you look at the historical norm, you've actually diversified a little bit more, which you know, can help with the volatility to a degree. And the third point I notice is that if you have a shorter time horizon, you can increase your withdrawal rate. The peak withdrawal rate for a person with a 10 year time horizon is 8.9%, about twice that for a person with a 30 year time horizon. And time horizon for this type of discussion is basically talking about how long you need the money to provide your retirement income. It's your retirement funds while you're out there living off of this so you can quit working with your hands and let your money work for you. You. And the fifth thing I notice is that, oh, actually it's the fourth one is increasing your withdrawal rate reduced your odds of a portfolio lasting the full 30 years. An increase of 1 percentage point above the calculated safe withdrawal rate, meaning based upon what Williams research shows, reduces the probability that Your portfolio will last 30 years by 15 to 20%. So you've got to be very careful when you're pulling these withdrawal rates. If you're getting into where you're counting on 5.5%, 6% a year of your total portfolio value, you might be getting a little aggressive. And it goes on to say an initial withdrawal rate of 2% above the calculated safe withdrawal rate results in just a 55 to 60% success rate. I saw that when you look at William's research, when you go to look at this, he has withdrawal rates here and I'm pulling the actual things it says looking at history. It went back. He has a figure here titled figure 2. It's called success rate for a 30 year portfolio that's diversified between 40% large company stock, 20% small company stock, and 40% in government bonds. He went back through time and looked at the portfolios and he found that a portfolio with that diversification mix and a withdrawal rate of 4.42%. And y' all know when I say withdrawal rate, I'm talking about if your account's worth, you know, $100,000, you're taking at the beginning of the year, you're taking 4.42% of that. You're multiplying that number. So you have $4,420 a year generated by that $100,000. So if you're looking at that, there's 100% likelihood that your withdrawal rate will work. I mean, there's not a time in history that you would have gotten in trouble if you were using 4.42% with that diversification strategy. If you go up to 5% with that diversification, you have a 94% likelihood of success. You go up to 6% now, you only have a 71% level. And then you go up to 6.5, you only have a 58%. So that ties right into those numbers that I was just sharing with you about how you have to be very careful with the number you're using. So I think it's pretty healthy to say a 5% rate because it has with a moderate level of risk, it's going to pretty much work out for you 94% of the time. According to some of the research that William's done talking about this topic, you can get into the numbers to look. But getting back to the few key points that I also noticed, here's something that I thought it was quite interesting because it showed me that lazy investing still kind of holds up. I did a podcast probably Over a year ago now, titled Lazy Investing is good investing. And it was talking about basically not outsmarting yourself, buying and holding good type of investments and not trying to buy and sell at all times to chase the hot dot and rebalance too much because you're probably outsmarting yourself. And this research shows that it says investors can marginally increase their initial withdrawal rates by changing the frequency that they rebalance their portfolios during retirement. According to Bingen's research, investors could rebalance every 75 months or every six years and actually improve the initial withdrawal rate to 4.65%. Now, I don't know if I would say don't look at your portfolio but once every six years to make adjustments because you actually are taking on more risk. I think the reason that you can increase your rate of return to 4.65 is because maybe if you only had. If you have 50% in stocks and you don't rebalance it for six years, you can imagine by the time you go to rebalance it in six years, instead of it being 50% stocks, you probably have 70% stocks and only 30% bonds. You see the point that I'm trying to make? You are taking on more risk with that type of strategy. Hence that's why you're getting a better rate of return. Because the more you're balancing, going in there and rebalancing on an annual basis, you are adjusting and lowering that risk level back down. This is just another way of saying if you just let your money sit, there is a level of risk that you're taking on because you're increasing your equity. Actually assuming that the equity markets are outperforming like they traditionally have, if you look at the historical figures, but very, very fascinating information that was shared in this research report, please go check out the links on moneyguy.com and I think you'll see that this stuff. I hesitated to do a show on it because you can see this is a lot of numbers, probably a lot of you, if you're tuning in for the first time. Not all my shows are this analytical, but I wanted to provide the answer, the free answer to you guys, because I know a lot of you are probably curious. Have I saved enough money? Where are we at? So I wanted to get you the information, but this is an analytical discussion and I know probably a few of you might be out there snoozing, but hopefully not. I did want to also throw in an email. Persistence does pay. I have a listener who's a good listener, but the listener has sent me. I think this is either the third or fourth email I've received from them now with the exact same question. I want to reward them for their persistence and actually answer their question. Mike is from Colorado and Mike wrote of course he did the nice stuff at the beginning. He says, first of all, let me say I thoroughly enjoy your show. I usually listen to it while I'm at the gym. Thus I'm getting a workout as well as in education. You really inform your listeners and an easy to understandable format and I appreciate that he goes on and he tells about his personal situation, which I'm not going to give too much about Mike, but Mike has done a good job of saving a good bit of money and here's where his question comes in. He must have written this originally right after my asset allocation show that I did a few. It's been a few months ago now. It says your last show involved adding additional asset allocation classes including real estate, energy and long short funds to your portfolio as a hedge to an uncertain market. Interesting timing is I just started a Roth in the Vanguard REIT fund, the real estate you mentioned. The percent of allocations to invest in some of these funds should be less than 5%. Will putting less than 5% really have a significant influence on your portfolio return? I've always been told to clean up funds with less than 5% and consolidate into another fund based upon your allocation goals. I think this is a great question, Mike, and I want to address it. I think the best way to put it, you can go back and listen to some of my shows and I'm being very consistent when I say this is that when you're young and starting out and you don't have a lot of savings. I do agree with Mike that you should not get caught up in all this asset allocation. Your primary goal should be to save. And why do I say that? What's the proof in saying that? What I just told you is that if you have three or $400,000 saved up and your portfolio goes up 10%, you will generate 30 to $40,000 of additional gain on your portfolio, which is substantial. That's a lot of money. If you have 3 to $400,000 saved up and you make 10%, you generate 30 to $40,000, which is a substantial sum of money. If you have $50,000 saved up, which is still healthy, but you make a 10% return, you're going to generate $5,000. Now, $5,000 is a decent amount of money, but it's not Going to change your financial life. And you probably generate more with your hands, your back and working physically than your income than your portfolio is generating for you. So I always tell people while you're in the accumulation stage, and when I say accumulation stage, that's people below 300,000 in their savings. You just need to go buy the some of the good funds out there, like the Fidelity Freedom funds, these Vanguard Target retirement funds, maybe even like the Fidelity form one Index. You basically just need to not get caught up in diversifying too much and just get to work on saving. Savings should be your primary goal. When you're just trying to accumulate enough assets so that when you do start to get that 10% rate, that it makes a huge substantial difference in your financial life. And that's what when I gave you the breakout and I told you I'm only doing 2 or 3% in real estate right now. In light of what's going on out there in the market, Mike is right that for a lot of you, that might not be the right move. But when I'm dealing with investors that have over a million dollars, it is the right move. Because I typically don't like to buy a fund unless I can buy at least $15,000 to $20,000 of that fund. Because most funds have initial investments that you have to do too. Minimum required investment that you have to go in there and make. So 15 to 20,000 usually gets you over that threshold. But I'm all about when you're dealing with clients that have over 3, 4, 500 to a million dollars in assets, you're trying to maximize rates of return as well as diversify completely to minimize the volatility that when you get into markets exactly what we're in right now, where you have ups and downs and maybe traditional stocks and bonds aren't just doing it for you, you got to throw in other asset classes like the long short funds like the real estate, like the commodities, like the Vanguard Energy and the oil and gas type funds, you've got to mix it up a little bit. So when you get to a large amount of money, it's okay that you're only putting 2 or 3%, because you still might be buying 20, 30, $40,000 of that fund. And you say, well, does that really make a difference? Yeah, you think about like Vanguard Energy last year was up, I think, I believe, and I'm doing this off memory, but all those oil and gas type funds like T. Rowe Price, New Era, as well as the other commodity funds were up over 50% and then you look at what they did the previous year. If you can do that and you only have 4 or 5%, it still can increase your total return by 1% or more. That's huge if you're thinking about the long term. If I can add an additional 1% to my clients portfolios over the long term, that's tremendous. So that's why I think Mike has a great question here. But for most of you who are in the accumulation stage, meaning you haven't even built up the 300,000 in net investable assets yet, don't get caught up in some of this. Use some of these tools I'm providing to you. File them in the back of your mind, but focus on the saving. The saving. And this is a great time to be saving. With the market being as volatile as it is, you can get in and get some great opportunities in the long term. Because remember, you should never invest unless you can let go of that money for five to seven years. But it at least allows you to focus on what you need to do. Focus on the savings. Now once you get over the 300,000, you still need to focus on the savings. But now you want to try to maximize rates of returns as well as minimize volatility through diversification. Mike, I hope that helps out. I probably felt like I rambled on a little bit there, but I was trying to put a lot of great information into a very short answer and sometimes that's not the easiest thing in the world to do. So remember today's show we're talking about choosing the right withdrawal rate for your retirement. And then I just talked to you about asset allocation a little bit. So hopefully there's something for everybody. Remember you can contact the show, you can write me, email me at Brian B R I A N B R I a n@moneyguy.net you can also go check out our show notes@moneyguy.net and I really appreciate you tuning in. Thanks for the great comments you put out there on itunes and thank you for keeping us popular. And until then I'll talk to you in about a week. I'm your host Bryan Preston of the Money Guy show.
- [24:31]
C
The Money Guy podcast is hosted by Brian Preston and Brian Preston is a partner with Preston and Cleveland Wealth Management. Preston and Cleveland Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with securities laws and regulations, Preston and Cleveland Wealth Management does not render or offer to render personalized investment or tax advice through the MoneyGuy podcast. The information provided is for informational purposes only and does not constitute financial tax, investment or legal advice.
- [25:26]
A
The holidays mean more travel, more shopping, more time online and more personal info and more places that could expose you more to identity theft. But LifeLock monitors millions of data points per second. If your identity is stolen, our US based restoration specialists will fix it, guaranteed your money back. Don't face drained accounts, fraudulent loans or financial losses alone. Get more holiday fun and less holiday worry with LifeLock. Save up to 40% your first year. Visit LifeLock.com podcast terms apply.