← Ready For Retirement
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- [00:00]
A
Any way you look, it seems like a million dollars is that magic number needed for you to retire comfortably. That's why in today's episode, we're going to talk about why that's not the case. Whether you have less or more, that's not the number you should be paying attention to. So tune in to see exactly what you should be paying attention to. Aaron? I was talking to a neighbor where the headquarters of Root Financial is. And this neighbor was asking some questions about retirement because he found out what I do for a living. And I told him I have a podcast that I do. He started listening to podcasts, and he said, this isn't going to probably connect with me or resonate with me. Your most recent episode was how do you retire with $3 million? I just don't have $3 million. I think there's a bit of discouragement that is that really what it takes to actually retire? And when we started talking and he started telling me about what he had and what's going on, and before long, it became very clear to me that this individual could retire with far, far less than $3 million. This individual had nowhere close to that. He had saved well done, well provided for his family. But it became very clear very quickly this individual did not need that. And in fact, he had about $300,000 in his portfolio, and it was plenty sufficient to do everything he needed and then some because of the actual cash flow that he was going to have through retirement. And so, Aaron, I think that what would be helpful to go over in today's episode is how much do you need to have to retire? Do I need that million dollars? Do I need that $5 million? Or is there something else I should be looking at to determine what is the amount needed for me to feel like I'm in a comfortable spot to retire?
- [01:30]
B
I feel like every headline we see says you need a million dollars. And it tries to put this feeling out there that if you don't have a million dollars, get ready for a rice and beans retirement just because you're not going to be able to make ends meet. And this is just the narrative that gets so pushed. And I feel like it adds to a lot of discouragement because the vast majority of Americans can look at their account balance at the end of the year. I'm nowhere close to that.
- [02:00]
A
Yeah, in this. So I'm going to go back to the individual I was talking to. Why did he not need 3 million or even 1 million to retire? And by the way, this is in Southern California, not Not a cheap place to live. Yeah, he didn't need that because we started working through his financial plan and he was going to have a pension. He was, his, his wife was a teacher in a school district, so there was a strong pension coming in. They had a rental property that was generating a couple thousand, a few thousand dollars per month that they both had Social Security benefits. And maybe most importantly, they were going to retire debt free. They didn't have an extravagant lifestyle and they didn't have a tremendous amount of expenses and lifestyle that they had to cover. And so when we work backwards into why was it this individual who had $300,000 in his portfolio and would have a perfectly fine retirement, why could he and his wife do it where some people, well, they very well may need a million dollars, $2 million, $3 million. It all depends on a few really important things. And I think those things, the way I think about it, Aaron, is number one, cash flow. So starting with what are your actual expenses going to be in retirement? Number two, what are your non portfolio income sources? Things like rent, things like Social Security, things like pension. And then number three, finally, how big of a portfolio do you need once you've determined how much actual income you need from that portfolio to put all these pieces together and maintain your lifestyle? So maybe we could start working through that to help people understand what is the actual amount that they need. Is it a million, is it more, is it less? Where do we actually start when determining what that looks like?
- [03:30]
B
Absolutely. I'm going to throw in another example here just from my side of things. So you've got a couple and they had pensions, they had rental properties, they have Social Security coming in, which takes so much pressure off how much investments they need. That still sounds like a lot of income streams. I want to talk about a gentleman I was speaking with a couple weeks ago. He's a retired veteran. He has a full disability benefit because he served in our US military for 30 years. He has Social Security and he has a paid off home and a paid off car. His expenses were very, very low. He said he spends about $3,000 a month between his pension and his Social Security benefits. He's still saving every single month. He doesn't have a robust portfolio in the terms that we would think of it comparing to a million dollars. But he's, he had somewhere around $250,000. But he's still contributing every single month. He's still saving even though he's fully retired. And he said, I don't touch my savings, I Have three sons. I want to leave everything to them. So my pension, my Social Security, it covers more than anything I could imagine. I want to live a modest lifestyle. I don't want to retire. So saying that you need a million dollars in a portfolio is so relative to where you live, what kind of lifestyle you want. And like you said, it comes down to cash flow. It comes down to your exp. And once you can nail down what your expenses are and once you look at what your income streams are, you may find that you need far less than a million dollars. Maybe you don't need anything invested. If a pension covers everything in Social Security, maybe you find that you need more than a million dollars because you bought a vacation property and it needs a new roof or you want to buy a new car every three years. It depends so much on those expenses and I think a lot of time. Oh, go ahead.
- [05:19]
A
You framed it well earlier, where it's not about your net worth, it's about your cash flow. What's the difference there? When people are saying you need X number of dollars to retire, they're typically talking about a net worth number. How big does your portfolio, how much does your net worth need to be? Hypothetically, you could have a net worth of zero and have a strong retirement. And I'll give an example. What if you are that person that you're talking about? You have a strong pension, you have a strong Social Security benefit, maybe you're married and your spouse has a strong Social Security benefit. It's cash flow that you on in retirement, not net worth. Now, our portfolio can serve both those purposes. It is both net worth and it contributes to our cash flow. But the main thing to look at isn't a number of do I need my net worth to hit X number of dollars? Do I need it to hit the numbers I see on the headlines? If you need a million dollars, you need $5 million. The answer is no. You need enough cash flow to support your lifestyle. And so the biggest key even there, I would say, is what is your lifestyle? You just gave an example, Aaron, of someone who lived very comfortably on $3,000 per month. There's other people listening that could live very comfortably on 2,000 per month. Some it's going to take 10,000 per month. So it's very dependent. And not everyone's going to have the same exact retirement plan. In fact, nobody will have the same retirement plan. But the foundational piece to it, to understanding, can you do this? Can you retire comfortably? Is defining what does comfortably mean to you?
- [06:41]
B
And I would say, is it something. Taking that net worth statement, I would say instead of focusing so much on that net worth number, rephrasing it to, like you said, you know, saying, how much cash flow can I generate from this portfolio and is that enough to cover my needs? That question is far more important than what net worth can I get to.
- [07:04]
A
Exactly. And here's where that comes in in my mind is let's. Let's assume I want to retire and I want to spend $6,000 per month, and I'm married, and between my spouse and I, we can generate $4,000 per month in Social Security. And let's also assume that my spouse has $1,000 per month of a pension coming in. Yeah, just very hypothetical numbers. 6000 is our desired lifestyle. That's what we need to be comfortable in to say, yeah, not only can we retire, but we can actually do the things that we want to do in retirement. I'm ignoring taxes here just to keep this super simple, but 6,000 is what we want to spend. If you add up our income sources, we have $5,000 per month coming in. This is one of those things I think far too many people miss is that 6,000 does not have to entirely come from my portfolio, from my 401k, my Roth IRAs, my savings, only the delta, or only the difference between how much is already coming in from things like pension or Social Security and my actual desired expenses needs to come in and the Delta, there is $1,000 per month. Now, if you look at 1,000 per month, that's 12,000 per year. That portfolio required to do that is what, $300,000 or so per year. If you're using a number like 4% to generate. If I had $300,000 in a portfolio, and if I apply the standard 4% rule, which is not a magic power law of this is all that you can, but it's a very simple, basic rule of thumb. 300,000. 4% of that is $1,000 per month. What that means for us is we would need a $300,000 portfolio to be able to retire. Now let's look at how does that shift if our lifestyle shift changes or if our lifestyle expectation changes. If all of a sudden we say, no, we're moving somewhere else, or we want to travel a whole lot more or we want to do more. And it's not 6,000 per month that we want, it's 8,000 per month. That doesn't seem like a big jump. That's only a 33% jump in terms of our actual expenses going from 6,000 to 8,000. But that is a much bigger jump in terms of my portfolio's responsibility.
- [09:09]
B
Because you're creating a larger gap between those guaranteed income streams.
- [09:14]
A
Exactly. Social Security doesn't care that all of a sudden we want to spend more. My pension doesn't care that all of a sudden we want to spend more. That's going to be the same amount in that gap, to your point, has tripled. It's not $1,000 per month, it's 3,000 per month, which means to maintain that same lifestyle, it's not 300,000 more or less that we might need. It's closer to 900,000 that we might need. So when you view your portfolio not in the sense of some magic number to attain to make everything happen, and more so as the role player of how does this supplement everything else that we're doing? And everything else that we're doing is tied at its foundation to how much do we actually need to live comfortably? Which take it a step further, even further, is what do you actually want your retirement to look like? And what does this need to be for this to be the best season of your life? Your portfolio is kind of that final step. Just say, how much of it do you need and how do you need to invest it to fill that gap, to create the outcome you're trying to create?
- [10:08]
B
Can you imagine the backlash that you would get if you started pushing the narrative that you could retire on $300,000 or $400,000? I mean, I just think the narrative is so overwhelming in the media that sometimes when a narrative is so strong, I think it can cause people, even with confidence, to second guess their plan.
- [10:34]
A
Yes. And I think that's because as humans, we don't like chaos. We don't like uncertainty. With financial planning, with finances, with retirement, there is so much uncertainty. There are so many unknowns. There's so many variables that this rests upon.
- [10:51]
B
It's 30 years of unknowns that you're trying, trying to cover.
- [10:55]
A
And we don't like that. It's easier to find something that says, okay, I need a million dollars, or okay, I need to work until age 70, or okay, I need my soul. We find these things to latch onto, which can be helpful if they serve just as very general, loosely speaking, like North Stars, what are we trying to attain? But be careful what you place as that North Star, Be careful what you set as that goal. Because if it is a million dollars, you might find that you work way too long and sacrifice way Too much because it's 10 times more than you actually needed. Or you may find that's only half the amount that you need, depending upon your actual lifestyle and what you should be doing. Which is why I get why people like that and gravitate towards a sense of control and a sense of, okay, all this chaos is now organized into one single number. But if you want to do it right, it's not actually all that complicated. It's just this framework that we talked about. Focus less on net worth, more on cash flow. And to your point, Aaron, how do you convert your net worth into cash flow?
- [11:52]
B
I think also you said one thing very subtly and quickly, but I think there is power to it. You said that your portfolio is kind of secondary. This is what we should be looking at to fill the gap. Whereas I would say for so many people as they're going into retirement, the thing they really focus on is their portfolio. They look at that as the number one spot. But I would argue that you want to look at your guaranteed income streams as your baseline floor. This is your income floor. That gap is how we're going to address that from investments. And that's really. It could be icing on the cake. It could be a very meaningful portion of your portfolio comes down to what your expenses are. But those guaranteed income streams, A pension, rental income, Social Security, those are the A players that we want to start with. And then the investments come along and that's our supporting staff.
- [12:52]
A
Exactly. And depending upon the delta, the difference between lifestyle and those A players that really should inform how you invest, how much you need to have in your portfolio, how you draw money. And not to make this too complex, but I think that the next step is, well, what about that person that retires at 60 and the pension doesn't kick in until 65, and Social Security doesn't kick in until 70, if that's what. So this isn't to say that there's only one way of doing this, and this is a simple formula as much as this is a helpful framework to think about it. The goal is to combine all these pieces and understand that, no, you don't need a million dollars because that's what the Yahoo headline said. You need the amount that's going to allow your portfolio to complement your Social Security, pension, whatever income sources, you have to give you the amount to do what you want to do.
- [13:44]
B
And I would say that who you are is likely who you're going to be, because we're tend to be creatures of habit. Like if I'm someone who travels every single year. If I upgrade my car on a regular basis, I'm probably going to continue being that person in retirement and my expenses will be similar. If I'm a homebody and I'm fine driving a 10 year old car, I'm probably going to be that same person in retirement. So your expenses today are probably going to look fairly similar. You're not going to change your entire personality when you go into retirement. So base it off your expenses today and how you see your retirement being.
- [14:23]
A
Yes. And the final point that I think at least I would like to make is the single most highly leveraged decision you can make in all this simplified equation is your expenses.
- [14:35]
B
Yeah.
- [14:36]
A
If we go back to my example, if my wife And I need $300,000 going back to, if we want to spend 6, we have 5 coming in from Social Security and pension. We need 300,000 in a portfolio to generate that $1,000 of expenses. If we're starting from 50,000 or 100,000, that's a, that's a big gap to fill.
- [14:56]
B
Yeah.
- [14:56]
A
The most highly leveraged thing we could potentially do is cut expenses.
- [15:01]
B
Yeah.
- [15:01]
A
Well, hypothetically, if we take six and drop that down to five now all of a sudden we don't, quote, unquote, need a portfolio. Now, I want to be mindful, like you don't want your retirement to be anything less than what you want it to be, but just in terms of the trade offs here of what's more realistic, do we want to keep saving and growing or do we maybe not upgrade the car because we find that's not actually as important to us as is being retired earlier and spending time with family. Do we move to a lower cost of area living where maybe kids or grandkids end up being do, you know? So these decisions that you can make and just understanding the leverage of each, at some point, it's the amount that you save that's going to have the highest leveraged impact on your ultimate retirement. The closer you get to retirement, it's going to be more of your expenses. It's the highest leverage decision you can make to kind of making the numbers work, making the equation work. If it's not working the first time around.
- [15:54]
B
100% agree. And I, you know, cutting expenses is kind of a double edged sword in a positive way. You know, you bring down your expenses, you bring down how much you need in investments. It helps across all fronts.
- [16:06]
A
Yeah. Aaron, anything else you want to add before we wrap up today's episode?
- [16:10]
B
I'm just going to say, Just know you don't need a million dollars. Figure out what your number is.
- [16:15]
A
There we go. All right, Aaron, well, thank you. And we will see you all next week.
- [16:20]
B
Bye.