← Ready For Retirement
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Do you think hitting $1.44 million would finally mean you're free? What if reaching that number actually creates a brand new problem that nobody warned you about? The truth is, the same plan that got you to 1.44 million can hurt you once you're there. While you were working, all that mattered was how much your money grew on average over time. Some years were good, some were bad. Didn't really matter because you kept adding money either way. But the moment you retire and start taking money out instead of putting it in, everything changes. And here's the other thing. When 1.44 million might not be the exact number for you, there are three simple things that will determine your specific number. And most people never take the time to stop and figure them out. So in this video I'll show you, where exactly does that 1.44 million come from? The three levers that could change what that number is for you and the one thing you must change once you get there. Let's dive in. Now, none of this is about hitting an arbitrary net worth milestone. There's plenty of that out there. 500,000, $1 million, $5 million. As if some arbitra arbitrary number changes anything. It doesn't. So we're gonna set that aside and we're actually gonna work with a number that has real impact on your retirement and your life. Let's look at a real example to show where this comes from. Now I've talked to hundreds of people over my career as a financial advisor and all these people were preparing to retire. Now when I asked them, how much do you wanna spend in retirement? Some people say $4,000 per month, others say $40,000 per month. So there's no one size fits all answer. But a common number I hear is right around $10,000 per month. So that's what I'm gonn. Now if that's not exactly what you want to spend, don't worry. The framework is far more important than the specific number here. But I'm going to use that number as the example here to illustrate exactly how you can come up with your number. So assume you want to spend $10,000 per month in retirement. That's the number that would allow you to travel, to support yourself, to go out, to eat, whatever that looks like. That's what we're planning for. Here's the reality. In retirement, not all 10,000 of that needs to come from your portfolio. Typically you're going to have another income source and the biggest income source other people are going to have is Social Security. Now, Social Security, too, is going to vary depending upon your earnings history and when you collect. But the average American collects about $2,000 per month from Social Security. So for the sake of this example, let's assume a married couple. And whether you're single or married doesn't matter. It's the framework that matters most. But let's assume you're a married couple, and each of you is collecting $2,000 per month in Social Security. So here's what we have. 10,000 per month is the goal. You want to say that as soon as you have passive income that can generate 10,000 per month, you can step away from that job that you have and actually focus on what you want to do. While the first 4000 is coming from Social Security, what that leaves is a gap. And that gap of 6,000, that's what we need to focus on. That's what we need to determine. How much do we need in our portfolio to fill that gap in? So here's what we're going to do. $6,000 per month. We're going to multiply that by 12 to say, what do we need per year? That comes out to $72,000. So the question is, how much do we need in our larger portfolio to sustainably be able to take out 72,000 per year for the entirety of our retirement and not worry about running out of money? Now, there's many different ways that you can do this, but I'm going to assume your portfolio is invested the right way. And if so, you can take out around 5% per year or so from your portfolio. Again, this is for illustrative purposes only. This will ultimately depend upon how you're invested. But if you can take 5% out per year from your portfolio and then adjust that number for inflation over time, what we have to ask ourselves is this. $72,000 represents 5% of what portfolio value? When you divide 72,000 by 5%, the number you get is $1.44 million. So that's where that number comes from. And this is a major inflection point, because if this is your goal of 10,000 per month and you need 6,000, that to come from your portfolio. One, what you're essentially telling yourself is, as you're saving and growing and investing, once you hit that point, your portfolio could now create that income for you. You are no longer dependent upon the job or the income you have because you can simply make that shift. And if you do this thing correctly, I'm going to show you that in the next step, step into that retirement lifestyle that you've dreamed of. Now, that's the average. Your number is almost certainly different. So let me give you the three things you need to know to find that specific number for you. The first and the most important is your expenses. Let's use a simple example. If Your expenses aren't 10,000 per month, but they're 4,000 per month, and we go back to our previous example of you have 4,000 per month in Social Security income, problem solved. Your income from Social Security covers all of your expenses. The number that you need to be free is zero. You've already hit it. So you can see the major impact that your actual expenses will have on this calculation for you. Now you do need to plan for what if one spouse passes away before the other. But generally speaking, if you have 4,000 per month coming in from pension, from rental income from Social Security, that's what your expenses are. You're good. Your portfolio is technically excess at that point. Now, on the flip side, if your spending is actually $20,000 per month, then you need $16,000 per month from your portfolio to do that. $16,000 per month is $192,000 per year. If we divide $192,000 per year by 5%, what we end up with is a portfolio required of about $3.8 million, but right about $3.8 million. So you can see, depending on what your expenses are, you might need very little in your portfolio. You might need a multimillion dollar portfolio to support the retirement you want to live. That's why it's so important to understand this first variable, which is what are your actual expenses? Not your neighbors, not averages, but yours. The second thing that you need to know to do this for yourself is what are your non portfolio income sources? Now I use Social Security as an example, but that's not the only one that exists. This could be a pension. This could be rental income. This could be an annuity income that you already have. What income sources do you have that aren't requiring you to take excess from your liquid portfolio? Those are non portfolio income sources. Let's go back to our previous example. Let's assume you and a spouse do both have 2,000 per month coming in from Social Security for 4,000 total. And let's still assume that 10,000 is the amount that you want to spend. Let's also assume that you have a $6,000 per month pension. Now you stack that 6,000 per month on top of Social. Once again, you are there this is a really important concept to understand. Retirement is less about net worth and total size of your net worth as it is about your cash flow. If you have cash flow coming in from pensions or Social Security or anything else that can cover your bills. And that's ultimately what we're trying to determine here. Now, on the flip side, maybe you have minimal Social Security benefit, Maybe you have no pension, no rental income. The less you have in non portfolio income sources, the greater the portfolio value. You need to support that lifestyle because you don't have any help. So understanding your specific non portfolio income sources is crucial here. Now here's where it can get a little tricky. Maybe you retire and Social Security doesn't kick in for a few years, or pension doesn't kick in for a few years, or you have rental income today, but that will be going away. If you want to model this out and have something more complex, this is exactly what we do. I have a video pinned at the top here. It's called our Sequoia system and actually shows you how do we plan for things like this to maximize portfolio income, minimize potential taxes. You can check it out there if you're interested. The third thing that we need to look at here is taxes. So it's not enough just to know what are your actual expenses and what are your actual non portfolio income sources. We also need to understand the impact of taxes. Here's what I mean by that. If we go back to that first example. You need $6,000 per month from your portfolio. You need exactly 1.44 million in your portfolio, assuming that 5% draw is sustainable for the rest of your retirement. Now that's true if all that money's in a Roth IRA or all that money's tax free. But what if it's all in a 401k or a traditional IRA? And what if you live in a high income tax state like New York or California? Well, every dollar that you pull out of that, you're not keeping 100% of that. You might be keeping 70 to 80% of it, but you need to factor that in. Here's the other reality. Most of you don't just have one account type. You probably have an IRA or a 401k or a brokerage account or a Roth IRA or an HSA. The order in which you pull those accounts out is going to help you to understand how do you keep your tax bill as low as possible. So it's not enough just to do the simple math. The simple math's a good starting point. To tell us how much do we need. But if I know I need 6,000 per month for my portfolio, I need to be able to work backwards to say how much do I need to take out before taxes hit to end up with 6,000 per month. That's going to be a very different calculation depending on how much you're taking out, what your tax bracket is, and even what state you live in. So once you know your real number and you've crossed it, the job isn't done. Now the entire strategy has to shift so that you can protect this. So the principle here is relatively simple and it's what got you here won't get you there. The things that work to grow your wealth and get you to this position today aren't the exact same things that are going to allow you to enjoy your wealth and have it support the retirement you dream of. Now, some of your core holdings might remain the same. You're not changing everything. But your strategy certainly needs to shift if you want this money to be protected going forward. I mentioned this at the beginning, but in your accumulation years, all you care about is what's your average return. You don't care about the sequence of those returns and you don't care if this year you're up 50% and next year you're down 30%. As long as you keep averaging a good number over time, you're going to be just fine. In fact, you like those down years when you're still working, you're putting money into your 401k, you're buying shares at lower prices. All of that switches as soon as you retire. What was good for you in the accumulation years is now bad for you in the decumulation years. This is what's commonly referred to as sequence of return risk. You retire and it's 2007. The markets had a few good years, then everything goes sideways. S&P 500 drops over 50%. Everything's crashing. Not only is your portfolio dropping, you're also taking 5% out per year. That begins to dig a hole that's very, very difficult to climb out of. So I'm going to tell you the two big mistakes I see people make here and show you what's a better approach in your retirement. Mistake number one, people don't change their strategy. They love their portfolio. It got them here. It's had incredible double dig plus returns leading up to the retirement years. Those positions you start to develop, whether you believe it or not, an emotional attachment to I love my Nvidia stock. I love My Tesla stock. I love my Apple stock. This is not an endorsement. These are just things I've heard clients say. It has built my wealth, and it's very difficult for me to step away from them. Now, I'm glad you owned those positions, or I'm glad you owned whatever positions helped to get you here. But here's the reality. Everything that's gone up at some point will come down, even if it's just temporary. But it's those temporary declines that can have a permanent impact on your retirement if you're not careful. So don't just own what got you here because it performed well recently. Think about what's gonna be the right thing going forward. The second big mistake, people say, okay, I understand. I'm not gonna own what got me here. I'm gonna shift to a 60:40 portfolio. Somewhere along the line, the 60:40 portfolio became the thing the retirees are supposed to do. Don't do that. Now, if you take this right approach and end up in a 6040 portfolio, that's fine. But don't just start there because you're told you're supposed to. Or don't just start there because you took a generic risk tolerance questionnaire and figured that's the best thing to do. Here's how I actually want you to approach this. I want you to understand what specific cash flows do you need from your portfolio? So if we're going back to our example, if you have a few thousand per month coming in from Social Security or pension, how much do you need from your portfolio each year? Now take that number and project it out over the next five years. If you have that total number, add up the next five years of withdrawals. I want you to have enough money in your portfolio as a starting place in something secure and safe and stable that's not going to be impacted by the stock market. Why five years? Well, the average downturn in the US Market is about two and a half years, meaning that when, not if you experience the next bear market, when the market's at its peak value, it drops 20% or more, it reaches its trough and then recovers again. That total time on average is right about two and a half years now. In really bad instances, it's stretched closer to five years. So we need to make sure there's enough money in your portfolio that's stable that you can live on. So when that downturn happens, it doesn't feel good. Your portfolio drops. But do you have some reserves in your portfolio? You can live on those. Think of those as like the moat around your portfolio, the moat around your castle that says we know we're going to be attacked, we're going to be attacked by a bear market, we're going to be attacked by a 30 or 40% downturn. The moat is the thing that's going to withstand that attack. And if you have enough in conservative investments, ironically, it can actually help you to be better positioned to invest in a growth oriented way for the future. Because once that protection's there, it frees you up for the rest of your portfolio in a prudent way, of course, to be positioned for long term growth so you can keep up with inflation and keep growing your portfolio over time. So take a very intentional approach to that. As I mentioned before, this is exactly what we help clients to do. At root, we call this our Sequoia system. If you want to learn more about that, click a link to the video below in the description or the pinned comment and you can learn more about that. But once you're here, once you've reached your inflection point, it is critical that you shift your strategy. Because once you've done that, you've protected what you've built and you can actually stop worrying about do I have enough? What happens if I get let go? And instead you can fully focus on what I want to do now with my time and my money, knowing that I have the financial independence to support it. And as we wrap up here, the specific number is not the point. The framework is what I want you to know. Understand your number, which is going to be based upon your real expenses, your real non portfolio income sources, and your actual tax situation. Those three details will help you calculate your number. And once you reach it, it's not the finish line, but it's time for a strategy shift. But knowing your number is only half the equation. The other half is making sure your portfolio is built to protect it once you actually get there. That's exactly the kind of planning we do with our Sequoia system. If this video is useful, the next one you need to watch is right here. It's called if you only watch one retirement video, make it this.