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No longer the 4% rule for retirement income planning.

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No longer the 4% rule

BLUF (Bottom Line Up Front):  This millennia old (it seems like) rule has been updated by the famous planner who created it.  Video below if you want to skip my pontifications 📽️👇

The #1 request of every retiree and near-retiree who comes through my door is a retirement income plan.  These Big 3 questions all connected:

  1. How much income will I have in retirement?
  2. When can I retire?
  3. How much do I need to retire?

In order to calculate that we need to know two things:

  1. How much will you have at retirement
  2. What is our planned distribution rate?

Now, there is a ton that goes into answering the distribution rate question.  How much risk can you take?  What is your liquidity needs?  What is the most tax efficient withdraw strategy?  What happens if the market tanks?  So on and so on….

But, the back of the napkin way to calculate your retirement income (if you insist your retirement should be calculated on the back of a napkin) is the famous olf 4% Rule.

Basically, take what you expect to have in retirement (assume no .com/housing/COVID/inflation bubble bursts) and multiply it by 4%, then add that to your social security and other guaranteed sources of income.

So…have a $1,000,000 in an IRA…you get $40,000 per year + social security…and there is your retirement income.

The guy who calculated that rule updated it.  To be clear, I am just the messenger here.  I think the reason for the update and the practices of my industry generally are out of date, along with a host of other problems. but this is good information for anyone using the old Wall St way of doing things.

Basically the inventor discovered small-cap stocks (small companies) and update the 4% rule.

In obtaining my ChFC at a conference the rule was basically 4% if you want to die with money in the bank, 5% if you want to die on the day you spend your last dollar.  Given modern investments and tools I personally use around 6.5% for my clients.

Anyhow, video below 📽️👇if you would like an updated way to update your income plan.

So, when constructing a financial plan in Sammamish, Bellevue, Maple Valley, or anywhere, I use a higher anticipated withdraw rate because modern investments for financial planning and retirement planning allow it.  As a fiduciary using these investments helps increase the confidence my retirees have in their retriement income plan, and the amount of money they can have in retirement.

https://www.youtube.com/watch?v=43WhvQX3CAk

6 Habits of Happy Retirees

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6 habits of happy retirees. 

BLUF (Bottom Line Up Front):

I used to think this job was all about investments, rates of return, market volatility etc…Its not.  In a decade of helping people get into (and more importantly stay) in retirement I have noticed some common things my happiest retirees do like:

  • Eliminate the unexpected
  • Focus on their health
  • Outsource

You can skip my pontifications if you like to the 📽️👇.

I have conversations every day with people at every stage of their financial lives.

Encouraging young savers to forego that cup of coffee and invest the $14 it costs to get time and compounding interest on their side.

Talking my near-retirees through market ups (ok, mostly the downs.)

Checking in with my retirees about that stage of life that they worked, saved, and invested to reach.

Over hundreds of conversations I have discovered that the things people talk about change.

Younger investors are focused on the money, an “escape hatch”, and planning for growth, tax efficiency, and individual investments.  But underneath those conversations I pick out that what they are really worried about is:

“Am I doing the right thing”

“Am I on track”

“I am so busy I don’t have time for this (or know what I am doing)”

When I talk to my clients who are kicked back on a beach or visiting their grand kids on vacation I have discovered that the conversation has shifted from the dollars and cents.  Given the right tools, I have very few clients who live the retired life they want knowing the money will be there.

In talking to retirees all the time (getting a glimpse into where I will hopefully be…one day…) I like to find out some common themes around what makes the retired people happy.  I have noticed 6 things happy retirees have in common 📽️👇.

The basic theme among the most successful retirees are things that

  • Free up time
  • Free up head space
  • Decrease worry
  • Increase confidence

Watch the video below to learn about these habits and try and incorporate them into your overall financial plan.

Truth: You want to pay more taxes in 2024

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High income earners, you want to pay more taxes in 2024.

BLUF (Bottom Line Up Front) No matter how much you make, it may feel like you pay alot in taxes.  But a quick glance at our history tells a different story 📽️👇:

I recently drew up a financial plan for two amazing people.  Both were in the US Navy, were physician’s assistants, and were just generally the type of people I help on a daily basis.  I spent 20 years in the Marines, so we communicated well.

They were sitting on idle cash (like a lot of people, they didn’t know where to start investing, didn’t want to lose if the market tanked etc…) and combined they make around $500,000 per year.  They were also worried about taxes.

And…they aren’t my clients.

As with many times in my life, my lack of a filter and belief that people deserve the truth led me to give it to them straight.

One of the main things that people come to me for is tax planning.  Now reducing overall taxation is something that gets me out of bed in the morning.  But I had to tell them a couple truths:

  • There is no legal way to pay net zero in taxes today (like a lot of folks, they heard real estate is a magic get-out-of-taxes-free card)
  • You  want to pay more in taxes today.  

It doesn’t feel like it when you look at your paycheck but compared to where this country has been (and definately where we are headed), income taxes are near historic lows.

All of my tax planning surrounds one central theme: create tax free wealth, as mcuh as you can, as fast as you can, using whatever tools you can.

Some of those tools are known, some are less widely known but used by wealthy and high earning individuals alot.

  • Roth contributions
  • Roth conversions
  • Mega Roth conversions
  • Sec. 7702 plans
  • Qualified Opportunity Zone investments
  • Municipal bond investments 🤮

This quick video is a primer on why you want to pay as much income tax now so you can pay lesss overall. 

 

The month you retire matters

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The month you retire matters.

BLUF (bottom line up front) If you have the flexibility, you could set your self up to have a lot more money in retirement.  Case Study Video 📽️ explainer at the bottom if you want to skip my written pontifications.

Being able to take advantage of the tax code, create passive income, and ultimately have the ultimate goal of retirement takes a lot of planning.

For me, in 10 years of helping people get into (and stay;) in retirement, I think most of my retirees would agree the ultimate goal is simple.  Peace of mind.

Not the biggest bank account.

Not the most vacations.

The ability to go to bed every night and wake up every morning knowing everything is going to be ok.

Out of 12 months, if you choose the right one, you could potentially

  • Pay net zero taxes for the year
  • Save significant taxes in the future
  • Create more tax free assets

A lot of the taxes you pay are based on your earned income.  So, if you have the flexibility, it might make sense to retire when you can report far less income for the year.

Most folks retire at a milestone.  January 1st is a big one, or a career anniversary.  These may seem like quick and easy decisions, but the implications are large.

Depending on when you retire you could

  • Tax loss harvest
  • Tax gain harvest
  • Do a mega Roth conversion

Having a low annual earned income gives you the flexibility to lower other types of taxes like capital gains tax.

Watch below to get some ideas on ideas on when you should retire.