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There’s a popular retirement ad that asks retirees what their retirement “number” is. This approach to retirement makes sense — and it’s generally better to have more savings than less. 

But that isn’t always the case. There’s something more important than your savings. And that’s how much income you make from your savings. 

In this episode, you’ll discover why setting a retirement income goal helps you enjoy your retirement while a savings goal makes you worry you’ll run out of money. 

Listen to the episode now so you can live your retirement to the fullest. 

Show Highlights Include:

  • Why following the popular “what’s your number?” TV ad can force you to get a job in retirement (5:41) 
  • Should you have a savings goal or an income goal in retirement? Here’s the answer so you enjoy your retirement (7:20) 
  • The cold, hard truth about why so many retirees can’t enjoy their retirement (and how to avoid this) (8:07) 
  • Why being afraid of running out of your retirement money steals your retirement memories (8:28) 
  • The counterintuitive way aiming for a million dollar nest egg makes you complacent and ruins your returns (9:25) 
  • The “Moving Target Method” for setting your retirement number that prevents you from running out of cash (11:12) 
  • Why you might have enough savings today to retire right now (even if you haven’t hit your “number” yet) (14:45) 

To schedule your free retirement tracking meeting, specifically for first responders, head to http://pensionattention.com/, call us at 805-409-8150, or text track to 805-409-8150.

Read Full Transcript

Welcome to Pension Attention, the best show for first responders who want to take control of their finances.

After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]

Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are. At whatever stage in your career, you are in, in order to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at One Capital Management are dedicated to ensuring you take control of your finances and build the life you deserve. And before we get started on this week's episode to find out more about me or my team here at one capital management, you can go to our website PensionAttention.com or give us a call. You can call us at (805) 410-5454 or you can text us. You can text the word TRACK, T R A C K to that same number (805) 410-5454 and we'll reach out to you. We provide a complimentary retirement track review meeting, it's just for you. In that meeting and after that meeting, we will provide you with what we call our black book. It's a custom and proprietary financial plan built just for you so that you know where your deferred compensation plan and your DROP and your pension, where that is heading for you and to make sure it works for you. Get it today. Text the word TRACK, T R A C K to that same number (805) 410-5454. [01:52.4]

And this week we're going to be talking about how much is enough. You know, it's a loaded question and I'm sure in reading the title of this week's podcast, you're probably like, man, what is Brad going to be talking about? That is a loaded question. And it got me thinking really ultimately, in the terms of what is your number and what I mean by that, especially when it comes to investment and retirement plans is how much is enough? What is the amount that you think you need or have been seemingly unknowingly, trained to think you need when it comes to retirement? And it got me thinking, you know, in the age of television and computers that we all live in nowadays, the average person, you and I are bombarded with advertising. We all can agree with that. Now, according to Nielsen's ratings, on average, an hour of TV contains more than 15 minutes of advertisements. So more than 25% of your viewing time is actually spent watching commercials. And this is probably not a shock to anyone listening. The United States is the largest advertising market in the world. [03:00.0]

Now, a couple of years ago, there was more than $200 billion spent on total advertising, about 40% of which was spent on TV and then closely followed up by digital advertising. Now, advertising is essentially messaging. It's a form of communication designed to advance anyone's position. It's quick, it's memorable, and really it should inspire you to believe something. Wouldn't you agree? Now, whether or not that's something is actually true is a separate matter. And in fact, in Washington, DC, the FTC, the Federal Trade Commission assumed the responsibility to protect consumers by ensuring that there is what they call truth in advertising. Now, according to the FTCs website, and I quote, “When consumers see or hear an advertisement, whether it's on the internet, radio or television or anywhere else, Federal law says that ad must be truthful, not misleading and when appropriate, backed by scientific evidence. The Federal Trade Commission enforces this truth in advertising laws and it applies the same standards, no matter where an ad appears in newspapers and magazines online in the mail or on billboards or buses.” Okay, that's pretty clear, nothing ambiguous, their advertising must be truthful. [04:21.6]

So how is it? You're probably thinking, how is it that certain advertisements seem contradictory? Let me give you an example. Beer ads! Okay, beer ads often convey the message that alcohol will enhance your social life. They'll often use images of young people drinking beer at some type of upbeat, fun gathering, a party atmosphere, and everyone's smiling and chatting. And of course, they're drinking the beer of choice in that advertisement. Let's contrast that ad to another beer ad. Do you remember the famous super bowl ad, I brought this up on a few episodes ago? The ads showing the two guys at the grocery store. They went into checkout with two items, beer and toilet paper, but they only had enough money to buy one. So, they chose the beer and when asked, if they'd like their beer put in a paper, a plastic bag, they both gave the resounding answer paper. And of course, they needed the receipt too. Now I bring that up because do you think beer has enhanced your social life? Maybe, or maybe not, but those two commercials as a very light-hearted example are just one example of contradictory advertising messages. I'm sure you can think of many others, but there's one in particular that got me thinking about this as it relates to the conversation or the question, I wanted to bring up today, how much is enough? [05:40.3]

There's a well-known investment company that has run a series of commercials. I'm sure you've seen them where it asks a retirees, a bunch of retirees a question. What's your number? A simple, concise question. What's your number? Now the ad is designed to convey the message that retirement can be reduced to a single savings goal. What's your number? And once you achieve that goal, like, you know, Viola, you can retire. So, I want to ask this question. What do you think is that will retirement planning or investment planning boils down to a simple savings goal, a number that once a cheek will allow you to stop working and retire? What's your number? So maybe, maybe not now in a contradictory manner to that ad is another commercial for the publisher's clearing house. Remember those? I know you've seen it. The announcement that says you can win $5,000 a week for your life snd then someone you choose can win $5,000 a week for their life. And I'm sure after hearing that ad, you've probably said to yourself, oh, if I had $5,000 a week coming in for the rest of my life, I'd stop working retired today. It's, you know, it's an effective ad so much so I bet based upon that publisher clearinghouse ad in the recent past, you probably have a coffee table full of magazines in your living room, but I bring it up for this reason. [07:02.5]

When you think about the two messages, they're very contradictory. The first claims that retirement is all about a pile of assets. And the second it says, retirement is all about income. Now on a larger scale, it's the same debate that we have here at the firm and why I'm bringing this topic up again and again, because you really think about it is which commercial do you think better describes the retirement strategy? Is it better to have a savings goal or an income goal for retirement? So, let's look at it this way. Why are some people afraid to enjoy their retirement? Why are some people so worried to spend any money during their retirement years? And by the way, as I've said many, many times before privy each week, retirement doesn't mean you need to be 55, 60, 65. Retirement really means financially free, whether that's through entrepreneurial work, having enough set aside, which is really the focus of today's episode, is how much do we need to have set aside to be able to equate to what we'll call financial freedom. [08:01.9]

Now we'll go into that in a second. But when you look at it this way, when I asked the question of why are some people afraid to enjoy retirement or leave their job in their thirties or forties, even though they have enough money set aside, they're afraid because they're afraid of running out of money. They're constantly afraid of depleting this, this nest egg, either through spending too much or maybe investment strategies that could result in losses. They look at spending as depleting their savings and they live in a fear of losing money. Is that someone I'm speaking to right now? And as a consequence, it creates an atmosphere of scarcity when it comes to living financially free, whether it's in retirement in your sixties or seventies, or maybe it's in your thirties or forties, and you've done the work to live financially free, but yet you're just, you're not there to do it because you're scared and that's okay. That's where planning comes in and living in an atmosphere of scarcity honestly will deny you of life's true riches. [09:06.3]

Now, as you can probably imagine the internet abounds with retirement calculators, that'll help you estimate the size of your nest egg you'll need so that you don't outlive your savings. It makes sense business gurus, by the way, tell us you can't improve what you don't measure. So, we set other measurable goals in our lives. So, what's the problem with aiming for say a million dollars in savings? It sets us up and what I want to bring up mostly is a savings goal. Like that sets us up for complacency. And it was actually written by a lady named Vicky Bogan, she's the associate professor of economics at Cornell University in Ethica. And she said, and I quote, “Anchoring on a specific number and saying, once you get to that number, you're done is not the best idea.” she said. Now she continues on saying, “The calculation of that number is predicated on a lot of assumptions.” Now let me add to this experts generally recommend having enough savings to generate about 80% of your pre-retirement income annually. [10:13.1]

Now that's factoring in for those that are actually retired, factoring in what you'll be getting social security and any pension, but by the way, it can be also saving enough to generate 80% of your pre financially free years as well. If you're not in your sixties or seventies or true retirement. So, you'll need a larger amount if inflation increases something we've been talking about lately, you know, or the stock market falters or healthcare costs rise, these are all things that are on the minds of those leaving an income source, whether through retirement or going to do other ideas they might have in the future, whether it's entrepreneurial-ism or whatever that might be. Now, it's interesting to note that only 36% of current retirees say they saved the right amount. Now compare that with 45% who believe they've saved too little and 18% who saved more than necessary. This was according to a 2020 survey by the Employee Benefit Research Institute. [11:11.6]

Now, although having a retirement savings number is important, it's also a moving target and fixating on one number runs the risk that you won't adjust your savings goal to new circumstances, such as again, as mentioned before additional financial responsibilities, maybe it's higher healthcare costs inflations or the economy in general. Life isn't stationary and your retirement plan or a financial plan put together for you, shouldn't be either. It needs to include maybe a target savings number, but it shouldn't just include it, you got to consider the bigger picture. [11:47.1]

Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the DROP program? Go to www.pensionattention.com to find out how we can help. [12:03.1]

So, when you hear an announcer on a TV commercial ad, what's your number you should ask, what are they really selling? You know, look saving more money rather than less money for retirement is a really good thing. In fact, it's a necessary thing. More savings is better than less savings, but most important of all is how much income those savings generate because retirement or living financially free is all about income, if you think about it. Income in retirement is a permission slip to enjoy life. Steady streams of income that will fund your living financially free or overall retirement lifestyle, allowing you to spend every penny of your monthly income with the comfort of knowing that there'll be more arriving next month and the month after that, month after that and the rest of your life. That's why when you hear the publisher's clearinghouse commercial, the one that focuses on income, your mind can drift into a dream state, a euphoric dream state. [13:02.6]

So, if retirement or living financially free, meaning not living for a paycheck is all about income. It just makes sense to use distribution strategies that maximize the income that's being generated for your retirement savings. It's important to understand that some strategies are better than others at maximizing your income. Let me give you an example of what I mean. If you ask the average retiree, I don't care what age, just someone that's no longer working for a company, but living off of their savings. If you ask them the question, would you rather have $1 million in your nest egg on the day you leave work or retire or 900,000? I think virtually everyone listening right now, if asked that question would answer $1 million, right? Now, in essence, they're looking at things from a what's your number perspective. And from that perspective, the bigger number always wins or at least that's what people think. [14:00.9]

But what if I were to ask you a different question, one that looks at things from an income perspective. So, what if I were to ask, would you rather have a million dollars generating a 3% retirement income? In other words, $30,000 a year or $900,000 generating a 4% retirement income or in other words, $36,000 per year. Well, now I think that most people would say, I'd rather have the higher income, right? Remember retirement or living financially free off of your savings is all about income and the distribution strategy you use to generate that income will make all the difference in the world. And in fact, when you think about things, a little deeper, a really pleasant dream begins to emerge. If you use, I'll call it optimal income distribution strategies, one that maximizes every penny from your savings, you just might find that you need less savings to retire than you originally thought. And maybe just, maybe you have enough savings today. Wouldn't that be nice? Or what have you can retire or leave that job a year or two earlier than you thought was possible. I bet that product, a few smiles to your faces. [15:12.1]

You know, nowadays more than ever as I've seen in nearly 20 years of being an advisor, more people are thinking entrepreneurial. So, it may not be that you're fully retiring, you just want to get to an income level you can live the life. You want to be able to create instead of consume or build something rather than working for someone else. Whatever your strategy is or whatever your thought process is, the item that I say pretty much every week on this show is to find that advisor to help plan this out. No one goes into business without a proforma or a business plan is successful one I should add. So why would you want to go through your retirement life or you’re living financially free life, if you're in your thirties or forties without a plan. Put that plan together. And you know what all of these things I've been mentioning today are possible. If you're employing cutting edge income, distribution strategies, it will work. And so, I ask you, are you, or is your financial person only talking to you about quote, unquote, your number? [16:14.5]

If that's the case, give us a call (805) 410-5454. And we'll help you build your plan to make sure that we focus both on whatever your ultimate income goals are, as well as the number you have to reach those goals, because ultimately it gets down to what we call a spending as a percent of your liquid assets, essentially a distribution rate. So, what is exactly a distribution rate or withdrawal rate? It's a number that provides context for the amount you take out of your portfolio or savings in a given year it's expressed as a percentage of your overall assets. So, a simple way to think about this or determine that numbers is your overall cash outflows less your inflows divided by your assets. The withdrawal rate is affected not just by the income you need, including taxes, but also by other income sources, because you may have other income sources after you retire that needs to be taken in consideration, so let me give you an example. [17:15.1]

In a hypothetical example, if you have a million dollars back to my hypothetical goal of a million dollars, you can withdraw essentially $40,000 a year. So, you're withdrawal rate for that would be 4%. Now, the first question you want to ask is what is a strong or good or sustainable or safe distribution rate? So, a sustainable withdrawal rate, which is really the answer to the question of how much is enough is first and foremost by two forms. One mathematical and resources, which we'll talk about in a second. But two is also your tolerance. What you're comfortable with. When planning your retirement income, calculating withdrawal rate is just the start. So, understand the impact of that withdrawal rate and how it changes over time. As I mentioned earlier is really essential to your overall financial security and essentially your financial success. So, you want to base your planning on a sustainable rate and monitor this rate throughout retirement to make sure it remains sustainable. Simply put you want to choose an amount you can withdraw annually from your portfolio and still be reasonably certain you will not run out of money during your lifetime. [18:24.0]

Now there's a lot of studies that have been done on this, but the main one goes back to 1994 by a guy named William Bengen. Now he found that a 4% initial withdrawal rate was actually a 100% percent successful over a 30 year rolling periods dating back to 1926. So, my example of a retiree could have withdrawn $40,000 from a million-dollar portfolio and increased that $40,000 every year by inflation and never run out of money over any 30-year period, but only very clear about this. Your individual sustainable withdrawal rate will differ from someone else's depending on really three things. One your retirement planning horizon, essentially the years in retirement. So, this is really important for those in their thirties and forties, looking to make a move or build that savings account up and really asking the question, do I have enough? We have to look at duration or time period. Secondarily, it'd be portfolio mix, how much stocks and bonds you have in the appropriate allocation between the two in your portfolio and really what you're comfortable with there. [19:29.0]

And then three, the probability of success you are comfortable with. And this third point has a lot to do with the Monte Carlo scenario of understanding all the different strategies that can happen within a lifetime of investment returns and figuring out on the bell curve, which one is most appropriate for the probability and figure out what is appropriate for you, and really ultimately what's comfortable for you. So, when you ask the question, when I lead the question off for this week's episode around how much is enough, as I mentioned before, it's a loaded question. It really does have multiple answers. A lot has to do with both the amount, the savings goal, the number you may have as a goal, but also how much that goal can generate. They work in tandem together, right. So, understanding your sustainable withdrawal rate, knowing what that is, feeling comfortable with that finding the right advisor to help build the investment portfolio around, that makes all the difference in the world. [20:30.1]

So, if you haven't had that advisor go through that with you, or if your current advisor isn't talking to you about that, you can reach out to us. We again offer a complimentary retirement track review meeting. It's free of charge, there's no obligation to become an ongoing client. We want to provide you with our black book. Get your black book today. It's a proprietary financial plan built just for you showing these exact items we're talking about today, what your income is. If we left that income source, whether it's through retirement or maybe early on to start something new, what can we fall back on? And is that viable? Is it sustainable? Get those answers for you today. It means all the difference in the world. You can call us at (805) 410-5454, or you can text us. You can text the word TRACK, T R A C K to that same number (805) 410-5454. And we'll reach out to you to set that time, to go through your complimentary discovery meeting that we call our retirement track review meeting to provide you with your own black book. You can also go to our website at PensionAttention.com and there you can set some time with myself or any one of our advisors, right on our website. So, you can call us, text us or go to our website. All three of which are there for you to make sure you solve the answer to how much is enough for you. [21:49.9]

I want to thank you for listening to Pension Attention and before acting on anything discussed today, remember to speak with a financial advisor near you about your specific situation, or again, if you'd like our help, you can visit us at PensionAttention.com or give us a call (805) 410-5454 nd until next week stay safe. [22:11.1]

The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.

To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [22:34.6]

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