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 Fire and Police are dedicated to ensuring you take control of your finances and build the life you deserve. To find out more about me or my team here at ONE Fire and Police, you can go to our website at PensionAttention.com or you can give us a call (805) 409-8150. I want to thank each of you who are listening here today on Pension Attention and for those of you who listen each week, and those of you who haven't, you can now go and subscribe and download our podcast Pension Attention on our website, which again is PensionAttention.com. You can go to the media tab and click download and subscribe, or you can go to any platform where you would download a podcast, whether that's the apple podcast app on your apple phone or Google podcast, SoundCloud, Spotify. And if you liked the podcast, tell a friend, if you don't like the podcast, tell an enemy because this week we'll be talking about something fun. Yeah. I said fun. I know it's a little nerdy finance is. I get it. You've heard me enough each week now to know that I enjoy talking about these kinds of topics. [01:48.9]
And in particular, I want to talk about something, we've had a reoccurring theme on here on Penton Attention, and then is generating retirement income or understanding that in retirement, those of you that are listening right now, by the way that are maybe 10 or 15 years on you're like, Brad, look, I got 10 or 15 years left before I even think about that. I promise you it's important to start thinking about it now. And those of you who are at the 20, 25 year mark, maybe looking to drop or in the drop program already, it's a really important time to understand that as you're accumulating your assets, whether through savings, deferred comp plan, or maybe just minding your cashflow about what's going out and what's coming in, when you get to retirement, the ultimate goal is to make sure that a, if you can try to live on your pension so that you're dropped deferred comp plan vacation and sick time become savings for you to use for what you want to be doing in your retirement life. And for those of you who have your pension and as well, we'll also need a distribution from your deferred comp plan, drop the assets that you've accumulated. We want to make sure that that distribution is something that's set up in a strategic way. Something that I call the secret sauce. [02:56.9]
Now, some of you may be familiar with a Nobel prize winning professor. He was a professor of finance, actually at Stanford university, a guy named William Sharp, we know him as Bill Sharp. And I'm bringing him up only because for decades, he's been doing really groundbreaking work on optimizing asset allocation and returns when it comes to investment portfolios. And you might be thinking, why am I shifting from an income discussion about how we have distribution of our assets in retirement to optimizing an asset allocation and returns on investment portfolio? I want to be very clear. They go hand in hand. Now Bill Sharp, he's authored really like several books on this subject. Now he's like in his mid-eighties and he's actually partnered with the American college of financial services, which is in Pennsylvania and they are actually doing research on optimal retirement income solutions. And some of his findings are somewhat turning the conventional wisdom of retirement planning field upside down, but not many. And the secret sauce I want to get to is understanding. And again, you've heard me say this a lot on this program, or you've heard me as a client or at a station talking about this and why it's so paramount, but the secret sauce to a sustainable retirement plan is understanding your spending as a percent of liquid assets, otherwise known as a withdrawal rate. [04:14.5]
Now as I was writing this week's Pension Attention podcast over the weekend, I was inspired by actually something that I saw my son Brooks do, he's five years old. And we were leaving a friend's house, I picked him up on Saturday and we were going from a friend's house and he was hungry. We were kind of moving around some things. So, I said, you know, let's go to McDonald's. Now, I don't know about you, but I love going to McDonald's when I was a kid, right. The happy meals who doesn’t, right? And Brooks recently, my son just started really getting into hamburgers. So, we go to McDonald's, we get a hamburger and I'm sitting there and I don't know about you, if you've been there with your kids is you get an adult and you're kind of looking at those burgers going, man, those used to be good, right? The big Mac in particular. And that's when I got the idea about the secret sauce. Now, many of you might be thinking well in and out secret sauce and that's for another debate, but let's talk about the big Mac for a second and actually, let's talk about McDonald's for a second, how it pertains to today's Pension Attention podcast. [05:09.4]
And I want to talk a little bit more about that because McDonald's, you know, it's like the fast-food chain of all fast-food chains. And everyone who has seen that movie, The Founder, which is actually a great movie. You can see it's got, it's interesting origins in real estate, which is interesting, and in perspective. And McDonald's has now currently more than like 36,000 stores. It's located in 101 countries and on average, they serve around 69 million customers today. And I don't know about you, but I'm still staggered by those numbers here and there. Now for nearly 50 years though, the big Mac in particular has been the signature hamburger of the McDonald's chain of fast-food restaurants. Now I know about you again, I've eaten quite a few big Macs. I used to love them as a kid. The key ingredient to the big Mac, as we know it is the “secret sauce.” And without it, the big Mac would be just another, you know, calorie overload hamburger. The secret sauce has made the big Mac let's call it unique. And it accounts for, by the way, I did the research on this for more than 550 million, which is more than a half a billion of big Macs being sold each year in the United States alone. It ranks among the most successful food products ever invented. [06:19.5]
But when you really think about it, the big Macs, other ingredients, they're pretty common and found in virtually all hamburgers. There's a bun, beef patty, lettuce, tomato, pickles, I mean ingredients that are anything but special, right? The big differentiator is the big Macs again, special sauce. And it's exclusive to that burger. The special sauce has indeed made all the difference in the world. The secret sauce makes the big Mac unique and in a class of its own, not just another hamburger. And in its own way, unique way, the story of the big Mac is completely analogous to why your secret sauce, if you will, in your retirement portfolio, needs to be the understanding of your sustainable spending as a percent of your overall liquid assets. Again, otherwise known as a withdrawal rate. [07:07.4]
Now you've all heard me say this before on this show, what a withdrawal rate is, it's a number that provides context for the amount you take out of your portfolio in a given year. it's expressed as a percentage of your overall assets. And they've also heard me say that a withdrawal rate is as important as a rate of return. I'm going to say that again. A withdrawal rate is as important as a rate of return. Why you might ask? Everyone loves to focus on the rate of return, who doesn't right? Everyone loves to be that guy at the table, sitting there saying, oh man, my guy, my deferred comp plan it earned 10% is a hypothetical number last year or last month. And that's all great and as an investment manager for doing this almost 20 years, when I overhear those kind of coffee shop watercooler conversations now, and again, I'm always reminded that they're only focusing on 50% of the entire story, the other 50%, which is the withdrawal rate matters just as much. [08:03.0]
So, if you're going to make in the hypothetical example, 10% rate of return, but as a percent of your overall assets that you've saved, you're spending 12% On a net basis, you're actually losing 2%. Aren't you? Spending 12, earning 10, you're a net negative 2%. So, what is a sustainable withdrawal rate? What is the secret sauce to your retirement plan? It's understanding your specific withdrawal rate. And by the way, if you have not done this already, and for those of you clients listening right now, you've obviously seen us do this in your cashflow. For those of you that are getting closer to retirement and understanding that percent I show of your assets being spent on top of your pension and the relativity that is to the portfolio we're designing for you. That's why it's so important. And for those of you listening, who haven't done that or not a current client, I urge you to understand what your specific withdrawal rate is. Because it is way more custom and way more unique than a rate of return. Anyone there's many people that who've had another rate of return just like yours, right or wrong, but not many people have the exact same withdrawal rate for the exact same reasons. [09:13.8]
Now let me give you an example of what I mean, let's say we have a retirees work 25 years on the job dropped now retiring. So, 30 years total with 25 years of cruel on pension. And let's just say, for example, that that pension is going to kick off $8,000 a month in pension dollars. Through that time, he has saved a quarter million dollars, $250,000 in deferred comp plan. Again, hypothetical there's another 50,000 that'll come from vacation time, sick time bank hours, that'll come on top. And let's just say, for example purposes, again, that the drop number for this individual is $500,000. So, let's add this up for a second. We have $500,000 plus the 250 250,000 in deferred comp plan plus the 50 that came off for vacation and sick time. And I'm just using those as examples, there might be other assets for you, but let's just use those that's $800,000, 500, 250, 50 $800,000. And again, that said, person is collecting $8,000 a month in pension as a hypothetical. Now we put their cashflow together and we're understanding, okay, when you go from active duty to retirement, what does that mean? By the way, this is exactly the, the rubber meets the road conversation when it comes to, can I retire Brad? Do I have enough money to retire? We love answering those questions and helping enroll you in the understanding of those questions you might have or those anxieties or those fears. We love doing that here at ONE Fire and Police, that’s what we do, that's where our passion is. And we've been doing it for 15 years for fire and police personnel. [10:50.4]
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. [11:06.3]
So, getting back to my example for a second, again, $800,000 of liquid dollars. Meaning when you retire, those are able to distribute from now that you're retired and $8,000 a month coming in. And all things considered this person with their lifestyle has $10,000 a month in what they need to live. So that $8,000 a month coming in now, and $10,000 a month going out. Now, mind you I'm excluding taxes for the purposes of those hypothetical, but we definitely include taxes in this environment for our clients here at ONE Fire and Police. And we will do that for you, if you want to do that for your plan. So, 8,000 coming in 10,000, going out, we have a net draw down of $2,000. Do we not? So, $2,000, a month times 12 to make it a year is $24,000. Right there gets us our need. That's our amount in terms of the dollar amount we need to pull from or distribute from your liquid assets. And again, your liquid assets I'm including here are some things that come off in retirement that you now have access to again, deferred comp plan, drop, vacation and sick time. And again, there might be other assets there, cash money, market trust, account, other IRAs from your wife or from you from previous employment. Okay. Those will all be added in there as well. [12:26.8]
So, if $8,000 a month coming in $10,000 a month, going out, we have a $2,000 need. Where are we going to pull that from? We're no longer working. We no longer have SOD. And I actually sometimes like in the drop, deferred comp plan, well that becomes accessible to you in retirement. That becomes your pool of sod, if you will. Your pool of overtime for the rest of your life. And I discussed that in stations, when I'm there. Saying that's now where we get to the concept of working smarter, not harder, having your money work for you now versus you working for it like you have in the past. And again, I actually love this analogy that I've used many, many times before is that money is a great employee, but a terrible boss. And we've all gone through the phases of most likely raising our families, buying our first house, paying that house off, or at least reducing the debt. So, we have to let money while we're working for it. But now in retirement, you have the chance to get control of it. And that's why I love speaking about this so much, because this is your shot. This is where you have money work for you, not you working for it and that's where the concept of a withdrawal worry becomes so powerful. That's the secret sauce that you need to know about your overall retirement plan. Okay, so let's use my example. So, $2,000 a month that we need to pull from your savings on top of your pension, that equals $24,000 a year. $24,000 a year again divided by 800,000, which is the amount I added up in my hypothetical example here of $500,000 drop, $250,000 deferred comp plan, $50,000 vacation and sick time, $800,000 accessible and we need $24,000 a year. What is the withdrawal rate? [14:06.9]
Well, for those of you, who've been keeping track pretty simple math, right? 24,000 divided by 800,000 is 3%. Okay, great, cool Brad, 3%. What does that mean? And that's again, your specific withdrawal rate as it relates to your specific assets. So, if you're in that example, for example of you, we would customize this for you, right? But if that's you, your withdrawal rate is 3%. You can do a lot with the understanding of that number. Now, to do that, we need to answer a question is what is a sustainable withdrawal rate, or in other words, what is a withdrawal rate that will get us the entirety of our retirement life? And so, when we're planning your retirement income, calculating the withdrawal rate is just the start. Understanding the impact of that withdrawal rate and how it changes over time really is the glue that binds the secret sauce to your financial security. Now you want to base your planning and that's what we do here at ONE Fire and police as well on a sustainable rate. And we want to monitor it throughout retirement to make sure it remains sustainable. [15:12.1]
Simply put, you want to choose an amount you can withdraw annually from your portfolio and still be reasonably certain you won't run out of money during your lifetime. It makes sense right. Now, there's a lot of studies that have been done on this topic. One in particular is the Trinity study and the Trinity study can assist us in determining a sustainable withdrawal rate and can be used as a, again, it's a guideline along the way. The Trinity study illustrates historical success rates using six different time horizons, which is basically 15 to 40 years. Five asset mixes everything from a 100% bonds to a 100% stocks and 10 different withdrawal rates, everything from a 3% withdrawal rate in my example, all the way up to 12% Now, understanding of withdrawal rate and how that fits into it actually started with a study done in 1994 by a guy named William Bengen. And he found that a 4% initial withdrawal rate was a hundred percent successful over a 30-year rolling period, dating back to 1926. So, a retiree could have withdrawn $40,000 from a million dollars and still increase that $40,000 each year by inflation and never run out of money over any 30-year period. [16:24.0]
Now, again, this is a hypothetical and these are back tested studies, but your individual sustainable withdrawal rate that secret sauce I'm talking about will differ, and we need to make sure we monitor that if you haven't looked at that, you want to make sure you have an advisor that does. And it'll differ from someone's else's depending on three things that I bring up. Three things will differentiate you when it comes to your withdrawal rate versus someone else's. Retirement planning horizon, basically your years in retirement, your portfolio mix, how you allocate or who you choose to partner with, like someone like us at one farm police, how we allocate your stocks and your bonds in your portfolio. So, portfolio mix is the second one. And thirdly, the probability of success, you are comfortable with, understanding if I want a lower withdraw rate, which will make me a higher probability of succeeding in terms of always having assets. I'm okay with receiving less income, because I want more of a probability rate and we'll discuss that on an individual basis for each one of you. And that's what we do here. We customize and uniquely build your retirement plan because by the way, the biggest thing that helps us for you other than educating and enrolling you in your own numbers, which I think is paramount and primary above all things, but for us to help our clients here at ONE Fire and Police, what really helps us is we can allocate and custom build a portfolio around your distribution rate. [17:44.4]
It also takes a lot of questions out the window. Things like what, you know, what is your risk tolerance? Well, you know, I'm really conservative. Okay, that's great, but are you? And what I mean by that as well, 3%, you know, you need to pull, so we know we can't be in cash. Now, I'm not saying that across the board as if it's just some ultimatum statement, but it's important to know, like, wouldn't, you want to know if you're pulling 3%, wouldn't you want to know that you want your portfolio, maybe to match that at minimum, to keep pace with inflation at minimum. So, it brings us to the table together to have an honest conversation about how we would build your retirement plan. It takes a lot of the questions away, the anxieties away, and really drives that core number to make sure that you know what you're taking and we know what you're earning, so we can marry the two together and we have a sustainable and healthy retirement life. That's the secret sauce, knowing your sustainable withdrawal rate, and then putting it to action utilizing it. That's the secret sauce that anyone with a portfolio with a deferred compound right now to start building it and understanding how that accumulation of that deferred comp plan will ultimately fit into your drop numbers. Again, your VC and SK numbers, but ultimately your pension and your cashflow, because the secret sauce, just like the big Mac's secret sauce, what makes that thing so good and different than just another burger? Understanding your withdrawal rate is the key to making it not just some cookie cutter off the shelf investment portfolio that you happen to have and you think you like it. Really drill down to know, is that going to serve me in retirement to distribute, you've been contributing your entire career, what is it going to look like when you start distributing to different games? We'll find a good partner to work with you, if you need us, give us a call (805) 409-8150, you can also go on our website at PensionAttention.com. You can set some time with myself, with Toby Rodriguez, my partner advisor, or any of our advisors here on staff here at ONE Fire and police to help get to the core of what your distribution rate is and know your own secret sauce when it comes to your retirement planning. [19:47.9]
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) 409-8150. I want to thank each of you for listening today to Pension Attention. And again, if you haven't already, please download and subscribe the Pension Attention podcast heard every week comes out on Tuesdays every week. You can go to our website, PensionAttention.com, click on the media tab. You can download and subscribe, or again, you can go to any platform where you would download a podcast, whether that's the apple podcast app on your apple phones, Google podcasts, Spotify SoundCloud. Give us a review as well, we love to hear feedback and how we're doing. And on next week's show Pension Attention, we're gonna be talking about inflation, why we need to know about inflation. I'm looking forward to it until then stay safe. [20:39.9]
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. [21:03.1]
