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To avoid running out of money in retirement, you have to be realistic about how much you save and spend. And if you aren’t realistic with your money, the entire plan could fall apart.

Retirement is about knowing how much you need, not how much you make right now. And most people spend their entire lives building a plan around the wrong number. 

In this episode, I discuss how to build your retirement plan around income (instead of bad habits).

Show Highlights Include:

  • Retirement Planning lessons from the story of Atlantis (and how to avoid “the fall” of your own portfolio). (1:30)
  • The Mountain Climber’s guide to building a successful plan and reaching your retirement goals. (5:44)
  • How to ensure your income for life through one mathematical equation. (10:02)
  • Using the ‘Trinity Study’s ‘golden number’ to protect your portfolio from inflation and unstable environments (while improving your plan as you age). (15:55)
  • The worst financial mistakes most Americans make in your retirement years (and how to prevent building bad habits right now). (20:57)

To schedule your complimentary retirement track review, head to https://onecapitalmanagement.com. You can also call us at 805-410-5454 or text the word ‘TRACK’ and we’ll reach out to you.

Read Full Transcript

Welcome to Make your Money Matter, the show that aims to change the way we think about financial advice. So, you can make better decisions.

Brad Barrett is a managing director and partner at One Capital Management, a wealth management firm serving nearly 1500 clients nationwide. With over $2.5 billion in assets, they’re a group of advisors dedicated to ensuring their clients achieve their investment and retirement goals. And now here's your host Brad Barrett. [00:26.1]

Brad: Welcome to Make your Money Matter. The show for truth seekers who are fed up with outdated financial advice. My name is Brad Barrett, I'm a Managing Director and Partner here at One Capital Management and it's my goal on this show to reaffirm what you know, to be true and to challenge the advice you may have been told is true. Here at One Capital, our mission is simple to help our clients and you listeners live well and not just survive, but thrive. Friends, we are in a world where we are consuming information at warp speeds, and it's easier than ever before to access information, yet more difficult to find truth. And that's all we're after because after all your money matters and knowing how to plan your financial future is vital to your overall financial success. Before we get started on today's episode to find out more about me or our advisors here at our firm, you can go to our website at onecapitalmanagement.com. You can also give us a call at (805) 409-8150. [01:28.9]

There's a song that I was thinking about in writing today's topic around how much income I can receive, or should I receive in retirement from my investments? It's a song called Atlantis. It's written by a guy named Donovan Leitch, and most of you who are listening right now, if you had heard the song, look it up, it's great. But he's more commonly known as just Donovan. He's the famous rock and roll star of the sixties and seventies. The guy was a Scottish musician, I did a little history on the guy. He was a Scottish musician and songwriter. He composed in a kind of a folk-rock style and most of you who heard him probably know what I'm talking about. And in some way, he was like Europe's version of Bob Dylan. He was a peer of the Beatles and The Stones, and they all really influenced each other those in that generation. And throughout the sixties and into the early seventies, Donovan and created some of the most commercially successful music of the period and Atlantis, the song that I'm referencing here, which was released in 68, became this huge international success. And some of you may remember in 2001, Disney used it in its animated film, Atlantis, the Los empire. Donovan's music quite honestly has really stood the test of time, in my opinion. [02:37.6]

And you know, music is often inspired by works of literature and myths that have stood the test of time. So, if I asked you what do Plato, the Greek philosopher who lived like 400 years, BC and Donovan who was born in 1946 have in common. What do those two have in common? Would you have to give me an answer? Now, here's why I'm asking this. Somewhere around 350 years, BC Plato created the legend of Atlantis, the mythical lost island and abstract place of near perfection, right, this is utopian society. And the idea of Atlanta's has captured I think everyone's imagination for more than 2000 years. And in 68, it captured the imagination of Donovan who again, penned his famous song, a rock tribute to play with Atlantis. The story of Atlantis, which is why I'm bringing it up today is complicated. But at its core, there's a simplicity. Atlantis was a sophisticated, very modern society, possessing more knowledge than any others. Sound familiar? [03:40.1]

It was the most technologically advanced solution of his time as well, but there was one fatal flaw in Atlantis. It lacked morality. It held few men of your and character. It ultimately this provided to me the downfall of the great Atlantis, the empire, which was set out to take over the world domination and this enraged, the gods such as Poseidon, who ruled over Atlantis again in fictional creatures. And in this disfavor, he flooded the empire, relegating it to a grave on the ocean's floor, never to be seen again. In the words of Donovan, way down below the ocean, where I want to be, she may be. Now, you and I both know Atlantis will never be discovered. Why? It's fictional. It will only be found in the imaginations of men like Donovan. Now, because the island never existed being this fictitious place created by Plato, it was serving as a metaphor, right? Resembling actual real places in situations that we've experienced as human beings. Through the story of Atlantis, Plato was trying to teach us lessons about our own lives. [04:43.3]

And here's where I'm going with this. You see the fact that Plato created Atlantis as a morally bankrupt society is less important than the fact that it was a fatally flawed society. You see, as a good as Atlantis was in many ways, it was simultaneously fatally flawed. Atlantis was the most advanced civilization of its day, technologically way ahead of all the others and militarily all the powers more than others. And it was an empire basically in this fictitious story, hell bent on growth and expansion, ultimately world domination. But that myopic view proved to be its downfall. You see Atlantis had no vision of self-preservation or sustainability. Its only concern was growth. And from the collision of those two opposing objectives, growth versus sustainability, Plato wanted to teach us lessons and other areas of our lives. And in today's world, one of those areas can certainly be preparing for retirement back to our original topic for today's episode. [05:43.4]

How much can I receive in retirement from my investments? And it has to do a lot with the differences between growing your assets and sustaining your assets. In other words, accumulating those assets or being in the accumulation phase of your life, the working and saving years versus the distribution phase of your life, ultimately your retirement years. And if you're a regular listener here on the Make your Money Matter podcast, you've probably heard me say and talk about the journey to and through retirement. And I like sharing stories that are analogous to retirement planning and investment planning, because it helps us understand that investment planning and retirement planning, aren't just singular topics. They're dynamic. They need to be put together with an entire plan that is moving in one direction at the same time, not these junk drawer type investments we do, right? We all have those where we did an insurance policy years ago, we did a cashflow one time. We had the investment over here with this guy and it's all kind of all over the place. I spoke about this a couple of weeks ago, right? We want to have it in a coordinated plan, moving in the same direction. [06:49.1]

And the first phase of your working life is the accumulation phase. This is where you're building your retirement, right? It spans, let's say 40 years, let's say roughly between 25 and 65. And these are the decades where you're diligently saving money, either through company sponsored retirement plans or personally studying aside savings. You're taking on investment risk, right? You're understanding the market. Hopefully you're working with an advisor and if you're not, this is where someone like One Capital Management comes in. You can give us a call at (805) 409-8150 or go to our website and set a time with any one of our advisors, our website is onecapitalmanagement.com, because you want to be able to set that time with someone, to be with you, to help you build your retirement. Now, in all of your efforts to grow your nest egg, to expand your retirement savings, your goal in this phase is growing your assets, right? Makes sense. Totally fine. Now we get to the bigger point that I mentioned. And for those of you who listen here each week, retirements about income. Understanding what your assets that you save for your entire life can do for you. [07:52.3]

The old saying of work smarter, not harder, it's essentially in our world, let your money work for you instead of you, working for your money, you see the accumulation phase and the distribution phase are two very different phases and the investment activities and the overall retirement plan that goes with it, that worked for one of those phases may not, and probably won't work for the other. Once you exit the accumulation phase and enter that distribution phase, the rules change a little bit. I mentioned on an earlier episode of Make your Money Matter, the story of mountain climbing and why that's so analogous to retirement planning because hiking up that mountain, don't get me wrong, a lot of work, hard work, but believe it or not is actually the more easier route than going down the mountain. In fact, in mountain climbing, the descent of the mountain is usually the more dangerous part. Since 1921, there have been 212 deaths on Mount Everest of those 192, met their demise on the descent of the mountain. [08:52.6]

So, in your retirement journey, understanding that getting down that mountain effectively and efficiently is paramount to making sure that all that work you did for 30 or 40 years to save up those monies, that it works for you in retirement. And Americans, we're living longer. That's great. We've had a lot of technical advances in the medical field, but with that comes more concerned that we're seeing here at our firm with clients when it comes to, Hey Brad, do we have enough money to retire? Are we going to be okay? You know, I'm 65 or I'm 70 years old and I really don't have any issues just going on. And I kind of see myself living into my nineties way past my pay parents. Am I going to have enough to get all the way through retirement? And that's where this episode of Make your Money Matter was born. It was born on the question of how much income can I receive and what that goes into what we do here at our firm is understanding what your spending rate as a percent of liquid assets means. And backstopping that against sustainability rates, meaning what is the sustainable withdrawal rate or distribution rate in retirement. And that's what I want to go through today. [10:01.0]

So first and foremost, in retirement, your measure of success as an investor, really changes from beating the market to ensuring income for life. Wouldn't you agree? That accumulation phase, the distribution phase. Now indeed, you know, when retirees think about risk, many say they, the outliving of their money is their number one fear. And I will say, as an advisor, in many of our advisors that I've spoken with here at the firm, we'll see that with our clients entering into retirement, the fear and anxiety has changed from making sure they're growing the assets to will I have enough? So, understanding your withdrawal rate is important. And if your is not speaking to you about that, make sure to bring it up with them or give someone a call that will. [10:40.7]

What is a withdrawal rate? A withdrawal rate is a number that provides context for the amount you take out of your portfolio, let's say in a given year, and it's expressed as a percentage of your overall assets. A simple way to determine that number is a simple math calculation. So, follow with me here. It's basically your outflows, your cash outflow per month, minus your inflows. So, understand what you have coming in, divided by your assets. So essentially using a round number as a hypothetical for a second, let's say in retirement, you have a million dollars between IRAs trust accounts, Roth, IRAs, whatever. It's a million dollars, and I'm not going to include real estate for the time being just liquid assets. Something we'll talk about in a little bit. So, at a million dollars, if you have $10,000 a month going out for your lifestyle and you have $8,000 a month coming in, whether that's from pensions or social security or rental income or other sources of income, right, your net need per month in retirement is $2,000, $2,000 times 12 to get an annual number is $24,000. $24,000 divided by a million is 2.4%. [11:51.2]

Okay. You're probably thinking Brad, that was a lot of math. What does that mean? What is 2.4% mean? Well, that's essentially your withdrawal rate. Now our job is to make sure that you understand what that means for you and what that means as a whole, with regards to probabilities money situations, that's our role, right. And the overall sustainability for your retirement plan. So, let's talk about that for a second. The withdrawal rate that I just mentioned is it's affected by not just your income, by the way, it'll include all those income sources I mentioned, right. Social security, pensions, other things like that. So, understanding how your withdrawal rate, what it is first and foremost, and then the sustainability of that is what's important. So, when planning for retirement, your calculation of it is vital. Simply put, and I'm going to be very clear about this. 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. A sustainable withdrawal rate, it typically points to the initial rate you start with at retirement. [12:52.8]

Now many studies, and you can Google this and we'll talk about this a little bit today. Many studies have been done over time, going back to the original study done in 1994 by a guy named William Bengen. He found that a 4% initial withdrawal rate was a 100% successful over 30 year rolling periods dating back to 1926. So essentially if you think about that for a second, 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 your individual sustainable withdrawal rate will differ from someone else's and it'll differ in really three ways. [13:32.7]

Number one, the retirement planning horizon, you know, your years in retirement, which if we can have the conversation with the wholly above, you know, I always say to our clients, we can dial your retirement plan in to have that last 20 bucks for an in and out double double, but we don't have that conversation nor do we want that. So, we have to understand that we have to leave some room to adjust for a lot of things, right. Things like inflation in the investing world, other things like care long-term care and those kinds of things in our later years. So, it can be adjusted by the time horizon as well in retirement. Now the other one that would be affected by as portfolio mix, how you're allocated. Again, that's where having an advisor to come in and sit with you to understand where your risks lie with regards to also the sustainability of those distributions in retirement, because it's different than your accumulation phase, remember? And the accumulation phase we're more growth oriented. In the retirement phase, we still want to be growth oriented, but we're looking at more of a preservation and an income-oriented portfolio. [14:31.5]

So, the portfolio mix stocks and bonds in particular has a lot to do with how your withdrawal rate may differ from someone else's. And the third one would be the probability of success you are comfortable with. For example, 85% probability, 95% probability. We have to go through that, understand what probability you're okay with as it pertains to your risk and your portfolio. So, whether either planning your retirement or you're currently retired now, listening to this, you should consider those three variables to help determine your withdrawal rate. And it should be noted as you're probably thinking and listening to this right now, while it's important to start with a sustainable rate and your advisor, and you should be in conversation about that, we also know your situation will change and the markets will maybe not perform as expected. So having that active manager, having that diversified portfolio, the rebalancing of the portfolio to manage risk inside the markets, the volatility that happens is really important and having a coordinated plan that fits into that. So even though the initial withdrawal rates studies attempted to take this into consideration monitoring your withdrawal rate, as you move through retirement is still important. That's something we here at the firm do for our clients, and we can help you understand when those adjustments are needed. Really, it's an order to maintain the level of success you're comfortable with. [15:53.8]

And I wanted to mention another study for a second on today's topic around sustainability and how much income you can be receiving in retirement from your investments. And it has a lot to do with those three factors, I just mentioned. But there's another study called the Trinity study, which can insist in understanding the sustainable withdrawal rate and can be used as really a guideline and I mean that as a guideline. In the Trinity study illustrates historical successes using six different time horizons, five asset mixes and 10 withdrawal rates. So let me go through that for a second. The six different time horizons they used was basically years of 15 to 40 years in retirement. So again, understanding, you know, where you think you'll be retiring and how many years you have. And again, that's a, an assumption, but it starts there. The next one is the five asset mixes and it shows it from basically a 100% bonds to a 100% stocks. And then the third one is they use 10 different withdrawal rates, everything from 3% to 12% And what the Trinity study confirms, it can really confirm the work of the guy, William Bengen, I just mentioned showing that a 4% withdrawal rate over a 30-year retirement horizon with a 50-50 mix, meaning 50% equities, 50% fixed income of stocks and bonds was a 100% successful. [17:10.0]

Now you might be thinking, well, Brad, if you're telling me, it's a 100% successful, why wouldn't I go with that? You understand these studies are also done on historical data. So, we have to use those to our advantage, but also manage the risk going forward and also partnering with you so you are enrolled in the process of your portfolio management. A lot of advisors out there, something that I really love about what we do here at One Capital Management, all of our advisors do, we involve you in the process. And a lot of our clients go, Hey, look, we trust you. We want you to do it, but we want you to know what we're doing and why we're doing the investing, what those specific things are in your portfolio, because the more, you know, the better. And why I wanted to bring up this subject today with regards to knowing your distribution rate has a lot to do with your rate of return. [18:00.4]

And as I've shared many times before a rate of return, everyone loves talking about that, oh, I'm making 10% over here. Oh, I'm doing 8% over here. But when you get into retirement, really the one goal you really should be going for is if you're talking about just the rate of return, it will always be only one half of the story. I want to repeat that. Your rate of return will always only be one half of the story. The other half is how much you're going to be taking from those investments. So, if you think about it, if you're going to earn 8% as a hypothetical, but you're going to be needing to take 10%, meaning your withdrawal rate is 10%. You're actually losing 2% of your investment value. Makes sense. So, understanding your withdrawal rate, I would argue is almost more paramount and probably primary to then understanding how your assets should be managed. [18:52.2]

For example, back to my hypothetical, a couple of minutes ago, if we're showing you need 2, 3% of distribution, then we can talk about a portfolio that not only maintains with inflation maintains with your distribution rate, we're not talking about something that has to go and earn double digits every year. Now you may want to, and we'll talk about that, nothing wrong with that. There's more risk involved obviously. But understanding what you need first or in other words, needs-based planning is paramount to the success of your overall plan and the more you know about that, the better. So, I really wanted to focus today this episode on the studies, I mentioned the Trinity study and the study done by William Bengen in the nineties of understanding historical data around distribution rates and how those impact your portfolio. And if you're listening right now and you're still in the accumulation phase and working years, it's really great to know, okay, what am I going for? Which by the way, it was talked about last week with regards to how much you should be contributing to your retirement plan, because it's never too early to understand, Hey, if I'm shooting for a target, let's say it's a million dollars in my hypothetical, but we go through your lifestyle and your retirement goals and objectives, which by the way, all need to come into the picture here. And your spending rate is a little bit higher. We may need to go past the million dollars. We may need to go and save maybe 1.1 million, 1.2 million. So wouldn't, you rather know that earlier to maybe put aside more now, or maybe change your investment allocations to encompass that. So, the more knowledge you have about this, the better, and for some listening that might be far off. Some of you are in retirement, maybe it's clients listening right now. And you've seen that on our Black book our wealth forecast that we design understanding what you have coming in, what you have going out. And obviously amortizing debts and different planning, things that are going to happen, whether it's kids, education paying off a mortgage or a business sale, we put all that in there and we get to that sustainability rate to know where your assets are going to be and how that will benefit you in retirement. [20:52.3]

And to put a bow on this subject today, a couple of years ago, the wall street journal, they carried an article titled the mental mistakes we make with retirement spending. And the article speaks to this very point, the need to make a shift as I mentioned before, from accumulation activities to distribution activities, essentially understanding your income needs, understanding your withdrawal rate, but it's difficult to do. Remember the old saying old habits die hard. And in quoting from this article and I quote, imagine spending a lifetime acquiring habits that offer the promise of a longer, happier and more fulfilling life. Then imagine that to have that fulfilling life, you suddenly must abandon all of those habits. It's not easy, right? But that's what happens when people go from working into retirement. So, we here at One Capital Management like discussing and really empower our clients to truly understand, Hey, as you're still in their working years, know what we're going for and let's do it together. Let's open the dialogue and partner with where your assets are now, go through the anxieties and the fears of investing, understanding how building a portfolio for you, make sense and build it custom and unique for your situation. And knowing that we all have this goal in mind at the end. And remember, we're still going to be adapting each year to the changes that happened because life happens. So, we'll always in our planning, adapt for the changes we're seeing. And that's why I bring up these items of understanding where your distribution rates lie and why that's so important to your overall success in the investing as well as in your retirement. [22:28.6]

Thank you for listening to make your money matter before acting upon anything discussed today, remember speak with a financial advisor near you. And if you're not sure where to turn and you'd like our help, you can go to our website at onecapitalmanagement.com or you can give us a call (805) 409-8150. Next week on the Make Your Money Matter podcast we'll be talking with my partner and the president of our firm, Pat Bowen on one capital management client experience. I'm looking forward to it. I hope you are too. And remember, we're the wealthiest society in the history of planet earth. Let's make our money matter. [23:04.6]

The information in this podcast is educational and general in nature and does not take into consideration the listener's 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. [23:27.9]

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