Welcome to How to Retire On Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is all about the nitty gritty. Now that said, remember, this is just a show. It's for educational purposes.

This is not financial advice. You want financial advice? Find a financial adviser like us here at Kedric Wealth. Now that said, let's remember that you can always text your questions to (913) 363-1234, and we will feature them on the show. That's (913) 363-1234.

David, what do we got today?

Hey, Mike. How much should I really have saved before I can retire comfortably? 1,000,000,000.

1,000,000,000. It's such an interesting question, because we need goals to achieve them.

Mhmm.

But there's so much nuance in just lifestyle, where you live, and so on. So let's distill it down to kind of the key factors to help figure this question out. First off, it's not just how much money do you have. This is a misnomer. And let me give you an example.

Okay.

A long long time ago, in a life of mine. Oh. I was like 15 years old, and somehow I ended up in an adult educational class on finance. It was this nice educational week long program thing, all these cool classes and stuff. There was classes for the youth.

There were classes for adults. There was classes for gospel doctor, and there was all sorts of things. There was even a dance class. So it was celebrating basically education. Really cool experience.

And I saw, oh, there's a personal finance class. I should go to that because I should probably learn about finance. Mhmm. As you know, a 15 year old kid would normally say

Sure. Oh, yeah. That's everybody's saying that.

I had no interest in finance at this time of my life. Zero. So I was just saying, how much money do I need so that I don't need to work? Yeah. And I go to this class, and it's I'm the only kid there.

It's a bunch of 40, 50, 60 year olds and me in this big auditorium. And this financial adviser's up there talking, and it wasn't a sales pitch. He was actually there as an educator.

Okay.

Okay?

He wasn't trying to sell anything.

Had nothing to sell. Okay. No brochures, no business cards, none of that. He was actually there to give educational information, so we had context. Hence, the emphasis of education for the week.

So we get there, and we're going through, okay, you know, the markets, you know, what is in stock and all the basic stuff. And then we get to when you hit retirement, there's this thing called the 4% rule. And the idea was if stocks average around 8% or so year over year, which is true. I know the past couple of years, they've done better, but if you look back down to 2,000, so you've got a flat market and an up market, both the cycles, it's kind of around 8% growth. That's not bad.

Mhmm.

And then you've got the bond market. The bond market is averaging around 4% or so if you have a nice blend of bond funds. And so if you average that together, you should get around a 6% growth portfolio.

Okay.

And so if you get a six percent average growth portfolio in theory, you could take out 4% of the gains and spend it, and the extra two, two and a half percent is what hedges against inflation. Because you always have to kind of increase your principal, your balance, so that you're able to offset inflation.

Because Makes sense. Yeah.

It gets more expensive every year. And so as the next year, your portfolio, the balance slightly increases to offset inflation. You take out your 4%, though it's the same percentage, you're still kind of living the same lifestyle. This made sense to me. And I went, great.

And so he said, alright, everyone. Pull out your phones. It wasn't a touch screen, but, you know, we can kind of do some things with it.

Sure.

The phones were kind of smart at this point in life. So we pull out our calculators, and we're doing some simple math. You could say, how much do you want? Divide that by 4%. But he gave us a number, and I figured out, okay.

If I just had x dollars, I could retire today. Whether it's 30 years old, 40 years old, doesn't matter.

That

was my mindset. And the problem was in theory, it worked. In reality, it doesn't.

Why not?

The sequence of the return's going to matter in that if you hit a flat market cycle and then up market cycle, and you're taking 4% out, you have a very different trajectory than if you have a up market or upmarket cycle, growth cycle at the beginning, and then a flat cycle in the end. If you take income out of an account that's lost money, you're not getting the same average portfolio. What you're getting is an adjusted average portfolio because the cash values are increasing at different rates. So if you think about it, like, let's say the markets go down 50%. Let's do 30%.

Let's be a little bit nicer.

Okay.

So let's say the markets go down 30%. You've got a million dollars. Okay. Now you have 700,000, and then they go up by 50%. Okay.

That's a 10% average, but you're not ending at $1,200,000, which the 10% portfolio average would suggest. You're at 1,050,000

Okay.

Or so.

Alright.

It's a very different situation. Sure. You're averaging, what, two and a half percent growth? So average portfolio performance is different than the average growth of your assets. And sometimes we blend those together.

Now a reason why I think this really matters is because of longevity risk. If you plan to retire at 40 or 50 years old, you have more longevity risk and a greater exposure to the sequence of returns risk. I actually just finished up for a 38 year old couple. Coolest people you ever I mean, just brilliant, diligent, disciplined, intelligent. Yeah.

And what was interesting is I said, look, even though in theory you could retire at this rate with this withdrawal rate and this plan and so on, If you average 1% less, you're running out of money in your eighties. Oh. If you average 1% over, you end up with, like, $2,030,000,000 dollars extra Oh my gosh. Because of how much time they could have had in retirement. And if you experience a flat market in the beginning, you'll probably run out of money in your sixties.

So just these small little margins, your course can go wildly, sounds like.

And and we get upset over things like a $600 management fee. Yeah. I'm being a little facetious because that's roughly how much we charge $600 for retirement right now. Yeah. But we don't labor over half a percent difference in performance or what those trajectories are, or we're overexposing ourself to risk to get one or 2% more, leaving ourself exposed to the downside risk.

Now I'm not saying you go out and buy an annuity, turn on lifetime income because that's inflation risk, which is huge for longevity risk and tax risk. Right? So it's not how much money do I need to save for retirement. You need to also factor in longevity and the risk or the variability of which way this could go. Because when you retire, you don't want to go back to work.

That's the idea at least.

Yeah. I wouldn't want to.

So you've got longevity risk. You've got sequence of returns risk, and that is helped by you having some assets in protected accounts, and there's the bear market protocol. There's other things to consider there. But then you also have health care costs. So long term care insurance is a funny thing, and that if you need it, you probably can't afford it.

And if you can't afford it, you probably don't need it. Whenever you buy insurance, whether it's car insurance, whether it's term life insurance, you're buying insurance in case the improbable happens. You don't buy car insurance and then try to get in a car accident, at least I hope you don't. Yeah. You don't buy term life insurance and then plan to die.

That's very dark. Yeah. So you don't buy long term care thinking, well, I'm going to use this, because if that's your thought, you probably won't get it because the insurance companies will find out.

Mhmm.

So you're buying a policy for the comfort or peace of mind that if something that's not probable happens, the insurance company is gonna take the hit, not you. And they're really good about quantifying these sorts of things.

And remind us, long term care is if you once you get older and you end up needing extra care.

Yeah. If you can't do some of the daily activities, like dress yourself, use the bathroom by yourself, feed yourself, things like that. Mhmm. Then if you can't do two of the different daily activities, you would qualify for long term care. Gotta get a doctor's note to to prove that.

You can't just say, I feel like I can't feed myself anymore, therefore I qualify. You have to get a doctor's note.

Okay. And then they pay for you to what? Be in a someone to come to your home, or you you're in like a rehab place, or

You got hospice. You've got long term care facilities. You've got skilled nurses. You've got many different options that are there.

Okay.

There's traditional long term care, which will pay a little bit more, but they don't really make those anymore, because they were priced wrong. You've got cash value policies, so you can buy it, you know, put in 50 k. If you get sick or need long term care in the first ten years, then you're gonna get a nice payout. You wanna do an indemnity policy or something that allows you to spend how you want and not get reimbursements. Just a quick side to to look into that.

But you're not gonna get approved if you're sick. Right. So just understand that if you're not gonna get approved, or if you are approved, you have to make the decision, is it worth transferring the risk for the the insurance company to take the blow if the worst should happen in the next ten to fifteen years?

Right.

Or would you rather have it be in the market? Because if it's in the market, maybe, and you can't promise performance, but if it's in the market, and the markets did go up, you might have more cash to cover your long term care expenses. So it's a conundrum. Yes. But the point being is your portfolio isn't just for income.

You need to plan for other expenses. Maybe you wanna cover funeral expenses. Maybe you don't care. You can have cheaper end of life expenses. You can have more expensive end of life expenses.

That's gonna be up to you and what you want. You've got health care. I think it's like 315,000 or so is the average someone will spend in health care costs. So if you have less money, let's say you only need 4% of 250,000 to retire because you've got pension, you've got Social Security, these other things. Maybe that 250,000 covers your income, and you could argue and say, well, you know, if my health goes down, then I might as well drain my principal because I'm on my way out anyway.

Maybe. But what if you have a recovery? You know, what if you rebound, and then you live an extra five, ten years? So the less money you have, the more buffer you need to account for, should there just be some unintended or unexpected expense.

Mhmm.

The more money you have, it changes a little bit. But do you see how there's different thresholds of longevity? Well, we didn't cover tax risk. So finding your number isn't as simple as, okay, well, how much do I need? Great.

Let's times it by what? 20 or whatever people say. It's slightly different.

Yeah. So what what would you tell people then? Hey, Mike. What should my number be? Do you just ask them a bunch of questions?

Yeah. First, I wanna know your lifestyle. What's the life you wanna live? Are you a homebody? Do you wanna travel?

How's your roof?

When does

your car need to get replaced?

Right.

We need to have kind of a lifestyle picture painted. Yeah. Then we can come to our cash flow number, or income number I should say.

Okay.

Then we take your total assets, we then put it into a simple planning calculator, and then just see what the numbers suggest. Do your assets grow so that in your eighties, do you have enough growth in your portfolio projected that it would allow you to start paying for medical expenses then? Do you move in the right direction? Do you not move in the right direction? Are you draining down your assets?

Let's put you through a 2,000 flat market simulation. Can you stomach that? Are you okay having all your assets at risk in that kind of scenario? Are you not okay with that kind of scenario? So there's all sorts of different scenarios that you kind of test through and say, are you comfortable with this, or do you wanna hedge against the risk?

Typically, I've found is people will lower their upside potential to cover some of their downside risk, so that they have a more predictable threshold or trajectory. Mhmm. That's not promising returns. That's saying, hey. Maybe all of your assets shouldn't be in stock market risk.

I mean, there's a reason why Harry Markowitz, the guy that made the 6040 stock bond fund recommendation or research, why he did the research, was to create more predictability in the growth. Because usually, if stocks go down, the federal drop interest rates, bond rates might go down. If the bond rates go down, then typically the value of your bond funds go up. It kind of help offsets these kinds of things. So it's just distilling down retirement planning to a number based on how much income you want times the 4% rule.

It's a good general starting point.

Okay.

But you need to factor in the other risks that might influence the certain decisions and certain thresholds. It's like, you first wanna figure out, are you in the ballpark? Mhmm. Then you wanna find the right seat in the ballpark.

Ah, yes.

Is that a good analogy?

Yeah. I like that.

What else do you think we missed on this one?

Mean, it's probably safe to say your number can't be like 50 k. Right? Eat more than $50?

I don't know. Yeah? I mean, if you have a pension

Uh-huh.

And your Social Security, and both of those are paying more than you need Mhmm. For the retirement you want Right. Then your 50 k would be added to technically every year, and that would then help grow for your health care costs in the future.

Oh, right.

And people that typically have a nice pension have saved less for retirement because they're expecting the pension. Ask questions to figure out your specific situation. Now would I say it would be comfortable having 50 k for retirement? No. If your roof goes out, if other things happen, that that's really a lot of pressure.

It

could evaporate quickly.

But I get that some people are forced into retirement either through health issues. Some, it's just they lost their job through economic issues. Maybe it's some personal thing. They just can't stand their boss anymore. I mean, who knows?

But let's stop overgeneralizing people's situation and look at how much do you need? How much do you have? What's the longevity? Is it in a pretax account like an IRA? Is it in an after tax account like a brokerage, or like a a Roth Mhmm.

Tax free? And then what are the mechanisms that you can use to build a plan that's right for you? Mhmm. There's just a few more questions than the simple cliche. If I had $2,000,000,000 Yeah.

Here's what I would do. I'm a blah blah blah. I'm a former financial adviser. Now I'm a TikToker, and here's how easy it is. That's dangerous in my opinion.

Right.

So, yeah, for all those who don't know, I'm slightly mocking someone that's online, but not to make fun of him. I think he's a well intended individual. Yeah. I think a lot of these TikTokers, and YouTubers, and social media influencers in finance, they just have the best intentions for you. They genuinely want to help you.

I think for the ones that I've seen, it's they don't know what they don't know, and because of that, they're spreading out well intended, yet slightly dangerous advice in my opinion. So be careful out there, and ask questions. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time.

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