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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire On Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon, or you can get a free copy by downloading it by going to www.retireontime.com. My name is Mike Decker. I'm the author of the book, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can talk about it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want financial advice, you can contact our team by going to www.yourwealthanalysis.com and request Your Wealth Analysis. With me in the studio today is my cohost colleague, mister David Franson. David, thanks for being here.
David:Yep. Thank you. Glad to be here.
Mike:David's gonna read your questions, and I will do my best to answer them. You can always submit your questions anytime during the week by texting them to (913) 363-1234. Again, that's (913) 363-1234, or you can email them to heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. I am 60 years old with $1,000,000 in my four zero one k. How much income can I get in retirement if I were to retire today?
Mike:It's a fair question. Yeah. Yeah. Max income.
Mike:So I don't have a good answer for this. And the reason why is the answer he probably wants me to say is, what is the appropriate withdrawal rate that he can do? So Okay. Million dollars, can I do 4%? Can I do 5%?
Mike:Can I do 6%?
David:Mhmm.
Mike:David, do you think we can get this guy 10%?
David:We're just gonna shoot for the moon. Yeah.
Mike:Let's get him 10. So there's there's a conundrum here because there is no perfect withdrawal rate, and when I say there's no perfect withdrawal rate, the reason why I don't like withdrawal rates is because it oversimplifies the mechanism that then supports the withdrawal rate. Here's an example. If you did, let's say, a 4% withdrawal rate, and all of your assets were in stocks, would you have a different experience than if you had a 4% withdrawal rate, and you had 50% stocks, 50% bond funds? Totally different experience, different growth Mhmm.
Mike:Different volatility, the sequence of the return is gonna be different. Now, hear me out here. Let's imagine you have a let's say you've got 40% stocks, 30% bond funds, and 30% alternative investments. So think of like real estate, maybe buffered ETFs, just the alternative stuff. The stuff that people don't really talk about Okay.
Mike:That's really cool. Alright. You'd have a totally different experience.
David:Yeah. I guess so.
Mike:So the question isn't necessarily the withdrawal rate. The question is what product or mechanism do you want to employ to get your income? So let's walk through it, and you can look up my Kipling article about this 10 ways to take income in retirement, but you've got dividend income.
David:Okay.
Mike:You're gonna get whatever the dividends pay. You maintain principal. No problem there. You're paying taxes on the dividends, unless it's IRA funds, and then you just would pay taxes on the dividends as you take it out as income, and you can look at the aristocrats and some good reasonable bonds that have a reasonable dividend rate, or you could do bond funds. I mean, the the list just goes on and on, but you can kind of put stuff together.
Mike:You could even talk about dividends from covered called ETFs. They pay around, I think, 8% or so, but there's more risk associated with it.
David:Okay. And that's an example of an alternative investment covered call ETF.
Mike:That's just a different type of ETF. Yeah. So alternative is more when you're limiting liquidity, and you have to be an accredited investor, and it's just a more sophisticated thing. A covered call ETF, can buy that pretty easily.
David:Okay.
Mike:But all these different mechanisms, it's like, okay. That's great, but what risks are you taking? What if the dividends didn't pay? So 600 major companies stopped paying dividends during the pandemic. Mhmm.
Mike:Why? Well, they foresaw some financial hardship. I think that's a reasonable assessment. So what did all the retirees do now? And then in this situation, well, what's my max income, or how much can I take income?
Mike:What's your mechanism? Can you get through a difficult time where dividends might stop for a while? It's not really a question of how much income could I take. It's what mechanisms are you willing to employ? What are the risks associated with it?
Mike:What do you do when that mechanism fails? Because there's no such thing as a perfect investment product or strategy. Then you can dive into the details of your backup plan, what we call the reservoir or the storehouse. You can dive into how do you maneuver based on different market conditions when markets are up, when they go down, when they stay flat for a ten plus year period of time. That's when you can really dial into the details.
Mike:Right. Okay? Also, this person's 60 years old. Right? When are they gonna file for Social Security?
Mike:So I think it would be ridiculous, again, my strong opinion, of someone saying I can only take 4% out of my portfolio, but I'm gonna wait until 67 years old to file for Social Security. Right. The first seven years or six years of your retirement, you had less income. Isn't that the time you should be traveling and really enjoying yourself?
David:It would seem so, yeah, on paper. Right? When you're younger, you can withstand I was just having a conversation with my mom. She was saying that she's in her seventies. I hope she doesn't mind me saying that, but she's like, I just can't sit in, like, in the little airplane seat anymore.
David:It's just that's just over. It's done. Like, I gotta start going first class. So when you're younger, you can sort of withstand more of that sort of bottleneck at the airport.
Mike:Live your life. Yeah. You got more energy. I don't know many 89 year olds backpacking through Europe.
David:Yes. And if they are doing that, kudos to them.
Mike:Kudos to them. They must be a triathlete. Yes. That's right. So but the point being is when you look at what is it that you want, if you want max income, there's no problem.
Mike:But what are the other influences, like when does Social Security start? Let's say you're retiring at 60 years old, you're gonna file for Social Security at 67 years old. What if you took 6%, seven % from your portfolio for the first couple of years, but your Social Security was high enough that you then took 3% there on out? And if that were the case, yeah, a six or seven portfolio withdrawal, that's risky. So maybe you then put a portfolio or part of your portfolio into something like laddered out ETFs or CDs or other lower risk assets that you know if the market's crashed, you're gonna be okay.
Mike:Yeah. What if the first five years you bought a single premium instant annuity, you just said, hey, look, I can't afford a market crash in the first couple of years of my retirement. I need this money to be there Yeah. And I don't want to accentuate those losses. Because you know, if the markets go down, let's say 30 percent, it takes a 43% return to break even, but if the markets go down 34%, it's a 50% return to break even.
Mike:Mhmm. So these are things you need you don't draw income from an account that's lost money. So maybe you just say, look, I wanna grow my assets. I want control over the future, but for the first five years, I wanna know the money is gonna be there regardless of market conditions. Uh-huh.
Mike:And maybe you buy a SPIA period certain. That means you're gonna get it. If you die in the second year, Someone's getting the money. Yeah. It's a structured payout guaranteed to go to someone, and maybe that's how you can afford a quote unquote 6% withdrawal rate, because you just funded the SPIA enough, and then all your other assets could recover, or continue to grow and offset what you're spending down.
Mike:Had a call actually just yesterday with a guy, we were talking about different ways that he could structure his portfolio, and one of them, because he's retiring younger, is I said, you might want some life insurance there for a death benefit for the first, really, five to ten years, just before you file for Social Security, just in case. Yeah. I said, but look, this thing isn't going to really grow until we drop the death benefit, so that there's very little cost of insurance. That's when the cash can really accumulate. So you need the death benefit there for that situation, because the surviving spouse could be destitute, or not destitute, but just in a tough spot if that were to happen.
Mike:But after that, you don't need it, then you could use it as a bond fund alternative. And we were illustrating around like 6% year over year growth, which is acceptable for a bond fund, especially when you consider AGG is what? Two point something 3% average growth? And what's AGG? AGG is the aggregate bond fund.
Mike:It's a really popular bond fund that doesn't do much. Alright. My point being is it was a suitable investment, but then I asked him, this is a lifelong investment. If you go into this, you shouldn't be in there for a couple of years, and then want to get out. You're in it for life.
Mike:Mhmm. He goes, I don't like that. And I said, great. Not suitable for you. Let's move on.
Mike:Yeah. No problem. And so we're looking at buffered ETFs or more short term investments to hedge his protection of his portfolio Mhmm. That he can also tap into before 59. The point being is, great.
Mike:You got a million dollars. Great. We can run a plan in a couple of seconds to figure out the dollar amount of your withdrawal rate. Mhmm. It's going to vary based on the other mechanisms.
Mike:So when do you file for Social Security? What are your tax plan? What's the schedule of your IRA to Roth conversions? All those different things. That all influences your withdrawal rate, And you withdrawing from a pretax account is gonna affect your withdrawing from an after tax account, because you've got income tax versus capital gains.
Mike:But the real question is, what tools, investments or products, do you want in your portfolio? Yeah. What are suitable for you? Because that's really how you're gonna plan this.
David:And we haven't even talked about Irma. Right? Like, what if you withdraw too much, and then you're subject to Medicare surcharges?
Mike:Yeah. Some people will end up in situations to where there's a snowball of accumulation growing. It's not tax efficient, and it can put them over Irma limits.
David:So many considerations. It is complicated. Mike, guide us as a Sherpa would.
Mike:Yeah. But I mean, as a general rule, anywhere from four to 6% generally withdrawal rate, I think could be appropriate. If you're doing this on your own, look to a three to 4% withdrawal rate. If you're willing to work with a professional like us, then maybe some years five or 6% could be appropriate. Maybe one year, seven percent or something like that.
Mike:Oh, yeah. But don't do that on your own. That is not investment advice. Please don't go and say, well, Mike's us. No.
Mike:A seven percent withdrawal rate in one year that comes from a CD is not a concern to me. But if you put all your assets in the S and P 500 and the markets go down and you drew out 7%, you just destroyed your ability to stay retired. Yeah. So please don't listen to this and say, well, I'm gonna take a higher withdrawal rate, or my portfolio is gonna average 6%, so I'm gonna take 5%. Those are oversimplified assumptions
David:Right.
Mike:That can cause all sorts of lifelong problems for you financially. So the answer is put a plan together first, not based on a withdrawal rate, but as an overarching, how does everything fit together? And then what mechanisms do you want to use to bring it to life? 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.
Mike:Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.