PODCAST EPISODE 290 – How much do you need to retire?


0:11 – Podcast begins.

0:20 – Financial independence and work-optional lifestyle.

1:41 – Assets, capital at work, and financial independence. (1:41)

5:40 – Retirement distribution strategies. (5:40)

9:35 – Retirement income calculation. (9:35)

13:11 – Retirement planning for high-income earners. (13:11)

[Tweet “The word retirement wasn’t really used to apply to people in the United States, until the 1930s, with the advent of social security. Prior to that, retirement was to put something away, because it was no longer of use. #YourBusinessYourWealth”]

[Tweet “And assets are what we need to accumulate, to develop our capital at work. #YourBusinessYourWealth”]

[Tweet “When we are investing, we are putting money into a dynamic asset, an asset whose value changes on a regular basis, both up and down. #YourBusinessYourWealth”]





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Full Episode Transcription



Hello, and welcome to sound financial group podcast. My name is Paul Adams, I am your only host today also CEO and founder of sound Financial Group. Today, Corey is traveling the country we’re doing some research for our next episode, we’re looking forward to bring it out to you guys. And today is going to be fun because we’re going to talk about how much money does it take to retire. Now, for those of you that have been listening, you’ll know we do not love the word retirement, the word retirement kind of implies a lot of things like something is no longer going to be of use. For instance, the word retirement wasn’t really used to apply to people in the United States, until the 1930s, with the advent of social security prior to that, retirement to put something away, because it was no longer of use. When we consider that today, many of us are building a career, we love what we do. We’re constantly trying to add value, we build better networks, etc. It’s not necessarily that we want to be put up and be no longer of use in our old age. And I think this word retirement kind of scares people off of that, and has us not wanting to do the planning. So instead, you’ll know we use the term definite financial independence for the sake of a work optional lifestyle. So that’s what we’re going to be talking about today is what is the capital of work required to have financial independence for the sake of a work optional lifestyle. When we look now, at what we’re building, we might look at our net worth and think our net worth is synonymous with capital at work, and nothing could be further from the truth. You see, there’s certain things we own that a bank might look at, say a paid off RV, they might look at that as an asset on your balance sheet. But you should not be looking at as an asset, when it comes to your capital at work. So let me share with you how we define an asset. An asset is anything that puts money on your balance sheet now, or has the ability to put money on your balance sheet in the future without changing your lifestyle. Now think about that for a moment when you think about your primary residence. For instance, if you have an enormously expensive home, somebody else even paid for it for you. And it’s $15 million, the average upkeep on that home is going to be 250 to 300,000 just paying the taxes and keeping the property up. So the home that you live in your primary residence is not an asset. And assets are what we need to accumulate to develop our capital at work. So what is an asset, an asset could be real estate that you’re not living in, of course, it could be a vacation home, a vacation home that you’re renting out when you’re not there. And if it’s a vacation home, saying the location a couple hours from your house, if you sell that home, you can still vacation there. Now we draw a distinction between the vacation home and a secondary residence. Secondary residence means you have some clothes in the closet, you have an extra car in the garage, it’s a place that you go immediately. And there would be a lifestyle change, if you couldn’t just go there immediately and enjoy it and had to work around the schedule etc. Primary residence not an asset secondary residence, not an asset. Collectibles can be an asset, you know if you have that collectible Corvette in the garage, but it no longer is an asset, if it becomes part of your lifestyle. Say for instance, a big part of your social network is now part of the Corvette club. So with that we’ve kind of covered now capital at work. That’s going to be the accumulation of assets. And of course, assets include stocks, bonds, mutual funds, ETFs, 401k, at work, all that stuff are assets. So now we need to develop how much capital at work is required for us to have financial independence. And ideally, and only we would want financial independence on a permanent basis or as permanent as we can get, not just for a couple of years. So I’m gonna share with you here. I’m gonna show you here what it looks like. If you have an asset, a mound that say is going to grow really, really well. Now, many of you watching this have probably heard of the 4% rule. And it’s this idea that you should only distribute 4% A year from your capital at work in your old age, so as to have the best chance of your money lasting the rest of your life. But let’s take a look at what that average return looks like. Now this applies equally to investment assets like the stock market as it does to real estate. And I’ll give you that distinction here in a couple of minutes. But what might normally happen is somebody invests, and they invest in the market and the market has its ups and downs. Now, as it has its ups and downs, what probably happened at some point in the past is somebody connected the end of that line, and the beginning of that line, and drew a straight line. And then what they said is See, look, it’s got an 8% Average rate of return. And you think to yourself, well, if I had an 8% Average rate of return, I should just be able to withdraw a percent every year in retirement. But when we take out money in our old age, we are not taking withdrawals. withdrawals are something we take from fixed assets, savings account, checking account CDs, that’s an asset that doesn’t move static, earn some interest, but never really changes in value. When we are investing, we are putting money into a dynamic asset, an asset whose value changes on a regular basis, both up and down. When we’re taking distributions from a dynamic asset, it’s not withdrawals, it’s dis investing. And when you’re disinvesting, that means there’s gonna be years the market is down. And you still have to take withdrawal. Because just because the market is down doesn’t mean that your property taxes don’t need to get paid, that you don’t have a vacation that you don’t have groceries that you want medicine, you still need to go golfing, whatever it is your retirement lifestyle looks like, you still need that money. And just because the markets down doesn’t mean, those other people are going to accept that the market is down, you can’t take money. So you still have to take withdrawals, well, if you’re taken out that 8%, it really changes the shape of this line. So for instance, let’s say somebody retired here, and they began taking out their 8%, well, then the asset goes down, and the next year the asset goes down, and then when there’s a rebound, there’s not quite as much they’re for to rebound, and then the next downturn happens, and what happens is you accelerate the erosion of your capital. And if the sequence of return from these investments is less than ideal, you could literally run out of money at 8% distribution in less than 10 years. And it’s all because of this sequence of returns. Now, the problem with sequence of returns is we don’t know what sequence they’re going to show up in. Now some of you may have heard of something called the Monte Carlo scenario, we run them for our clients. And what it’s doing is going through, say a 30 year period, and it’s doing a stochastic modeling. So picture a bingo ball, like where they do it at the bingo hall, and that big ball, they put all the little bingo balls in, in this big tumbler. And in that tumbler are all of the available or likely rates of return of that portfolio. For each year, the machine reaches in pulls the ball out looks the ball takes the rate of return off of it puts the ball back in and turns it again for the next year. A Monte Carlo snare will do that like 3000 times and give you a percentage likelihood that your distributions will be maintained by your asset base. And when you run those over and over again, the 4% distribution is about as high as you want to get and some people would say even lower. So that is why the 4% distribution. Let’s go look at what it might look like if it was a piece of real estate. Because while the piece of real estate doesn’t go up and down the same way the stock market does, that piece of real estate does have ups and downs in terms of maybe tenants, or expenses, or when there might need to be your new roof. Or when there might be a zoning change, or when there could be a flood all things that impact that rental property that put you in a position that if it’s not doing let’s say it’s 8% cap rate, and for those of you that are in real estate, you know what that means? That 8% cap rate doesn’t mean you should take out 8% and spend it every year, you still need to reserve for vacancy for repairs for that roof that’s gonna get redone for the AC unit. So you can’t just because your property’s kicking off 8% You can’t just spend it all even some of that needs to be reserved, hence this 4% distribution rule. Well, then that enters into Well then how much money do I actually need? Well, let’s just scroll down a little whiteboard. I’m going to walk you through the simple formula. What you’re going to do first is on top of the former you’re gonna put you and your family’s annual desired lifestyle for financial independence or retirement if you prefer that vernacular So let’s say for the sake of this conversation, somebody wants to have 200,000


a year in total income in their old age, now they want $200,000 A year, they may have some other money that’s going to come in and help with that. For instance, we might have social security. So we can subtract off, I suppose I should put that in green. And let’s say this person has 30,000 a year in Social Security. So their actual need for their assets to produce income is 170. So you’re basically going to take your desired amount of income that you want every year, you’re going to subtract out of that all of your dependable paychecks that are still coming in Social Security, a pension, etc. Any a buyout from your business, if it’s going to be stable for a certain amount of years. But if it’s just 10 years, you might need to do some more math, and you’re 11 and beyond. But we have a household here that wants $200,000 A year every year in their old age, they anticipate $30,000 A year from Social Security, if you want to be extra conservative with your estimates, remove Social Security or pensions all together, and make it so that your assets can do 100% of the work. But right now, here we have the 170, there’s two ways to do the calculation here, we can do the one I feel like it’s simpler, we take 170,000 and divide it by point 04. But another easy way to do is you take your 170,000, and then you just multiply that by 25. Both of them are going to get you to the same number. See, we’re just going to take this 170 divided by point 04. And we get a capital of work amount required of 4,250,000. Now just to show it to you, I’m going to do 170,000 times 25. And we get the same number 4,250,000. Now that’s gonna seem like a large number. And the reason it feels like a large number is because it is a large number. You see, it takes a lot for capital to do what you do freely in the marketplace. As you go out to work every day as you go into your business every day, as you transact freely with other people every single day, sometimes giving up your money to buy something sometimes somebody’s paying you. You do an amazing thing. For instance, we know from that simple math $200,000 A year of earnings is the equivalent of $5 million of capital at work. So if you’re listening this right now, and you make $200,000 a year, and there’s that old saying of how do you feel today, I feel like a million bucks. Well, what you should do is say I feel like 5 million, because that’s the capital of work that would be required to bring the amount of money into your household that you’re doing just by freely transacting in the marketplace. Now with that, it has a pretty big warning. Because whether it’s that 4.2 5 million, or 5 million, or maybe yours is $400,000 a year, and it’s going to be $10 million. To do that, regardless of your income, you’re gonna have to say no to a lot of things, you’re going to have to stand back from society, while many, many people are financially irresponsible spending 95% of what they make every single year. And you’re going to have to contain yourself and cultivate your wealth. And the reason I bring this up is that for you as a high income earner, the fall will be far worse for you. If you retire with insufficient capital than for the person making $80,000 a year the person making $80,000 A year has so security maybe has a little pension. So with Social Security, pension, maybe a little bit of savings, they can maintain maybe 40 $50,000 of the ad. But if you’re making 800,000 It just to try to replace, say 400,000 is going to take you $10 million. That’s to replace half of your income. And there are many, many people who are making that kind of income that are going to be lucky to have three 400,000 of or sorry, three, three or 4 million of assets. And now that’s not a joke. That’s a decent amount of assets. But what we have to keep in mind is that that person, and if you’re that person making that good of money. The reason this is an extra big deal, is you’ll never get to complain about it. You’re never going to get a chance to go to the people that make $100,000 You’re like oh I just can’t retire. I can only have $150,000 A year people are going to have zero compassion for you. And I think that’s going to make old age a lot tougher for the high income earners, the people who did really, really well and enjoyed a very large life through their entire working career. And having had some of those people as clients and them trying to bail it out in the last 10 years before age 65. Anybody who’s under that age now is a great time to take a serious look at how much capital it will take for you to have financial independence. Because there’s another version of you you haven’t met yet, that’s the 65 year old version of you, the 65 year old version of you, you owe money to. And the amount you owe them is your net present value of your future retirement. If you listen to this podcast, just statistically speaking, you’re probably short. And because you are short, you’re going to meet that older version of you in the future, and you’re not going to have enough money to give them. Now, if you’ve ever been owed money, or owed someone money and not had the money to pay for it, it’s a really uncomfortable thing. Imagine how much more uncomfortable who’s waiting on the other side of that is you and your spouse, the older versions of you, who are waiting in the future for you to keep your promise for you to keep your promise that they could have medicine, education, shelter, to keep the promise that your children will not have to have half to have you live with them. And to keep the promise that you as the working version of you would allow the older version of you to retire with a great deal of dignity and comfort, with access to medical care and the ability to visit and care for and help family. That is what we’re working with our clients for that is the reason we do the podcast. We want all of you to be able to see what’s coming to understand the consequences of it and take action to day to make that a reality. If you think we can be of help email us info at SF g way.com. That’s sound financial group way.com SF G way, you can reach out to us on LinkedIn, Twitter, Instagram, follow us here on YouTube. Put a comment below if you had a little bit of an AHA in this conversation today or tell me if you think the 4% rule is bunk and what you think it ought to be. But with that, we hope that this episode has been a contribution to you subscribing, the YouTube channel, commenting below texting it to at least three or four people and your ability to design and build a good life. See you next week.



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