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Lifetime Income Stability

Retirement is a cash flow problem. In fact, anyone who has planned their retirement the traditional way, focusing on whether they have enough money, has probably learned the hard way that this approach doesn’t always work.

When the stock market plummets some 35%, and the value of your nest egg drops with it, and interest rates are at an all-time low, you can see how the traditional approach, that relies heavily on statistical probabilities, falls apart.

Our approach, on the other hand, focuses on lifetime income stability and asset preservation. This makes turbulent times not so scary, because we assume they are going to happen and we’re prepared for them.

One of our core philosophies is to be pessimistic about the future in general.

Now that may seem contrary to how you want to think about retirement planning, but it’s actually critical to your success. By being pessimistic about the future in general, it enables you to be extremely optimistic about your personal financial future. Here’s what I mean…

What we’ve noticed over the years as we’ve implemented damage control for people coming from other advisors, is that many advisors tend to be overly-optimistic in their assumptions. Then, when things don’t go their way, the plan falls apart.

You see, there are many variables to estimate when you develop a retirement plan. Things like life expectancy, cost of living, inflation, return on investments, market volatility, and future healthcare costs, just to name a few.

Oftentimes advisors want to impress or “win” your business by showing you a very attractive retirement projection. The thinking is that you aren’t going to hire an advisor who’s plan shows you barely making it, but you will hire the advisor who’s plan shows you having far more money than you’ll ever need!

Unfortunately, many people are persuaded by this. They assume the advisor that shows them having plenty of money must be better.  We would argue that sometimes this advisor isn’t even aware that they are potentially misrepresenting things. Most will base future returns on historical average returns and in our experience, this is very dangerous and how most financial planning software is designed!

We suggest a very different approach…

When creating a plan, we want to underestimate every variable that will work in your favor and overestimate every variable that will work against you.

Why would we do this? Because if we can create a plan that works when we take this approach, then the reality will be even better! But if we’re overly optimistic, we increase the odds of the plan not working. And twenty years from now, if the plan doesn’t work, what’s your consolation?

We want all surprises to be good surprises. So we are purposefully overly conservative in our planning approach.

We work with a lot of engineers, and the way we explain this to them is this – our job is to stress the plan as much as possible to ensure it won’t break when/if things get messy down the road. This seems to resonate with those individuals pretty well. Now for those who aren’t engineers, simply think of it as wearing a belt AND suspenders at the same time. The goal is to be sure you don’t get caught with your pants down.

Developing a plan that assumes there will be significant headwinds allows you to have a higher degree of confidence regarding its long term success.

Your Preferred Future

We will begin our deep dive into the details of each of the three steps – starting with Step 1: Planning for your preferred future. Getting this first step right will give you a strong sense of peace regarding the success of your plan.

Your preferred future is what you’ve had in mind all these years and why you’ve been working so hard to get to this point. And now you’re here!This is the fun part, when you get to actually see your dreams materialize into an achievable reality.

Everyone else will tell you that planning for your ideal retirement is all about how much money you have. I’m telling you they’re wrong. They’re all wrong. Retirement is not about how much money you have. Retirement is a cash flow problem. Period. It’s about creating stable, increasing, tax-efficient, lifetime income.

By stable I mean not overly dependent on factors you can’t control, like the stock market, or interest rates, or tax rates. You want to know, just like your paycheck, it’s going to be there.

Increasing because it has to keep up with inflation in order for you to retain your standard of living. So your income will need to increase on a compounding basis, throughout your retirement years.

It also needs to be tax efficient. There’s a saying that only two things in life are certain – death and taxes. But the only thing certain about taxes is that they will exist and we will have to pay them. Unfortunately, what future tax rates will be is anything but certain. If I were a betting man, I’d say tax rates will be much higher ten or twenty years from now than they are today. But regardless of whether I’m right or not, if we want our money to go as far as possible, we can’t ignore the impact taxes are likely to have.

Lifetime income is pretty straight forward. You need your income to last as long as you do. And since we don’t know when you’re going to die, it needs to last practically indefinitely.

Once we’ve created your stable, increasing, tax-efficient, lifetime income, then and only then, do we care about how much money or assets you have.

But these are not the assets you’re relying on to generate your income. It’s precisely the opposite. These are the assets you’re not relying on to generate the income.
These are your discretionary, liquid assets. These are the assets you’ll access whenever you want or need something that’s not included in your ordinary, monthly expenses.
Maybe a furnace or maybe a second home, or a new car, or an extra vacation…
We don’t want you touching the assets that are producing your income, because that would be like taking a bite out of the goose that’s laying your golden eggs. We want separate, liquid assets that we’re not relying on for income.

So since retirement is all about cash flow, then our plan better be VERY detailed when it comes to that cash flow. Let me explain what I mean:

Not so long ago, a couple came into our office, we’ll call them Jack and Jill. They had recently attended one of our evening classes and afterward they signed up for a retirement strategy session. Like many people who attend our classes, they already had an advisor, so they brought their plan with them and we reviewed it together. They had told their advisor how much they thought they’d need each month in retirement. He plugged that into his software. He also totaled up all their investments and assumed a 7% average rate of return based on his recommended portfolio allocation. Then he ran a simulation to determine if they were likely to have enough or if they were likely to run out of money, assuming they had an average life expectancy. That was it. Their entire plan was a very esoteric probability of success, given a number of historic market scenarios.

The simulation didn’t tell them:
Where would their income come from each year?
How much tax they would owe each year?
How much discretionary, liquid assets would they have available from year to year?
What would happen if one of them were to die prematurely?
What would happen if we experienced another 2008 within their first ten years of retirement?
What would happen if one of them required skilled nursing care for an extended period of time?

What they actually had was nothing more than an educated guess. They asked us to design a comprehensive retirement plan for them and now they have the answers to all of these questions. Remember, retirement is a cash flow problem. Solving the cash flow problem requires a detailed, annualized, cash flow projection, not a generalized, overall probability of success.

In our next video, we’re going to dive a bit further into Step 1 by teaching you a simple way to estimate your monthly expenses in retirement, versus having to actually track all your expenses and build a budget, which can be quite onerous. Once we know that information, then from there we’ll begin to determine which resources we want to utilize when, in order to create the most efficient plan.

Plan, Prepare & Review

Let’s start at the 30,000 ft. level and provide a very broad overview of the three steps we’ll use throughout the process. So this is truly foundational.

Let’s start at the 30,000 ft. level and provide a very broad overview of the three steps we’ll use throughout the process. So this is truly foundational.

Here are the three, simple steps I want you to commit to memory:   Plan, Prepare, and Review. Let’s keep our focus on the big picture and the underlying philosophy of these three steps by adding a simple phrase to each one:

Step 1: Plan – for your preferred future
Step 2: Prepare – for what might go wrong
Step 3: Review – and adjust on a regular basis

Step 1: Plan – for your preferred future
My wife, Diane, always says it best: She prays daily for every member of our family to have a long, healthy life, and a quick, painless death. That’s what we all want, right?
That’s what makes step one so much fun. We’re preparing for our preferred future.

Step 2: Prepare – for what might go wrong
This is where we consider what would happen if we experience a premature death or disability, or a stock market crash, or major changes in tax rates or inflation – things like that. Some of these issues apply to everyone. And some may be very unique to your own personal situation. It does us no good to have an exceptional plan for our preferred future, but then we completely ignore what might happen to derail that plan.
We need to know that, if life throws us a curve, our entire plan won’t implode.

Step 3: Review – and adjust on a regular basis
Of course, we don’t want to create a plan once and then just forget it. We always tell our clients that the planning process itself is really just the beginning. Any good plan should be highly flexible and should be reviewed and adjusted regularly to ensure it continues to be as effective as possible over time, because over time, things will change in your personal circumstances and also in the world at large. So think of your plan as a living, dynamic thing. Here’s the spoiler alert – we’re going to review and adjust our plan annually. No more, no less. None of this crazy weekly or monthly or even quarterly stuff. You’ll not only drive yourself crazy, but you’ll actually reduce the effectiveness of your plan.

So there you go:

You’re Planning – for your preferred future
You’re Preparing – for what might go wrong
You’re Reviewing – and adjusting on a regular basis (annually – no more, no less)

So you see, at that 30,000ft level, it’s super simple – but extremely important to understand and commit to the process. Three simple steps- Plan, Prepare, and Review.

Retirement Road Map

Three Keys to find the Right Advisor to Build Your Retirement Road Map

There are three important keys you need to understand before you begin to build your retirement roadmap. These three keys are non-negotiable.

If you’re planning on working with an advisor (which we definitely recommend, because you have only one chance to get this right) these  keys are critical to ensuring you’re working with someone who can execute this process effectively.

Even if you’re planning to try and do this yourself (which I don’t recommend) you’re still gonna have to rely on third-parties to help you implement each of the different pieces of the puzzle. So if you’re a do-it-yourselfer, these keys are critical in vetting each of those individuals.

So here are the three keys:

Key #1: Truly Independent:
You have to be working with someone who is completely independent of any significant conflicts of interest. This means they cannot be affiliated with any of the following: bank or credit union, broker/dealer, money manager, insurance company, or a mutual fund company. (That’s not an exhaustive list, but those are the main ones to look out for.)

Unfortunately, the vast majority of advisors are, in fact, affiliated with one or more of these types of organizations. This is because many advisors are simply glorified distribution channels for certain products & services. But if you look hard enough, you can find advisors who aren’t. I assure you of that.

Look for truly independent, registered fiduciaries, who use only third-parties to implement their strategies/solutions – meaning they aren’t selling their own products or money management services, or the products or services of an affiliate.

Even with the best of intentions, if these affiliations exist, it will taint the advice you receive, and you won’t know the difference until it’s too late. Objectivity is the key here.  So that’s key #1. Truly independent.

Key #2 is Truly Comprehensive
So often, the retirement planning process focuses on investments, with all the other issues being an afterthought. This is a huge mistake.

An effective retirement plan must include the following, crucial areas:

Investment planning – This is very important, but it is not the end all, be all.   Income planning – which, contrary to popular opinion, is very different from investment planning. As you’ll see, a really good, reliable plan will identify where every bit of your income is coming from, for every single year, of the entire remainder of your life. Tax planning – This is long-term tax planning, not just what should I do this year or next year, but how do I minimize my taxes over the next thirty years. Healthcare Planning with two major areas: Medicare planning – understanding the system and making sure you have the best coverage for your unique situation & Long-Term Care Planning for the cost of potentially chronic, long-term needs, such as home care, assisted living, or a nursing home. Survivor and Estate Planning – Survival, if we’re talking about a couple, is what happens if someone dies prematurely. When both are gone (if we’re talking about a couple) or obviously an individual upon their death.

You must consider each of these critical areas because they all affect one another, which we’ll explain in detail as we go along. So that’s key #2. Truly Comprehensive. The right advisor will  have expertise in Investment, Income, Tax, Healthcare, Survivor and Estate planning – because your plan must encompass each of these five areas.

Key #3 is Truly Focused
You have to work with someone who specializes in retirement planning. I can’t stress this enough. This is because, as I mentioned earlier: The rules of the game – and the keys to success – completely change as you make the transition from accumulation to preservation and distribution. And if you don’t understand that reality, but instead keep on playing by the same rules you’ve followed throughout your accumulation years, the likelihood of optimizing your financial outcome is extremely low.

Unfortunately, most advisors are generalists – trying to be all things to all people in order to cast as broad a net as possible to gather as many assets as possible. Because that’s how advisors get paid.  They don’t get paid for: Social Security planning, or Medicare Planning, or Tax planning Survivor and Estate Planning. They get paid for managing assets. So most advisors don’t actually specialize. And just like in the medical industry, there are generalists and specialists. But you don’t want your GP performing your brain surgery, do you?

These are the three keys to finding someone who can help walk you through this process of beginning to build your retirement road map. 

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