Tip #1 To Help Ensure You Don't Run Out of Money In Retirement


Well, happy Friday! We're in Suncadia this weekend. Just a quick family trip. It is 9 degrees outside, so I'm going to try to hurry through this. But, over the next 3 weeks, I'll be doing 3 retirement tips. So, happy Friday! Let's jump into it.


So, Retirement Tip #1 is to build out a robust retirement cashflow projection. I've seen projections come in from people that are looking for a potential wealth manager or approaching retirement. And it's the Excel spreadsheet and it has year 1, year 2 year 3... It assumes a certain growth rate of the portfolio, certain tax rates, and some of these spreadsheets are pretty good. There's maybe 3 items I would say could be improved upon when you're looking at these spreadsheets.


This is why, even myself, I wouldn't just use a spreadsheet. I would use a software that can build this out and look at all of those things that can happen over such a long-term timeframe. Retirement might be 30+ years long, and you need to make sure that you've looked at all of it.


So, a couple of the things I would say. First is the return assumptions that I see. If you look at the last 10 or 12 years, we've had very strong returns in the markets. So, 60/40, 70/30-type portfolios (60% equity, 40% bonds, or 70% equity, 30% bonds), those portfolios may have averaged between 8% and 10% over the last 10 or 12 years. If you talk to economists today, they do not expect portfolios to perform the same way over the next 10 years that they did over the last 10. So, instead of that 8 to 10% that you may have seen, their estimate is more like 6 - 7%. So, you need to build in a fair return assumption for your portfolio projections.


The second thing that I would say is, when you're spending from a portfolio that is volatile, or going up and down, there's a slight harm. Just like dollar-cost-averaging on your way into the market, if you're spending from a portfolio that has volatility, there's a slight harm. So, if you're using an Excel spreadsheet for your projection, and you just assume a fixed 6% per year, one year, you're not going to get that. It's actually going to be lower, or one year it's going to be higher. And there's actually a slight harm from spending from that portfolio versus the fixed 6% every year. So, you need to build that in. It's actually mathematically inaccurate if you don't build in volatility to the projection.


The final thing that I would say is your tax bracket can change over time. So, if you retire at the age of 60, for example, you'll have a few years there before social security starts paying in. So, those few years, you might need to spend a higher rate from your investment portfolio to meet your spending needs. Then, in a few years, when social security kicks in, you can reduce the spend from your investment portfolio because you're getting social security. A different mix of where your income is coming from is going to have a different effect on the different amounts of tax that you're going to owe that year. So, use a proper cash flow planning software can actually build in your expected tax bracket over time. It also helps with things like doing Roth conversions in your IRA’s and all of that.


So, really, I'd say use realistic return assumptions, volatility needs to be included in the projection, and the final piece is taxes need to be included too. All of those we help manage around. We try to get as much return as we can. We try to manage volatility and risk in portfolios. Then certainly, we're helping with the tax planning and tax management over time, so hopefully, over the course of your life, you'll have to pay less in taxes.


So, if you're looking for someone to do one of these cash flow plans for you, we're happy to help. We can run those scenarios. If you're considering retirement, especially if you're within 3-5 years of retirement, I'd really encourage you to get a proper cash flow plan done so you know you're on track and set up to live that retirement that you always pictured living. So, thanks again. Happy Friday.


Have a great weekend and we'll talk to you soon.