Your Safe Retirement Roadmap
Retirement today comes with tremendous opportunities as well as staggering challenges. The opportunities are that we can dream bigger dreams, travel to farther places, spend more time with our loved ones, more than our parents and grandparents could have ever imagined. The challenge, however, is how do we make sure our money lasts as long as we do.
This dilemma can be resolved by using my Four Bucket System outlined in my book “Your Safe Retirement Roadmap.” But before I go into the details of the four buckets, let me give an example of why it is so important to use my system.
Mr. Smith and Ms. Jones both retired at age 65, both had about $1,000,000 in their 401K, both had about an average annual return of 10.5%, both withdrew 5% a year from their portfolio. They both felt that since their average annual return was 10.5%, they should be fine by withdrawing 5%. The only difference was that Smith retired 5 years before Jones. Smith however ran out of money and had to move in with his kids, while Jones was fine, and her money lasted for the rest of her life.
So, what happened? Smith did not realize that the year he retired the Stock also went down and he was digging himself into a hole he could never recover from. Jones on the other hand was fine because the year she retired the market went up which gave her a cushion to survive the down years later.
This is called the sequence of returns risk. Because no one knows when the market will go up or down and especially when you start withdrawing money from your nest egg. So do you want to leave your retirement to the vagaries of the stock market or do you want certainty. Most people would want certainty.
My Powerful four-bucket system that makes sure you do not end up like Smith.
Your First Bucket
This is your emergency bucket. Your emergency funds will be in this bucket. Why do you need emergency funds?
You need them because emergencies always happen — and usually at the most inopportune time! Emergencies can be anything from paying for sudden healthcare costs to unforeseen car troubles. Hundreds of other circumstances can lead to emergencies AND the need for emergency funds.
Emergency funds need to be liquid and easy to access. That means you need to fill this bucket with funds you can get your hands on quickly!
Your Second Bucket
This is your long-term growth bucket. The investments in this bucket enable you to keep up with inflation and, in many cases, to far exceed inflation and to grow your money.
In your second bucket, your investment options could be stocks, mutual funds, ETFs (exchange traded funds), bonds, real estate, and annuities, etc. If well-selected, each of these will grow over time.
You want to make selections based on your risk tolerance. An investment may look very tempting. However, if you do not understand an investment or if it will cause you to lose sleep at night, you should avoid it!
Inflation is known as the silent killer of wealth. Inflation promises that what you buy today will be more expensive in the future. That is why you need this bucket with investments that will not only keep up with inflation but outpace it.
Your Third Bucket
Your third bucket is your income bucket. This bucket should provide you with reliable income that will last for the rest of your life. There are only three vehicles that guarantee income for life: social security, pensions, and annuities.
Today less than 20% of the US has a pension so we need to create our own. How do we create our own? The only way to create an income stream that is guaranteed for as long as you live, like a pension is an Annuity. Why an Annuity? Because Insurance companies are on both sides of the equation, they have life insurance in case you die too soon and annuities in case you live too long.
Social Security, pensions and annuities are the only vehicles that can give us an income stream that is guaranteed for as long as we live irrespective of what happens in the stock market.
Your Fourth Bucket
Your fourth bucket is your Legacy Bucket. These are the funds and assets you want to leave for the next generation for pennies on the dollar estate and income tax free! But more importantly it gives you permission to spend all your money because your kids are already taken care of.
As in life you will also run into roadblocks in retirement.
There are four major roadblocks in retirement.
The First Roadblock to Retirement Success
This first roadblock is longevity risk. What does this term mean?
Longevity risk is a term used to describe the increasingly common situation in which people live longer or much longer than they had assumed, and the risk is that they will run out of money in retirement!
The average life expectancy for a sixty-five-year-old man is about nineteen more years (to age 84). The average 65-year-old woman is expected to live another twenty-two years to age 87!
Bear in mind that these are just averages and do not consider individual circumstances. Fifty percent of people aged sixty-five will live longer than the above-stated life expectancy. Some of the readers of this book will live to be more than one hundred years old! Do you have savings and investments to pay all your expenses for all those years of retirement?
The Second Roadblock to a Successful Retirement
This second roadblock is inflation risk; as time goes by, the value of money becomes less and less. We have all noticed that a dollar today buys much LESS than it did 10 years ago or 20 years ago.
Ten years from now, a dollar will buy much less than it does today due to the wealth-eroding effects of inflation!
To deal with the inflation risk roadblock, you will need investments that keep up with inflation and even exceed inflation. Investments like stocks, bonds, real estate, and tax-deferred annuities are examples of vehicles you can use to keep up with inflation.
The Third Roadblock to Your Retirement Success
This third roadblock to your retirement success is disability: The possibility that you might become disabled, become unable to work, may need long-term care. More people become disabled each year than die. Unfortunately, most people underestimate the odds that they will become disabled and when disability happens, they are unprepared for it.
This is a topic I hold dear to my heart. Over the years I have seen clients struggle both financially and emotionally dealing with taking care of a loved one. Not only that but I have experienced this firsthand with my mom. About Seven years ago my mom was diagnosed with Alzheimer’s. Fortunately, my brother lived close by so he and his family could take turns providing care for Mom. Eventually mom needed 24-hour care which my brother could not provide, so we had to hire outside help. Her care cost was over $10,000 a month for about four years, fortunately we had policies and funds set aside for her care. This could have been a huge burden on the family had we not planned for her care in advance.
The question I often get is “What is Long Term Care?” Long Term Care is not being able to do two of the six daily living activities such as:
Transferring (Getting out of Bed)
Bathing
Dressing
Toileting
Eating
Continence
Typically, when you need help with two of these six activities of daily living, you need long-term care.
Or, if you have a cognitive impairment like Alzheimer’s Disease or Dementia you may need long term care.
Most people think that Long Term Care takes place in a nursing home, but in fact 80% of the care takes place at home.
Did you know that 70% of the people over sixty-five will need long term care during their lifetime?
Did you know that 700,000 people suffer from stroke every year? That is every 40 seconds someone has a stroke in America. One in ten people aged sixty-five or older have Alzheimer’s and 33% of people aged eighty-five or older have Alzheimer’s. In the US over fifty-three million people have osteoporosis.
There are creative ways to pay for Long Term care on a tax-free basis through the Pension Protection act passed by congress back in 2020.
The Fourth Roadblock to Your Retirement Success.
What if the stock market goes down? What if it goes down significantly? This happened in 2001 during the dot-com bubble crash, and it happened again in 2008 during the Great Recession when many stocks fell by 50% to 60% or even more! Even index funds took huge losses during these market crashes.
If you are young and the stock market crashes, you may have time to re-build your portfolio and your net worth. However, what happens if the stock market goes down in retirement or when you close to retirement? Will you have time to rebuild your retirement nest egg? Or will you end up like Mr. Smith and move in with your kids?
The five years before you retire and the first five years in retirement is known as the “retirement danger zone” or the “retirement red zone.”
So, what is the biggest Roadblock of them all?
I believe that the biggest roadblock, easily, is longevity risk. Why do I say that?
The longer you live, the greater the chance that you will run out of money.
Also, the longer you live, the greater the chance that you will run into a stock market debacle like those that happened in 2001 and 2008.
The longer you live, the greater the chance that you may become disabled and need long-term care or nursing home care, which is expensive.
The longer you live the greater the chance that you will run in Inflation.
What if we could take longevity risk off the table? I believe we can.
According to some experts, stocks, bonds, real estate, CDs, and money markets accounts cannot take longevity risk off the table — only annuities can. An article published by the Boston College, National Risk Index study, states: “Ensuring retirement security for an aging population is one of the most compelling challenges facing the nation. The focus is ensuring that retirees have a large enough nest egg. However, to achieve real security in retirement, households need to get out of their nest egg as much as possible during the drawdown period. Annuities guarantee that households do not outlive their money. Finally, annuities provide more monthly income than any other approaches, such as the 4 percent rule or living off the interest of your assets.” (Boston College, National Risk Index Study. October 2010.
STOCKBROKER VS. MY POWERFUL FOUR-BUCKET SYSTEM
Most stockbrokers only use one bucket, which is their stock, mutual fund, ETF, bond, and cash portfolio.
When you want less risk, a broker will typically reduce the percentage of your assets in stocks, mutual funds, and ETFs and increase your investments in bonds or bond funds. As you are aware, bonds and bond funds, just like stocks, can decline in value. Historically, bonds are less volatile than stocks, but if interest rates go up (as many experts are now predicting they will), bond values will decline.
This one bucket system just does not work in retirement and puts you as risk of running out of money in retirement.
Ask yourself three questions.
Have I taken the unnecessary risks in retirement off the table?
Have I created an income stream I cannot outlive?
If I retired today and 30 years went by and I look back and say, “I loved how I lived those years in retirement” What must happen now so you can truthfully say that then?
People, you insure your Home in case of a fire.
You insure your car in case of an accident.
Doesn’t it make sense to insure your retirement?
Frank Gutta CPA, PFS
YourSafeRetirementRoadmap.com
