Tom Advocates Building and Growing Wealth for Retirement
Transcript:
Easan Arulanantham:
So the first question of the week is, what is the best way to get income from or retirement?
Tom Vaughan:
Best way to get income for retirement? Yeah. Okay. When we look at retirement, you know, there’s a lot of things besides income, there’s a lot of things besides finances that are really important, you know, your health and your family and, and just your enjoyment as a whole, you know, your satisfaction with your retirement. But in terms of finance, when we’re looking at all the different financial aspects of it, obviously income, I think it’s probably number one, and it has that ability to kind of, you know, you know, make your retirement more successful and more satisfying, if you have enough income. I would answer this question, though, first, by just a discussion about expenses, because I think it’s super important. You know, if your expenses are so high that no matter what you do with the income side, you can’t need those, you’re going to have some troubles, and you’re going to have a very dissatisfying retirement. And so the first thing that I would notice within my clientele, and that is, I think this is one of the advantages that I have, I’ve been doing this for 35 years, I’ve done over 6,000 financial plans. And even more importantly, I can work, let’s say, an 80 year old, and I’m able to look back over their whole life path and talk to them about what they did. And I can compare an 80 year old, that’s been very successful with an 80 year old, that hasn’t been very successful. And I’ve noticed some differences. And so that’s what I’ll try to talk about.
So first of all, in the expense side, those retirees that are doing very, very well, they’re spending less money than they could spend. And that’s true, at any age, right? I mean, that’s one of the key aspects is to be able to save and continue to save. So let’s just say, for example, we have a client who could spend 100,000 a year well, and they’re spending 70,000 a year, and that’s a really big deal. So they have this extra money that they could be spending each year. And what that does is it gives you room for emergencies, you know, house maintenance, things that happen, you know, I just had my my house blow up because of leak inside the wall, and, you know, wiped out a bunch of hardwood floor and what have you. So very expensive to fix all of this. Or if you have kids, you know, anything can happen with the kids no matter what age they are, and you want to have money for that. Or if you have dental issues, or vision issues, or hearing aids, all of these things are things that aren’t often counted in somebody’s overall budget, there are things that happen on or on an occasional basis. And so that’s number one, spend less than you could at any point in time in your life, especially in retirement, and that will help.
But then if we break that down just one more step of that, say $70,000, that that hypothetical person spending, if you can reduce the amount that is fixed versus variable, that’s a huge deal, because it just gives you massive flexibility. So let’s say for example, we have one person whose fixed expenses are about 50,000, right, versus the 70,000 that they’re spending. And another person whose fixed expenses are 20,000, the person with the lower fixed expenses has a way more room for error. And when things fall apart, they can cut back easier. So fixed expenses are those things, you know, the next time the market dropped 60%. And you take a look at all of your expenses, those things that you can’t get rid of very easily. Those are fixed expenses. And the biggest ones are mortgage payments, car payments, those types of things. So most of my very successful clients have no debt. Now, some have a little, but it’s very little, most have no debt, and they’ve paid off their house. So that’s something to try to achieve in retirement. It just gives you flexibility. So if you have to reduce from 70, down to 50, you can do and just go back to share. It should work.
And we’ll just keep going. I was mentioning that, again, you know, a retirement that’s very successful is one where you’re spending less than you could spend and of those expenditures, you’ve reduced the fixed expenditures that are very hard to get rid of as much as possible for the rest of your retirement. And so once that’s achieved, then it’s a matter of generating income to kind of accomplish that. So let me let me share my screen here so I can show you. This is a thing I call the retirement income builder. And so these are just a whole bunch of different places that you could generate income, you know, for your retirement as far as that goes. And so, you know, we’ve got stock and bond investments. We have savings and CDs annuities, alternative investments. So security pensions, I’ll get back to those because those are important. And maybe you have rental income, or maybe you have second or first mortgages, you know, investments that you’ve made, where people are paying you, you know, the money back, maybe you use your home equity, you know, you can do that by maybe moving to a smaller home at some point.
Or you might continue working for a while is part time job or consulting or little business to get started, I have a lot of clients doing this now, that more than they used to retirements become kind of this fluid thing, where people just want to be able to shift to something they really want to do. So if I look at this, the two things that really jumped out at me are the social security and pensions for starters, because, again, my most successful clients have low fixed cost, but they have high fixed income. So I would call these kind of fixed incomes. And it really, it’s money coming in from an outside source that doesn’t rely upon a renter or the stock and bond market or interest rates at the bank. And what happens and why this is so important, you really want to maximize your social security and your pensions. And this is essentially a math problem to figure out how to maximize those, we use financial planning programs with Monte Carlo simulation to figure out the optimal age to take. So security and the optimal choices to make for a pension distribution. So that’s very, very important component. Again, my happiest clients, the ones that are the most relaxed are the ones that have the most money coming in here and have very little fixed expenses. So it just gives them tons of flexibility.
But your distribution from these other areas, assuming that these two pensions, social security does not meet everything you need. Really, you have to take a look at you know, should I have rental income? Should I be investing there, if you already have that great, but do you want to add to that, should you be taking money from stocks and bonds? Should you take money from IRAs first or from your non IRAs first, and so what we call the sequence of withdrawal from the rest of these is incredibly important. And it really makes a big difference. It’s one of the things that we kind of figure out in the financial planning process as to where to get the income from these, but you should have a fairly robust system of income potential. And that is really, you know, having a lot of these different circles filled in so that you have something to fall back on in case one circle doesn’t work, having everything you own in any one of these circles, could work if it has to be a great circle, but it also has that risk of really being a, you know, an issue with, you know, lack of diversification. So diversify your income sources as much as possible is what I’d recommend.
Easan Arulanantham:
So if I like, for me, I don’t really have an option of pension pensions kind of falling off with my generation is like, what’s a good way to fix it? Because right now, if I’m my options are 401(k)s and IRAs, which are kind of depending on the market, is there any way I can get that fixed income is, do I turn to annuities?
Tom Vaughan:
Yeah, that’s exactly what you do. For most pensions are farmed off to an annuity company, some of the big ones aren’t, but a lot of them are. And so the company will accumulate a certain amount of money and then give that to an insurance company to produce an income for life. So you could make a pretty good argument for, you know, using what’s called an immediate annuity, they’re fairly efficient, where you would accumulate some assets, and then turn it into an immediate income that comes out for the rest of your life, maybe the rest of your spouse’s life, you got all these different options as to how you do that. I, you know, look at that, personally. And that’s one of the things that I plan on doing. Again, I have sat across the table from 1,000s and 1,000s of people and watched you know, what’s happening in their retirement. And I’ll tell you what, the people that have lots of money coming in here in this fixed income area, are very, very pleased and very happy. Now, the problem is, it just kind of depends, you can’t put, you know, if you don’t have that much money outside of say, so security, then you probably don’t want to do an immediate annuity and wipe out all of your liquidity in these other places. So, you know, this would be something where I’d be looking at more like a 10% or something less than that, in this area, just to generate, you know, an income for life. And so, you know, again, if you don’t have tons of money, that probably not worth it. So the value of your entire, you know, asset growth has as a as a factor in this but yeah, that’s, that’s one of the ways to take a look at that. You know, and obviously, I like to stock and bond investment area. So another way to kind of make sure that you’ve got at least some security there is to have more in the bond market, you know, if you have 60% in stocks and 40% in bonds, you know, a bad bond market isn’t nearly as bad as a bad stock market. So that that leads to gives you some security for a chunk of your assets that will be there, you know, more likely for the long term. So, you know, those are? That’s a good question, though. And it’s an interesting area, it again, it depends on how much assets you have as to what you can really do.
I mean, if you don’t have enough assets to buy a home to create a rental income, you know, that’s, that’s, that’s not an option, for example, but yeah, so it depends. So what are your thoughts on, you know, reverse mortgages and using home equity as kind of a, to make a kind of a fixed income to, yeah, Home Equity comes out in two ways that I’ve seen number one, and we’ve, you know, we currently have licenses our clients and 26 states outside of California, because people have taken their, you know, basically high value home here and sold it and move someplace else that’s cheaper. And then, you know, the, so they sell something for a million and a half and buy something for 500,000. And that extra million dollars, you know, after tax goes into really kind of their stock and bond investments, which can then generate income, right. So that’s one way of doing it is to actually move and a lot of people have done that. The other way, if you don’t want to move is this concept of the reverse mortgage. Now, the problem with reverse mortgage is that they’re not the best deal, when you really dig into them, they’ve gotten better, they used to be really bad have, you really want to use that as sort of a last resort. So when all of these other things are exhausted, and you don’t have enough money to really make some of these other things work. And you’re sitting on you know, a million and a half dollars worth of equity in your home. So basically, you’re home poor and you really don’t want to move, then reverse mortgage is probably your best option in that particular regard. And there’s different ways to do that you can kind of do quasi reverse mortgage by just getting an equity credit line, and withdrawing, you know, small amounts per, you know, per month to live off of, and there’s a whole bunch of different ways to do that. But nonetheless, yeah, that that is an option. But it would probably be the last thing on my list. You know, once all these other things weren’t enough, I would be looking at that. Again, only if I didn’t want to move, which which happens actually quite a bit.