We ask Tom When is the Right Time to Retire?
Transcript:
Katie Nealis: “I’m trying to decide if I can afford to retire. What’s the best way to figure out when to retire?”
Tom Vaughan: Yeah, this is one of the most stressful periods, at least financially that that people run into, outside of not being able pay bills and those types of things. But it’s just, you know, all of a sudden, you go from, earning a paycheck to having the money, disappear from your paycheck, and you’re living off of your assets, and maybe Social Security or other things, pensions that you might have. And it can be a really tough decision, what we do is we prepare a financial plan. And that’s really critical. So in that plan, you’d haveall of the different income sources that you might have coming in, rental income, pension, Social Security, those types of things, you’d have all of your assets that you have, taxable accounts, IRAs, 401Ks, how they’re structured, and everything, and then you’d have kind of your goals, hey, what do I want to do, I want to spend this much I’m going to travel, I want to have money in the future, for the for these gifts to my kids, or charities, all of those are the kind of the outflows. And once that’s all in there with these current financial plans, you can do what’s called Monte Carlo simulation. And what it does is it runs your financial plan 1000 times.
So it’s running down this path over and over and trying to see what happens in different situations, the market has great, the market is terrible, you have higher expenses, inflation is low, all of these scenarios, and out of 1000, how many times did it work. So if it only works, let’s say 400 times, that your plan is not going to work. I mean, as too many failures, you’re probably going to run out of money. If on the other hand, your plan works 900 times your plan is probably going to work. And so that’s what helps with the decision. And we run the financial plan that says, okay, that works. You know, it’s within reason, usually, for retirement, I’d love to see more than 850 successes out of 1000. So higher than 85% would be something that would make me feel comfortable and advising somebody that they could retire with those goals. And then we redo that plan, every six months, when we have our strategy sessions, we kind of push the button, look at the Monte Carlo simulation. And it’s really just like an early warning system. So if there is a problem that’s coming up, because of market downturns or expenses were higher, it gives some time to make adjustments to those. So Monte Carlo simulation, and a financial plan is the only way I would decide, whether retirement was possible at some point in time.
Katie Nealis: Great. So let’s say, “I’m about 35 years older, I’m going to be retiring soon. How do I generate an income to live off of?”
Tom Vaughan: Oh, okay. Well, first of all, you have, most likely, at some point in time, what I call outside income sources that you have to take a look at. So security will be one that comes eventually if you qualify, you might have a pension, you might have rental incomes, royalties, I’ve seen all kinds of so you have to take a look at those first, those are your basic income sources and kind of plot them out when they’re going to come in. And then if there’s a deficiency, in other words that you need more money to live off of, which is very common, actually, then you’re going to live off of your assets. And so drawing income on your assets is a really interesting area. Because when you really look at what a lot of people are doing, they’re buying a lot of bonds and trying to live off of the interest.
Used to be people bought CDs, and live off the interest. But now they’re not paying anything, or they buy dividend paying stocks. And the problem with using those strategies, especially solely to generate the rest of your income is a kind of shoves your portfolio off into this one category. What I have found and this, I’ve been doing this for 34 years, and it has worked, I have found that I want to keep a balanced portfolio. So it might be 20% stock or 40% or 60% or 80%, whatever it is, I create a balanced portfolio. And then we set up a distribution right out of the money market. It’s called a Systematic Withdraw. And then when the money market runs down, we rebalance the portfolio replenish the money market. And as long as the withdrawal is somewhat reasonable someplace in that kind of 2 to 5% range, it kind of really depends on what’s going on with the markets. And you have to be somewhat flexible there too. But, that has worked fantastically well.
And actually, the thing that really fascinates me is that I merged with Cam Neri in 2005. She had her own practice, it was roughly the same size as mine, when we merged, she’d been in business for you know, 20 plus years. I’d been in business for 20 plus years. And we both had exactly the same methodology. We both did Systematic Withdrawals and had worked up until then, and it just continued to work since then. So using a Systematic Withdrawal on a balanced portfolio, I think that’s the best way you’re getting some dividends, you’re getting some interest from those bonds, and you’re getting some long term capital gains out of those stock pieces. And it just allows you to kind of have this overall balance and kind of march forward.