Tom Can Help You Change Your Financial Path
Transcript:
Tom Vaughan:
So the first question I’m going to kind of present because it came in this week. And we really, you know, thought it was an interesting question. And we decided to do a deep dive on it and show exactly how we would do this. And so the question is, and this is a, this is not an unusual situation, hey, I am wanting to retire in a few years, and I keep looking at it [my financial plan] and trying to figure it out and I can’t make it work. It doesn’t seem like I’m going to be able to retire when I want to retire. And so, you know, what do I do? This is not an uncommon situation, where somebody is, you know, initial parameters, they actually don’t work. And so anyway, we’ll we’ll go through some of that. And I’m going to jump back in between times here and just have some conversations with Easan. So we can kind of flesh out some of the pieces, Easan helps me do all of these financial plans. So he’s very familiar with this. So I’ll start with my sharing my screen. We call this finding a retirement path. And I think this is incredibly important. It basically wants to be able to find the path that works for you. And it’s very motivational once you find that.
So in this particular situation, we’re looking at a scenario that doesn’t work, and what path does work? And is that path acceptable? And if it is, you got it, and you move forward as far as that goes. So I’ll give you you know, a brief run through of the basics for this particular plan. I made these people up, none of this is real. But it’s based on you know, 35 years of doing these plans and 6,000 plants under my belt. And so, you know, there’s some reality to this, but we have Brad and Jennifer, okay, randomly chosen, they’re currently 62. Right. And so that’s, that’s an important age, a lot of people come to see us around that timeframe. And, you know, Brad’s employed, he’s making hire 1000. Jennifer’s also part time employed, she’s making 30,000. They’re married, they live in California. Okay, so all of those are important data points. And so they want to retire at 65. So I’m talking to Brad and Jennifer, this is the most important component, they have other things that they desire to do, and certain amounts that they’d like to spend. But the most important thing to them is to retire at 65. Because every plan, you can move things around which say what happens to retire at 67? They don’t want me to move that one around, basically, is what they’re saying, I hear this a lot. You know, we’re tired. We’ve been working for a long time, and we would like to retire at 65. So then we have to figure out well, what age are we retire? are we planning to how much time are we going to need the money? Well, that’s really hard to tell, obviously.
But we can use some averages. So if you look at male age 65, average life expectancy is 92, female age 65, average expectancies 94. So we’ll do that right at least start with kind of the averages. As far as that goes. The biggest challenge in financial planning by far is longevity. If somebody doesn’t live very long, then you know, it doesn’t really it’s not very hard to accomplish that financial plan. It’s somebody that lives a long time. And so you definitely want to push the envelope a bit as to you know, what you’re looking at. I mean, this is 30 years of almost, essentially, of time that they’re going to be withdrawing and using this money, so that that’s what makes retirement planning a challenge is kind of making the money last that long, as far as that goes. Now, here’s some of their other issues. And this has to do with what we call the goals. Really, this is the outflows This is the money that’s going out. And so they have figured out that they need about $75,000 a year, alright, to pay for the things that they like to do their travel and their bills and everything else that they want to do. And, you know, again, are retiring 65, we’ve also broken out a cost for health care. So roughly 90 $500 for Medicare, once they retire, that will grow at a faster rate to inflation. That’s why we build that out. And then we set you know, we put in $1 amount for car, you know, truck type of thing, 30,000 every 10 years, we build that out as a separate thing, because it’s kind of lumpy, and it’s just one of those things. There’s all kinds of things we can put in there. I’m trying to keep this simple, but this is the basic concept. So here’s here’s the outflows here’s what we want to outflow.
One of the income sources is Social Security. And so they say, okay, when we retire at 65 we want to take Social Security when we retire. And we think that’s the, you know, one of the part of our plan, and so Brad would be getting almost 28,000 Social Security and Jennifer would be at almost 14,000 So security. And if they live to their average life expectancy, they might get 1,000,002 at a Social Security, so that’s pretty cool. And then here’s some of the assets that they have 450,000 and Brad’s 401k, he’s still adding for the next three years 13,000. And he’s going to get a match and what have you to so Jennifer’s adding to her 401k, she has 150 at 18 $100 a year, they saved up about $250,000 in data, Chase checking, savings, those types of things. And so this is their asset base that they’re going to be withdrawing from, for income needs above Social Security. As far as that goes, they have a house, it’s worth a lot 1,000,002. And they don’t, at this point, have it in their plan to sell it. They want to start off the planning process, just saying, hey, what if we just don’t use it in the plan, right, so we don’t count it. So we’ll start there and see what happens.
Okay, so now we can run this current scenario through what is called Monte Carlo simulation. So Monte Carlo simulation allows me to push this button, it’ll run their plan 1,000 times. And every time it runs, the planet, lets the computer randomly choose amongst the different variables. And so it’s really, really awesome, it’s a great way of telling it’s supposed to be replicating their life. So if I push this button, boom, here’s the Monte Carlo simulation. And if you right away, you can tell this is somewhat problematic. There’s so many times here out of 1000, that it ran out of money before they ran out of time, there was 220 successes and 1000 trials. So that’s not very good. Basically, that means that four times out of five, they’re going to run out of money, that’s not a comfortable retirement. And so you know, that’s one of the pieces that, you know, we would deal with here. So we’ve got this situation, they want to retire at 65. They want 75,000 Medical truck car, you know, they’ve got Social Security at 65 coming in, and all these things, and keep the house those, it doesn’t work. Alright, at least for those parameters. That’s not a path, right? I mean, that would be successful path. And so then it’s a matter of trying to figure out what to do next. One of the things that we would look at next is really kind of the Social Security Arena. And so this is, again, one of the things that Easan helps with is trying to, you know, figure out these areas and what you know, we test and test and test and try to find some of these different things that can work to make some of these plans work.
Easan Arulanantham:
Yeah, Social Security is important. And the nice thing about it is you really don’t have to do anything to get the additional money. There’s nothing coming out of your wall, it’s just making sure that you take at the right times to make maximize your chances of success.
Tom Vaughan:
Yeah, it’s up. We do seminars, or we were doing seminars before the pandemic, just on Social Security pack the house every time. And people are very curious about how you maximize those security. And it is amazingly complex. It’s incredible how it works. And it’s also kind of controversial, honestly, because people are worried about it surviving. Right, that’s a big issue that certainly came up just a few weeks ago. And so Oh, I should take it earlier. You know, I but if you take it earlier, that could be very detrimental to you financially. And so security has never failed, even though it’s been talked about failing forever. Back to the 40s. I remember going to a class on Social Security and the person teaching the class had a whole bunch of different headlines, and one of them was Time magazine from 1940 about so security’s going to fail, well, it’s still here. Alright, a lot of times, that is pretty easy to fix. So personally, and the study that I’ve done, I do not think it’s going to fail. So then it’s a matter of making the right choice and getting to the right spot and Social Security, especially in a plan situation like this, where it’s not working under the current scenario.
Alright, so let me show you what we do there. inside of this program. This is program is financial planning program is called Money, Money Guide Pro. We’ve been using it for a long time, I really like it. Let me describe this chart. I think I find it interesting. So the current strategy we’re using right here is this 65 for both of them. It’s also the same strategy number three, it’s the same concept, but it shows how much they would get right with a total amount probability of success. And what to call the break even point is actually, you know, if you took it at 65 versus different ages, you know, when do you break even on that, so this case, 67, but here’s something really fascinating. They could take it now. Essentially, they’re both 62. They would give up about a couple $100,000 In total, in terms of their, you know, amount, if they live to the average life expectancy that’s in there. And that knocks, they’re probably success down all the way to 12%, they almost cut their property success in half, just because they take Social Security at 62, this would be wildly detrimental to them to do that. And so I think this is something very fascinating to take a look at, they could take it at full retirement age, which for them is 66 and 10 months, 66 years and 10 months, they would make more, they get, you know, more total, probably success jumps up to 24%. Right. In that case, you know, their breakeven point is 72. So a little bit longer, but still probably make it to 72, especially on the average, or they could take it both at age 70. And this is where they get the most money. 1.4 million breakeven point is 76. So again, if they last if they if they live past 76, they’re better off taking it at 70. But I’d probably choose this one here, where Brad takes it at 70. And Jennifer takes it at full retirement age 66 years and 10 months, because this is the highest probability of success. And I like that. And I think that this kind of works allows them to take at least some of it a little bit earlier, just, you know, almost a year and 10 months past retirement.
But more importantly, and this is critical. The bigger one, though, you know, so Brad has 27,000, she has 13, etc. The bigger ones survive. So in other words, if one of them passes away, the smaller one goes away, and the bigger one stays. But look at this, it’s kind of interesting, the total amount they get at 65. And again, I’m going around here very simply. But if you add 27, and 13, you get 39,000. Look at that, just his all by itself is 39,000 by waiting to 70. So if something happened to one of them, they’re actually replacing this entire amount that they would have taken at 60. And they’re getting and that’s again, that’s why the probability of success Jones from 22, to 25. And we can see that, you know, if we go in and push the button, there it is, you know, you can see the spaghetti pattern here, so to speak, is that 25%. And so this is kind of a really, an important piece of the puzzle, especially in these situations, is trying to maximize that Social Security.
Alright, so now the next thing we want to look at is the possibility of selling the house. So this is an interesting one, you know, I have clients all over the country, because they’ve moved from here, house values are very high here, and they can usually go someplace else and buy something cheaper. Brad Jennifer is at I’ve actually told me that they have a son in Las Vegas. And they don’t really want to live in Vegas itself. But they’ve heard great things about Henderson, Nevada, which is not far away, and some of the retirement communities there. And I actually have some clients that live in Henderson, and live in a retirement community. And they love it. And they think it’s the best of all worlds. Because they you know, there’s no state tax in Nevada, they can, you know, tell me that they can actually see the, you know, the strip from where they are, but they’re not in that whole hustle bustle of the Vegas part, they still have this kind of nice town in Henderson. But if they want to, you know, before the virus or after the virus here, they used to go into shows like there’s some great restaurants there. So they kind of have this access. And of course, the airport flying in and out of Vegas, you know, is unbelievable. You can go almost anywhere from there. So, you know, that would be an prices for homes, they’re much cheaper than they are here. So they might be able to capture something out of that.
Easan Arulanantham:
Yeah, and especially in the Bay Area, tapping into the asset of your house is important or can be important if you’re on the essentially what your plan is in trouble because you have such a big asset here that’s appreciate if you’ve been here for multiple decades. And maybe a sale is good for you. But there’s other options if you really want to stay like you can have a using a reverse mortgage that might affect your own, how much you give into your state, but you want to have a successful retirement over giving more money to your state.
Tom Vaughan:
Yeah, that’s a good point. I mean, so if you really want to stay in your home, there are some issues, some ways to kind of deal with that. And one is the possibility of a reverse mortgage. All right. And what happens there is essentially instead of you taking a mortgage out and paying it back, they actually pay you a little bit a month and every time you get paid your your mortgage value grows. And so again, that could be detrimental to your beneficiaries, but you get to stay in that home. And actually, one of the nice things about this area so far as the appreciation of homes has been so dramatically good, that you’d be able to stay here longer, and maybe get even more appreciation than you’re taking out and alone. And your beneficiaries actually do better than moving to Henderson, Nevada. So they’re reverse mortgages, you have to be careful. Some of them aren’t very good. But there are some good ones. Now, they used to be horrible, but now there’s some decent ones, they just have to pick and choose and be a little bit careful there. But it is really it is an alternative as far as that goes. And so and that’s part of this process and find your path, find your retirement path. And everybody’s got a different path.
Everyone’s got different desires and things that they want to, in this case with Brad Jennifer, they said, they’re okay, looking at the concept of moving, you know, in this case, to Henderson, Nevada. So let’s take a look at that and see how that plays out what difference that makes. Okay, so again, now we go back to their basic information, and we put in Nevada here instead of California, right for because now that program will actually calculate the taxes in a different way, it was calculating it staying full time for the rest of their lives in California. Now, we’re going to say, you know, at retirement, we’re moving to Nevada. And so there’s lower tax, and so that makes a difference. But you’re also theoretically going to be buying a cheaper place. And so let’s just say in this, in their case, that they get an extra 250,000. So they sell their house, they pay the realtor, they take care of any moving costs, they put, you know some money into their new place, which seems to always happen when my clients move, or some furniture or something that’s needed. And maybe there’s some taxes depending on the situation. And let’s say they net, after all of that 250,000, they can now put into kind of their investments. And all of these things are invested at 60%, stock, and 40% bond, except for the checking, which is what we call cash, basically. And so this would be invested in that same 6040 mixture. And then again, now that we’ve changed the plan, we can go back and see we know so far, we went from 22% on the base case, so to speak to 25 when we maximize those security. And let’s see what happens if we sell their house and move to Henderson and net 250,000 and lower our taxes, because there’s no state tax in Nevada, we hit that, you know the button here again, and that’s pretty big difference, that moved all the way up to 77% probability with that move.
So makes you know, if they’re okay with that, if that’s a path that is, you know, acceptable to them, it really makes sense financially, it really does work. And so that that’s another piece as far as that goes. So it’s really, really fascinating. You know, again, this is why we have so many people that have moved all over the state and all over the country, to different places. Not everybody wants to move, I have a lot of clients who want to move at all. But I will say those people that have moved, you know, that wanted to move, they’ve been pretty happy. I haven’t heard from anybody over the years, you know that they were really unhappy with the fact that they moved. The only time I’ve heard anything, and this is one thing you got to be a little bit careful about is somebody that moves to a really small rural area, like Arnold, you know, or in Cal here in California can move up into the foothills, and Arnold mainly because or Sonora, you know, whatever. These are scenarios that I’ve run into just in my practice, mainly because if they have a health issue, you have cancer, you have Parkinson’s, or you have whatever, they don’t have the facilities there to really deal with you. And you’re having to go out on a regular basis for treatment and maybe go down to Sacramento or Modesto or San Francisco, and in a lot of driving and it just kind of takes away. So I would focus and that’s where like Henderson and Las Vegas, you know, in this case for bad Jennifer makes a difference. They’re going to run into some pretty good care facilities there. And if they had to go out for something pretty major, like come back to Stanford, they could get back to Stanford pretty easy, out of out of the Vegas airport, like an hour and 20 minute flight. So those are considerations for that move as far as that goes.
But the next thing though, we’re still at 77%. And one of my kind of lines in the sand that I like to try to do I try to get these plans to at least 85%. If you understand Monte Carlo simulation 85% is probably overkill, but I do like to really make sure that people have successful retirement as much as we can possibly do that. And so that’s where, you know, taking a look now at their budget, as far as that goes, would be kind of the next big thing. He used to take a look at. Alright, so go down here. So let’s just say we take a little bit off the head 75,000. Let’s say we take that down to 70,000. So about $400 a month, it’s possible and my client who lives in Henderson talks about how much cheaper it is, they’re just to go out to eat, go to grocery store all these things, it’s possible, you know, that we could be moving to Henderson and spending a little bit less anyway, and still have the same exact standard of living. And so let’s just see what happens here, if we just reduced that a little bit. And so we would hit the MonteCarlo simulation button again. And here we are, hey, we did it, we’re over 85% 88% is great. So think about what just happened here, they click they come in, they’re a little bit concerned, because it doesn’t seem like their plan is going to work. And they’re right, retiring at 65, taking Social Security 65 keeping their existing house as is with no other alternatives. Really, it’s not going to work. You know, I can say that pretty emphatically, when you’re at 22%, probably success, you’re gonna run into problems.
And, you know, then they, you know, go through a process where we’re going to maximize Social Security, and we say, Okay, great, that gets us up to 25% probability success, Brad takes it at 70, Jennifer takes it at full retirement age. So that’s good, you know, we live off of the other assets that they’ve got in the interim. And that’s what the plan is showing you works, it works better than taking Social Security 65. And it works way better than taking Social Security early at 62. Then we sell the house and we net some money, we say some taxes by moving to a lower tax state, and we end up with, you know, a 77% probability of success, cut the budget by a little bit. And all of a sudden, we’ve got a plan and a path that works. I talked to them, we make sure the budget works, they really look at that they’re okay with the home move at some retirement and all of these things happen. And, and that’s, that’s, that’s their path, that’s their retirement path. And now, you know, we just keep working on that. And we look at this, you know, plan every six months to try to see, you know, what happens, you know, does it change? What’s the probability of success? Or is the house now worth more, you know, or less a stock market doing well, or not, you know, those types of things that they can have an impact. And so that’s, that’s, that’s, that’s the overall process as far as that goes. And I think it’s really interesting all together, as far as I’m concerned. Comments Easan?
Easan Arulanantham:
Yeah. And the nice thing about it is like, say, you want to test different scenarios, like a different like kind of forks in the road, say, we test a reverse mortgage versus selling your home and moving to Henderson. And we could have both those scenarios, and we can delay and just see, you know, maybe they want to move to Henderson as kind of like a last resort. And if they could figure out how to stay in this house, they would do that, because they’ve invested so many years, this is, you know, where there’s up the roots.
Tom Vaughan:
Yeah, that that’s the beauty of it, actually, there. This is a fairly simplified, you know, presentation of what you’re looking at. And your situation might be a lot more, you know, complex. But we can essentially model and ask questions, and get an answer and use 1,000, you know, trials to get that answer. This is an amazing timeframe to be looking at retirement and retirement planning. The tools that are available are incredible. And you’re exactly right. I mean, we actually do that a lot. Eastern, I will kind of meet before we you know, present every plan and just start to do a lot of what ifs What if this happens? What if we do that? What if the mortgage is paid off? Or, you know, whatever it is that, you know, we look at, and we do find some things that consistently work and some things that consistently don’t work, you know, so that’s helpful for us to kind of guide us in a quicker fashion. But it’s really, really interesting. As far as that goes, I find this work to be fascinating as far as that goes. Now, one thing we didn’t really talk about too much is the kind of the investing arena because it is important to try to get the best rate of return that you can, and that’s for sure. And we’ve you know, created a scenario here where we’ve got, you know, 60% stock and 40% portfolio, we’re just looking at kind of a generic scenario. I just wanted to show you what our portfolio looks like for those mixtures. So you can get an idea of how it works. And so this is our 60% model here. And you’ve got a scenario where the blue is kind of the stock and the green is the bond.
So here’s a couple things. Number one, I’m a big believer in buying basically the whole market. I’m also people lever and buying Exchange Traded Funds, which are very well diversified pieces. So give me example. This is the Vanguard total stock market index has 38, little over 3,800 different stocks, which is almost all of the stocks in the US market, we can buy it with one ticker symbol VTI. Very simple. And we can buy and sell this. There’s no commission to buy or sell it either, which is really nice. So know that that’s a piece. I’m a big believer in using the biggest companies in the country that provide Exchange Traded Funds, which are Vanguard, which is number two, and then I shares is owned by a company called BlackRock. And so that’s number one, that’s the biggest provider of Exchange Traded Funds. And then spider here SPDR -is actually a company called State Street back in Boston, they’re the third biggest and so if you look, you’ll see an awful lot of those three companies, I like you know, they kind of are big enough to get enough volume into these ETFs, they’ll be around for a long time. And also that bigger size allows them to lower the internal fees, I believe the internal fee, for example, in this total stock market index is now point 03 percent. So very, very efficient portfolio. With this mixture, we can buy the S&P 500 with one ticker symbol, instead of buying 500 stocks, we can buy ESG stock. So this is this is in the portfolio, because these are doing well. So this ESG portfolio here, this Vanguard ESG portfolio is actually exactly the same as this total stock market. But what they’ve done is applied in ESG screen.
And so in that screen, what they’re doing is they are using outside company to analyze all the different companies out there. And they give them a number based on how they interact with the environment, how they interact with their community, how they interact with their employees. And ESG stands for environmental, social and governance. And so in this particular portfolio, they’re only buying those stocks that are here in the total stock market that meet a certain ESG number. And these have been doing very, very well. So that’s why they’re in there. I know we got the I like big stocks, because they’re safer, in my opinion, more liquid. So the top 200 stocks on the growth side, top 200 stocks on the value side, healthcare and utilities is doing quite well right now for a variety different reasons. So and then we’ve got our bond portion here with treasuries. And this is the total bond market index, which has, you know, just 10s of 1,000s of different bonds. And so the diversification is unbelievable here. And if somebody wants to get income, like, let’s say, Brad and Jennifer, when they retire, if they don’t take their Social Security, what we would do is we increase this money market to 5%. And we take the money from the money market until it runs down. And then we rebalance the portfolio to bring this back to 5% is what’s called a systematic withdrawal. So this is how we would handle Brad and Jennifer’s, you know, income need, especially during that timeframe, when they’re not taken.
Social Security, as far as that goes, probably take it out of their trust account first, and then eventually take a look at, you know, their 401k IRA assets. As far as that goes, we also have a pure ESG portfolio. So for those of you who are really, really interested in kind of that socially responsible portfolio, this is all ESG pieces, ESG screen, this is the S&P 500 for ESG, etc. So, you know, we can accommodate that. And we’ve had these portfolios for a long time, and they’re, they’re very efficient, and they’ve done quite well actually we have been very pleased with that. So that’s important component of it, you know, if you’re, if the plan is saying, okay, here’s the averages, and here’s what’s going to happen. And MonteCarlo simulation is looking at some bad situations, it’s got to be careful that you don’t create those bad situations yourself by going into the wrong investor areas. And really, you know, finding a situation where, you know, you don’t want to hamper your own abilities, your own retirement plan, by having, you know, horrible advice. And unfortunately, that does happen. But try to keep that to a minimum. I think that’s important. Because that that would help, especially in the situation where you’re, you know, kind of on the edge of making it work just right, as far as that goes. So any closing comments Easan?
Easan Arulanantham:
Yeah, like, especially finding that your correct risk tolerance and finding that for your portfolio, you know, if you’re not 60/40 being able to stick through that will really help you in the long term.
Tom Vaughan:
Yeah, that’s a big piece that I didn’t really cover, which is just, you know, we just randomly chose a 60/40 mixture, 60 stock 40 bond, because it’s very popular. Our overall practices roughly that right now, I think we’re 63% stock across all of our accounts. But everybody’s got a different personal risk tolerance. And so that would be probably part of the planning process and maybe for you, you really can’t handle more than 20% risk, and that’s okay. And that’s your path as part of the path. And we got to figure out what that means. Or, you know, you really like more risk, you believe in the stock market more and, and you really want, you know, maybe an 80% portfolio. And we can do those too, we have, basically our portfolios go by 10% increments from zero to 10, to 20, to 30, to 40, all the way up to 100% stock. And so that, you know, we can accommodate those risk levels, but that that’s a good point. That’s, that’s a super important area altogether, of this whole, you know, concept is just making sure that you’re matching the risk, the plan can say you need a certain level of risk to make it work. But if your personal tolerance is lower than that, you need to readjust the plan to that lower tolerance and find the path that works. Because in the end, if you’re taking more risk than you can mentally handle you will lose. That’s been my experience. So that is a part of the process that we would normally go through there too. So it’s a good point.