Retirement Planning: How Much is Enough? – Monthly Mastermind May 2023

Monthly Mastermind - May 25, 2023

All Live Learning

Retirement Planning: How Much is Enough? with Tim Baker, CFP, RLP

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Welcome so much to our monthly mastermind topic today. And this is a topic that I don’t think enough pharmacy owners really think about, in the sense of like really thinking about it. We all think about that one day when we might sell our pharmacy or what life might look like. But we don’t really think about it in the sense of let’s create an actual path of like, what we need, and what does retirement look like. I think as entrepreneurs, retirement is this weird, fuzzy place that we don’t know if it quite exists? I’ve been there myself, technically, I was retired in my early 30s. And that didn’t sit so well, like I know a lot more now than I did, then. And I probably could have done retirement better at at 30. But, you know, as we’ve didn’t delve back into the pharmacy ownership dove back into owning businesses, you know, retirement continues to morph, you know, as we mature. And so I thought it was really important to kind of start talking about this, you know, we’re here as diversify, to help you have a more profitable pharmacy. But what do you do with that profit, you know, some you might send your kids to college, you might give to charities, you might buy more pharmacies, but at some point, you’re not going to be in the mood, or you may not be in the health wise, or you may not have the energy or desire to continue to run a business and run your pharmacy. And so what does life after that look like? And how much money do you need? Like, when do you know, it’s time to say, Stop, like I have enough? Or to calculate like, oh, I don’t have enough, but how much do I need. And so anyways, lots of topics, we sure surely are not going to cover every possible thing that you can about retirement, and this mastermind call. And we’re actually having the team from your financial pharmacist, which is a perfect blending of pharmacy and all that stuff that comes in being in our world, along with financial experts that come with investing and retirement and taxes and all those kinds of things. And so we’re really excited to be doing a couple of couple of these calls. You know, again, even in a couple of mastermind calls, we’re certainly not going to dive in into everything. But I think the important thing is that you start asking yourself some of these questions. We have a wide variety of owners inside our membership, we have some people in their 20s that are actually opening their first pharmacy haven’t even opened yet. We have people in their 80s that have owned their pharmacy for 50 years, and are still you know, doing the daily grind. So just to kind of help frame up, you know who our memberships are, and who might be watching this video. Obviously, not everybody watches live, some people watch the recording. So anyways, I’m excited to be talking about this. Um, I love thinking about retirement, I love thinking about building wealth. That’s just my happy place because I’m a nerd. So But not everybody’s like that. But I have some other nerds on the call with me from your financial pharmacist. And so if you guys can please introduce yourself, give a little bit of background, and then we’ll hop on into the topic. Awesome. Awesome. Well, I’ll go ahead and lead us off. And Lisa, is it okay, if I share my screen with a few slides? Perfect. All right. And I’m gonna lead on do it, Justin, so I can have the well I’m gonna I’m gonna start Tim and then I’ll give you the screen. So I don’t have to keep asking you to advance the slides. So if that’s okay, that works. I’ll get right back to you as well. So all right. So my screens loading. Can everybody see that screen? Okay. Yes, spectacular. Perfect. So real quick, this is the first time that we that I’ve been in front of this group, Tim Baker as well. So I’d love to hear where everybody is. Checking in from if you can, if you guys can type in the chat your city or state I’m in Richmond, Virginia, Tim Baker himself is outside of Columbus, Ohio. But we’ll love to hear where everyone else is, is checking in from if you guys that folks in Durham, folks in Charleston leases in Dallas. Perfect. We got Scott in South Florida, very sunny there, I suspect. So that’s spectacular. They’re awesome. So even though I was a practicing pharmacist for about 10 years, I’m now a self proclaimed hype man for webinars like these. But before I pass them like to Tim Baker to impart a lot of his wisdom on us, let me really just set the stage for our time together to really help you get the most out of this time. So any questions, feel free to toss those in the chat. My goal is to pause Tim Baker throughout to keep this session engaging to keep the those quick questions being answered. So first off, I want to thank all of you who are here live. And because of that, we want to give you guys the opportunity to win one of our personal finance books. So I’m gonna throw a link in the chat here. You can either go that link or scan the QR code that is on your screen there. Enter your information. And by the end of this session, I will pick a winner for one of our
Personal five finds books that we will ship directly to your house can completely free right so go ahead and click that link there and get your your yourself entered. So really want want to thank Lisa and diversify RX for having us here our co founder Tim and Tim over couldn’t be here today. But he didn’t have the opportunity to attend to the pharmacy profits summit lat lat last year and always speaks about the energy in that room. There’s also a lot of other folks who support what why have P does. So if you’re looking for a home loan, do not skip this step of reaching out to Tony at first horizon. If you’re thinking about buying a home or getting involved in real estate to Nate Hedrick from the real estate, RPh has coached many farm pharmacists through that process. And finally, pearls pearls is really changing the game and drug information. So if you haven’t used their resources, once you start, you’ll wonder how you ever practice pharmacy without it. So check out those partners who helped us. Now the real question is, can you trust us, right, the folks who are here talking to you guys. So we’ve been helping pharmacists achieve financial freedom for about eight years now. Founded first in 2015, y of p, we’re a fee only financial planning practice that connects the pharmacist or wipey. community through the podcast or blog through website resources as well. So there’s really an infinite amount of personal finance information out there. And you know, thank you to the internet, social media as well. So let’s be honest, none of the information that we’re showing today is revolutionary, because it is just just challenging in the nature of applying this information to your life. And that’s usually what people struggle with is oftentimes we lack those tools to make those to make the information actually consumable and usable, create those actionable changes. So that being said, applying personal finance in a webinar, it’s difficult to do so we do hope you learn maybe one or two principles in your financial life to make a difference. But reality we’re all human, you may forget 90% of what you learn in one week. And that is where the wipey planning team really comes in. So it’s comprised of Certified Financial plant planners who help pharmacists like you one on one, actually apply that Personal Finance information, help you make better financial decisions help you live that wealthy life right now, we currently work with over 280 households across 43 states. So you’re probably wondering where I come into all of this, I’m not a financial expert. I’m not a financial planner. But partnering with a financial planner, or financial advisor, it’s a big decision to make. And let’s be honest, most folks are pretty skeptical about what financial advisors do. So that’s really where I come in. I joined the Y of P team back in November of 2021. Since that time, I have met with over 350, pharmacists and various seasons of life, who are really curious about one on one financial planning and tax planning as well. Some shared they’re just like confused about how to balance multiple financial priorities, maybe frustrated, you’re not progressing financially, maybe you took a DIY approach for a while and just don’t know what that next step is. Or maybe you’re kind of nearing the end of your career looking at retirement, and just are uncertain of how that next chapter will unfold. So through a lot of the conversations I have with pharmacists about their financial situation at the core core of it, people really feel this misconception about pharmacists income that a six figure salary is not a financial plan. I’ve seen it play out not only in my own life, but in hundreds of other pharmacists as well. So if you ever feel like you’re at what in one of those buckets that I described, feel free to visit our web website to reach out and we can have a conversation. But the real focus today is on retirement planning and primarily how do we determine how much is enough so as Lisa mentioned, not only with the topic today, but we’re going to come back twice it can’t to hone on some some other skills too. We have a webinar in July about bit bit building on top of okay, now you know what your number is, how we build out what that retirement paycheck might look like. And then October, we’re going to come back with our CPA, Shawn to talk talk about some tax optimization strategies as well. Okay, disclaimer, we do not know your exact financial situation. Therefore, this webinar should only be used as educational only should not be relied upon for investment or any other advice. A couple of learning learning objectives for this afternoon. Before I get Tim in front of the crowd, let’s learn about why you should trust his insight. So Tim Baker, became a financial plant planner in 2012. And then 2016 launched his own financial planning practice called
called script financial and then 2019 merged with the your financial pharmacists brands, who is currently the Director of Financial Planning at EY F p is the co founder as well leads a team of four other CFPs the letters after his name show designations as a certified financial planner, a retirement income certified perfect, that professional and then a registered Life Planner. Okay, so last last part here. Why is this topic even important? I’m glad that all of you asked that. So compared to 2001 2002, both workers and retirees competence has significantly dropped and returned to levels that we’ve last seen in 2018. The last time a decline in their competence about retirement was of this mag, no two was observed during the 2008 global financial crisis because most people rely on advice from family or friends online resources or their employer as the primary source of information to feel confident about retirement. We’ve never actually surveyed pharmacists, but anecdotally, I do hear that pharmacists rely on this thing here, this dial from their retirement account dashboard and pharmacists, we know highly trained in evaluating evidence based research to make treatment recommendations. But when it comes to like our income, that will will fund an average of 18 years of our life, this is what we put our competence in which I feel is a little bit wild. But if you look at the psychology of it, studies show that it’s difficult to prioritize retirement because we feel disconnected to that person, it is compared to actually saving for a stranger, the stranger, right, so I make decisions. For a stranger, this future guy here is a little bit creepy to look at. But my hope is that you leave this session with more confidence to determine how much your future self might need. So I’m gonna stop sharing my screen, I’ll let Tim Baker take over. But as I mentioned, I’m gonna manage the chat. So feel feel free to drop questions in there. And I’ll pause Tim Baker throughout Tim, I think they’re ready. So take it away.
Thank you, Justin, I appreciate it. Thank you, Lisa, for having us here today and really excited to present for the first time to this group. So
yeah, I’m gonna jump right into it. And in, you know, for me, I like this to be as interactive as possible. So there’s a lot of technical things that I’m gonna go and maybe skip through to get to some of the juicy bits. But you know, feel free at any point to stop me ask questions. I’d love this to be as interactive as possible. So retirement income. So what are we talking about today? retirement income planning is really, and how much of is enough for your retirement is, I think key to the overall financial plan. So when we approach clients with this, this picture, it’s really, you know, so much of the focus and the effort is, is on the accumulation phase, it’s just can I put enough away to survive for those senior years of unemployment? That the money doesn’t run out? So that’s one of the biggest pain points is, Do I have enough money to stop working? Will the money run out? You know, will I be destitute, and a lot of the a lot of the curriculum, a lot of the the approach is on the accumulation phase, and the withdrawal phase is somewhat ignored. So in the retirement income space, what we’re really trying to do is convert your resources. So whether that’s a traditional portfolio, a pension, Social Security income, a business that you’re going to sell at the end to a steady paycheck, that’s going to last you for an undetermined time. So the downshifting from the accumulation to the withdrawal phase is where it’s often ripe with lots of risks and barriers and uncertainty. Some of the numbers, you know, Justin kind of mentioned some of this, but you know, the baby boomers, we have, you know, roughly 10,000 Baby Boomers turn 65 every day. So this is a thing that’s happening in real time, and trying to again go from that accumulation to okay, how do I allow for a lifestyle to be sustained over a 3020 3040 year period is really important. 50% of us have never calculated you know, whether, you know, what we have and what we need in order to maintain the lifestyle that we have. So I’m gonna go through some a scenario later Later, just kind of shows are we on track or off track with regard to this picture? And really, this this issue is complex. converting these these assets to income stream while keeping Uncle Sam and the taxes in mind is a hard thing to do. And, you know, we know that the environment is often unstable as well. We see what’s going on in the stock market.
We see how inflation is affecting a lot of things. So checking in with yourself or checking in with your plan, I think it’s going to be important to make sure you know that we smooth out any bumps along the road. There are lots of issues to address as well. And some of the key issues are, how do we how do we get a paycheck and place that is stable? And there’s lots of instability and where that where the money comes from, but how do we how do we increase our stability and our paycheck to meet those basic retirement needs? But also, to feel like you’re you don’t have to live on ramen, as Lisa was talking about earlier, you know, how can we how can we, how can we make sure that after a lifetime, a career of hard work that we can actually apply the assets that we’ve accumulated over time to live a life that is meaningful, and is you know, bountiful, as well. So we want to make sure that we’re doing that we’re making sure that we have enough dollars set aside for those one time, large planned expenditures. So that could be you know, trips, could be weddings, it could be gifts, it could be legacy things, we want to make sure that we have an accountability for that. And then addressing the risks, you know, that we face in retirement. So things like life expectancy, retirement assets, assets, and income sources must last a lifetime. And we just don’t know when the end of the rainbow is for us. So we are kind of planning with one hand tied behind our back, because we just don’t know, when the story ends, inflation so that sources of retirement income need to increase at the same rate as the cost of goods and services. And we saw last year, how much that has spiked death of a spouse, or it could be that, you know, we have a joint plan. But you know, when one spouse dies, that causes uncertainty in the plan in terms of how incomes gonna continue to come through into the household health care expenses, and the increases that we’re seeing their long term care, does a policy make sense? Do we self insure? How do we make sure that,
you know, our basic needs are covered in the event that we can no longer do those daily, you know, living tasks, and then investment returns, you know, we know that the stock market is volatile, we know that fixed income investments, and you know, interest rates, they change over time in terms of what they pay out. So accounted for that over time as well. And then finally, sequence risk, or what’s called sequence of returns risk. And this is the risk of receiving
lower or negative returns early in the period of withdrawal, that could affect the overall portfolio. And I remember this visit, visibly or vividly, I should say, my, my first career after the the army, I’m a West Point, grad, by training, I worked in a warehouse, I didn’t really know what I wanted to do after the army. So I worked in a warehouse for a large retailer called Sears Kmart, and actually took over for a lady that was retiring as part of our management staff. And she retired right in the oh, 809 crisis. And it was so significant on her portfolio, that she was actually forced back into the workforce. Because, you know, in broad terms, if her portfolio was a million dollars, and then that dropped 40% to 600. And then she started to withdrawal on that amount of money, that’s problematic. So the sequence of return risk is something that is hugely important in your ability to plan. And I actually put this slide together, because I’ve been talking through this, but I love the visual of this. So this is the first time I’ll present to this group. But if we think of the eye of the storm being it being your, your date of retirement, your age of retirement, really, we want to be the most conservative, and we’re saying five to 10 years before retirement. So if you’re retiring at 65, age 60, to five to 10 years after retirement is where we want to be the most conservative. So I had the little purple overlay on a Gulfstream or anything like that, that is the percentage of stocks to bonds. So when your career begins in your early career, you should have mainly in all equity, or mainly a stock portfolio. And this is against the grain. So I know that that the rules of thumb out there right now is that I’m age 40. So the rule of thumb is you take 110, you subtract your age, and that’s the amount of stocks that you have in your portfolio. So for me, I should have 70% stocks and 30% bonds, I don’t I take take more of a cliff approach to say, Okay, I’m going to put the pedal to the metal and really accumulate as many assets until I get to the fringes of the eye of the storm. So if I’m retiring at 65, then maybe at 60, I’m going to start adding more bonds to my portfolio, and that’s represented here to get my laser out to make it official. And then in this eye of the storm, where sequence of return risk is most prevalent
This is where I’m going to be most conservative. And then as I get out, and I kind of see where my spending is, that’s where I’m going to, again, go back to, you know, maybe what’s a 4060 or 5050 portfolio. And, and really work on increasing my, my, our allocation over time until, you know, the end of my plan, which is, which is my dad for, you know, not to be too morbid. So, this is kind of one of the major risks that I think is overlooked. And, you know, we typically don’t do enough on this. And in the accumulation phase, we typically get into this, you know, area of danger sooner sooner than we should. And then we don’t really think about it post kind of the five to 10 years after after retirement. So, the problem with this is that the market, as we’ve said, is really scary. You know, but it’s often more positive than it is negative. So this is the s&p from 1872 to 2000 2018. We typically say that historical rates of return, it’s gonna return about 10%. When we adjust that down for inflation, it’s closer to that 6.87% number, but more often positive than negative. But the real illustration here that I think is important is what’s important to the sequence of returns is this. So these are rolling new year periods from, again, 1872 to 2020 2018. You know, if you were to say, Hey, Tim, you know, I’m going to retire in a year,
you know, what should I be doing my portfolio, I said, you want to be pretty conservative, because in a year, we’ve seen results as high as 53%, and as low as negative 37%. But as we get, you know, more time, the more of a time horizon, they’re, you know, rolling five years, you know, we see a tighter shop group, so to speak with regard to the results. So the the best rolling five year period, 28 and a half percent, down almost 12% 10 years past positive six 17%, down minus 4%. And then finally, we’ve never had a rollin 20 year period that’s been negative, and that’s through the Great Depression, the Great Recession, it’s been flat, but not negative. So the idea here is, if you have 20 years to retirement,
then you should be fairly aggressive. If you have five years, we should be fairly conservative. And this is just another way to look at kind of the real returns with regard to the market, you know, a lot of variation within one year, even five years, but when we get out to 1020 years, it’s closer. So another way to look at this is this is a an illustration of the portfolios that we use at y FPR. Our portfolios are very much passive low cost index funds, and it shows
an all equity portfolio, so 100% in stocks, 0%, in bonds, all the way down to what, you know, my dad would be in his in his late 70s, which is, you know, 40% equity 60% in bonds. And what we see here is, you know, we still have variation in return. So, you know, when, when the the equity portfolio that I’m in is up, it’s up, but when it’s down, it’s down. So the idea here for me is like, if I’m, if I’m 40, and I’m gonna retire at 6525 years, I don’t want to put 70% of my portfolio into A into equities I want, I want to be more aggressive, because I’m really not going to remember the bumps in a row. So when we had, you know, COVID happen, yeah, this is not fun. When this is happening, you know, you want to take your investment bowl and go home and go to cash. But the reality is, in 2040, and 2050, we’re not even going to really remember that and what you give up to feel safe today, excuse me, what you feel safe today is return on the back end. So you can see over time, this is annualized over, I think this is what yeah, 20 years, you know, you give up that return on the back end. So and what I often say to clients, especially, that are in that accumulation phase, and have a long accumulation to go, you know, in the worst economic recession of our time, the Great Recession, you know, the market went from here, bottomed out and then returned. And what a lot of people do from a behavioral standpoint is they get out on the bottom and then they buy in after it’s come up. And often with investment, you want to do the exact opposite of how you feel. So where you want to take your investment ball and go home, this is typically where if you have dollars on the sideline, maybe you shouldn’t invest. If you’re on if you’re feeling you know great about your investments and you’re in you know, everything is confident, then that’s probably where we’re due for, you know, a slight cyclical change where the markets gonna go down. So the sequence of return risk is important because, you know, again here, where we went, where we bonded out and then kind of achieved the portfolio where it was before a bond amount, it’s about three, three and a half years. So that that is my that’s the basis of my and that’s that’s how most of these market returns are is that in two, three, maybe on the long end, four years. Your your your portfolio is going to recover. So that’s where the secrets of
returns of five years, well aggressively 10 years more conservatively, that’s where you should be the most most conservative in your portfolio. And they’re just another way, you know, people see percentages and and, you know, like, what does that mean in real dollars. So if you were to invest 100,000, on May 17 2023, you know, in an equity portfolio, that’d be approaching six, if you’re more conservative, you can see how the numbers and my belief is, I want that total total return. And, again, if I’m not
accessing that money anytime soon, I don’t really care what the what the market is doing, which is easier said than done. Because even me, you know, when I look at it, I’m like, oh, like, the portfolio is not looking good. But I got to remember over the course of the long, long term, excuse me, the market will take care of us. So where do we start with this whole retirement thing. And again, one of the things is that we don’t really know when the end of the planet or death is. But the other thing, although you guys probably have more control of it as do is we don’t really know when we’re going to retire. I often talk about my dad, and the situation is, you know, he’s like, Hey, I’m going to work until I’m 65. But he was pushed out of his job, I think at 6162. So we often don’t even have control over when we’re going to retire I guess in our in our normal or our main career due to things like health due to things like job loss. So we want to make sure that as much as we can we have a plan in place to account for that as well. But beyond that, I think where we often like to start in any of these discussion is the kind of the questions of where are we at? And where are we going. So in terms of where we at where we’re at, the biggest thing that I want to look at is the balance sheet, what does the balance sheet look like the assets, the things that we own, minus the liabilities, the things that we owe equal our net worth. And to me, that is the most important number that we want to make sure that we’re tracking over time that’s increasing. Often we don’t feel our net worth, we feel our cash flow, we feel our budget, we feel what’s, you know, kind of affecting our everyday checking account. But this is the the number that’s important in terms of what sticking to, you know, to the balance sheet. Things like cash flow statements, things like social security statements, as we’re tracking, you know, the retirement picture is also really important to inventory. And then second, secondarily, and I would say just as important, though, is where are we going? So what are the things that are most important to you, when we go through goal setting, if we do a deeper dive with some with some clients in terms of life planning, where we go through the hearts core grid, and the things that really drive us the three questions about, you know, what are what are the most important things that we’re trying to extract and built into the plan? That to me is really important. One of the things I say, when I speak, when someone asked me a question, or on the podcast, you know, it’s a Hey, Tim, should we should I do this? Or should I do that? And I’m like, it depends. And it really depends on these, these two things, where are we at? And where are we going? And without them, we can’t really advise clients, we can’t really advise you, we can only give you rules of thumbs, general information, as we’re doing today. Before we can actually really get into the nitty gritty, and it’s the same thing, you know, you guys see, as you know, with patients, and you know, the people that you serve, so for me, when I break this down, obviously, it’s my my family, you know, we we like to travel. Benji here, my dogs probably loved him, probably more than anybody on this on the slide, believe it or not, we purchased an RV, which is probably the worst investment ever, in the history of investments. But it’s a Memory Maker and something that when I went through life planning myself, you know, I thought that, you know, that would be something when I that I would do in retirement. But I was like, Why Why Wait, why not. And after I leave you guys, I’m going camping camping with the family to Hershey Park, in Pennsylvania. So really excited about that. And that’s really the Memory Maker, in the things that I want to first and I see is just as important as making sure I’m putting enough money into my Roth, making sure that my asset allocation is correct. My tax situation is on point. So this translates, again, to more of the balance sheet. These are just some screenshots of some of the tools that we use, you know, what is the net worth? What are the goals? You know, what, what are the scenes and expenses, the income picture look like, and make sure that we’re tracking to that over time.
And make sure we have a plan for all of those things. So the the, the places or the buckets in which we put these these dollars, you know, traditionally and I’ll run through these quickly, because this can be a little bit boring, but are things like the HSA. So, you know, if you have a high deductible health plan, you know, this is often the one that you’re going to want to fund first because of the triple tax benefits. So it goes in pre tax, it grows tax free, you can invest it just like an IRA and then when you pour it out, either for a health expense today or in retirement, it’s also tax free. So for a lot of people, this is the first thing that they’re going to
they’re going to fund
And but if you don’t have a high deductible health plan or you have a lot of medical expenses, then this would not be for you. But definitely appropriate to kind of supplement your, your, your retirement and make sure that the, you know, you’re not doing any type of unapproved distribution, so you don’t get that penalty, which is 20% in this particular
case. So the section 401 K, can you get there was a question, can you go back and just hone in a little bit more on the triple tax benefit of an HSA, for those who aren’t familiar? Yeah. So the way it works is to give you broad an example, let’s say you make $100,000, and you put $3,000 into an HSA.
When you do that, you the first tax benefit is you get a deduction. So the government when you file your taxes looks at you as if you made 97,000. So you get a pre tax deduction now that $3,000 can go into an account. And what a lot of people make the mistake of is they just stick it in cash, and they leave it in cash, which is fine if they’re going to use it today or in the near future. But what you should do if you’re if you’re not going to touch this account is you should invest it, you should invest it per, you know, risk that you have risk tolerance that you feel good about. So for me personally, my wife and I, what we try to do is we try to cashflow most of our healthcare expenses out of pocket. So we have a very, so we’re looking at the HSA investment as a long term. So that’s where we’re we’re mainly in equities. So let’s say you buy an s&p 500 Index Fund, when you invest that, it also grows tax free. So what that means is if I buy that index fund, $100 per share, and then I sell it inside of the HSA $300 per share, I have a $200 per share capital gains, that in a brokerage account, I would have to pay capital gains tax on but inside of an HSA, instead of a 401 K and IRA, I have to pay capital gains tax. So that’s the second tax benefit. And then the third tax benefit is that when we pour out this money for a medical medical expense, or in retirement, once you get past 65,
it also comes out tax free. So that what that means is that, you know, if I have $10,000 in that account,
in a pre tax account, like a like a, like a traditional IRA, that $10,000, if I’m in a 25% tax bracket, I get 7500 and the government gets 2500. For the HSA, that’s not the case. So that’s the third, the third, the third tax benefit with regard to the HSA. So it’s the only vehicle out there that has a triple tax benefit, which is a really, really nerdy thing that accountants like to say, but that is the that is the HSA. So unlike unlike an FSA, which is user lose, the HSA can accumulate over time. And it’s a stealth IRA because it doesn’t matter if you make a million dollars or $100,000, you can still contribute as long as you have the high deductible health plan.
So the section 401 k, and this is typically most people’s bread and butter. Now I would say for independence, this is where I often see, not the best 401k is out there because typically, the smaller the 401k, the crappier it is unfortunately for the participant, they just have to charge, the administrators of the 401k have to charge that much more to make money on the plan. So with a lot of independence, what I would recommend is do an analysis, this is something that we can do to you know, potentially replace a 401k to do something that’s low cost, you know, to you, the owner and the participants. But for a lot of people for a lot of w two, this is going to be their main avenue, their main bucket for the retirement. So it’s the most profit, most popular profit sharing plans typically funded by seral salary salary deferrals. In 2023, you can put up to
another 7000. And the contributions in a traditional 401k are not taxed until withdrawn. So again, if I use the 100,000, and I put $20,000 in the IRS looks at me as if I paid eight or if I made 80,000. And then that 20,000 grows and grows. And then when I pour it out, it’s then taxed at the ordinary income rate in my retirement. So, you know, if you live in Ohio, I’d be taxed at the federal and the state. If I were decide to move to Florida, and join one of our listeners down there, you know, I think that was Mike in South Florida, that would just be taxed at the federal the federal level. So the big advantages here is that it provides you and your employee some choice, you can potentially take in service withdrawals for hardships, you can take loans, a lot of these have Roth components now so you have that Roth component, as well. But to think that this is going to fully fund your retirement is as often not the case. So a lot of time, the investment selection and the price associated with
This is not great. So again, smaller, typically, the smaller the employer, the, the less beneficial it is to the owner and the and the participants, the traditional. So this is typically where we’re supplementing. So this is a pre tax account,
you know that you can contribute up to 6500 into an aggregate with a Roth. So if you put in 3000 into a traditional, you can only put $3,500 into a Roth, it does have that $30,000 per year catch up after age 50. And then you are subject to deduction. So most people I would imagine, on this call, you can put anybody with earned income can put money in but once you get to those phase outs, which I think for a single person is like 67,000, I had those numbers, numbers end somewhere, then you don’t, you don’t basically get that deduction, and you’re contributing with after tax, which is really no benefit. So this is typically where we look at a backdoor contribution. But again, the appropriate use here is we typically are supplementing the 401k. So shelter income from taxation, if you’re below those limits, and then, you know, it’s a another bucket for a long term accumulation for the for the retirement portfolio, excuse me.
The big
disadvantage here is that just like the 401k, just like the Roth IRA, if you do withdrawal this before 59 and a half, then you receive a 10% penalty. And then the big another big disadvantage is, once you reach age 72, I think they just now you have you’re required to make minimum distributions, which says, Uncle Sam is saying, hey, remember, you know those 20 3040 years of accumulation now I’m forcing you to withdraw from that. So I can take my bite at the apple, which is the the tax bill on those pre tax dollars, and that is taxed as ordinary income. The Roth again is this is that these are after tax. So very similar to the traditional except for that money. Once it grows in and it grows, it goes into the account and grows tax free. If you have a million dollars in a Roth, that million dollars is yours. If you have a million dollars in a traditional in your 25% tax bracket 750 Is yours a quarter million it goes to Uncle Sam. So the idea here is to make sure that you have a few of these different types, and we’ll talk about that a little bit. But a big advantage here is that there’s no RMDs. Again, you kind of pay taxes at taxes at a known rate versus we don’t know what rates are going to be in the future. And you can do conversions and do this over time if you if you have the right plan and and then last but not least, the taxable account. So this is typically a brokerage account. There are no really no contribution limits, you can pretty much investment with whatever you want a lot a lot of flexibility, no penalty with to withdraw, you will pay capital gains tax on any gains. So that example, if you buy that index fund and $100 per share, it grows to 300 you are going to pay either short term capital gains tax which is taxes, ordinary income or long term capital gains for most people, it’ll be about 15%.
So you know that that is a detriment here. But for those people that are trying to retire early, say between before 59 and a half the taxable account is something that we want to make sure that we are you know, put money into and and making sure we have a plan for that. So for a lot of people, they’ll also see this in employee stock purchase plans, restricted stock units, or instead of base types of compensation regarded to stock stock options. So for for business owners, probably the the other ones that you know, we should dive into more things like SEP IRAs,
and 401 K’s single solo 401, K’s, even SIMPLE IRAs. Those are other avenues that a lot of I see a lot of independence. I think where the revolution has been in 401 K’s that’s typically the one that I see most of I often showed that when I worked when I changed careers and started working in financial planning. I worked for a solo practitioner. So it was just him he had a SEP IRA that he used to
invest in contribute in every year. And then when I got there, he stopped. Because once I got there, he had to contribute in your mind as well. And he just didn’t have the means to do so. So the SEP IRA does has have its limitations. But it can be a beautiful thing to shelter income and also get money into the retirement bucket. So the shift gears and we talked about Social Security. I think social security in the retirement picture is probably one of the one of the most important decisions that you’re going to make in terms of your claiming strategy. And often this is done wrong. Often that this is this can be very much
affected by what colleagues are doing what family members are doing. And the numbers are starting to shift because what often happened is people look at would look at this as like okay, I paid him this for a lifetime
I really need to get as much money out of this as possible. But often, you know, thing, going through an analysis and looking at a deferral strategy is, is often a a thing, or an avenue that’s overlooked. So 78% is the amount of your Social Security benefit increase each year from age 62, to 70. So, you know, your full retirement age is going to be based on the year of your birth year, the month and the year of your birth. For a lot of people, it’s 65, and then it graduates to 67. That’s, that would be my full retirement age. But once you go past your full retirement age, you get credits, and those credits each year are going to increase your benefit for up to 78%. And then it’s also if you if you take it early at 62, it’s going to diminish your benefit. And the Social Security income stream is is probably the best one that’s out there. Because there are a lot of income streams that are not inflation protected, and backed by the full faith and credit of the US government. Now there’s a lot of negative press about Social Security. And we’ll be there for when I need to collect and what that looks like. And I do think that in the future, it’s not going to look like what it does today, like it is today. That the end of the day, if you look at this as a stable income source, this is probably the most stable that you have more so than a portfolio, or a pension or an annuity that you have through an insurance company. So this decision is monumental. Many claim the benefit at 62, or as soon as they’re eligible, and that’s often a mistake, you know, different this benefit could greatly increase the amount of income. And once you make the decision, it’s permanent. You do have a year window. So if you’ve if you’ve claimed Social Security, and you’re like, oh, I shouldn’t have done that, there is a way to kind of unwind that. But like I was saying most sources of income retirement income are not eligible for inflation protection, they don’t even sell an annuity out there that has a cost of living adjustment, it might be a flat 1% or 2%, or 3%, but they’re not going to correlate it to the CPI. So really, the steps here is to educate yourself, you know, determine the amount of the benefits available to you and the implicate implications that has a different age, claimants ages. And then what fits your best situation and when you have a spouse involved, that, you know, the the the wrinkles in terms of this decision increase. So you want to make sure that you’re looking at this holistically, you know, buzzword and make sure that whatever strategy you employ, it fits what you’re trying to do. And a lot of a lot of advisors will talk about breakeven and total benefit and things like that. And I think that’s important. But the end of the day, you know, this should be a bedrock benefit, you know, that that’s built into your plan. So this is my Social Security statement that I pulled just a screenshot, it basically takes, you know, the the top 35 years of earning, and it says, Hey, Tim, if you work and start claiming at 62, this is what you’re going to receive if you wait until age 70, which is probably what I’m going to do, this is what it’ll look like. And to me, this decision, again, I think is one of the most prominent ones that you’ll make. So if we transition and we talk about the the approach, we’re gonna jump more into this in future sessions. But the approach to build out your paycheck and what this looks like, at the end of the day, this really comes down to
the dreaded b word or better put the cash flow analysis, you know, everyone talks about, Do I Need A Budget, the tighter your budget and you know where your dollars are going, the better because it can ultimately lead to more productive and fruitful conversations about how do we account for a retirement paycheck over the next 20 3040 years. So this is just a representation that we show clients in terms of like the different sources of proposed income. So for this particular client, you know, in the early stages, we have a spouse that is going to continue to work but then we’re going to do a stable and through withdrawal on the portfolio there is no pension or annuity in this case, but also no shortage and you can see that a good chunk of the income over time is really going to be made up of social security with a lot coming from the portfolio. The good part about this is this projection is that there is no income shortage but if we if we stress this and we show you know years of down markets or living longer it actually will determine you know some of the the exposure and risk that’s there 37% of this portfolio is from a stable source which is basically anything that’s from Social Security a pension or an annuity anything else outside of that so if you the name of the game is have as little dollars in income shortage and as as many dollars in a source that’s that’s stable. So when we tackle this whole thing of okay how do we actually build out you know, this you know, retirement paycheck for said year, there’s really three main approaches that
are out there. If one is the floor and strategy, which is probably the most conservative, you have the bucket strategy. And finally, the systemic withdrawal strategy, or most people know this as the 4% rule. So I’ll go through these. And I think in future sessions, we can kind of talk through this a little bit in more detail. But the floor approach, as I mentioned, it’s probably the most conservative of the three. And it’s probably the best solution to mitigate the risk of running out of money. And ideally, ideally, what works, how this works is that the floor and approach builds an income floor to meet the essential expenses, often with safe lifetime income, like social security, or a pension from work, or a commercial annuity product. And then discretionary expenses. And other financial goals are funded from the investments that you have, say, in a 401k, a traditional IRA may be what you get from the sale of a business. And the idea is to convert the assets into an income stream that eliminates the possibility of excess withdrawal risk. So that’s where your portfolio is spent down, and you don’t have enough. So in this very crude example, here, we we’ve kind of listed out, Hey, what are the retirees essential expenses? And we’ve determined that it’s about $5,400 per month, what are the discretionary expenses between travel gifts, things like that $2,200 a month, and essentially, we’re matching those expenses with an income stream. So we say, okay, you know, for Social Security, that’s the only one that we had available. So at $3,000. So we had a shortfall of about $2,500. So that’s where we peel off some of that traditional portfolio to buy an annuity for the life of the annuity. And we know that come hell or high water, we’re always going to have enough money for those essential expenses. And then the discretionary expenses would line up with your portfolio, so withdrawn and amount, or maybe you’re doing part time or consulting work, that type of thing that can fund those. So the for the approach is probably, again, it’s the most conservative, it could be an approach that you’re leaving some money on the table in terms of what you can spend month a month, a lot of people don’t like this approach, because if I have to part ways for, you know, if I have a $2 million portfolio, and I have to part ways with 500,000, or whatever the amount of money to turn that into an income stream, people often see that as you know, a bet that they don’t want to take, because if I give that money to an insurance company, and then I die the next day, what happens to that money type of thing, so, but there are some psychological benefits to this, where, you know, a lot of retirees stress out, they kind of look at the market too much because their livelihood is connected to how much is in that account.
So but if you just have a check coming in from a mental
behavioral perspective can actually be beneficial to the to the retiree, the bucket approach, basically segments your spending. So you set up separate pools of investment with lower risks in the near term bucket, so that zero to five years, and then somewhat higher risk investments in the next segments, that would be bucket two, and then the riskiest, or more equity or growth stocks in the longest term bucket. And then income is you’re drawn from one segment at a time. So you’re basically drawn down bucket one, bucket two will then fill bucket one, bucket three will then refill bucket two. So once the first segment is depleted, you kind of have rules in place that say, Okay, how do we then you know, replenish bucket one. And you really need to establish rules and how the buckets will be plant be replenished over time. So this could be a delayed approach and automatic approach could be based on the market, it can be based on capital needs. For a lot of Pete, for a lot of retirees, this approach is probably easiest to understand. In reality, it’s really just the systemic approach, but kind of compartmentalized in in our brains, because we know that okay, if I have enough money for the next zero to five years, I’m good. So if the market does take a turn, I’m not necessarily as worried about this, because I’m not going to, you know, be using this bucket of funds for a long, long time. So the bucket approach from from a understanding and a just segment and spending in different assets toward a particular purpose is is the name of the game here. And then finally, the with the system, systemic withdrawal, often called the 4%. Role. 4% is the common rule of thumb, how much of your portfolio you can spend in retirement each year. The idea is that if you have a Million Dollar Portfolio, you can spend 4% of that $40,000 each year, and that will sustain you. The problem with the 4% rule is it is a rigid rule. It applies to a very specific portfolio composition. It’s the hypothetical. The study was built on a 50% stock 50% bond portfolio, which I think is
you know, is not appropriate over the course of retirement. It does use historical market returns. So a lot of people believe that historical rates are higher than what we will see in the future. It does assume a 30
your time horizon. So for a lot of people, we’re going to live longer than that. So there’s, there’s some risk there. And then it includes a very high level of confidence that your portfolio will last you for a 30 year period, which means that, you know, in just about every case, there was money at the end of the, at the end of the portfolio, which sounds great in theory, but it also means that you have less to spend in retirement, to achieve that level of safety. So you’re kind of trying to thread that needle. And then it also doesn’t account for any type of taxes or investment fees, you know, related, which, you know, obviously, we know are there. So, with with the withdrawal with this withdrawal strategy, again, it’s based on that 30 year time period, to determine the safe withdrawal rate for the worst 30 years in the market. And what we try to do is diversify investments based on the client’s risk profile and manage the total return of the, of your total portfolio. So the 4%, being the most well done, or well known. So just to kind of, you know, throw this out. So this is that $1 million portfolio and you’re wanting to retire retirement, we’re in that eye of the storm, and we are most safety of principle. So we’re in a kind of a split 5050, you know, these are, you know, what the the portfolio return can see what inflation is, and then what it is at the end of the year. And then based on the rules that we provide, we say, Okay, for the next coming year, we have a $41,000 check the following year, based on returns and inflation 43,000. And then we can see that over time, you know, the portfolio becomes diminished, you know, the with inflation, we know that the spending is going to go up, but in year 29, it fails. So this is where, you know, when we talk about probabilities, we’re not going to let this fail, we’re going to make sure that we we put in, you know, you know, a fork in the road and make sure that that we will sustain over the course of the time that we need. But this is a little bit more flexible. And this is what I would say is the most predominant with most advisors out there. Again, when I got into the industry, and I was talking about the solo practitioner, we didn’t really, we didn’t really drive this conversation, the client would say, hey, I want $50,000 This year, I want $30,000 this year. And I feel like a lot of advisors do this. But to me taking a very measured and you know, approach to this, I think it’s important for the longevity of the portfolio in general. So the last thing that we have to do is account for Uncle Sam. So like I said, I think at the end of the day, we want a little bit in column A, which is the taxable asset. So that’s like a brokerage account, a little bit of column B, which is that tax deferred. So anything that says traditional, or has no precursor at all. And then finally, that tax free asset, which is typically anything in the Roth bucket, and we often will order the distributions accordingly. So we often will begin with from withdrawals from the taxable account, and then move to the after tax, and then you know, typically from the tax deferred, and this exercise in itself,
will prolong the portfolio longer than you know, if you were to just kind of do it in, you know, a parade a pro rata amount across the across all accounts just to illustrate this a little bit more. You know, if we, if we look at this, if we have a a an original investment of $10,000, while we’re in a 25% tax bracket, and we assume that the the investment essentially doubles or there’s 100% ROI.
Basically what that means is that if in when we retire if we’re in a 15% tax bracket, so we know that that $7,500 in a Roth doubles to 15,000, or 15,000 of that is mine. So in that case, it would be better to basically when I when I was in a 25% tax bracket
to do the pre tax. So essentially, we’re looking at a doubling of 10 to two, in this case, 10,000 to 20,000. When I take it out in a 15% tax bracket, I owe the government 3000. So when they’re equal 25% tax bracket, that 25% tax bracket, it’s 15 and 15. So the idea is that you want to pay the taxes, when you’re in the lowest bracket when you’re in the highest bracket saying that that’s the 35% It would have been better to pay the taxes than the 25%. So this is a convoluted slide and says, you know, when you pay the taxes is going to be important as well. So finally, they asked question of how much how much is enough? There’s a very detailed approach to this. And you know, you can use simulations and Monte Carlo analysis to say, hey, based on the plan, we have a 71 probability of success. Most planners try to do anywhere from 70 to 80%. That, you know, in those cases, the money doesn’t run out. And we can show that over time. I like to do kind of the simple approach, at least to start and do a nest egg calculation. So in this in this example here, and I know we’re kind of running up against time here
in the nested calculation, can you guys still see my screen Justin? We have a thumbs up there. Yep, we got Okay, gotcha.
So the idea here is we want to make sure are we saving enough? Or are we on track to save enough, so I’m going to walk through a hypothetical client here. And this is Jane. So Jane is age 45, she has basically 60, she has her target retirement ages or full retirement age of 67. So she has 22 years, essentially the work work for the man, her life expectancy is 95. So you know, most planners will use between age 90 and 100, you can go on to social And it’ll tell you, for me, I think I’m gonna live to age 88. But because we want to be a little bit more conservative, we were gonna say 95. So essentially, from 67 to 95, we have 28 years of senior unemployment. Jane currently has $225,000 saved for retirement and her current income was 135,000. Now, for a general rule of thumb, we use a wage replacement ratio of 70%. Most planners use between 60 and 80%. The best
approach here is to actually go category by category and look at you know, your spending and try to you know, extrapolate that over retirement, that is harder to get to. But we use a wage replacement ratio for this exercise. And again, the idea is that in retirement, you’re not going to be saving for retirement. So often people are saving 1020 30%. And that’s automatically discounted when we go from the accumulation to the withdrawal phase. So she’s using that kind of rule of thumb was like when you’re in your 40s, you know, you have 70%, equities, 30% in fixed income. So her real rate of return when we come for inflation is about 5%. And then when she’s in the withdrawal phase, she’s, again, more conservative 5050. And we can kind of see that based on historical rates of inflation and return, so that her total annual need is 94,500. So essentially, team that is just 70% of 135,000. Now, in our plan here, we’re not going to account for Social Security, we’re going to plan as if we’re going to go the whole way. Now we know that’s not true. But we also know that the benefit is going to be in the undetermined probably, you know, in 22 years, when she goes to retire, she doesn’t have a pension benefit. So her annual need the whole way is 94,500. Now in 22 years, the future value of that is 181,000. So at age 67, essentially, if I’m her planner, she’s gonna say where’s my check for 181,000, over 12 months at age 68, at age 69, all the way to 95. So for her to be able to sustain that portfolio, she needs about $3.2 million. So this is where typically advisors will say, okay, break, you know, you got it. And this is what we used to do in my last firm, and I’m like, that doesn’t connect with anybody, like it doesn’t, you know, you look at it, you know, the officer would look at us, like we have 3 million heads. So, to me, let’s, let’s actually discount that back to what we’re doing today and see if we’re on track or off track. So if Jane had $0 saved for retirement, she would essentially need to be investing 4300 bucks per month. That’s that’s a, that’s a lot. But because she has 225,000, that number goes down and she needs about $2,500 per month invested into her portfolio. So she’s currently saving 10%, she gets a safe harbor match for her employer of about 3%. So she’s currently putting in 1463, she’s not putting anything into an IRA or taxable taxable account. So she has about a deficit of $1,000. So if you go back to my argument about you know,
you know, making sure that you’re in the right portfolio, a lot of this can be so there’s, there’s a few levers you can pull, you can work longer, so she can work to age 70. And that can often you know, solve a lot of the problem. Let me zoom out of this. So we have the full picture here.
Hopefully, you guys can still see that. It’s a little bit small. But she can also
basically let the market do what the market does. And I wouldn’t say go right to 9010, because we are going to have to like taper that. But we can see the impact of that just to say, okay, stock market, I know over the course of time, you’re going to take care of me. So I’m not going to be conservative, I’m going to let it do its thing and not worry too much about it. But it also could be that in the withdrawal phase, we’re not going to be super conservative, maybe we average is 6040. It could be that you know, Hey, Tim, I’m not comfortable with being more conservative. So I’m going to save harder, I’m gonna max out which is in her case, 18 seven. And that gets me to the 22 five and I run a deficit or I run a run a surplus. It could be where hey, I’m gonna wait till full retirement age. And this is probably the most impact where if you put that number in, where does that put me and you can see again, Social Security is going to buoy a lot of us. So the idea here is to model this out and then to know what levers can we pull to
better our overall picture. So to go back to, you know, the strategies here, you know, the idea is, we can always save more, we can try to seek better performance out of the portfolio, we could decide to live on less, which is often the hardest one to do. We could work part time in retirement or we could also extend you know, I put that out to 70. This when I was going through the Ric P train, or ICP training, this was the one that kind of blew blew me away. So this is a paper. So a study published by Stanford’s Institute of economic policy research that says, The Firm retirement by three to six months is like saving 1% More of salary for 30 years. Deferring retirement by one month is like saving 1% More of salary for the final 10 years. And this is often, you know, a lot to do with, you know, pushing back spending, social security, health care, all that stuff. But these are, you know, interesting, interesting statistics. So, actionable steps, understand your statements, where are we at understanding, you know, your why, where are we going, you know, clarify, you know, where you’re at your position, your goals, contribute, when you look at your contribution, are you putting in, you know, what you need to for retirement? Is the is the asset allocation appropriate? Are you more conservative? Or are you too aggressive in terms of where you’re at? And then focus on what you do best being a pharmacist and obviously, you know, shameless plug, hire a professional, and there’s lots of, you know, third party stories about why that’s beneficial to, to you. So, Justin, I know we’re a little bit over time, I believe, but yeah, yeah, but but I think going back to that nest egg piece, I threw in the chat here, kind of like what what my wife I have for our numbers. And that was powerful for me when I started working with the YP playing team, because I worked with an advisor through Ameriprise for a long time, it was just focused on invest, invest, invest. I was grateful for that. But I didn’t have an idea where we were going, right. And when I switched to yp planning went through that exercise, I found out we were actually running a surplus, right and that and that’s what made us take a step back and say, You know what, we can prioritize our life now because future, Justin with all the gray and white hair there, he should be fine, right? So if if you feel like you’re in one of those buckets, potentially needing help, I’m available to chat, you can go on our website and click that link there. Pull joke in there, obviously, you want to talk to this guy, because he talked to the older guy. Probably by that time. It’s too late. So but I know we’re over time. I thank you guys for having us. We can certainly stay on for some questions as they come in as well. So yeah, that’s all we got, though. Yes. Thank you. Thank you, Lisa. Thank you. Great. Appreciate the the attention. Yeah, I haven’t seen any questions coming in. That was a lot of information. So for those of you that were on even if you were on live, obviously we do record these and we’ll send out an email with the recording. Because you might need to go back and like re listen to that you guys put like, I think a whole day’s of retirement education into into a webinar. So I think it’s it’s a good start, I think, if you feel a little scared after this, like, I think that’s okay. Because fear, get you into moving and find out what you do want for, you know, starting with just asking the question, what do you want retirement to look like? You know, are you going to be one of those people that you know, love to garden at home and stay home? And, you know, make your own food? And those kinds of things? Are you going to want to travel the world are you going to want to, you know, fund, you know, your grandchildren’s college education, I think it’s just really important to start thinking about the future. And as a pharmacy owner, you know, we don’t know how this industry is going to play out. Nothing’s predictable. And a lot of times, I think too many too many times, pharmacy owners just assume they’re gonna be able to sell their pharmacy, and that’s going to fund their retirement, which sometimes that works. And sometimes it doesn’t. And so I think in the process while you’re operating your pharmacy year after year, you need to be planning for retirement and not just hoping and praying for a one time buyout at the end, and then life will be good. So God is my summary for this. So thank you guys, thank you, the IFP the whole entire team there, and I highly recommend you at least reaching out and get just start having these conversations and gathering more information. I think it’s just what’s really important and they have a fantastic podcast. So listen to their podcast, and I highly recommend that so thank you guys. I will let you all go and we’ll talk to you. Thank you. Bye bye


Date: May 25, 2023
Time: 12:00 pm