Pilot Money Guys:
The 4% Rule
Welcome to Flight #16!
On this podcast, we are talking about a commonly used rule-of-thumb for taking retirement income distributions. The 4% rule is meant to help you easily determine how much you can withdrawal from your retirement accounts each year, without running out of money in retirement.
The 4% rule goes like this:
- The year you retire, add up all of your retirement accounts, and withdrawal 4% of the total.
- Each following year, take out only the 4% (of the total balance at time of retirement) + adjustments for inflation.
- At this withdrawal rate, your money should last 30 years.
So, should you keep it simple and use the 4% rule? We don’t think so!
In fact, this who episode is dedicated to help you know why the “4% Rule” may not be best solution for taking retirement income distributions.
We recommend checking out this great article from Charles Schwab on the 4% rule!
TOP 10 Flying Movies!
10- Dr. Strangelove with James Earl Jones
9- Air America
"I don't wanna crash twice in one day!
Gene Ryack : Don't worry, I crash better that anyone I know."
8- Strategic Air Command with Jimmy Stewart
7- Hot Shots with Lloyd Bridges,
“Gentlemen, we've waited a long time to hear this. In exactly 5 hours and 17 minutes we hit the enemy toast"
Block: "Err... I think that's enemy coast sir"
Benson: "Huh? Coast? That'll take a bit more planning. But it doesn't matter..."
6- Flight of the Intruder With Willem Dafoe and Danny Glover
If only for the line “this is going to be the most exciting thing you've done with your clothes on doc”
5- The Right Stuff
4- Command Decision 1948,
Clark Gable, the trailer is fantastic beginning with, “here told with shattering impact is the inside the mysterious the hitherto top secret chronicle of men who shook the very earth itself whose spirit is embattled but whose hearts are with their families and one woman thousands of miles away.”
Best quote: "You're gonna have to land this plane!"
Ted Striker: "Surely you can’t be serious..."
Rumack: "I am serious… and don’t call me Shirley."
"A hospital? What is it? A big white building with lots of sick people but that's not important."
2- Top Gun
"Ben, it’s not your financial planning, it’s your attitude. The crypto markets are dangerous. But right now, you’re worse than Bitcoin. You’re dangerous and foolish. You may not like the guys financially planning with you, they may not like you, but whose side are you on?"
Flight #16: 4% Rule
[00:00:00] Rob: Hey folks, tip of the cap to you. Thank you for joining us here at the pilot money guys, podcasts flight 15. We're going to talk about the 4% rule. This is the place we aim to give you some a light-hearted financial fun. And we usually talk about some airline news, but today, a little bit different. We're going to be talking about the top 10 flying movies of all time.
[00:00:25] I'm your host, Rob Eckland flight crew today. I'll also known as rubber man. By those I don't like your flight crew today is the godfather CFP. Charlie. Madingley welcome, Charlie. Johnny's a little under the weather. Cut him some slack folks, but we've got Mr. Kyle Bell, Ben Dickinson. Welcome. Ben
[00:00:45] Ben: glad to be here and I'm feeling a hundred percent, so, uh, it's going to be, it's going to be good.
[00:00:50] And we're going to, we're going to make sure that Charlie gets through this
[00:00:52] Charlie: Charlie
[00:00:54] Rob: slack. Somebody needs to all right. Seriously. Excellent. Well, we're talking, we got a lot of good feedback allegedly about the top 10 lists. So we're going top 10 flying movie. The number 10, number 10 of all time, top flying movie is Dr.
[00:01:12] Strangelove with a lot of folks, but one of them's James Earl Jones is the Bombardier. Anyways, the best quote, I think from that movie is gentlemen. You can't fight in here. This is the war room. Number nine,
[00:01:23] Charlie: Ben, what do you got? We got
[00:01:25] Ben: air America. I don't want to crash twice in one day. Don't worry. I crashed better than anyone.
[00:01:32] I know.
[00:01:32] Charlie: Nice. Love it. Pretty good. Nice
[00:01:37] Rob: Charlie.
[00:01:38] Charlie: Number eight. Uh, number eight is a strategic air command with Jimmy Stewart. Something. It's a wonderful life. Maybe it was a throat. One confused something about an angel in that movie, not the set,
[00:01:54] Rob: the same Brigadier general Jimmy thought that
[00:01:57] Charlie: was where the bell rings on the Christmas tree and the angel gets his wings.
[00:02:00] Rob: Didn't Reagan make Jimmy Stewart a major general later on. He did. I'm pretty sure he did. Yeah. Yeah. Okay. So take that, uh, number seven. Is, uh, you know, maybe, maybe a critically acclaimed hot shots with Lloyd bridges, famous quote, or a little excerpt gentlemen, we've waited a long time to hear this in exactly five hours and 17 minutes.
[00:02:24] We hit the enemy toast, or I think that's enemy coast, Sur coast. That'll take a bit more planning, but it doesn't matter. Number six, Ben.
[00:02:38] Ben: Flight of the intruder with William Defoe and Danny Glover. If only for the line, this is going to be the most exciting thing you've done with your clothes on doc.
[00:02:50] Rob: Be the best line and aviation flying history movie, uh, in the movie world.
[00:02:56] That is number five. Great stuff. Charlie, what do you got
[00:03:01] Charlie: the stuff coming in at number five, you had a great quote. Oh, ghost
[00:03:06] Rob: in the inner demons. There, there was a demon that lived in the air. They said, whoever challenged him would die, their controls would freeze up. Their planes would buffet wildly and they would disintegrate.
[00:03:16] The demon lived at Mach one on the meter, 750 miles an hour, where the air could go no longer Mo there could no longer move out of the way. He lived behind a barrier through which they said, no man could ever pay. They called it the sound barrier. Whoa, that's scary. That was a, obviously that one could be arguably be number one.
[00:03:35] I think that's good. Number four command decision Clark Gable, the movie itself, not that great, but the is fantastic and epic and it goes something
like this here told was shattering impact is the inside the mysterious, the hitherto top secret Chronicle, a man who shook the very earth itself, whose spirit is embattled by who, but whose hearts are with their families and one woman, thousands of miles.
[00:04:01] Yeah. I mean, it just stopped podcast right here.
[00:04:05] Ben: Nice. We put that at four, we get based on the fact that the movie isn't good, but the trailers off is that right?
[00:04:12] Charlie: Okay, here I go. Here I go. You're going to have to land this plane. Ted striker says, surely you can't be serious. I am serious. I know. Call me Shirley.
[00:04:21] Rob: That's you know,
[00:04:23] Charlie: I mean, we've got another one, a hospital. What is, is it a big white building with lots of sick people, but that's not important.
[00:04:35] Rob: Classic. Okay. Number 10. I, uh, I'm going to take, because I, I switched it to make it a financial planning because it's so well known by everyone listening to probably top gun, obviously number two, Ben, it's not your financial planning. It's your attitude. The crypto markets are dangerous, but right now your worst, the Bitcoin you're dangerous of foolish.
[00:04:54] You may not like the guys financially planning with you. They may not like you. Whose side are you?
[00:05:02] Charlie: A little bit too close to home, a little bit too true.
[00:05:04] Rob: Only kid cause I love man.
[00:05:07] Ben: I love that though. You know, I mean, as Bitcoin Jesus, I can say I am a little too into crypto and crypto is, are dangerous. Disclaimer.
[00:05:17] Rob: Yes. Number one, Charlie, bring it home for us. I mean this one is number one.
[00:05:22] Charlie: Memphis Belle. Yeah. That's it, no quote, necessary
[00:05:26] Rob: quote necessary B 17 crew flying their 25th and final sword. Wow. Germany notables left off this list. I know a lot of people are thinking where's irony Eagle where snakes on the plane
[00:05:40] didn't make it. Yup. All right. Enough of that, let's get into our financial topic of the day, the 4% rule. What is it? How do we think about it? Ah, let's dissect this a little bit. Who wants to take first shot at this?
[00:05:57] Charlie: Let's do this. I could definition Ben. Rob, you got a definition
[00:06:01] Ben: I can, yeah, I can. I can do a little definition.
[00:06:05] You'd have to ready. All right. So 4% rule. You've worked hard. You've saved for retirement. And now you're ready to take some money out of your accounts. Um, but you don't know how much you can spend. If you spend too much, you may be, you may run out. If you've been too little, you may not be able to do the things you want.
[00:06:23] So the 4% rule is a way to figure out how much you can withdraw from your retirement accounts and hopefully, and most, you know, how with high probability not run out of your money. So the 4% rule is. Take 4% of your total retirement accounts, the year you retire and you can withdraw 4% of that amount. So for instance, if you have $1 million in your entire retirement accounts, then your first year, you could take out $40,000.
[00:06:55] That's 4% of a million. And each year you increase the amount that you withdraw based on inflation. So you can adjust it just by the cost of living and that money should with a high probability lasts you for about 30 years. So that is a very common rule. We hear it a lot. Um, it's, there's millions of articles about as probably the first thing that comes up with.
[00:07:18] If you, uh, Google, how, how much can I take out of my retirement
[00:07:21] Charlie: accounts?
[00:07:23] Rob: Absolutely. Well done.
[00:07:24] I would say the 4% rule should not be called the 4% rule. I contend it would be the. Uh, guideline or rule of thumb, but not by any means.
[00:07:34] Right? So, um, little, little history here, uh, for us nerds developed by William being and back, and it was published back in 1994 in the October issue of the journal of finance. He's a native of Brooklyn. Does anyone, do you guys know happen to know what bill being in did for a living prior to becoming a financial advisor?
[00:07:56] Anyone excavator clothes, clothes. He got her, he got a bachelor of science from MIT and aeronautics and astronautics. Wow. He coauthored topics in advanced model rocketry and. At MIT, I guess. So I don't know that he's still doing anything, but yeah, he's he was at least, uh, some of the research.
[00:08:16] I said he was, he saw, he was still doing stuff up through the 2007. I don't know if he's still doing stuff. That's a great question. Put that in the show guests guest,
[00:08:24] Ben: or you should definitely tune into the show. He would enjoy it. Yeah,
[00:08:28] Rob: sure. Uh, but originally it was. Taking 50% large cap, uh, stocks, low cost index funds, ish and 50% bonds.
[00:08:43] And it doesn't get into the bonds too much. Or at least I didn't see that any of my research. And like you said, 30% would draw a safe what they consider a safe withdrawal rate, which is there such a thing? Is there just one number, Charlie? Do you think that just one number that we can say as this.
[00:08:59] Charlie: No, no way.
[00:09:01] That fact that's one of the, uh, the drawbacks about this is so rigid, you know, and like you said, or alluded to at least Robert's rules of thumb,, I don't really know what they're good for. You know, if you're planning for retirement, I don't think this is something to maybe just give you an idea of ballpark, big time ballpark, but there's a lot of assumptions that go into it that may not apply to you.
[00:09:20] You know, a lot of them such as historical rates of returns such as your time horizon, a risk tolerance, et cetera. So yeah, absolutely not to
[00:09:28] Ben: mention that most people spend less in the future. Then they, throughout their retirement, they actually decrease their spending overtime rather than increase it.
[00:09:36] This rule actually says you. Lots of train. Ignore that.
[00:09:42] Rob: yeah, I think what's interesting too about there's so many assumptions that go into it and he later went back and looked at, okay, let's just not look at large cap funds. Let's throw in some small cap and surprise, surprise the rule or the 4% moves to 4.5% when he throws in small.
[00:10:02] Funds, which is no surprise because we are always talking about, you know, where returns come from. And a lot of returns come from small cap funds and a dimensional fund advisors. And we talked at nauseum about that. Well, maybe talk more about it, but, but very interesting how it moved from 4% to 4.5% throwing in different asset classes, uh, or at least different diversification.
[00:10:25] Charlie: Yeah. I think what Ben mentioned is, is really critical in that, as a, when we're working with clients. , firstly, we don't want anybody to run out of money. We don't want that to be even an issue that they have to worry about. That's a big fear that people have. So we want to alleviate that fear, you know, really quickly.
[00:10:41] The second biggest fear that I have as far as retirement income is I don't want to shortchange people early on in retirement. , I really want to get this. Especially when they're newly retired, they're most active, ready to travel. Ready to go. One of these, uh, the go-go years. Is that right? Rob?
[00:10:59] Go-go slow-go
[00:11:02] Rob: no-go slow-go no-go yeah. Yeah.
[00:11:07] Charlie: And I think one of the things. , the 4% rule, with the assumptions of 50 stock, 50 bond, we could talk about allocation a lot and what the assumptions are for future returns versus past not to mention 30 years of life expectancy, maybe you're, maybe that's not an appropriate number either.
[00:11:27] But what I think is, is a very interesting, and that is the assumption that it's a 100%, uh, level of comfort. Now that's interesting because when we do our planning, we also come up with a probability of success or level of confidence. And what, let me take a minute to explain what that is, , it's a Monte Carlo analysis where you run a thousand different stock market scenarios, different rates of return, a different order of return.
[00:11:56] And so then it says out of a thousand scenarios, your success. Uh, you know, if you're, if your level of confidence was a hundred percent, you're a successful a thousand of a thousand times. That's great. And some people think, oh, that's what I want. However, I would argue that you don't want that. I would argue that if you have that level of success in retirement, and this is just my opinion, not advice, but I would argue that you need to spend more.
[00:12:21] You know, because, uh, you have probably have the capacity to do that. And here's, let me give you another example. There was a great study by, uh, some people on Michael Kitces team about what does this probability of success mean? Or level of competence? In other words, let's say you didn't have a hundred, but you had 75.
[00:12:41] You know, level of confidence. And I've seen this before with people going into retirement. One of them was a teacher and she said, oh my gosh, I got, I'm getting a C, this is a bad grade. You know? And we've had other people say, Hey, if that falls less than 90%, that I'm, I'm not going to sleep well at night, but let me explain and, and maybe put a different, uh, framework on this thing.
[00:13:00] And that is that if you're going into retirement and you're doing these calculations, You have a 75% level of confidence or probability of success. What that really means then is that at some point in your retirement, the next, and at some point in the next 30 years, there's a 25% chance that you'll have to make.
[00:13:20] I change, that's it a change? So that sounds much better, right? I mean, and so I think that, you know, th and this is really called dynamic. You know, if, if this is, if we're talking about the 4% rule, what I'm talking about now is dynamic spending where you evaluate it every year, and you look at the, spend, you look at the markets and what's going on and you reevaluate, however, Personally, I'd rather have the 75% cause I'm willing to make an adjustment at some point.
[00:13:47] And the way that, we do this is in, I think, I think people can do this on their own., you all correct me if I'm wrong, but , we dissect it so much that,, a failure in retirement, let's say the 25% scenario where I got to make a change. It's not like you've got to stop spending and eat beans and rice.
[00:14:06] It just means I've got to stop playing golf five times a week and maybe cut back. Or maybe I've got to downsize my RV just to, from class a, to, to a fifth wheel, you know, I mean, so it's not a fail fail. It's just, we've got to
make some adjustments and, and, uh, again, that's the, I think the benefits of dynamic versus the strict of 4%
[00:14:25] Rob: in, even if you tried to do this strict 4%, and I'm gonna put you on the spot here bend a little bit because you described it perfectly.
[00:14:31] It was very well done. Thank. Yeah. How would you even imply apply that 4% rule in it? And I think if we walk through that a little bit, the very easy example we're going to get into it's it becomes very apparent that this is not something you would actually do in practice. So if you had the million dollars, like you said, how would the 4% rule apply first?
[00:14:50] The first year you're taking out 40,000 and then you adjust for inflation, say it's 3% or deflate. Right. Yeah. Not to mention, Hey, you're 50% large cap and large cap had been crushing it lately. Right? So maybe your, your, your million dollar million dollars is ballooned up to whatever 1.1, 1.2. Now, all of a sudden, you're, you know, you're raising your level of spending just because the markets went up and then converse.
[00:15:19] If the markets went down, right? What would you do benefit if the markets went down using the 4%, you know, guideline that they talk about and you're at a million dollars and it goes down and now you only have 800,000, , we don't have to get into the exact numbers, but what are you going to do with your spending?
[00:15:33] If you're, if you're a retired.
[00:15:35] Ben: Yeah, that's a great, that's a great question, Rob. And a lot of people, that's one of the problems with the 4% rule. So it's a problem because a lot of times people will see, oh, well last year my S my accounts did great. So this year, my 4% is higher than it was last year, but the whole rule hinges on the fact that you can take it's based on.
[00:15:54] Account balance at retirement. That number, not the number that it is year by year. And so that's really tricky with, you know, like you said, one year, oh, well I may be, I may have to spend less, but if it's a great year, you're going to be really tempted to be like, well, I'll pull out a lot more because all of a sudden I have so much more money and that that's where that 4% rule falls apart.
[00:16:15] And so that, that's why it's a little tricky with this.
[00:16:19] Rob: Yeah, it's definitely gets tricky when you're trying to put it into practice, I think, and it just doesn't really make sense. Why would I, you know, all of a sudden go down. As opposed to 40,000, I'm going down to 30,000. Did you know, is it, can I even do that?
[00:16:33] Is that possible? And oh yeah, the next year stocks, you know, if it went down 10%, the next year might be up 20% or 30% or whatever. So that volatility, if you're going strictly by that year to year, Um, data is, is tough to, to implement, which kind of brings up the point when he did the study. Now, this is kind of a warm, fuzzy, when you think about it when he did the study, but again, back in 1994, and he's repeated the stage with other things like small cap, it was kind of a worst case scenario, which is kind of a warm, fuzzy, Hey, this is.
[00:17:05] 4% rule was based on, uh, if a person retired in 1968 historical returns and that's important too, to foot stop. And Charlie got into it a little bit, the difference between historical returns and what can happen. It reminds me of that quote I picked up in the military somewhere is you don't plan for what you think is going to happen.
[00:17:22] You plan for what can happen. Um, it was kind of, uh, uh, you know, can be used in a lot of ways and in particularly this way. So he looked back historically at what has. Which is, which is a, you know, something to consider. But the 4% rule looks at someone retiring in 1968 and suffering two major bear markets within the first five years.
[00:17:43] And then 10 years of high inflation. And they still lasted for 30 years now, something to think about that was with us investments and a 30 year horizon. If you're shorter, if you're higher, if you're not in the us. You know, different, uh, diversification methods it's going to change. So it sounds good. But when we run Monte Carlo, correct me if I'm wrong, but my understanding of the whole Monte Carlo is it's more about what can happen.
[00:18:11] Not the historical returns, it's a thousand different or whatever. Uh, you know, I guess whichever Mar Monte Carlo you're using, uh, analysis, and it's gonna run through a thousand different, uh, market timing, not market timing. Excuse me. Sequence of returns. Uh, scenarios. So, Hey, the first year the market goes way down, what's that going to do?
[00:18:33] And, uh, you know, runs it all the way through. And then it gives you that 75%, which is so important that that 75% or whatever percentage comes up with is if you change nothing. So that all that percentages, if you
change nothing, that's the percentage that you won't run out of money. And two things here, two fears that I have.
[00:18:52] Uh, is running out of money for sure is probably the top one, but closely followed, like you said, is having too much money when I die. I mean, I don't want to just sit there and eat beans and rice the whole time when I have, you know, a couple mil in the bank. Yeah.
[00:19:06] Ben: Yeah. You could have bought that Tesla when you were 65 and all of a sudden you're 19.
[00:19:12] And you're like, dang it. I can't, I can't get down into a Tesla too old. I've missed my chance to
[00:19:19] Charlie: buy it. Have you seen the video, those, those old guys trying to get out of the sports? I can't do it. If you're, if you're 80, you can't get out of some of these sports cars. So don't wait till you're 80 to buy sports car.
[00:19:30] Ben: That's why you gotta buy a Buick. You gotta
[00:19:32] Charlie: buy, you can't get out of those things. Is it too low?
[00:19:39] What are some alternatives to the 4%?
[00:19:42] Rob: You know, there's a. I think the 4%, you can start with that and say, it depends on your w what you're thinking about as far as your retirement. And there's obviously the bucket approach is, is helpful. And maybe combined with some type of, not the 4% per se, but some type of, uh, changing percentage I think is something, uh, that is used.
[00:20:05] Kitsis Michael Kitces, obviously. Prominent financial planner talks about the bumper rules. So he likes using the 4%. Again, he uses, I think even more than 4%, 4.5, or maybe in 5%, uh, based on the returns and, uh, and the diversification methods. And he uses the bumper rule where he'll go to like, you know, 5% plus or minus two, and he's not going to change.
[00:20:28] You don't change your spending, uh, until you hit one of those bumps. And so if you think of the bumpers, like a bowling alley and you put the, for the kids, you put up the bumpers, you know, and the ball hits the sides. So you're not changing your percentage until it hits the sides. But even that I think is complicate
[00:20:46] So I think you're, you know, Charlie, the point of having somebody to help you with this, not to mention when you're hitting this age, uh, I hate to tell you, but your mental capacity may not be as sharp as it once. And at some point they might be for awhile, but at some point it won't be, uh, or it's likely that it won't be.
[00:21:04] So having somebody as a backup is helpful on this.
[00:21:08] Charlie: Absolutely. Ben, what you got?
[00:21:11] Ben: Yeah, I was gonna, I was just going to throw out the, probably the easiest one, which is. You know, talk to, uh, talk to a financial planner, get a couple hours if you're about to retire. And you're curious about, Hey, how much can I spend year to year in retirement, spend a couple hours with the financial planner and come up with a plan.
[00:21:27] What you're going to buy, what you're planning to do in retirement and how much you have. And, you know, they can help really lay it out because it is one of those situations that you may year to year at your spending is going to be maybe completely different. You may want to buy a, buy a big boat one year.
[00:21:42] You know, that would ruin your 4% roll right there. You want to, so you should really get a plan together. We can run the Monte Carlo scenario. Um, but even just to get a. Sort of outline of how much you can, you can withdraw year to year, but, uh, I maybe just took the easy way out. I don't know.
[00:22:00] Charlie: I like, I like that's good.
[00:22:02] Hey, and do you happen to know and good financial planners? I
[00:22:07] Ben: think there's one on this call,
[00:22:10] Charlie: but no, this is a it's in all seriousness. I was telling you all. , this would take a lot of effort. I think if you're on your own, it takes a lot of, I think you should put a lot of effort into it regardless because it's worth it.
[00:22:22] You know, if I could, if I learned that I could spend some more money in retirement and do some more stuff, that's pretty cool. And, and or if I, if I learned. You know, I can prevent myself from running out of having to worry about running out of money, but, , that's worth the effort, whether it be yourself putting in the time and effort or hiring someone.
[00:22:38] But, um, you know, I like, uh, there's definitely other methods. Like you talked about Rob, um, the bucket approach. We, we liked that one a lot. We think that, um, can you describe really just like, absolutely I think is really effective, um, because of what you said, in fact, you alluded to, you know, the mental capacity and I would also add on.
[00:22:58] The emotional capacity. I mean, when we're working and we're accumulating watching the stock market go up and down, as you know, it was kind of painful, but when you're pulling money, And you have that's it it's really painful. Right? I mean, so there's a,
[00:23:15] Rob: I just talked to a guy, you know, we're, we're sitting there chatting and we got into that exact scenario where he was, you know, he was telling her, talking about how he was talking to his mom about the COVID crisis.
[00:23:27] And he was saying, don't do anything. And I said, Absolutely. , you want to rebalance do all these different things, but don't pull your money out. She was wanting to pull her money out and I said, that's so easy for you, or it's a lot easier for you when you have, uh, you know, $30,000 a month paycheck coming in and.
[00:23:47] You are still saving for retirement and you keep seeing your nest, they get bigger. That's easy to kind of, or it's easy. You're still not easy, but it's easier to withstand the ups and downs or the downs per se, uh, of the, of the market. But when you have stopped, you know, making money and you. Nest egg is just dwindling and that's all it's ever going to do.
[00:24:09] And that's why I hate the term nest egg. I would prefer the term deferred spending, although it doesn't, you know, have a good mental picture. I guess the, your spending egg is just dwindling and you see it go down by 30, 40%. That's tough to not run for the Hills. So that's having a financial plan or having a buddy with you saying, Hey, it's going to be okay.
[00:24:32] We're not, it's only bad if you're withdrawing everything this year, which you're not. So, uh, having that bucket approach of the zero to five years of pretty riskless money set aside, Hey, you're good for five years, five to 15, maybe a little more risk. And above 15 years now, you've got a lot more money, a lot more risk, and you can, you can really withstand those ups and downs.
[00:24:54] Charlie: Yep, absolutely. And you just kind of described the bucket approach and, and, uh, I'll just pile on a bit, but. But yeah, you separate those
assets. In other words, if I'm in retirement or entering into retirement the year before then, you're you can, we literally open up new IRAs or new brokerage accounts. We can name them, you know, bucket one safe money.
[00:25:17] One guy said, play money, fund money, whatever we can name it. And there's some psychology behind that. There's mental accounting, you know, behind that, where, when you see, uh, an account that belongs to you and it says. Short-term retirement money, you know, or whatever you want to call it bucket one. And then COVID hits and you see that that money is stable, you know, relatively stable, especially compared to equities.
[00:25:42] Then man, you, you, you were enjoying retirement in the middle of a pandemic as much as you possibly can in the middle of a pandemic without being able to go anywhere. But anyway, you're not stressed out about your, your income going away because you see that one account and you see that it's not. Uh, again, it could be down.
[00:26:01] There's no guarantee, but it's not down as much as the equities usually. So that's, that's, that's really important for our emotional health and our ability to enjoy retirement is to pull those apart. For example, the opposite of that is kind of what you were talking about, where let's say you're in a target date fund, nothing wrong with target date funds to a certain extent, but when you enter retirement, you have one bucket, so to speak or one account, and it's one.
[00:26:27] And even if it's 50 stock, 50 bond is going to go down during a bad stock market because there's equities in there and you're not going to be able to distinguish, you're going to feel like your retirement money is going away. And that's very stressful, very stressful. And so that's one of the beauties of the bucket approach.
[00:26:45] The other thing, and that's kind of a mental, you know, um, mental emotion. You know, benefit. And I would tell you that some of the other benefits are, are that when let's say that a bucket one is your conservative next couple of years of retirement monies, are there be that bonds short term, government bonds, whatever CDs.
[00:27:07] Then when the bad times come along. And we know they will. And equities go down and, and maybe let's say your bonds go up. Sometimes they do that in a bad market. Well, now guess what we get to sell some of those that, that went up because our bucket one is too much. Now it went up, it's too high.
So I'm going to sell some of that stuff and I'm going to buy some bucket three potentially, cause it went.
[00:27:30] So that's really hard to do if you're not, uh, you know, set up to do that. And it's kind of hard to do anyway, quite honestly, because you're, you know, when you're in the middle of a downturn and you're buying more stocks as a retiree potentially, you know, but, but that's an advantage. That's what you're supposed to do.
[00:27:46] You're supposed to rebalance into that and sell high buy low.
[00:27:50] Rob: And I think maybe we need to do a whole, let us know. Hit us firstname.lastname@example.org. But I think we might need to do a whole show about that. And I've been thinking about that, maybe writing a paper, white paper on it or something to target retirement date funds, because that's one of my arguments with it.
[00:28:09] It sounds so great. Oh, target retirement date and see if it got the word target in there, which, you know, fighter guys love. Right. Charlie, you and mark would love it, but. It's one of those things. Where is that accounting for your pension is accounting for your IRAs is accounting for all the different facets of your, your retirement inheritance, uh, different scenarios that you're going to go through.
[00:28:31] It doesn't account for those things. It just is saying you're going to retire this time and we don't want you to have that much. At that point, doesn't use a bucket approach, which is, you know, is there's something to be said for having that risk that's whether we like it or not. That's where returns come from is when you have a risk.
[00:28:47] If you're willing to bear the time horizon associated with different, uh, investments, that's where you're going to get the returns. That's partly where returns come from. So I like that.
[00:28:59] Ben: Yeah, I I'll just pile on that as well, the bucket, but, uh, I love that, uh, that first bucket where you see you go into you go into a COVID situation and you look at your cows and you say, oh, I remember now I have this entire account of money.
[00:29:15] That's just cash for the next year, two years, maybe three years. Uh, if, if, depending on how you set it up, but that just gives you that safety. Okay. So all the money I need to spend for the next, however, many 1, 2, 3, That's
that's there. I've already got that. So hopefully the markets will recover by, by that, but even if not, you've still got another safe bucket in the bonds.
[00:29:38] Following that, that usually in a recession does better. So even if the recession lasts for longer than three years, you start running out of that cash. Well, you still got this bond portion that. I just, and then of course you got your long-term money invested, more risky stocks. So maybe some, some Bitcoin
[00:29:56] Charlie: it's like bucket seven or something ultra high risk.
[00:30:00] But I will tell you that, we do have to be careful. The amount of cash we have. And I know you were kind of speaking in generalities a little bit, um, but you don't, that's the one thing where you got to balance how much cash do I have? Cause I don't want to have money just sitting around for, for years, that's just cash, maybe not producing.
[00:30:17] So there's some moving parts to that. Uh, But we do like it and we think it pairs up really well with like a dynamic spending, um, approach as far as kind of reevaluating every year. I think you kind of need to reevaluate every year anyway, but, um, just shifting gears a little bit, I want to hit on, uh, what about just living on my dividends and interest you all?
[00:30:38] What do you think about that?
[00:30:40] Rob: The dividends and the interest off of your, uh, your 50, 50 portfolio kind of thing.
[00:30:47] Ben: Yeah. Yeah. I mean, you, you probably wouldn't spend nearly as much as you could. Yeah, exactly. I would think
[00:30:53] Charlie: it would
[00:30:54] Ben: be insight going down that road, Rob. I mean, Charlie.
[00:30:58] Charlie: Well, I mean, I, I think it it's, it's fascinating.
[00:31:01] The dividend thing is fascinating. In fact, uh, Kevin, oh,
[00:31:04] Rob: go ahead. Robert. You got, oh, I was just going to say, what if you didn't get any dividends or what if you're a native that year? So
[00:31:11] Charlie: that's right. So, so. You know, one of the most popular videos we we've done, uh, and I I'll give a credit to Kevin was about dividends.
[00:31:20] It just attracts a lot of attention. You know, people want to buy these dividend players about dividend stocks, whatever. And, uh, and those are great stocks. Those are great mutual funds, ETFs, whatever. Usually, however, what I think is my theory is that. Our parents, grandparents could do that. They could do that effectively.
[00:31:40] There were the blue, big blue chippers and they, they were reliable and steady and they lived off dividends possibly. And then they just tell their kids, Hey, just gets you some dividends and live off of them. And so now we have people. Wanting to do that. And I'm thinking, I don't think that applies anymore.
[00:31:56] And here's why there's a couple of things that I think create problems when I want to go by dividends and just live off of them. First of all, it skews my portfolio, asset allocation. You know, I start leaning towards all these dividend players. Again, great companies, but now you're missing out on maybe some companies that are not dividend players, small companies, like you mentioned earlier, Rob, you know, a large values, maybe some of these big companies don't pay dividends and oh, by the way, what if they stop paying dividends such as, uh, for example, last year, Southwest ended its streak of.
[00:32:32] I dunno, 177 quarters of dividend payouts. In fact, they had to write, they, if you take, that was one of the stipulations were taking the, the, the, uh, government funding was no dividend payouts and no stock buybacks. So, people think, well, I can't cut the dividend. Well, they'd cut them all the time.
[00:32:52] 2008 dividends were cut reduced big time. So I love dividend investing, but I do love it as part of an overall. The diversification plan and, , you can create your own dividend. Let's say you own a thousand companies. You're perfectly diversified if that's possible. And they don't, and none of them pay dividends.
[00:33:13] You create your own, just sell capital gains. It's essentially the same thing. So, uh, so that's my 2 cents on dividends is just a kind of , a word of caution. Anyway, I think it's, I think it's different a little bit.
[00:33:24] Ben: . And ju and those companies that don't pay dividends, there's a reason they don't do it. And it's because they can then take that money that they
would pay out in dividends and then reinvested back in their companies and grow more. And that's typically why they don't do that.
[00:33:36] So a lot of those companies, typically over time, don't grow as fast. And again, this is generalization. It's definitely happens, but typically over time, they may not grow as much as these companies that are reinvesting these dividends back into their, their company, just in. From that kind of
[00:33:53] Charlie: perspective as well.
[00:33:55] Ah, so it's like, uh, the 4% rule is a popular rule of thumb, Rob, like you said, but what are, how can we do this, to the meat of the mission, , like what can people do? What should people do if they're approaching retirement? .
[00:34:10] Rob: What do y'all think? I think the first thing, even for me, even for you trolley, right? Like I have you as an advisor, um, and this, I don't want to get into testimonials per se, but you're my advisor and it's nice knowing that number one, if something happened to me, you know, Jan and the FA and Robbie are taking care of.
[00:34:31] But number two, if something, if I'm not, uh, thinking of things correctly, we got got people behind us that are making sure we're doing the right thing. So I think that's number one for me.
[00:34:41] Charlie: Yeah. I got one.
[00:34:45] Ben: I think, I think if you, you got to think how, how much, how long do you think you will need to take money out of these retirement accounts?
[00:34:53] Um, you know, what, how long, how long will you live? How long will you be taking this money out? Because once you do that, then I think you can really kind of nail down a little bit more accurately. How much can you spend, uh, without underspending, without overspending? Yep. So talk about that. Look at your family history.
[00:35:10] Maybe that would help, obviously it would be really nice if we all knew when we would die, which we don't, but that's
[00:35:15] Charlie: right.
[00:35:17] Rob: Gypsy, we recommend going to a gypsy now I'm kidding.
[00:35:24] Ben: There's one of those Palm readers down the street from me.
[00:35:26] Charlie: You can go to the column writer and then go to legal planning. We can tell you exactly what to
[00:35:31] Rob: do there.
[00:35:34] Charlie: So I think number one is what you all said,, get a plan and start thinking about like how long, well, you know, my 60 am I retiring at 60? Am I retiring at 70? What's your time horizon? How long does the money need to last? You know? And then, uh, that's gonna, that's gonna be a big factor in. Whether the rule of thumb is anywhere near, , what, what you might want to spend.
[00:35:59] Um, you know, I think number, number two is, um, get a spending plan, you know, I guess that's part of planning still, and maybe, maybe one a, but how much are you going to spend? How much do you want to spend? And that's something that we go through. , especially if they're in their fifties and whatnot is like, well, what does retirement look like to you?
[00:36:17] You know, and you, and again, we're not talking about I'm straying far from the 4% rule, but, uh, I think early on, if you know how much you want to spend, what kind of lifestyle you might have.
[00:36:27] The other one I have and, , maybe this is number three. Um, what is your emotional, tolerance. And we talked about earlier, the reason I say that is because I think that should have an effect on how you invest. In other words, you know, annuities, we throw annuities out there, very, a polarizing topic in our business, but there are some low cost commission-free annuities that can be, , can be purchased and they can add peace of mind.
[00:36:52] Retirement plan, you know, they, they can help you. And there's been a lot of studies. In fact, I'll throw this one out there too. How about reverse mortgages, reverse mortgages. Talk about their own. A polarizing went out there. They've come a long way. They're very different. Uh,, I've got a paper right in front of me about Wade fowl.
[00:37:07] He's, uh, he's part of the retirement researcher organization, and he's very, well-respected up there with Kitces and he talks about how to use reverse mortgages
[00:37:18] , you know, um, there's a lot of things you can do on your own. There's no doubt about it. If you're willing to put in the time, the effort and, and do some planning, it can be done.
[00:37:26] But this one, I think is one of the more complicated things with the highest, um, consequences. I mean, again, I want my family, me, you all to have a blast in retirement, you know, especially those first 10 years, 10, 15 years when you're active, Healthy before you're in a wheelchair and I'm pushing you around and all that kind of stuff.
[00:37:49] Ben: I I'll pile on and get some advice. I feel like a lot of this stuff, people, people don't know about retirement, how these withdrawals work and then not to mention some of the tax consequences of these withdrawals as well. Uh, for instance, RMDs are a huge one. I'm sure a lot of people have heard of the.
[00:38:05] You know, those are very important. I did talk to my father and not to just roast him on this podcast. He's about to retire. And I was like, yeah. So what, w what do you plan thought about your RMDs and things like that? He's like, well, what's an RV. Say what the heck is that? And I was like, Well, we need to talk, what is an RMD required?
[00:38:27] Minimum distribution, right?
[00:38:32] Charlie: Yeah. You better charge your dad double that's all I'm saying.
[00:38:36] Ben: So
[00:38:37] Rob: I think we could do a whole show on RMDs. Not that we haven't covered them in the past, but we could probably do let us know folks. We need to know. .
[00:38:46] Awesome. Fantastic. Anything else guys? That's
[00:38:51] Charlie: good coverage right there.
[00:38:53] Rob: It felt it was strong. Oh,
[00:38:54] Ben: I do have one thing. Oh, you introduced this podcast as flight number 15. Not forget. It's 16. Technically it's 16. Wow. I know. It's
[00:39:04] Charlie: crazy.
[00:39:04] Rob: . . we've arrived at our final destination of whatever flight. This is. It's the end. Thanks for joining us here on my guys podcast. If you have questions, hit me up email@example.com or info at leading edge planning.
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