Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

Run This Test BEFORE You Retire Early (How To Avoid Getting UNLUCKY)

• Ari Taublieb, CFP®, MBA • Season 1 • Episode 204

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What-if scenarios allow you to retire early with confidence.

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

I know you are not confident about your retirement next year and it would be really weird if you had all the confidence in the world with no concerns at all. That would make me more concerned. But what I want to do is to prevent you becoming unlucky and that is how you will have confidence in retirement. You will understand wait. So even if markets don't do well and even if it turns out, I'm like the most unlucky investor ever and I still spend everything I want to do. I sorry I'm along. Okay, I think I have a pretty good idea why you are concerned about retirement Now. That could be in one year or a month, or in five years or 20 years. The reason for that for most people is they are worried about being unlucky and they're going what if I retire and markets go down and healthcare costs go up and tax brackets go up and it turns out I didn't project my retirement perfectly? Am I going to have to go back to work? That is most people I talk to and there's not a magic switch. I wish there was. That created confidence overnight, but you will become very confident when you understand the different trade-offs and the positions you're in, and I'm going to show you what I mean by that. So I'm going to go through in today's episode an example. It is a real case study, but I'm going to help you understand how you can have confidence and it is, yes, possible, but it comes with education and making sure you're not overlooking anything, because I will run for my clients what's called the unlucky test.

Speaker 1:

What if you are the most unlucky investor ever and markets don't do well? What if you live 10 years longer than you think? What if social security gets reduced? What if inflation goes up? What if? What if? What if? And if all those things happen and you are just unlucky and your plan shows that you would not run the risk of running out of money and you can still do everything you want to do, you might go. Why the heck am I worrying? If I'm the most unlucky person ever, I'm still going to be able to do everything I want to do. You might go wow, so if I'm the most unlucky person and I work two more years, that would negate any unlucky things that might occur, which means I'd still be able to do what I want to do. Okay, I was going to work six more months. Now I'm going to work two more years, because I'm naturally just going to feel better that way. Sorry, milan, I'll need that one little edit right there.

Speaker 1:

Many of you are not going to like what I'm about to say right now, but this is a comment, so it's not from me, okay, you can see. This comes from a recent video, and the recent video on YouTube was titled I have $10 million. How can I optimize? Now, I know a lot of you don't have $10 million. A lot of you have $1 million or $2 million or $30 million. I have a bunch of different case studies and videos, regardless of where you're at in life, and these strategies apply to everyone.

Speaker 1:

Now, this was a comment left five days ago by Carolyn Dolphin. He says my current net worth is $6 million. I don't feel wealthy. My car is 10 years old. Someone replies at 6 million net worth, you are richer than 99% of all the people in the USA. Sorry, but you're rich. Carolyn replies. Rich is when you can buy something without thinking about it. 6 million invested before tax provides 200,000 per year, once again, before taxes. I'm only 45 and it needs to last me another 40 years approximately. So why am I choosing this as the comment for this week.

Speaker 1:

Well, here's someone who might have a lot more money than you, but it doesn't mean that he's more confident than you. In fact, I have clients and they know who they are because they listen to the videos and they watch and they are like yep, that's me. I've got $10 million and I still don't know if that's enough. And I have other clients that go look, I have a million dollars and I've got a pension and I don't even know what the heck I would do if I had more money, like I'm good and then some. So the net worth of six million, well, that's very different. If you have a home worth five million dollars and no mortgage and a million in your investments, that's not going to create a ton of cash flow compared to someone who might have $4 million in investments and $2 million home. So net worth never tells the full story. I have a video on that that I've done in the past. But what I want you all to think about is this true, unlucky test. That's what I'm going to go through today.

Speaker 1:

So, if you don't already know, my name is Ari Taublieb, I'm a certified financial planner, I'm the host of the Early Retirement Podcast and I'm the vice president, here at Root Financial Partners, regardless of where you're at, if you have $2 million or $5 or $10 or $20, we have different options. So if you don't feel you need an advisor on an ongoing basis, we have the Academy option. We have the academy option. For a few hundred bucks you go and you're going to get to play around with the tool I'm going to show you right now. So this I'm going to explain. I do recommend, of course, I prefer if you watch on youtube because you can see what I'm explaining. But for all of you podcast listeners and I know there's a lot of you I personally listen on the podcast because there's less ads than on youtube and it's nice to not be interrupted. So I totally get that. But when the podcast I listen to go, hey, can you just tune in for five minutes to see this clip? I'll do it. So if you guys don't mind, that is my favor. I'm requesting. So this is called a stress test and this is available in the Academy.

Speaker 1:

The reason I'll do this and I'll show you a little background on this couple real couple, just change their names. $1.6 million across a few different accounts. $1.3 million home. $400,000 mortgage. They're 60 and 57 with a 23-year-old child, and they're wondering, hey, am I in a good spot? Should I work? Should I not work? How much can I spend?

Speaker 1:

And retirement is about confidence. If you saw something that said, hey, like imagine you go to the doctor and they guarantee, hey, we're going to have surgery, you're going to be fine, and not, we're going to have surgery, you're not doing it with them, you're going to have surgery and you're going to be fine, and I guarantee it. You'd believe them. It might sound nice, but you'd also be going look, I know you can't guarantee I'll be okay, because stuff happens Very unlikely. That's the approach I'm taking here, where I'm not guaranteeing anyone that they retire and never run the risk of running out of money. World War III and a gazillion other things could occur. I'm saying what level of confidence do you have in your retirement ability to actually feel it, not just what does the financial answer say?

Speaker 1:

Most of you probably know, hey, I'm in a good spot, or I'm saving and investing, I'm going to be in a really good spot. But I still don't really know. And the reason, in my opinion, you don't really know is because you don't know what if you get unlucky. I could be wrong, but I am a soccer player. Many of you know I love playing soccer and I am not fun to be around when I get injured. I don't know who is, but I'm really not fun until I get my MRI and then I go got it. So there's the severity of the injury and my fiance thinks that I'm going to be depressed when I see what the MRI says. I might be sad, but I'm actually pretty relieved when I go got it. That's the severity of the injury. Now I need to have physical therapy. Now I have a plan. Yeah, it's going to be six months and then I'm going to be back Now. Luckily I'm not injured right now, but or else the tone of today's video would be very dark.

Speaker 1:

But you can see here, this is what I'm asking you to do for your money. I'm asking you to go here and look at the little slider and I'm going to explain it if you're listening. But you can see there's different sliders and it allows you to go. What if you retire and markets drop immediately by 30% and Social Security gets reduced by 40% and inflation is higher than you think by 2.5% and your returns do less than you think by 2% and tax brackets go up and you live eight years longer than you think and healthcare goes up and you refresh this and you go, got it.

Speaker 1:

Where does that leave me in relation to my financial strategy? Yes, it's going to be a number that's low, but you can still see, here, for this couple, their probability of success. You can see they're still in a really comfortable position. Now you're wondering, okay, well, what percentage should I be relying on and it's not a magical number of this person, 90%, and this person 30% has a 30% probability of success and they're retired and the reason for that is because they have inheritance that is coming in the next two years. That's going to be significant, and then their probability shoots way up. So it's very different based on every person.

Speaker 1:

But when you're looking at this and you're running these different projections often called Monte Carlos, if you're familiar you're basically going, hey, assuming a gazillion assumptions and thousands of different potential things, what am I missing? I mean, what could I possibly not know because I just haven't done it yet? So there's lots that go into retirement planning. It's withdrawal strategy that I care about. So if we just look at this case, just for an example here, you can see, when they retire at 60, their withdrawal rate is 18%. That is way too high. Okay, that's not sustainable. And what's happening in their case is they have healthcare costs, they're going on a vacation, they're buying a new car and they're doing a wedding all in one year. So that's not sustainable forever. But you can see, as life goes on, it starts to decrease significantly to the point when they're in their 70s, their withdrawal rate is too low. It's at 1%. I mean 1% is they're going to get crushed in taxes later because they're not spending enough.

Speaker 1:

So the idea that you have the right confidence and how you think through retirement planning, I prefer that someone doesn't spend a ton in one year and does a home remodel and buys a new car and funds a wedding. But if you're willing to be dynamic in retirement and say you know what markets are doing, well, I'm going to take the extra trip, I'm in a great spot and then other times going, hey, markets aren't doing so well, maybe I'm going to still do the wedding, but I'm not going to buy the three cars or I'm not going to do the home remodel at the same time. So, understanding your position, regardless of where you're at, this is where I would encourage all of you to start is begin stress testing, not because it induces anxiety. I had one client come to me and I love how transparent my clients are. They're like Ari, you know, when you first told me about this, this actually induced I had more anxiety because I thought I was in a good spot and to me ignorance is bliss and that's just. That was their thing. I go, I get that and it might induce anxiety for the 10 minutes I talk about it and then it's going to, I promise, have way less anxiety. You are going to have way less, should I say, for the rest of your life, because you're going to understand that even if you're so unlucky, it doesn't matter, you're going to be okay.

Speaker 1:

Now, the mistake I see people also do is they get too unrealistic. Here they go. What if markets drop by 80% and social security is gone entirely and inflation is an average of 5% and I live 25 years longer than you think? Well, you're not going to live till 130. Sorry to break it to you. Yet markets aren't going to go down 70% if you have a portfolio that's safe enough to weather downturns Like you, don't want to be so unrealistic that like cause I've seen people do this and like, looks like I can never retire. I'm 84 with $16 million. I'm like, okay, you're nuts, like we need to be. There's a level here of confidence that has to be attained. Now I wouldn't tell someone they're nuts, but that's what I was thinking.

Speaker 1:

So, when you're thinking about your retirement plan and you're thinking about, hey, what if I get unlucky, and what can I control? Well, that's what I want you to think about. What can you control? You can always spend less. I'm not saying you're going to want to, but you could. That is a factor in your early retirement strategy, the fact that you might be able to spend less. Some people come and they go. Ari, I don't really need to spend $10,000 a month. That'd be nice, but I'd rather stop working. To spend 10,000 a month, that'd be nice, but I'd rather stop working. That's what I would like. I have other people that go. If I didn't have 10,000 a month, I couldn't even exist. I mean, I don't even know why I'm existing now and I'm barely spending that and I'll go got it. You're definitely going to want to keep working, so understanding, what do you care about more? Is it working longer so you can spend more or stopping working. No longer have to work, it just means you might spend a little bit less.

Speaker 1:

And are you open to being dynamic? What if, while markets do well, you spend more and the markets do poorly, you spend less? Are you willing to shift? That? That's one question to ask yourself. Are you willing to shift your allocation over time If you are 60. And you might need income for 40 years? Well, we don't want to be so aggressive that if markets take a downturn, that's putting your investments in a gigantic possible hole that would take us years to recover from. But you also don't want to be so conservative that you're 80 and your assets have been outpaced by inflation. So what can we control? Well, we can control our allocation, we can control where we own our investments. But the biggest thing you can control is how much you spend, how long you work Not always the sexiest things to talk about, but the big thing I can control as an advisor is tax planning.

Speaker 1:

That's the number one value I believe an advisor brings, which is oh, markets went down, let's do additional conversions, let's consider should we spend less? At the same time, what brackets do we fill up? Oh, by the way, you're going to want to do that big trip next year and the wedding in three years. Let's prioritize, this year being the year of conversions. Let's understand what brackets we need to stay in so that you get that healthcare subsidy, the tax planning that's the value I believe an advisor brings, whether it's equity comp, whether it's social security, whether it's real estate. A big mistake I see people making is selling a real estate property in the same year they want to do conversions, or having a bunch of appreciated stock and they don't end up gifting that. They end up just gifting cash which could have saved them a ton in taxes if they would have gifted stock instead. So so many different strategies. It's the taxes. That's where I believe a value is added.

Speaker 1:

Now we do it all. We rebalance, we do the investing, we do the tax, we do the trust, we do the wills, we do the estate, we do everything so that you don't have to do it. Most people are paying us in retirement to go look, I could do this Maybe if I spent my time studying this, but that's not how I want to fulfill my retirement. I want to do what I want to do and I'm happy to pay for it. I just want to make sure there's value. So hopefully this podcast was helpful, a little bit different, because I asked you to go to YouTube for a little bit. If you didn't, or you want to check it out later, it's going to be on the YouTube channel, so all the videos get released on YouTube a day early of the podcast, and so YouTube videos on Sundays, podcasts on Mondays and tons of stuff in between. So hopefully this was helpful and I'll see you guys next time.

Speaker 1:

Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom that's earlyretirementpodcastcom, and you can always go to my website, earlyretirementpodcastcom that's earlyretirementpodcastcom and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only, thank you.