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

How Do I Invest To Create The Most Income In Retirement?

• Ari Taublieb, CFP®, MBA • Episode 217

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When is the right time to make work optional? What are the real costs of retiring too early or too late? Join us as we challenge conventional retirement wisdom and unpack the delicate balance between financial security and life enjoyment. You'll gain practical insights into the pitfalls of the FIRE movement and learn how to avoid compromising health and relationships in the pursuit of early retirement. By examining diverse client scenarios, we highlight the importance of timing, empowering you to make retirement a choice rather than an obligation, and to enjoy a future filled with confidence and clarity.

Explore the intriguing world of dynamic retirement spending strategies with us as we stress the importance of a flexible withdrawal rate. Discover how adjusting your financial plans to accommodate changing market conditions and personal expenses can lead to a vibrant early retirement. The discussion also delves into the benefits of extending your working years slightly, which might significantly impact your financial stability later in life. With guidance from a community of listeners and experts, you'll walk away equipped with the tools to navigate required distributions and adapt your plans for a secure and enjoyable retirement journey.

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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:

You work too hard to not optimize your income in retirement. Let me explain what that really means in English. So someone came to me and they said I want you to help me make sure I don't run out of money. I said, great, easy solution Work till you're 100. They go yeah, stop being coy here, like I want to retire, but I just want to make sure I do it right. I said, great, retire right now. They're like, hey, that's kind of not what I was expecting from this conversation. I said you could retire now. I'm not sure you could spend exactly what you want. I definitely don't want you to work until you're 85, 90, 100, or even 60. But I just don't want you to retire too early, run the risk of running out, or retire too late and go. Why didn't I retire earlier? I had my energy and my health then. That's a fine balance. So the title of this episode is how do I invest to optimize my income? That's my role. Sometimes, optimizing your income is telling you to stop working earlier because $20,000 a month, that's not needed for you to enjoy your retirement.

Speaker 1:

I have other clients. This is me being nice. Okay, just so you all know I joke that I'm the meanest advisor, but I'm not actually mean. I don't think so. At least you guys can tell me. I try to be transparent and I have certain clients that want to spend $30,000 a month or they're like why am I retiring? I can't even do anything I want to do.

Speaker 1:

So there's a wide range of people Now, not right and not wrong, just kidding, it's wrong. No, it's not wrong. Okay, I'm just trying to be fun here. Here's my point. There's a line where you start to go uh, I don't know if I need to work longer, and it's my job to help my clients figure out. What is that line? Where is that spot where they can truly make work optional? And that's what everything I do is all about. I just want you to know the earliest time work is optional where you're going. Look, I'm working because I want to, not because I have to. I find a lot of my clients actually enjoy their work. They just think they don't because they're there on obligation. It's very different to work when you want to work. So, with that being said, today's episode is going to be about optimizing income. Now, as always, this will be on the podcast app, so you can certainly go ahead and listen to today's episode there. If you want to watch the demonstration on YouTube, which I encourage because the visuals might be more helpful be my guest. But I totally listen to podcasts as well and sometimes I find it's nicer because I'm just listening and it doesn't buffer as much because it's not video format. So don't blame me. Either way, I want you all to know this is all for educational and informational purposes only. I try to keep it fun and engaging.

Speaker 1:

I am the host of the Early Retirement Podcast. I am the vice president of Root Financial Partners and I'm a certified financial planner. And if you don't know my dopey joke on that, someone said Ari, I heard you're certified, that's important, I should hire you. I said how many doctors would you never let touch your body? He said I don't know. I said there should be a lot, and that's a concern that you don't know, but lots of doctors I would not let get near my body. In the same way, there's lots of certified financial planners I would not let manage a dollar of my money, let alone hold my hydro flask. Okay, so very dear to my heart, this hydro flask. So here's my point. Today is all going to be about optimizing income, and that means withdrawal rates.

Speaker 1:

So many of you have heard of this movement called the FIRE movement, which stands for Financial Independence Retire Early. Now, I don't like that movement. I'm very transparent about that. That is a lot of people who are in their 30s and 40s going. Yeah, I'm going to work like crazy, maybe get two jobs, never talk to my spouse, sacrifice my health, not go to the gym, not eat healthy, just so that I finally have this dollar amount let's call it $2 million and I never have to go to work ever again. To me, that's not sustainable, it's not healthy. I don't like it. And I've seen people who are 40 who have sacrificed their health I've had them on the show and I've actually gone through samples with them and they regret it. And so there's that issue.

Speaker 1:

Then there's the other issue and I've shared this a few weeks ago but a really nice woman who I spoke to, who was mad that she had $3 million. I go look, I just don't hear that all day Like, why are you so mad? You have $3 million. She goes. Well, I think I would have been fine with 2 million, and I've been sitting for the last four years at this job where I don't have a lot of movement, and now my sciatica is really bad and I can't hike to the degree I want in retirement. So there's a risk of kind of both cases people working so hard that they actually, you know, put themselves in a spot where they don't know what they're going to do from 40 to 100.

Speaker 1:

Now some of you are listening and you're like who are these people? Like I have two million bucks, I'm out of here, I'm good to go, I'm not worried about that. Great, it doesn't apply to you. Others of you are like no, I think I might be doing. The second person Like I think I have two million, finally feel the magic day that you have enough, and that doesn't exist. So what I'm going to do is help you through an example, because retirement planning is all about confidence.

Speaker 1:

So this FIRE movement I don't like and I made up my own definition. I call it recreational employment. So financial independence, recreational employment. Are you working because you want to or because you have to? If I were to ask all of you guys what percentage? Put it in the comments if you can in live time. So what percentage of my clients that I say can retire early, go to retire early when I go, yeah, you have my green light. I don't know why you're ever working ever again, unless you want to. When I go, yeah, you have my green light. I don't know why you're ever working ever again, unless you want to.

Speaker 1:

Now, in light of time, I'm going to let you comment, but I'd probably say 60% of people will go yeah, if I don't have to work anymore, I really don't want to work. I've worked many years. And then they do some part-time or consulting, but sometimes they don't. 40% of people go well, that's going to keep working. Maybe I'm going to do something different. I'm going to take less responsibility, but that's what you want to think through right now where you're at.

Speaker 1:

Would you work five more years where you are right now If you knew it would pay you the same amount as today? You couldn't get fired. Would you do it? But you have to do it. You can't leave after three years. You can't leave after four years. You have to stay where you are right now, making $200,000 a year from now, five years from now, or you have to leave today. What would you do? I'll do these types of what if scenarios with my clients, not because I'm making them do it. It really helps them think differently.

Speaker 1:

And I had one client go wow, if I had to stop like I don't want to work three more years. And they told me they were very transparent about that. They're like two more years is the max. I know I've said that a few years now, but that's the real max. I said it's five more years or it's nothing. What are you doing? And they said I'm probably going to go get another job because I'm going to feel better, because I'm worried about healthcare, but I'm not going to do nothing. And I said great, let's assume you enjoyed that job Hypothetically. How long do you think you'd do that? They said eh, maybe 10 years, I go. You recognize, you told me you didn't want to work more than two years. Now you're telling me you're willing to work 10 years if you like it. They go, yeah. I said what am I missing here? Don't you see how amazing this is? They go, no. I said well, right now you're making $100,000 a year, stressed and not enjoying it. Yeah, but what if you made $40,000 a year and you liked it? You did it for 10 years. That'd bring in way more money. And they're like huh, I really thought about it that way. So, overall, this planning we talk about is about confidence. So if you look at my screen right now, I'm going to show you this is a sample case. I'm going to explain it for those, of course, on the podcast app.

Speaker 1:

But this couple is 56 and 55. They have a 22-year-old child and they don't hate their jobs, but they're thinking, hey, when can we retire? And so when we went through some planning projections, we said, hey, you guys work two to three more years Now. When they first came to me, they said we want to spend six thousand a month in retirement. I said, hey, that's great. Does that include vacations and new cars and kids, college and grandkids? And one of their kids is in grad school right now. So they're like no, I said OK, so six thousand a month is just getting us to live. And they don't have a mortgage and in terms of their assets, you can see they've got $2.1 million. They have a home that they own and they have a rental property that doesn't bring in a ton of income but they use it because their kid lives out of it. And we had a lot of talk about that, trust me. So you can see that net worth about $3 million. They're in a good spot, they have saved and invested well. But now they're wondering, hey, could we possibly do this earlier? How do we think through this? So it's the spot a lot of you guys are in.

Speaker 1:

And this is a tough one, because it's like, hey, we might retire early and need healthcare for like maybe seven, eight years. Like what are we going to pay $20,000 a month for that, or thousand a month for that, or twenty thousand a year? Should I say sometimes, yeah, and sometimes I go it's a big cost and you should do it because your plan would support it. Now you're gonna have to pay for it. It's gonna kill you to pay for it. But you know what, it's gonna kill you more. Not being mad at me when you're 75 with 20 million dollars wishing you retired earlier.

Speaker 1:

So sometimes I'll tell a client hey, do you want to retire earlier because you really don't like what you're doing, or or would you rather spend more? And they're like I think I'd rather spend more. So this couple and I we had a conversation and they said, hey, we'd rather retire earlier. They don't wanna spend more money. That's not as important to them. So they said, if we had 6,000 a month, that's 72,000 a year. If we had 20,000 a year, for the first 2020,000, $92,000.

Speaker 1:

I'm a CFP. Guys Just did it, you just saw it right there. And then they want to do a big vacation with the family. I made them put this in. They didn't want to, but I said, hey, guys, put extra amounts for health like massage, physical therapy. They're like hey, you're just shadowing on your expenses. Onto me I said, yeah, kind 22,.

Speaker 1:

But they're thinking it could be occurring Don't know exactly when. So we've got healthcare costs. Generally that could be 15,000 bucks a year. It could be 50 bucks a month. It could be $600 a year. I've seen everywhere in that range and I have lots of videos on that. But I want to give them confidence to dream big, because the last thing I want someone retiring too early going. I'm going to run out of money.

Speaker 1:

So, once again, everything I'm explaining here and showing on YouTube if you want to play around with your own what if scenarios and run these projections, be my guest. So what you're going to see here is a really interesting graph. I'm going to explain it, of course, as well. So they're wondering can we withdraw, can we retire? And when someone talks about a retirement. What I think about? You want to optimize income. The easy way out is just working longer. Yeah, I'm just going to work a little bit longer. Yeah, I'm just going to work a little longer. And they just keep pushing it down. But what we also want to consider is hey, how much is too much, and what does our graph really look like, and how do we think about this? And so this graph is very interesting because you can see, and I'm going to explain it as well when they first retire, their withdrawal rates are very low because maybe they're working halfway through the year and they have income coming in to supplement it, so they just need a little bit from their portfolio.

Speaker 1:

But what about their first year of retirement where they're not working at all? Well, if, at 58, this couple stopped working, so in two years from now, they've got about two million bucks their withdrawal rate would be 10.6%. Is that sustainable? Absolutely not. They would run out of money, but this starts decreasing. So what happens is they're at 10.6%, which you guys probably know by now.

Speaker 1:

I like to be in the range of five to five and a half percent if you're doing all the right things. I don't want it too low and I don percent. If you're doing all the right things, I don't want it too low and I don't want you sacrificing lifestyle. I don't want it too high. I don't want you running out of money. So you can see here, 10 and a half percent, that's not sustainable. The next year is 12%, then it drops to seven, then in their 60s it's at three and a half. Well, that's too low. That's when I get mad at clients.

Speaker 1:

So they came to me going hey, I don't know if I'm on track to make this happen, because you say this 10 and a half is too high and this three and a half is too low. So give me some confidence. Like, what the heck do I do? And I showed them the power of a dynamic strategy. And what that means in fancy terms, but also in English, is Whenever you're running projections for yourself, put in it's not going to be perfect, put in your best assumptions, but dream big. So I made them dream big. I go hey, guys, vacations, big vacations, health, massage, physical therapy, yada, yada.

Speaker 1:

I say, guys, you're in a good spot, but it's not like you can just go spend everything we just discussed every single year, for example, the first year of a full retirement. They have health care costs. They might be doing a home remodel, they might downsize that's probably not for a while and they're also going to have vacations. They're gonna take a big vacation. So I said, guys, the first few years of retirement, when it's really important, I want you to spend on your energy while you have your energy, I want you to spend while you have your health. But I don't want us to just spend without intention. And I said hey, guys, you told me you want to retire earlier. Is that right? They said that's right. I said great. Well, if we optimize your healthcare and we optimize, you know we're not going to change your basic living. You still got to meet your groceries and bills. I still want you to take trips. But what if you took $8,000 a year worth of trips versus $20,000 a year? And what you could see is their withdrawal rate just came down by 2%. So now their withdrawal rate's 8%. Well, still higher than I would like, but 8% in a single year.

Speaker 1:

If markets don't do really well, that could be a big issue If they spend too much at the same time, markets don't do well. So this is them asking themselves from a confidence perspective? Do we feel confident or open to being dynamic if markets don't do well, that we could cut maybe some more of these costs out? We could not vacation at all, we could live on eggs and top ramen, and I'm like guys, I don't want you to do that. So what this is telling me is we should probably work another year, or maybe we should work two more years. And they go really why? And I'll go, let me show you and we'll run projections. And so now all of a sudden, I'm showing them a similar example and what you can see here is their withdrawal rate First year of retirement is six and a half percent, then it's seven and a half percent and then it drops like crazy to three percent, two percent in the one percent.

Speaker 1:

I say, guys, one or two years of withdrawal rate. If we can watch her spending these two years from 62 to 75, like guys, it's time to spend. This is too low, because what happens up here is it jumps and at 75, you have to spend way too much. Those are required distributions. So the mistake I see people go through is they want to optimize their income so much that they go.

Speaker 1:

Well, my withdrawal rate. You said it should be 5%. This number says 6. I'm not going to retire If that number said six and kept increasing. That would be a problem.

Speaker 1:

But if it's decreasing and you're looking at your withdrawal rate and some big potential jumps later in life, that's generally you in a good spot. When you have required distributions forcing you to take out more than you need, that's generally where I go. Hey guys, we're probably in a good spot to either retire earlier or spend even more, what's most important to you. So just thinking through withdrawal rates as a dynamic thing as opposed to 4%, 4%, 5%, 6% it's a moving thing, and the beautiful thing why I love this software, as well as many other things about it, is it's dynamic. So if markets do well, these numbers will shift. If markets don't do well, they will shift the other way, if taxes go up.

Speaker 1:

If you want to execute a different strategy, you can really build out some cool plans to give you confidence. So if you don't already know, you can get access to this tool in the description. If you want to work with Root on an ongoing basis to give you confidence for income throughout retirement, of course feel free to do that, and then my only request is that you like this video and share it if you found it was helpful. If you're listening on the podcast app, please do leave a review on iTunes. It goes farther than you can know. Same thing on Spotify, and I'll see you guys next time. Thanks, guys.

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 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.