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

Retirement Planning With Guaranteed Income (Pension, Social Security, Rental Income, etc.)

• Ari Taublieb, CFP®, MBA • Episode 233

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The episode sheds light on the importance of personalized retirement planning, especially for those with guaranteed income sources like pensions. Listeners learn how risk tolerance, investment allocations, and tax strategies should align with their unique financial situations for optimal retirement success.

• Emphasizing the role of guaranteed income sources in investment strategies 
• The importance of personalized financial planning over cookie-cutter strategies 
• Understanding how risk tolerance changes during retirement 
• Demonstrating asset allocation strategies based on income needs 
• The value of proactive tax planning and Roth conversions 
• Addressing the need for cohesive financial guidance among different advisors

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

Speaker 1:

Welcome back to the Early Retirement Podcast. This is going to be the podcast for you if you have a pension or any other income that is going to be coming in throughout retirement. So if you have rental income, if you have inheritance, if you anticipate doing part-time income, this is gonna help change the way you think about planning and I'm gonna tell you exactly why I'm doing this. So if you look at my screen, I know a lot of you are listening on the podcast apps. I'm doing this. So if you look at my screen, I know a lot of you are listening on the podcast apps I'm going to read it out. I will have a lot of people that will submit questions through my website, earlyretirementpodcastcom, which you can do, and I'll have people book a call to work with us. This is someone who recently booked a call. I'm speaking to them in two months from now and there's going to be a nice surprise for them because I'm actually going to use them as a case study, but they don't know it today. So when I speak to them, I'll say, hey, I actually ran a kind of case study for your case, not to say the word twice, but it might give them a little bit of insight. Before you know, they actually start working with us. So, anyways, to get to the point here, I say please share anything that will help prepare for our meeting. And they said the following I plan to retire early 2026. I'll have a pension with 100% survivor benefits $220,000 a year. Wife is five years younger, highly compensated, a million plus a year, and won't retire until 2030, 2035. So who wants to be their best friend? Just kidding? Okay so, guys, they're obviously in a good spot. They know that. Why are they reaching out? Okay so, guys, they're obviously in a good spot. They know that. Why are they reaching out? I imagine it's because they're seeking guidance on tax strategy and maybe they don't want to be an advisor in retirement and have to handle the finances. I don't know, but that is why we exist and I get to explore that on a call with them, just like I could do with any of you guys.

Speaker 1:

Now, today, I'm going to start with my favorite quick story. I'm going to go through a review, an interesting one for you, and, as always, these videos are going to stay on YouTube so you can watch this If you're listening on the podcast app. Awesome, that is how I listen to podcasts. I rely on all of your feedback to help me grow the show, so if you find anything we discussed somewhat valuable, please do leave a review. I appreciate it more than you know.

Speaker 1:

Now here's my fun quick story. So this couple reached out months ago and they said this is going to sound really weird, ari, but I'm 83 and I have 100% equity, so you're going to like freak out. I said maybe, maybe not. Like I don't freak out that easily. They're like okay, big shot. So I said look, tell me why you have 100% equities. And they said I have a pension that covers all of my needs, so, theoretically, if my $3 million portfolio went to zero, I'd still be okay. I said I love the thinking and if any advisor tells you to do anything other than what you're doing, I will not trust them. And they're like huh, like. I thought like you're just an advisor and you're gonna tell me as I get older, I should be more conservative and I'm 83 and 100% equity is kind of crazy. I said if you had no pension, it's a horrible recommendation and you should not do that, because if markets don't do well and your 3 million goes to 2.3 million, you might not be able to spend and do what you want to do in retirement. So the point of the story here is you should not have a cookie cutter strategy.

Speaker 1:

I have this jar that I talk about a lot because it's one of my favorite gifts that I was given to me, and it says anti-cookie cutter jar. Love the pod Because I don't believe in cookie cutter planning. I had a couple that one said, hey, I want to work with you guys and I love the approach, but you forgot to ask me my risk tolerance. So it's kind of a big deal. I said, okay, let me ask you right now what's your risk tolerance? And they're like I'm an eight. And I said what about you, spouse? And she's like I'm a two. And I said okay, do you guys think if I asked you that question when markets were down 40, you would tell me the same thing? They're like no, we think we'd actually be more risk averse at that time. I go. That's why I don't love that question, because risk tolerance changes.

Speaker 1:

There's something called risk tolerance, which is how do we emotionally feel if our million dollars went to 40, 400, 000? Would we be like that's cool, there's an opportunity, let's put more money in? Or would we be like that's cool, this is an opportunity, let's put more money in. Or would we be like I am not loving this? Well, most people, it depends on their stage of life. If you're 30, adding money to a 401k, when it goes down, you don't like it, but it doesn't really bother you. It's the opposite. When you retire, you don't want markets to go down 40%. That's when you people start freaking out.

Speaker 1:

So the point here if you have a guaranteed income source like a pension or rental income which I know is not guaranteed social security whatever you don't need as much in safe money because you already have the safe money being taken care of. If you want to spend $100,000 a year and you have $60,000 coming from a pension, you don't need $100,000 from your portfolio. You need $40,000 to make up the difference. Now maybe you need $60,000 because you need to go pay taxes to end up with $40,000 so that, after taxes adjusted for inflation, you have your assets. But that's the point of the story here.

Speaker 1:

So let's look at this example. I do not know all of the assets of the person I'm gonna talk to in a few months, in a month, but I put some assumptions here. I use the same case study from last week, and so this is someone that inherited about a million dollars in a brokerage account and they inherited property. So they have. I call this, by the way, the lucky sperm and egg club. I know it's a little graphic, but you guys get the point. So 2.8 million property and, by the way, I stole that from a mentor of mine who has the best jokes in the world, so I made it sound like it's my phrase, not my phrase. So 2.8 million property, 3 million in liquid assets. They've got 401ks and Roth and brokerage and HSA and 529s and all this stuff.

Speaker 1:

So this couple let's assume they told me that they wanted to spend 100,000 a month in retirement. Sorry, 100,000 a year in retirement, not month, that'd be wild, but I have seen someone who wants to spend 40,000 a month. That's the most I've ever seen. So, 100,000 a year. Well, they have $3 million. Now, all these different accounts have different tax implications, but let's just keep it simple. What's 4% of $3 million? Well, that's $120,000. So I think it's a safe estimate to say that if we were to essentially create 100,000 of income, that we would need to sell $120,000 worth so they could end up with $100,000 of income that we would need to sell $120,000 worth so they could end up with $100,000, which is what they'd love to spend in retirement.

Speaker 1:

Now the first thing I would say here is they're not going to spend $100,000. They're going to spend more when they have their energy and their health, then a little less, then it's going to shoot up again. It's a dynamic, moving thing because that's real life. But the point here is this couple's in a good spot, so let's assume they want to retire today, which they don't. This couple's in 49 and 51. They're not retiring for 10 years.

Speaker 1:

But the idea here is this couple's wondering how much should I have in equities or fixed income? Well, I like having at all times, five years of safe assets. So, no matter what happens, you're going to be okay. And the reason I do this is because I show this fun chart here and this was put together by another advisor and you can see it says bear markets. A bear market and I'm going to read this for all you podcast listeners a bear market is when stock markets drop by at least 20%. Here's a look at how long bear markets have lasted before the recovery. So the shortest ever bear market was 33 days during COVID. The longest ever was 929 days, meaning the longest ever bear market. Until it fully recovered. You didn't make money but it recovered was about three years and the average is a little over a year. So I'm extra conservative and I double the longest ever bear market because that's who I am. So now you have five years worth of safe assets.

Speaker 1:

Well, this person wants to spend $100,000 a year. Five years times $ 16%, which means on paper this person's asset allocation should be 84% equities and 16% fixed income. Make sense Five years of safe assets. That's assuming they're retired today. They're not retired today. This couple's not retiring in 10 years. So because of that, they should have way more arguably 100% in equities, assuming they're comfortable with that level of fluctuation.

Speaker 1:

And that's the next graph that I would share, if you know, once again I'm working with a client. This is a really cool graph talking about the best, worst and average investment returns by allocation. So if we look at 100% stock allocation at the bottom here and I'm going to explain this once again the worst 100% in a single year has ever done if you had all equities was 43.1%. The best it's ever done was 54.2%. On average it does 10.3%. So I would, with a couple, say, hey, let's talk about it. Is there any amount that if it went down you'd be like I just can't sleep at night? Okay, let's factor that in. So we're gonna go one step deeper. Stick with me here.

Speaker 1:

This does not include any pension. So let's assume this person had a pension and the pension was let's keep it easy let's say, $80,000 a year. They wanna spend 100,000. Well, how much safe money do they need? Well, they want to spend $100,000 a year, every single year. Hypothetically, $80,000 a year is coming in through a pension, no matter what. Well, if $80,000 is coming in, no matter what, that means, we need $20,000 from their portfolio so they can spend $100,000. What's 20 times 5? That's $100,000. So all we have to do is take 100,000, don't really need the calculator for this but that's 3.3%, which means hypothetically they could have a 96.7% equity allocation and a 3.3% fixed income allocation, so that I could sleep a night as their advisor with enough root reserves.

Speaker 1:

But the couple that we are talking about today, they have way more coming in through their pension. They make a super healthy income. So if that's the case, we largely are gonna want 100%. Equity is growing for us because you have a pension that's allowing you to have that level of flexibility. So if you have those assets, like this person here, they should be thinking about tax strategy. And the reason they should be thinking about tax strategy in a big way is because, if they have a pension, what that means is their 401k is going to be growing like crazy because we don't have to withdraw from it and it's just going to keep growing. So they're going to have a huge tax opportunity. The reason that opportunity will exist is we're not withdrawing from their pension, excuse me, we're not withdrawing from their portfolio because they have the pension, which means their portfolio will keep growing like crazy.

Speaker 1:

So what you can see here this once again on my screen, but of course, if you're listening on the podcast app, that's perfectly okay as well there's something called Roth conversions. Now, roth conversions make a lot of sense for people who are going to be, in a way, higher tax bracket in the future. So for this couple, you can see if I try to fill up the 22% bracket, it's not going to make a difference. Now some of you are like why? Well, the reason is, if you have a pension, you're already in that tax bracket. So you might need to do Roth conversions at a higher rate, which will not always be the most fun because you're paying taxes at a fairly high rate, but it's to avoid paying taxes at an even higher rate in the future.

Speaker 1:

So you can see here for this couple, they're 51. If they retire at 59, it's hard to see here, I know, so I apologize, we'll beat up the software company together, but they have this little green sliver here. The green sliver is from 59 until 67, social Security for them, even though I would argue they should delay further. Regardless, this is them getting about 1.3 million more tax-free dollars at the end of their life by doing good Roth conversions. But watch what happens if I increase this further. What if we say, hey, let's go pay taxes at the 32% bracket? Well, now there's 15 million more dollars in value and you can see the green very clearly.

Speaker 1:

The reason these conversions are so helpful is because if we go and look at what's called the retirement cash flow section and I'll, of course, always be explaining this, because I listen to podcasts on the apps as well what happens is, if we look at ending balance per account I mean theoretically this couple, if they have $220,000 coming in every single year, that is probably going to meet all of their goals, and then some. So their brokerage account, it's going to be worth $4 million by age 70. Their 401k could be worth $10 million. Their Roth 401k could be worth $700,000. So they might have in total like $15 million, it literally growing by a million dollars a year at this point because of compound interest. Now they might go well, rather than have us have 15 million at 70,. What if we bought a second home? What if we went out and did more charitable giving? What if we helped out our kids? Well, I'm not including any of that in here. So obviously, the goal in life is not to minimize tax liability but to live your best life and, in light of that, be smart with tax strategy. So, with that being said, obviously, asset allocation, thinking about planning when you have a pension it's very different, and if you have a spouse or a big age gap, all of those things need to be considered, but tax strategy is the big one.

Speaker 1:

So many of you guys have heard this little dopey story, but I'll give it to you to end this episode. So someone reached out and they said Ari, my CPA sucks. I said that's kind of a weird word, like, why do they suck? They're like well, they didn't tell me that tax brackets are changing soon and that should impact my plan. I said fair point, what else they're like? Well, they didn't tell me if I inherit an IRA, there's a schedule I can withdraw from to optimize my tax liability. I said good point, keep coming. They kept going, on and on and on. I said I see the problem. They said, oh, this is great, you agree they suck. I said nope, they do not suck and you're beating up a waiter. They said beating up a waiter, what do you mean? I said you're mad because your CPA is filing your return but not doing all the other planning. And they're like yeah, that's my point, that's why I'm angry. I said they are a waiter that brings food to your table. They're trying to file your return and 500 other returns. They're not gonna give you guidance on Roth conversions and tax gain, harvesting and charitable giving and estate taxes and healthcare and real estate and inheritance and equity compensation and business planning and withdrawal sequence. That's what we do as tax planners. It's a forward-looking plan.

Speaker 1:

So for most of you that reach out to me, you have, I'd say 60 to 80%. You have an advisor, but you're frustrated because when you ask them a tax question, they tell you to talk to your CPA. Your CPA says go talk to your advisor. And now you're playing middleman of coordinator. And my fun joke here is I had a couple that reached out. They're like I'm retired. I said I don't believe you. They're like well, you're nuts because you don't sleep next to me. So how the heck would you know? I heck would you know? I was like yeah, I just don't think so. They're like well, you're crazy. I said I bet if you ask your advisor a tax question, they're going to tell you to talk to your CPA. Your CPA is going to tell you, for health insurance, talk to your agent, and your insurance agent is going to tell you to talk to your state attorney and you're going to have like five people to coordinate your retirement. They're like yeah, isn't that how this works? I said no, no, that's what a financial advisor is supposed to do. And the tough thing is we're all called advisors and we all do different things. So tax planning transparently that's the main reason people reach out.

Speaker 1:

So if you're looking for this type of guidance, we'd love to give it to you. That's, of course, if you're looking for a partner. If you're like, no, I'm not looking for a partner, I just want to play around with this tool, go, put all and stress, test all the scenarios. Well, like, be my guest, and we love getting to. I love getting to hear from people who find value in the software and I encourage everyone. That's where you should start. Like, if you're just unsure, start with the software. You get to see what's it like, kind of playing around with the tool that we recommend, and then, of course, if you go through that, as many of you do go, yeah, I still want next level help. Well, that's why we exist, so you can go hear from people that have used the software, people that became clients. I love getting to do this.

Speaker 1:

Please, guys, if this was helpful at all, leave a comment on YouTube like this, share this, subscribe, leave a review on iTunes. That's the best way to help more people find the show. I'm grateful for you guys. Love you. See you next time. Thank you all, as always, for listening to the Early Retirement Podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years, and that is because I love getting to do this.

Speaker 1:

Now, please be smart about this, before you actually execute any strategy that you see me talk about or hear me talk about. Should I say Please talk me talk about or hear me talk about? Should I say, please talk to your financial advisor, your tax preparer, your estate attorney? Please be smart about this. None of this should be construed as financial advice. This is for fun, educational, informational purposes only. Once again, just quick disclaimer here. Guys, please be smart about this. Appreciate you listening, as always, and you can, of course, submit a question on my website, earlyretirementpodcastcom. If you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person and if I find it will be helpful for a lot of people, I will absolutely make an episode on it, at the very least give you some insight. That's it. Thanks, guys.