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Why Your Retirement Plan Might Fail and How To Prevent It

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Why Your Retirement Plan Might Fail and How to Prevent It

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Want to retire successfully? Then it's time to rethink your approach! In this video, we dive into the core reasons why most retirement plans fail and how to overcome these challenges.

Do you consider retirement as simply quitting the workforce with a certain bank balance, or is it about leading a fulfilled life without worrying about your finances? Find out why a healthy retirement means much more than just having a sizable portfolio and high returns on investments.

Discover how issues like unexpected overspending, emotional investing, and even an existential crisis following the loss of work identity can contribute to a failed retirement. Learn how to avoid these pitfalls by redefining your retirement goals and developing a comprehensive plan that addresses both your financial and emotional needs.

Have you ever thought to yourself, "I'm saving for retirement, I'm investing for retirement, but I'm so busy with work, family, and just life overall that I have no clue what kind of retirement is even possible"? Well, if you've ever thought that, then you are definitely in the right place because I'm going to break down, step-by-step, what you should do to get started. So, let's talk about how to figure out what kind of retirement you can achieve based on where you're at today.

Now, if you're like most people who have the goal to one day retire and live a comfortable life, then you've probably wondered what you should even be shooting for and what's possible at different ages and different stages of life if you decide to stop working. The thought of trying to forecast exactly what you're going to spend 5, 10, 15 years from now can be extremely difficult and leave a lot of people overwhelmed.

Hello and welcome back to the Think Retirement Channel. Today we're going to be talking about what retirement looks like for a couple that reached out to us a few weeks ago and the steps that we took to help them figure out what kind of retirement is possible. Now for those that are new to the channel, I'm Jonathan Rank and I've been helping people plan and execute their retirement goals for going on 20 years now.

Realistic Retirement Goals

When most people think of the idea of retirement, it's around living a comfortable lifestyle. It's not this dream retirement that people talk about in headlines about lavish trips and vacation homes. It's being able to live the way that you live your life today but just not going to the office anymore. Now, that philosophy is where this video is going to be rooted. There are always goals that you can stack onto every retirement plan, whether it's more travel or buying a second home or gifting money to grandkids; those are all things that we can add. But for most people, they just want to know, "What if I stopped working at this age with this amount of money? Am I going to be okay?" And that's what we're going to go through today.

As I was thinking about what scenario I wanted to share with you, I thought about the most common age that I've seen people start thinking about retirement, and that's 65 years old, because for most people, they want to be able to retire and have Medicare that's going to help them with their medical costs. So, that's where we're starting today with this video.

Meet Bill and Cheryl

Focusing on a couple that reached out to us recently, they're 64 years old and they've accumulated just about $2 million in savings. Keep in mind whether you have $2 million saved, a fraction of that, or exponentially more than that, the numbers in this case don't necessarily matter. It's the principles and the steps we're going to go through that are extremely important when thinking about your own retirement situation.

So let me introduce you to Bill and Cheryl. Bill and Cheryl are 64 years old and, obviously, we changed their names for privacy reasons, but they reached out to us earlier this year because they started to think about retirement and they want to see if they can retire at the beginning of next year. They think they have enough saved, but they just don't know where to start or what to do. During our first conversation, we spent time understanding how they got to where they're at today and what they would like to accomplish when they're in retirement. They gave us three things that were at the top of their mind.

The first thing they wanted to know is whether or not they had enough to maintain their current lifestyle. The second thing was that Cheryl was extremely worried about the markets and their investment strategy, especially with the markets near all-time highs. She was worried about what retirement would look like if we went through a significant pullback. Now Bill, on the other hand, wasn't concerned about the markets or investing; he wanted to know how much extra, what he called "play money," he could have each year to do things like travel or spend money just outside of their normal lifestyle because he really wanted to enjoy retirement.

As you could see here, their total net worth is about $2.5 million. They've got a number of different savings accounts; they've got their 401ks, they've got IRAs, they've got Roth IRAs, they've got a savings account or really what they call their emergency fund of $35,000, and then they have their brokerage account. They don't have any debt and they have one daughter who is 36 years old, and they've got some new grandbabies.

Now they know they would like to retire at the beginning of next year, and in a perfect world, Bill and Cheryl would know exactly what they spend today, and they would have a clearly defined budget that lays out all their expenses. Guess what? This isn't a perfect world, and for most people, it's extremely overwhelming when you ask somebody how much do they expect to spend a year from now, two years from now. I mean, I've got two small kids and sometimes it's hard to know exactly what we have to spend month to month because, hey, life happens.

So for most people, thinking about projecting their spending over the next couple of years is very difficult. So where we started the conversation was just trying to understand what their take-home pay was today. Let's start there and see if we can maintain your current lifestyle without the risk of running out of money later on in retirement.

Now going through their income, currently, they make a little over $215,000 a year, and out of that, what they told us was that their net income, after saving the 40K taxes insurance, they said they take home about $10,000 a month. So that's what we're going to use as their goal today; that's a net amount that's direct to their bank account.

Now the only retirement income that they will receive in retirement is Social Security, and so we have that estimated here, uh, based on their most recent statement. Now speaking of Social Security, their current plan is that they want to start taking Social Security at their full retirement age, so we assess what it would look like to delay their benefits until age 70. And of course, it looks like it's the more optimal strategy because we have the plan going until age 90, and as you could see, the break-even in this case is 80 years old. And because they're not starting Social Security until age 67, they have to spend down some of their savings to fund their lifestyle in the first few years, and that's why you see their withdrawal rate a little over 5% in those first few years, but then begins to taper off, and it doesn't get over 4% until they're close to 90 years old.

Now, even with a withdrawal rate over 5% for a few years and the fact that the only retirement income they have is Social Security, as you could see, they are still have a 100% probability of success. In fact, at age 90, they should have somewhere around $6.9 million left over. Now, these are just estimates. We run what's called Monte Carlo simulations, so it's a thousand different variations of Market Cycles. The one thing that we do that is different than most advisers is that we leverage different platforms to make sure that our results are consistent.

Now, as you could see, even with the data put in the exact same way, the results are slightly different; in this case, they are 99% probable success with about $6.4 million, but we're in the right ballpark, and that's really what's important to see. Now, if we go back to the three things that they wanted to know, they wanted to know if they had enough to maintain their current lifestyle. The next thing was that Cheryl was concerned about the market and wanted to see if they could still retire if the market pulls back, and Bill wanted to know what they can spend above their retirement lifestyle to have some what he called "play money."

So we already answered whether or not they have enough to maintain their current lifestyle, which, as you could see, has a high degree of confidence that they can not only maintain their lifestyle but they're going to have plenty of assets to pass on.

Now to help answer Bill's question, we're going to assess the maximum amount that they can spend and still be at an 80% probability of success. Now, keep in mind that an 80% probability of success doesn't mean there's a 20% chance that they're going to run out of money. What this means is that there's a 20% likelihood that they have to modify their lifestyle depending on market returns, inflation, and other forces.

Now, where I've seen people go wrong is that they believe that their retirement is this steady static line that once they set up exactly how much income that they're going to need and how much income they're taking out of their portfolio that they're just going to stick with that forever and there's never a modification and they never actually go back to their retirement plan. So, based on that 80% probability of success, as you can see, the most that they can spend in retirement and feel confident is $159,000 a year after tax, adjusted for inflation.

Now that's going to give Bill about $3,250 a month that will be, in his terms, play money. Now, in this scenario, this is a very foundational plan because the only goal that we're planning for is their retirement lifestyle. Typically, we'll also add other financial goals like travel, maintenance on a home, a dedicated healthcare budget, and many other financial goals that are important to them.

Now, from the case of Bill and Cheryl, they have about $39,000 a year that Bill can either play with or they can earmark for some of those other financial goals down the line that we haven't identified yet. Now, that is what I like to call their safe spending range, which, in their case, is from $120,000 up to $159,000 of after-tax income every single year, adjusted for inflation. Obviously, they can go above that if they want. That just means that we're going to have to make sure that we're fine-tuning that plan every single year.

So now that we've determined whether or not they can maintain their current lifestyle and we've determined exactly how much Bill can have, in his terms, play money, it's now time to focus on Cheryl's concerns of what happens with the market.

The Most Important Thing To Do With Your Retirement Plan

One of the most important things to do with your retirement plan is to stress test it. Now, what do I mean by that stress testing? Well, this means putting your whole retirement through bad scenarios to see what happens. I always like to say that the goal of stress testing is to see where your retirement fails. If we know where the fail points are, then we know the true risks to your retirement.

So, to stress test Bill and Cheryl's retirement, we're going to look at their current spending plan of $120,000 a year and a proposed spending plan of adding Bill's play money to the monthly budget, increasing their yearly spend to $159,000. Now, just as we saw before, the $159,000 puts them at an 80% probability of success. And so now, we're going to stress test each scenario.

The first thing we're going to stress test is their current plan of spending $120,000 a year, which we're going to call their Baseline plan. And the first thing that we're going to do is help Cheryl feel more secure with their retirement because her biggest fear is that the Market's going to fall and it's going to cause their retirement to fail.

So when we walk through that, the first thing that we're going to look at is what happens if the equity markets fall by 50%. So, if the stock market falls by 50%, as you could see, their current baseline is at 99.8% probability of success; they drop down to 94.7% probability of success, still above that 80% target that we were shooting for before.

Now, we also are going to look at what happens if taxes are going to be higher by 20%. Well, in that case, they're at 99.7%. We're going to look at what happens if Social Security is reduced by 50%. I like to go through this one because there's so many headlines out there about what happens with Social Security going bankrupt and if they take away benefits and they slash our benefits.

A lot of people will try to plan their retirement for not counting on Social Security, but here, let's just say that they cut benefits by 50%. Well, in that case, they're at 93.7% probability of success, and we can adjust these as much as they want. We can run through if the stock market drops by 70% and who knows what would have to happen for the market to go down by 70%, but let's just make Cheryl feel more comfortable and let's see exactly what that would do.

So if we had the equity markets drop immediately by 70%, that still puts them at an 81.5% probability of success. Now, this is looking at their current baseline plan, but what if we switched over to Bill's play money plan or their proposed plan? Now, this is where we start seeing things change a little bit.

So, as we mentioned before, their baseline is just about 80% probability of success, but as you can see, if the market fell by 70%, they would be at a 5.1% probability of success. There's definitely going to be some things that they need to change about the retirement, but what if it's a moderate crash like 50%?

Well, a 50% crash in the stock market, if they were spending the most that we're talking about in this case, which is that $159,000, that puts them at a 25% probability of success. And we can go through all the different numbers to make sure that we can figure out what kind of drop in the markets could we tolerate and what type of lifestyle should you be living depending on what type of market we're in and what the rate of return that we're getting at that point is. But this is just a way where we can stress test a number of different scenarios.

The one that we've been looking at lately is what happens if inflation is going to be higher by a certain amount because, you know, inflation has been stickier than what most people thought. And so if it is higher by let's say 2 and a half% for the rest of their entire retirement life until they're 90 years old, what does that do? Well, that puts them in this case at a 39.6% probability of success.

But if we go back to their current plan, which is that $120,000 a year, then that's going to make things change just a little bit. Then the inflation, they're still at 97.4%. So, as you can see, depending on how much they're going to be spending, now this is forecasting it for the throughout the entire retirement. So if we set it as $120,000 now and then let's say next year is $159,000, and they go back and forth, then that's something that's why we do this active planning. But just looking at it plain numbers, if they were to live off $120,000 a year, they would be okay in this scenario.

Now, going through this, it made Cheryl feel a whole lot better about the long-term viability of their retirement. She felt better knowing the things that would cause them to have to make major changes to their lifestyle. But going through these things, this just scratched the surface of what we went through. We wanted to make sure...

Tax-Efficient Retirement Withdrawal Strategies

...that we were being tax-efficient in our planning because they had money in different tax buckets. There are going to be different taxes based on which buckets they pull from. In their brokerage account, they're going to be subject to capital gains. In their 401ks and their traditional IRAs, well, they're going to pay ordinary income tax when they take anything out, and any withdrawals from their Roths are completely tax-free.

When I'd asked them what their withdrawal strategy was, their initial plan was that they were just going to pull the same amount from each account to spread it out. Now, our recommended strategy was that they withdraw from their taxable accounts first, so that would be their savings and their brokerage account, and then they move to their tax-deferred accounts, so their Traditional IRAs and 401ks, and lastly from their tax-free money, which would be their Roth IRAs.

Now instead of just telling them to adopt our strategy because hey, it's better, we wanted to show them the data behind it and why and how it's more tax-efficient. So we compared the different strategies and just by switching which accounts they're pulling from, they would end up saving over $200,000 in taxes paid over the course of their retirement, and that would end up with a total of over $800,000 more than their original plan.

Now I know it's mentally tough for people to completely zero out and empty their taxable savings because, for the longest time, retirement accounts were thought of as off-limits, but in the end, the goal during retirement is to maximize every single dollar that you have saved and minimize the amount of taxes that you pay.

Now there are so many other things that we went on and we analyzed with Bill and Cheryl. We went through a detailed review of their investments, which we haven't even touched on today. We talked about how are they allocated based on how they should be allocated based on their individual plan. We talked about modeling Roth conversions to long-term care life insurance needs and estate planning. But our first goal was to focus on the three main things that were at the top of their mind: they want to know if they could just maintain their current lifestyle, they want to know what would happen if the market were to pull back and how that would impact their long-term retirement, and they want to see how much money could they spend above their current lifestyle to have some flexibility in retirement to live a different lifestyle, to travel more, to spend more on things that they might not have spent while they're working.

Now that we accomplished that, they feel a lot better about their retirement goals, and now we can start fine-tuning everything else.

I would love to know if this video was helpful. Our goal is to make retirement planning less stressful and help you achieve your retirement goals. If this was helpful, please do me a favor and hit that subscribe button to the channel, and that way you're notified every time we put out a new video. Sometimes the first step in feeling comfortable with where you are on your retirement journey starts with just knowing what's possible with where you're at today.

It's always helpful to have a crystal-clear understanding of what you want retirement to look like and what your expenses are going to be and what your income needs are going to be. But for most people that are focused on work, family, and just overall life, sometimes they just need to know what's possible for their vision of retirement to go from blurry to just being a little bit more clear because we can always figure out a budget; we can always fine-tune those things, but the first step is just figuring out what's possible.

Now, you may be watching this and thinking, "Hey, that sounds a lot like me. I've been saving and investing, and I know that I want to retire, but I have no clue what that looks like, and I don't know where to start." And if that's how you feel and you believe that going through a process like this would help you feel more confident in your financial picture, then click the link in the description below, and a member of our team would be more than happy to help build out your unique plan.

Now, if you are thinking about retiring soon, make sure you check out this video coming up next where I cover 10 mistakes to avoid when you're retiring. I'll see you there.

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC.– Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. –  Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. – Theorem Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. Third party posts do not reflect the views of Theorem Wealth Management or Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and have not been reviewed for completeness and accuracy. All further communications from this representative must be sent from and received by johnathan@theoremwm.com. For additional information, please refer to one of the following consumer websites: www.FINRA.org, www.SIPC.org.

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