When people come to see me for financial advice, they fall into one of two categories: the accumulation phase or the distribution phase. Those in the accumulation phase are dealing with questions and issues around growing their wealth, whereas people in the distribution phase are reaching retirement age, and they want to start dipping into their nest egg.

Accumulation Phase – Clients in this category are typically under 50 years old. They are focused on protecting and growing their wealth. They have questions about what would be the best savings and investment strategies to use when it comes to safety, liquidity, rates of return, taxes, asset protection. For these people I ask: “Where are you today, where do you want to be, and how do you want to get there?”

Distribution phase –  Clients in this category are typically focused on simplifying their life, and they don’t want to work or can’t work as hard as they did in their 20’s, 30’s, and 40’s. They are focused on having financial independence (financial freedom) to do something else they enjoy or want to retire completely (when everyday is a Saturday).

When new clients are nearing or already arrived at the distribution phase and first sit down with me and ask, “so what do I do? Here’s my nest egg, is this enough for me to survive for the rest of my life?”, they are terrified they will outlive their money, and there’s substantiated reason for this terror.

Today isn’t like those pension days when people used to have certainty they would be paid X amount for the rest of their lives once they retired. Pensions are a rarity nowadays, unless you’re working for the local, state, or federal government.

The Problem

What is the probability that you will outlive your money? Typical financial advisors and money managers are focused on securities (e.g. stock and bonds) in the stock market which aren’t so secure. They will use computer financial simulations, such as the Monte Carlo simulations, to account for a variety of potential variables (e.g. market volatility, returns, inflation, interest rates) that can affect your wealth and passive income.

To answer the question, let’s first address the circumstances. Today we’re looking at a low-interest rate environment, where the consensus in the financial industry used to be the 4% rule, which indicated you can withdraw 4% of your portfolio balance every year at retirement and it’s relatively safe (meaning ~ 80% chance of success) that you won’t outlive your money. Now the number is more like 2.8% per year from your nest egg if it’s all tied up in Wall Street. So let’s say you have a nest egg of $1 million, and let’s inflate the percentage to 3% to keep the math simple.

With these numbers your typical financial advisor is recommending to not withdraw more than $30,000 at a time in order to have an 80% success rate (success meaning not outliving your money). If you do the math, this also means a 20% failure rate. This is what most financial advisors teach and preach, but I say that’s B.S. Here’s why:

  • You may own these qualified plans and these investments on Wall Street, but they really control it. They want to control it throughout your accumulation phase (typically 25-65 years old) and they make good money every single year on it.
  • On that $30,000/yr there can be a huge impact on the taxation of your social security income, which means less net income.
  • On that $30,000 there can be a huge impact on Medicare. How would you like to pay hundreds of thousands of dollars while your neighbor pays $0 for the exact same service?
  • A lot of typical financial advisors forget to talk about the required minimum distribution (RMD) that kicks in at 70 and ½ years old. Which is a great (sarcasm) rule created by the IRS that says “Hey, we’re going to mandate that you take out this percentage of money from your qualified plan(s) and if you don’t, we will tax 50% of what we think you should have taken for that year.” Now those rules change all the time, but as it exists today, those are the rules.

That’s painful! But there is a different way to play the game.

As an engineer, I spent the first part of my career studying how things work and more importantly, don’t work, and how to fix it (troubleshoot). I can tell you the standard retirement plan strategy (Plan A) is not working.

Plan A: The typical Wall Street scenarios, with typical financial advisors preaching and teaching strategies that do not put you first. What that looked like for your nest egg of $1 million:

  • 3% withdrawal rate ($30,000 a year)
  • 80% success rate (20% fail rate)
  • Taxed if you do, taxed outrageously if you don’t (50%)

 

Of Course There’s Another Way …

So what if you had a custom designed financial plan that gave you closer to a 99% chance of success? What if your financial plan was designed in such a way that you could withdraw 7-13% per year for the rest of your life?

Plan B: A privately designed pension using my understanding of finance from an engineering perspective combined with the latest research in actuarial science. Below is a taste of what it could be:

  • 7-13% withdrawal rate
  • $70,000 or more each year
  • Income taxes are substantially reduced
  • Minimal impact on social security

Let’s break this down. When you’re looking at 7% with a $1 million nest egg, that could be $70,000 or more until you die. You could enjoy $130,000 a different year and have great certainty you will never outlive your money. Not only will you not outlive your money, but you can pass on a huge amount of wealth to your family and charities that you care about. How powerful is that?

 

The Takeaway

The way the majority of the financial industry teaches clients how to use and invest money favors Wall Street and the government, not you. That’s because while you own your money, they control it. They can mandate for you to take out a certain amount so it can be taxed, and they can tax you 50% if you don’t obey. All this for a 20% chance of failure? I don’t think so.

Curious to learn more about how you could enjoy up to a 99% success rate? Schedule an appointment with me and we can design a custom financial plan that suits your needs.