Speaker 1  00:46

I am doing fantastic, and I love this topic. I can’t wait.

 

Marc Killian  00:50

Well, so what exactly is Dave recommending, and what’s his reasoning? Can you break that down a little bit for folks?

 

Speaker 1  00:55

Yeah, so Dave, in his infinite wisdom, is talking about what he calls the 8% rule, and basically you’re just two phases of your life financially. There’s the accumulation phase, when you’re saving money. I like to kind of give an analogy of you’re moving up the mountain to financial freedom, so every time you can save $1 and add it to your 401 k4 3b you’re the accumulation phase, and you’re moving up the mountain, and every dollar you save gets you closer and closer to financial freedom, which is at the top of the mountain. You were trading in your time for money, but not at the top of the financial mountain, you’re going to start using all the money you’ve accumulated to buy back your time, and in that normally there’s a percentage of distribution that you’re taking off of your net worth or the amount of money that you’ve accumulated, and so what Dave is saying is because the stock market has done so well over the years, averaging about 10% that you could distribute 8% from your portfolio and get all the income you need, and you never have to worry about a thing, and pixie dust will rain forever.

 

Marc Killian  02:08

Sure, so I mean, like, you know, easy math, we’ll say a million dollar, you know, million dollars, 80,000 a year is what you’re talking about, versus 40,000 right? If you were going with the 4% rule, now the catch to this, Jude, is it only works if a large portion of your portfolio, or maybe even all of it, is invested in the market. So, what’s your reaction to that as a protection-first kind of financial strategist?

 

Speaker 1  02:34

Yeah, when I’m talking to clients in the real world, they’re mainly concerned about having income for life that they don’t have to worry about,

 

Marc Killian  02:43

right?

 

Speaker 1  02:43

They never want to have to worry about where the next dollar is coming from, and so using the 8% rule, in my opinion, really puts people at risk, because the market doesn’t always go straight up. You’re what he’s figuring the math on is a solid 10% return every year. Now the market may average 10% over a lifetime, you know, be up 10% this year, be down 5% of next year, and then return a higher percent next year, and if you average it all up, it’s 10% but here’s the problem with that, as you know, the market doesn’t always go up, so if, if I, as a client, using your numbers, need $80,000 a year, and I’ve got $1,000,000.08 percent times a million, the math works out to that 80,000 but what if the market goes down that year,

 

Marc Killian  03:39

right,

 

Speaker 1  03:39

if my, if your return goes down 10% and I asked you, Mark, hey, if you’ve got a million dollars and the market goes down 10% what would you need to return next year to get back up to that million? Now you’re a little bit more advanced, you’re probably going to give the right answer, but what do you think typically people would say? I

 

Marc Killian  03:58

think most people would say, well, if I’m down 10, I probably got to make what, 2025 to get back, right? They think that I think most people think they’ve got to make a little more to get back, but it’s they’re usually off in that assumption.

 

Speaker 1  04:08

Yeah, yeah, and you’re right, some people do believe you have to make more. What I, what I commonly hear is people say, if I’m down 10, I need to make 10 next year, and I’m right up, no, because if you’re down 10 now, your portfolio is 900,000 right? And 10% on 900,000 doesn’t get you back up to a million. You actually need about 12% the next year to get back up to the million. Yeah, if you lose

 

Marc Killian  04:34

50, you gotta, you gotta get 100 right? I mean, you could use that as the math. If you need to get back, you got to get 100 right? So kind of do that, and then work your way from there,

 

Speaker 1  04:43

but doing the math, here’s what actually happens. If you add another 8% to that distribution from the withdrawal from the withdrawal from right, plus being down, you actually need 22% the next year just to get back up to that million,

 

Marc Killian  04:58

right?

 

Speaker 1  04:59

And if you don’t. Get it, you’re further declining that million, that million went down to 900,000 Then you took out 80,000 and now your portfolio has to work even harder to get back up to par value. And if you don’t recover, that means next year, when you’re taking out that 80,000

 

Marc Killian  05:16

it’s taking out 80,000

 

Speaker 1  05:17

on a lower number, and you can see how the decline can continue to happen, and before long you may be out of money.

 

Marc Killian  05:26

Well,

 

Speaker 1  05:27

doing this,

 

Marc Killian  05:28

yeah, that sequence of return risk, right? So, you know, we talk often, people have probably heard that phrase, you know, if you’re retiring in great markets for the first five years, that makes a massive impact versus somebody with the same numbers who retires in down markets, you know, it’s just its sequence of risk return or sequence of return risk, so it’s something very real. And even the guy, Jude, who created the 4% rule back in the 90s, not that long ago, remoded it to about 4.7 so he’s not even shooting at the 8% he’s saying yeah, inflation, and so on and so forth, we can tick that up a little bit to about 4.7 but at the end of the day, 8% still seems wildly optimistic. I think, or it may be, you know, again, I think this is where people get confused, and you kind of break it down from here. If you want, it’s easy to look at the market and go, hey, it made 21% last year, I only got 12, so my advisor must be doing something wrong. I should fire them, right? And it’s like, well, did they have you 100% in the market? Well, no, I don’t want to take that much risk. Well, that’s why you didn’t get the 20% right. It

 

Speaker 1  06:31

went 100% And here’s how we address that problem at the firm, because we’re not talking theory. That’s great that Dave talks this theory, sure, yeah, but real people in real life want to make real dollars, and I love how you said, I love

 

Marc Killian  06:47

how you said a minute ago, in the real world what we have to do, because yeah, Dave doesn’t have to make sure that this works, that if he’s wrong, it doesn’t ruin somebody’s life, you know, because he’s not actually building them a plan around

 

Speaker 1  06:59

it, absolutely, and I’m glad you interjected the word plan, because when we’re building plans, it’s holistic. We’re using our proprietary GPS guidance planning solutions to look at all five pillars, and one of those pillars is income, and when we, when we’re looking at the income pillar, the tool that we use to provide sustainable income is the is our three bucket model of safety. In the first bucket, things that cannot lose money, your money markets, your your savings account income in the second bucket, how we strategically plan to get that income that you need, and then growth in that third bucket, so that we’re continuing to grow the assets, so we can provide cost of living, because that’s not another thing that he doesn’t address in the 8% rule, you know, there’s always going to be inflation, and so we need to grow the assets to be able to provide more income over the years, and that’s a really, a more sustainable. I’ve seen, look, I’ve been fortunate to be in this industry for 25 years. So, we’ve taken clients from their working years and accumulation to retirement years, and have had clients now that have been retired for almost two decades, and they’re, they’re, they’re getting the income that they need,

 

Marc Killian  08:21

you know, Jude. I was just talking earlier today. Check this out. This is this is a mind trip for listeners and data for yourself, which, you know, I’m sure you don’t know offhand, but I’m sure it’s going to sound right to you. So, just the other day, the Dow popped 53,000 right? Saw the headlines come up, and at the end of 2008 okay, after, after it had fallen and everything, I don’t remember the exact number, but somewhere right around 8000 okay, it went from 14 to about eight, think about that, since 2000 end of oh eight to here in the middle of 26 it’s gone from 8000 and change to 53,000 so I was looking it up, and over five, over just the last five years. Now that’s 20, that’s like what, 18 years, right? Over the last five years, the Dow is up 51% So, if you had a million dollars in an indicee just doing that, you’d have made an extra half a million dollars, but you have to risk it all. Who wants to risk it all, especially if you’re at 55 or 57 or 60 or 62 and I think that’s the point here, right?

 

Speaker 1  09:30

It’s 100% the point, because when you’re in retirement, you don’t have the number of years to bounce back from a drastic downturn in your portfolio. I

 

Marc Killian  09:40

want to make an extra half a million, Jude, but

 

Speaker 1  09:42

yeah, it

 

Marc Killian  09:42

scares the hell out of me to risk it all. Right,

 

Speaker 1  09:45

right, right. And that’s why plans are interactive. It’s not a set it and forget it. Okay, we built you the plan, we’ve got your say, your safety, income, and growth buckets, and go have a nice life,

 

Marc Killian  09:59

right.

 

Speaker 1  10:00

No, we’ve got to adjust for what happens in the market. We’ve got to adjust for what may happen in Congress with tax regulation. We’ve got to be interactive, and that’s why I love meeting with clients when we’re doing their review meeting in our GPS, because we’re asking them a simple question, How’s your income? You know, and in depending on their response we’re making adjustments to our strategy, it’s not a static thing.

 

Marc Killian  10:26

Yeah, that’s a great way of looking at that. So, I’ll wrap it up with some of some final thoughts here for you to kind of tackle. So, based on our topic today, do you do you have a specific withdrawal rate per clients? Do you kind of start with a target and then adjust from there, or is it completely person to person,

 

Speaker 1  10:42

that’s an excellent question. I’m so glad you asked that. To give clients kind of a ballpark to shoot for, we start off with just using the 4% rule, just to kind of give us a ballpark, but then to your point, we get very specific when we’re putting together the GPS plan, particularly on that income pillar, and the withdrawal percentage could be different because we’re building a specific bucket for income, so I tell people use that 4% rule not only as a rule of thumb, but if you ever want to figure out what your financial freedom number is, you can back into that number that you might need at retirement. Let’s say, just for example, you need 40,000 a year,

 

Marc Killian  11:30

right?

 

Speaker 1  11:31

So, backing into that, you’ll get using that math, you’ll figure out you need at least a million dollars, a million times 4% will give you that 40,000 right? So, but it’s just a rule of thumb, it’s not specific financial plan, yeah,

 

Marc Killian  11:44

and to kind of go back to where I started saying the 4% versus the 8% a million dollars, let’s just say in the account, for easy math, if you needed the 80 grand, you know, Dave’s sexy 8% and that sounds appealing to you, and you’re doing the back of the nap, and you’re like, actually, we do need the 80, okay, fine, did you first off take into account anything else other than just the investment accounts that you’re pulling from? Because that’s the other piece of this equation, right, Jude? If, if Couple A has two pensions because they both were state employees or teachers or whatever, they may not need the 80, right? You know, or whatever. So, they may not need to pull 8% They may be able to do four or six or three and a quarter, or whatever, right? So everybody’s going to be a little different based on their social security. You need to do that maximization there based on whether you have pensions, you don’t have pensions. So it’s a complete to your point earlier, a holistic, you know, you know, little puzzle here that you’re putting together and not just grabbing a rule of thumb, and saying let’s roll with it. Yeah, that gets you the back of the napkin, but dive into the specifics then, and figure out what you need.

 

Speaker 1  12:47

Yeah, I like what you said about back of the napkin. The back of the napkin kind of gets you in the ballpark, get you thinking, you know what you’re, what you’re shooting for, but then a professional is going to help you really hone in and address all the things that the 8% rule doesn’t address like inflation, like taxes, like the sustainability of taking out that income, and that’s what we do with GPS, with the guidance planning and solutions.

 

Marc Killian  13:11

Yeah, that’s a great point. Stress test that Joker over a 20 year window, right? Run those analysis, you guys can run those projections and go, here’s what happens to the 8% if you actually do it. I imagine there’s probably a few people that would sit down, watch you do that, and do the illustration, and be like, oh, I don’t want to take the 8% then that would not be good, right?

 

Speaker 1  13:30

Yeah, it is,

 

Marc Killian  13:30

it is the unknown, Jude, because we don’t know what the markets will do, right, that’s part of the equation too. So, yes, there is some, you know, educated guesses happening to a certain degree, we have historical data on the market, but again, fifth, I mean, look, how much it’s climbed, you know, in the last 18 years, nobody expected it to go that high, right? Who knows where it goes from here?

 

Speaker 1  13:53

Yeah, I’ll just tell you one last quick story. Yeah, so I’m gonna age myself here. When, when I first came into the industry. I remember walking. I was working in downtown Jacksonville, and I remember walking by a newsstand, and in the cover of Time magazine, in the news stand, it said, “Will the Dow ever break 10,000? You know, look at where we’re at now, and like you said, there’s no telling where you know how high the Dow will go, but the thing that people really need to understand is that these general rules are great to give you an understanding, but you need something customized to your situation, because your situation is different, and you want to make sure that you’ve got the highest probability of having the income that you need for life.

 

Marc Killian  14:45

Yeah, I’ll say, look, Dave, you know, not trying to crank on Dave, he’s got some really good ideas, he’s got some good things out there that have helped a lot of people, especially in the debt side of things, right? But the retirement income planning side is a different animal, and it’s not really the strong. Long suit there, and so I, again, you got to get a specific plan based around what it is that you need, and not just kind of, you know, some of the big talking heads. I mean, he’s got a big empire, it makes easy sense to go, hey, he knows what he’s talking about, but at the same time, he’s not in the trenches doing this every day. You’re not able to go to the office and say, hey, run these numbers for me, I want to see it in black and white, and that’s what you can do with the GPS and the five pillars, and that Jude, and you know, and again, there’s financial people all across this country, you know, if you’re not seeking Jude’s help, seek somebody’s help who’s a qualified professional that does this day in and day out, and helps 1000s of families to retire, you know, on their timeline that they’re looking to do, but if you need Jude’s help, he’s in Florida, but he helps people all over the country as well. So, reach out to him online. We’ll have links in the show descriptions below to get your own GPS. Just click on those links and get started at his website there. So, we’ll have all that stuff in the show descriptions on Apple, Spotify, and of course right here on YouTube. Hit that thumbs up and subscription or subscribe button, so you catch new episodes of The Roth Guy when they come out, Jude, my friend, thanks for breaking it down, buddy.

 

Speaker 1  16:03

I enjoyed it as usual. Thank you.

 

Marc Killian  16:05

I appreciate it. We’ll see you next time here on The Roth Guy with Jude Wilson.

 

Speaker 2  16:14

Investment Advisory Services are offered through Centrus Financial Strategies (“CFS”) a Registered Investment Advisor. CFS does not provide tax or legal advice. Consult with a qualified financial, legal, or tax professional prior to taking any action. Information received from this podcast should not be viewed as individual investment advice. Centrus Financial Strategies does not accept any liability for the use of the information discussed. Product discussions and illustrations are hypothetical in nature and will vary based on many factors including, but not limited to, age, health, product, insurance carrier and product design. You should consult the insurance carrier website and policy for detailed information. Before investing, consider investment objectives, risks, fees, and expenses. Investments in securities involve the risk of loss, including loss of principal. Past performance is no guarantee of future returns. The views and opinions reflected in the content are subject to change at any time without notice. The content speaks only as of the date indicated. Some information was obtained from external sources. The information is believed to be accurate, but there is no guarantee that it is. Please read the disclosure statement carefully before you invest or send money. For information pertaining to the registration status of CFS, please contact the firm or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about CFS, including fees and services, send for our disclosure statement as set forth on Form ADV from CFS using the contact information herein.