Update: Three-Bucket Retirement Strategy

I met with a man recently in his early sixties who’s looking to retire within the next six months. As we started talking about the Three-Bucket Strategy and how it fits into his retirement income plan, the question came up: how much should I have in each one of the buckets? If you don’t know about Three-Bucket Strategy yet, stop reading now and watch this video. Then come back here for my conversation with this client and what we decided to do with his three buckets.

First Step: Creating an Income Plan

If you’ve seen my previous videos, then you may remember that there’s a certain order in creating your ideal retirement plan. Before we can create the investment plan and decide how much of each asset class going to go into each one of the buckets, we must first create the income plan.

The income plan is a visual representation that allows us to see what impact any financial decision has on the life of the total retirement plan. It’s a very useful step in creating more confidence in your financial life. For example, if you wanted to spend a little bit more money traveling early on in the first few years of retirement, we would be able to see that the total retirement plan amount does go down a little bit, but it’s not harming the plan as a whole. Or maybe you’re going to have part-time income in retirement; seeing how that affects your total amount is going to help us decide what to do moving forward. We can really look at all different sorts of scenarios. Sometimes we talk about the four economic seasons and what sort of impact they might have on the ideal plan.

Once we have the income plan, we start looking at what investment plan is best suited to achieve the goals of the income plan.

Start with Ideal Income Amount

My new friend, who I mentioned at the beginning of this post, had done some preliminary work in trying to figure out how much should go into each one of the buckets. First, he figured out what his ideal income would be coming into the bank when he was retired. That amount was $20,000 per month.

And now as a quick note, don’t let the numbers throw you off. We’re all in different positions and we’re all planning for our unique lives. We don’t need to compare to other people. Some people have more, and some people have less. This person that I was talking to is a giver. He’s also supporting charities, and he wants to travel a lot the first few years of retirement. So, I’ll use his numbers here, but don’t let it impact your mindset as you’re planning your retirement.

This client wanted enough in his Conservative Bucket for at least five years’ worth of withdrawals. He’s going to have about $5,000 coming in from his and his wife’s Social Security. So, he estimated withdrawing $15,000 from his investments in various accounts each month. Then he did the math of $15,000 times 12 months, then times 5 years to equate $900,000. ($15,000 x 12) x 5 = $900,000

Plan for Different Scenarios

Based on this math, he asked if this means he should have $900,000 cash in his Conservative Bucket. His logic seems reasonable and it makes sense, but the total investments he had across the board was $6 million. This means that if he followed that plan, he was thinking he’d have an allocation mix of about 15 percent conservative assets and 85 percent more aggressive assets.

We looked at his income plan, and then modeled out what a portfolio would do in these upcoming years. We considered both the good and the bad scenarios. Then, we had a conversation about his own feelings of risk around retirement. We also considered the least amount of risk that we need to take on order to have a successful retirement plan. Based on these factors, we ended up lowering the return assumptions and updated his income plan. We also added some asset classes that he did not previously have in his total allocation. Finally, we found that an allocation with a lower risk number than his first assumption was better suited for him. So, to keep it simple, he ended up closer to a mix of 65/35 conservative to aggressive. There are many asset classes within that mix, so he’s prepared for all the potential economic seasons that we may head into.

Process of Planning

If you’re like many of our clients who are close to, or already in, retirement, you might have the feeling that you’d like to take on no more risk than what you need in order for your plan to be successful. And as you can see from this post, creating your ideal retirement plan is really a process of discovery. Once you create the plan, it’s not over because a retirement plan isn’t necessarily that valuable. Life changes tomorrow; the economy changes, the markets change. It’s really the process of planning that’s the valuable thing.

An exercise to try today could be to pick out a monthly income number that you’d like to have coming into the bank in retirement. Then choose the numbers of years of safety you’d like to have in your Conservative Bucket. Go back to the formula I shared earlier of (Monthly Income x 12) x Years to see how much you need to have saved. Sometimes we look at the average Bear Market and make sure we can last from peak to trough and back to peak again––that’s one way people do it––and then work backwards to see what your total allocation would be. When you look at that allocation, think about if you’re comfortable with the risk, or does something have to change. This is a good way to start thinking about your own process of planning.

How Much to Save for Retirement

I recently came across a visual representation of how much to save for retirement and what sort of income that savings might be able to provide. The visual looked at three different retirement income numbers and a few different scenarios. I’ll provide a link for you to check it out at the end of this post, but first I want to highlight what I thought were the most important things.

When you see these numbers, you might have one of two reactions. You might see this and think, oh good! Seems like I’m on the right track and everything’s fine. Or you might think, oh, I’m really behind. What am I going to do now?

If you have the second reaction, don’t let this ruin your day. Remember that these are just assumptions and not your specific financial plan. If you feel any sort of anxiety when looking at this information, do one thing that will give you a sense of progress in your financial life. A great way to fight anxiety is seeing small steps towards a goal. So, take one small step today. It could be listing out your accounts and how much is in each one. Then, see if you can save a small amount more into one of the accounts, or something like that.

Additionally, remember this is not specific advice to you. Talk to a financial professional before doing anything related to changing finances or updating your plan.

Factors to Consider

The big question is always how much should I save? And although this is just about the most frequently asked question, it never leads to a straightforward answer. It really is about the income. A few factors to be thinking about are:

  • Lifestyle – how do you plan to spend your time later in life
  • Downsizing – a lot of clients end up doing this because they’re still living in the same house that they have for 30 years and just don’t need the space anymore
  • Medical Expenses – the average American, age 65-plus, spends roughly $11,000 on medical expenses each year
  • Inflation – a lot of people will use 3 percent inflation across the board, but what if it was higher for an extended period of time? What would that look like for your plan?

Savings Scenarios

Before we get into the actual numbers, there are a few underlying assumptions. The big one is annual income. These projections assume that you’ll be using 70 percent of your current annual income. And that you’ll have a 7 percent estimated annual return on investments. Keep these assumptions in mind as we look at the numbers. Yours can look much different than this.

Scenario 1 is for an annual salary of $50,000 per year. 70 percent estimates a $35,000 need, coming out to about $778,000 saved in order to get that sort of income per year.

There are also numbers on the visual representation that look at what you need if you’re just now starting to save for retirement, 20, 25, or 30 years out, but I’m guessing you’re most likely in your 50s or 60s already so I won’t go into those here. If it is applicable to you, you can check it out on the infographic linked at the end.

Scenario 2 looks at somebody who’s making about $75,000 per year. Seventy percent of that number is between $52-53,000 per year with a savings target of about $1.17 million.

Scenario 3 is for someone making $100,000 per year and using the 70 percent assumption, we’re looking at about $77,000 per year. You’d need about $1.7 million.

Something important to remember. If you’re reading this and your expenses are close to one of these examples, please don’t just think, oh, I’m going to be fine. This is my retirement plan now and it looks like I’m going to be just fine.

It’s important to explore multiple scenarios that could happen in your life. Meaning that maybe this is Plan A, where a lot of the assumptions in these scenarios are true for you with the types of investment return and the amount of income you need.

But we both know that life changes rapidly and having a Plan B is crucial planning for the worst-case scenarios, or maybe just the unexpected. It isn’t fun, but it will give you more confidence if you do it. Mapping out different scenarios will end up giving you more peace of mind too. I actually recorded another video looking at a similar scenario to the $100,000 income. With just a few small changes, it really messed up the trajectory of their retirement plan. So, I’m sharing this with you just to give you some information that’s helpful and encourage you to talk to a financial professional.

If you’ve made it this far and you don’t see yourself represented in any of the above scenarios, I have a tool called the DIY Retirement Plan to help you map out more accurate numbers and give you some idea of what it could look like for you.

Click here to view the infographic on The Visual Capitalist.

The Biggest Risks in Retirement

We get to talk to a lot of people around the United States and even expats who live around the globe. And when we’re designing ideal retirement income plans, one topic that comes up over and over is the risks that we currently face. Some of common worries that we hear from people are:

  • how a certain political environment could impact the market or impact their finances
  • decisions being made and how are they going to change things
  • is the dollar going up or down
  • what happens if relations with a certain country escalate
  • is there going to be inflation or deflation
  • what if a major market crash ruins my retirement

Many people come to us thinking that there are all these different problems that we have to solve for and they have to prepare for. But I have good news for you because none of these issues are the real problem.

The Real Problem

The real problem is that you don’t have a clear and concrete plan of action for how to navigate these scenarios if they do happen. I’m going to explain how to do that, but first, I want to share an example. You’ll see that once you have the right plan in place, things get a lot easier for you.

Last summer I drove to Nashville, Tennessee. At the beginning of the trip, I plugged my destination into the GPS and it mapped out my entire path. I didn’t have to worry about future roadblocks or detours or any things that might be ahead that I have no control over. All I did was drive and enjoy my audiobook. When unexpected detours did come up, the GPS accounted for the change and updated the path, alerting me when necessary.

If I didn’t have the GPS, it would have been a much different experience. I’d be looking at every highway marker to make sure I didn’t miss my turn. And if there were detours, I’d have to get out the map and figure out the next best route to use. But since I did have the GPS, it turned out to be a pretty smooth ride.

This is how your retirement plan should work too.

Once you have a plan, you should have more confidence with your finances in retirement. You shouldn’t have to worry about unexpected events and things that could affect the economy or the markets because you’ve planned ahead for it. You should have a plan that you understand. And, have the right systems in place so that you can follow it easily. All of this is so you can live an exciting, fulfilling, joy-filled retirement.

The goal of retirement isn’t to have this plan that you follow. But to have a plan so that you can do all the other things you want to do with your life.

How do we do it?

At Streamline, we model potential risks ahead of time. This way we can be prepared and know what to do if one of these scenarios happens.

If you’re currently working with an advisor, or interviewing potential advisors, ask them what financial planning software they use and if they can model out potential scenarios. Some specific questions you can ask are:

  • Is there a way to model if inflation rose higher than expected?
  • What if we base our returns on investments on lower-than-expected returns, instead of on past returns?
  • How to optimize Social Security?
  • When should we start collecting Social Security?

If they say they can’t do any of these things, they might just be investment managers. They aren’t helping people with income planning and tax planning, which is really important. Also, if they model out retirement by using a spreadsheet, ask to look at an example to see if you can understand it. You should be able to understand the plan that you have.

If you don’t want to work with an advisor, I have a DIY Retirement Plan in which I share some of the best consumer-facing calculators. Utilizing one of those calculators could be a way to model out some of the various scenarios as well.

Remember not to worry about the potential problems you might see on the news this week. Focus on having a proper plan and understanding the proper process of planning. A plan can be useless the day you create it because life changes so fast. But if you practice the process of planning, it will be invaluable.

Common Money Mistakes People Make When Retirement Planing and How to Avoid Them

Because we get to work with and talk with dozens of people who retire each year, we get to see those who do it well, and then we also get to see those who make some mistakes. In this post, we’re going to look at some of the most common mistakes people make in retirement.

Relocating Too Quickly

It’s definitely okay if moving is part of your retirement plan. But here are two couples who went about it in different ways.

The first couple knew the town they wanted to move to; it was the hometown where they both grew up. After they retired, they sold their Chicago house and bought a house in their hometown. It was more rural, less expensive, and they still had some friends there. The next year, they made some changes to their new house and got it updated just the way they wanted. But after six months or so, they realized they didn’t love the place they were. It wasn’t the same. The problem wasn’t the house; the house was fine because they had made it the way they wanted. But they didn’t have the same feelings as they remembered from when they used to live there. So, they ended up selling that house and moving to a new area. Now they’ve been in the new location for over 10 years and things are good.

The second couple sold their house and relocated to a new state, California, about 10 years ago. When they arrived, rather than buy, they rented and tested the waters to make sure it was right for them. They found out that they didn’t have sense of community in the first year. It was hard to make new friends where they were and it just didn’t feel right. After a year, they tried a new location. They rented again and quickly fell in love with the place because of some new social connections they made. That’s when they bought a home in that location. They’ve lived there for about nine years and are living out their retirement plan.

Think about your options. If you’re relocating, maybe it’s worth paying for flexibility for a year or two, just to make sure you’ve found the right place. There’s nothing wrong with renting. Some people think it’s a waste of money, but I think it’s worth it for a big move.

Not Spending Enough

It sounds strange, but not spending money or over-saving is a common thing that we see. This just means that many retirees have the ability to spend more money or give more away in retirement, but they’re overly frugal. They are still worried about running out of money or they want to save more to leave to their heirs. The reason I believe this is, is because they don’t have a plan or they haven’t looked at the various scenarios that could play out. Once you’re able to create an income plan and see the impact of the money decisions on your future, it becomes a lot easier to use your money the way you want to. It also gives you more confidence in the future as well.

Failure to Predict Taxes

Many retirees don’t accurately predict or project what taxes are going to be in retirement. Or, they might plan out the next one to three years, which is good, but they don’t look at the next 10-plus years. I know it’s impossible to predict what tax rates are going to be and things like that, but at least look with reasonable growth rates at the required minimum distribution. This is a good idea because you might be in a postion where you wouldn’t take the distribution amount required each year by the government if you weren’t forced to. If that’s the case, there are tax-planning strategies you can use in retirement to minimize how much tax you pay over your lifetime.

Doing tax projections each year is a good idea and it’s a key part of the tax planning system here at Streamline as well.

Becoming an Investment “Expert”

Another common mistake that we see in retirement is when people use their new free time to take up investment study. People think now that they have extra time, they’ll be able to become more of an expert in investing and want to take the reins back. This can be a mistake because there are different levels of retirement planning. Level one is really just using rules of thumb to plan retirement. And it is possible to have a successful retirement by using these rules. But there are also things you can do to make it even better with expert guidance. Having someone who has a lot of experience and can run multiple scenarios and help make decisions is valuable as well. We’ve seen that it actually brings more stress to retirement to try and manage all the investments on their own.

Now, this isn’t everybody. You might love investing and it’s something that lights you up. You may have a passion for it and it doesn’t cause you stress. If so, then continue to do it! But there are many who are hearing a lot of conflicting views and don’t know what decision to make because of all the different points they’re pulling from YouTube or other places when attempting to do it themselves. When you get to retirement, you’ve probably got the most money you’ve ever had. And the chances of making a costly mistake are a lot higher when you’re dealing with $2 or $3 million.

This leads directly to the next mistake we see.

Taking Money Advice from Friends

It does make sense to learn from those who have gone before you. You might have friends who are a few years ahead of you in retirement, You’re able to glean wisdom from them and maybe learn from the mistakes that they made so you can avoid them. But when it comes to details of investment strategy or income strategy, don’t put too much weight on someone else’s experience. They’re not you and they have different financial needs and different values and risk tolerance.

One guy I talked to recently said his friend who is 10 years older than he is put money into a 60/40 portfolio at Vanguard. It’s a two or three fund solution and it worked out for his friend, so he wanted to try it too. But when you look at the different asset classes that are available, this strategy would really be investing in just a small fraction of the available investing world. This strategy might not leave him prepared for all the economic seasons we could go through, so it wasn’t really a wise solution for him.

Failing to Plan How You’re Going to Spend Your Time

In order to make yours the best retirement possible, you need to think about the non-financial side of things as well. Think through what will give you purpose, excitement, and joy in retirement. This is important because there’s a stage after the honeymoon phase of retirement where a lot of people experience disenchantment and ask, is this really all that there is?

To help you avoid that stage and live a life you love, I have a worksheet in Module One of the DIY Retirement Plan. Click here to access it.

Conservative Investing

As you get closer to your retirement date, the feeling of wanting security and safety gets stronger. This tends to make people want to get more and more conservative with the assets they’re holding in retirement accounts. But this could actually lead to harming the retirement plan, especially during periods of higher-than-expected inflation seasons.

Be aware of the feelings and the emotions that come with retirement and don’t let them negatively affect your plan.

Not Aligning with Your Partner

Be sure you’re aligning with your partner on how you want to spend your time and money in retirement. You may have different perspectives around money and have different ideas about what you want to do. This is why defining and discussing your money values is so important. Because when our values become clear, our financial decisions actually become easier.

For example, if I value being outside, nature, and travel, then I may spend several thousand dollars on an Alaskan vacation with my family. Whereas my neighbor might have values aligned with local community and relationships. He’d rather spend money on entertaining friends at home or going to restaurants, things like that. Both are good uses of money, but one is better for me and one is better for him. It’s the same way with your spouse or partner. Thinking through these things together is very important before you get to actual retirement. And there are exercises in the DIY Retirement Plan (linked again here) if you’re interested in those.

Three Reasons to Start Social Security Early

In this post, we’ll discuss when it may make sense to take Social Security early.

The common Social Security planning technique or strategy is to wait as long as you can before you start. If you can wait until age 70, that’s the maximum benefit. And you hear this advice a lot because every year that you do wait, the benefit goes up between 6 and 8 percent.

When we run our Social Security optimizer, we’ve seen that, in most cases, if clients live past between 80 to 83, then it does make sense to delay Social Security until age 70, because that’s about where the breakeven point is. But sometimes we recommend taking it earlier than age 70, and sometimes even earlier, for example, before 66. So, I want to share some of those reasons with you.

Reason #1 to start Social Security early: Your Health

I have a client who recently recovered from cancer. He was 66 and still working, and he decided he just wanted to start taking Social Security now. He had income from work and he didn’t need the Social Security. But he thought he might not live to that breakeven point in his early eighties. Also, we looked at when he would stop working and we estimated that the percent of his retirement income from Social Security would only be about 10 percent, meaning that if he was wrong about how long he was going to live, then it wouldn’t have that big of an impact on his retirement income plan. Due to these factors, we didn’t wait until age 70. This client started taking Social Security at 66.

Reason #2 to start Social Security early: You Need the Income

Every one of us has a unique life and journey to go through. Yours probably looks different than the previous client that I just mentioned. If Social Security is going to make up a bigger percent of your future retirement income, and if you don’t have any other sources of income coming in right now, or they’re just not meeting it, it might make sense to take your Social Security now.

Let’s say that you’re 65 and no longer working. Then you might want to start taking Social Security so that you can have something coming in, if there’s no other wage or income. Waiting to maximize Social Security might not make sense if it’s going to cause you a lot of stress or pain to delay it.

And as a reminder, this is not financial advice for you because I don’t know your specific situation. I encourage you to find a financial professional before you make any decisions about Social Security. Get someone to weigh in before making a decision on your own.  

Reason #3 to start Social Security early: You Want to Spend the Money Now

Let’s assume as you’re planning for your retirement. You’ve run the Social Security optimizer and you have a good chance that you’re going to live past 83 and into your nineties because of genetics and healthy living. On the financial side, it probably makes sense to delay social security. But we both know that every single financial decision also has an emotional component to it. Let’s pretend you’re 64 and you’re looking at the next few and you want to travel now, while you can.

So, the third reason to possibly start Social Security early is if you want to spend more money. Now, you might be like one of our clients who wanted to go to Israel a few years back. And she said, when I’m 70, I don’t know how I’m going to feel. I might not be able to walk around as easily as I can now to all these cities that I want to see, and I know that I can do it now. That encouraged her to start Social Security now so that she has the extra income. We also looked at the next 25 years as well, to make sure it wouldn’t cause any red flags within her plan if she were to start Social Security now and everything looked good.

As you can see, when to start Social Security is part science, which is the number part, and then part art, which involves the emotion. It’s going to be different for everybody. And I do highly encourage you to figure out the science part––the numbers part––before you make a decision. Doing so can help give you more confidence to that decision.

IRS Warns of a “Frustrating” Tax Season PLUS How To Lower Last Year’s Taxes.

The Internal Revenue Service stated that this tax season could be a frustrating one. I want to share what the IRS commissioner said so that you can be prepared, and then also I’ll share a few things you can do now in order to save on your 2021 taxes.

The IRS Commissioner, Chuck Reddick, said this tax season may be a frustrating one as they deal with a lot of backlogs of returns and personnel shortages and more taxpayer phone calls than normal.

“We’re unable to provide the level of service and enforcement that our citizens and tax system deserve and require in many places.”

Chuck Reddick, IRS Commissioner

What does that mean for us? Longer-than-normal hold times and longer-than-normal response rates, most likely when it comes to sending out refund payments to you. The time from filing to refund receipt is estimated to be about three weeks.

Individual tax returns for 2021 are accepted starting January 24th. The filing date is April 18 for most taxpayers.

Now, on to some things that can actually lower last year as taxes.

Contribute to Eligible Accounts

If you have one, you may be able to contribute to your health savings account for last year. That will actually lower your adjustable gross income, which will lower your taxable income as well.

Another thing, if eligible, is contributing to your deductible, retirement counts, like IRA or SEP IRA. There are some income limits, so it’s important to make sure that you’re eligible for those.

Itemize Your Deductions

See if itemizing your deductions is worth it. It might be for you if you can add up your qualified expenses and they total more than the 2021 standard. That is $12,550 for most single people and $25,100 for married couples who file jointly.

Many deductions are well-known things like mortgage interest or charitable contributions. You can also deduct a portion of medical expenses that exceed 7.5 percent of your adjusted gross income for 2021.

Working From Home?

Lastly, if you made any extra income on the side last year, or if you’re considered self-employed, you may be able to claim a home office deduction. This means that you may be able to write off expenses that are associated with a portion of your home when you exclusively conduct business in that portion of your home. Possible write-off potential include: rent, utilities, insurance, or housekeeping. The percentage of these costs that could be deductible is based on the square footage of that home office to the total area of your house.

There are some specific rules around home-office deductions. I recommend talking to an accountant or CPA to see if it makes sense for you.