441 First Principles Retirement Planning

Welcome back to another round of Sound Retirement Radio.

What if I told you that having a net worth of 3 million dollars was not enough to retire. In today’s podcast we are going to uncover how this could happen. We’re diving into the first principles thinking and how it is applied to retirement planning and then focusing on what I believe to be the most important foundational number for a successeful retirement. At the end of todays show I am also going to give you some questions you can ask your spouse after the relatives leave and you have time to think about retirement planning over an slice of Costco’s pumpkin pie. These questions will be available at SoundRetirementPlanning.com just click on episode 441

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Articles, Links & Resources:

Spending Habits

When you hear the word budget, what does that mean to you?
If you don’t like the word budget, would you prefer to call it a spending plan?
What spending makes you feel successful?
What spending brings enjoyment, fulfillment, and pleasure?
What spending is really essential?
What type of spending do you like the least?
Do you get joy from buying gifts for people?
Do you prefer to spend on things or experiences?
Should there be a limit on the number of times Amazon delivers to your house per week?
Are we currently paying for subscriptions that we hardly ever use?

2. Lifestyle Choices

Would you be willing to sell your house at some point in the future and downsize your home?
Would you be willing to move to a less expensive area?
Would you be willing to live in a senior independent living retirement community?
Is it more important to spend your last dollar as you take your last breath, or do you need to leave anything as an inheritance or bequest?
Do you prefer to make dinner at home or dine out at a restaurant?
How important is the car we drive?
How important is it to own more than one vehicle?

3. Emotional Connection to Money

Do you control money, or do you feel like money controls you?
Do you feel like you have plenty, or is there never enough?
Does money ever create stress in your life? If so, can you think of a time when there was stress about money? How could you have avoided that situation?
Do you ever feel guilty about money? If so, when?
Do you consider yourself a penny pincher or a spendthrift?
Does finding a good deal on something make it easier to purchase?

4. Family and Giving

If you had to choose between taking a personal vacation or helping the kids financially, which would you choose?
Do you hide money or accounts from your spouse? If so, why?
When have you enjoyed giving money the most? Is there specific giving you remember?
Do you get joy from giving gifts to others?

5. Financial Philosophy and Planning

How do you feel about having debt?
How do you feel about having an emergency fund? How much should it be?
If you could retire now by cutting back on expenses, or work for five more years with no reduction to expenses, which would you prefer?

6. Personal Reflection

What is the best purchase you ever made and why?
What is the most luxurious thing you have purchased?
When you were a child growing up, what do you remember about money?
Is shopping for clothes enjoyable for you?

Transcript:

441 First Principles Retirement Planning

Announcer: [00:00:00] Welcome back America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now here is your host, Jason Parker.

Jason Parker: America, welcome back to another round of Sound Retirement Radio.

So glad to have you tuning in to episode number 441. Before we get started, I always like to start the day by renewing our mind. And I’ve got a verse here from Luke. Uh, chapter 14, verse 28. Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?

And then something fun for the grandkids. Why did the cranberries turn red? Because they saw the turkey dressing. Why did the turkey cross the road? It was Thanksgiving and it wanted people to think it was a chicken. [00:01:00] What if I told you that having a net worth of 3 million was not enough to retire? In today’s podcast, we’re going to uncover how this could happen.

We’re diving into first principles thinking and how it’s applied to retirement planning and then focusing on what I believe to be the most important foundational number for a successful retirement. At the end of today’s show, I’m also going to give you some questions that you can ask your spouse after the relatives leave and you have time to think about retirement planning over a slice of Costco’s pumpkin pie.

are going to be available at soundretirementplanning. com. Just click on episode number 441. Before we get into the retirement details, let’s take just a quick minute and discuss what are first principles and explore how first principles have been applied in a completely different industry. First principles are the core truths that you can’t break down any further.

They help us solve problems by stripping away assumptions and focusing on the basics. Before we get into how to apply first principles to retirement, [00:02:00] let’s look at a completely different industry and a great example of first principles. Traditionally, people accepted that batteries for electric vehicles were prohibitively expensive, treating it as an unchangeable fact.

Then, under Elon Musk’s leadership, the people at Tesla challenged this assumption by breaking the problem down to its most basic elements. They analyzed the cost of raw materials, like lithium, nickel, and cobalt, and discovered that the materials themselves were pretty inexpensive. The real issue was with inefficiencies within the battery manufacturing process.

So by rethinking the problem from the ground up, Tesla was able to innovate new battery designs and processes, significantly reducing costs and making electric vehicles more affordable. So just as Tesla revolutionized battery cost by questioning assumptions, we can rethink retirement by breaking it down to first principles.

What do we really need to retire? This kind of first principles thinking is exactly what we need to apply to [00:03:00] retirement planning. It’s asking what is the most important thing we need to focus on and then drilling down to the most basic elements as you prepare for retirement. At its core, retirement is ultimately about one thing.

It’s about ensuring you have enough income to support the lifestyle and spending you envision. The sooner you create predictable, reoccurring income, the sooner that you can step away from a job with confidence. Some people achieve this by investing in income generating assets like real estate. But most retirees rely on social security, pensions, and their retirement accounts, such as 401ks and IRAs for future income replacement.

The key is having a plan for when to start this income and how to transition these retirement accounts from accumulation vehicles to tools that provide steady, reliable, inflation adjusted income. Retirement is all about cashflow. It’s about having enough money to cover your expenses. Without income, there is no retirement.

You could have a high net worth but no [00:04:00] income and still be unable to retire. You could have a great budget and know exactly how much you’re spending, but if you don’t have income to support that spending, you don’t have retirement. For example, I recently met with someone whose net worth exceeded 3 million, but all of their assets were tied up in raw land.

While valuable, the land didn’t produce any income, which meant that they couldn’t retire unless they sold it. And this illustrates just a simple truth. If you don’t have income or assets that can quickly and reliably generate income, you just don’t have retirement. Well, and some people say, well, if they just sold the 3 million of land, they could retire.

And they’re absolutely right. And so once they sell the land, then yes, they can retire because they’ll have an asset that can produce income, but as long as they hold the land, they don’t have income, they’re not retiring. It’s one thing to retire. It’s another thing to retire comfortably and worry free.

And ultimately what people are wanting to do before they retire is to create confidence. They don’t want to retire [00:05:00] prematurely only to discover 10 years into retirement that they haven’t saved enough to produce the income that they need for the remainder of their lives. And I recently created a YouTube video to demonstrate how a married couple with 1.

4 million saved could stress test their financial plan using the retirement budget calculator. The goal was to help answer the critical question of have they saved enough to retire? This video had some interesting comments. Man, if you can’t live 20 years on 1. 4 million, you seriously need to reevaluate your priorities.

Another person said, I don’t know how this is even a question. Yes, you can. And then another person said, do you really need to ask such a dumb question? Many people don’t have 1. 4 million saved, which may cause them to respond in a way that seems flippant. While having a million dollars saved may seem like a lot of money, the real question isn’t about your net worth or your retirement account balances.

It’s about how much income can that one million dollars [00:06:00] generate and how long will that income last. To know if you’ve saved enough to generate a lifetime of income and create worry free retirement, you need to understand how much you’re spending. When it comes to retirement planning, there are two back of the napkin methods that you can use to estimate whether or not you’ve saved enough.

Number one, start by totaling all of your liquid assets, including things like 457 plans, Roth IRAs, brokerage accounts, and then let’s say you’ve saved 1 million across all these accounts. So next you’re going to take, you’re going to multiply your savings by 4%, and this is going to provide you with an estimate of how much income you can withdraw annually.

Of course, this makes some assumptions that you’re going to have 60 percent of your portfolio in stocks and 40 percent of your portfolio in bonds and that your retirement is not going to last for more than 30 years. So if you had a million dollars, it works out to 40, 000 per year. The next thing you’re going to do is look at your social security statement to estimate your annual benefits.

For instance, if Mr. [00:07:00] Jones expects to have 2, 000 per month and Mrs. Jones has 1, 000 per month, their combined social security income would be 3, 000 per month or 36, 000 per year. And then you take your 40, 000 of investment withdrawals and you add in the 36, 000 of social security income. And so in this scenario, the couple could estimate 76, 000 per year in total annual income adjusted for inflation over a 30 year retirement.

Now, the second way that you can do this, and this is actually my preferred way because I think it really gives you confidence in, because it starts with the spending part of the equation. So the second method, you’re going to create a budget and calculate how much money you’re going to need to live each year comfortably.

For example, let’s say you need 75, 000 annually. Next, subtract your social security income from your total expenses. So you take your budget of 75, 000 and you subtract out 36, 000. That’s the social security. So I mean, you have 3, 000 a month of social security, and [00:08:00] that gives you a gap of 39, 000. That 39, 000 represents the portfolio withdrawals that you’re going to need.

So finally, you take that 39, 000 shortfall and multiply it by 25, which results in 975, 000. And this represents the amount that you’ll need in investable assets to cover the shortfall through portfolio withdrawals. for a 30 year retirement. Again, assuming that you’re invested 60 percent in stocks and 40 percent in bonds.

Both methods highlight the importance of knowing your expenses and income sources. The first method starts with your total savings to estimate income, while the second starts with your spending needs to determine how much you’re You should have saved to support that spending. Either way, these quick calculations can give you a rough idea of whether you’re on track for a secure retirement.

And one more number that I think you’ll find helpful when looking at retirement planning is to understand your secure income score. To calculate your secure income score, you’re going to want to create a detailed year by year spending plan that [00:09:00] spans your expected retirement. And then you’re also going to want to mark expenses as either essential or discretionary.

Then you can add up all of your lifetime of guaranteed income in retirement and compare it to your lifetime of essential expenses. If 80 percent of your essential expenses are covered by guaranteed income and you have 25 times your annual portfolio withdrawals saved and invested, then You should feel pretty confident that barring any black swan event or a bad long term care or health care event that you should be able to retire and have a lot of confidence that that plan is going to work out well.

Of course, this is probably the most important financial decision of your life. So I recommend meeting with a financial advisor who specializes in retirement. Who can offer valuable experience and insight and can maybe help you see things from a perspective that you hadn’t thought about or hadn’t considered.

The key to good retirement planning is that you want it to be ongoing. You create the initial plan, but then you’re going to want to update the plan over time to make sure that you’re on track for achieving your financial [00:10:00] goals. The plan will help you evaluate future decisions. The process of ongoing planning will help you course correct as necessary and will help you have a lot of confidence as you make your way into and through retirement.

And so before I give you some questions to ponder, here’s a few quotes that I thought you might enjoy. Susie Orman says, a big part of financial freedom is having your heart and mind free from worry about the what ifs of life. Dave Ramsey says, a budget is telling your money where to go instead of wondering where it went.

Epictetus says, he is a wise man who does not grieve for the things which he has not, but rejoices for those which he has. And Theodore Roosevelt said, if you could kick the person in the pants responsible for most of your trouble, you wouldn’t be able to sit for a month. Also, just a quick update. I wanted to let you know, we released a couple of new features in the retirement budget calculator.

The first one is called budget snapshots. And similar to the way that we’ve created a net worth snapshot. So you could every month [00:11:00] go in and just see how your, see how your net worth is changing over time. The purpose of the budget snapshots is to be able to look backwards to understand what you were spending in the past.

And I always thought it would be valuable to understand, you know, how is inflation truly impacting your plan? And that’s what the new budget snapshot. feature allows. It allows you to see, you know, if you were spending 1, 000 a month on groceries before and now you’re spending 1, 500 a month on groceries, you can see how that changes over time.

This week we’re unveiling a new feature that lets you evaluate how the anticipated reduction in Social Security That’s projected for 2035 could affect your plan. So visit retirementbudgetcalculator. com and explore how this change might influence your strategy. Okay. I’ve written out 33 questions to consider with your spouse.

They’re organized by the following categories. You’ve got spending habits, lifestyle choices, emotional connection to money, family, and giving philosophy and planning. And personal reflection. And I’m going to give you a few of these questions from each [00:12:00] category. If you want the entire list, just visit soundretirementplanning.

com and click on episode number 441. So category one, spending habits. What spending is really essential? Should there be a limit to, on the number of times that Amazon delivers to our house per week? Are we currently paying for subscriptions that we hardly use? Lifestyle choices. Would you be willing to move to a less expensive area?

How important is it to own more than one vehicle? Emotional connection to money. Do you feel like you have plenty or is there never enough? Do you ever feel guilty about money? If so, when? Family and giving. If you had to choose between taking a personal vacation or helping the kids financially, which would you choose?

When have you enjoyed giving money the most? Is there a specific giving you remember? Under financial philosophy and planning, how do you feel about having an emergency fund and how much should it be? And [00:13:00] then under personal reflection, what’s the best purchase you ever made and why? When you were a child growing up, what do you remember about money?

As you reflect on today’s episode, remember that successful retirement planning starts with understanding your income needs and aligning them with your spending goals. By breaking down the complexities of retirement into first principles, you can create a clear, clear picture. actionable plan that builds confidence for the future, whether it’s evaluating your secure income score, prioritizing essential expenses, or answering questions we’ve shared.

These steps will guide you toward a more intentional and fulfilling retirement. So if you’re ready to take the next step, try the retirement budget calculator to stress test your plan and gain the clarity you deserve.

Announcer: Thank you for tuning in to Sound Retirement Radio. For articles, links, and resources from today’s show, visit sound retirement planning.com.

If you enjoy the podcast, share it with a friend and give us a five star review. Ready to kickstart [00:14:00] your retirement planning head over to retirement budget calculator.com. Need assistance with investment management, explore our services@parkerfinancial.net. Information and opinions expressed here are believed to be accurate and.

For general information only, it should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program.

Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk.

Jason Parker is the president of Parker Financial, LLC, an independent fee based wealth management firm located at 9230 Bayshore Drive NW, Suite 201, Silverdale, Washington. [00:15:00] For additional information, call 360 337 2701 or visit us online at soundretirementplanning. com.