I’m 5 Years Out From Retirement, What Should My Portfolio Look Like?

Transcript

00:00:00:01 – 00:00:26:03

Mike

Today we’re going to talk about how you structure a portfolio for retirement. So let’s imagine you’re getting ready to retire. You’re going to retire in the next year or two. And you need to start thinking, how are you going to replace your paycheck? The other day I had a couple come to me and they want to retire at the end of the year.

00:00:26:07 – 00:01:01:05

Mike

They had. And by the way, I’m going to round this off in their IRAs and 401 KS. Right. You can kind of see them on the screen. They had roughly $1,000,000. Here’s what they wanted. They wanted to generate income each year of roughly $40,000. Now, in the financial world, this is also known as the 4% rule. So the idea is, hey, take your lump sum of money.

00:01:01:24 – 00:01:21:12

Mike

And if you invest it the right way, you can pull out. You see the number there, 4% every year for as long as you live And that should work out. Well, wait a minute. What did I say? Invest your money in the right way. Right. That’s important. And you should be able to take out 4% a year, and it should last for pretty much forever.

00:01:21:18 – 00:01:54:27

Mike

Well, what is the right way? Well, the right way is this roughly. 60% should be in stocks and the other 40% should be in bonds. That is considered a classic balanced portfolio. And obviously within the stock section, you’re going to have a mix of large companies and small companies, U.S. and international, all that kind of stuff. And in the bond section, you have some shorter term and longer term.

00:01:55:05 – 00:02:21:26

Mike

Again, maybe government bonds and corporate bonds you know, you want to be diversified in each of those categories. So the idea, though, is if you do this, then check it all works out. It’s lovely. It’s wonderful. Everybody’s happy. Yay! Job done. Oh, if you’ve been watching this enough, you know what I’m going to say? Not so fast. Right.

00:02:22:05 – 00:02:45:01

Mike

You know, I’m going to say that in today’s world, we have a problem here. Now, before I tell you what the problem is. Let me give you a little history. This concept that we’re looking at right here was introduced to us back in the mid mid 1990s. What was happening in the mid 1990s? Well, here’s what was going on.

00:02:45:17 – 00:03:11:12

Mike

The stock market. Well, whatever stocks doing back then flew up in a big way. Ten, ten year treasuries, ten year government bonds. Right. Treasuries sorry, I don’t write as neatly as I might like to. They’re paying 5% per year. Market’s doing great. The Government’s saying here we’ll give you a good interest rate when you loan us money. Bonds are paying 5%.

00:03:11:12 – 00:03:37:02

Mike

Stocks are paying double digits. Yeah. If stocks are paying double stocks over here, if they’re paying double digits, in the bonds, they’re paying 5%. Yeah, that works out. But then what happened? We had the dot.com crash in the early 2000 so we had nine 11. We had 2008. And where are we today? Today, our stocks growing like they were in the eighties.

00:03:37:02 – 00:04:11:09

Mike

And nineties. Now they’re not. And more importantly, this 5% number right here. Do you know what bonds is? Same ten year Treasury bond pays today about 11. If you’ve got 40% of your money earning one and you’re hoping that the stock market makes up the difference over the next 30 years of your life. Well that might be a problem too day on this 4% rule.

00:04:12:02 – 00:04:42:22

Mike

The dividends and interest that this is generating down here it’s not 40,000. This portfolio today does not generate 40,000 of dividends and interest. It generates about 15,000 Where is the rest of the money coming from? Where are you going to get the other 25,000? Guess what? You’ve got to sell stock so you’ve got to sell positions. So if those positions aren’t going up over time, you got yourself a problem.

00:04:43:18 – 00:05:11:17

Mike

And here’s what happened back at this point. 20, 13. So eight years ago, 20, 13, 20 years after this whole idea came about. Morningstar you’ve probably heard of them. Morningstar came out and said, you know, maybe we should revisit this whole idea. Maybe we should say, Does this really work? Angel Morningstar said, they said this. They said, You know what?

00:05:12:20 – 00:05:38:11

Mike

You might as well flip a coin flip a coin because. 50% of the time, if you do this, you’re going to run out of money. Half the time it works out. Half the time it doesn’t. That’s equivalent of flipping a coin. And I don’t know about you, but I don’t want to enter in retirement knowing I only got a 50 50 chance that my money is going to last.

00:05:38:20 – 00:06:06:16

Mike

How do we fix this? Well, here’s what we do now. This is something I’ve been doing for a long, long time. So here we have in the middle, here’s our million dollars for this couple that came in the office. What I like to do is I like to take that million dollars and put it over here into to general categories.

00:06:08:22 – 00:06:37:21

Mike

Over here on the left, we have the income category. And over here on the right, we have the growth category. How am I doing so far? You take your money, you say, I’m going to split it into two general categories. We take income from over here. And while this is being spent down over time because we’re taking money out, this side is growing to replace it all.

00:06:37:23 – 00:07:06:10

Mike

Now, by the way, this is really important. You there’s a couple of rate returns here that we need to hit. We need to have a target rate of return on the income side of 3% a year. So all the math that I’m about to give you assumes that we can get 3% or better on the income. So anything we put in the income side won’t be safe, won’t be stable.

00:07:06:14 – 00:07:33:12

Mike

And we want to get 3% a year or better. Okay. How’s that? The growth side, we’re targeting 5%, right? Or better. I’m not looking to get 10% returns here. Right. I’m not doing that now. I might get 10%. Like, in fact, we often get 10% or better over here. But I don’t want to assume that I’d rather assume low hanging normally these days.

00:07:33:13 – 00:07:56:08

Mike

On the income side, we’re getting maybe four or 5% returns. So we’re getting better returns in both categories. I don’t want to assume that. I want to assume low on my returns I want to assume very, very conservatively. Now, let’s look at some different structures that might make sense because remember how much income what’s our target? 40,000 per year.

00:07:56:08 – 00:08:23:08

Mike

That’s our target. Here are three different paths that when I was talking to this couple, let’s call them John and me, I said, John, Mary, we’ve got three different paths we could potentially go down here. Let’s explore that path. Number one here, let me change colors. Okay. Path number one we could put 400,000 and in the income side, right.

00:08:23:08 – 00:09:03:00

Mike

400 k, which would mean the balance. 600 would go over here on the growth side, if we earn 3% over here that 400,000 would last for about 12 years. And at the end of 12 years guess what, that money is gone. On history out of here. There’s none left. We’ve spent it all down to zero. But if we are in 5%, this 600,000 has grown to about 1.1 million.

00:09:03:26 – 00:09:26:27

Mike

In other words, what’s happened Yeah, we spent some money down and it was stable and predictable and at 5% we grew to replace it all. By the way, what if you get 7%? That might be 1.5 million or something like that. What happens now with 12 years later? What do we do? We? Well, we’re back to our million. We do it all over again.

00:09:26:28 – 00:09:44:21

Mike

Well, what’s another path we could go down? I want my money last longer than that. I don’t want to mess around. I would like this to be more like 20 years right? I want this to be more like 20 years that it lasts before it goes to zero. How much money would I have to put there for it to last 20 years?

00:09:44:21 – 00:10:26:24

Mike

And a 3% return? The answer? 600,000. And that means you’ve got 400,000 left over here to grow that way. The money lasts longer. But the question is, will this grow enough at a 5% rate of return? Yeah, it grows to about 1.2 million right around there. That works, right? That works to stable income and growth to replace it. And then number three, sometimes people ask this question, they say, Well, Mike, what if I want to have a guarantee that my income lasts for life?

00:10:28:04 – 00:10:49:24

Mike

How much money do I have to put here for that to happen? Well, that depends on your situation. But for most people who are getting ready to retire in their ages, it’s usually somewhere around 800,000, which means there’s 200,000 left over there. We would just call this extra, extra money and that could grow and be used for anything.

00:10:50:02 – 00:11:21:19

Mike

Three different paths to give you that income, which is the right path. Well, the answer is it just depends on you. When should I start setting up my portfolio? Kind of like this. Like, when should I start doing it? Now this. I do have an answer for you. Think about this. A five years. If you plan on retiring in the next five years, by the way, if you’re already retired, you should have it set up like this.

00:11:22:28 – 00:11:43:12

Mike

But if you are not yet retired, you’re working and you say, Man, I really want work to be optional. You want to start setting this up within five years of retirement. You start getting within five years. You want to start doing this. Why do we want to start setting this up? It’s really simple. Let me ask you this very simple question.

00:11:43:22 – 00:12:09:21

Mike

Let’s say you’re five years away from retirement, so you’re thinking, oh, I want to retire in five years. I want to retire in three years. Whatever. Do you think it’s possible that the stock market could have a correction? Right. We don’t call crashes. We call them corrections. Do you think it might have a correction between now and when you want to retire?

00:12:09:26 – 00:12:20:04

Mike

Yeah, it could happen Well, let’s say it does have a correction. Right. And this is you. And you want to retire in five years.

00:12:22:05 – 00:12:42:04

Mike

If you set this up now, guess what? You’re not going to take any money out of the income side for the next five years. That just means the money lasts longer instead of lasting for 12 years. Maybe it’ll last for, I don’t know, 18 years or 19 years or something like that instead of lasting 20 years. In my last you know, 27 years.

00:12:43:00 – 00:13:04:29

Mike

You’re not going to touch your money. That’s okay. It just lasts longer. The correction is now only going to affect what the money that you have over here. But that’s okay because you’ve bought yourself an extra five years for it to grow, or three years or two years whenever you’re going to retire. Right. You bought yourself time, extra time for this to grow and for it to pay out.

00:13:05:05 – 00:13:19:00

Mike

That buys you more time over here to handle the ups and downs in the market. If you set this up now, when you want to retire, bang, you can do it on your terms. What if you don’t do this yet? You say, you know what, I’ll deal with this when I’m, you know, like within a year of retirement.

00:13:19:08 – 00:13:41:17

Mike

I’ll just put all the money in growth. I’ll just leave it in growth for now. And then the market corrects on you and your million dollars goes down to 800,000 or 700,000. Guess who’s not retiring when they want to retire now? Yeah. You because you didn’t set this up when you should have this puts a control in your hands.

00:13:41:24 – 00:14:01:21

Mike

If you want to retire in five years, you’ll be able to do that no matter what the market does between now and then. What this does is it puts the control of when you want to retire in your hands, no matter what the market does. If you leave all the money in the growth right now, before you know you want to retire in five years, you leave all the money in growth.

00:14:02:02 – 00:14:21:28

Mike

Now the market is the market who doesn’t know you and doesn’t care about you. The stock market will determine when you retire. Put the control in your hands. Make that great decision. So anyway, this is different for everyone, right? How this is structured depends on how much income you need, how much money you have. You know, timing of income, all that other stuff.

00:14:21:28 – 00:14:37:29

Mike

This is just a general model, but this is a great model. We’ve been using it for years and have helped people retire comfortably. Where they have stable income. And it doesn’t matter what the market does. They know they’re in great shape. And I want to get you there as well. All right. We’ll see you next time

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