Am I Ready To Retire?

Am I Ready To Retire?

Am I Ready To Retire?

Let’s tackle the question, “Am I ready to retire?” It’s a common question and many of today’s retirees are seeking the answer to it. The way that they’re doing that is by going to their financial advisor if they have one, talking to friends, or perhaps doing online research.

First, let’s discuss the principles behind retirement planning advice today and how they’re applied specifically when it comes to retirement calculators. There are a lot of retirement calculators out there, some common ones include Vanguard, Fidelity, or for today’s video, Schwab.

What we’ll do in this first section is look at a retirement calculator provided through Schwab and we’ll identify some confusing areas as users are interacting with that tool and we’re going to zoom out and talk about why those are confusing, giving insight into the retirement planning landscape today and the issues with it.

In the second section we’re going to talk briefly about the 4Buckets strategy and the 4Buckets retirement income tool that you can use as soon as you’re done reading this. Stay tuned and let’s dig into the calculator together.

About Retirement Calculators

Here we are in the Schwab Retirement Calculator and I have pre-filled some of this just to get us started. It’s a simple calculator and that’s what’s great about any retirement calculator that you use; generally, it’s going to be simple. You’ll have a few questions that you need to answer and you’ll be provided with some information at the end.

The problem is that as you go through most calculators, you’ll be faced with questions you don’t necessarily know the answer to and then you’ll be given analysis based on your answers that you may not understand.

So, let’s look at what I mean here. Step one: we’re going to tell a little bit about ourselves as a potential retiree using this tool, and let’s say we’re sixty years old. First question asks “What age do you plan to retire?” That may seem like an easy question but I would argue that it’s relatively loaded. But, let’s just identify a quick issue. What if I wanted to retire today? I hit “60 years old” because I wanted to retire today — and Schwab’s gonna tell me, “Actually, you can’t do that. We need you to pick a number that’s beyond your current age,” Oh, I guess retiring today or at least getting some information about retiring today isn’t doable. Well, we’ll play by the rules and we’ll go ahead and say, “Yeah, if we can’t do it today, let’s do it tomorrow,” So we’ll retire at 61 hypothetically.

What Is My Risk Tolerance?

Our next question is also a very big question and it relates to “What is your investment style?” or as you’ll see from many tools, “What is your risk tolerance?” One of the fundamental things that we think about when it comes to risk tolerance using our 4Buckets system is that your ability to assess risk and your ability to take it on with your investments is actually a much later question, and it’s after you’ve developed a financial plan and a financial strategy.

If you think about it, investing naturally involves risk as it should. You’re seeking to make more money off of your money. So when anyone approaches investing, they need to actually have a solid financial picture before even venturing into those waters. What does a solid financial picture look like? Well, it consists of a good baseline income that provides sustainably for your lifestyle. It requires having cash reserves, money that’s quickly available for bigger things that come up in life. And then finally, a debt profile that doesn’t leave you burdened or perhaps exposed if things were to shift dramatically.

So, income reserves and debt profile, are all elements of a prudent financial picture that we believe have to be in place before you can even begin to answer the question, “What’s my risk tolerance?” But again, before we can move on — before we can hit this next button using this calculator,, we have to play by the rules. And so, what many retirees will do and what they’ve been told as they near retirement is, well, you’re a moderate or you’re a balanced risk profile, and many of their retirement accounts may be invested in such fashion. So, a retiree will commonly answer this question with “I’m a moderate risk” and then move on.

Using Retirement Calculators

As we answer some more questions about our hypothetical retiree using this tool, let’s say the current household income is $100,000. Let’s say they saved $1,000,000 for retirement. Great, well done. And each year in retirement, they’re saving $10,000 or 10% of that income that they’re receiving. Here’s another big question that retirees have, “When is the optimal time to take Social Security? And we’ll spend a whole other video talking about Social Security Optimization, but I would also say that this is another question that retirees don’t know the answer to. They understand generally that there’s an age when they can start receiving it at 62 but there’s a lot of noise and information about how bad of a decision that is. Whether or not that’s right or wrong, they’re fed with “62 is available ” but it’s really not an option.

When Do I Claim Social Security?

Then they understand their full retirement age and this is actually often the age that – if we were to jump back on the previous page – this is often the age that people associate when they’re going to retire. Whether or not they’ve thought about alternatives, “If my full benefit is age 66, 67, 68, whatever, that’s when I plan to retire because that’s the number that I’ve been exposed to the most.”

And lastly, there’s the age of 70 which is the longest you can defer your benefit and many calculators or optimizers out there will say this is the best time to take social security. Well, what if you had a tool that allowed you to take all of those numbers from 62 to 70, plug them in, and give you information that you can take and use and determine for yourself? Well, again, we’re faced with picking an age so we need to pick an age when we want to turn that on and so let’s just use the default setting here that says “Age 65.”

Dealing with Retirement Unknowns

Another big question is, “How much supplemental income do you plan to receive each year in retirement that does not include Social Security or investment portfolio income?” We need to look at the details button here and it looks like this could be things like pensions, annuities, rental income, part-time work, etc. Well, if you’re not yet retired, you may want to be able to answer some of those questions critically around pensions and annuities but part-time income could be unknown, you may step into retirement, ready to be completely done and after a year of it, you’re like, “I need to get back to doing something.”

This tool is asking you questions about an unknown phase of life and it’s asking you to answer things that you really don’t yet know the answer to. There’s gonna be some of this that you can apply directly like pensions and annuity income, you can fill that in but there’s gonna be other things that you don’t know quite yet and it would be helpful to have that information ahead of time.

And then finally, something that you’ll see on just about every calculator that you use is, “How much money do you plan to spend each year in retirement?” Well, it seems odd from the start because if I’m a retiree — I’m making $100,000 – would like to continue to make $100,000 when I retire. I’ve done the savings, I’ve done the investing, I’ve done all of that throughout my career, and I’d like to be able to spend that same amount in retirement.

Issues with Today’s Retirement Calculators

Well, I’ve seen calculators that actually have a default setting that’s lower than your gross income today saying, “Well, automatically, let’s assume you’re going to spend 85% of today’s income.” What? What if that’s not what I want to do? Show me something that will give me better information about what I am able to spend based on the work that I have done up to this point. That is what’s unique about the 4Buckets tool that we’ll look at.

So we’re going to move on, we’ve answered all of our questions. Let me give you a brief summary of what we’re talking about — how we got to this point. We talked about retirement at age 61 – a year from now. We’re saving 10% of our salary and we’re spending $100,000 a year. This tool is telling me that I need to save an additional $350,000. Somehow, between now and a year from now, I need to come up with $350,000 and for many retirees, that’s actually impossible.

So if I’m looking at this, trying to discern, “Am I ready to retire?” I’m doing online research using calculators — this is disheartening, this is discouraging. Let me tell you what’s different, and let’s talk about the 4Buckets for a little bit.

A New Approach to Retirement Planning

As we’ve seen with the Schwab calculator, there were several issues that came up when we were working through that. Questions around, “Can I retire today?” A retirement today wasn’t even an option when using this tool. Other questions around risk tolerance – questions that retirees may not be able to answer. “Does that risk tolerance apply to all of my assets for retirement? Does that risk tolerance simply apply to a portion of my assets?” – retirees are naturally unsure. Later in the second phase of the calculator there were questions around when a retiree planned to take social security or how much income they anticipated needing in retirement. These were some of the challenges that presented themselves when using this tool.

Behavioral Biases and Tendencies as Investors

What’s different about the 4Buckets system and the Four Buckets Retirement Income Strategy® is that it is built based on our understanding of investors and their behavioral biases. We have a desire for security and safety. The retirement income strategy is based on our desire for that safety.

For example, let’s say I were given two job proposals and the first job paid me $100,000/yr base salary and the second paid me $120,000/yr base salary. Even if there was a high probability I could make more total compensation with the first offer, most individuals would elect for a higher base rather than higher overall compensation. If this is the behavioral tendency of most retirees then we need to use a framework that positions them best for success. This is the key difference between the 4Buckets system and most strategies and tools that you’ll use today. They are built on traditional finance which doesn’t factor in who we are as humans and the environment that we’re in. So the first principle behind our strategy is determining how much baseline income can be provided and how much of that is guaranteed for a lifetime. That’s principle number one behind our strategy.

How Do I Determine Risk Tolerance?

The second principle is, once I have established a financial picture that provides the income I’m looking for, that has a solid cash reserves cushion, what do I then do with those extra assets? That’s where the risk tolerance question, we believe, can be best determined. We have established a solid picture around it, now we’re in a much better position to assess what sort of risk I want to take with those assets for the growth potential that I am looking for. These two principles are fundamental to our strategy.

A New Focus on Retirement Income

And then one last big framework and way to think about using 4Buckets is that we have to understand that retirement has a cost. There’s a reason that you saved what you have for retirement. All the savings and the investments over the years to get to this point means that we need to use those assets for your lifestyle and for your enjoyment.

So the 4Buckets is designed to show you the highest sustainable income and thereby lifestyle that you can enjoy throughout retirement. Using what you’ve saved and the numbers involved, what’s the highest amount that you can enjoy from that? That’s the thing that we solve. Too often retirees and the advice that they’re being given approaches retirement and the decisions around retirement with a focus on preservation or deferring for later. “I don’t want to take distributions from IRAs and 401K’s because I want I need to protect that balance, that nest egg that I’ve saved.” Or “Let’s just start Social Security at the latest age possible because I don’t really need it today anyway.”

The 4Buckets actually works differently and it’s going to encourage you to take income now because we’re dealing with the present and we want you to enjoy the present.

How Much is my Social Security Benefit?

As you do that, get prepared with two easy pieces of information. All you need to know is your full retirement age Social Security benefit. If you don’t have any idea what that is, head to https://www.ssa.gov/myaccount/ and establish an online account where you can track your Social Security benefit now and into the future. We need to know what your full retirement age benefit is.
How to Get Started

We also need to know the liquid assets available. This is the money that is available to be used for income and lifestyle, and for periodic needs as they come up throughout retirement. What is the total balance of those liquid assets that you have? These are going to be cash reserves in checking, savings and investments in 401K’s, IRAs, etc. Things that are liquid that you can quickly get to for everyday income and periodic needs. We need to know those two numbers: your full retirement age benefit and the total balance of liquid savings? Then you can begin to have a much better idea of what your actual retirement income could be.

Household
Age & Retirement
Income
Assets
Step 1/4

Household

First, tell us about your household. How many people are you creating retirement income for? Just for yourself? Or you and another person, such as a spouse or partner?
Start Over
Step 2/4

Age & Retirement

What is your age? What is the age of your spouse or partner, if applicable? Are you currently retired? This will help determine when you will start taking income from Earned Income (Social Security, Pension) and your accumulated savings.
Start Over
Step 3/4

Income

What is your current monthly income from all sources, including withdrawals from savings, if that is used for your ongoing lifestyle?
How much of this monthly income comes from Earned Income, such as Social Security benefits, pension payments and other lifetime sources? If you are not collecting these, how much do you anticipate you will receive from these sources when you do? A best guess is fine.
Start Over
Step 4/4

Assets

What is the current total amount of your liquid assets? Include stocks, bonds, mutual funds, bank accounts, retirement savings accounts – all savings that can easily be converted to cash. Do not include the value of your home(s), car, etc. A best guess is fine.

The
4BucketsSM
Strategy

How it Works

The 4BucketsSM Retirement Income Strategy has a simple goal: to align your retirement assets with lifestyle income that is reliable. Each bucket serves a particular purpose for common goals in retirement: reserves for everyday use, reliable lifetime income, and growth for the future. It's a simple yet sophisticated approach to the retirement journey.

Bucket 1

Cash Reserves

Cash for those periodic needs that require quick access to capital, such as emergencies and enjoyments. We can help establish the right cash accounts to balance your overall retirement strategy.

4BucketsSM Lifestyle Income

Bucket 2

Earned Income

This is the income you earned throughout your working years, like Social Security, pensions, and other lifetime sources. We can help you confidently navigate pension and social security claiming strategies.

Bucket 3

Secure Income

This bucket is designed to enhance your retirement lifestyle by creating consistent, reliable income. We will review a range of retirement income options to find the right ones for you.

Bucket 4

Growth & Legacy

These assets are used to create growth, flexibility, and opportunity. They enable you to confidently invest for the future. We can help you select the portfolio that aligns with your true long-term investment profile.

We can develop a plan to help make your retirement income goal a reality.