Ready For Retirement
Ready For Retirement
I've Helped Hundreds of People Retire Comfortably. Here's the Exact 7-Step Framework I Used.
Retirement planning isn’t about chasing numbers, it’s about building a life with intention.
The Sequoia System helps you get clear on what matters most, organize your finances around that vision, and create a plan that supports the freedom, peace of mind, and purpose you’re truly after.
We start with your life vision, translate that into a monthly income goal, and map out your cash flow using a mix of reliable income sources and portfolio withdrawals. Then we align your investments with those needs, optimize for taxes, and protect the plan through insurance and estate strategies, so everything works together to support the life you want to live.
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After collectively working with hundreds of different people and helping them to create successful retirements, there's one thing, one pattern, that we see over and over again, and that's this Financial success does not come from scattered financial knowledge. Instead, financial success comes from being able to take that knowledge and organize it in a way that's applicable and unique to you, to create the life that you want to create. As the founder of Root Financial, which is a financial planning firm that serves hundreds of clients across the country, one thing that we've done is we have said how do we organize all these various financial planning topics? How do we organize all these things that people need to do to create a successful retirement and do so in a way that people can follow this structure and create the retirement they want to create? So that's exactly what I'm going to share in today's video. What is that framework? We call it the Sequoia system, but this is just a way that you should be organizing your finances so that, as you go into retirement, there's nothing that hasn't been addressed, there's no stone that's been left unturned, so that you can fully focus on the life that you want to live. And, as I go through this today, this is a framework that literally anyone can use. You don't have to be a client. You don't have to be a client. You don't have to have a certain level of net worth. You don't have to have anything special. You just need to know how do you organize all these things, all these various financial topics, in a way that will allow you to do what you want to do. So we're going to go through those seven steps, and the first one is this the first step is a vision for what you want life to look like.
Speaker 0:If you are viewing financial planning as just a math formula, you're doing it wrong. One of the things I'll often say is a sign of a good financial plan is a life well lived. So if you get all the financial things right but you have a miserable life or you don't do the things that you want to do, we really missed the mark when it comes to your financial planning. So think about it this way Imagine you're 90 years old and you're healthy. You're looking back on the life that you lived. What would have to have happened between now and then for you to look back and say I got everything that I wanted out of this life? This has nothing to do with Roth IRAs. This has nothing to do with social security. This has nothing to do with any of those details. It has everything to do with what you actually want your life to look like. What does that look like in terms of who you spent time with? What does that look like in terms of the activities you did, the trips that you took, the impact that you made?
Speaker 0:Start with that. Start with an understanding of exactly what you want your life to look like, and then, from there, go to step number two. Step number two is define what would that cost. Now, this might seem like an overwhelming exercise, but it can be quite simple, and there's really two ways that you can do this. You can take what I call the bottom up approach and you can take what I call the top down approach. Let's start with the bottom up approach. This is going to be a little bit more detailed, this can be a little bit more time consuming, but it's going to give you really good accuracy or really good sense of what would it actually cost to live that life that I want to live. When I think about these trips, when I think about these hobbies, when I think about these activities, when I think about that impact.
Speaker 0:What's that actually going to cost? What you need to do is you need to understand what's the cost of every one of those things. This is basic things like utilities. So get a spreadsheet, get a piece of paper, whatever it is, write out what are your monthly expenses. Keep this in mind If we're talking about retirement. Your expenses in retirement in some ways are going to be different than they are today, but for a big portion of those expenses utilities, food, insurances, transportation, entertainment, a lot of that's going to be the same.
Speaker 0:So the bottom-up approach says take a spreadsheet or a piece of paper or a budget worksheet and define what you want to spend money on. Some of these things are going to be necessities. This could be property taxes, this could be your utility bill, your cell phone bill, all these various things. Add them all up. Now, the things that you defined you want to do. This could be trips that you want to take. What's that going to cost? This could be giving that you want to do, charitable giving, family giving. What's that going to cost? Or how much of that type of giving do you want to do? What about hobbies? Well, if you want to have a membership to a very nice country club, that's going to cost a whole lot more than if your hobby is simply hiking and being outdoors. So neither is right or wrong. But when you start with what you want your retirement to look like, then you can define what are those expenses going to be. So the bottom up approach starts with understanding each of those expenses, adding up the cost of each of those and coming up with that number Very detailed, but that can be a bit time consuming.
Speaker 0:The other way, the other method, is to take the top down approach. The top down approach is what are you earning today? So if you're still working today, for example, how much income do you receive each month in your paycheck? Whatever that number is is a great starting point. It's going to get you most of the way there. Let's assume just use a very simple example that that number is $10,000 per month. You or you and a spouse combined, after taxes, after 401k deductions, you have $10,000 hit your bank account. Well, from there we need to back out expenses that will no longer be there in retirement.
Speaker 0:So of that $2,000, for example, do you have a $2,000 mortgage payment? And when I say mortgage payment, I specifically mean the principal and interest payment. If you do, and if that payment will be going away by the time that you retire meaning the mortgage is paid off you can reduce that or you can back that out. Meaning you don't need to plan on $10,000 of expenses in retirement to maintain your same lifestyle. You can plan on eight. It doesn't mean you took a pay cut. It simply means you maintained every other single thing you were able to do. Now you just don't have a mortgage anymore. You don't have that payment to the bank, or maybe of that $10,000 per month, you're saving $1,000 per month to retirement. Well, that's $1,000 that you won't be saving when you're in retirement, so you can take that out. So if in this example, we were to remove the $2,000 principal and interest mortgage payment and we were to remove the $1,000 of investments that you're making to your retirement account, now what you're down to is $7,000. So that's a simple example.
Speaker 0:If you go to retirement saying I just want to maintain the lifestyle that I have today, I'm living the life I want to live Wonderful, go through an exercise like that and you might come up with a number like $7,000 in this very simple example. Or maybe you say you know what, when I retire the things I want to do in order for me to look back when I'm 90 and say I really got everything that I could have out of life I want to take some really awesome trips, and those trips are going to be $30,000 per year. I'm just making up a number. Well, $30,000 per year, that's $2,500 per month. What you would need to do, using the previous example, is, if you got that number down to 7,000 per month, to say, I can maintain my current lifestyle and all is good, but this current lifestyle doesn't allow me to take those $30,000 per year of extra trips. Well, add in that $2,500 per month that you just calculated. So now you're at $9,500 per month.
Speaker 0:So of course, there's more nuance, there's more detail to this, but the top-down approach simply says what's your income today? Which of those expenses do you have today? Which of those will be gone? This might be family support. This might be principal and interest portion of a mortgage. This might be certain costs associated with your job. Maybe it's commuting gas. This might be savings that you're making for retirement.
Speaker 0:Take those out and then add back in any expenses that you don't currently have today that you want to have in retirement, because that's going to allow you to fund the things that you want to do. So that's going to allow you to fund the things that you want to do. So that's step two is, once you've defined your vision and step one of what you want to do, step two is defining what's that actually going to cost. You're translating that life that you want into the financial, the income resources that you need to make that happen. Step number three is to go through a cashflow projection to say when you retire, where will that income come from to meet those expenses you just defined? I'm going to go back to using a nice round number of $10,000 per month in terms of that's the number that we're defining that we need for expenses. Just have a basic example to use as we walk through this.
Speaker 0:Step three the cashflow, the income portion is to say that's great that those are expenses. Where's the income going to come from to do that? Is it social security? Is it a pension? Is it a rental property? Is it your portfolio? In most cases, it might be a combination of two, three or four of those different things.
Speaker 0:So as you're going through this, of course the income that you have is going to be different if you're married versus single. But let's assume that you're married for a second. If you're single, just cut these numbers in half. You are married and you and a spouse both have $3,000 per month of social security income coming in. You can just use a nice round number. So when you retire and you want $10,000 per month, you have $6,000 per month combined, assuming that social security income starts at the time that you are going to start retirement, so that $6,000 is already taken care of. I'm not factoring taxes in and all that I'll do that in a little bit but that $6,000 is income that's going to help you meet 60% of your needs.
Speaker 0:6,000 is what's coming in. 10,000 is what you want. What you need to solve for is that remaining $4,000. Could your portfolio generate that? So $4,000 per month is $48,000 per year. Let's just round that up to 50,000. How much do you need to have in your portfolio to generate that $50,000 per year? Well, this is where it comes down to, of course how are you invested? How long does this need to last? But, generally speaking, somewhere between four and five and a half percent is what a portfolio might be able to generate, depending upon how are you invested and what type of rules are you following? What type of a dynamic approach are you taking or not taking as you go into retirement?
Speaker 0:So let's assume, just for simple numbers, that you have a portfolio that you think can sustainably generate a 5% withdrawal rate throughout the course of your retirement. What would you do? Well, we need to take that 50,000, and that 50,000 is just you identifying. This is what I need for my portfolio to supplement our social security income and allow us to live on that 10,000 per month, which that 10,000 per month again translates into the life that we want to live, the life and the things that we want to be doing to feel like we're getting the most out of our retirement. Well, 50,000, you would divide that by 5%, meaning $50,000 needs to represent 5% of a larger number, a larger portfolio, and that's how you determine what portfolio size do you need to determine that you're in a position where you're ready to retire. So if I take that $50,000 and I divide it by 5%, that gives us a $1 million number. What that million dollars means is that's how much you would need to have in your portfolio in this case for it to generate 5% of income aka $50,000 in this example and that income would be enough to supplement your social security benefits and allow you to do the things you want to do.
Speaker 0:Now I know I'm not fully taking taxes into account here. Ideally, you have some modeling software, you have some projections that can actually factor that in and what is the tax impact of where you're taking money from? I'm just trying to use a very simple example here to show you the framework, more than anything, that everyone should be going through as they prepare for their retirement. And again, this just comes from the exact method we use internally at Root Financial. We call it our Sequoia system to say this is the process we go through with clients to ensure they have that great foundation going into retirement. So that's what you need to do in step three is determine your retirement readiness, or determine that cash flow by working backwards into how much portfolio do you need to create the income necessary to supplement other income sources and give you everything you need?
Speaker 0:Step number four is defining your investment allocation. So when you retire, should you be a 60-40 portfolio, because that's what everyone tends to say? Should he be all stocks? Should he be half stocks, half bonds? Where does that actually come from. Well, it should not be guesswork. It should very much be tied to what are your cash flow needs from your portfolio. For example, if we go back to the same example we used and instead of needing 10,000 per month, you only needed 5,000. And if you and a spouse have 3,000 per month each from social security, you have 6,000 coming from social security and only 5,000 expenses. Technically, you don't have any cash flow needs from your portfolio.
Speaker 0:Now there could be an emergency, there could be something that happens. You may want to enhance your spending, but at least on paper, at the beginning, there's no cash flow needs, which means that theoretically, you could afford to be all stocks if you wanted to. Now you might not be comfortable with that, but all stocks. You can afford the ups and downs and even though you're retired, a downturn in the stock market isn't going to impact you as much because you're not relying upon your stock portfolio to meet your income needs. You could also make the case to be a lot more conservative. You could make the case to be a lot more conservative simply because that's going to allow you to sleep at night. That's going to be something that resonates more with you. You feel more comfortable with.
Speaker 0:But that's going to be a very different circumstance than the one that we're actually looking at, where someone wants to spend $10,000 per month and they have $6,000 per month come from Social Security and they need as we've rounded the number $50,000 per year from their portfolio. Well, what do we invest that in? If you have a million-dollar portfolio and $50,000 is needed every single year, how do we determine the appropriate stock-to-bond allocation? Well, there's a few things to look at, but at the beginning we need to understand that your long-term growth is going to come from the stock portion of your portfolio. At least historically speaking, stocks have had very strong long-term numbers 10 plus percent rate of return If you just look at the S&P 500 going back about 100 years. The problem with that is you're not getting 10% every single year. You have some years where you lose 20, 30, 40% or more. So you can't be all stocks if you know that you're going to have to be drawing a specific amount from your portfolio every single year because you want to avoid a situation where stocks are down and you're pulling from them.
Speaker 0:So one way we like to think about this is do you take your cash flow need from your portfolio. So $50,000 in this example. Multiply that by five. What you get is $250,000. Can you invest that in something that's a lot more stable, a lot more secure, a lot more conservative? You are not going to get great long-term return from that, but what you are going to get is you're going to get some safety and security so that if and when stocks decline, you're not being forced to sell those stocks at a downturn. You can simply pull money from the more conservative portion of your portfolio.
Speaker 0:Internally we call that root reserves. How do we define, how do we create this root reserves portion of your portfolio that, when all else seems to be going down, we have this asset, we have these investments that ideally, are going to remain a lot more stable and ideally even be growing a little bit when markets are down. So in a million dollar portfolio, that would look like putting $250,000 in something more stable and the remainder could potentially be invested in stocks. So when you do it that way, what you back into is you back into an investment allocation. In this example, your investment allocation could be something like 75% stocks, 25% bonds. That gives you. Not all bonds are created equal, so I don't want to be very careful here.
Speaker 0:This isn't just a generic bond portfolio. It's a bond portfolio that should be specifically designed to create short-term income in the event that it's needed. But that's one place to start, or that's a place to start. That type of portfolio now isn't just disconnected from the entirety of your financial plan. It is specifically designed, specifically engineered to create the income you need, both when markets are up and when markets are down. So that's step four is really defining the investment allocation.
Speaker 0:Then comes step five, which is the tax piece. Everyone loves to talk about this, everyone loves to start with this, but you can't start with it because this is contingent upon. How do you do other parts of your plan? For example, if you jump right into the tax piece but you don't understand, or you don't yet know, how you're going to be invested, how on earth are you going to project out what your Roth conversion strategy should be? Your Roth conversion strategy is going to be very much driven or very much contingent upon. What are your projected required distributions going to be when you turn 73 or when you turn 75, depending upon what your required minimum distribution age is?
Speaker 0:If you are in a portfolio that's a very, very conservative, you're probably not going to get a whole lot of growth on your IRA assets, which means your required distributions in the future are going to be a whole lot lower than if you're invested very aggressively in your IRA or pre-tax accounts. Let's assume, for example, you're 60 today and you're modeling out a Roth conversion strategy. Well, do you think there's going to be a difference if your IRA grows at 4% per year for the next 15 years versus grows at 8% per year for the next 15 years? What would that do to your projected IRA balance? What would that IRA balance then do to your projected required distributions that you're going to take? So it's not until you understand. When are you going to take social security? How are you going to be invested? What types of assets will you have in different accounts?
Speaker 0:That's when you can then say, okay, what is the right tax strategy given all this? The right tax strategy should be looking at everything from potential Roth conversions. It should be looking at things like tax gain harvesting For a lot of people in retirement. If they have gains in their brokerage account, there might be some years where you can realize those long-term gains and pay 0% federal taxes on doing so. What about healthcare subsidies? Does it make more sense to prioritize keeping your taxable income low so you qualify for health insurance subsidies if you retire before the age of 65? Or should you create more taxable income low so you qualify for health insurance subsidies if you retire before the age of 65? Or should you create more taxable income by realizing gains for tax gain harvesting or realizing ordinary income for Roth conversions? What do you prioritize and why? And by doing this at step five, after the other parts of your plan are dialed in, it becomes a lot easier to do that.
Speaker 0:Then there's all kinds of other things. Do you look at donor advised funds? If you do any charitable giving, what about qualified charitable distributions? What about family gifting? What's the most effective way to do that If that's a part of what you want to do? What about asset location? So we talked about having a 75% stock, 25% bond portfolio, high level. Should he be investing that same exact way in your IRA and your IRA in your brokerage account? Probably not. Different investments have different tax consequences. Is there a way to shift where that 75% stock is held or where that 25% bond allocation is held so you can still protect your income needs throughout retirement but do so with minimal tax head. So these are the types of conversations that you should be having, that you should be looking at, but that tax piece should be based upon the rest of your plan, the rest of the framework that's already built out.
Speaker 0:And one thing I want to emphasize here is the reason this doesn't come first is, if the tax piece comes first, what you should do if all you're trying to do is optimize for lower taxes is spend as little as you can. Don't take those trips, don't pull anything out of your IRA, try to keep your income super low so you can implement this Roth conversion strategy and potentially save hundreds of thousands or millions of dollars over the course of your lifetime. But if that's what you're optimizing for, what does it actually mean? For step one, when I talk about the fact that financial planning good financial planning, the sign of a good financial plan, is a life well lived, not tax savings. Not, you save seven figures on your tax bill because you stayed at home, didn't take money out of your portfolio, but you got to take advantage of great tax strategies as you do so. So by ordering in this way, it's really prioritizing. What are those big things, what are those big rocks that we need to prioritize first, to make sure you're living the life you want to live. And the tax piece then comes along and says how do we optimize your tax strategy without sacrificing what's actually most important? So that's why the tax piece is step number five.
Speaker 0:Now, step number six is reviewing your insurance coverages. So it doesn't matter how great your financial plan is, if you don't have the right protection, you don't have the right insurance coverage. It might not be stable, it might not be well protected as you go through retirement. Now, part of this insurance decision is do you need all the insurances you currently have? At some point, you probably don't need life insurance. At some point you don't need disability insurance anymore. At some point you don't need certain insurances that you did need earlier in life. However, on the flip side, as you get closer to retirement, typically, your net worth is growing.
Speaker 0:Do you have the appropriate levels of insurance, whether this is car insurance, whether this is home insurance, whether this is an umbrella insurance policy? Are you sufficiently protecting your assets? What about health insurance? Maybe you want your whole career with your health insurance being covered by your employer. What do you do when that's not the case? Do you let COBRA when you leave? Do you get something in the marketplace? What about Medicare? How many options are there there? Which is the best one for you? What about long-term care insurance? Is that something that you need to protect yourself and maybe loved ones later on in life? Or can you self-insure or self-fund because you have sufficient assets to take care of that without needing an insurance policy? All these questions, and more, start by understanding what does your plan look like and what insurance coverages need to come into the picture or be modified to make sure that plan is protected as you go.
Speaker 0:And then, finally, is the estate planning piece. An estate plan doesn't have to be big and complicated Again, it's just this form of protection at its first level. Do you have the appropriate trust documents? Do you have an updated will? Do you have updated advanced directives? Are you in a position where you, your loved ones, your assets, everything will be cared for, everything will be done in the appropriate manner if you become incapacitated or if you should pass away? This is where the estate planning piece, at the very minimum, is just protection titling things correctly, getting things in the right accounts. And then, at a more advanced level, if your net worth is at certain levels, you probably need some more advanced estate planning strategies. There's a pretty significant estate tax for any estate that you have over current exemption amounts. 40% of every dollar will be taxed.
Speaker 0:If you don't have a strategy in place to say how do you actually start to optimize your estate plan? And even if you're not above that limit today, look at your projections Are you projected to be there at some point in the future? What can you do today, whether it's gifting, whether it's setting up certain type of trusts, whether it's certain type of charitable giving strategies to make sure that your estate plan is in order to protect the assets, to protect the net worth in the valuables that you have. So once you've gone through that, once you've gone through steps one through seven, you have a really incredible foundation built. Of course, you want to monitor it. Of course there will be changes along the way. Of course some of these things are designed to be dynamic and designed to change over time.
Speaker 0:But if you can do those seven steps, what you've done is you've taken all the scattered financial information, scattered information about Roth, conversions, tax strategy, how should you invest, what should you do with social security. All that information is good, but in a vacuum it doesn't do anything for you. You have to organize it in a way that says how do we use our financial resources to help us live the life we want to live? This is the framework we go through at Root Financial. We call this framework our Sequoia system. The good news is, whether you're a client or not, the same exact framework is really effective for helping to put your finances in order so that, at the end of the day, you can have one of those financial plans where the sign of it being good is that you're living the life you want to live. So that's it for today. Thank you, as always, for listening. I'll see you next time.
