How to Structure Your Portfolio For Retirement

Transcript

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?

Mike:

The other day I had a couple come to me and they want to retire at the end of the year in their IRAs and 401ks. Right? You can kind of see that on the screen. They had roughly a million dollars. Now here’s the deal. You might have more than that. You might have less than that. Don’t get hung up on the number here. Just know, just focus in and stay in on the, on the concept. 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 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. Well, what is the right way? Well, the right way is this a I’ll draw a little line here, looks like this.

Mike:

And obviously I’m doing the best I can. I’m clearly not an artist, but 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, us and your national, all that kind of stuff. And in the bond section, you have some shorter term and longer term. 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. If you’ve been watching this enough, you know what I’m going to say, I’m going to say this. I’m going to say not so fast. Right? You know, I’m going to say that in today’s world, we have a problem here.

Mike:

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 1990s, right? That’s 25 years ago, this concept kind of was introduced to us. What was happening in the mid 1990s? Well, here’s was going on the stock market. What were, what were stocks doing back then? Whew, up in a big way. 10-Year treasuries 10 year government bonds. They’re paying 5% per year, right? 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%. Stocks are paying double digits. Yeah. If stocks are paying double stacks over here, if they’re paying double digits in the bonds, they’re paying 5%. Yeah. That works out. That works. But then what happened? We had the.com crash in the early two thousands.

Mike:

We had nine 11. We had 2008. And where are we today? Today are stocks growing. Like they were in the eighties 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 one one. If you’ve got 40% of your money or any 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 to day on this 4% rule, 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 got to sell stocks. You got to sell positions. So if those positions aren’t going up over time, you got yourself a problem.

Mike:

And here’s what happened. So in 2013, 20 years after this whole idea came about Morningstar, you’ve probably heard of them. Morningstar came out and they said, you know, maybe we should revisit this whole idea. Maybe we should say, does this really work? And you know, morning star said, they said this. They said, you know what? 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 before you die. You will run out of money in retirement. About half the time, half the time it works out half the time. It doesn’t, that’s equal than a flipping a coin. I don’t want to enter in retirement. Knowing I only got a 50, 50 chance that my money’s going to last. So how do we fix this? How do we fix this? Well, here’s what we do now.

Mike:

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 two general categories over here on the left, we have the income category. And over here on the right, we have the growth category. So what you do is you take your money, whatever the dollar amount is, again, you might have more, you might have less, 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’s growing to replace it all. So let’s go ahead and look at how this works. Now, by the way, this is really important.

Mike:

You, there’s a couple of rate of returns here that we need to have. 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. On the growth side, we’re targeting 5% or better 5% or better. How’s that 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. Hey, normally these days on the income side, we’re getting maybe four or 5% returns. So we’re getting better returns in both categories. But I don’t want to assume that I want to assume low on my returns. I want to assume very, very conservatively.

Mike:

How are we doing? Does that make sense now, by the way, this means that no, you can’t put your money in the bank. It’s not going to work. If you do that, right, you got to at least have something. The, I get something over here, three different paths we could potentially go down here. Let’s explore them. Okay. Path number one here. Let me change colors. Okay. Path number one, we could put 400,000 on in the income side, right? 400 K, which would mean the balance 600 would go over here on the growth side. Now, if we did that, 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. History outta here. There’s none left. We’ve spent it all down to zero. So in 12 years we now are $400,000 is now $0.

Mike:

And that’s no fun is it. But if we’re in 5%, this 600,000 has grown to about 1.1 million. 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. Good news. You don’t have 1.1 million, you know, here at the end of this time, period, you have 1.5 because we did a little better. Right? I’d rather have that conversation then. Oh, we don’t have enough. What happens now? It’s 12 years later. What do we do? Wait. Well, we’re back to our million. We do it all over again. Right? That’s what we do. We just do it all over again. Well, what’s another path we could go down. I want my money to 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 at a 3% return the answer 600,000. And that means you’ve got 400,000 leftover here to grow. Right?

Mike:

Well that way the money last longer, but the question is, will this grow enough? Well, again, at a 5% rate of return. Yeah. It grows to about 1.2 million right around there. Okay. That works. Number three. Sometimes people ask this question. They say, well, Mike, what if I want to have a guarantee that my income last for life, 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 leftover this. We would just call this extra extra money and that could grow and be used for anything, three different paths to give you that income, which is the right path. Well, the answer is, it just depends on you. It just depends on what’s best for you.

Mike:

Here’s the other question is a red letter question. When, 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 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. 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 and you might say, oh, I don’t. You know? And, and why, why do we want to start sending this up? It’s really simple. Let me ask you this very simple question. Do you think that it’s possible that the stock, 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 them crashes. We call them corrections. Do you think it might have a correction between now and when you want to retire? Could that happen? 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.

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 last longer. Instead of lasting for 12 years, maybe it will 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, 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 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 that buys you more time over here to handle the ups and downs in the market.

Mike:

So you’re in a much more secure position. And here’s the best part. 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, I’ll just put all the money and 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 not retiring when they want to retire. Now. Yeah. You, because you didn’t set this up when you should have, see 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 and leave all the money and growth.

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, right? You don’t want that. Put the control in your hands, make that great decision. So anyway, this is different for everyone, right? How this is structured. It depends on how much income you need, how much money you have, you know, timing of income, all that other stuff. This is just a general model. But this is a great model. We’ve been using it for years that have helped people retire comfortably. And I want to get you there as well. All right. That’s today’s discussion. I hope you found it helpful again, if you liked it, click the like button below, click the share button subscribe. If you haven’t done that yet. And as always, we want to give you an easy path, just like this, an easy path to financial prosperity. All right, we’ll see you next time.

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