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Solving the Two Biggest Retirement Problems

Listen to Best in Wealth Podcast Episode 242

The #1 issue most people face when it comes to retirement is running out of money. Secondly, most people want to live the best retirement that they can. If there is anything left, they will gladly give it to their children—but it does not need to be millions of dollars. 

Too many people are dying with too much money and never got to live out the retirement of their dreams. You have been saving your entire life. You should not be scared to spend the money and fear it running out. So how do we make sure that does not happen? I will share some of the common solutions—and our strategy at Fortress Planning Group—in this episode of Best in Wealth.

Outline of This Episode

  • [1:07] Spending money in your retirement
  • [2:49] The two central issues with retirement income
  • [4:38] Solution #1: Purchase an annuity
  • [5:50] Solution #2: Live off your dividends
  • [8:00] Solution #3: The 4% rule 
  • [10:04] Solution #4: Guyton and Klinger’s Guardrails
  • [15:30] Utilizing risk-based guardrails

Solution #1: Purchase an annuity

An annuity has the potential to give you steady income until you die. Let’s say you give $1 million to an insurance company in exchange for monthly payments. It might be $4,000-$6,000 per month. But when you pass away, the insurance company keeps your money. 

If the insurance company goes out of business, you lose those monthly payments. Many people still use annuities to fund their retirement. The biggest drawback is that most people do not think about inflation. That money will not go as far in 20 years. 

Solution #2: Live off your dividends

Let’s say you have $1 million and you decide to buy a company that’s paying a nice dividend. Let’s just say you are receiving a 5% dividend or $50,000 a year to live off of. But most people do not know that dividends can go down. Secondly, when the stock price fluctuates, your $1 million could lose value. Someone who invested in Wachovia Bank lost everything when they filed bankruptcy. The investment became worthless. 

Solution #3: Follow the 4% rule 

Stocks can gain value over their lifetime. The 4% rule means that if you have $1 million, you could live off of a 4% withdrawal from your portfolio the first year. Every year, you take an inflation adjusted raise. If inflation is 10%, you withdraw $44,000. If you do that, your purchasing power stays the same. Bengen looked at every 30-year period in history and 93% of the time, the 4% rule works. What about the other 7% of the time? What doesn't the 4% rule solve for? 

Solution #4: Guyton and Klinger’s Guardrails

Guyton and Klinger’s Guardrails try to solve for both running out of money and dying with too much money. They propose that a 4% withdrawal can be too small of an amount. They usually start with withdrawals of 4.5–5%. How is their process different? 

If you start with $1 million and the portfolio goes to $1.2 million, you give yourself a raise as well as an adjustment for inflation. And if your portfolio goes down to $800,000, you have to be willing to take a pay cut until the portfolio gets back above your lower guardrail. 

When you take raises when your portfolio is doing well, it solves the issue of dying with too much money left. You rely on your guardrails to dictate what you do. 

But we do not entirely use this strategy—or any of these strategies—at Fortress Planning Group. What do we do? I share our strategy that’s unique to each of our clients in this episode of Best in Wealth!

Connect With Scott Wellens

Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.