On this week’s episode of The Secure Retirement Podcast, April Schoen joins us to take a deep dive into the five financial risks you will face in retirement and how to overcome them. Additionally, April discusses retirement planning and what balance looks like in retirement.
Listen in to learn more about the retirement red zone as well as:
Mitigating financial risks
Retirement planning: what works and what doesn’t
Building a financially balanced retirement plan
And more
Mentioned in this episode:
Podcast: https://johnhcurry.com/podcast
Email April Schoen, April_Schoen@glic.com, for a copy of John’s new book, The Secure Retirement Method for Members of The Florida Retirement System
Transcript:
April Schoen: Hello, everyone. Good afternoon and welcome to our webinar today. We're going to be talking all about financial risks in retirement, and how to avoid them. My name is April Schoen, and I am an advisor here with North Florida Financial. And I'm glad that you guys were able to join us today on our webinar. So before we get started, I've got a couple of housekeeping items for you. First and foremost, if you don't have it, grab a piece of paper and a pen. So what we want to do is we're going to go through, we've got a lot of information we're going to get through today, it's going to be very informative, uplifting. And so you may want to jot down some questions that you have, there might be something that you like, oh, I need to look into this, this is something I need to do. Maybe you've got a question you want to have with someone on our team as well. So go ahead and grab a piece of paper and a pen and make sure that you can take notes as we go along.
We're also recording today's webinar. And the webinar will be posted to our website, which is johnhcurry.com. And those are going to be posted in our podcast section. We do have a podcast where we interview people in the community and talk to them about retirement planning. And then we also post copies of our webinars as they're we go through our webinars, record them, and then they'll be in our podcasts. So we're going to get started today, like I said, today, we're going to talk all about risks, financial risks that you're going to face in retirement, and how to overcome them. What's kind of interesting about these risks as we're gonna get started here is that these risks that we face in retirement, we actually face them in our working years, too. It's the same risk that we face in retirement we face when we are in our working years, but they affect us differently in retirement. Okay, so we're going to walk through those today.
So especially when we're talking about retirement planning, the risks that we face are living too long, because that really compounds all the other risks that we're going to talk about. It's having health issues along the way, right? It's becoming sick, it's becoming injured. With market volatility. I mean, if you just look at the market over the last year, it's been a crazy year on the market, right. And so market volatility is a concern that we have to face. Taxation. If you were not on our webinar a couple weeks ago, we just did an entire webinar all about tax diversification in retirement, and how important it is to have tax diversification in retirement. So we're going to talk about taxes today. We're going to talk about inflation, right? How do we combat inflation? So we're going to talk about that.
And then we're also going to look at some real life studies, we're going to pull up some different scenarios, we're going to run some Monte Carlo assumptions, some Monte Carlo simulations. We're going to look through some sequence of return risk and talk about it and how you can navigate sequence of return risk as well. So what I'm going to do is I'm going to go ahead, I'm gonna share my screen with you. So we can get started talking about these risks in retirement. So give me just one second here. There we go. Okay, so hopefully, you can all see my screen now. So like I said, at the very beginning, my name is April Schoen, and I am an advisor here with North Florida Financial. I work with my partner, my senior partner is John Curry. And John has been helping clients when it comes to retirement planning for over 45 years.
And as you can imagine, there's a lot that has changed in the last 45 years, especially when it comes to retirement planning. And so what we want to do is, we're going to share with you some of the things the lessons that we've learned about retirement planning, and how things that that work for people and things that don't work for people, especially when it comes to retirement planning. So as I said, today, we're going to be talking about how traditional planning doesn't work when it comes to retirement. We're going to look at some real life scenarios that talk about traditional approach to planning and how that doesn't work. We're going to talk about the difference between saving money and spending money. So there's a big difference between we're when we're in our working years, and we're saving money. And once we get to retirement and we begin spending money, right? So we're going to talk about the difference between those.
And along the way we're going to talk about the risks that you're going to face in retirement. Okay, we're going to talk about those five financial risks that you are going to face in retirement and what are some tactical things that we can do to overcome those? And along that we're going to talk about what does balance look like in retirement? We talked about in our planning with clients, we talked about balance a lot, what is financial balance look like? What is tax diversification? What does it look like to have balance from a tax standpoint look like in your planning. So there's a lot of things that we're going to go through on the balance side of things today. So as I said, earlier, we've got these risks in retirement, we're going to do a deep dive into those, these risks are living too long, becoming sick or injured, market volatility, taxation, and inflation.
So those are all the risks that we're going to those are the five financial risks that we're going to talk about today, living too long, becoming sick or injured, market volatility, taxation on retirement accounts, and inflation. Now, I know some of you may have to jump off the call early. Just so you know, we've got, our webinars, we plan on them to be an hour, sometimes they do end up being around 45 minutes, 45 minutes to an hour. So that's really what we plan on for the webinars. I know some of you may have to jump off early, so I want to make sure you've got our contact information. One of the things I'd recommend for those on the call is for us to schedule a time for a phone appointment, this would be a 25 to 30 minute call, to talk about the concerns, the goals that you have, when it comes to retirement planning. There's a couple other things that we can do as well. You know, sometimes we get asked for a copy of our PowerPoint slides. So if you'd like a copy of the PowerPoint, you can email me for that as well.
And then I want to tell you one other thing, too. I don't think I have a copy of it here. I was going to show you, John has a new book that just came out. And it's all about the secure retirement planning for members of the Florida Retirement System. It's a great book. It's hot off the press. It really just came out about a month or maybe two months ago, I guess it was first printed. So it's really it's brand new. And it's all about retirement planning for members of the Florida Retirement System. Now in this book, we cover a lot of these risks we're going to talk about we talk about taxation, inflation, RMDs, we go through a lot of different information in that book. So if you'd like a copy of it, just you can also send us an email, and we're wherever you'd like us to send that book. And we'll make sure to get it out to you. Alright, let's get started talking about these risks that I've been talking about these risks that we face when it comes to retirement planning. So as I said, we are firm here in North Florida Financial, and John has been with the firm for a little over 45 years now.
I've been in financial services for almost 11 years, and I've been here with North Florida actually just celebrated this week, my seventh anniversary with North Florida. So time flies when you're having fun. So it's been crazy to think that it's already been seven years. But it's been it's been great. So really what I want to share with you today, like I mentioned earlier, are these lessons that we've learned about retirement planning. And you know, what we've learned when it when it comes to really seeing clients step off into retirement and what works and what doesn't work from them, what works and what doesn't work for them. From a planning standpoint.
The first thing I would say is that, by far, the most common approach that we see, to retirement planning is something called the safe withdrawal rate, the safe withdrawal plan, or you may have heard of it as the 4% rule, or the 3% rule. This is the most common approach to retirement planning. But it doesn't always have the best result. And we're actually that's part of our case study today, we're going to do a deep dive, and we're going to test it out and we're going to see what does it look like really to take a look at this 4% rule and how does it work? So the idea behind this common approach is that you have an asset that's invested in stocks and bonds, and you begin to take fixed consistent withdrawals from this asset that is variable, right, that's inconsistent because it is invested in the market and so it fluctuates on a daily basis.
So that alone brings a certain amount of uncertainty and unrest to the strategy. And really, studies have shown that while it's the most common approach, it's not the most efficient. It doesn't always have the best outcome, I'm going to tell you why. So what we find with this approach is that it needs, right it needs the most amount of capital, you have to have the most amount of assets to provide you less income. To provide you the least amount of income than some other strategies that you can employ. So it's the most capital to produce less income. And at the same time, it causes a high degree of taxation, based on how the strategy's invested and the income that's coming off of it, it causes a high degree of taxation, and there's more risk, there's actually constant risk, because everything is always invested, everything always has to be invested.
So it causes us to have more risk than maybe we normally would in our portfolio. And it causes us to have less liquidity. Because we've got this bucket, this asset, and we're taking an income from it a fixed income, right? If we take more income from it, we take a larger withdraw. Guess what that means? That means we have less income later. So while this approach, again tends to be the most common, it really does leave a lot to be desired. And we don't find that it really works well on a consistent basis. So we've chosen to do things differently here. And the reason that we this approach fails most of the time, is because it doesn't take into consideration that there's a difference between distributing wealth and accumulating wealth. There's a difference between saving money, putting money back on your balance sheet and spending money in retirement.
And we really have to approach retirement planning from a different way, we can't keep doing the same thing that we always did the same way we always did when we were in our working years, we have to approach it differently, because of those risks that I've talked about. So I'm going to show you and kind of walk you through why it is different. Why is distributing wealth different from accumulating wealth. And by way of an example, I want to compare this to climbing up and down a mountain, right, which is which we like this comparison, because it's it's very typical of a person who is working and trying to retire one day. We're on the way up the mountain, they're taking their income, and they're turning that into net worth, they're saving money back on their balance sheet. And ideally, they reached the top of this mountain one day, right, they reached the top of the mountain, they decided they're going to retire and they start to go down the mountain, they're going into retirement, and now what are they doing?
Well, they're taking their net worth. And they're turning in that turning that into cash flow, they're taking their net worth and turning it into income. So this is an entirely opposite goal. At the end of the day, they are polar opposite. And there are economic factors that are always at work that we have to deal with. Let me give you an example. If we were planning to climb up and down a mountain, we would have to deal with gravity, right? Gravity would always be there, it would always be present. And it's gravity, right. But how we approach it how we deal with gravity is very different when we're going up the mountain, and then when we're climbing down the mountain. And the same thing is true in retirement, there are economic forces that are always there. And we react differently to them in retirement than we do in our working years.
So let's walk through these risks. And we're going to talk about the difference. How these risks affect us in retirement versus in our working years. The first thing that we're going to talk about is mortality, the risk of death, right? So in our working years, it's very clear that the risk is what if I die too soon. So I'm going to use myself as an example. I'm 37. I'm married. I have two boys who are four and seven years old. So the risk that I face right now is that if something happens to me tomorrow, and my income stops, the financial impact that's going to have on my family, right? So that's a risk that we have in our working years. Something that I've worked to take that risk off the table. But in retirement, this risk does a complete 180.
In retirement, it's not about dying too soon, the risk is living too long. Outliving our resources. It's the exact, it's a same risk, but with affects us differently. Right. And so we have to address that we have to make sure that we address this idea of living too long in retirement. What about from an injury and illness standpoint? In our working yours, what's at stake again, is we lose our income, we lose our paycheck, right? Something happens to me tomorrow. I can't get up and go to work tomorrow, my income stops, right. That's a risk that I have in my working years. But in retirement, it's completely different. It's not that my income would stop, because that's not what happens in retirement. In retirement, your income continues to go on. So it's not the loss of income. It's the threat of expenses. It's the costs associated with becoming sick or injured along the way.
That can be the thing that erodes our assets over time. So same threat, but it impacts our balance sheet in very different ways. What about market volatility? Market volatility is always present. Like I said earlier, look at the last year, right there, no, and no one really likes the ups and downs that we have in the market. But when we're in our working years, if managed properly, that volatility can actually be our friend. It can be the thing that helps us have a better rate of return. In retirement, though, it can be the thing that causes us to run out of money, right? It can be the economic force that causes we have threats over stability in our retirement, right? Because we've got what's called sequence of return risk. And we're going to look at sequence of return risk today. And I'm going to show you really what that looks like.
So we're going to come back and talk about that one. What about tax deferred vehicle? You know, when we're in our working years, putting money in an IRA, a 401k, a 403B, a 457. These can feel like the best places to save $1. Because we're saving on that tax, right? We're deferring that tax to the future. But when we're in retirement, it can feel like the worst place to spend the dollar, because every dollar that comes out is taxed at our highest marginal rate. Okay, so that again, every dollar that comes out of those tax deferred vehicles, is taxed at our highest marginal rate. So while it can feel like the best place to save $1, it's the worst place to spend $1. And I know it because when I am meeting with clients every single week, and helping them get ready for retirement, and helping our clients that are already in retirement, and I can tell you from experience, that clients in retirement, the last place they want to take money from is their retirement account, because they don't want to pay the tax.
And then especially we talk about required minimum distributions, and you get to 72. And the IRS says, you've got to take money out of these accounts, whether you want it or need it. Clients all the time are telling me, why do I have to take this out, we don't need the income, I don't want to have to pay the tax. What do I do with this money now? Those are all the things that we work through in our planning process. Okay, the next threat that we talked about is inflation. Now inflation, we call this the silent thief, because it erodes our purchasing power over time. We all know that, you know, I use the analogy, milk is gonna cost more tomorrow than it does today. But it's slow, incremental changes, it's not big, sweeping changes to inflation, usually, right. And so that's why we call it the silent thief. Because all of a sudden, our income may be at one level, maybe, you know, whatever it is 100,000, whatever your number is, and it starts to feel like less and less and less.
Because of this, our purchasing power is being eroded, we're not able that dollar is unable to go as far because of inflation. So when we're in our working years, how we combat inflation is we earn more money, right? We get a raise at work, we get a promotion, we change jobs. That's how we combat inflation when in our working years. In retirement, though, we end up spending less money. When we're on a fixed income in retirement. And when the cost of goods and services go up. We're forced to spend less just to maintain our current net worth and our current balance. So what it means is because these challenges are different, going up and down the mountain, right, we need a different strategy, we need a different approach to retirement to succeed. Different than the one that we may have used in our working years. And this is really an approach that we've refined over the last 45 years. And we've developed kind of a set of rules, if you will a playbook on to help our clients find optimal balance in retirement, let's talk about that. Let's talk about what it looks like in retirement so that we can combat these risks.
The first thing that we want to do is try to mitigate and take those risks off the table. So we're going to we're going to talk about that today. And and how do you do that, what were some tactical things you can do to mitigate some of those risks that we talked about? Because it's really these risks that cause people pain in retirement. It's not really usually like underperformance of the market, or the inability to deal with, you know, unexpected events, that that's not what we find, we find it's really, our ability to mitigate those risks that causes us, or our inability, I should say, to deal with those risks is what causes us the most pain in retirement. And we really want to address that, you know, those risks, not only the ones that are that are broad and economic in nature, the ones that affect everyone, right, like market volatility, for example, inflation, but we also want to deal with the ones that are very specific to you, like living too long or becoming sick or injured, right, we want to make sure that we address those risks.
And the next thing we want to do is we want to take a look at what's your cash flow allocation? What's your income stream in retirement going to look like? Everyone wants to talk about asset allocation, right? How are your assets allocated? We don't want to start there. We don't want to start with asset allocation. But we want to start with cash flow allocation, what's your cash flow going to look like in retirement? And we want to understand that allocation before we start talking about assets. Right? So we start, we look at it at cash flow allocation, we want to make sure that you've got liquidity, true liquidity. Liquidity that's not required to give you an income in retirement. That's how we define what true liquidity is. It's the liquidity that's free from the requirement to provide ongoing income. We want to make sure you've got liquidity on your balance sheet. You know, I was just talking with a client the other day. He has quite a bit of money in checking and savings. And we talked about that right? How do we have balance here? How do you have enough in checking and savings to feel comfortable? Right?
What's your, I always call it your happy number. What's your happy number, what number and checking savings money market CDs, makes you feel happy and comfortable. And then let's design a plan where you've got the liquidity that you want, and need in retirement. But then we also have to make sure our money is working for us, right, we can't have all of our money in a checking and savings. Or look at CDs, CDs are earning next to nothing these days, right. So the days of just parking all your money in a CD and earning the interest are gone. They do not exist in today's market, because interest rates are so low. So we want to have liquidity. But we also have to have balance there to make sure that our money's still working for us. And then we also want to minimize taxes.
Strategically minimize taxes, not just in one year, not just here we are in 2021. So let's reduce taxes for this year. But how do we strategically reduce taxes over a long period of time. So those are really what we want to look at. This is really kind of how we see people have balance going into retirement, we manage those risks, we want to have some cash flow allocation, we want to have liquidity. And then we also want to minimize taxes along the way. So these rules really allow us to create financial balance and have a an optimal structure for retirement. Let's talk about what that looks like. For us we find that a balanced structure, it begins with that liquidity question. It begins with making sure that you've got assets on your balance sheet that you can get your hands on, if you need it or want it. An asset that's a buffer to the stock market where you don't have so much market volatility, right.
So we want to start with this liquidity discussion. And from there, when we start talking about your cash flow allocation, we want to make sure that you have guaranteed streams of income in retirement. These income come from many different sources. Could be a pension. Could be Social Security. But we want to build out what is your income and retirement look like? And what's your retirement baseline, we call this your retirement baseline, whatever your guaranteed streams of income are. So we want to take a look at that, what's your baseline for retirement. And then on top of that, we want to have some other buckets for variable income, right. So let's say we want to have some discretionary spending in retirement, most people do.
So we want to make sure we've got a bucket that's had some variable income for you, so that you've got discretionary spending. And the other thing we want to do is we want to have another bucket that's for growth, we want to have this bucket for growth, because we want to be able to offset inflation in the future. We want to be able to offset taxation. We want to be able to have another asset, if we get sick or injured along the way, right. This is a bucket that's for growth. It could also be for legacy, if legacy is important to you. But really, it's to help us combat those those risks we talked about earlier, living too long, becoming sick or injured, inflation and taxation. That extra growth bucket really helps from that standpoint. So what we want to do is, ideally, we want to have these buckets as we approach retirement. And this is really part of our planning process, right? Is a series of conversations and our planning process with clients is a series of conversations about where they are today, and how do we get them to this optimal structure.
So I'm going to share with you a little bit about our planning process. And then I want to dig in to this, really dig into this 4% rule, this traditional approach to retirement planning that we see. And we're gonna do some case studies and take a look at that. Really quick, I'll tell you a little bit about our planning process. So first, when we're meeting with clients, we have a philosophy discussion. This is our philosophy around money and your philosophy around money. We go through some data gathering, getting some high level data about where you are today. e want to talk about your goals, your concerns, when it comes to retirement, what do you really want your retirement to look like? I have a series of questions that we go through with clients, I'm going to bring those up at the end. So you can kind of start thinking about what do you want your retirement vision to look like?
And then we really have two distinct conversations. We have that protection conversation about how do we mitigate risk, right, how do we take those risks we talked about earlier off the balance sheet. And then we talked about cashflow. Part of that is that cashflow allocation, what does cashflow really look like for you in retirement? Along the way, when we're going through our planning process, we may make some recommendations along the way. And it's really our client's job to decide if they want to implement and and to what degree. And then of course, if someone does become a client with us, we want to have regular reviews with our clients to check in and make sure, see how are things going for them. So that just gives you just a general idea a little bit about our planning process and how we talk about these risks and take them off the table.
So now I want to do this case study, I want to do a deep dive into this traditional approach to retirement because we started off and I was telling you about this traditional approach to retirements called the safe withdrawal rate. Sometimes you hear that sometimes you hear it as the 4% rule. And what I want to do is see how does that really play out in someone's retirement? What does this really look like for you? What risks are involved? And how do we mitigate some of those risks? And we're going to use we're first going to use a Monte Carlo simulation. Let me go to Monte Carlo. So first of all Monte Carlo simulations if you've never seen them, I call them like the spaghetti models. You know, have you seen those spaghetti models for like if our hurricanes coming and it shows like the gazillion different ways that our hurricane might go? That's very similar to a Monte Carlo. Monte Carlo is just going to run certain variables. And it's going to take a wide range of variables and try to figure out what's the most likely to happen given those sets of parameters.
So I'm going to walk through, we're going to take a look at this Monte Carlo using this 4% rule. And we're going to apply a little bit of stress to it. We call it stress testing. So we're first going to look at what does it look like from a baseline and then let's apply some stress to our plan and see how it stands up. So, again, we're looking at this 4% rule. So we're going to assume that someone has a million dollars invested, again, this is going to be invested in some sort of mixture of stocks and bonds, and we're going to take an income off of that we're going to take off 4% income, so we're gonna take 40,000 out per year for income. And for inflation, we're going to use us 3% inflation. So we're taking 40,000 out per year. And we're going to increase that slightly to adjust for inflation. And we're gonna run this for 25 years, that's what I typically see with these Monte Carlo simulations is about a 25 year study period, that would take someone who was 65 till they're 90.
Okay, and then we're gonna say that we've got this asset is in a moderate portfolio. That means, again, it's in a mixture of stocks and bonds. And with a moderate portfolio, it's gonna be about 60% stocks and 40% bonds. So we're gonna first take a look and see what does this look like? How does this look in retirement, excuse me, if someone was to have a million dollars invested in this moderate portfolio, and they were going to take out 40,000 per year. Okay, so this looks pretty good. Let me explain what you're seeing here. So again, I said it was a spaghetti model. So you're seeing these are all the different possible outcomes that could happen with your portfolio. And this blue line is, you know, kind of the average or the most likely scenario to happen. And look what this is showing us. It's showing us that over a 25 year period, you know, you've been taking out this 40,000 per year, adjusting for inflation, and at the end, you have more money than you started with. Right. So it looks pretty good. And one of the things that I look at when I'm looking at these is this simulation failure rate. So this is asking, or this is saying, what's the percentage? What's the likelihood that this scenario would fail? And right now, it's less than 1%? Right? So it looks pretty good. It's .58%.
Looks pretty, pretty successful. But what we have to understand when we're looking at these Monte Carlo simulations, is that what did they consider to be success? What is the algorithm? What is the Monte Carlo saying is success in the scenario? Well, they actually assume that if you their success is if you have $1 left in the account, they consider it a success. So you get to the end of your 25 years, you've been taking out your 40,000 and then adjusting for inflation, you get to the end of 25 years, and you have $1 left. That's what they consider to be success. Now, where, what the what the issue is with this, right is this leaves out some some key factors, some major concerns around this strategy.
For example, you know, most people want to leave something behind, maybe they have a spouse, maybe they want to leave something to children or grandchildren, or to the causes they care about, or you know what maybe they want to make sure that they don't get to the end of 25 years and have no money. Right? So we're going to go back, and we're going to apply some some stress, we're going to stress test, this idea of using the 4% traditional approach to retirement. Because these Monte Carlo simulations, what I find with them is they're used to give investors a sense of confidence and their overall investment strategy, and overall competence on the success or failure of that strategy. But you can't just look at this in a vacuum, there are too many variables. And there's too much at stake to get this wrong. Right.
So let me go back. And we're going to plug in some legacy values. So let's say we do want to have money leftover. Let's say we want to have, instead of, we don't need to have a million dollars left over, but maybe we want to make sure we have $500,000 left at the end of 25 years. Okay. And we also know that we have taxes, right? There are taxation is is a very real thing in our in our world in our society today. And obviously, we have the threat of higher taxes in the future. But I'm just going to use a 20% tax rate on this. And we also know that if we have investments that are again, invested in stocks and bonds. Our assets are invested in stocks and bonds, there's going to be a fee, there's going to be a cost for those investments. So we need to actually need to add that into the mix as well. Right, we need to make sure we're showing a true and accurate representation of what it looks like for us.
So what I'm going to do is I'm going to recalculate and we're going to see what this looks like. Okay, so now what happens so now we have a 54% chance of failure. We have a 54%, a little over half of literally a 50% chance that at the end of 25 years, we have no money left in our accounts. Right. So now we have a higher probability of failure. And that's the issue sometimes with these simulations is that they're very sensitive to the input. So you can make it look really beautiful, right? You can make it look great and make it look like all rainbows and unicorns and butterflies. But that's not real life. So we've got a stress test it and we've got to add these things on. So let's go back because I like I said, these simulations are very sensitive to these inputs. And so I just want to show you too what happens here. So what happens if we get into retirement and, and inflation is no longer just 3%. But it's 4%.
Because I don't know if you've been reading it in the news, but you know, inflation is a concern, there is a concern that we're going to have rising inflation, higher inflation come roaring back, because of what's going on right now with our economy due to the pandemic, right. So inflation is a real concern. So what if we get into retirement? And it's not 3%? It's 4%. What if tax rates go up in the future? If you were on my webinar two weeks ago, on tax diversification in retirement, I talked about this. Right? I talked about how we're actually in historically low tax rates right now. And it's very likely that tax rates go up in the future. And then what if we live longer retirement, people are living longer and longer? Right. So what if we now have 30 years of retirement? Not just 25? What does that look like? 93% failure rate? Right? 90, almost 94% failure rate. So when you're thinking about your retirement, do you want to go down this path? Do you want to use something like the 4% rule to fund your retirement where you've got a 93-94% failure?
Let me give you this example. Let's say you know, as people were starting to get vaccinated, right, hopefully, you know, travel restriction started to lighten up, we started to travel again, and go places. So let's say you know, you've been waiting to be able to go on this vacation, you want to wherever it is, you want to go, right, you want to go overseas, somewhere tropical, you want to go somewhere else in the United States, there's so many great places to visit here. But you're gonna travel, right, you get on that airplane, and you're all buckled in. And the, you know, you've all gone through all the safety procedures, and you're getting ready for takeoff. And the pilot comes on and he says, ladies and gentlemen, we're about to take off on our trip today. But we have a 94% chance that we're not going to make it there. We have a 94% chance that we're not going to make it to our destination. What would you do? Would you stay on that plane? I wouldn't. Right?
What about earlier when we looked at it was 54 or 55% failure? How about that? Would you stay on the plane then at the pilot's like, hey, we have about a fifty, you know we have like a 50-50 shot of making it there. Would you stay on that plane? What if it was 25%? Or 20%? Probably not. Right? So sometimes we don't think about that. And in terms of what does that retirement look like? These are very real risks that we have in retirement, inflation, taxation, costs, fees, living too long, these are all things that impact us. So there are some things that we can do to mitigate this risk. So the first one that I'm going to talk about, it's not my favorite, but it is an option. One option is you could take less money from your portfolio. Right? Again, it's not my favorite option. I'd rather structure another way. So you still have the income that you want, and mitigate these risks at the same time. But yes, spending less money is an option. I hear that sometimes for people that say, well, I'll just spend less money in retirement. More recent studies do say that that safe withdrawal rate, that safe withdrawal plan, it's not a 4% rate anymore, it's more like two to three.
So let's look at that. Let's drop it down to 30,000. And let's see what that looks like. Okay, 58, almost a little shy of 60% failure rate. So it's better, right? We did, we definitely took some risk off of our plan by dropping that income. Right. The other thing that we may want to look at in our plan, and we're going to talk about this a little bit more to is one thing that we need to make sure that we have in retirement is we need to have another asset need to have a buffer asset on the balance sheet to offset this risk to offset the risk of market volatility and running out of money. Okay. This also means that we really need to take a deep dive and look at what income streams you will have in retirement, especially those guarantee streams of income. Because the more guaranteed streams of income you have, the less pressure it puts on your other assets. Right? So that's when we get to take a look at that to have your overall plan. Remember, we talked about that optimum balance, right?
We got to look at cash flow allocation where your retirement income stream is going to be in retirement. And that's part of it, how do we alleviate some of the pressure from our portfolio. And that's one of the ways that we can do that. Right? If we want to make sure we've got some income there. And we've also have this other another asset, that buffer asset on our balance sheet that's not correlated to the stock market that's not tied to the stock market. So that we've got some resources available for us. Now, one of the questions I get sometimes when I'm going through this with clients is the question of why, why is it that we've got you can even see here, this model portfolio, right, it's showing that we're, we're earning about an we're averaging an 8% rate of return 8.06.
That's what that means. That's what the average rate of return is. Average rate return for this, this portfolio. Well, and if we're only pulling out 3 to 4%, why don't we have a better outcome than this? And it's because of something called sequence of return. It's not just that you get a 7% rate of return, or an 8% rate of return, it's the order in which you receive those returns that matters most. So we're going to go I'm going to go and show you what this looks like, we're going to take a look at sequence of returns. Because sequence of return risk is a very real thing. You know, when we're talking about this 4% rule, a lot of the way that it's addressed, again, this idea that we are taking these fixed, consistent withdrawals from a bucket that variable an inconsistent, that challenge is all the more difficult due to the expectation.
Due to the way that that idea is presented. Because the idea that's often presented for this is yeah, oh, you've got this asset, you've got this retirement account, these investments, we're going to invest in stocks and bonds, it's going to be in a 70-30 portfolio, it's going to be in a 60-40 portfolio and look at here. Look at history, it's averaged about a 7% rate of return. So we're going to factor that in to our assumptions. And then you're just going to take like 3 to 4% off the portfolio every year. So you're going to be just fine. Right? That's the most common approach. That's what we hear. That's the most common approach to retirement. The problem with that approach is it assumes the math is linear. It's assuming that you're getting that 7% every single year, day in day out that there's never a bad day.
That's not real life. Right? That's not really how the market operates. Right? So again, if we did, if we did get the 7%, year in and year out here, we'd probably be pretty good. So let's take a look at it. So we're gonna look at this 30 year study period, we're going to look at again, we have our million dollars. Forgot a zero. We're gonna say we're taking out $40,000 from the portfolio, and we're going to use an annual increase again, for inflation, that 3% number. Alright, so again, here, we're assuming a 7% rate of return. And we're using a fixed rate. So you can see over this 10 year period every year, year in and year out, you're getting 7% rate of return. It never has a bad day. What does it look like? Well, it looks pretty good, right?
I mean, this strategy is pretty simple to understand. It's very appealing, it looks pretty good. Look at that. After 30 years, you still have you've got you started with a million, you've been taking 40,000 out and now you have over 2 million in your portfolio. You're doing pretty good, right? It looks good. The problem is that that's not how the market reacts. So the math says, you have more money in the end. Unfortunately, the reality is that when we're managing withdrawals from a portfolio, it's not that simple, right? Real life returns are not 7% every single year, in fact there are 1000s of different combinations of returns that we could see, to get us to still average 7%.
So I'm going to go back to the sequence. And I'm gonna say random, what if we had a random sequence of returns? What does that look like? This looks like here. We've got some bad years. We've got some really good years, right? There's again over a 10 year period of what we're looking at right now with different hypothetical rates of return. And you still average 7%. This is more likely what it feels like in retirement, because you have ups and downs, right? We're all used to seeing the ups and downs in the market. So how does that impact our retirement? So I'm going to click recalculate. Okay, so you can see here, this is showing the ups and downs that we feel in the market. This is more representative of what real life looks like. So instead of 2 million at the end of the rainbow, right, the 2 million at the end of 30 years, you've got a million. So math linear masters, we have 2 million, but this real life random assumption of return gives us a very different result. And the main issue here is, is that we don't have control over our rates of return. There, you know, we can manage portfolios, and we can tweak portfolios, but at the end of the day, we don't really have control over our rates of return, right.
And what I can tell you from studying this for the last 10 years, that the worst thing that can happen in retirement, is that you step off into retirement. And we have, we have negative returns, we have back to back to back with negative return. That's the worst thing that can happen in retirement. Right. In fact, there are studies that show that if you suffer a big loss, five years before retirement, or five years after retirement, you will not be able to recover. We call that the retirement redzone. That's the 10 years before. And that is the 10 years after retirement that we are the most critical, right? So now I'm going to recalculate. Because if and we're going to look and see what this outcome is, if we started off with some negative years. Yeah, very big difference, right, in our outcomes. Instead of having 2 million, right, the math says we'd have 2 million in the bank, the market may say otherwise.
The markets may say that we have a negative that we're in the red that we've got. The worst case here would be that we've got a negative 600,000 at the end of this 30 years. So the issue is here is that we don't control our return. And the order in which we receive those term returns is everything. It will make or break you. And there are things that we can do to mitigate that as well. One of the things we want to do is we want to build some additional tactics around the portfolio around or plan to mitigate the sequence of return risk. One of the things that we talked about earlier, we could again, we could consider taking less income from the portfolio that can help that can help us mitigate that risk. Okay, it also means we need to have look at having a buffer asset. An asset on the balance sheet is not correlated to the market that we can turn to, to get returns when we need them in those down year, or at the very least having a bucket that can then come in when we have depleted a certain asset.
And again, this for me also confirms again, that we really need to look at what those retirement incomes are going to be for you look at that retirement baseline, and to know about the guaranteed streams of income, because it's going to take pressure off of your portfolio. So I know I have gone through a lot of information so far today, looking at these different risks that we're going to have in retirement, but I'll tell you retirement should be a time for you to enjoy it and have fun. And go do all the things that you want to do in retirement. You want to travel when we when we have the ability to travel more by all means go travel, you want to pick up that hobby, pick up that hobby, you want to go volunteer, retirement should really be about you enjoying the things you want to in life, right. So we've got a couple things. And I'll email these over to you that we go through some vision questions that we go through. When we're talking to clients about what what is what is their vision for retirement look like? What do they want retirement to look like?
So I'm going to go through these kind of quickly with you to kind of start get you to start thinking you may want to jot some of these questions down. And but I'll email these over to you as well. So the first thing we want to think about when we're going into retirement are the relationships. The people in our life. Who are the people in our lives that a that we want to spend time with? Is it kids grandkids? Do we have aging parents we need to talk about, we need to take care of? Will we need to support them in any way. These are the relationships that people. Are their friends that we want to reconnect with? Who are you going to be spending your time with in retirement? Right? So we want to, we want to talk about the relationships, the people in your lives.
We want to talk about housing. Right? Will you stay in your current home? Will you downsize? Will you move to another city and state? Our client this morning, I was talking to her. And she moved she downsized a couple years ago, she's currently living in a townhome and she said, yes, this is my forever home, right? I purposely downsized, I sold the big house and moved to something smaller, it's easier to take care of and I plan to be here for as long as possible. I have some other clients we were just talking about last week, who they live in Tallahassee, but their children live in Chicago. And so they're like, yeah, they're going to retire. It's about two and a half, three years from now. And so they said, yeah, when we retire, we're gonna move to Chicago. Our kids live there, our grandkids, we want to move and be closer to family. So housing is important to think about where do we want to live in retirement?
Lifestyle. I love asking this question. How do you see your future when every day is a Saturday? Right? Like right now, if you're still working? Your Saturday and Sunday is when we do all the things right? We go shopping, or we go golfing, or we meet our girlfriends for lunch, or whatever it is that we do a lot gets packed into Saturday and Sunday. Well, what about when everyday is Saturday and Sunday? What do you want your life to be like? How do you want to spend your days when you have this newfound time? Right? What are the things that you always wanted to do, but life got in the way? I said earlier, are there organizations you want to volunteer for and help out with, right? These are all the things you got to make sure that you're not retiring from something, but you're retiring to something.
We have a client who's over 90 now. And I remember a couple of years ago, I called him, it was time for us to have one of our review meetings. And so he's 90 years old, and he says, April, I have got to quit some of my social obligations, I have no time on my calendar for the next three weeks. And I just laughed. I just love this picture of him. He's so vibrant, he's got so much energy, he is always giving back to people in the community. And spending his time in that way. And I just loved that is 90 years old and tells me his calendar is too booked for the next three weeks. You've got to get rid of some of his social commitments. Right. But that's important. It gives him a sense of purpose, it gives them something to look forward to and to do and feel like he's still providing providing value in this world.
Healthcare. This is probably the number one concern that we talk about. If you've been on our webinars about Medicare, we go through a whole thing about health care. If you haven't, go to our website, johnhcurry.com. Go to the podcast section, and listen to any of the podcasts on Medicare, we do a whole deep dive into Medicare. So really, we want to look at how much are you spending on on healthcare? And are there any healthcare concerns that you have right now? Anything that you any known concerns that may impact your future?
Of course, we want to look at financial when we're talking about our retirement vision. How do you earn your money today? Do you have any debt? Will it be paid off by the time you retire? How much money are you putting into savings? And then also having a spending plan for retirement. I don't call it a budget. Okay. But I do call it a spending plan. We want to have, what's our plan going to be? How are we going to distribute assets in retirement? And how are we going to spend money in retirement?
So I want to say thank you again, to everyone for joining us on the webinar today. I hope you found it impactful. I know we went through a lot of information, but we really covered these key financial risks that you're going to have in retirement, some things that you can do to mitigate those risks. We talked about Monte Carlo simulations, if that 4% rule really work in retirement, right. We talked about sequence of return risk and how can we mitigate some of that as well. And then we really want to start somewhere retirement, we want to make sure you have a plan for what is your retirement going to look like in the future? What do you want your retirement to be? That's the most important thing.
And then the next thing from there, once you have a clear picture, what you want to look like, how do we make sure that you get there, right? We do that by taking a look at where you are today financially and we see if those two match up right. Does your goal for the future match up with where you are today. Do they match? Okay, are you on the path to get there? Or are there some things that we need to change along the way. So on that note, I'd encourage you on the call, you can schedule a time for 25 to 30 minute phone appointment. This would be a time for us just to talk again about any goals you have when it comes to retirement planning. Concerns when you have retirement planning as well. So, again, I hope you guys enjoyed the webinar today. And please feel free to reach out if you've got questions if there was a specific part of the presentation that you've got questions on. We're happy to help. And yes, I hope you guys have a great day and hopefully we'll talk soon.
Voiceover: If you'd like to know more about John Curry's services, you can request a complimentary information package by visiting johnhcurry.com/podcast again that is johnhcurry.com/podcast or you can call his office at 850-562-3000 again that is 850-562-3000. John H Curry chartered life underwriter, chartered financial consultant, accredited estate planner, masters in science and financial services, certified in long term care, registered representative and financial advisor Park Avenue Securities LLC. Securities, products and services and advisory services are offered through Park Avenue securities a registered broker dealer and investment advisor. Park Avenue Securities is a wholly owned subsidiary of Guardian, North Florida Financial Corporation is not an affiliate or subsidiary of Park Avenue securities. Park Avenue Securities is a member of FINRA and SIPC. This material is intended for general public use by providing this material we are not undertaking to provide investment advice or any specific individual or situation or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. All investments contain risk and may lose value. Past performance is not a guarantee of future results. Guardian, its subsidiaries, agents or employees do not provide legal tax or accounting advice. Please consult with your attorney, accountant and/or tax advisor for advice concerning your particular circumstances. Not affiliated with the Florida Retirement System. The Living Balance Sheet and the Living Balance Sheet logo are registered service marks of The Guardian Life Insurance Company of America New York, New York Copyright 2005 to 2020. This podcast is for informational purposes only. Guest speakers and their firms are not affiliated with or endorsed by Park Avenue Securities or Guardian and opinions stated are their own.
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