Welcome back to the Early Retirement Podcast . This is going to be the podcast for you if you have a pension or any other income that is going to be coming in throughout retirement .
So if you have rental income , if you have inheritance , if you anticipate doing part-time income , this is gonna help change the way you think about planning and I'm gonna tell you exactly why I'm doing this . So if you look at my screen , I know a lot of you are listening on the podcast apps . I'm doing this .
So if you look at my screen , I know a lot of you are listening on the podcast apps I'm going to read it out . I will have a lot of people that will submit questions through my website , earlyretirementpodcastcom , which you can do , and I'll have people book a call to work with us . This is someone who recently booked a call .
I'm speaking to them in two months from now and there's going to be a nice surprise for them because I'm actually going to use them as a case study , but they don't know it today . So when I speak to them , I'll say , hey , I actually ran a kind of case study for your case , not to say the word twice , but it might give them a little bit of insight .
Before you know , they actually start working with us . So , anyways , to get to the point here , I say please share anything that will help prepare for our meeting . And they said the following I plan to retire early 2026 . I'll have a pension with 100% survivor benefits $220,000 a year .
Wife is five years younger , highly compensated , a million plus a year , and won't retire until 2030 , 2035 . So who wants to be their best friend ? Just kidding ? Okay so , guys , they're obviously in a good spot . They know that . Why are they reaching out ? Okay so , guys , they're obviously in a good spot . They know that . Why are they reaching out ?
I imagine it's because they're seeking guidance on tax strategy and maybe they don't want to be an advisor in retirement and have to handle the finances . I don't know , but that is why we exist and I get to explore that on a call with them , just like I could do with any of you guys . Now , today , I'm going to start with my favorite quick story .
I'm going to go through a review , an interesting one for you , and , as always , these videos are going to stay on YouTube so you can watch this If you're listening on the podcast app . Awesome , that is how I listen to podcasts .
I rely on all of your feedback to help me grow the show , so if you find anything we discussed somewhat valuable , please do leave a review . I appreciate it more than you know . Now here's my fun quick story .
So this couple reached out months ago and they said this is going to sound really weird , ari , but I'm 83 and I have 100% equity , so you're going to like freak out . I said maybe , maybe not . Like I don't freak out that easily . They're like okay , big shot . So I said look , tell me why you have 100% equities .
And they said I have a pension that covers all of my needs , so , theoretically , if my $3 million portfolio went to zero , I'd still be okay . I said I love the thinking and if any advisor tells you to do anything other than what you're doing , I will not trust them . And they're like huh , like .
I thought like you're just an advisor and you're gonna tell me as I get older , I should be more conservative and I'm 83 and 100% equity is kind of crazy .
I said if you had no pension , it's a horrible recommendation and you should not do that , because if markets don't do well and your 3 million goes to 2.3 million , you might not be able to spend and do what you want to do in retirement . So the point of the story here is you should not have a cookie cutter strategy .
I have this jar that I talk about a lot because it's one of my favorite gifts that I was given to me , and it says anti-cookie cutter jar . Love the pod Because I don't believe in cookie cutter planning . I had a couple that one said , hey , I want to work with you guys and I love the approach , but you forgot to ask me my risk tolerance .
So it's kind of a big deal . I said , okay , let me ask you right now what's your risk tolerance ? And they're like I'm an eight . And I said what about you , spouse ? And she's like I'm a two . And I said okay , do you guys think if I asked you that question when markets were down 40 , you would tell me the same thing ?
They're like no , we think we'd actually be more risk averse at that time . I go . That's why I don't love that question , because risk tolerance changes . There's something called risk tolerance , which is how do we emotionally feel if our million dollars went to 40 , 400 , 000 ? Would we be like that's cool , there's an opportunity , let's put more money in ?
Or would we be like that's cool , this is an opportunity , let's put more money in . Or would we be like I am not loving this ? Well , most people , it depends on their stage of life . If you're 30 , adding money to a 401k , when it goes down , you don't like it , but it doesn't really bother you . It's the opposite .
When you retire , you don't want markets to go down 40% . That's when you people start freaking out . So the point here if you have a guaranteed income source like a pension or rental income which I know is not guaranteed social security whatever you don't need as much in safe money because you already have the safe money being taken care of .
If you want to spend $100,000 a year and you have $60,000 coming from a pension , you don't need $100,000 from your portfolio . You need $40,000 to make up the difference . Now maybe you need $60,000 because you need to go pay taxes to end up with $40,000 so that , after taxes adjusted for inflation , you have your assets .
But that's the point of the story here . So let's look at this example . I do not know all of the assets of the person I'm gonna talk to in a few months , in a month , but I put some assumptions here .
I use the same case study from last week , and so this is someone that inherited about a million dollars in a brokerage account and they inherited property . So they have . I call this , by the way , the lucky sperm and egg club . I know it's a little graphic , but you guys get the point .
So 2.8 million property and , by the way , I stole that from a mentor of mine who has the best jokes in the world , so I made it sound like it's my phrase , not my phrase . So 2.8 million property , 3 million in liquid assets . They've got 401ks and Roth and brokerage and HSA and 529s and all this stuff .
So this couple let's assume they told me that they wanted to spend 100,000 a month in retirement . Sorry , 100,000 a year in retirement , not month , that'd be wild , but I have seen someone who wants to spend 40,000 a month . That's the most I've ever seen . So , 100,000 a year . Well , they have $3 million .
Now , all these different accounts have different tax implications , but let's just keep it simple . What's 4% of $3 million ? Well , that's $120,000 .
So I think it's a safe estimate to say that if we were to essentially create 100,000 of income , that we would need to sell $120,000 worth so they could end up with $100,000 of income that we would need to sell $120,000 worth so they could end up with $100,000 , which is what they'd love to spend in retirement .
Now the first thing I would say here is they're not going to spend $100,000 . They're going to spend more when they have their energy and their health , then a little less , then it's going to shoot up again . It's a dynamic , moving thing because that's real life .
But the point here is this couple's in a good spot , so let's assume they want to retire today , which they don't . This couple's in 49 and 51 . They're not retiring for 10 years . But the idea here is this couple's wondering how much should I have in equities or fixed income ? Well , I like having at all times , five years of safe assets .
So , no matter what happens , you're going to be okay . And the reason I do this is because I show this fun chart here and this was put together by another advisor and you can see it says bear markets . A bear market and I'm going to read this for all you podcast listeners a bear market is when stock markets drop by at least 20% .
Here's a look at how long bear markets have lasted before the recovery . So the shortest ever bear market was 33 days during COVID . The longest ever was 929 days , meaning the longest ever bear market . Until it fully recovered . You didn't make money but it recovered was about three years and the average is a little over a year .
So I'm extra conservative and I double the longest ever bear market because that's who I am . So now you have five years worth of safe assets . Well , this person wants to spend $100,000 a year . Five years times $ 16% , which means on paper this person's asset allocation should be 84% equities and 16% fixed income . Make sense Five years of safe assets .
That's assuming they're retired today . They're not retired today . This couple's not retiring in 10 years . So because of that , they should have way more arguably 100% in equities , assuming they're comfortable with that level of fluctuation . And that's the next graph that I would share , if you know , once again I'm working with a client .
This is a really cool graph talking about the best , worst and average investment returns by allocation . So if we look at 100% stock allocation at the bottom here and I'm going to explain this once again the worst 100% in a single year has ever done if you had all equities was 43.1% . The best it's ever done was 54.2% . On average it does 10.3% .
So I would , with a couple , say , hey , let's talk about it . Is there any amount that if it went down you'd be like I just can't sleep at night ? Okay , let's factor that in . So we're gonna go one step deeper . Stick with me here . This does not include any pension .
So let's assume this person had a pension and the pension was let's keep it easy let's say , $80,000 a year . They wanna spend 100,000 . Well , how much safe money do they need ? Well , they want to spend $100,000 a year , every single year . Hypothetically , $80,000 a year is coming in through a pension , no matter what .
Well , if $80,000 is coming in , no matter what , that means , we need $20,000 from their portfolio so they can spend $100,000 . What's 20 times 5 ? That's $100,000 .
So all we have to do is take 100,000 , don't really need the calculator for this but that's 3.3% , which means hypothetically they could have a 96.7% equity allocation and a 3.3% fixed income allocation , so that I could sleep a night as their advisor with enough root reserves .
But the couple that we are talking about today , they have way more coming in through their pension . They make a super healthy income . So if that's the case , we largely are gonna want 100% . Equity is growing for us because you have a pension that's allowing you to have that level of flexibility .
So if you have those assets , like this person here , they should be thinking about tax strategy . And the reason they should be thinking about tax strategy in a big way is because , if they have a pension , what that means is their 401k is going to be growing like crazy because we don't have to withdraw from it and it's just going to keep growing .
So they're going to have a huge tax opportunity . The reason that opportunity will exist is we're not withdrawing from their pension , excuse me , we're not withdrawing from their portfolio because they have the pension , which means their portfolio will keep growing like crazy .
So what you can see here this once again on my screen , but of course , if you're listening on the podcast app , that's perfectly okay as well there's something called Roth conversions . Now , roth conversions make a lot of sense for people who are going to be , in a way , higher tax bracket in the future .
So for this couple , you can see if I try to fill up the 22% bracket , it's not going to make a difference . Now some of you are like why ? Well , the reason is , if you have a pension , you're already in that tax bracket .
So you might need to do Roth conversions at a higher rate , which will not always be the most fun because you're paying taxes at a fairly high rate , but it's to avoid paying taxes at an even higher rate in the future . So you can see here for this couple , they're 51 .
If they retire at 59 , it's hard to see here , I know , so I apologize , we'll beat up the software company together , but they have this little green sliver here . The green sliver is from 59 until 67 , social Security for them , even though I would argue they should delay further .
Regardless , this is them getting about 1.3 million more tax-free dollars at the end of their life by doing good Roth conversions . But watch what happens if I increase this further . What if we say , hey , let's go pay taxes at the 32% bracket ? Well , now there's 15 million more dollars in value and you can see the green very clearly .
The reason these conversions are so helpful is because if we go and look at what's called the retirement cash flow section and I'll , of course , always be explaining this , because I listen to podcasts on the apps as well what happens is , if we look at ending balance per account I mean theoretically this couple , if they have $220,000 coming in every single year ,
that is probably going to meet all of their goals , and then some . So their brokerage account , it's going to be worth $4 million by age 70 . Their 401k could be worth $10 million . Their Roth 401k could be worth $700,000 . So they might have in total like $15 million , it literally growing by a million dollars a year at this point because of compound interest .
Now they might go well , rather than have us have 15 million at 70, . What if we bought a second home ? What if we went out and did more charitable giving ? What if we helped out our kids ? Well , I'm not including any of that in here .
So obviously , the goal in life is not to minimize tax liability but to live your best life and , in light of that , be smart with tax strategy .
So , with that being said , obviously , asset allocation , thinking about planning when you have a pension it's very different , and if you have a spouse or a big age gap , all of those things need to be considered , but tax strategy is the big one . So many of you guys have heard this little dopey story , but I'll give it to you to end this episode .
So someone reached out and they said Ari , my CPA sucks . I said that's kind of a weird word , like , why do they suck ? They're like well , they didn't tell me that tax brackets are changing soon and that should impact my plan . I said fair point , what else they're like ?
Well , they didn't tell me if I inherit an IRA , there's a schedule I can withdraw from to optimize my tax liability . I said good point , keep coming . They kept going , on and on and on . I said I see the problem . They said , oh , this is great , you agree they suck . I said nope , they do not suck and you're beating up a waiter .
They said beating up a waiter , what do you mean ? I said you're mad because your CPA is filing your return but not doing all the other planning . And they're like yeah , that's my point , that's why I'm angry . I said they are a waiter that brings food to your table . They're trying to file your return and 500 other returns .
They're not gonna give you guidance on Roth conversions and tax gain , harvesting and charitable giving and estate taxes and healthcare and real estate and inheritance and equity compensation and business planning and withdrawal sequence . That's what we do as tax planners . It's a forward-looking plan .
So for most of you that reach out to me , you have , I'd say 60 to 80% . You have an advisor , but you're frustrated because when you ask them a tax question , they tell you to talk to your CPA . Your CPA says go talk to your advisor . And now you're playing middleman of coordinator . And my fun joke here is I had a couple that reached out .
They're like I'm retired . I said I don't believe you . They're like well , you're nuts because you don't sleep next to me . So how the heck would you know ? I heck would you know ? I was like yeah , I just don't think so . They're like well , you're crazy . I said I bet if you ask your advisor a tax question , they're going to tell you to talk to your CPA .
Your CPA is going to tell you , for health insurance , talk to your agent , and your insurance agent is going to tell you to talk to your state attorney and you're going to have like five people to coordinate your retirement . They're like yeah , isn't that how this works ? I said no , no , that's what a financial advisor is supposed to do .
And the tough thing is we're all called advisors and we all do different things . So tax planning transparently that's the main reason people reach out . So if you're looking for this type of guidance , we'd love to give it to you . That's , of course , if you're looking for a partner .
If you're like , no , I'm not looking for a partner , I just want to play around with this tool , go , put all and stress , test all the scenarios . Well , like , be my guest , and we love getting to . I love getting to hear from people who find value in the software and I encourage everyone . That's where you should start .
Like , if you're just unsure , start with the software . You get to see what's it like , kind of playing around with the tool that we recommend , and then , of course , if you go through that , as many of you do go , yeah , I still want next level help .
Well , that's why we exist , so you can go hear from people that have used the software , people that became clients . I love getting to do this . Please , guys , if this was helpful at all , leave a comment on YouTube like this , share this , subscribe , leave a review on iTunes . That's the best way to help more people find the show . I'm grateful for you guys .
Love you . See you next time . Thank you all , as always , for listening to the Early Retirement Podcast . I love getting to host these shows and make different content for you guys every single week . I've not missed a single week in years , and that is because I love getting to do this .
Now , please be smart about this , before you actually execute any strategy that you see me talk about or hear me talk about . Should I say Please talk me talk about or hear me talk about ? Should I say , please talk to your financial advisor , your tax preparer , your estate attorney ? Please be smart about this .
None of this should be construed as financial advice . This is for fun , educational , informational purposes only . Once again , just quick disclaimer here . Guys , please be smart about this . Appreciate you listening , as always , and you can , of course , submit a question on my website , earlyretirementpodcastcom .
If you , of course , want me to address a specific case study or topic . I will not promise I can get to it , but I respond to every single person and if I find it will be helpful for a lot of people , I will absolutely make an episode on it , at the very least give you some insight . That's it . Thanks , guys .