What's Your Number?

Ever wonder how much money you need to retire comfortably? The reality is, your “number” changes at every stage of life. Join Modearn® Advisors Chris Galeski, Joe Seetoo, and Kevin Rex as they explore retirement planning, challenge common rules of thumb, and reveal how spending, taxes, and account types can make the biggest differences. 

Tune in if you’re interested in…

* Why “your number” evolves throughout life
* How taxes and account types can make or break a retirement plan
* The biggest flaws in common retirement rules of thumb
* How much return you actually need, and when taking less risk makes sense
* Why defining your spending plan matters more than hitting a magic dollar amount

Transcript

SPEAKER_01 0:09

I figured that the age of this crowd was going to be a little bit younger because of the topic. Um we're going to talk about defining your number and how to kind of figure out what's that number that you need for retirement. For those of you that don't know me, I'm Chris Gilleski, the Director of Growth and Advice. Joining me are two of my partners, Joe C2 and Kevin Rex. We have a lot of fun around this topic, and we even talk about like what our number is here. Hopefully you'll have some good takeaways in terms of what it means to define your number for retirement, and a couple of those myths that are out there. So just by show of hands, how many people kind of know what the number they need to retire is?

unknown 0:49

More than you have.

SPEAKER_01 0:50

More than you have. You're in the same boat as me. I like that. I'm not alone. We're not going to talk about what your handicap is, which is oftentimes the number that people care about when they retire. We're going to actually talk about that dollar of the number. It's like a golf handicap.

SPEAKER_02 1:08

Just for to be clear.

SPEAKER_01 1:10

Golf handicap. So I thought I'd start the conversation with Kevin and Joe in terms of talking about have you guys defined what your number is?

SPEAKER_02 1:20

Do you want to start? All right. Yeah. So so uh my wife and I have, right? And uh but the way I look at it really is more I I think of it more as a process. Um it's actually funny. When we first got married, she's like, what, you're gonna put me on a budget? And uh which no, that really wasn't the case, but it it it's the that's the divorce. Exactly, right. The uh the but the reality is I think it is important in the sense that, you know, I'm getting ready to turn 50. She's been with the sheriff's department now for a number of years. And so having that framework around, you know, juggling kids, her mom lives with us, you know, balancing current me uh versus future us, you know, I'm I tend to be a little bit more of a warrior planner by nature, that's why I'm a financial planner. She's a little more like, hey, let's uh go enjoy the the memory bank and fill it up today. And you know, certainly saving is important to her, but but it allows us to see eye to eye in terms of like those hard conversations around, you know, the making important decisions today versus versus tomorrow.

SPEAKER_00 2:20

Yeah, we we talk about our number all the time, probably too much, actually. We always joke we're on like a romantic date and you have, you know, dinner shows up, you have wine, and we're just talking business the entire time. So it's either talking kids or talking business. But what's interesting about our number when we started sitting down and running the calculations and figuring out where we need to be, the number for us today is substantially larger than what that number needs to be in the future. And I think intuitively it makes sense, but I didn't really understand how much bigger in our largest expenses currently are our mortgage and our children, specifically like education costs and those things. Every year that we go down the road of working, not only are we saving more so our accounts are getting bigger, but we have one less year to pay for. And so when we talk about when do we want to retire, understanding what that number is at different stages and how quickly we want to work to get there, because if we want to retire next year, it's gonna take a lot more work and honestly a lot more luck than if we want to plan out for 10 or 15 years, which then allows us to make different decisions around what we spend, what we save, and and what we do. So knowing the number is not just, hey, my number is this, it it can change.

SPEAKER_01 3:30

I'm in a similar boat as Kevin. Like when I was defining my number, I thought I had a pretty good idea. We had dual income, no kids, on a good path, and then surprise, my wife's pregnant. And now I have a five and a half year old and a two and a half year old. So the number that I thought I needed is way different because they're both girls. I've got like weddings, other things. I mean, the amount of princesses' dresses that you can have at five and a half is amazing and it's expensive. Um, have any of you ever heard of the rules of thumbs around retirement? One of them being the four percent rule. Okay. And the other one being if you save 20 times your income, you're probably gonna be in a good spot. Have you guys heard that one? So if my annual income or if my expenses are$100,000 a year, if I've saved$2 million, I'm probably in a good spot. The 4% rule means if I've saved a million dollars, that could generate about$40,000 a year for me to live off of. Those are two common ones that are in our industry. I'm gonna walk through a couple case studies here as to why those numbers are extremely accurate and so wrong at times. Because they only work if they only work if you understand the expectations of the future and if you're only gonna be around for about 30 to 35 years. Because the the weird things in life that can happen, depending on the type of account you've saved in and the unforeseen events that actually happen, can drastically shift that number. Now we've had inflation hit us over the last four or five years. How many people in this room feel like they're spending a couple extra thousand dollars a month more today than they were five or six years ago? I'm gonna show you the impact of even just that as well. All right, what you're looking at here is going to be two scenarios of 65-year-old couples that have saved$2 million. So on the left-hand side, they are 65 years old, they've saved$2 million. We have their income from Social Security, we have their expenses, and we assign a growth rate. And you can see over time, they have saved enough money to be on that retirement landscape. They actually have a little over$3 million left over at age 100. That's why the blue bars go up over time. Okay? That's the 4% rule. But what if we're wrong? What if all of a sudden we wake up and we get slightly lower growth rates than are expected and inflation happens and we end up needing to spend a couple thousand dollars more a month than what we were expecting? They lose three million dollars very quick and potentially run out of money at age 95. Now, I don't mean to be doom and gloom with this because if we run a scenario and a cash flow plan and we look at it regularly, we are going to see any issues long before they happen. This person saved money through a trust account. Okay? Now we'll take the same couple. They're 65 years old, they saved$2 million, but instead of saving money in a trust account, they saved money into their retirement plan, and it's all in an IRA where every dollar they have to take out, they have to pay taxes on it. Same growth rate, same income, same expenses, same unforeseen event where oh, we're gonna have to spend a couple thousand dollars more a month. What happens? Potentially run out of money at age 88. The reason why this is so important is because the number that you need to retire is based off of two very important variables. And this is why you can't be like, oh, well, my neighbor, we're kind of in the same spot, they did it, we can do it too. It depends on how much money you need to live, what your expenses are, and what type of account you actually save money in, because taxes can erode that a little bit.

SPEAKER_02 7:16

And just jump in here too, Chris. And I think this is the what we really want to try and get across to, and I think uh the well-held clients who've been with us for years, you know, this is one of the reasons why we've embraced financial planning over the year. But, you know, the old yogi bear quote if you don't know where you're going, you're gonna end up someplace else. And I think that's one of the critical reasons why making sure, like it's just not the investment strategy, the dollar number, but it's the planning and the projections that are critical to ensuring you have financial security as you're uh going into retirement. Kevin, anything you want to add?

SPEAKER_00 7:50

Yeah, the other thing that's really important when it comes to financial planning, obviously we all want to make as much money as we can. The more money we make in the portfolio, the less we have to save, the more we get to spend now. And when we run through these projections and we can start playing with different numbers, it allows us to understand how much do you need to make from a return standpoint. Most people walk in the door and they say, I hired a financial advisor so they can make me as much money as possible. But I think there's a little bit of a miss there. Oftentimes financial advisors might get you the same return that you can get on your own sometimes, but with a significantly less amount of risk. And so if you can retire and only need to earn 5%, does it make sense to shoot for stock-like returns and try to get 10%? Well, if you have a goal like buy a boat or travel more, or you have reasons why you want to make more money, then taking that risk might make sense. But don't take unnecessary risk. And so by going through this financial planning process, it's really easy for us to identify. I know you want these returns, you only need these returns. How do we get that with the least amount of risk possible?

SPEAKER_01 8:51

Yeah, I love the way that you brought that up. I mean, many of us talk to our friends, family members, you're like, oh, I made 12% this year. And we're we're proud of that number. We should be. It's a good return. But being able to make investment decisions, knowing the amount of return that you actually need to get in order to live the life that you'd like is a very important one. It helps you make right strategic decisions in terms of what should I invest in? Is this helping protect me, meeting my goals? And so you can sort of have your cake and eat it too. You can have years like this year where you make 12%, or you can look at it and say, Well, I'm still okay if I only get five or six. Um, talk to us about some client scenarios where you've helped them go through this process and the impact that it's made on them.

SPEAKER_02 9:38

So, one that comes to mind for me is a client that I've worked with for uh probably about 15 years. Uh, she was the breadwinner. Uh, the husband made good income, but they really were dependent on her career. It was a pretty high stress profession. Um, and when we met in 2008 or nine, it was like, I want to be able to retire at a certain point in time. And so, over the years, we were doing the financial projections. Uh she was naturally more of the warrior as well, just in terms of their personality types. And so it was like every year running those calculations. She was very diligent about saving for retirement. And I can distinctly remember when she actually, you know, hung it up in terms of her career. The elation that she had was palpable. This stress level, like that literally came off of her, was tremendous. She actually improved physically in terms of her health, her mental health. She was able to be more present with her kids, her grandkids. Actually, she went into coaching, uh, which really sort of filled her bucket as well. So, for me as an advisor, being part of that journey was just so inspirational and one that I that holds dear to my heart.

SPEAKER_00 10:41

Yeah, the client I was thinking through, it's you have this process of our entire lives saving, saving, saving. So you're watching your accounts get bigger. And then the mental shift to go from I'm putting money in to all of a sudden I need to take money out is something that we deal with every single day with clients. They they're like, Hey, can can you send me a little bit of money? Or like, how come you didn't do that? It's like, well, I didn't want to ask for money. Like, you know, it's your money, right? Like, yeah, but it's just this hurdle for them to overcome like actually taking money out because it's gonna jeopardize their future. And so knowing your numbers, one piece, and I'm gonna get to my client here in a second. So we we went through, I was sitting down with this client in particular, they had worked their entire lives, not a huge spender, really diligent at saving, had amassed a really nice net worth. Uh, and we talked about retirement, and he was like, I'm gonna retire at 65, and that way I can start taking Social Security. And he was going through this whole process of he thought retirement was an age, and then the the whole process starts. We went through the financial planning process, and I said, I'm pretty excited for this, but you're two years away from retirement. You could actually retire at 60. And thinking he's gonna be like, This is amazing. And the amount of stress and fear that that kind of caused was like, oh wait, I'm really that close to retirement. Good news, two years later he got to 60, still hit his number, had a little bit of a cushion, was totally good. And what do you think happened? You think he hung it up and walked away? He didn't. He's like, Well, if I stay toward the toward the end of this year, I get a$15,000 bonus. And if I wait another two years, then I can do this, or they'll, you know, they'll they kept having him hang on a little bit longer and a little bit longer. He didn't hold on all the way to 65. We got him to cut the cord. But similar to what Joe was mentioning, just the the time that he spent traveling with his family and enjoying the wealth that he worked so hard to create, but it's still for those first couple years, we're forced sending him money and saying, hey, this is gonna be in your account, spend it. Don't send it back to me. And that that hurdle is so hard to overcome. So just because you know your number and you reach your number, we still have to work with our clients on spending that number.

SPEAKER_02 12:43

Can I just chime in real quick too? Because I think like there's the math of knowing your number, but you we find the sort of the emotional, the psychological component, whether it's retiring or I mean, for years, I mean, the muscle you build of like saving and accumulating, it's 40 years of a habit. You as much as we think like I'm just gonna switch it on and all of a sudden start pulling out, you come to realize as an advisor, it is a lot harder to change that mindset. It's something what we've seen most retirees actually sort of ease into often as well. So I'm just sharing that with in terms of like don't underestimate if it's a struggle, it's okay, it's natural. Um, but it is it is a four, it's a it's a change behavior over time.

SPEAKER_01 13:22

Yeah, I I love the stories that you guys shared. And obviously, we're lucky to work with people that have been successful in their life, their careers, savings, and investing. But I mean, I've run probably a thousand financial projections in my career over the last 16 years. I've seen people be able to retire with less than a million dollars, I've seen people to be able to retire with a few million dollars, and I've seen people with$10 million that cannot retire. It's all because of how much you need to spend. That is the most important variable. And so when we look at it from a budget standpoint, budget sounds like you have to cut costs. That is not the life I want to live. I don't want to work for 40, 50 years. Hope I don't have to work for 50, but probably two girls. Um, I don't want to work that long and then all of a sudden say, well, I really enjoy that, but now I can't do that anymore. Think of it in terms of a spending plan. What is the life that I want to live? What is that cost? Come work with us, and we will figure out whether or not you're at that number. Because again, your number is different than your neighbor's number or your friend's number because you spend money in different ways on the value that you you enjoy. Um, we've talked a little bit about basic numbers for people that are not business owners. Business owners, it can be a lot more complex. Joe, you want to share with us a little bit about what that experience looks like and how we help navigate those conversations?

SPEAKER_02 14:43

Yeah, I think so. With business owners, and Kevin, you're married to one as well, and you know, we're we're all business owners as well, but in terms of you know, the owner-operator mindset, you're just simply they have more variables going on in their lives. And so because of that, you're gonna have a wider range of potential outcomes. One is we find that oftentimes they're making good income from their business, right? And so what happens? Their lifestyle goes up. They some of them are using it like an ATM machine where they're just pulling the cash out. But invariably, that oftentimes puts them into a position of dependence on the business, which long term is a challenge. They may not have a clear line of sight on what they actually need as well, because a lot of them are running maybe some of their personal expenses through through their business. Are they able to monetize the business at some point for liquidity event? That's a different variable than a W-2 employee has to contend with. Um, the other thing we'll see there as well is that usually when a deal is, if it's sold to a third party, it's not all cash paid at closing, right? You may have an earnout where you have payments over a period of time based on your performance. You may be required to roll your equity into the acquiring company. What does that do to your cash flow plan as you're transitioning to retirement? Right. So those are all the various factors that we need to start to think about and why you have to do projections with owners to give them the clarity and alignment around how to better prepare themselves, both in the business and in their personal lives, to give them confidence in their path forward.

SPEAKER_01 16:06

Yeah, I mean, there's a lot of triggers that we need to pull for anybody that's looking to retire. Business owners, it's obviously a little bit more complex. Do I take cash today? Do I have it paid out over a number of years? Is it all going to be liquid to me? Um, all of those things, if you can think it, we can model it. We can figure out tax strategies to minimize taxes, help you feel more confident in your decisions. I didn't mean for my slides to be so you know dramatic, but I kind of did because I wanted to get a point across of saving money in it in one particular account versus another. Put some roadblocks in the decisions that you have to make. And so having tax diversification, whether it's through the accounts that you're saving in or the decisions that you can make when you're selling a business is crucial. Kevin?

SPEAKER_00 16:56

Yeah, the other thing on the business owner side that I worry about with my wife, she left so I can talk freely. But business owners, that value is locked up in the business. So the business might be worth a million, five million, twenty million dollars, but it's not accessible. And you kind of have the lottery winner mentality, all of a sudden you move$10 million into an account and you get that lifestyle creep that you were talking about where they look at the number, they're not used to seeing that. And it's like, oh, we can do whatever we want. And so it becomes accessible. So there's, I mean, just to re-emphasize, business owners have a lot of additional complexities and levers that that make a big difference.

SPEAKER_02 17:31

The other thing I do see, and I'll just add on to this, is that they're really potentially good at being an operator running their business or their skill or their craft. And like to your point, it was it's an illiquid asset, but they know how to manage it, they know how to grow it and scale it, and then all of a sudden it's liquid, and it's like maybe they think they're good at trading crew crypto or trading options, or they're friends of the country club or telling their latest stock, right? And so those skills aren't necessarily transferable from an operating business, right, into you know, managing a large sum of money.

SPEAKER_00 18:01

Yeah, but the entrepreneurial mindset doesn't leave them, right? They don't want to be in control and they want so there's those things that we work through.

SPEAKER_01 18:07

Totally. Kev, have you ever seen anything negative come from somebody kind of running these projections and figuring out what their number is?

SPEAKER_00 18:16

The answer is really no, other than the stress that the clients see when they're like, oh, I can retire. Like the the good the good side of it. But running a financial plan and having knowledge, the the knowledge is power, allows you to make better decisions, which ultimately gives you better outcomes.

SPEAKER_01 18:31

Yeah, I think the only negative thing is that experience of actually filling out that spending plan and being like, I really spent$3,000 on dry cleaning? Like that wasn't that much fun. Um, but that that's the hardest stressor in terms of being able to run this type of analysis to figure out what number you actually need. There are some people that say, hey, we don't want to include Social Security in the analysis. We want to assume that we retire and all of a sudden we go under a recession. How does that affect us? Um, all of these components challenge those two sort of industry rules of thumb of, you know, if you have a million dollars, you can generate$40,000 a year of income and you're likely to be okay. And the answer is maybe. Or if I spend$100,000 a year and I've saved$2 million, I'm probably fine. The answer is maybe. I know that no one likes that maybe, and it depends, but they are good rules of thumbs to actually gut check yourself from a high-level standpoint of saying, am I on track for where I'd like to be? Just remember to add in Social Security, pensions, other guaranteed sources of income, because otherwise you're reading those articles, you're not including that income stream, and you're you're thinking you need five million to retire and you need two and a half. It can be drastically different. Any um any follow-up points? We got about 16 seconds, I guess.

SPEAKER_02 19:55

You nailed that right on time, Chris. That's pretty good.

SPEAKER_01 19:58

Yeah. I've only done this for three years now, right? Um any questions from from the group? Yeah, it it goes back to your expenses. If you know that you need ten thousand dollars a month to live off of, right? That's a hundred and twenty thousand dollars a year. Let's say you've got sixty coming in from Social Security, so now you're gonna need to spend, you know, another sixty to eighty-five thousand dollars, depending on taxes, out of your own pocket, you're probably pretty safe at you know, two and a half million dollars plus social security to live that lifestyle. That's not a bad way to gut check, like, hey, am I on track? Does that did that help break it down in terms of how to define your number if you don't want to run a projection like this?

SPEAKER_02 21:01

Yeah, I mean, I I would encourage, I mean, anyone who's real serious, like the the do it, there's nothing that substitutes doing the homework and and actually putting it through a plan because ultimately what you get is a range, right? We'll typically show sort of upside scenarios that clients want to see of you know, extra travel, you know, whatever it is really aspirationally that's in alignment with their values, but then stress testing it to the downside of God forbid a long-term care event, a premature death of a spouse who may be working, whatever it might be, extra spending because of inflation. That's the the most bulletproof way to actually get the number. But then, you know, you can do the back of the envelope calculations like Chris just did, if for whatever reason doing the legwork isn't sort of in your wheelhouse at this point.

SPEAKER_01 22:09

I mean I'd be happy to. I'm unfortunately an eternal optimist. Um Social Security is a system that I think politically you're gonna have a hard time pulling the rug out from under you and keeping your your job in the future. Um but that's not to say that there won't be changes to Social Security. You could fix change you could fix Social Security overnight by not having a cap on income. I think the cap right now, don't hold me to this, please, but it's probably around$168,000 that's a tier of income. So once you start making over$168,000 of income in a year, you stop paying into Social Security. You could do away with that. You could come to me, I'm 45 years old, and you can say, Chris, full retirement age for Social Security is no longer 67. It's 70 or 72. I'm gonna say thanks. Appreciate the 30 years heads up. And those two things right there would ja drastically change the economics for Social Security. And it's happened before. Um, it happened in the mid-2000s financial crisis. They moved full retirement age from 65 to 67. Um, I'm not saying that you should, I'm not saying that you should count on Social Security as a sole income source, but I do believe that part of it will be there. If you're 29 years old, you have time on your side. So if you're saving somewhere between 15 to 20 percent of your income, you're you're well on your way, especially if your company has an employer match, other things, you're well on your way for being on track.

SPEAKER_02 23:36

That's also why scenario analysis is important, where you can do it with, you know, assuming zero social security in sort of a worst-case scenario, or some reduced benefit, or let's assume in a very optimistic scenario, it actually is there. Right. And that would help give you again that range of outcomes.

SPEAKER_01 23:52

I know we have one more question, so we'll take that last question and then I think we've got to make some time for the next next stage. Was it over here? Okay. Joe, Kevin, and I will be around. I promise to answer more detailed questions if you have it. I know that defining your number is an important reason why many people came here. Um, I hate to disappoint and say it depends. It is just so crucial on a couple of particular factors, what you're saving into and how much you actually need to spend. Those are the two critical points. And then defining your number can be a little bit easier from there. I want to thank you all for today, and uh we'll be around. Thank you, guys.