Divorced, 61 Years Old, $1M Invested: a Signature Life Plan Review

If you could have a candid conversation with financial advisors who have decades of experience helping professionals, business owners, and families just like yours plan for their financial future, what questions would you ask? I'm Chip Munn, financial advisor, author, host, and CEO of Signature Wealth Group. For decades, my partners and advisory teams have had the opportunity to answer the tough questions for hundreds of our clients. Now we want to do the same for you. On the Signature Life Show, you'll hear answers to your burning and most perplexing finance, investing, and retirement questions from our Chief Investment Officer, Senior Wealth Advisors, Certified Financial Planners, and more. We aren't just financial advisors. We're parents, children, community leaders, and entrepreneurs with a passion for helping empower our clients to live life intentionally. What we call a signature life.

John Tate, what's up, man?

Chip Munn, happy Friday to you, sir.

And happy Friday to you. Always a good Friday when I get to spend a little time with my good buddy John Tate.

Is this one of the 3 things to kind of get your day started?

This is one of my 3 things. I try to do 3 important things every day and work from top to bottom. And on my list today was spending time with you. So, welcome.

It's good to be here. It's good to be seen.

Well, John, today we're going to try something a little different. We've never done this before, but in lots of previous shows, I think something that we make reference to is the creation of or working from a signature life plan. And so, this is the first time you and I have decided we would take kind of a hypothetical case and just kind of walk through it on air so that folks could hear some of the process. And so today we're going to be talking through a hypothetical example. So in this case, it is a client, her name is Bobbi. Bobbi is in her early 60s, recently divorced, and trying to figure out what's next. Now, for a lot of people going through a divorce, John, as I'm sure you've seen, can lead to lots of introspection, and then potentially, depending on what that introspection kind of reveals bring about a lot of changes.

It can, and it can be compared to making a major life change, as in a move. You know, when you move into a new house, you spend the first 9 months nesting, so to speak. You, you fill the house with things that you want, you get it to look the way you look, and then after that period, you're in. You walk in the front door and it's what you want. There are times when somebody is divorced that The start of this period can sometimes vary by person, obviously, because everybody's different, but there is a period of time where that person feels like they want to get out, they want to meet people, they want to be more social, they want to do things, they want to travel. And so there is a period of time where you are in some cases spending more than you would normally because you're doing more things with the intent of meeting more people, expanding your social network, and doing things that you might not do if you were not trying to get out and meet people. Because when you meet people, you eat, you drink, and you do things that cost money. Yeah.

And again, important to note, as we're talking through this particular example, this could be said for most any kind of life change. So in this case, we're talking about Bobbi and her going through a divorce, but it could easily also be Bob, who is now a widower. Sure. We're talking in concepts. We're using this as an example, but what we're talking about, and this process works exactly the same in terms of how it flows and works regardless of the situation. So a few facts about Bobbi. Bobbi is again early 60s, wants to retire at 65. She's got about $1.1 million in, we'll call them retirement accounts, some at work through a 401, some in an IRA, and then she has her home is paid off and it's worth about $900,000, very little if any debt. So she's got a combined kind of net worth of between $1.8 and $1.9 million. So as she's nearing retirement, that's a big part of what she has to work with. So as we look at that, one of the things that it's also important to note in this particular plan is that our plan for Bobbi is that she's going to start taking Social Security at 65. And a lot of these things, John, as we go through these plans for specific people. There are certainly plenty of people that say, well, I want to wait until full retirement age, or I don't want to wait, I want to take it as soon as I can get it. And these are all things that we can kind of model out, all these individual— not just what people have, but some of their preferences when it comes to some of this kind of thing.

And Social Security is a specific one because when you bring up divorce for Bobby, or in Bob's case, being a widower, you know, you always want to ask the questions about Social Security specific to the strategies. If somebody was married for at least 10 years, then you can look at their spousal benefits on their ex-husband. Or if somebody is widowed, there are some things you can do, switching to a survivor benefit over one period of time and then switching back to your own benefit at a certain time. There are some kind of tricks of the trade, so to speak, and things that you do need to take into consideration with Social Security that immediately come to mind when you bring up some some of the details about Bobbi here as you're talking.

Yeah, and so again, we've kind of walked through the high level of what Bobbi has. Now let's take a look and talk a little bit about what she wants. So she wants to retire in 2026. She'll be 65. And this is again an important thing I think to point out, John, because I think a lot of people miss this. She wants to have a spendable income of $30,000 a year, so $2,500 a month. However, for most people, what they forget a lot of times, they will look at how much money they have on any given month or what their bills are. What they tend to forget is those one-time, either annual or every few years expenses. So, for Bobbi, she wants to be able to spend $2,500 a month starting at age 65, but she also wants some other things. So when she retires, she wants to move to a new city, and so we're going to have to buy a new house. Now, in this particular plan, our estimate is that we're going to sell her house and buy the new house. They're going to be similar in terms of cost, in terms of price, but one of the things in talking with Bobbi that we found out was that because she's wanting to move from where she is now to another state, but also into a kind of a, what we'll call, I'm from Pamplaco, South Carolina. So anything's a big city to me, but a major metropolitan place is that one of the things we found out is that her property taxes and homeowners for the condo or townhouse that she wants to buy are $28,000 a year. So almost as much as her projected kind of living expenses. So when we start to look at how much income we need to generate, That has to be taken into consideration because it has to get paid. Also, Bobbi wants to be able to travel, particularly during her early years. And the way that we have it as an example in this particular case is every year for the next 20 years, she wants to be able to take a trip or trips that will cost an average of $15,000. So she wants to be able to take a really nice trip once a year or 2 really nice trips, but she wants to be able to do some travel. And again, I think it's important to note that for the average person, if you're not paying attention in the planning process, a lot of times you just look and you say, this is how much I spent, this is how much my power bill is, this is how much my water bill is. We intentionally, in Bobbi's plan, left out a car because she's planning to move to a city and isn't going to need one. But otherwise, Every now and then you're going to need a new roof. In Bobby's case, it's covered by the HOA in the building, but normally you'd have some home repairs. You might have a car upgrade expense unless you're in a place where whatever car you have is going to last you as long as until what I think, John, in these plans we refer to end of plan, but which is a just a really kind way of saying going home to glory. So in Bobby's case, We're looking at $30,000 in annual spend plus $28,000 a year in property taxes and $15,000 a year in travel. And all of those are net of taxes. And we've done some episodes on how taxation occurs. So ultimately that's the money we need to be able to have spendable regardless of how the income is earned and how it's taxed.

And not knowing some of the details behind the actual meeting with Bobbi, I would just ask, when you look at the retirement age of 65 and she's 61 or in her early 60s, I think you said, how set in time is that retirement date for her? Is that an absolute number? Is it a general number? Is there the chance she could want to retire earlier if she gets sick and tired of the people that she works with? What were some of her conversational points around that?

So with Bobbi, it is flexible, like with most people. As we're talking through this, a lot of these things are flexible, and one of our jobs in putting these plans together is to really look at all the different what-ifs and options of what if I decided I wanted to retire today, what if I decided that I was willing to work part-time. And so that would definitely be a conversation that we'd have with Bobbi. Again, for the purposes of illustration, we'll assume that she's open, she's not in a hurry to retire today, she does know that she wants to kind of put a fine point on when it could be, but also looking to move to another city and state is also open to kind of what the possibilities might be there. And I see that a lot as far as whether it's going back to work for pay or for fun or to get yourself out of the house. That's always an option. And I think for me, John, when I put these plans together, a big thing for me is— we'll talk about this in a second— once we know what somebody has, and what they want, then it's math, right? In between how fast does the money that we currently have or are going to be contributing, how fast does it have to grow in order to be able to provide what I want? And what we do is we use a Monte Carlo simulation that gives us what we call a confidence number. It essentially runs 1,000 scenarios of various market performance. I think we've talked about it on the show before. While average performance of an investment over 10 years might be 8%, it's 0 one year, 16 the next year, minus 4, plus 12. Like, it averages to 8, but it's not 8% every year, as an example. And so we run 1,000 different variations of that via this Monte Carlo simulation to make sure that we're getting a fair sample of. And the confidence number is essentially out of those 1,000 times, how many times would we be successful? And one of the things that I love most about using the confidence number as just a talking point is it takes a lot of complex data and it boils it down to two numbers. As we model what-ifs, the number either goes up or it goes down based on the decisions that we're making, and we can really take what end up being a lot of variables and boiling them down to something simple and pretty easy to understand. In Bobbi's case, after we looked at where her current portfolio was, what she had versus what she wanted, what we found was that her confidence number based on where she is right now, exactly as she has stated that she wants it to be and with where her assets are right now, her confidence number was a 77. Now, for me, ideally somebody would fall between 70 and 90. The higher the better. I don't know about you, John. I'm a believer personally that planning for the confidence number to have to be a 99 runs the risk of leaving some life on the table. You know, if the number is too low, then you may not be able to even make small modifications and have a soft landing. If the number's too high, chances are— and I have this conversation a lot— chances are there are a lot of things you could do for yourself somebody else, or a charity between now and the end of your plan that you may enjoy more than, again, in some cases, dying with $20 million, right?

And the way we usually talk about this with our clients here, and it's similar to what you just described, but most of the time I will set an output with a confidence score of 75%. So what that means to me and what I explain to the client is that means 3 out of every 4 times you make it to the end of your plan without running out of money, 1 out of every 4 times you don't. That's pretty much as risky as I want to get. And so what I use that 75% confidence score as is kind of a spending speed limit. It's not that you can't go over it in a given year, but if you're going over that speed limit consistently and for years consecutively, there is a higher risk that you're going to get, quote unquote, caught by the spending police. And anytime you get caught by the spending police, you get a ticket. And in our case, it is If you're overspending too many times or too many years consecutively, then at some point, you're going to have to pay the piper. You're going to have to reduce your spending from what you're already spending. And those conversations are much more difficult to have in the throes of life than they are to agree on a number ahead of time and kind of stay underneath the speed limit. Because what happens when you're overspending in the early years is essentially you're just spending down the buffer that you would have near to or close to what we consider the end-of-your-life plan.— and most of our plans take men out to age 92 and women out to age 94. We can certainly adjust that to whatever we need it to be. But in circumstances that you would live longer than what the plan suggests, that buffer at the end will provide those additional years. And so, what you're doing if you're overspending all the way along is spending down that buffer and reducing your ability to outlast your plan if that is— what actually happens. Because, you know, none of us know the exact date that we're going to die. We're just kind of shooting in the dark there. If you move to a big city like Bobby, maybe you just step out in front of a bus. But for some folks, it's not going to be that easy.

No.

And I think the other side of it is looking at the person who doesn't spend very much and has a confidence number in the upper 90s. One of the things that these plans also do is they give a projected range of end-of-plan value. And for example, if you were to have a confidence number that's 99, meaning 99 out of 100 or 990 out of 1,000 times you would be successful being able to do what you want to do, then a lot of times, John, what we do is we look at that end-of-plan estimated value, and there's a range, and have a conversation about whether or not the client's comfortable with that. Are you comfortable leaving to, again, your kids, grandkids, charities, this amount of money all at one time? Are there other things? Well, I see a lot, John, is folks who are so worried about running out of money that there are lots of things in their early retirement or when their kids are young or grandkids, there are a lot of things they choose not to do, not because they couldn't, but because they aren't really aware and haven't been able to get comfortable with the fact that they can. And so I think this is also a good tool to be able to show that. But in Bobbi's case, what we did, again, uh, confidence number 77, one of the things that we did was we had a conversation about spending. And there are a couple of things you'll remember from Bobbi's situation that at least initially she did not want to change. She could not change the homeowners and property taxes or did not want to. Where she wanted to live for now was a given, and she wanted to be able to travel. That was kind of the whole point of retiring. And so what we did was we looked at her investment mix and we were able to illustrate some slight modifications of that. But then we also talked about, okay, well, if we're going to travel and that's important and living in this particular place is important, What she decided, at least for the time being, that she was willing to do was to plan to spend a little bit less otherwise. So instead of spending $30,000 a year, she wanted to plan for spending $25,000 a year. And in, in that case, all other things being equal, with the exception of a small tweak to her portfolio mix, her confidence number went from a 77 to an 88. And so all of a sudden, dramatic improvement in terms of kind of relative probability or confidence, but with a small change. And there are a lot of ways, John, that— and you touched on this when you asked me the question earlier— there are a lot of ways that you can address that difference. We could have just as easily taken it and said, well, we want to be able to spend $30,000 a year. So instead of reducing it, but we're willing to work part-time and make $400 or $500 a month. The net works out being the same. How people want to get there oftentimes is different. And so I think a big part of this is walking through all these different options because our job as financial advisors, as best we can, is to say, yes, you can, and here's how, as much as possible.

Right. And I guess the one thing that I try to impress upon folks, especially like somebody like Bobbi, who is a few years away from her intended retirement date, is that these strategic plans that we create, these Signature Life Plans, it's a living, breathing document. It changes with you. We help you figure out what changes might be necessary based on the information that you're giving us. We try to come up with all these different what-if scenarios to provide you with the best information that we possibly can. To help give you the confidence to make the decisions that you want to make. But it's definitely a give and take, and trying to figure out what inputs to use are certainly important, but it's not as if what we use today can't be changed in the future. And one of the things I know that I can see here in the plan is that we do assume that things get more expensive over time. And if there's one word that's in the news flow these days. It's the word inflation. And so we do think that things are going to get more expensive, so we build those kinds of things into the plan. So it's not as if on day 1 of age 65, Bobby's spending X amount and we just assume she's going to be spending that same amount for the next 40 years of her life. We assume that she's going to be spending incrementally more every year. Now, whether or not she actually takes more out of the portfolio every year like the plan suggests is completely and utterly up to her, but we're baking in that flexibility so that when she gets to a year where she absolutely does have to take out more than she did the year before, we've hopefully prepared for that, planned for that. It's already in the plan, and what she does end up taking out will in actuality not do anything to change her confidence score and her own confidence.

Yeah. And so as an example, in this particular case, if Bobby's 61 and wants to be able to spend $30,000 a year in today's dollars, With the inflation rate we assume, at 65, she'd be taking out a little over $34,000. So she'd be spending more. That's a good point, John. We do utilize today's dollars for what we want because that's what most people can understand. It's hard to understand future money. Yeah, we all would like to have some, but it is hard to understand that. Another thing interesting to point out as I'm looking at it is in most of the cases We don't tend to project huge portfolio performance. I think that if someone were to go through this process and look at the average portfolio performance that we're using to make these projections, it's not absurdly high. And I think that's one of the things when I talk to folks who have never been through this process before and come to us for the first time is they've been— and I think, John, you may have seen this. I know that it's the way that I was trained. You talk about the stock market has historically returned X% per year, and depending on when you're talking about, somebody will say between 8 and 12, and then they'll base somebody's retirement projections and what they can spend off of an 8 to 12 number. We tend to be much more conservative than that when we're looking at these things. And again, that plays into it. But a couple of things, John, that we didn't touch on in this particular plan. Because Bobby didn't want to talk about them at the time, because some things are hard to talk about, was long-term care insurance. So in a lot of cases, maybe at some point in one of these plans, because we'll do hopefully a few of these every now and then, probably at some point we'll go back and have a conversation about long-term care insurance and how that works into this. As it stands right now, based on her current confidence number and kind of the assets that she has, not a real big need. Didn't mention it earlier, but does have some life insurance at work, but not a tremendous need or importance. Same with disability. So any of the liability side of things where you get yourself into trouble, in a lot of cases, by the time you get to your 60s, the need for a lot of those things has been— I heard it years ago, my old philosophy on insurance was you need— typically you need insurance or money but not both. So at some point, for a long time you need insurance because you don't have any money, and you get to it, there's a crossover point where you have enough money that you probably don't need the insurance. But again, that's kind of a case-by-case thing. John, anything else that you can think of that we should have touched on?

Obviously there was a lot of work that was put in on the beginning of this plan. We usually devote, when we're creating a plan for the first time, from an hour to an hour and a half of time with the client to prepare this kind of plan and get a readout. And the better the inputs that you can provide us, you being the client, Bobby being the person in this case, the better inputs we receive means the better the output will be at any given time. And so the more time you put into giving us the data and not just simply using round numbers or wild guesses or things like that, not that you can't, it's just the better the input, the better the output, and the more confidence you'll have in using that data to lead your life, to help guide you when you're making decisions, that kind of thing. So the planning process itself is not something to take lightly. It's something that we take very seriously. And it's clear that you did that in this case as well.

Yeah. And the other thing, because you mentioned planning as a process, and we obviously, I mean, that's kind of a core belief of ours, is that circumstances change. Most people think about what changes is the market, you know, the investment market, but in reality, The thing that is more likely to substantially change is your life situation. And the vast majority of our clients who are in some portion of that sandwich generation where they still have living parents, very few, if any, ever include things like inheritance. Nobody, John, that I've ever worked with includes winning the lottery. Things that could happen, and in some cases with regards to things like inheritance, may likely happen. But very, very few people, if any, include that in their plan. But it's one of those things that even after you have a plan, it is a living, breathing— it's a verb, not a noun. And so even after you've created a plan, it's important to keep that information current because the one fact about any of these plans is as soon as they're presented, they're almost immediately obsolete in terms of something changes. Relatively quickly. And so it's something that we want to not only get on top of and get this, what we typically call kind of the base case, the first plan, but also then it's something we want to stay on top of as life and situations change. John, I appreciate the opportunity to go through one with you, and let's get back together again next week.

That sounds like a plan, sir.

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