Why Your 401k ISN'T Enough for Retirement
In this instructional talk, financial educator Denzel Rodriguez presents a three‑pillar cash‑flow framework for retirement—active, passive, and guaranteed income—and explains why a 401(k) alone cannot secure a comfortable retirement. He outlines the limited sources of guaranteed income in the U.S. (Social Security, pensions, and annuities) and details how annuities work as insurance contracts that protect money from running out, emphasizing the role of mortality credits and the timing of payouts. Using a client example (Lauren), Denzel demonstrates how to calculate future cost‑of‑living needs, allocate a portion of accumulated wealth to annuities, and let the remainder continue compounding to keep pace with inflation. He recommends leveraging tax‑free vehicles such as Roth IRAs/401(k)s, HSAs, and whole‑life insurance to maximize net retirement income, and stresses building passive income in low‑tax brackets while maintaining purpose‑driven active income. The talk is aimed at women and mothers, offering practical steps for debt payoff, credit building, and gaining financial authority, and includes a book recommendation (Retirement Alpha by Tom Hegna).
Chapters
Solving for cash flow is quite a simple process and it eliminates risk. In this equation that I'm going to give you, we have three types of incomes. We have active income, we have passive, and we have guaranteed. Here's what's cool. There's only three forms of guaranteed income in America today. Social Security, or any kind of government entitlement program like disability, VA benefits. Right. And anything that's from the government. I'm going to wrap that and just put it under Social Security income benefits. Okay? That's guaranteed income for life pensions, which are basically extinct at this point. Very few people have pensions now. It's really limited to like police officers, military firefighters, maybe some people in the, in the hospitality industry, potentially government workers. But it's, it's rare. So pensions. And what is a pension? A pension is something called an annuity. Does anybody know what an annuity is or familiar with it? If you don't know what an annuity is, let me know in the comments. So for Lauren here, and this is what I do with all my clients, I first look at guaranteed income. We want to take this part of income that would cover your cost of living. And let's say, I'll use the same example, Lauren, let's say you're 10 years out from retirement. I use the inflation number. We can use 3%, we could use 4%. And let's just say that in order for you to live your life today, it costs say 7,000 bucks. So let's say Lauren, it costs her 7,000 bucks to live her life today. If Lauren was debt free, so she had no obligations come retirement, just cost of living to operate, cover all her needs and maybe some lifestyle expenses. Let's just say that number was $10,000. Okay? No contributions at a 3%. If Lauren kept her lifestyle the same today, it is estimated that in a decade it'll cost about $9,400 for her to live the same life style today. Cover all our needs, right? Covers everything. So that's, that's one thing that I do, Lauren. Right? And then so I run that number, we come back to the whiteboard, I say, okay, Lauren, it is going to cost in about 10 years and when. And I like to round up, right, Leave room for error in the good way. So, Lauren, I want to create somewhere in the neighborhood around 9,500 to $10,000 a month in guaranteed income for the rest of your life at the point of retiring. And we know everybody is going to get Social Security for the most part. We hope, we hope there's a lot going on right now. Social Security is on track to go delinquent by like 2030 or 2035 or something like that. So hopefully doesn't happen. But we're going to assume Social Security, let's just say, covers 30%. So maybe she gets. And let's say it's the full benefit, 2,500, 3,000amonth, something like that. So now we have to substitute the rest of that income the way baby boomers did, because that's what actually worked. And the generation before that is they have pensions. But since if you work in an industry and you don't get a pension, you have to make one. What is a pension? A pension is an annuity. What is an annuity? Annuity is an insurance contract with a life insurance company. And what does an annuity insure? So annuity is insurance on your money. That's what it is. That's all it does. It ensures that your money doesn't run out of money. So what do you do when it comes to our process? You're going to invest in something, someone or yourself. Those are your three options. Yourself, someone. Right. Did you invest in Tesla stock? Well, you invested in someone. Elon Musk, Apple. Jeff Bezos. Right, sorry, Apple, the other dude. Tim Cook, Amazon. Jeff Bezos. We're all investing in someone or we're investing in ourselves or something. Now, here's the game changer. Whatever amount of money you accumulate. Again, I'm not against net worth, because with cash flow, you can have both. But with net worth alone, you're not able to have the cash flow you think you can have. But with cash flow, you can create the proper amount of net worth to continue to feed you cash flow on guarantee basis. So you're going to invest money, you're going to grow that money over time. It's going to keep growing for you. Bom, bom, bom. You're going to use different accounts, maybe use a Roth, maybe you use a 401k, maybe, you know, whatever accounts that you may come across and use, and I help people, you know, make decisions on that. And what will happen is there's money that we're investing for the future, for Lauren to retire on the mathematical way to. For her to have success in retirement all the way through. You need the word guaranteed. There's no other way to do it and not have stress and worry. So guarantees, let's say she was able to accumulate a million bucks. We would take a percentage of that and roll it over into an annuity. At the time of retiring, she can activate that annuity and it's going to produce guaranteed income for life at a certain number. But it still doesn't fully answer Lauren's question that even Denzel, even if we solve for this number, well, then 10 years from the age of retirement, that number is going to be too small for me because inflation is going to eat away at that, at that money. She would be right. So what do you do? Well, because we took a portion of of our investment dollars and secured it, what did that allow the rest of her investment dollars to do? Continues to compound even without contributions. Does that make sense? So let's say she had a million and we took 400,000 of that million, put it into annuity, let it defer, and it's going to produce a certain amount of income for her. The other 600,000 when she gets to retirement, she doesn't have to draw from that account. So that money can keep compounding for what, 10 years, five years? Then what does she do? Well, that 600,000, let's say it grew to 800,000. So from six to 800,000, she could roll another 200,000, 150,000 into another annuity. Now here's what happens with annuities. Annuities is based off of what's called mortality credits. Write that down. The older Lauren gets in retirement, the greater her mortality credits are. So if you were to compare a 60 year old with a $400,000 annuity compared to a 70 year old with the same company and the same amount, 400,000. The person that's 70 years old is going to have more guaranteed income paid out to them simply because that 70 year old is closer to mortality than 60 year old Lauren. Right. So if you have a 60 year old Lauren and a 70 year old Lauren, the 70 year old is closer to passing away. That's how insurance companies view all this mortality. So they're able to give Lauren more money at 70 with the same dollars than at 60, because the insurance company is ensuring that they can keep paying her over and over and over and over again, year over year, no matter what, for as long as she lives at 70 years old. They know she ain't living that much longer. They know this. Insurance companies have this down to a science. They literally if outside of God, knowing when we're going to die. Insurance companies are able to predict our death down to the year and in some cases down to the month. But they don't disclose that. Right. But they use a lot of factors, a lot of science, a lot of data, a lot of history, mortality, deaths, location, environment, everything. They pull medical records. Right. They're able to look at all this stuff to get an idea. And they're able to, again, they do what's called risk pooling. They know, okay, Lauren at 70 is closer to mortality, so we can give her more money. But Jennifer at 60, we can only give her this amount based on that dollar amount and the rates that they're able to pay out at that point in time. So mortality credits increase in time and a credit is referring to the amount of income that they can give per dollar to that individual. Okay, so unlike a life insurance product. Right. Know how, like if you wait too long to buy life insurance, it's too expensive? Well, with annuities it's not. It doesn't have certain annuities don't have like costs associated with it. It's simply this mortality chart that they use of mortality credits that they're able to pay out money for Life. So that 400,000 or 300,000 or 200,000, if you live long, healthy life, God willing, you live all the way to age 190, 95 years old, that 100, 2, 3, 400,000 that you initially contributed, you'll receive more than that. Okay, and so that's solving for one out of the three equations for retirement is between pre retirement and post retirement. We're trying to create as much guaranteed income as we can for you to not be in a position where you have to work now. You're in a position where you get to work, you want to work. Then we have the passive income and we want passive income in the lowest tax brackets. So passive income, low tax bracket. Because all passive income is long term capital gains or being taxed at the business tax rate, which is less than the ordinary income tax rate. And then there was tax free income. So there are vehicles like Roth IRA, HSA, Roth 401k, whole life insurance, that all could be paid or used as tax free income in retirement, which means you net more of every dollar you receive because you don't have to pay Uncle Sam. So that becomes very, very strategic. That's how I teach passive income. And then active income is the abundance. Okay, let's say you discovered what your purpose is in life. Lauren, would you ever stop doing your purpose? Almost everyone I talk to says no. Right. If that was your purpose, like why would you ever stop? So you're going to, you know, you're going to keep doing it and have a good one. Gayle thank you for attending. And you got to go again. I'm going way over time now. I'm at this point, I might be abusing your time, so forgive me, but I just, I get fired up about this stuff. So these are the categories that we're solving for. And when you have enough guarantees, it allows you to be more abundant in retirement and it gives yourself permission to spend money. Here's a great book. This is literally a super small book. It's called Retirement Alpha by a guy named Tom Hegna. Highly recommend. Everybody in this room reads this. How Mortality Credits Improve Retirement Outcomes. It is a small, simple, easy to read kind of book. Super helpful. Okay, super helpful. And then, Lauren, you said don't annuities pay what your income level was for a certain term after you retire? No, that's actually a pension. So that's kind of like the only difference is the pension accounts are in custody by the employer or the government. So there's a bulk of money that's being contributed by the employers and by the employees into that. And then the way it's set up is depending on when you retire and when you, when you take your pension, it'll replace 50, 75, 100% your highest income years. Right? That's usually how pensions work. So pensions are amazing because it's a combination of you contributing, the employer contributing. But understand that the product that they're using are annuities. So they're buying annuities, huge annuity plans, right. And maybe a combination of other investments as well into that. And then they're able to distribute income according to how each individual worked in their life. A standalone, self funded annuity by W2 employee or a small business owner is purely based off of your age and the amount of money you're contributing into that annuity. And then the third factor is when you actually turn it on, when do you actually start to turn income on for that, for that annuity? And what's cool is you can have as many annuities as you want. So that's how we would keep up with inflation, is you keep taking profits out of your passive income engines and your retirement accounts, you keep rolling that money into annuities. And there are some accounts that by 72, like a 401k. By 72, you have to start taking distributions out of that. You're forced to liquidate the account. There's no better way to liquidate money than an annuity in retirement because it's guarantees. And the distribution rate is much higher than what a 401k could provide safely. I help moms women build wealthy kingdoms that will last forever and to have authority over their finances by helping them pay off debt, increase cash flow, lower your expenses, build your credit all using your own income.
