Why The Wealthy Don't Withdraw From Their 401(k)

Picture two retirees with the exact same $1.2 million in their 401 balance and the same average return over 30 years. Now, one of them runs out of money before 80, the other one's fine well into their 90s. The difference isn't luck and it isn't even their investments. It's something that almost actually nobody even checks for their own portfolio. And by the end of this video, I'm going to show you exactly what to check for your own. So let's go. All right, so let's talk about how we could have two people with identical balances and return profiles and end up with completely different universes. Versus, and it comes down to how they use that wealth in their retirement, right? How they spend down that money. So let's go ahead and just take a look at this. So let's say that in this example, let's just use easy numbers. Let's call it $5 million. And let's say that they're making a 15% return, compound annual growth rate. All right. So both the same, they both have the same starting balance. They both have the same return profile. All right. Now let's say that they plan to retire for, let's call it 20 years. So apples to apples, same starting balance, same return profile, same timeframe. And then let's say that they both want to retire off of, let's call it $750,000 per year. Okay. Now, how does one go broke doing this? Well, what happens is Person A, let's call this Person A, uses the regular portfolio theory, which is to spend down assets. That means that I can spend down, I can sell a small percentage of my assets every single year to live off of. And I'm making a 15% return. So if I live on 15% or less, it could last forever, right? Well, not necessarily. Unfortunately, most assets, I think pretty much every asset, and there's never been an asset that's ever gone up in a straight line, nor is there ever an asset that goes down in a straight line. So what happens is it's more like this. And so what happens is if I'm spending down, if I'm spending down here, that's one thing. But what happens when I spend down here? I have to sell more of my assets. Now, I don't want to go through the full math. That'd be a full video on its own. But let's just take a look at this example. So let's just ignore the fact that we could be selling through downturns and actually losing a chunk of our portfolio. Just using this math alone, Person A is spending down assets. So of my $5 million net worth making 15% return, I'm spending down assets to make the $750,000 per year. Over 20 years, Person A ends up at $5 million, the same amount. Now, again, over 20 years, if there's any drawdowns in the market, you're going to have less than $5 million. I'm not getting into that math, but let's show you a different way to do this. And I'm talking about Person B. Person B does something different, something that a central bank does, something that corporations do, something that half of all Fortune 500 CEOs do. But it's something that you've never heard about. What am I talking about? Like a central bank, I build assets and then I use the assets as collateral and I get liquidity against them. So like a central bank, I build assets and I issue credit against my assets. And what that means is I harvest some of the appreciation using debt. I know the bad word, the four-letter word debt, but it's not like that. If I did this strategy again, Person B, same starting balance, $5 million, same return profile, 15%, same timeframe, 20 years, and same $750,000 a year. Instead of ending up at the same amount or probably less or broke because of the downturns in the market over 20 years, Person B ends up at $84 million. Hmm, quite a difference. Why is that? Well, the difference is because they approached the game starting from the same place, playing in the same, in the same game, but the approach to the game was completely different. Okay, so now that you can see how somebody, or actually two people, starting from the exact same place, the exact same return profile, with the exact the same amount of monthly spending and the exact same time frame, can end up in completely different universes. I mean, $5 million assets or less, or $84 million or more. It's insane. But let me show you why it's not even actually that. So what I'm talking about is back to Person A. So Person A is again spending down their assets. And as I said, markets don't really move in straight lines. Markets sort of go like this. So as I'm spending here, it's one thing, but when I spend here, I have to sell a larger percentage of my portfolio. It's easy to understand that, right? But the bigger problem is something even different. And what that is, is something called taxes. What do they say? The two things in life that are inevitable are death and taxes, right? So taxes are one of the biggest losses of wealth, one of the biggest thefts of our wealth that we have. And what happens is, as I'm spending down my assets, so every time I sell, whether I lucky enough to sell at the top of the market or I sell at the bottom of the market, either way, every single time I sell, it could be 20% to maybe up to 50% of that wealth goes over to the government. And so not only am I selling more of my, a larger percentage of my portfolio in the down years, in addition, I have to sell even more of my portfolio because 20 to 50% of it continues to go over the government over time. That's another reason why this strategy is guaranteed to be a loser. Now, real quick, before I keep going, What I just walked through is something that most people have never even run the math on for their own portfolio. And it's the difference between retiring with confidence and retiring in a countdown. Now, my team runs a free strategy session where we look at your actual numbers and what to do about them before it actually matters. Now, it's not for everybody, but if you've got some money and you've got real money on the line and you want a real answer instead of just a guess, scan the QR code that's on the screen right now, or grab the link in the description down below, then come back and let's finish the breakdown of this video. Okay. So hopefully this is, uh, may be pretty alarming for you. It was for me when I ran the math for the first time. And when I share with other people, I get the, oh wow, I get the aha moment, right? It's pretty big. It's a big number as it should be. So what happens if you're 5 or 10 years away from this? Let's say that you've been person A and you've been spending it down. You've been paying the taxes and you're watching your portfolio deplete. And you are worried that you maybe are going to run out of money before you die. Now I was actually on a podcast just this week. It was about money and longevity. What an interesting combination. It was mainly for baby boomers and they were talking talking about how do we make our money last to plan for us living so much longer. With modern advances in technology and artificial intelligence and for high-income earners, living to 130 or 140 may not be out of the question. So if your money is only planning to live, you know, last until you're 80 or 90, what happens if you live 5, 10, 20 years longer? That's a good question. So what do we do if we're person A and we find ourselves in this situation and we're worried? Well, we do a couple of things. Again, it starts with a plan, right? And I approach the plan just like Google. Built their Google Maps application. So I start with, where do I want to be? A little GPS signal. Sorry, I don't know what that means. What is my destination? Where do I want to be? Then where am I? Right? So then that little GPS thing, like my current, my current location. Okay. So then if I figure these two pieces out, now I have a math problem. Now I have an engineering problem. Now I could stop the bleeding and I can change things before it's too late. Now we need to know what amount we need. For you, most likely it's going to be how much do I need every month or every year? Is that $100K per year? Is it $250K per year? Is it the number I showed before? Is it $750K per year? Okay. So once I know these numbers, how much I have here, how much I need to have, and what my goal is, then I can work this math situation out. So there's 3 levers I like to call them. So this is the amount of capital, right? How much capital do I have? How much cash flow do I need? And in order to to get my assets into my cash flow, what is my rate of return or my CAGR, my compound annual growth rate percentage that I need to get the cash flow I need? Those are the 3 levers. I can put more capital in, which again, if you're 5 or 10 years from this goal, getting more capital in may not be the easiest one for you. So then the question could be, can I live on less? Well, I don't recommend that. Why do we want to skimp on our lives? So then the question becomes, how do I get maybe a better CAGR to do that? And once I've done those things, then we have to change the entire strategy of the game. And again, We change the strategy of the game by changing what we're doing. So instead of selling the assets down through the downturns, we now want to start issuing credit against the assets that we have. That way we save on taxes and we continue to hold the assets so they continue to compound forever. Now, this isn't just about your life either. The numbers I just showed you, what happens in 20 years are absolutely mind-blowing. And I can't show you what happens after 30 years. Or 40 years, because if I showed you that, you would laugh and you'd think I'm a crazy person. But imagine what it's going to be for your kids. Imagine what it'll be for your grandkids. Spoiler alert, they'll be billionaires. That's by just changing the strategy, by staying as an owner instead of going back to a consumer. The owner versus consumer is not about whether you're a business owner. It's not about whether you're a W-2 earner. It's not about how you earn your money. It's about what you do with the money after you have it. Do I spend it or do I buy assets that I own? Am I an owner of assets? And every time you own assets in your retirement account like this and I decide to spend or sell the asset so I can spend the income, I move from the owner column back over to the consumer column. That means the tax code punishes me for that. That means I lose the ability to continue to get liquidity against my assets as collateral. And so we want to stay in the owner column as long as we can. And it all starts with making a plan based off of the real numbers that you need, where you're starting from, and then just doing the math. So now you know why the balance sheet on your statement, it could lie to you, right? The same person with the same balance sheet and the same return can end up in completely different places because they change the approach to the game. So just looking at your balance sheet, it's not going to give you the right information. You have to know how you're applying it, right? So knowing the problem, it's not going to fix it either. You still need to know the exact math. And then you need the actual system to apply the math to. The system that's going to protect you from the sequencing risk and from the tax bill at the same time. And that's exactly what the next video breaks down. This video right here on the screen. I'll see you over there.