Why Your Retirement Budget Is Most Likely WRONG

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience Live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. What if the retirement plan or the financial plan you're following right now is completely wrong and you don't even know it? See, if you've been told to aim for 70% or 80% of your income in retirement or you've been following or using some generic rule of thumb to plan for your future, this episode's for you. Because I'm about to tell you and show you why traditional retirement advice doesn't work for your life and how to create a plan that ensures that you not only survive retirement, but you thrive in it.

Most people's retirement plans are based on generic advice and they're setting themselves up for disappointment. Think about this. What if your retirement plan isn't wrong because you're under saving, but it is wrong because it's based on the wrong assumptions? So in this episode, I'm going to show you why traditional advice about retirement planning is missing the mark and how you can create a plan that actually works for your life. Because this is about your life and not some cookie cutter life. All right, so let's just talk about the problem first. Here's what I see the common advice and I'm, I'm going to be upfront and transparent. I say this too. The common advice is to replace 70 to 80% of your pre retirement income as your retirement goal. Now, at the beginning, at the beginning.

That is okay because it's better than nothing. But if we just stop there, that's where the problem lies. Because here's what happens is that they base the the plan on an industry standard. This came out of a study called the Trinity Study. Industry standard withdrawal rate of 4% and they call it the 4% rule. I've taught about it, I've done episodes on it and that type of thing. So it is valid at the beginning. But when we start to really dial into your life, your journey, it needs to be more bespoke and more custom to what you want. So why does this fall short? Well, it Assumes that your spending habits and your lifestyle will remain static. And we know that's not the truth. Okay. Also ignores your personal goals, your dreams, your quality of life, what the things are that you want. Not everyone wants the same life. There's people that want the tent in Montana. There's people that want the yacht in Monaco. All right, I'm a yacht in Monaco kind of guy. All right? So we need to make sure that it's bespoke to that. Then there's things like inflation, healthcare costs and, and other variables that come into play. That one size fits all just makes that kind of a plan, just makes it totally ineffective. So think about this. There's a study by Employee Benefit Research Institute that found out that nearly 40% of retirees spend more than their pre retirement retirement income in the first two years. Now think about this. We're saving 70 to 80%, planning on saving to, to replace 70 to 80% of our income. But we're spending, 40% of people are spending more than that because there's travel, there's bucket list goals. When you first, when you first retire, you're going, oh, I'm going to go get it. And lifestyle upgrades, all kinds of things. So, and I'm not saying here's my job isn't to say don't do it. My job is to make sure you can do it and that it doesn't jeopardize your future. Then we look at other studies like Fidelity estimates that health care costs for retirees are going to be around $315,000 per couple. But generic rules don't really account for those. And trust me, I just came through something with my mom. We lost my mom in September and she was on assisted living and dialysis for six plus years and that was over $850,000. And when you don't plan for those, if you don't have that in the plan or you're not thinking about it, some cookie cutter approach doesn't work. So here's how I want us to look at this and I'm going to break it down for you. I'm going to tell you exactly how to plan and what I think you need to think about in moving forward. So that's, this is when you're trying to create a bespoke plan, a plan that works for your life, not some generic plan. Generics are fine to start with, but at some point we need to look at your life. We start with a vision. What does that ideal retirement, that ideal life look like and everything? Do you Want to travel? Do you want to spend time with family? Do you want to pursue a hobby? Do you want to downsize? Maybe you have a big home and you don't need it. Do you want to shoot, just sell your home and be nomadic? I don't know. But the question is really an introspective question about what you want in your life, because after all, it's you who has to live the life. And Bronnie Ware, who wrote the book Seven Regrets of Dying, she. She found out as being a hospice nurse and talking to people in their last days, the top regret of most of them was that they didn't live the life that they wanted to live. I want you to live the life you want to live. The reason we want the wealth, the reason we build the money machine, the reason we want the money is so we can have the life that we dream of, not someone else's life. And so I want us to be clear on the vision without. Without filtering it, without asking ourselves how we're going to get there. That's a different question and a different conversation. Okay, but let's get clear on what it is first. And if you're in a committed relationship, an intimate relationship, it's important to make sure that you all are on the same page. My wife and I, we speak about it regularly and in. So it's important for us to be that. So here's what I would say. Lifestyle first, math second. That's the key elements of. Of your desired life. What is it that really matters to you? What is it that you really want? Okay. And then you can ask yourself, am I going to prioritize the experiences and essentials over arbitrary income percentages? I don't want to just put arbitrary percentages down. I actually want to try and define. Now, you might be in your 30s, and you say, I got a lot of years. I have no idea what it's going to look like. That's okay. I did that in my 30s, too. And as I grew, as life shifted, as life changed, I changed the vision. I allowed it to morph. But what I did by getting that vision in place at the first place is I knew I was going towards the horizon that I wanted to go through. So here's the thing. You think about a plane that's flying from west coast to East Coast. Maybe they're going from Los Angeles to New York City. The majority of the time, they're off course, and they're constantly course correcting until they get the destination.

And they refine it as they closer and closer. It's the same thing with our financial plan. We refine it as we get closer and closer to the time that we need it, but we are moving towards that direction. Okay, so think about it this way. If you look at it from this perspective, and this is why it's so important, if you're someone that earns $100,000 a year and you go by the conventional advice of 80%, so that means that you create a plan that gives you an $80,000 income stream in retirement. But what if your dream, like Stephanie Zamina's, is to travel extensively? You may actually need a hundred thousand dollars a year or, or more, or maybe it's not and you're going to downsize. And maybe you don't need even the 80,000. You need 70,000. And it's, it's less if you plan to simplify your life. So the key is this. I want to make sure that you're on the trajectory of the journey and the destination you want to accomplish and not some generic formula that we put to it. So let's just look at what I think are the core pillars of personalizing a financial plan for your future, and then we'll talk about the steps to make that a reality. And so the first pillar is your expenses. And we need to take the time to truly understand our spending habits. Thinking about it from this perspective, what are my fixed costs in retirement in my later years, are there costs that are not going to go away? Maybe it's housing for a period of time. Maybe it's something else. What are the fixed expenses? Utilities, insurance, that kind of thing. Then what are the variable expenses, the discretionary expenses that might be hobbies and travel and some of that stuff. And the only reason I want you to do that is I want you to understand the thresholds that you have with respect to living your life. Okay, so when it comes to expenses, the two things is to understand your spending habits, and the second is to adjust for retirement changes. Okay, Some costs in your retirement years are going to go down. You're no longer going to be commuting to work. If you commuted to work, you're no longer going to need work attire. If you had to wear suits to work or business attire, you're not going to need that. You're likely not investing in your 401k anymore because you're now using it and building it. So, so there's investment things that come into play. So there are some things that might decrease, but there's some things that Might increase, like I said, travel, okay, or health care costs. That becomes a challenge. So at the, the first pillar is to really get a handle on the exp of it. The second pillar is this inflation. Now, you don't have control of it. You know, inflation is going to happen based on monetary policy and what's going on in the economy, but we can't ignore it. Inflation is our ability to purchase things. And what happens is this. If we plan in today's dollars and don't think about inflation, today's dollars won't get us the same amount in 20 years. So let's just put some numbers to it. Let's say that in today's dollars, you want $50,000 as your, your plan, your budget, your income, okay? But in 20 years at 2 1/2% inflation, you actually need $75,000 to be able to buy the same thing that 50,000 could buy today. And so it becomes really important to be really clear and understand that inflation is this, this erosion of our ability to buy things. And we need to make sure that that is considered in the, in the plan. We can't control the inflation itself, but we can control whether the plan considers it. Okay? The third pillar is what I call longevity. Okay? The third pillar is this. Look, the average 65 year old today will live about 20 years, 19 to 21 years based on statistics. So they'll get to about 85, 86 years old. But there's many folks that actually lived into their 90s. My mom was in her 90s. Okay? So if your longevity is far greater than you had planned, we have a challenge. So one of the things that we will do is to build in flexibility, to not outlive, you know, your money. Okay? So we need to think about longevity. Is it 90? Is it 95? Is it 100? Is it 80? And I don't want to, I don't want you to shortchange yourself, okay? I want you to live as long as you want to live, all right? As long as the quality of life is good. All right? The fourth pillar, and I've mentioned this a couple times, is healthcare costs. Okay?

Healthcare is a big number, and it can be a big number, especially if you have some chronic illness or some care like my mom did that. So you need to realize that there's Medicare options, but our medical system is very complicated and convoluted and they'll be out of pocket expenses. And so getting really clear in the plan about how healthcare dynamics will affect the plan becomes really important. The other thing to think about is this is what's your long term care look like? Okay, if you do have some prolonged illness, is this something that you can live at home? Do you have any plans? Do you have long term care insurance? Those kinds of elements come into play. They're not in the vision. When you're 30 years old, even 40 years old, even 50 years old, when you start to get 60, you start to ask yourself, how do we navigate this if there's a prolonged illness and everything? So healthcare costs is an important pillar. That's why I give it a pillar in and of itself. Now the fifth is this. What are your income sources? Okay, Are you eligible for Social Security? What are the benefits going to be? When do you claim it? Do you take early Social Security? Do you wait till full retirement? Do you wait till it's extended? What do you do? Okay, where, where's that max? Now a proper plan will look at that and determine that we just in fact did that with, with myself is looking at when should my wife take our Social Security versus versus me? And we can get into the debate, is Social Security going to be around or not? But that's not what I'm talking about. I want us to look at it and remember this. Social Security is not the solution. It's a supplement. So if we can create a plan that isn't dependent on Social Security, we're even better off. Okay, so Social Security investment income. What kind of investments do you have? Now here's a time where you need to understand. You have investments in different accounts. You might have tax deferred accounts, things like your IRA, your 401k, that when you take the money out, you're going to pay tax on it. So you got to think about the tax impact of it. You may have money in a normal brokerage account, okay, that's your typical Schwab or Fidelity account where you take the money out. And the only tax you pay would be any on the gains in the investments that are in the account. And then you have a third location which is your tax free. That is your money in your Roth 401K or your Roth IRAs, where you put money in without a tax deduction and it grew. And when you take the money out, you don't pay any tax on it. So when it comes to investment income, there is tax planning to be able to navigate that in hopes that you have money when the plan's done right in the three different locations so you can control the tax bite that you have. The other thing is, is to think about from an income standpoint is that at some point, and currently it's going to be about age 75 currently, depending on your year of birth, there's something called required minimum distribution. So at some point the government on your IRAs, your 401k are going to say, all right, enough tax free running, you're going to have to take a minimum distribution and they're going to trigger the tax. So all of that needs to come into play. And then one other piece of the income would be okay. When you retire, are you really going to retire? Are you going to do some passion projects? You can do some side hustles, are you going to do some consulting? Are you going to sit on boards of directors like I do? That is going to generate some income for you. And you want to make sure that you consider. So those are the, the five pillars, if you will, of, of a plan. But how do you do it? So let's just talk about the steps to creating a personalized financial plan. Okay, step one. Step one will always, always start with the vision for your life to get clear on your goals. What. Ask your question, this question to you. What does a perfect day in that retirement look like? What activities light you up? What are you doing? And get really, really clear. We have to start with the vision first. So the very first step is life. What do we want it to look like? Then the second step is a dose of reality. Okay? So step one is the vision for your life. Step two is what's your current reality? Understand your current financial position. What's my savings? What's my investments? What's my debt? What's my expected income? Really taking a good look at you now, I not wanting to look at this in judgment, beating yourself up and getting upset about where you are compared to where you want to go. What I want you to do is to look at it from awareness because it will inform you the gap and the things that you need to do. Okay? So vision first, current reality second. Number three. The third step is to build a plan.

The, the vision informs the plan. Literally break down your, your retirement. What does it look like? Maybe there's active years of retirement. Because I know with my mom and even my father before he passed away, there was years of their retirement that were very, very active. And then there was years where they were not as active or medium active and then there was years where they really weren't very active. So, so they're typically. And why I say that is that your active years are going to have higher Spending for travel, for hobbies, for activities, and you want that built into the plan. Then there might be slower years where you might be in your. Say you're in your 80s. Okay, but I know some people in their 80s that are still going strong. Okay, but you're not going to be traveling as much, so you're not spending as much, but you might be spending more on health care and other essentials. So you build your plan based on the categories and make it real. Okay?

Now number four, step four is to run what I call scenarios. Testing. It's stress testing your plan, it's looking at it and saying, what are the worst case scenarios? What are the best case scenarios? What is it that happens if the market turns down when I retire, let's say, and this happened to my dad, he retired and then shortly after that the market dropped and it affected his retirement. And at that time he didn't have the right plan structure in place. Okay, if you have the right plan structure in place, it will navigate. Is already stress tested. Even if the market drops, you know that you're in good shape. So I want to stress test the plan once you have it, to sit back and say, what happens in the best case scenario? What happens in the worst case scenario? What happens if you retire earlier, what happens if you live longer? Adjust for market downturns, adjust for unexpected expenses, adjust for inflation increasing, Test every different way. Look at the probability of success.

Because the higher likelihood then is to sit back and say, I've tested every alternative. And I feel, okay, we just literally went through that in our plan because let's face it, I'm 63, I have no intention of slowing down. All right? But the fact of the matter is I want to see where we're at. And I say, well, what's, what happens if the market drops 20%? What happens if I decide to stop working? What happens if we decide to just travel for six months and we test everything? What happens if inflation comes back? You know, all the things and we're looking at the probabilities. And I'm going to show you a screenshot of something so you can understand how this can play out in, in your, in your world to, to make that happen. But let's complete this once we've run the testing. Then step five, really, you can do all of these with this step five, and that is working with a proper planner, coach or mentor. And now here's the deal. I don't think that everyone needs a financial planner. I do think that a lot of people almost Everyone need a financial coach or a mentor. When I say financial planner, the ones that you will pay a percentage of assets to and that kind of thing. Now I have a team that does that for me, but they do it with me and they do a lot of things other than investing because the complexities of some of the things that we have. At some point you may need professional advice to navigate things like Medicare and Social Security and, and you know, Irma premiums, all the different things that, that can come into play, but maybe not at the outset. So this step, that's why I have it as at step five is it's not an automatic okay, but it is something that as your wealth grows, in all likelihood there will be value to use them for aspects of your financial journey. Okay, so let's look at it from this perspective. I'm going to jump to something to share with you how a properly structured plan can work and the power of it, of understanding that. Now this is something that I do with my clients in my money machine master plan and that type of thing. But, but understand what we're trying to accomplish here. I'm simply trying to give you, give them the comfort, give them the understanding and give them the plan to navigate their financial future. They, this is what a properly structured plan works and looks like when you're not doing, you know, conventional rules of thumb, which I, I think that you can start there. We don't want to end there. So let's just jump to it. This is a sample. This is, you know, it's just sample Paul and Amanda and there are a couple, let's just look at, at their profile. There are a couple that have a $2 million net worth. They're 52 and 50. They have some things in 401k IRAs, they have some life insurance. They have joint and the house, they have 401k and 529 plan. So, so when we look at this, what we're literally looking at saying, okay, when are they retiring? What are they trying to do? This is the analysis part of it. But what this allows me to do is say what's the probability of success? In other words, what's the probability they don't run out of money? And in this case, the current plan as is is 78%. Now typically that means that 78% of time they're going to be okay. I want that above 80% if at all possible. But here's the power of this is there's all these inputs that I can change if we turn around and say, well, what happens if instead of retiring at 65, he works till 60, 63, he works till 65 and it literally will change it. And now all of a sudden he's at 86% here. We can change the income, I can change the expenses, I can, we can add some things in. So this is what I mean by stress testing the plan. And the beautiful thing is then I can also look at this here where we take the plan and now look at different impacts of things on the plan to make sure that they are going to still be okay in this situation. There's a couple things that I'm going to, I'm going to look at and that is the market drop, the stock market dropping, taxes, Social Security, longevity, inflation, health care and the return on assets. So what happens if the market drops 20%? Okay, so let's say it drops 40%.

You'll see this, this here will update. And now all of a sudden, instead of having a possible success rate of 86%, they drop to 69 and a half percent. So you get a chance, see that, well, what happens if inflation, and this is a big one, just went up one and a half percent higher? Okay, what does that do? Well, it literally drops the probability of success.

To 66%. So what I'm getting at is that when you get a chance and then you can go into more detail and see literally what is happening year to year in the cash flows. If you really want to get into detail, you can look at the details here. But the bottom line is this, is that to truly do a proper financial plan for your future, it needs to be bespoke to the vision for your life, to the circumstances you have, to the desires you want, and not some rule of thumb or generic formula at the beginning. We start there because it's the best place to start, usually early on. But as we get further on, we need to refine it because a lot of things come into play. So here's the deal. A retirement plan isn't about some magic percentage. It's about creating a life that you love. So I don't want you to settle for generic advice. I want you to build a plan that works for you. You specifically, your future self, your future life, your future vision. Okay? That's what I want for you. I hope that you found this of value. I hope that you will look at and say, one, do I have a plan? If I don't have a plan, let's get on, on the road to a plan. And even if you start off with the generic rules of thumb. At least you are getting there. At least you are getting there. I have an affluence number calculator that we can send to you for free. You just go to melabraham.com forward/number. You can download it, okay? That will give you the ballpark. But at some point, I want you to make it custom. I want you to make it bespoke. I want you to have conversations. I want you to be real about the vision you have for your life so we can create a plan to make that, that vision for your life a reality in your life. All right? I hope that you found this helpful. I hope that you found it valuable. And I'd love to hear from you on your journey, hear from you, what you're doing, what you thought. Any questions to make that happen? Because here's what I believe. I believe financial freedom is your birthright. I want to be here to help you light the path to claim that birthright. All right? So if I can, let me know. I hope to see you on the road to your financial freedom. And until I get a chance to see you in another episode or on that road, always, always strive for the life.

Thank you for listening to the Affluent Entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to me, melabraham.com group and I'll see you there.

And that's it for this episode of Building youg Money Machine, where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcasts, or wherever you're listening this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright and I want to help each and every one of you claim it. Thanks so much.