Common Sense Financial Podcast

EP 52: Strategically Separating Your Assets with the Five-Minute Retirement Plan

Episode Intro

How can a mindset shift help you avoid one of the most common retirement planning mistakes? And how can you know assets you should set aside to generate the income needed to retire? Learn about the Five Minute Retirement Plan and why it’s an invaluable resource to leverage as you’re planning your retirement.

Show Notes

  • The most common mistake people make when planning their retirement is assuming that the way wealth was created is the same way they should hold wealth in retirement, with the added twist of being a little bit more conservative.
  • Popular belief suggests that, as you age, the level of risk an investor should take declines in an effort to preserve assets and protect them from market loss.
  • Most people face a dilemma: by taking on too much risk they run the risk of losing money, while by not taking on enough risk they run the risk of running out of money.
  • One approach often used is to simply keep the risk moderately high with the belief that profits can be skimmed from the portfolio while remaining below the total earnings for the year in an effort to protect principal and continue to grow the portfolio long-term.
  • A variation of this approach is to use a dividend portfolio where you can receive dividends for income.
  • With both strategies you face uncertainty when it comes to the income you’ll receive one month to the next, and you’re forced to accept the possibility of having no earnings in a given year due to market volatility or poor company earnings.
  • Thinking of bonds as the answer? Think again. With interest rates on the rise, there’s a high probability of losing principal.
  • The 4% rule for taking distribution: based on past performance, if you withdraw 4% from your account, then you should statistically carry those assets for 30 years.
  • There’s an assumption that the way wealth was created (typically using a portfolio of growth stocks and ETFs) is the same way wealth should be held in retirement but leaning more conservatively.
  • The biggest hurdle when it comes to retirement planning is the mindset you have about it. The primary goal of building wealth is to ultimately generate income.
  • Most of Brian’s clients find themselves transitioning from having to work for a living to worrying about their money for a living – neither is a picture of freedom.
  • The solution to this issue is understanding that growing money is done one way, and distributing income is done another way.
  • Financial freedom is only achieved if the income is sustainable and you don’t wake up every day wondering if that freedom is going to be washed away with the next pandemic, political decision, leadership decision and other things outside of your control.
  • Here’s how to calculate the assets you should set aside to generate the income needed to retire. Take your annual income total and divide it by 6% (this is the average using the Assets2Income Method). The result you’ll get is the amount needed to set aside to generate the income you need, right now, to retire. The remaining assets will be separated and invested long-term as a flushing inflation hedge.