Retirement planning isn’t about chasing numbers, it’s about building a life with intention.
The Sequoia System helps you get clear on what matters most, organize your finances around that vision, and create a plan that supports the freedom, peace of mind, and purpose you’re truly after.
We start with your life vision, translate that into a monthly income goal, and map out your cash flow using a mix of reliable income sources and portfolio withdrawals. Then we align your investments with those needs, optimize for taxes, and protect the plan through insurance and estate strategies, so everything works together to support the life you want to live.
Create Your Custom Strategy ⬇️
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 0 (00:00):
After collectively working with hundreds of
different people and helpingthem to create successful
retirements, there's one thing,one pattern, that we see over
and over again, and that's thisFinancial success does not come
from scattered financialknowledge.
Instead, financial successcomes from being able to take
that knowledge and organize itin a way that's applicable and
unique to you, to create thelife that you want to create.
As the founder of RootFinancial, which is a financial
(00:22):
planning firm that serveshundreds of clients across the
country, one thing that we'vedone is we have said how do we
organize all these variousfinancial planning topics?
How do we organize all thesethings that people need to do to
create a successful retirementand do so in a way that people
can follow this structure andcreate the retirement they want
to create?
So that's exactly what I'mgoing to share in today's video.
What is that framework?
(00:42):
We call it the Sequoia system,but this is just a way that you
should be organizing yourfinances so that, as you go into
retirement, there's nothingthat hasn't been addressed,
there's no stone that's beenleft unturned, so that you can
fully focus on the life that youwant to live.
And, as I go through this today, this is a framework that
literally anyone can use.
You don't have to be a client.
You don't have to be a client.
You don't have to have acertain level of net worth.
(01:03):
You don't have to have anythingspecial.
You just need to know how doyou organize all these things,
all these various financialtopics, in a way that will allow
you to do what you want to do.
So we're going to go throughthose seven steps, and the first
one is this the first step is avision for what you want life
to look like.
If you are viewing financialplanning as just a math formula,
you're doing it wrong.
One of the things I'll oftensay is a sign of a good
(01:26):
financial plan is a life welllived.
So if you get all the financialthings right but you have a
miserable life or you don't dothe things that you want to do,
we really missed the mark whenit comes to your financial
planning.
So think about it this wayImagine you're 90 years old and
you're healthy.
You're looking back on the lifethat you lived.
What would have to havehappened between now and then
(01:46):
for you to look back and say Igot everything that I wanted out
of this life?
This has nothing to do withRoth IRAs.
This has nothing to do withsocial security.
This has nothing to do with anyof those details.
It has everything to do withwhat you actually want your life
to look like.
What does that look like interms of who you spent time with
?
What does that look like interms of the activities you did,
the trips that you took, theimpact that you made?
(02:07):
Start with that.
Start with an understanding ofexactly what you want your life
to look like, and then, fromthere, go to step number two.
Step number two is define whatwould that cost.
Now, this might seem like anoverwhelming exercise, but it
can be quite simple, and there'sreally two ways that you can do
this.
You can take what I call thebottom up approach and you can
take what I call the top downapproach.
Let's start with the bottom upapproach.
(02:29):
This is going to be a littlebit more detailed, this can be a
little bit more time consuming,but it's going to give you
really good accuracy or reallygood sense of what would it
actually cost to live that lifethat I want to live.
When I think about these trips,when I think about these
hobbies, when I think aboutthese activities, when I think
about that impact.
What's that actually going tocost?
What you need to do is you needto understand what's the cost
of every one of those things.
This is basic things likeutilities.
(02:51):
So get a spreadsheet, get apiece of paper, whatever it is,
write out what are your monthlyexpenses.
Keep this in mind If we'retalking about retirement.
Your expenses in retirement insome ways are going to be
different than they are today,but for a big portion of those
expenses utilities, food,insurances, transportation,
entertainment, a lot of that'sgoing to be the same.
So the bottom-up approach saystake a spreadsheet or a piece of
(03:13):
paper or a budget worksheet anddefine what you want to spend
money on.
Some of these things are goingto be necessities.
This could be property taxes,this could be your utility bill,
your cell phone bill, all thesevarious things.
Add them all up.
Now, the things that youdefined you want to do.
This could be trips that youwant to take.
What's that going to cost?
This could be giving that youwant to do, charitable giving,
(03:34):
family giving.
What's that going to cost?
Or how much of that type ofgiving do you want to do?
What about hobbies?
Well, if you want to have amembership to a very nice
country club, that's going tocost a whole lot more than if
your hobby is simply hiking andbeing outdoors.
So neither is right or wrong.
But when you start with whatyou want your retirement to look
like, then you can define whatare those expenses going to be.
(03:54):
So the bottom up approachstarts with understanding each
of those expenses, adding up thecost of each of those and
coming up with that number Verydetailed, but that can be a bit
time consuming.
The other way, the other method,is to take the top down
approach.
The top down approach is whatare you earning today?
So if you're still workingtoday, for example, how much
income do you receive each monthin your paycheck?
(04:15):
Whatever that number is is agreat starting point.
It's going to get you most ofthe way there.
Let's assume just use a verysimple example that that number
is $10,000 per month.
You or you and a spousecombined, after taxes, after
401k deductions, you have$10,000 hit your bank account.
Well, from there we need toback out expenses that will no
longer be there in retirement.
So of that $2,000, for example,do you have a $2,000 mortgage
(04:37):
payment?
And when I say mortgage payment, I specifically mean the
principal and interest payment.
If you do, and if that paymentwill be going away by the time
that you retire meaning themortgage is paid off you can
reduce that or you can back thatout.
Meaning you don't need to planon $10,000 of expenses in
retirement to maintain your samelifestyle.
You can plan on eight.
It doesn't mean you took a paycut.
It simply means you maintainedevery other single thing you
(04:59):
were able to do.
Now you just don't have amortgage anymore.
You don't have that payment tothe bank, or maybe of that
$10,000 per month, you're saving$1,000 per month to retirement.
Well, that's $1,000 that youwon't be saving when you're in
retirement, so you can take thatout.
So if in this example, we wereto remove the $2,000 principal
and interest mortgage paymentand we were to remove the $1,000
(05:24):
of investments that you'remaking to your retirement
account, now what you're down tois $7,000.
So that's a simple example.
If you go to retirement saying Ijust want to maintain the
lifestyle that I have today, I'mliving the life I want to live
Wonderful, go through anexercise like that and you might
come up with a number like$7,000 in this very simple
example.
Or maybe you say you know what,when I retire the things I want
to do in order for me to lookback when I'm 90 and say I
really got everything that Icould have out of life I want to
(05:46):
take some really awesome trips,and those trips are going to be
$30,000 per year.
I'm just making up a number.
Well, $30,000 per year, that's$2,500 per month.
What you would need to do,using the previous example, is,
if you got that number down to7,000 per month, to say, I can
maintain my current lifestyleand all is good, but this
current lifestyle doesn't allowme to take those $30,000 per
year of extra trips.
(06:06):
Well, add in that $2,500 permonth that you just calculated.
So now you're at $9,500 permonth.
So of course, there's morenuance, there's more detail to
this, but the top-down approachsimply says what's your income
today?
Which of those expenses do youhave today?
Which of those will be gone?
This might be family support.
This might be principal andinterest portion of a mortgage.
(06:28):
This might be certain costsassociated with your job.
Maybe it's commuting gas.
This might be savings thatyou're making for retirement.
Take those out and then add backin any expenses that you don't
currently have today that youwant to have in retirement,
because that's going to allowyou to fund the things that you
want to do.
So that's going to allow you tofund the things that you want
(06:49):
to do.
So that's step two is, onceyou've defined your vision and
step one of what you want to do,step two is defining what's
that actually going to cost.
You're translating that lifethat you want into the financial
, the income resources that youneed to make that happen.
Step number three is to gothrough a cashflow projection to
say when you retire, where willthat income come from to meet
those expenses you just defined?
I'm going to go back to using anice round number of $10,000
(07:10):
per month in terms of that's thenumber that we're defining that
we need for expenses.
Just have a basic example touse as we walk through this.
Step three the cashflow, theincome portion is to say that's
great that those are expenses.
Where's the income going tocome from to do that?
Is it social security?
Is it a pension?
Is it a rental property?
Is it your portfolio?
In most cases, it might be acombination of two, three or
(07:33):
four of those different things.
So as you're going through this,of course the income that you
have is going to be different ifyou're married versus single.
But let's assume that you'remarried for a second.
If you're single, just cutthese numbers in half.
You are married and you and aspouse both have $3,000 per
month of social security incomecoming in.
You can just use a nice roundnumber.
So when you retire and you want$10,000 per month, you have
(07:53):
$6,000 per month combined,assuming that social security
income starts at the time thatyou are going to start
retirement, so that $6,000 isalready taken care of.
I'm not factoring taxes in andall that I'll do that in a
little bit but that $6,000 isincome that's going to help you
meet 60% of your needs.
6,000 is what's coming in.
10,000 is what you want.
What you need to solve for isthat remaining $4,000.
(08:15):
Could your portfolio generatethat?
So $4,000 per month is $48,000per year.
Let's just round that up to50,000.
How much do you need to have inyour portfolio to generate that
$50,000 per year?
Well, this is where it comesdown to, of course how are you
invested?
How long does this need to last?
But, generally speaking,somewhere between four and five
and a half percent is what aportfolio might be able to
(08:38):
generate, depending upon how areyou invested and what type of
rules are you following?
What type of a dynamic approachare you taking or not taking as
you go into retirement?
So let's assume, just for simplenumbers, that you have a
portfolio that you think cansustainably generate a 5%
withdrawal rate throughout thecourse of your retirement.
What would you do?
Well, we need to take that50,000, and that 50,000 is just
(09:00):
you identifying.
This is what I need for myportfolio to supplement our
social security income and allowus to live on that 10,000 per
month, which that 10,000 permonth again translates into the
life that we want to live, thelife and the things that we want
to be doing to feel like we'regetting the most out of our
retirement.
Well, 50,000, you would dividethat by 5%, meaning $50,000
(09:20):
needs to represent 5% of alarger number, a larger
portfolio, and that's how youdetermine what portfolio size do
you need to determine thatyou're in a position where
you're ready to retire.
So if I take that $50,000 and Idivide it by 5%, that gives us
a $1 million number.
What that million dollars meansis that's how much you would
need to have in your portfolioin this case for it to generate
(09:41):
5% of income aka $50,000 in thisexample and that income would
be enough to supplement yoursocial security benefits and
allow you to do the things youwant to do.
Now I know I'm not fully takingtaxes into account here.
Ideally, you have some modelingsoftware, you have some
projections that can actuallyfactor that in and what is the
tax impact of where you'retaking money from?
I'm just trying to use a verysimple example here to show you
(10:01):
the framework, more thananything, that everyone should
be going through as they preparefor their retirement.
And again, this just comes fromthe exact method we use
internally at Root Financial.
We call it our Sequoia systemto say this is the process we go
through with clients to ensurethey have that great foundation
going into retirement.
So that's what you need to doin step three is determine your
retirement readiness, ordetermine that cash flow by
(10:22):
working backwards into how muchportfolio do you need to create
the income necessary tosupplement other income sources
and give you everything you need?
Step number four is definingyour investment allocation.
So when you retire, should yoube a 60-40 portfolio, because
that's what everyone tends tosay?
Should he be all stocks?
Should he be half stocks, halfbonds?
Where does that actually comefrom.
Well, it should not beguesswork.
(10:44):
It should very much be tied towhat are your cash flow needs
from your portfolio.
For example, if we go back tothe same example we used and
instead of needing 10,000 permonth, you only needed 5,000.
And if you and a spouse have3,000 per month each from social
security, you have 6,000 comingfrom social security and only
5,000 expenses.
Technically, you don't have anycash flow needs from your
(11:06):
portfolio.
Now there could be an emergency,there could be something that
happens.
You may want to enhance yourspending, but at least on paper,
at the beginning, there's nocash flow needs, which means
that theoretically, you couldafford to be all stocks if you
wanted to.
Now you might not becomfortable with that, but all
stocks.
You can afford the ups anddowns and even though you're
retired, a downturn in the stockmarket isn't going to impact
(11:27):
you as much because you're notrelying upon your stock
portfolio to meet your incomeneeds.
You could also make the case tobe a lot more conservative.
You could make the case to be alot more conservative simply
because that's going to allowyou to sleep at night.
That's going to be somethingthat resonates more with you.
You feel more comfortable with.
But that's going to be a verydifferent circumstance than the
one that we're actually lookingat, where someone wants to spend
$10,000 per month and they have$6,000 per month come from
(11:49):
Social Security and they need aswe've rounded the number
$50,000 per year from theirportfolio.
Well, what do we invest that in?
If you have a million-dollarportfolio and $50,000 is needed
every single year, how do wedetermine the appropriate
stock-to-bond allocation?
Well, there's a few things tolook at, but at the beginning we
need to understand that yourlong-term growth is going to
come from the stock portion ofyour portfolio.
(12:10):
At least historically speaking,stocks have had very strong
long-term numbers 10 pluspercent rate of return If you
just look at the S&P 500 goingback about 100 years.
The problem with that is you'renot getting 10% every single
year.
You have some years where youlose 20, 30, 40% or more.
So you can't be all stocks ifyou know that you're going to
have to be drawing a specificamount from your portfolio every
(12:33):
single year because you want toavoid a situation where stocks
are down and you're pulling fromthem.
So one way we like to thinkabout this is do you take your
cash flow need from yourportfolio.
So $50,000 in this example.
Multiply that by five.
What you get is $250,000.
Can you invest that insomething that's a lot more
stable, a lot more secure, a lotmore conservative?
(12:54):
You are not going to get greatlong-term return from that, but
what you are going to get isyou're going to get some safety
and security so that if and whenstocks decline, you're not
being forced to sell thosestocks at a downturn.
You can simply pull money fromthe more conservative portion of
your portfolio.
Internally we call that rootreserves.
How do we define, how do wecreate this root reserves
portion of your portfolio that,when all else seems to be going
(13:17):
down, we have this asset, wehave these investments that
ideally, are going to remain alot more stable and ideally even
be growing a little bit whenmarkets are down.
So in a million dollarportfolio, that would look like
putting $250,000 in somethingmore stable and the remainder
could potentially be invested instocks.
So when you do it that way,what you back into is you back
(13:38):
into an investment allocation.
In this example, yourinvestment allocation could be
something like 75% stocks, 25%bonds.
That gives you.
Not all bonds are created equal, so I don't want to be very
careful here.
This isn't just a generic bondportfolio.
It's a bond portfolio thatshould be specifically designed
to create short-term income inthe event that it's needed.
But that's one place to start,or that's a place to start.
(14:01):
That type of portfolio nowisn't just disconnected from the
entirety of your financial plan.
It is specifically designed,specifically engineered to
create the income you need, bothwhen markets are up and when
markets are down.
So that's step four is reallydefining the investment
allocation.
Then comes step five, which isthe tax piece.
Everyone loves to talk aboutthis, everyone loves to start
(14:22):
with this, but you can't startwith it because this is
contingent upon.
How do you do other parts ofyour plan?
For example, if you jump rightinto the tax piece but you don't
understand, or you don't yetknow, how you're going to be
invested, how on earth are yougoing to project out what your
Roth conversion strategy shouldbe?
Your Roth conversion strategyis going to be very much driven
or very much contingent upon.
What are your projectedrequired distributions going to
(14:45):
be when you turn 73 or when youturn 75, depending upon what
your required minimumdistribution age is?
If you are in a portfolio that'sa very, very conservative,
you're probably not going to geta whole lot of growth on your
IRA assets, which means yourrequired distributions in the
future are going to be a wholelot lower than if you're
invested very aggressively inyour IRA or pre-tax accounts.
(15:06):
Let's assume, for example,you're 60 today and you're
modeling out a Roth conversionstrategy.
Well, do you think there'sgoing to be a difference if your
IRA grows at 4% per year forthe next 15 years versus grows
at 8% per year for the next 15years?
What would that do to yourprojected IRA balance?
What would that IRA balancethen do to your projected
(15:26):
required distributions thatyou're going to take?
So it's not until youunderstand.
When are you going to takesocial security?
How are you going to beinvested?
What types of assets will youhave in different accounts?
That's when you can then say,okay, what is the right tax
strategy given all this?
The right tax strategy shouldbe looking at everything from
potential Roth conversions.
It should be looking at thingslike tax gain harvesting For a
(15:49):
lot of people in retirement.
If they have gains in theirbrokerage account, there might
be some years where you canrealize those long-term gains
and pay 0% federal taxes ondoing so.
What about healthcare subsidies?
Does it make more sense toprioritize keeping your taxable
income low so you qualify forhealth insurance subsidies if
you retire before the age of 65?
Or should you create moretaxable income low so you
qualify for health insurancesubsidies if you retire before
the age of 65?
Or should you create moretaxable income by realizing
gains for tax gain harvesting orrealizing ordinary income for
(16:13):
Roth conversions?
What do you prioritize and why?
And by doing this at step five,after the other parts of your
plan are dialed in, it becomes alot easier to do that.
Then there's all kinds of otherthings.
Do you look at donor advisedfunds?
If you do any charitable giving, what about qualified
charitable distributions?
What about family gifting?
What's the most effective wayto do that If that's a part of
what you want to do?
(16:33):
What about asset location?
So we talked about having a 75%stock, 25% bond portfolio, high
level.
Should he be investing thatsame exact way in your IRA and
your IRA in your brokerageaccount?
Probably not.
Different investments havedifferent tax consequences.
Is there a way to shift wherethat 75% stock is held or where
(16:54):
that 25% bond allocation is heldso you can still protect your
income needs throughoutretirement but do so with
minimal tax head.
So these are the types ofconversations that you should be
having, that you should belooking at, but that tax piece
should be based upon the rest ofyour plan, the rest of the
framework that's already builtout.
And one thing I want toemphasize here is the reason
this doesn't come first is, ifthe tax piece comes first, what
(17:16):
you should do if all you'retrying to do is optimize for
lower taxes is spend as littleas you can.
Don't take those trips, don'tpull anything out of your IRA,
try to keep your income superlow so you can implement this
Roth conversion strategy andpotentially save hundreds of
thousands or millions of dollarsover the course of your
lifetime.
But if that's what you'reoptimizing for, what does it
actually mean?
For step one, when I talk aboutthe fact that financial
(17:37):
planning good financial planning, the sign of a good financial
plan, is a life well lived, nottax savings.
Not, you save seven figures onyour tax bill because you stayed
at home, didn't take money outof your portfolio, but you got
to take advantage of great taxstrategies as you do so.
So by ordering in this way,it's really prioritizing.
What are those big things, whatare those big rocks that we
(17:57):
need to prioritize first, tomake sure you're living the life
you want to live.
And the tax piece then comesalong and says how do we
optimize your tax strategywithout sacrificing what's
actually most important?
So that's why the tax piece isstep number five.
Now, step number six isreviewing your insurance
coverages.
So it doesn't matter how greatyour financial plan is, if you
don't have the right protection,you don't have the right
(18:17):
insurance coverage.
It might not be stable, itmight not be well protected as
you go through retirement.
Now, part of this insurancedecision is do you need all the
insurances you currently have?
At some point, you probablydon't need life insurance.
At some point you don't needdisability insurance anymore.
At some point you don't needcertain insurances that you did
need earlier in life.
However, on the flip side, asyou get closer to retirement,
(18:40):
typically, your net worth isgrowing.
Do you have the appropriatelevels of insurance, whether
this is car insurance, whetherthis is home insurance, whether
this is an umbrella insurancepolicy?
Are you sufficiently protectingyour assets?
What about health insurance?
Maybe you want your wholecareer with your health
insurance being covered by youremployer.
What do you do when that's notthe case?
Do you let COBRA when you leave?
Do you get something in themarketplace?
(19:00):
What about Medicare?
How many options are therethere?
Which is the best one for you?
What about long-term careinsurance?
Is that something that you needto protect yourself and maybe
loved ones later on in life?
Or can you self-insure orself-fund because you have
sufficient assets to take careof that without needing an
insurance policy?
All these questions, and more,start by understanding what does
(19:21):
your plan look like and whatinsurance coverages need to come
into the picture or be modifiedto make sure that plan is
protected as you go.
And then, finally, is the estateplanning piece.
An estate plan doesn't have tobe big and complicated Again,
it's just this form ofprotection at its first level.
Do you have the appropriatetrust documents?
Do you have an updated will?
Do you have updated advanceddirectives?
(19:41):
Are you in a position where you, your loved ones, your assets,
everything will be cared for,everything will be done in the
appropriate manner if you becomeincapacitated or if you should
pass away?
This is where the estateplanning piece, at the very
minimum, is just protectiontitling things correctly,
getting things in the rightaccounts.
And then, at a more advancedlevel, if your net worth is at
(20:03):
certain levels, you probablyneed some more advanced estate
planning strategies.
There's a pretty significantestate tax for any estate that
you have over current exemptionamounts.
40% of every dollar will betaxed.
If you don't have a strategy inplace to say how do you actually
start to optimize your estateplan?
And even if you're not abovethat limit today, look at your
projections Are you projected tobe there at some point in the
(20:26):
future?
What can you do today, whetherit's gifting, whether it's
setting up certain type oftrusts, whether it's certain
type of charitable givingstrategies to make sure that
your estate plan is in order toprotect the assets, to protect
the net worth in the valuablesthat you have.
So once you've gone throughthat, once you've gone through
steps one through seven, youhave a really incredible
foundation built.
Of course, you want to monitorit.
(20:47):
Of course there will be changesalong the way.
Of course some of these thingsare designed to be dynamic and
designed to change over time.
But if you can do those sevensteps, what you've done is
you've taken all the scatteredfinancial information, scattered
information about Roth,conversions, tax strategy, how
should you invest, what shouldyou do with social security.
All that information is good,but in a vacuum it doesn't do
(21:08):
anything for you.
You have to organize it in away that says how do we use our
financial resources to help uslive the life we want to live?
This is the framework we gothrough at Root Financial.
We call this framework ourSequoia system.
The good news is, whetheryou're a client or not, the same
exact framework is reallyeffective for helping to put
your finances in order so that,at the end of the day, you can
(21:28):
have one of those financialplans where the sign of it being
good is that you're living thelife you want to live.
So that's it for today.
Thank you, as always, forlistening.
I'll see you next time.
After collectively working with hundreds of
different people and helpingthem to create successful
retirements, there's one thing,one pattern, that we see over
and over again, and that's thisFinancial success does not come
from scattered financialknowledge.
Instead, financial successcomes from being able to take
that knowledge and organize itin a way that's applicable and
unique to you, to create thelife that you want to create.
As the founder of RootFinancial, which is a financial
(00:22):
planning firm that serveshundreds of clients across the
country, one thing that we'vedone is we have said how do we
organize all these variousfinancial planning topics?
How do we organize all thesethings that people need to do to
create a successful retirementand do so in a way that people
can follow this structure andcreate the retirement they want
to create?
So that's exactly what I'mgoing to share in today's video.
What is that framework?
(00:42):
We call it the Sequoia system,but this is just a way that you
should be organizing yourfinances so that, as you go into
retirement, there's nothingthat hasn't been addressed,
there's no stone that's beenleft unturned, so that you can
fully focus on the life that youwant to live.
And, as I go through this today, this is a framework that
literally anyone can use.
You don't have to be a client.
You don't have to be a client.
You don't have to have acertain level of net worth.
(01:03):
You don't have to have anythingspecial.
You just need to know how doyou organize all these things,
all these various financialtopics, in a way that will allow
you to do what you want to do.
So we're going to go throughthose seven steps, and the first
one is this the first step is avision for what you want life
to look like.
If you are viewing financialplanning as just a math formula,
you're doing it wrong.
One of the things I'll oftensay is a sign of a good
(01:26):
financial plan is a life welllived.
So if you get all the financialthings right but you have a
miserable life or you don't dothe things that you want to do,
we really missed the mark whenit comes to your financial
planning.
So think about it this wayImagine you're 90 years old and
you're healthy.
You're looking back on the lifethat you lived.
What would have to havehappened between now and then
(01:46):
for you to look back and say Igot everything that I wanted out
of this life?
This has nothing to do withRoth IRAs.
This has nothing to do withsocial security.
This has nothing to do with anyof those details.
It has everything to do withwhat you actually want your life
to look like.
What does that look like interms of who you spent time with
?
What does that look like interms of the activities you did,
the trips that you took, theimpact that you made?
(02:07):
Start with that.
Start with an understanding ofexactly what you want your life
to look like, and then, fromthere, go to step number two.
Step number two is define whatwould that cost.
Now, this might seem like anoverwhelming exercise, but it
can be quite simple, and there'sreally two ways that you can do
this.
You can take what I call thebottom up approach and you can
take what I call the top downapproach.
Let's start with the bottom upapproach.
(02:29):
This is going to be a littlebit more detailed, this can be a
little bit more time consuming,but it's going to give you
really good accuracy or reallygood sense of what would it
actually cost to live that lifethat I want to live.
When I think about these trips,when I think about these
hobbies, when I think aboutthese activities, when I think
about that impact.
What's that actually going tocost?
What you need to do is you needto understand what's the cost
of every one of those things.
This is basic things likeutilities.
(02:51):
So get a spreadsheet, get apiece of paper, whatever it is,
write out what are your monthlyexpenses.
Keep this in mind If we'retalking about retirement.
Your expenses in retirement insome ways are going to be
different than they are today,but for a big portion of those
expenses utilities, food,insurances, transportation,
entertainment, a lot of that'sgoing to be the same.
So the bottom-up approach saystake a spreadsheet or a piece of
(03:13):
paper or a budget worksheet anddefine what you want to spend
money on.
Some of these things are goingto be necessities.
This could be property taxes,this could be your utility bill,
your cell phone bill, all thesevarious things.
Add them all up.
Now, the things that youdefined you want to do.
This could be trips that youwant to take.
What's that going to cost?
This could be giving that youwant to do, charitable giving,
(03:34):
family giving.
What's that going to cost?
Or how much of that type ofgiving do you want to do?
What about hobbies?
Well, if you want to have amembership to a very nice
country club, that's going tocost a whole lot more than if
your hobby is simply hiking andbeing outdoors.
So neither is right or wrong.
But when you start with whatyou want your retirement to look
like, then you can define whatare those expenses going to be.
(03:54):
So the bottom up approachstarts with understanding each
of those expenses, adding up thecost of each of those and
coming up with that number Verydetailed, but that can be a bit
time consuming.
The other way, the other method,is to take the top down
approach.
The top down approach is whatare you earning today?
So if you're still workingtoday, for example, how much
income do you receive each monthin your paycheck?
(04:15):
Whatever that number is is agreat starting point.
It's going to get you most ofthe way there.
Let's assume just use a verysimple example that that number
is $10,000 per month.
You or you and a spousecombined, after taxes, after
401k deductions, you have$10,000 hit your bank account.
Well, from there we need toback out expenses that will no
longer be there in retirement.
So of that $2,000, for example,do you have a $2,000 mortgage
(04:37):
payment?
And when I say mortgage payment, I specifically mean the
principal and interest payment.
If you do, and if that paymentwill be going away by the time
that you retire meaning themortgage is paid off you can
reduce that or you can back thatout.
Meaning you don't need to planon $10,000 of expenses in
retirement to maintain your samelifestyle.
You can plan on eight.
It doesn't mean you took a paycut.
It simply means you maintainedevery other single thing you
(04:59):
were able to do.
Now you just don't have amortgage anymore.
You don't have that payment tothe bank, or maybe of that
$10,000 per month, you're saving$1,000 per month to retirement.
Well, that's $1,000 that youwon't be saving when you're in
retirement, so you can take thatout.
So if in this example, we wereto remove the $2,000 principal
and interest mortgage paymentand we were to remove the $1,000
(05:24):
of investments that you'remaking to your retirement
account, now what you're down tois $7,000.
So that's a simple example.
If you go to retirement saying Ijust want to maintain the
lifestyle that I have today, I'mliving the life I want to live
Wonderful, go through anexercise like that and you might
come up with a number like$7,000 in this very simple
example.
Or maybe you say you know what,when I retire the things I want
to do in order for me to lookback when I'm 90 and say I
really got everything that Icould have out of life I want to
(05:46):
take some really awesome trips,and those trips are going to be
$30,000 per year.
I'm just making up a number.
Well, $30,000 per year, that's$2,500 per month.
What you would need to do,using the previous example, is,
if you got that number down to7,000 per month, to say, I can
maintain my current lifestyleand all is good, but this
current lifestyle doesn't allowme to take those $30,000 per
year of extra trips.
(06:06):
Well, add in that $2,500 permonth that you just calculated.
So now you're at $9,500 permonth.
So of course, there's morenuance, there's more detail to
this, but the top-down approachsimply says what's your income
today?
Which of those expenses do youhave today?
Which of those will be gone?
This might be family support.
This might be principal andinterest portion of a mortgage.
(06:28):
This might be certain costsassociated with your job.
Maybe it's commuting gas.
This might be savings thatyou're making for retirement.
Take those out and then add backin any expenses that you don't
currently have today that youwant to have in retirement,
because that's going to allowyou to fund the things that you
want to do.
So that's going to allow you tofund the things that you want
(06:49):
to do.
So that's step two is, onceyou've defined your vision and
step one of what you want to do,step two is defining what's
that actually going to cost.
You're translating that lifethat you want into the financial
, the income resources that youneed to make that happen.
Step number three is to gothrough a cashflow projection to
say when you retire, where willthat income come from to meet
those expenses you just defined?
I'm going to go back to using anice round number of $10,000
(07:10):
per month in terms of that's thenumber that we're defining that
we need for expenses.
Just have a basic example touse as we walk through this.
Step three the cashflow, theincome portion is to say that's
great that those are expenses.
Where's the income going tocome from to do that?
Is it social security?
Is it a pension?
Is it a rental property?
Is it your portfolio?
In most cases, it might be acombination of two, three or
(07:33):
four of those different things.
So as you're going through this,of course the income that you
have is going to be different ifyou're married versus single.
But let's assume that you'remarried for a second.
If you're single, just cutthese numbers in half.
You are married and you and aspouse both have $3,000 per
month of social security incomecoming in.
You can just use a nice roundnumber.
So when you retire and you want$10,000 per month, you have
(07:53):
$6,000 per month combined,assuming that social security
income starts at the time thatyou are going to start
retirement, so that $6,000 isalready taken care of.
I'm not factoring taxes in andall that I'll do that in a
little bit but that $6,000 isincome that's going to help you
meet 60% of your needs.
6,000 is what's coming in.
10,000 is what you want.
What you need to solve for isthat remaining $4,000.
(08:15):
Could your portfolio generatethat?
So $4,000 per month is $48,000per year.
Let's just round that up to50,000.
How much do you need to have inyour portfolio to generate that
$50,000 per year?
Well, this is where it comesdown to, of course how are you
invested?
How long does this need to last?
But, generally speaking,somewhere between four and five
and a half percent is what aportfolio might be able to
(08:38):
generate, depending upon how areyou invested and what type of
rules are you following?
What type of a dynamic approachare you taking or not taking as
you go into retirement?
So let's assume, just for simplenumbers, that you have a
portfolio that you think cansustainably generate a 5%
withdrawal rate throughout thecourse of your retirement.
What would you do?
Well, we need to take that50,000, and that 50,000 is just
(09:00):
you identifying.
This is what I need for myportfolio to supplement our
social security income and allowus to live on that 10,000 per
month, which that 10,000 permonth again translates into the
life that we want to live, thelife and the things that we want
to be doing to feel like we'regetting the most out of our
retirement.
Well, 50,000, you would dividethat by 5%, meaning $50,000
(09:20):
needs to represent 5% of alarger number, a larger
portfolio, and that's how youdetermine what portfolio size do
you need to determine thatyou're in a position where
you're ready to retire.
So if I take that $50,000 and Idivide it by 5%, that gives us
a $1 million number.
What that million dollars meansis that's how much you would
need to have in your portfolioin this case for it to generate
(09:41):
5% of income aka $50,000 in thisexample and that income would
be enough to supplement yoursocial security benefits and
allow you to do the things youwant to do.
Now I know I'm not fully takingtaxes into account here.
Ideally, you have some modelingsoftware, you have some
projections that can actuallyfactor that in and what is the
tax impact of where you'retaking money from?
I'm just trying to use a verysimple example here to show you
(10:01):
the framework, more thananything, that everyone should
be going through as they preparefor their retirement.
And again, this just comes fromthe exact method we use
internally at Root Financial.
We call it our Sequoia systemto say this is the process we go
through with clients to ensurethey have that great foundation
going into retirement.
So that's what you need to doin step three is determine your
retirement readiness, ordetermine that cash flow by
(10:22):
working backwards into how muchportfolio do you need to create
the income necessary tosupplement other income sources
and give you everything you need?
Step number four is definingyour investment allocation.
So when you retire, should yoube a 60-40 portfolio, because
that's what everyone tends tosay?
Should he be all stocks?
Should he be half stocks, halfbonds?
Where does that actually comefrom.
Well, it should not beguesswork.
(10:44):
It should very much be tied towhat are your cash flow needs
from your portfolio.
For example, if we go back tothe same example we used and
instead of needing 10,000 permonth, you only needed 5,000.
And if you and a spouse have3,000 per month each from social
security, you have 6,000 comingfrom social security and only
5,000 expenses.
Technically, you don't have anycash flow needs from your
(11:06):
portfolio.
Now there could be an emergency,there could be something that
happens.
You may want to enhance yourspending, but at least on paper,
at the beginning, there's nocash flow needs, which means
that theoretically, you couldafford to be all stocks if you
wanted to.
Now you might not becomfortable with that, but all
stocks.
You can afford the ups anddowns and even though you're
retired, a downturn in the stockmarket isn't going to impact
(11:27):
you as much because you're notrelying upon your stock
portfolio to meet your incomeneeds.
You could also make the case tobe a lot more conservative.
You could make the case to be alot more conservative simply
because that's going to allowyou to sleep at night.
That's going to be somethingthat resonates more with you.
You feel more comfortable with.
But that's going to be a verydifferent circumstance than the
one that we're actually lookingat, where someone wants to spend
$10,000 per month and they have$6,000 per month come from
(11:49):
Social Security and they need aswe've rounded the number
$50,000 per year from theirportfolio.
Well, what do we invest that in?
If you have a million-dollarportfolio and $50,000 is needed
every single year, how do wedetermine the appropriate
stock-to-bond allocation?
Well, there's a few things tolook at, but at the beginning we
need to understand that yourlong-term growth is going to
come from the stock portion ofyour portfolio.
(12:10):
At least historically speaking,stocks have had very strong
long-term numbers 10 pluspercent rate of return If you
just look at the S&P 500 goingback about 100 years.
The problem with that is you'renot getting 10% every single
year.
You have some years where youlose 20, 30, 40% or more.
So you can't be all stocks ifyou know that you're going to
have to be drawing a specificamount from your portfolio every
(12:33):
single year because you want toavoid a situation where stocks
are down and you're pulling fromthem.
So one way we like to thinkabout this is do you take your
cash flow need from yourportfolio.
So $50,000 in this example.
Multiply that by five.
What you get is $250,000.
Can you invest that insomething that's a lot more
stable, a lot more secure, a lotmore conservative?
(12:54):
You are not going to get greatlong-term return from that, but
what you are going to get isyou're going to get some safety
and security so that if and whenstocks decline, you're not
being forced to sell thosestocks at a downturn.
You can simply pull money fromthe more conservative portion of
your portfolio.
Internally we call that rootreserves.
How do we define, how do wecreate this root reserves
portion of your portfolio that,when all else seems to be going
(13:17):
down, we have this asset, wehave these investments that
ideally, are going to remain alot more stable and ideally even
be growing a little bit whenmarkets are down.
So in a million dollarportfolio, that would look like
putting $250,000 in somethingmore stable and the remainder
could potentially be invested instocks.
So when you do it that way,what you back into is you back
(13:38):
into an investment allocation.
In this example, yourinvestment allocation could be
something like 75% stocks, 25%bonds.
That gives you.
Not all bonds are created equal, so I don't want to be very
careful here.
This isn't just a generic bondportfolio.
It's a bond portfolio thatshould be specifically designed
to create short-term income inthe event that it's needed.
But that's one place to start,or that's a place to start.
(14:01):
That type of portfolio nowisn't just disconnected from the
entirety of your financial plan.
It is specifically designed,specifically engineered to
create the income you need, bothwhen markets are up and when
markets are down.
So that's step four is reallydefining the investment
allocation.
Then comes step five, which isthe tax piece.
Everyone loves to talk aboutthis, everyone loves to start
(14:22):
with this, but you can't startwith it because this is
contingent upon.
How do you do other parts ofyour plan?
For example, if you jump rightinto the tax piece but you don't
understand, or you don't yetknow, how you're going to be
invested, how on earth are yougoing to project out what your
Roth conversion strategy shouldbe?
Your Roth conversion strategyis going to be very much driven
or very much contingent upon.
What are your projectedrequired distributions going to
(14:45):
be when you turn 73 or when youturn 75, depending upon what
your required minimumdistribution age is?
If you are in a portfolio that'sa very, very conservative,
you're probably not going to geta whole lot of growth on your
IRA assets, which means yourrequired distributions in the
future are going to be a wholelot lower than if you're
invested very aggressively inyour IRA or pre-tax accounts.
(15:06):
Let's assume, for example,you're 60 today and you're
modeling out a Roth conversionstrategy.
Well, do you think there'sgoing to be a difference if your
IRA grows at 4% per year forthe next 15 years versus grows
at 8% per year for the next 15years?
What would that do to yourprojected IRA balance?
What would that IRA balancethen do to your projected
(15:26):
required distributions thatyou're going to take?
So it's not until youunderstand.
When are you going to takesocial security?
How are you going to beinvested?
What types of assets will youhave in different accounts?
That's when you can then say,okay, what is the right tax
strategy given all this?
The right tax strategy shouldbe looking at everything from
potential Roth conversions.
It should be looking at thingslike tax gain harvesting For a
(15:49):
lot of people in retirement.
If they have gains in theirbrokerage account, there might
be some years where you canrealize those long-term gains
and pay 0% federal taxes ondoing so.
What about healthcare subsidies?
Does it make more sense toprioritize keeping your taxable
income low so you qualify forhealth insurance subsidies if
you retire before the age of 65?
Or should you create moretaxable income low so you
qualify for health insurancesubsidies if you retire before
the age of 65?
Or should you create moretaxable income by realizing
gains for tax gain harvesting orrealizing ordinary income for
(16:13):
Roth conversions?
What do you prioritize and why?
And by doing this at step five,after the other parts of your
plan are dialed in, it becomes alot easier to do that.
Then there's all kinds of otherthings.
Do you look at donor advisedfunds?
If you do any charitable giving, what about qualified
charitable distributions?
What about family gifting?
What's the most effective wayto do that If that's a part of
what you want to do?
(16:33):
What about asset location?
So we talked about having a 75%stock, 25% bond portfolio, high
level.
Should he be investing thatsame exact way in your IRA and
your IRA in your brokerageaccount?
Probably not.
Different investments havedifferent tax consequences.
Is there a way to shift wherethat 75% stock is held or where
(16:54):
that 25% bond allocation is heldso you can still protect your
income needs throughoutretirement but do so with
minimal tax head.
So these are the types ofconversations that you should be
having, that you should belooking at, but that tax piece
should be based upon the rest ofyour plan, the rest of the
framework that's already builtout.
And one thing I want toemphasize here is the reason
this doesn't come first is, ifthe tax piece comes first, what
(17:16):
you should do if all you'retrying to do is optimize for
lower taxes is spend as littleas you can.
Don't take those trips, don'tpull anything out of your IRA,
try to keep your income superlow so you can implement this
Roth conversion strategy andpotentially save hundreds of
thousands or millions of dollarsover the course of your
lifetime.
But if that's what you'reoptimizing for, what does it
actually mean?
For step one, when I talk aboutthe fact that financial
(17:37):
planning good financial planning, the sign of a good financial
plan, is a life well lived, nottax savings.
Not, you save seven figures onyour tax bill because you stayed
at home, didn't take money outof your portfolio, but you got
to take advantage of great taxstrategies as you do so.
So by ordering in this way,it's really prioritizing.
What are those big things, whatare those big rocks that we
(17:57):
need to prioritize first, tomake sure you're living the life
you want to live.
And the tax piece then comesalong and says how do we
optimize your tax strategywithout sacrificing what's
actually most important?
So that's why the tax piece isstep number five.
Now, step number six isreviewing your insurance
coverages.
So it doesn't matter how greatyour financial plan is, if you
don't have the right protection,you don't have the right
(18:17):
insurance coverage.
It might not be stable, itmight not be well protected as
you go through retirement.
Now, part of this insurancedecision is do you need all the
insurances you currently have?
At some point, you probablydon't need life insurance.
At some point you don't needdisability insurance anymore.
At some point you don't needcertain insurances that you did
need earlier in life.
However, on the flip side, asyou get closer to retirement,
(18:40):
typically, your net worth isgrowing.
Do you have the appropriatelevels of insurance, whether
this is car insurance, whetherthis is home insurance, whether
this is an umbrella insurancepolicy?
Are you sufficiently protectingyour assets?
What about health insurance?
Maybe you want your wholecareer with your health
insurance being covered by youremployer.
What do you do when that's notthe case?
Do you let COBRA when you leave?
Do you get something in themarketplace?
(19:00):
What about Medicare?
How many options are therethere?
Which is the best one for you?
What about long-term careinsurance?
Is that something that you needto protect yourself and maybe
loved ones later on in life?
Or can you self-insure orself-fund because you have
sufficient assets to take careof that without needing an
insurance policy?
All these questions, and more,start by understanding what does
(19:21):
your plan look like and whatinsurance coverages need to come
into the picture or be modifiedto make sure that plan is
protected as you go.
And then, finally, is the estateplanning piece.
An estate plan doesn't have tobe big and complicated Again,
it's just this form ofprotection at its first level.
Do you have the appropriatetrust documents?
Do you have an updated will?
Do you have updated advanceddirectives?
(19:41):
Are you in a position where you, your loved ones, your assets,
everything will be cared for,everything will be done in the
appropriate manner if you becomeincapacitated or if you should
pass away?
This is where the estateplanning piece, at the very
minimum, is just protectiontitling things correctly,
getting things in the rightaccounts.
And then, at a more advancedlevel, if your net worth is at
(20:03):
certain levels, you probablyneed some more advanced estate
planning strategies.
There's a pretty significantestate tax for any estate that
you have over current exemptionamounts.
40% of every dollar will betaxed.
If you don't have a strategy inplace to say how do you actually
start to optimize your estateplan?
And even if you're not abovethat limit today, look at your
projections Are you projected tobe there at some point in the
(20:26):
future?
What can you do today, whetherit's gifting, whether it's
setting up certain type oftrusts, whether it's certain
type of charitable givingstrategies to make sure that
your estate plan is in order toprotect the assets, to protect
the net worth in the valuablesthat you have.
So once you've gone throughthat, once you've gone through
steps one through seven, youhave a really incredible
foundation built.
Of course, you want to monitorit.
(20:47):
Of course there will be changesalong the way.
Of course some of these thingsare designed to be dynamic and
designed to change over time.
But if you can do those sevensteps, what you've done is
you've taken all the scatteredfinancial information, scattered
information about Roth,conversions, tax strategy, how
should you invest, what shouldyou do with social security.
All that information is good,but in a vacuum it doesn't do
(21:08):
anything for you.
You have to organize it in away that says how do we use our
financial resources to help uslive the life we want to live?
This is the framework we gothrough at Root Financial.
We call this framework ourSequoia system.
The good news is, whetheryou're a client or not, the same
exact framework is reallyeffective for helping to put
your finances in order so that,at the end of the day, you can
(21:28):
have one of those financialplans where the sign of it being
good is that you're living thelife you want to live.
So that's it for today.
Thank you, as always, forlistening.
I'll see you next time.
Popular Podcasts
Bookmarked by Reese's Book Club
Welcome to Bookmarked by Reese’s Book Club — the podcast where great stories, bold women, and irresistible conversations collide! Hosted by award-winning journalist Danielle Robay, each week new episodes balance thoughtful literary insight with the fervor of buzzy book trends, pop culture and more. Bookmarked brings together celebrities, tastemakers, influencers and authors from Reese's Book Club and beyond to share stories that transcend the page. Pull up a chair. You’re not just listening — you’re part of the conversation.
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com