Beyond the 4% Rule: Retirement Income Strategies for Affluent Investors

the 4% rule, all $3 million plus investors can build a better retirement paycheck. So, yeah, really what we’re talking about here is as you transition into retirement, uh you’re no longer receiving a paycheck, you got to get that money somehow. Um how do you do that? We’re going to talk about that kind of the ideas that get thrown around. Um and then some of the issues, some of the opportunities that are that are available for those investors. So, uh, I think we have enough time here. We can go ahead and get started. All right. So, again, who this is for, anybody that’s built a a fairly substantial retirement portfolio in the millions of dollars essentially, um, getting close to retirement or maybe already there and contemplating to figure out how do we how do we get this income right now? You already did the hard part, building up this this massive good amount of wealth, right? Um, and that that was probably by following the right rules, right? You saved regularly. You invested it.

You didn’t just sit on the cash got diversified. You didn’t panic when the markets happened, right? During COVID or 2008, you stayed invested. That’s how you got here, right? That’s how you built up this these assets. Um, but when we talk about retirement, that really changes what this money, what this investment needs to be doing. What is the goal, right? It’s no longer just about growing it to some point uh and having a retirement fund, but now it’s actually about how do you take that amount of assets you have and turn that into a paycheck. How do you get it so that it’s actually paying you replacing the income that you no longer have from from working, right? And that’s the real shift. That’s the real change that happens. And it’s not just for a short time period, right? We don’t just look at it and say, “Hey, today what can I do to to generate income off of my portfolio?” We’re gearing up for retirement. We’re looking for a long time frame. Right?

If we look at two uh just some some easy stats here. If we look at a couple age 65 today, the odds that one of them is going to reach age 90, 47%. So almost half, right? And then one out of five is going to reach age 95. Right? So if you’re a married couple right now, 25 uh you know, 30 years, not real uh short time frame, right? that that’s that’s very realistic that you need to have that money over that time period. So, it’s not just planning for today, not just planning how do I get income right now when I retire, but how can I make it sustainable through however long that retirement is going to be. Uh, and again, if you’re younger than 65, you’re going to be retiring earlier. That’s push that out to 35 uh 30 35 40 years. Um, that’s where it can become, yeah, a major stress for some people. So, we’re going to talk through it today and we’re going to kind of use David and Lisa as our our uh kind of our examples. Um, so like a 65 63 year old couple that’s retiring next year.

They got $3 million portfolio and they’re looking to withdraw at least that first year $120,000 to cover that portfolio. They’ll be coming back and visit them um and and dealing with all the kind of the changes, everything that’s moving um through their through their whole life. And yeah, it’s going to be the market changes. Yeah, they they’re used to the markets going up and down, but what does that mean in retirement? How do you survive in retirement that way? Um, we’re going to talk about different ways of getting income like CDs or bonds. Um, and understanding how those change over time, right? Those those are some great ways to generate income, but you know, looking over the last 10 years, you can see how much interest rates can change. So, that’s not always a consistent, reliable uh resource for us. We’re also going to look at what happens um as the rules change, right? Over time, over those 30 years, how much is the tax rules going to change?

This is just a quick look back of the last 10 years, right? Tax Cuts and Job Act. We got the Secure Act One, Secure Act 2.0, one big beautiful bill. And all of these changes here are making tweaks to RMD rules, uh, DAX rules, anything, you know, a lot of things that the retirees are going to be dealing with. And again, that’s looking back 10 years, looking 30 years forward into the retirement. Are we going to be certain that all these, you know, tax rules are going to stay the same? Um in addition to that changes in the tax law, we also got to look at your life, right? So when we’re planning our income, when we’re looking out over the next 30 years, how much is going to change uh with you, right? And if you look back just as an exact exercise to think back 10 years, right? That would be 2016. Think back of where you were at 2016, right? Obviously a very different uh place in your career, but look at the family who was around. Um maybe we had some grandkids from them.

Like things have changed a lot. Look at your health, right? Right? When I look at myself and I look back 10 years in 2016, yeah, my body worked a lot differently then, right? So, looking forward 10, 20 years, how are things going to change? Um, spending, right? What do you have going on? Things you like to do and enjoy? What are your goals? Um, all of those things have changed significantly over the last 10 years. So, when we’re looking out over the next 10, 20, 30 years, these are all things that we have to take in consideration that could be, you know, make have to make some adjustments and just know that they’re going to be moving targets. Um, and so that portfolio, right, I talked about even if we stayed a very significant amount of money, that that portfolio, that retirement portfolio has to do a lot of work, right? Um, one, create income today. We got to fund everything that that we’re going to be living off of today. But two, we got to get growth to be able to fund tomorrow.

We need to have liquidity, have funds available to us, right? Not locked up an annuity or a CD. Have that available when we need it. Flexibility, as we were just talking about, tax law changes, your life changes, needs change. So, we need to be have have something that we can move around and make it just our lifestyle and what we need. Um, of course, taxes are always going to be in play no matter what. If you have money, government’s going to be trying to get some of that. We got to figure out how to deal with that. And at the end of the day, what do we want to leave behind, right? And this could be a lot. This could be a little, this could be for family, this could be for for other uh charities that we want to support. Um, but that one portfolio has to deal with all of these issues, right? And so that’s what we’re going to talk about today is how we’re going to do that. Now, who’s giving you this advice?

Again, a lot of you may already know Mission Wealth, who we are, but just a real quick overview about us. Mission Wealth, we are an RAIA, registered uh investment advisory firm. Been around for about 26 years. Started in Santa Barbara, California. Now, you can see we got offices uh across most of the uh United States. Currently manage about 17 billion dollars. Have 5,300 client relationships. um really have an amazing team here that I love working with from uh our our tax accountants to our you know in-house attorneys. Um but a lot of what we’re talking about today is from our amazing investment committee. Bunch of CFAs, all those investment guys leave the investment strategies here. So we’re going to be pulling a lot of information from them. Um speaking of that investment committee, there’s there’s a lot of core principles that they have where they, you know, base their investments off of, but the the four big ones, right, are what we have on here.

and wanted to review this with you so you understand the perspective that mission wealth I’m coming from as we start to talk about uh the different 4% rule idea. So the key four ideas here, one, alignment. What that means is we want to make sure that your portfolio fits your financial plan, right? So your taxes, your goals, whatever. It’s not just, hey, here’s a really good investment um product or strategy. It’s how does this fit your life, your specific plan, what you have going on. Um two, diversification, right? We’re going to spread out risk. Diversification is always going to be be a help for us. And we’re going to look diversification in any way possible. So yeah, there’s stocks and bonds, but within that there’s many different areas we can go. There’s other types of alternative assets. Um, so diversification is always going to be a big piece. Uh, discipline. We’re doing long-term investing here, right? There’s no emotional getting in and out of the AR market.

We’re not going to try and time anything. Um, we’re not going to react quickly when something comes up. We’re going to have a plan that’s going to work in all different type of market environments and then we’re going to stick to that plan as things go forward. Um, and then fiduciary commitment. no proprietary funds, there’s no Mission Wealth ETF, um there’s no products. Again, no matter what recommendation or idea we make for our clients, it doesn’t change how we get paid. So, anything we’re talking about here today, we’re not trying to set you up for any one particular product or idea because again, we are flexible. We give custom advice to our clients. So, just understand that we’re not coming at this with any any bias towards or against any products. And who am I? Kyle Buffo. Uh I am a senior financial adviser here at Mission Wealth.

I have been helping you know pre-retirees and retirees for the last decade and a half um through retirement planning, helping generate income, dealing with tax um strategies to help be more efficient in income and helping with legacy concerns as they pass on that wealth to the next generation. All right, so what are we going to talk about today? Here’s a kind of quick rundown of our agenda. So, what the 4% rule actually solves. Um, then we’re going to switch to why withdrawals, right, taking money out change market risk. We talk a little bit about market risk going up and down, how withdrawals change that, where the paycheck should come from. How do you actually get that? Where do you take the money from in retirement? How affluent investors can expand the toolkit. This is kind of fun because, yeah, there’s other ideas people don’t always know about um that can really make this portfolio work better for you.

um how taxes, Medicare, um all of those issues come into play and how that flexibility that I was talking about earlier really matter. Um and then at the end we have a special offer there too if you want to actually do some analysis on your portfolio and say, “Hey, how does this look as far as income preparedness for retirement?” Uh we have a process where we can help you figure that out. All right. So part one, what the 4% rule is actually trying to solve. what is this that we’re we’re doing here? And we’re going to go back and kind of use that David and Lisa example um and talk about that and what that 4% looks like. Now, the 4% rule, one thing I’ll note up here is uh it’s talked about a lot. It was really a study, an academic study that was done like back in the early 90s. It’s been updated a few times. Um but it’s really it’s done in a vacuum, right? We’re talking about investments in in the market.

um it’s looking at like a 60/40 portfolio and how it would be how it would sustain through through a retirement. Um but it’s really just looking at investments, the growth um and the withdrawals on it. It’s not factoring in all of the pieces that a real retirement plan would have. Now looking at that um the things that it does do that are that are really important withdrawing 4% of the starting portfolio is where where it’s where that idea starts. But then the key thing to note too is that it’s going to increase year after year with inflation, right? So we’re going to have that 4% draw pulling down off that portfolio, but we’re knowing that year after year that’s going to keep increasing on us, right? So that idea here, if we had $3 million in that portfolio that first year we put up there, they need $120,000. So they take that withdrawal and that that that’s 4% of that portfolio, right? That’s that’s that’s where that math starts.

We go into that next year though, say we got 3% inflation and then next year we’re not taking $120,000 out. Now we’re taking 123 plus, right? So year after year, that number is going to keep going up. We go out to 10 years, right? At that 3% inflation, now we’re all the way up to that $161,000. So again, that’s what that 4% rule is trying to figure out. We’re invested in the market. It’s going up and down. we have to start taking out money and we’re going to have to increase the amount of money that we’re taking out every year. All right? So, that’s the idea is we’re going to create a paycheck. We’re not just going to create a static paycheck. We’re going to have to create a paycheck that increases and and grows with our needs. That’s why a 4% rule, and this is where a lot of confusion people come in, they say they look at that portfolio and they go, I know I need 4%. Can I just get 4% yield and then I’m good. That’s where it can get a little tr troublesome, right?

People come in with the ideas of, hey, I can see, especially right now, I can see CDs are getting well over 4%. I can get high yield savings accounts that are getting me 4%. Can I just throw all the funds in there, collect the 4%, and then I’m good to go. Well, couple issues we run into with that one. Yeah, right now we’re seeing um, you know, decent rates. We get, our bond, CDs are giving us some decent returns right now. That’s today. look back a few years ago and you look back you know back 2016 and before rates were really really low. Okay, that’s that’s the problem is if we move forward as uh yield on all these things keep changing our pay our need doesn’t right so we’re going to have that issue of rates are going to reset um but we’re not going to be able to get that same level of yield in addition to that if we put let’s say that $3 million all into uh into something that is yielding um good money like that year after year as we saw we don’t need 120.

Every year we need 123 and then 126. That keeps going. We need something that can help us keep up with inflation. So again, just going into that fixed product, even if we bought that bond that was, you know, kicking out 4%, we bought a 10 or 20 year bond, kick out that money, is it going to be able to keep up with all the inflation costs, right? Uh and and so that that’s where that issue is really going to come in when we think about, you know, a 4% yield only. Um, in addition, yeah, like we said, we’re not looking just 10, 20 years out. We could be looking 25, 30 years out. So, you think about how large that paycheck need to be all the way out there. That’s kind of what’s discouraging us from just sitting that in in a simple CD and collecting the yield. Now, we come back and we look at, well, what about investments, right?

We know like, hey, if we just invest in the market, um, and and yeah, there’s going to be ups and downs, but I’ve been investing in the market the last 30 years, Kyle. Like, I know if it goes down, just wait and the market’s going to come back up, right? And that is true. And that was a huge huge uh important piece as you’re going through that accumulation phase, right? Um, one of the nice things about the 401k is you got a 401k if you’re still working and you have this pullback in the market. The nice thing is is if you’re still working, you’re adding money to that 401k. So when that market pullback happens, you’re adding more money. You’re buying the low. You’re getting money in at that lower level. And then when the market rebounds, you had more money invested at that lower level. More of that money got to to grow uh grow with it. Okay? So it still matters in retirement. We are still absolutely we got to stay invested.

We’re not going to try and jump out of the market just because of scary headlines or, you know, a possible AI bubble. we need to stay invested. But there’s a major difference, right? And that is that this portfolio has money leaving it, right? When you when you leave it in the portfolio, when the money stays in the portfolio, uh you get to ride that back up. But if you’re pulling actively pulling money out, that’s where these issues can really come in. That’s leading us to part section two. Why withdrawals again pulling money out of these accounts can change what that market risk is. So, let’s kind of go back to that example. We’re looking at uh you know a couple $3 million and if things were going well or if we look at you know through the whole retirement they’re going to average 6% return on that portfolio. What would that do? What would that look like? Right? So, we got 3 million portfolio. Um 6% return is what we’re representing right here. At the end of that year, $3.18 million.

So, that’s how much it would grow. And yeah, I’m simplifying the math here. um a little bit more about the beginning of the year, end of year, and the cash flow, but just to simplify the math, $3 million grows at 6%, we’re at $3.18 million, right? Um then we got to take the money out, right? So, we’re talking about um needing $120,000 a year. David and Lisa pull that out. After they pull that money out, they’re still left with $3.06 million, right? So, that that’s the kind of the nice thing. That’s the plan. And that’s what we’d like to see happen. You pulled out that $120,000. You got to spend it, live it, and then the amount of money you had left over in that uh portfolio is still more than when you started the year, right? So that way next year you could be able to pull out even more money to increase with the inflation. All right, but now let’s look at it in a slightly different way. We could still look at that, you know, 30-year retirement.

We can still say, yeah, we’re going to average 6% or whatever that’s going to be. But what if in that first year we had one of those bad years? We had one of those market pullbacks, right? So, let’s run through that example. Now, instead of um going up 6%, we have this pullback. We’re down 15%. Right? So, now if we do that math on that $3 million portfolio after we have this pullback drops down to 2.5 million, right? So, that’s how much we have left in the portfolio after that pullback. All right? But we still have to take that $120,000 out, right? We still got to live. We still got the expenses. Um, what happens after that is now we’re not down to 25. We’re down to 2.43 million, right? So, this is after one year. We had one big pullback. Then we pulled out the money that we were planning on taking anyways. Um, and now we’re down to 2.4 million. When you look at the math that way, now that $120,000 isn’t 4% of the portfolio. It’s 4.71% of the portfolio. Right?

So now we’re taking a much bigger chunk than what we kind of were talking about. And if we look at to the next year now, we don’t need to pull out another 120. We need to pull out another 123,600. Right? So now we have to pull out even more money. As that keeps falling, income need keeps going up, but the capital available for us to spend is going down. All right. So, a lot of you too will say, “Well, Kyle, I’ I’ve gone through these markets. Yeah, things go down, but what do they do afterwards? They come back up. They they they will rebound. We just got to stay invested and we’ll be okay.” And again, absolutely the best advice, long-term investing as you’re as you’re building up your 401k 401k, super crucial. But let’s compare what happens again in this scenario when that when that rebound happens. So, first of all, if we’re looking at this slide here, if we’re not doing withdrawals, this is just we’re investing. We have the $3 million. We’re not touching it.

What happens in that scenario? Well, if we have that 15% pullback, that’s going to pull us back to this 2.5 million number again, right? So, we have that pullback. Then, we have the rebound. We’re going to say, “Hey, 18%.” Right? After we had that big pullback, then we’re going to have a nice rebound, 18%. What happens to this portfolio? It’s going to rebound. It’s actually going to be a little bit higher than when we started. Okay? So this is this is what would happen to the portfolio if we weren’t taking any withdrawals out. But when we move on uh and review our David and Lisa example, they had to take $120,000 out of that paycheck when it out of that account when it dropped down to the $2.5 million. So now they have 2.43 instead of $2.55. Right? So, both of these um examples, you’re getting that 18% return. The problem is because we’re pulling money out and we’re pulling it out at that low. Now, we have less money to be able to be uh in that rebound.

So, that leaves us being well under, you know, more than $120,000 less than what we had before because we don’t have as much money working for us um when when those markets are moving around. the uh to represent that kind of a little bit further is we just ran out and this is just basic math of two portfolio or two scenarios they have the exact same average return right so the average return through the whole time looks exactly the same they’re actually the exact same returns just moved in different orders and so if you kind of look at the the red line below you see that there are some some negatives here right these kind of negatives here are looking looking kind of bad early on this green one I just put negative years at the end, right? So, we got kind of got the falls down here. So, what we’re looking at is either the red one being if we get some bad returns early and the green one being if the bad returns are pushed to late. Okay, this is this is what we’re getting at.

This is the big deal. And again, in this scenario, both of these, the red and the green are not withdrawing any money. This is just the numbers of how the investments would go if the bad returns came early versus later in the in the uh in that 20-year period. As you can see, yeah, the green is much higher. The difference, bad returns only get us to 3.46. Whoops. Oh, yeah. Bad return and then bad returns late get us to 4.9. So, essentially, we’re looking at almost $1.5 million difference in the portfolio growth. Again, both portfolios uh had the exact same average return. They both had no money being taken out of them, but just by rearranging the order in which those returns come and having bad returns up early, we end up losing almost $1.5 million over that 20-year period. Right? This is what’s called the sequence of returns risk.

So, it’s the idea that, you know, just staying invested, managing the volatility, you can stomach it doesn’t really work, especially when you’re going to be pulling down money out of these accounts. So that’s again one of those big issues is yeah we want to use stocks and and and that’d be a great way to to grow our portfolio but the sequence of returns risk is what’s really damaging to us and creates you know a lot of the stress and the problems around owning stocks in that retirement portfolio when you get to uh when you actually get to retirement. So the solution is not avoiding growth, right? As we already saw there, if we just go into the CDs and we just get our yield off of it only, that’s not going to help us all the way through the entire uh uh retirement. Um if we just avoid growth or we just uh lean way too much into it, it’s not going to work out. The big piece we need off of this is to avoid forced selling at the wrong time. Right? That’s the big issue.

We don’t want to be pulling money out when that portfolio goes down, right? So, that changes the question from what should I own versus like where should the paycheck come from? What sources can we be using to generate that income so we’re not damaging our portfolio? All right, excuse me a sec. All right, so the next section, where should the paycheck come from? All right. So again, with David and Lisa, market’s down, but they would still need that $120,000, right? At the end of that that first year, where’s that money going to come from? And so we can look at it, and we’re going to look at cash, bonds, and equities, all of those pieces there. We can consider all of those pieces. There’s going to be some other income assets, too, we can look at. We’re going to talk about those in a little bit. Um, but the decision isn’t just looking between these options here because where are those options at, right? So this is the other question is which account should it come from?

So again when I talked about the 4% rule it was it was you know built and it was created in a vacuum. It didn’t factor everything in. These are some of the key points you may have been asking earlier in there. It’s like well $3 million but where is that $3 million? Is it $3 million all in a traditional IRA? Is all of it still have to get taxed? Is it going to be paid in ordinary tax? Is some of it or all of it in a taxable account? Right? Okay, we got we got clients who, you know, uh build their own business, sell it at the end, and none of that money is not necessarily in a traditional IRA, but it’s all in a taxable account. Um, how do we know which account we want to be pulling from? Are we going to be dealing with capital gains? Are we going dealing with ordinary income, or is it going to be coming out of a Roth IRA and there’s not going to be any taxes on it yet?

But then also, what the consequences of pulling money out of the Roth IRA is, maybe the traditional IRA stays too big and creates tax issues down the road. So again, kind of a lot of moving pieces on this, trying to figure out where that money needs to come from, right? So same $120,000, but dramatically different tax results depending on where you pull that money from. Uh and again, these decisions then have cascading effects all the way through.

So this one decision right on figuring out where are we going to pull the money from can absolutely have impacts all the way across from uh you know taxable income uh capital gains versus w or uh uh uh ordinary income right if you’ve heard of Irma or those of you who are already on Medicaid have seen it before if your income goes $1 over the line you get bumped up into the next category right and there’s definitely situations where we see people getting double sometimes triple the Medicare costs um could average being tens of thousands or over $100,000 difference throughout your retirement, right? If you’re pulling money out of the wrong account and getting hit with more of that um I mentioned before RMD pressure, right? If you have done any research on Roth conversions, trying to understand the income coming off of uh out of that IRA, understanding the RMD pressures is going to have dramatic impact on where you’re pulling money from to generate income in retirement.

And then also flexibility. Uh, I mean flexibility early on is important, but also later on again when we look 10 years out, 20 years out, what what are your goals going to be? Are you going to still want to be living in the same place? Maybe you have grandkids now that are in another part of the country and you want to relocate. Maybe you’re going to run into medical issues. Um, so again, flexibility, maintaining that flexibility out of your portfolio is really critical. U, and the last piece there on that too is um it’s not a short-term plan, right? We need to make sure that this is lasting a long time. time we need to feel comfortable about it. And again, a lot of the risks are at the front end of that retirement. How is it going to start off with us? Um because we need to make sure that we have that longevity available. So the real retirement question is is less of like just 4%. How much do I pull out of my account? Is it 4%. Yeah, it’s how much.

But also from where is it going to be? You know, from the stocks, the bonds, the cash, the different accounts we have. What type of account is it? A Roth account? what’s the tax taxability of it? Um, and then also which year because again early on maybe we have it coming from different accounts in different places and then the middle and later on we need to have it coming out of uh different accounts to again manage all the the variables and the tax that we’re going to have to face with it. Um, I think we mentioned before things change right throughout uh throughout that whole retirement plan. So we need to be able to be flexible. So maybe we retire at 65, retirement begins. Well, we got to have some higher income. But then a little bit later, social security or maybe pensions kick in. So maybe we don’t need as much income then because now we have some other sources.

Um but also what we see a lot of times you see this mile spending people will talk about in retirement earlier on maybe it’s a little bit higher because we’re traveling, hanging out with the family, doing all these things. Um and then maybe we slow down, right? After we’ve done it for a while, we don’t want to have to get up and, you know, go out quite as much, staying at home a little bit more. But then mid70s, we might have RMDs. Then we have forced income. So, we still have to strategize about that, understand where that money is going to be coming from, making sure we’re being taxed smart with that income that’s coming out to us. Um, but then maybe again a little bit later, healthcare needs. And this may be we have to start having monthly additional monthly costs. um or this might be a couple you like really big uh issues that come up that we got to get a chunk of money to pull out. So again, things constantly change all throughout there.

We need to have the ability to change that income and have flexibility for any money uh you know for those emergencies. So the way we like to look at it is is we need to have more of like a dial on it. When we look at income, we can’t just say, “Hey, we need to replace that paycheck. What is that dollar amount? We’re going to replace that every year and it’s going to be the same amount throughout our whole retirement. Really what we want is more flexibility. The the need is going to come and go as far as how much we want on a monthly basis. Um and then things can always come up in which we need larger chunks of money for a remodel for you know healthcare issues whatever it is. Having that flexibility to dial that back and forth is really crucial. Um again just touching on the different areas more take less. Um pause right again that’s another thing that we have clients coming to us all the time.

they get set up, they have a consistent income strategy they’re working through and then something changes in their life and they stop traveling as much or they just don’t end up spending as much money. Well, now if you keep having this income coming in, you know that you’re not being as efficient with it. Um, we’re not saving money, reducing volatility for later down the road or for legacy purposes. Um, so just having that flexibility to turn off the faucet is really helpful. Um, and also being able to switch amongst accounts, right? Having the flexibility to go from a taxable account to a non-t taxable account in the way that you’re taking money creates a lot more flexibility for all the unknowns down the road. Now, there are some uh more guaranteed like products when you look at things like some CDs or annuities and yeah, those are some some really nice benefits being able to transfer some of the risk off to somebody else or not carry as much risk.

Um having longevity protection for some annuities that are that are lifelong. Um, but you are going to be, you know, kind of trading off some of the other pieces that we were saying we still want to make sure we have like full liquidity, right? Um, not having those assets locked up in any way, having that flexibility or having that dial to be able to turn up or down those different pieces there. Um, and all of those things again could have a major impact on the growth. So, our ability to to to at, you know, in the long run, um, be able to cover expenses and still have the assets we want and the legacy, right, for the next generation. So the key that I would say about all of those looking at those different areas is there is always going to be numerous tools or products that you’re going to want to to use again diversification using different um uh different asset classes that are going to react differently again as everything changes throughout the whole retirement timeline.

All right, part four. Now moving on to expanding the toolkit. All right, this is going to be this is kind of like the uh most technical part of the the webinar. So, if it gets a little boring for you here, like I apologize. We’re going to go through it quickly and move on. U but I do like some some of the key points here. Um and again, if you’re looking at what else could I be doing in the uh in that income generation piece, this is kind of where the the the the rubber meets the road here. So, first of all, I want to step back and kind of look at what most people have a lot of experience in and are really familiar with, right? Um, and I got an associate, a friend here at the the firm that talks about it in in in a way that I find interesting, is kind of helpful. Um, talks about it like it’s a salt and pepper, right? So, anybody that goes out, you know, if you’re looking at the different new restaurants in town, um, anything in town, right?

Every every restaurant is going to have their salt and the pepper, but they’re also going to have a bunch of other seasonings, right? If you went to a restaurant, you know, new restaurant opened up there and in your town and you find out that the only seasonings they have is salt and pepper and that’s it. They don’t have anything else there, are you really going to expect that the whole world of flavors there’s going to be available to you at that restaurant or is it going to be a little bit limited? This is kind of the way that we look at it. Stocks and bonds are super crucial. It is kind of that core piece, right? That salt and pepper. We definitely want those involved, but we also know that there’s some other uh ideas that we can go out there to get something a little bit better for us. Now, taking a quick look at what we see in the stock market right here on the left side. This is a really interesting chart.

What it’s looking at here is every four-year period, how has the stock market performed? And it’s looking back over the last about a hundred years. So, over any four-year period, you’re seeing the the top 10%, the bottom 10%. And if you look right here, it’s a little hard to see, but that median, the average right here, um, of what that what the stock market returns over a four-year period. The other one you’ll note up here, and you’ll see at the top it says current. That’s the green line. So, this is looking at kind of the last uh four years. How has the stock market compared? And what you can see very well there is uh a lot of volatility. when you’re only looking at that, you know, one period, yeah, there can be a lot of volatility, but it is quite a bit higher than even the top 10%, you know, over the top 25% quite a bit.

Um, and if we know anything about averages, if you’re above average, above average, above average, how do you get back to average is you got to be below average, right? We’re not saying Armageddon here, but we are saying stocks have had a really good run. They’ve been a little above average. are they due to come back to average a little bit? So, that’s just an area where we might be maybe a little bit nervous just kind of understanding where uh the stock market is right now on the on the other side, right? We got salt, we got pepper on the bond side, we kind of already talked about it. Um right now, yeah, we have some good return, right? Rates are up. We can use them. Bonds are really good at giving us protection, but at certain times they can give us some decent income, too. Not huge, but we can actually get some income right now as rates are rates are up here. Again, if we look back 10 years ago, right, in a long time in the early 2000s, rates were next to zero.

So, bonds would give us protection, but we couldn’t use them as part of the income play as much because they just weren’t generating that much income. Again, these are going to change over time, but kind of like where the where the where we see things as of today. Now, that’s the salt and pepper that we just talked about. But again, if we’re um looking at affluent investors and again at Mission Wealth here, that’s that’s exclusively who we work with. Um, there’s actually more options available to you. So, anybody that’s familiar with alternatives, there are for accredited investors, investors that have a million dollars more essentially of investable assets. Um, you can go into alternative investments that are just structured a little bit differently and have some different pros and cons in them.

Um, and our investment team, what we kind of work off of when we build out these portfolios, because again, we’re working with clients that have larger portfolios is off of what we call the endowment model. And this is something that if you look at, you know, university endowments there like Yale and Harvard um any big endowment um pensions use this kind of idea or if you look at like insurance companies or annuity companies, if you gave their money, they go and invest. And what is kind of the strategy that they use? How do how do these guys invest? And that’s where this endowment strategy comes into. Now, one of the things if you were to think about like, you know, Yale, um, the Yale endowment, they have all of this money. Yeah, they’re going to invest in stocks and bonds, um, but they have a lot of money, right? When we’re talking like 50 million, hundreds of millions, uh, you know, sovereign wealth funds that have billions of dollars.

Yeah, they’re going to invest in stocks and bonds, but they have so much money. They can invest in a lot of different things. And one of the areas that they found, if you’re thinking back and and like when Yale was doing this, you know, 30, 40, 50 years ago, and rather than stocks and bond, they could go out and do something like buy an apartment building, right? Let’s say they go out and bought a big $50 million apartment building. Um, they’re renting that out. They’re getting all the cash flow. It’s kicking off really good money for them that they can use. And then after 20 years, they sell the apartment building. It had capital appreciation. Worked out really, really well, right? And the returns, the risk and returns on um investments like that can be really really good, right? You can get better returns with lower risk. The problem, right, when it comes to typical investors, one, we don’t have $50 million to go buy one apartment building.

Two, if we own an apartment building and we needed cash today, you can’t just get off of that tomorrow, right? If you have stocks, you can just go in and liquidate them and you have that cash available to meet your needs. You own an apartment building, you’re not going to be able to just turn that around tomorrow. right now. Um, so those are those are kind of the issues. That’s the way that these kind of endowments started working though is if we can hey invest into products that you know at Yale didn’t need that money right away. They could lock up that apartment building for, you know, 10, 20 years, no problem. Or you could even do things like invest in a private company, right? You invest in a private company, could be a great company, great returns, you know, good risk. Um, but if you invest in a private company, it’s not traded on the stock market and you need that money. You just can’t go and sell it, right? it’s not liquid, it’s not available to you um immediately.

So, those are kind of the pros and the cons. So, we can get better returns, but we know those assets aren’t going to be liquid and available to us all the way. So, let’s look at a little bit deeper that endowment approach and doing that comparison of uh of those different strategies. Now, looking at this here, what I would say is traditional investments, this is kind of the like the salt and pepper, right? That’s everything down on this bottom bottom uh right of the chart here in in black. That’s our salt and pepper. Basically all liquid, the typical investments that you’ve been seeing. If we look down at this chart, we have volatility on the bottom. We have average return on the left. And what you see this line going up the middle. As volatility increases, so does the average return. Most people are fairly familiar with that dynamic, right? you buy an investment that’s more volatile, you’re expecting it to produce more recurrent.

Or the other way, if you bought a an investment, you expect it to have a really good return, you kind of would expect along with that, it’s going to have a lot of volatility up up and downness. So that’s the relationship we see here. Most of this as as we add volatility or or return, we’re getting some more of the other. Now, where things get different here is if we were to look at the salt and pepper side, we were to look at like the US stock market, right? Now, US stock market, what’s publicly um traded, really, that’s only about 15% I think of all of US companies here. So, again, we talk about diversification, but if we’re only looking at the publicly traded stock market, right, the S&P 500, we’re not getting exposure to everything there. Where else can we get access to all those other companies? They’re going to be private. They’re in that private equity side. So if we look over here, right, traditional investments was the salt and pepper.

We go and look at the paprika or the cayenne pepper over here on the alt space. Private equity is going to be the kind of that equivalent of the US stock market, right? What do we notice about these two? We’re comparing apples to apples here, but what we’re going to see is the volatility going to the left. Volatility is actually going down and then the return is going up. So the return went from about you know 10 up to about 15 but then we reduce the volatility from that 17 to uh you know under 10%. And again, if we were to do the same thing, kind of going apples to apples, if you look at like high yield bonds or corporate bonds down here, right? These publicly available, you could liquidate them any time. The relative on the alternative side would be that private credit space. And again, you see that same relationship. Volatility is going down for both of these, but then the return is actually increasing, right?

So, these are breaking that line, that rule of that line that increasing the return um has to increase the volatility. But the thing we noted, right, being an alternative investments, the biggest difference here, they’re not going to be liquid. They’re not going to be able to just go in any day and sell them and get out of them. So, it creates other issues, other burdens within that portfolio, right, that we have to have to adjust for. So, managing that that um liquidity issue along with trying to capture some of these better risk uh reward statistics. So, what does that actually look like? Right? Let’s actually say like all right if we were to take some of these investments and put together in a portfolio how does that impact what happens in the portfolio.

So we just have a quick example here looking at a 60/40 right and on the left here it’s it’s light gray and dark gray it’s boring right this is this is before this is just the salt and pepper portfolio 40% fixed income 60% in the equities this is what that portfolio is producing 7.3 return 13% volatility 2.9 yield how would we change that how are we going to slide in and and bring in these alternative investments that we were talking about First look at the equity. So we went 60% down to 45. So we just knocked 15% off of the equity. We also took that fixed income that that the public stock or public bond market fixed income piece from 40% down to 25%. So we took 15 off of those. That gave us 30% to work with. We just put that 30% split evenly across credit equity and real estate on the alternative side. from from that last slide, right? If you look at that chart, what would we expect to happen if we were to slide in those types of investments? One, the return goes up, right? Check.

It does that. Two, the volatility goes down, right? So, we’re actually getting a few percentage knocked off of the volatility. So, the the the up and down of the mark of the portfolio isn’t going to be as dramatic. And the yield went up, right? So, now we’re actually able to get more yield coming out to us. So again, when we look at that portfolio, we have money getting shot off to us for uh every every uh whatever’s year month. Now that yield is much much higher. And again, this is kind of that start off of of of that idea, but we can move these back and forth, expand and close to match what that return, volatility, and yield needs to be for your specific portfolio, your specific lifestyle. Again, sometimes that yield needs to be high. Sometimes that yield needs to be lower, but we can play with these to move them around to match whatever that need is. All right. Part five, build your own retirement uh build your own retirement endowment.

So again, that idea of that endowment strategy, it used to be something that only the um really big large funds could do because, you know, it’s a $50 million apartment building. You got to have that much money available to go and buy it. Now um through the years through different uh alternative companies making that process more efficient, um we’ve been able to develop portfolios that are much easier and cleaner to u to actually execute on for clients within that, you know, one to 10 to$20 million range. Um, but what we need to do again looking at the portfolio, how are we going to design this for income? We’ve looked at before is, you know, income alone isn’t going to work. Growth alone isn’t going to work. So, how are we going to piece together two engines that can do both of those, right? So, we have that’s the way we’re going to look at is we’re going to have a growth engine and we’re going to have that income and resiliency piece, right?

The growth is yeah long-term making sure that portfolio keeps growing so that we can continue to increase our income, still have legacy down the road, still have all the flexibility we need. Uh but the income, right, making sure that we have that money this year, next year, and that if we have any market pullbacks, we have liquidity, we have access to it, and we have resiliency in our portfolio. Where do these different pieces fit that we’re talking about? you know, the public equity, the stocks and bonds, the private equity, those all those core American companies that that are that are out there that aren’t publicly traded, real assets, so real estate, you know, um that could be, you know, individual, corporate, uh different types of infrastructure, all of these pieces we can put in there and that’s going to be part of our growth. There’s other diversifiers, other products we can do too that but those are going to be kind of that that core growth engine.

And then on that other side, we’re going to have that income piece. So yeah, there’s going to be the cash reserves, that immediate liquidity that we’re going to be using to fund, you know, expenses, but then both on public and private uh uh fixed income side, we’re going to be generating more income, just getting that money to kick out to you, be ready to be there for for spending. Um there’s going to be other assets like some real estate assets in different ways and different categories that are going to be doing that, too. There’s also times where we could have stocks that are paying dividends. So, some of these some of the tools in here might have a, you know, a foot in each camp a little bit. Um, but as long as we’re being intentional about this and as we build out those portfolios, we know that we have both those engines and that they’re properly lining up with the the the strategy that you uh or with the financial plan and the goals that you have.

So, again, kind of the the two different um horizons. Near-term staying liquid, right? Making sure that cash is available. long-term needs um are are actually in that growth phase for future down the road and that flexibility right again connects those two engines and that’s a piece that’s really important there. So again, what’s that going to look like? If you have those two engines and they’re growing um as you go through your portfolio, that normal market, what we’re what we’re going to be hoping for on a regular basis, market’s going to be growing up, right? That example we had at the beginning, you got to pull out $120,000, but you’re going to get that 6% growth. Your portfolio is growing more than what your your income need is. So, as that happens, the growth side of the portfolio is going to become bigger. And what we’re going to do is just use the this good old rebalancing to bring the portfolio back to balance.

That’s going to take the income producing side and make that bigger. Right? So the growth side is going to grow. We’re going to rebalance. We’re going to be able to pull the income out. Keep that both engines growing forward as as the market’s going up. But they’re not going to always go up. We’re going to have those pullbacks. And when that happens, we’re not going to have to react. We’re not going to have to change our strategy. We’re going to already have that plan liquidity. We’re going to have that income planned and coming out. We’re going to have stable assets, right? So, we’re not experiencing much as much volatility. And as I mentioned before, the big big piece here is this is what’s going to allow us to avoid the unnecessary sales of those growth assets. That’s really that key, right? Thinking back earlier in that presentation when we were talking about, oh, when that market pulls down, that’s when we really don’t want to go in and have to pull anything out.

That’s what’s really going to mess up the plan and cause a lot of damage to our portfolio. So, if we have preparedness for those down markets using those the the right level of income, having liquidity in the places we need it and the stability, then we can manage those down markets, survive through them, keep our growth assets invested so that when the bounce back happens, we have those growth assets invested the right way. So, again, good retirement plan. um adapts. All right. So, again, we talked about before from your personal life um to the markets to anything that’s going on there, we need to have that flexibility so that whatever is going on in your life, going on in the markets, um we can adjust and make sure that we’re still making the most out of that portfolio. Moving on to part six, um coordinating the paycheck. Again, we kind of talked about this before, but asset location can really change what that after uh uh after tax paycheck looks like.

Um so, understanding really what the investments are, strategizing before we get there, which accounts are we going to be pulling these out of because again, all of these decisions tie together. When we look at how much risk do we have in the portfolio, ah we need to derisk a certain amount has a major impact on uh you know, where our liquidity can be from. Um, every every choice that we take of which account we’re pulling money out of is going to impact our taxes for today. Um, taxes and future RMDs are pretty much connected there, too. Are we are we getting our IRA values low enough that we’re not going to have major RMDs down the road? Are we going to have more flexibility if we have money in a Roth uh in a Roth IRA uh when we want to pull that out later? But again, both of those pieces and where we’re pulling that money out is going to have a huge impact on Medicare, right? Um, are we going to get Irma?

Are we going to have too much income and get bumped up to the higher levels there? And then all of these pieces and how well we can keep that portfolio healthy and going is going to leave u lead to how much legacy are we able to to to leave to the family to other causes that we care about. Um again, you choose what you want to do with that money, but if that is that priority, you have to be factoring in all these considerations um before it gets to there to the end. So that’s why when we look at this, you know, we talked about the 4% rule that was designed in a in a vacuum, right? It wasn’t looking at tax um law changing. It wasn’t looking all the differences and things that happen in your life that you would need different uh levels of income, right? All of these things need to be factored in when we’re looking at and building a retirement income plan. So yeah, it’s much more than just 4% return.

We got to understand what that cash flow is going to be, what social security, other income is going to be. How’s that going to impact our needs? Um tax strategy, withdrawals, are we going to do Roth conversions? Um you know, do we have to deal with capital gains? You know, the estate plan, right? Do we want to hold on to certain funds for better tax uh purposes? Are we saving money for um char going to be donating to charities? So, we have leave them in different accounts. All of those pieces tie into what that investment strategy is going to be, how we’re going to allocate everything. So, all of these pieces do have to work together. It isn’t just, hey, I can just get one good investment product and then I’m going to have good income for the rest of my rest of my life. So, when looking at that, when you’re looking at your paycheck, these are the the the kind of the questions that I would be really focusing on. So, yeah, how much can I safely spend, right? Is it 3%, 4%?

What does that number look like? Um, where does that money come from? Am I selling stocks to do it? Is am I am I getting income off of CDs? Which account should should fund it? Are we going to be pulling out of that Roth IRA or the traditional IRA? Where’s that money actually coming from? Um, what does the decisions trigger? This is the complicated one because it’s hard to know if you haven’t built out that full cash flow plan, but the m the the the money you take out today and which account you pull it from can have impact on what your Medicare costs are going to be 15 years from now, right? It’s going to impact which tax bracket you’re going to fall into 15 years from now. So understanding what these decisions you make today are going to trigger all throughout uh the rest of your plan. And then the last one, what else does this portfolio need to do later? Maybe it’s just give you security that all healthc care is covered later in life. Maybe you have philanthropic goals.

Maybe you have, you know, kids and grandkids that you want to do. So understanding that what you want this portfolio to do later is going to be impacted by how well you can withdraw correctly tax efficiently out of the portfolio today. So retirement income it’s a it’s a it’s a planning problem not just an investment problem. So again that’s where I want to shift it from just being hey yeah 4% rule. How do we get investments that get that 4%? It really is a lot more about full retirement income planning versus just how do I get the investments to work. So, let’s talk about it. We’re going to finish up talking about how do you put your portfolio to the test? What do you look at? What are the things that we need? So, again, the key pieces that we talk about that we’re going to be looking at when we look at clients portfolios, right? Be intel. How much how much income can we take off of the portfolio? Two, what is that draw down? Right?

Are you if the market goes down 15%, is your portfolio going down 15%, is it going down 20%. How much how much damage is it going to get if we have that market pullback and you still need money? Um, tied into that, where is the liquidity? Where are you going to be able to pull money if there’s a market pullback? Um, or just in general, where you going to be pulling that paycheck on a regular basis? Accent impact, again, that just flows through everything on where you’re going to be pulling that money from. Um, and then building in flexibility. Do we have assets in different uh diversification, you know, different investments, different um investment products, um different types of accounts? Um how much flexibility do we have? Can we move things around so that in the future when things change either because of tax laws, because of the markets, you know, because of what’s going on in your life, do we have that ability to move things around as needed?

Um another way that we do like to review things and stress things. uh you know the 4% rule is is is trying to factor in what happens if we have you know up and down markets throughout. Um one of the things that we can we can stress test is specific market events right so we can look at it and say what if you know the S&P goes down 30%. If that were to go down 30%, what would happen to our portfolio, right? And if we’re diversified across stocks and bonds and real estate in the different areas, hopefully not as much, but we can we can go in and actually test that portfolio for that. Um, run through other scenarios, too, right? You you may live through the the financial crisis, the you know, the the um tech bubble. You know how bad that got. Well, how would your portfolio um hold up to that, right? That’s one of the things that we want to see so we can really visualize that, hey, if things got really bad, if things happened like they did in 2008, how much are we losing?

How how bad does it get? And if that pullback happened, do we still have other places to go through to generate the income we need for our retirement? All right. So, how would your current portfolio respond? And again, it’s not just about the return. It’s about the income it’s producing, the flexibility you have, and the ability to withstand any of those market pullbacks, right? So, not the highest return, um, but what’s going to give us that retirement paycheck even when conditions are changing. So, if you want to look at this and how would it actually look, um, in your portfolio, what would that analysis be? Um, as I mentioned earlier in the call, we’re giving you a chance to come out and kind of use us to stress test that portfolio.

So we can do a readiness review for your retirement income plan whatever it is right now whether you’re just kind of looking at it you haven’t made adjustments you’re going to make adjustments you were kind of say what what does that look like how am I doing we have this offer right here anybody million dollar million dollars of investable assets whether you’re recently retired and you’re trying to figure out you know uh income to to last the rest of it or if you’re maybe 5 10 years from retirement but you’re starting trying to figure out how am I going to make that shift um that’s who this is really for and what it It’s a three-step process. First step, you sign up for a meeting. You’re going to meet with a CFP professional here at Mission Wealth. Um, your job would be to to gather your investment statement so we can see what the holdings are going to be. That kind of that highle discussion about spending, incoming spending, and seeing what that looks like.

Step two, we’re going to go back. We’re going to use all our fancy software and all our analysis. Run those stress tests. Look at like the income, the liquidity, um, you know, run it against it. uh financial crisis 2008, what’s going to happen in there, take a look at all the tax considerations, right? Uh help you look at dissect whatever tax bombs might be coming at you later down the road and give you that full like retirement readiness, right? Income, is it going to be there? Where am I going to get it? Give you that full review. Um this is what we’ll come back and present what’s working, where maybe we need some attention, any risks, right? any any possible gaps um in the plan that we would see, any other opportunities that may be available to you that you’re not currently, you know, leveraging. Um so exactly what we would consider next and why. So again, those are the three steps to get access to that, what you need to do. Um scan the QR code.

I think we’ll probably put in the link into the chat, too. Um you have it available there, but if you just scan this with your phone, take the picture of it, that’ll take you to a link where you can sign up. Um just a calendar link, book a meeting. um and then we can get started on that. So,