Written by Hi, it’s Dre Griggs with Obsidian Wisdom. Today, I’ll share with you my retirement planning guidebook for families to make sure that when you retire, you stay retired, that you enjoy your retirement, and that you have peace of mind. When I talk to my clients and we talk about retirement, why it’s important, how do I make sure that I enjoy mine?
What is the most important part of retirement?
Most of the time I’m usually saying, Hey, what is the most important part of retirement? And most people will say, happiness or our health, or, we wanna make sure our family is okay. We wanna make sure we have enough money. There’s so much that goes into a retirement to make sure it’s successful, that that’s often why you hear me say it’s “more than riches”. That is true about all aspects of life. The success of your family. It’s about more than riches. Your retirement is more than riches. Whether you enjoy your job is more than riches. Whether you have a plan, it’s not always about the money. Now the money is important and we’re gonna talk a lot about it, but we have to put it in the right context. Our goal is not to get the money. Our goal is to be able to use the money to build comfort, to build the freedom, to build the flexibility so we can then do the things we want to enjoy. Now, sometimes we’re willing to sacrifice some things that maybe we wouldn’t if we really thought about it.
The businessman and the fisherman
It reminds me of the story of the fisherman and the businessman. And there was this fisherman. He would wake up at five in the morning. He would go fish for about four hours, so it’s about nine o’clock when he is done, and then he goes home. The businessman noticed that he kept doing that. Now, granted every time the businessman saw the fisherman’s boat, he always noticed that it was full of fish. And he just really was trying to figure out why the guy doesn’t fish all day, because if we fish all day, he can have so much more money. And so one day the businessman went up to the fisherman and he said, Hey, I’ve noticed that you stopped fishing around 9:00 AM. Can I ask you why? The fisherman was like, sure. I normally like to get home around 9, 9:30, because it’s important for me to have breakfast with my wife. And then I often see my kids off the school and, and that’s often something that I also cherish and I enjoy doing. And then I go into town around noon, one o’clock, and I usually catch up with old friends. We have a couple drinks, we catch up on old times, we share great stories. When my kids come home, I’m there to be able to hang out with them. And then I usually spend the evening, we play like board games and we just have fun in general. But I like to spend time with my family and my friends and just enjoying myself. And then the businessman asked the fisherman, have you ever considered fishing all day?
And the fisherman looked and he said, he said, I haven’t. And he said, why would I do that? He said, well, if you fished all day, then instead of getting one boatload of fish, you would have six boatloads. And then you could expand your business. And he said, well, well, why would I want to do that? And he said, once you expand your business, you could hire multiple people and then you could make a ton of money. And then the Fishman was like, okay. And then why would I want to do that? And he’s like, well, once you have all the money, then you are able to have the freedom to kind of live your life exactly how you want. And once you have all that money, then you’re able to cut back to fishing only from like five to 9:00 AM and then you can have breakfast with your wife, see your kids off to school, hang out with your friends, and catch up on old times. And then you can even be at home and hang out with your family early each afternoon. And the fisherman looked at him and he said, that’s exactly what I have right now. And the businessman looked at him and he said, yeah, you’re right. See, oftentimes we think that we have to have all of this money to be able to live a certain life, but the reality is most of the things that we would cherish in life, we can actually do that today.
Mindset shift
And it’s important to be able to have that shift because the reason that most of us have difficulty spending money is because we know what it costs us to get the money. We know that a $10,000 trip. Well that’s really expensive because; you know, that’s three months of my salary. That’s four months of my salary. I don’t, I don’t know how many months, one month of your salary. You would say, well, I don’t want to do that, because that’s, that’s, that’s such a long amount of time. Like, how could I trade one month of my life for one day of some sort of a vacation? But if you’re able to separate your money from your time and you saw the time as just what you do with yourself each day. Well, then you’re able to say, well, I can spend the money because the money isn’t really that important. My happiness, I’ve tied so many things up already. Now, granted, there are expenses. You are going to need to, to be able to have the money to afford certain things in life. But it money is about comfort, not about happiness. The happiness that comes from what we do each day. And Happiness by Design is a great book, and it talks about that. It says, look, at the end of the day, you’re gonna be happy from pleasure and purpose. How much of your time each day do you spend on pleasure. Versus how much of your time do you spend each day on purpose. If you have the right balance, then you’re gonna be happy.
1. Financial Planning for Retirement
That leads us very nicely into the first aspect of your retirement planning guidebook, and that is the financial planning. The financial planning is what type of lifestyle do I want and what does that actually cost me? Let’s go ahead and put numbers, pen to paper, let’s see exactly what it costs, and then we know what our goal is. You’d also need things like your time horizon. How long can I leave my money invested to be able to afford the freedom that I’m looking for before I need to spend the money? Generally, I tell people, if you want to have the money in the stock market, you need to be comfortable leaving that money alone for at least five years. At least five years; because the way the market ebbs and flows if you’re just looking for one year. I can show you the charts where it will show that you have the ability to gain or lose a hundred percent of your portfolio. But if you’re willing to leave your money in all the way up to 20 years. That the amount of loss is so insignificant that you actually are just talking about, am I gonna lose a little bit of money or am I gonna gain a solid, a very large investment, a very large return? You’re not as much at a risk of losing all of your money when you leave it in the stock market for 20 years.
No guarantees
Now, granted, we know the market goes up and down. We know that I can’t make any guarantees, but I can say, statistically speaking, the longer you’re willing to leave your money in the stock market, then it usually works out in your favor. So once you know how much your expenses are, then you need to know what my income is. Now, your income, most of you are starting with active income or business income, which is fine. When you start with that, then you’ll say, okay, this is the amount of income I have, these are the the expenses that I have. What is the amount of money that I plan on having when I retire? Do I wanna have 80% of my income because that’s what most people have.
2. Eight Best Retirement Plans
The second part of your retirement guidebook requires you to choose the best retirement plan for you. I’m gonna go over the eight most common, most successful retirement plans. I go into this in great detail in my “Best Retirement Plan For Me” article, so I will hit the highlights here.
- 401(k), 403(b): Pre-tax retirement plan. Most Americans have a 401(k). It’s a great place to start and usually has a company match for you to access free money.
- Individual Retirement Account (IRA): For those who don’t have a 401(k) or have changed jobs. You can open an IRA. It’s nice because you have more customization and the fees can be lower than a traditional 401(k).
- ROTH IRA: After-tax investments offer tax free income in retirement. You do have to qualify for a ROTH.
- Pension: Most companies don’t offer a pension anymore. Your employer will give you an income the rest of your life based on your salary and number of years worked.
- Real estate: Rental income and appreciation of asset. Can be used for income in retirement or you can sell the property to fund your retirement.
- Business ventures: Profits from business and selling your business to fund your retirement.
- Annuities: Similar to a pension. Offers an income stream for life. Offered by insurance companies. There is a difference between variable annuities and an traditional guaranteed income annuity.
- Cash value life insurance: An alternative investment option if you are maximizing all other investment options. Traditionally for a high income individual who is interested in creating multiple streams of tax-free income.
3. Building Income Streams and Managing Money In Retirement
I don’t know if you know, but 65% of millionaires have at least three streams of income according to the IRS. Which means that if you want to be a self-made millionaire, then you would want to have multiple streams of income. The majority of people have active income where you get it from an employer where you work and you work a certain amount of time and they give you a certain amount of money. The second most common is people will have business income profits from your business. And that’s just after you take your revenue and you subtract your expenses. Your profit is what you’re, you’re left over with. You have royalty income, so maybe you have an invention, maybe you have a patent. And you’re able to leverage that to be able to generate income where you allow other people to use. Your, your patents, your ideas for their own company. The fourth one is gonna be your interest income. So that’s gonna be money that most of us get when we put our money in like a CD or a money market account or a savings account. While it is not usually a high return. It’s very safe. You put a thousand dollars in, you’ll probably have $1,001 in a year.
It is very unlikely that you would have $999 in a year. When you put your money in those type of investments, they’re just very safe. But they do generate an income and it is considered a stream of income by the IRS. Your fifth stream of income is going to be your investment income. That is gonna be normally your dividends from your investments. Capital gains. That’s when you sell your investments. And then the last one is gonna be your rental income. You could technically rent equipment, but for most people, that’s gonna be rental income from real estate. When you have those seven streams of income, you don’t want to stay in only the earned income. You want to be able to diversify your income streams. As you add multiple streams. You already know the magic number. 65% of millionaires have three streams of income.
4. Future-Proof Your Retirement Plan
If your retirement plan assumes that it’s always rainbows and Skittles and that everything is gonna go perfectly, then you don’t have a plan. You have a wish and we can’t wish for our retirement plan to go perfectly. We have to plan for what is inevitably going to happen and what does that look like. You have things like a disability where maybe something happens where we can’t work and our plan required us to work for an additional 10 years. But something happened that we could not work and make the same amount of money that we used to make. I have someone who was an engineer and I forget the exact disability he had, but he could no longer work in that type of capacity anymore. And the issue for him was the work that he could perform, paid him maybe half of what he used to make. And if you have disability insurance, then you’re fine because they’re gonna cover the income. And then there’s a couple versions of disability insurance. Is it any job that I can’t do for it to kick in or can I just not do my physical job that I used to do? And then that kicks it in. Where you can make these changes, but you want to be prepared. How else can you future proof?
Likelihood of financial catastrophe
You have to look at what’s the likelihood of financial catastrophe and can I do something to prevent it? When you’re younger, your most valuable asset is your future income earning potential. Which is why most people have life insurance when they’re younger. Now, as you get rid of debt, you may say, all right, I don’t need my life insurance anymore. That’s, that’s your choice. You’re future proofing. So you may want to have the life insurance to make sure that there is no financial catastrophe if you or your spouse pass. You have recession sometimes. What are you gonna do if there’s a recession? Do you have all your money in real estate? Because the real estate market normally goes down with the stock market. They don’t normally go the opposite direction. So do you have something that goes up in a recession when other things go down in a recession? Right.
Be prepared
A lot of people like to invest in, in gold. I’m, I’m not really here to, to pitch you on gold, but you have to have something that you are comfortable with when we’re in a recession. Something that you know will go up. You want to be prepared for it. If there is a chance that you’re getting fired. Do you have any emergency fund in place, so you can pay your bills while you’re unemployed. Do you have long-term care where you don’t have to be put in a nursing home when you get older and you’re able to make sure that you are taken care of in your own home with the dignity that you deserve? Do you have these plans in place? This is how you future proof.
There is a certain percentage of likelihood of something happening. And each of us, it could be different where you may say, well, everybody in my family dies at 60. Okay, well if everybody in your family dies at 60, then we should plan for what happens if that happens. And then also what happens if we don’t? I talk to people all the time, they’re like, well, I had this one friend’s, cousin’s, dog, cats uncle who when he was gonna retire at 70, he passed the day after he retired. So he didn’t get to spend any of his money. And that’s not gonna happen to me from the second I retirement I’m gonna take my money as soon as they let me take it. Which right’s? Neither here nor there. But what happens if you were to live to a hundred?
I often feel that most of the time people are retirement planning. They’re planning for an exact specific situation, and they’re not really planning for those other possibilities that could completely ruin your retirement. Where you have everything set up where if I work this long, and I pay these bills and I make this much money, everything goes perfectly. And you know, you get this stock returned and all my investments in my real estate and my business sell for $30 million, I’m gonna be able to retire perfectly.
5. Ideal Retirement Lifestyle
Your retirement lifestyle is my favorite. That is your ideal retirement lifestyle. I told you I was gonna come back to your goals. We can’t forget the whole reason we’re doing all this. We’re doing all this so that you can have a certain lifestyle, and I don’t know if that lifestyle is you staying in your house or selling it. I don’t know if that lifestyle is you living in America or going to Costa Rica. I don’t know what a lifestyle is, but you need to.
Does your lifestyle require you to travel all over the world? Or are you gonna sit at home on the porch and read a book? Does your lifestyle include your spouse or does it not? Does it include your children or does it not? Does does your lifestyle have have anything like a dog, a cat, a boat, a car? Like what does your lifestyle have? Ideally, I would tell you to list out 50 goals that you have for yourself. Just 50 things that you would love. It could be people you want to meet, places you want to go, things you want to do cause you wanna support.
6. Navigating Social Security and Medicare
We have no idea if Social Security is going to be there, but I think right now Social Security is projected to go bankrupt by like 2035, 2037. And so most people know that means we have to figure something out and exactly what that is, whether you’re gonna raise the age or you’re gonna decrease the benefits. The reality is that there has to be a change that’s coming. More times than not, people ask me, Dre, do you think social security is gonna be completely gone? It’s gonna be $0. And I generally would say no, because you are paying that in taxes.
What most likely happen is the Social Security Office can’t increase the retirement age. That would be an act of Congress. But what they can do is decrease the benefits, and that’s probably what they would do. They would change the benefits of what you would get from Social Security. So it becomes a decision of how much you want to rely on Social Security. I think something about 40% of retired Americans. All of their income comes from Social Security and the numbers even higher for just where the majority of their income comes from.
When to take social security?
The good news is if you have a plan in place that allows you to not, take the money out when you can, like when you take the money out early, but you wait until full retirement. And that age differs for each of us, and I’ll put a chart up that shows as far as what age you would need to be to be fully considered, fully retired based on the year that you were born. But once you’re fully retired, if you forego each year that you’re allowed to go into social security early, it’s like increasing your return by 8%. So you have an 8% growth in the income that you would get each year. I believe on the average household, gets about $2000. A month in Social Security. I believe that that’s what it is about average, and that’s, that’s just slightly above the, the poverty line. So it becomes very tough to manage your overall household off of just social security. And it becomes very important to have a retirement plan in place that supplements it. Now, ideally, if you at least were able to wait until you were considered fully retired. Well, now that number is much higher because it’s increased by 8% every single year.
Understanding Medicare
When it comes to navigating Medicare, that one’s a little bit of a different animal, but it’s equally complex and can be rather confusing. The most important thing you can do first for Medicare to make sure that you don’t have those extra penalties and the cost is to enroll on time. So three months before you turn 65 to three months after you turn 65, that is that seven month span that you have to enroll in Medicare. Even if you don’t plan on doing anything with it, you do wanna make sure that you sign up on time so that you don’t have those extra penalties and the higher fees that you would end up paying. We’ll talk about each of the parts. So there’s four parts of Medicare. So you have Part A and that covers the hospitals. So part B covers your doctor visits and your outpatient services. Things like your, your blood test, your x-rays, things like that. This is the one where it could increase your fees if you weren’t enrolling on time. So if you didn’t enroll in that seven month period, Medicare, they’ll increase it by about 10% every 12 months that you’re late and enrolling in it.
And so you do wanna make sure that you’re at least enrolling it on time, even if you don’t plan on doing anything with it. And Medicare Part D has your prescription drug costs and Medicare Part D has some of those same fees when you enroll late. So those ones are a little bit tighter where it could increase your prescription drug premiums by 1% every single month that you’re not enrolled on time.
Accepting, Participating, or Non-participating
After you’ve enrolled in Medicare, it’s pretty important that you choose your doctors very carefully. So you have participating doctors, which is pretty nice. It just means whatever Medicare pays, that’s what they charge you. So whatever Medicare covers, that’s exactly what your fee will be. And so you don’t really pay anything out of pocket outside of your just monthly premium. So that’s kind of nice.
You have non participating, which is a very fancy way of saying those doctors will accept the Medicare payment, but they’re allowed to charge you up to 15% more than whatever Medicare is. And you would pay that out of pocket. And the third one is opt out, which is just a very fancy way of saying that those doctors are not in the Medicare program. They don’t care what Medicare charges because they’re going to charge you whatever they have already said in their mind. And then you’re gonna have to pay that. There is no no help for Medicare for someone who’s opted out. It’s important that you understand your doctor’s fee structures and how they charge, whether they accept Medicare, whether they’re participating, non participating or opted out.
7. Tax Planning Strategies For Retirement
There are plenty of tax deductions and credits available for families saving for retirement. It’s important to know whether you are being tax now, taxed later, or tax-free. Depending on your current income, you can decide which buckets you want to focus on. Contributing to a retirement account, such as a 401(k), 403(b), or individual retirement account (I.R.A.), can help you reduce your tax bill today. These would be considered tax later accounts.
Accounts like the ROTH IRA and municipal bonds can ensure you have tax-free income in retirement. Capital gains, stock market investments, and business income generally have a more favorable tax treatment than traditional income. Ideally, you will craft your retirement plan in the most tax-efficient manner by limiting taxes and eliminating penalties.
8. Five Best Withdrawal Strategies
We go into great detail regarding the five best withdrawal strategies for your retirement planning guidebook in another post. In short, the right withdrawal strategy depends on many factors, such as: money saved, fear of running out of money, age you’ll retire, and the amount of income your investments are generating.
Withdrawal strategies include: (1) the 4% rule, (2) fixed percentage, (3) three bucket strategy, (4) fixed dollar amount, and (5) systematic withdrawals. Regardless of your situation, you must account for the required minimum distributions (RMD) from tax-advantaged investment accounts [401(k), SEP, IRA, 403(b)]. RMD rules require you to withdraw a certain portion from your investments each year after 72 or you’ll have a 50% tax penalty on the amount you didn’t withdraw.
9. Legacy and Incapacity Planning
Your legacy is how you will be remembered and how you transfer your wealth. It is essential you have a plan in place in your retirement planning guidebook. Do I have a trust? How am I leaving the money for the kids? Am I comfortable with my kids? Do I have a will in place? If we’re splitting everything evenly amongst my kids? Are some of my kids too young? So I have to have a trust in place? Because your kids can’t accept the money from you, right? They, they can’t enter into a contract with the government because they’re not 18, so the government won’t give them any of the assets that you left them. Do you have someone to watch over the kid? Does that person know that they’re gonna watch over the kid? Does the kid know that they’re gonna go with them? If something was to happen. What are we doing with our real estate?
Do you need a trust?
Because those are sometimes hard to split up. If you put the real estate in something like a trust, then you could have it set up to where some of your kids get income from the real estate while the other kid, once that’s paid off, will get the actual real estate because they want to keep it, you know, build like a family legacy. Is there a nonprofit that you always take care of? Your, your church or a cause that you believe in and you wanna make sure that they’re set properly. You wanna leave something for them. There’s so much that goes into legacy planning, but it always starts with just having a will. Just have at least a will to say where your money is gonna go. I think that’s a fantastic place to start, and then we can talk about what trust makes the most sense for you as far as determining how that money is allocated, how it’s given out.
Keep your family together
You don’t want your kids arguing and fighting in court. Swearing they’ll never talk to each other again. You just, you don’t wanna leave that kind of a legacy. You want to leave a legacy that shows your family that they were very valuable to you, that you took care of them and they’re gonna be able to move on and transition to much better than if they were trying to figure out how, how are we paying for this? Where’s the money at? I don’t, I don’t know. Dad ever told me, you know, mom never told me. I have no idea where the money is. I’m not sure what we could do. I don’t, I don’t know how many insurance policies they have. It would be good if you could just list off all of your assets. All your benefits, and probably have a family meeting. I know it’s not the most fun thing to talk about, but if you wanna be able to successfully leave your legacy, you’re gonna want to have these conversations. Most people will tell you that splitting things doesn’t work very well. Giving the asset to one person here. Giving this asset to another person there. And giving a different asset to the, you know, the third, fourth kids that vet normally works better. But I find that if you have the proper communication, it increases the likelihood that the transition goes well. You know, imagine any anything that you’ve done in your life where no one ever talked about it, right? So no one ever talked to you about college.
10. Put It All Together
You have a whole bunch of information all over the place. You have seen, you put some pieces here, some pieces there. Don’t shove all this information in that one drawer that has all the bills that we don’t go through. Don’t shove it all in the shoebox. We like, I’ll get to it later. You want to take this and put together your retirement plan. You want to have the money set up, have the investments set up, and the legacy. Your goals, the whole reason we have the money, what freedom looks like and happiness. Success and wealth. What is your retirement number? You wanna be very comfortable and confident in that number, and then you know that you’ll be able to live in your retirement and have the best of experiences.
And you don’t have to worry about paying Uncle Sam too much. You don’t have to worry about your kids fighting. You don’t have to wonder if your kids are gonna be okay. You don’t have to wonder what you’re gonna do with your house, or if you have enough to be able to eat out a couple of times or to take that trip, you know. And you have that confidence. You know for sure that your retirement plan is set up in a way that regardless of what the future holds, you have a plan for that.
More than riches
Because as I’ve told you from the beginning, it’s about more than riches. But you’ve often heard me say there is a plan for every season in a process for every result. I have yet to find a situation that isn’t possible to overcome. Even the most dire of situations where you’re looking at the Great Depression. As awful as that was, as as as scary as I can imagine. I remember when she had passed and my mom was talking about her having money in mattresses. and in the closet and different things because you know, granny lived through the Great Depression. She didn’t trust banks anymore. She wasn’t playing with banks. And I can’t even argue with it because sometimes I’m looking at the banks and I’m like, I don’t know if I trust banks either. But that was something that she went through and that was how she dealt with it. But isn’t it also true as bad as a Great Depression was that there were people who made more money than they’ve ever made in those years? Of course it’s true. They had a different plan.
Same with the great recession that we just had in 2009, 67% of the stock market lost value. I think it was something like that. But yet it’s also true that there were people who made more money than they’ve ever made in their life during the Great Recession. Same with Covid, Bill Ackerman. He was a notable of that. I think they said that he invested like $16, $17 million against the stock. Like, you know, he shorted it saying that the Covid was going to ruin the stock market essentially. And he was able to make like two and a half billion with a B dollars. So he made more money than he ever made in his life from Covid. Now, I’m not telling you to go short of stock, but I am saying that if your retirement plan is future-proof, as we mentioned, and you have taken care of all of these situations. You will always be in the best position you possibly can. It doesn’t mean you’ll always win, doesn’t mean everything will always be rainbows and Skittles, but it does mean that you’re in the best position that you can possibly be in.