3 Helpful Tips Going Into Retirement with Jessica Cannella

 

Jessica Cannella: Congratulations. You’re thinking about retirement. You’ve worked 30, 40 years, maybe longer, to get here. You’ve been a good steward of your finances. You don’t spend recklessly and you’ve even managed to keep your debt low.

Hopefully, the kids are off the payroll and you’ve accumulated a nice little nest egg. Maybe the beach is calling your name or perhaps it’s your grandkids calling your name from the beach. Maybe it’s the comfort of your own home. The projects that you’d work on if only you had the time. Is now the time? Are you researching questions like, can I retire? Do I have enough?
If you’re an engineer I’ll venture to say you’ve started doing some math. You’ve recently been updating your spreadsheets to include things like inflation and cost of living adjustments.

I bet you’re checking if that old 4% rule applies to you in your situation. You know, the one that says, if you just withdraw 4% a year you’ll be a-okay in retirement? Maybe you’re one of the lucky ones and you’re, maybe, attempting to calculate your pension or lump sum options. If you don’t work for the government, it’s usually best to go with a lump sum option. I’ll link my lump sum or pension video in the comments below for more on that.

If you’re considering retiring and you’re feeling a mix of excited, apprehensive, and a bit overwhelmed, you’re not alone. More importantly, you’re on the right channel. You didn’t come this far to sit there and wonder how far can I go financially.

Jessica Canella, co-founder and president of Oak Harvest Financial Group and founder of the Go-Go sisterhood. Today I’m going to give you three tips for generating income in retirement. Tip number one, CYA. For those of you who haven’t heard this friendly call to action, it means cover your [beep]. I know, I know. Words a lady, let alone a professional, shouldn’t say, right? Sorry, mom, but y’all need to remember this one. Your lifestyle should not change when the market goes up or down.
Gosh, could you imagine your phone rings, it’s your husband. “Donna, our accounts are up big today. Make us reservations at the steakhouse. Go ahead and get you something nice to wear too, baby.” 4:00 PM, phone rings again. “Donna, honey, crazy turn of events. The market is down big this afternoon so cancel the steakhouse reservation and do you have that receipt to the dress?”

Let’s be real. Life has enough crazy turns of events as it is. Letting the market dictate your lifestyle cannot be one of them. The market is volatile. It goes up, it goes down, corrections happen and they happened when you were busy working and retirement was still a far-off dream. Recessions happened, epidemics happened. If you were working in 2001 or 2008, crashes happened. Things happen and things will continue to happen. Russia and Ukraine are happening right now and if you’re in retirement or seriously starting to think about it, the differences is that now for you it really matters. You’re feeling the uncertainty now.

A few industries aside, what hopefully didn’t happen to you when you were working was that your boss called and said, “Hey, market’s down 20%. Yes, I’m going to have to go ahead and deduct that from your paycheck, but see you tomorrow.” Retirement should be no different. Reliable and consistent income in retirement is essential. Your lifestyle depends on it, your mental well-being depends on it. Sometimes your physical well-being depends on it. Stress is the leading killer of men over 60. If you’re looking at the market every day determining your readiness to retire, then you’re probably feeling the stress.

What’s the anecdote and income plan? Though it’s been a while since I’ve heard the old 4% rule suggested as a viable income plan, I would be remiss if I didn’t take a moment and mention it just in case you’ve fallen victim to this terrifying advice. Victim. Bold choice of words. Yes, and for a good reason, just ask someone unfortunate enough who had their retirement time up with the crash of 2008 leading into what is now known as the great recession. Maybe they couldn’t retire, or worse, like so many, maybe they were already retired enjoying retirement, and had to go back to work just to make ends meet.
We all remember it. Seeing someone’s 80-year-old papa who should be sitting at the kitchen table cheating the grandkids rummy instead chasing down customers for their receipt at a local Walmart. How did this happen? It’s called sequence of returns. If you’re relying on the 4% rule to get you by, you’re dependent on a market performance. You can’t time the market. Yes, historically the market goes up over time. If you’re withdrawing 4% in a year like 2007, the S&P was up over 20%, you’re feeling good, you’re buying the steakhouse dinners.

The reverse is true too. If the market is down 38% like it was the very next year, the S&P down 38% in 2008, your withdrawal wasn’t 4%. You withdrew 38% plus 4% for a potentially devastating 42%. People don’t come back from that without having their earned income. I don’t want to see you at Walmart when you should be with your grandkids. The average recession lasts 15 months. During the great recession, the S&P fell a staggering 49.17% from its high in October 2007 before bottoming out in March of 2009. Your lifestyle should not depend on what the market does or does not do. We cannot time the market.

Tip number two, create retirement paychecks. When you have a reliable income in retirement, you have freedom in retirement. Freedom to spend money, freedom to spend time, time doing the things you love with the people you love, and most importantly, freedom to sleep peacefully at night knowing that you’re going to be okay in retirement. Sounds good, right? Great. Where do you get these checks from? How much do you need? The first question is straightforward. You need to have enough income to cover your baseline expenses.

A baseline expense is not the same thing as a budget or spending parameters in retirement. You should want to spend a little bit more in retirement. That first 10, 15 years, we call it the go-go years where you’re feeling good, able-bodied, you’re ready to get up, get going, and enjoy the fruits of your labor. Baseline expenses is the sum of your fixed expenses like your mortgage, car payments, utilities, property taxes, insurance premiums, plus any habitual expenses like the pool guy, the lawn guy, dinners out, subscriptions, gas, and groceries.

A quick way to grasp these expenses is to monitor your checking account or your credit card statement for three to five months. You’ll identify in that time period spending patterns and habits. The total of the expenses that define your lifestyle equals your baseline expenses. Your retirement paychecks should be designed to satisfy the amount of your baseline expenses.

Now the question of where are the checks coming from? I want you to think of the retirement paychecks as streams of income. You want at least three but ideally four or more different streams of income in retirement. You got to have options. That old saying don’t put all your eggs in one basket, that applies here. Income streams come in several varieties and that’s important. An income stream can provide fixed income like your pensions, annuity incomes, social security and rental incomes.

They may fluctuate a little bit to adjust for things like cost of living or inflation, but for the most part, they’re stable sources of income that typically won’t decrease. Ideally, the fixed paychecks should cover your fixed expenses. Other income streams are directly correlated to the market like dividend income or taking distributions from your retirement accounts. Ideally, you want these accounts growing steadily based on your risk tolerance and your risk capacity so that the income streams can grow and build over time.

Then we have our low correlating streams of income. What does this mean? An example here is a publicly traded or private REIT. Low correlating means the stock market doesn’t directly affect this type of income. A mix of income streams in retirement provides flexibility to pick and choose when and what checks to turn on and off. Having a mix of income streams in retirement provides flexibility to pick and choose when and what checks to turn on and off.

Which brings me to tip number three. Get a quarterback. Sports can be unpredictable and life can be too. Retirement doesn’t have to be. Having an income plan and an advisor to help you pivot when life throws curveballs is the path to freedom in retirement. Transparently, I don’t know a lot about football, but I know the game well enough to know that the game would be a hot mess without a quarterback. Yes, each player owns their role on a football team. Blockers block, kickers kick, but it’s the quarterback who calls the plays, communicating to the rest of the team what’s happening and when. If it wasn’t for him it would look like a bunch of dudes running around in tights with no clear direction.

Is that your retirement portfolio, think of it like this. You’re the coach of your retirement. You worked hard to get to where you are and you’re finally here. You’ve made it to the playoffs baby and it’s game time. You’ve briefed your advisor, the quarterback, on your goals and she understands what winning means to you, what it means to your family. Your portfolio and its income streams, those retirement paychecks. They’re the team that are going to support you in retirement.
Your income plan is your playbook. That playbook needs to have a variety of plays that consider real threats to your retirement, like changing tax codes, unforeseen expenses, market volatility, inflation, and of course, medical expenses. A game plan is just a place to start and plans change, the game changes. You want to avoid taking a paycheck, for example, from your retirement or investment account if that investment account is down, if we’re in the middle of a, say, COVID scenario. You don’t want to keep that paycheck coming to you if it’s going to be reduced.

Your quarterback will help you to understand how to play the game. Maybe we put that check on hold for a moment and we seek to pay ourselves with a check that cannot lose money from over in this bucket. Deciding when to take social security is a play that you don’t want to mess up. Get a quarterback that’s going to help you to consider things like cash flow, maximizing that check, how the tax implications relative to your total income picture will affect your social security check. Get a quarterback. Get a quarterback that will run plays that are going to keep you and your family winning the game.

Now let’s huddle. Quick recap. We talked about tip number one, CYA. Remember what that means? Tip number two, retirement paychecks. Create them. Tip number three, get yourself a quarterback so that you know when to turn on and off those retirement paychecks to prolong the longevity of your accounts. For more information and retirement tips, do not forget to subscribe to the channel and leave us a comment below if there’s something you’d like to speak more about. In the meantime, if your team’s running amok, get a quarterback, give us a call, and get yourself winning the game in retirement.