There is a common misconception that the best way to retire is to simply build up a large lump-sum of assets and slowly withdraw from those assets over time, but many Americans fear they will outlive their retirement savings. In this episode of Money Script Monday, Michael explains a retirement strategy that shields assets from stock market volatility and provides a lifetime stream of income.

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Video transcription

Hello, everyone. My name is Michael Clementi and, first of all, I want to thank you for attending this episode of Money Script Monday.

Today, we're going to be answering the question, what is your lifetime protected income number?

Now, we'll start off by defining and breaking down the sources of protected income. Then, we'll walk through a real-life case example.

And, at the end, we're going to give you the tools to solve for what your lifetime protected income number is.

This is otherwise known as the spend-down strategy or the 4% rule. And a couple of problems arise when taking advantage of these strategies.

One is that it's assuming everyone has the same retirement portfolio, 60% stocks and 40% bonds. But if you don't fall into these criteria, you may be selling yourself short retirement.

The second problem is every time you withdraw from these assets, you're lowering the account value down, almost giving yourself a deadline for when the money will be running out.

What we want to do, change that mindset, turn those assets into income.

What is it?

Let's start by defining what lifetime protected income is.

This is going to be an income stream protected from any stock market volatility. So, any negative downturns, zero is still your hero and this is also contractually guaranteed until life expectancy.

No way you will ever outlive this source of income.

There's only three sources of income that fall under these criteria.

First one is a social security plan. Now, if you're working, getting a pay check, you're already investing in your social security, but you need to keep in mind that social security only accounts for 40% of your retirement income.

I'm not making this number up. This is coming directly from ssa.gov.

So, the people providing this for you are telling you that this will not be enough to solely rely on. You need to backfill that extra 60%.

The second thing we need to keep in mind is that there's over 500 different ways to file for social security.

So, when that time comes, make sure you sit down with a financial professional, find out the best strategy and age to maximize your income.

The second source is the pension. This is the income stream directly from your employer.

It's retirement income provided by certain employers, mostly from nurses, police officers, teachers, firefighters, or government-mandated jobs.

When you want to activate that pension, make sure you sit down with your spouse. Figure out the best way to maximize that source of income.

And lastly, the last source is an annuity. This is a great way to guarantee a portion of your retirement income.

Transferring the risk off of you onto the insurance carrier, protecting it from stock market volatility, getting positive index returns to market, and also taking advantage of the income rider for an income stream you'll never be able to outlive.

Real Life Example

So, now that we know what lifetime protected income is, the sources, let's move on to a real-life case scenario.

This was a gentleman, an account executive at a marketing firm, aged 55, planning to retire at age 65.

His retirement portfolio consisted of a 401(k), which he was investing in far past his company match, a small IRA in place, and the rest was in a savings account.

He was solely relying on the 4% rule. And from what we talked about before, nothing in place for guarantees or nothing in place for protection.

So, let's fast forward down the road when he's approaching retirement. The year is 2008. The stock market crashes, the housing crisis hits, and he loses 40% of his total retirement assets.

That idea of retiring at 65, taking those long vacations, buying the boat, showering his grandkids with presents, is completely gone and vanished.

He needs a work all the way up until life expectancy just to backfill all the money he had lost.

So, what can we do today to give you the tools to avoid a situation like this?

Budget

The best way to solve your lifetime protected income number is to create a budget. And there's two parts to your budget.

There's your essential versus discretionary.

Essential expenses are what you need your money to do.

And just some common examples is living. You need clothes. You need food. You also need to provide household and shelter for your family, gas, electric, water bills.

Automobile and transportation, that's getting to and from work, what might you need to put into your car to keep it running?

And then insurance, any insurance in place, medical, dental, vision.

So, before you start pulling out the piece of paper, writing down all your expenses right now, what I want you to do is look down below this video, there's a link to this worksheet.

It's called our retirement lifestyle worksheet. It goes over everything we talked about today, plus breaking down all the categories.

All you need to do is go through the essential expenses, total them up and circle that number because that is your lifetime protected income.

Even on the backside, it's going to give you a roadmap of where you may be overfunding some accounts that don't line up with your goals.

The last thing I want to talk about today is that, in my experience of talking to friends and family about them planning for retirement, none of their meetings with their financial advisors sounded like this.

It was mostly about finding the best stock at the right time for the highest return. Very rarely were they solving for income, especially lifetime protected income.

So, if you are in fear of outliving your money or being exposed to too much market risk, please fill out the retirement lifestyle worksheet and consult with a financial advisor.

Again, my name is Michael Clementi. I want to thank you for your time today. We'll see you next week.

Additional Resources

• Retirement Lifestyle Worksheet