Nikki:

Imagine you’ve reached retirement with a million dollars saved. That sounds great, right?

But then someone asks a surprisingly difficult question:

How much can you safely spend each year?

Is it $40,000? $50,000? $70,000?

And where should that money come from? Should you withdraw from your IRA first? Your Roth IRA? Your brokerage account? Does it really matter?

The answer is yes—it matters a lot.

Today we’re exploring why retirement income planning is about much more than following a simple rule of thumb. We’ll discuss withdrawal strategies, taxes, investment accounts, and how all of these pieces work together to determine not only how much income you can generate, but how long your money can last.

Welcome to Paladin Financial Talk.

Joining me today is Financial Advisor Jack Ekholm from the Paladin Financial team.

Jack, thanks for being here.

Jack:

Absolutely, Nikki. Thanks for having me.

Nikki:

Before we dive in, I want to brag on you for just a minute.

For anyone who hasn’t met Jack yet, you can learn more about him on our website at paladinfinancial.com, but here’s a little background.

Jack graduated from Drake University with degrees in Finance and Actuarial Science—which sounds incredibly difficult. Fortunately for us, instead of becoming an actuary, he joined the Paladin team.

Before coming here, Jack completed internships with Travelers, Allianz Life, Principal Financial Group, and Deloitte Consulting.

He started with us as a paraplanner and has continued to grow professionally every year. Today he’s earned his Series 7 and Series 66 registrations, holds his Life and Health Insurance licenses, and is currently working toward becoming a Certified Financial Planner™ professional.

Congratulations on everything you’ve accomplished.

Jack:

Thank you. I appreciate that.

I’m gearing up for the CFP® exam next, so that’s the next big milestone.

It’s been a lot of work, but it’s been a great learning experience.

Nikki:

You’re going to do great.

If anyone can pass another exam, it’s you. Looking at everything you’ve accomplished over the last few years, it’s really impressive.

You also work alongside Jeff Foley as part of one of our advisory teams. You began by supporting him as a paraplanner, but over the last couple of years you’ve really grown into your role as a financial advisor and partner in serving clients.

One of my favorite things is hearing clients compliment the work you do.

Before we get started, is there anything else you’d like listeners to know about yourself?

Jack:

Not much to add.

For those who are familiar with Jeff, we’re actually pretty similar. We’re both analytical by nature and probably a little on the nerdier side when it comes to financial planning.

I genuinely enjoy digging into topics like the one we’re discussing today.

Nikki:

I love that.

And you definitely came prepared.

Let’s talk about where today’s conversation fits into our current podcast series.

Over the next several weeks we’re focusing on investment strategies and retirement withdrawal strategies.

Building wealth and creating retirement income are two completely different challenges.

Accumulating assets requires one strategy.

Turning those assets into reliable retirement income requires another.

Throughout this series we’re covering the key concepts that guide retirement planning. Some of the terminology may sound technical—things like accumulation, withdrawal strategies, diversification, and asset allocation—but the real question is much simpler:

What decisions need to be made, and why do they matter?

Last week Jeff Foley introduced the foundation of investment strategy.

He talked about starting with goals.

That may sound simple, but having clearly defined goals influences every financial decision that follows.

We also discussed concepts like net worth, cash flow, taxes, diversification, asset allocation, and some of the common mistakes people make while they’re still building wealth.

Today we’re shifting our focus.

Instead of asking how to build retirement savings, we’re asking:

How do you actually turn those savings into retirement income?

You’ve spent decades accumulating assets.

Now you’re ready to retire.

How do you make that money work for you?

Jack:

That’s exactly the right question.

And I think it’s helpful to remember that having retirement goals makes planning much easier.

Ideally, while you’re still working, you’ve identified the income you’d like to have during retirement and intentionally built your savings around that goal.

Of course, that’s not everyone’s experience.

Some people simply reach a point where they’re tired of working.

They decide they’re ready to retire and ask a different question:

“If I retire today, how much income can my portfolio realistically provide?”

That’s actually a difficult question to answer because you’re balancing two competing priorities.

First, you don’t want to overspend and risk running out of money.

For most people, that’s the biggest concern.

No one wants to be forced back to work later in life because they withdrew too much too soon.

But there’s another concern that often gets overlooked.

You also don’t want to underspend.

Technically, retirement becomes much easier if you’re willing to spend very little.

But is that really the retirement you’ve worked your entire life to achieve?

Most people want the confidence to enjoy retirement—not simply survive it.

That’s why there are several different approaches people use to estimate how much income a retirement portfolio can safely generate.

Today I’ll walk through some of the more common strategies that people have probably encountered online or read about elsewhere.

Nikki:

Before we get into the different withdrawal strategies, I want to share a real client example because I think it helps make this more relatable.

You and I were talking before we turned on the microphones, and we couldn’t remember the exact statistic, but it’s something like 60% or more of people retire earlier than they originally planned.

When you’re building a retirement plan, it’s easy to say, “I’ll just work a few more years,” or “Maybe I’ll work part-time because I could never sit still.”

But life has a way of changing those plans.

Health issues happen.

Family situations change.

Sometimes people simply decide they’re ready.

The reality is that many people retire much earlier than they expected.

I think that’s an important theme because it runs through everything we’re talking about today.

Even if we discuss rules of thumb, life rarely follows a rule of thumb.

Things change, and your retirement plan has to be flexible enough to change with them.

So let’s imagine someone comes into our office and says,

“I think I’m done working.”

Maybe they’re considering part-time work, maybe they’re not.

By the end of the conversation, they’ve decided they’re ready to retire.

Jack, where do you begin?

How do you determine what advice to give them?

Jack:

There are several different approaches you can use to determine how much income a portfolio can support in retirement.

One of the simplest methods is based on Required Minimum Distributions, or RMDs.

Most people are familiar with RMDs because they eventually apply to traditional retirement accounts like IRAs and 401(k)s.

Once you reach the required age, the IRS calculates the minimum amount you have to withdraw each year based on your life expectancy.

If we apply that same concept to someone entering retirement, the process is fairly straightforward.

Let’s say someone expects to live another 25 years.

In the first year of retirement, they withdraw one twenty-fifth of their portfolio.

The following year they withdraw one twenty-fourth.

Each year the withdrawal percentage increases slightly as life expectancy decreases.

One advantage of this method is that, theoretically, your portfolio never completely runs out because you’re only withdrawing a fraction of what’s remaining.

The downside, however, is that it doesn’t match how most people actually spend money in retirement.

Early retirement is often when people are healthiest and most active.

They’re traveling.

They’re spending time with family.

They’re checking items off their bucket list.

Later in retirement, spending often slows before increasing again due to healthcare or long-term care expenses.

This pattern is sometimes called the retirement smile because spending typically starts higher, dips during the middle years, and rises again later in life.

The RMD approach doesn’t naturally accommodate that pattern.

Nikki:

I love that phrase—the retirement smile.

I’ve also heard people describe retirement as the go-go years, the slow-go years, and the no-go years, and I think that’s another helpful way to picture it.

Most people spend differently during each of those phases.

Jack:

Exactly.

So while the RMD method has its place, it isn’t the best fit for many retirees.

Another common approach is what we’d call a fixed-dollar withdrawal strategy.

With this method, you choose a percentage of your portfolio—typically somewhere between three and five percent.

Let’s use a simple example.

Suppose you retire with one million dollars and decide to withdraw five percent.

That gives you $50,000 during your first year of retirement.

Rather than recalculating every year, you continue withdrawing that same dollar amount for a period of time—let’s say five years.

After that, you reevaluate.

If your portfolio has grown, your new five-percent withdrawal will be larger.

If your portfolio has declined, your income decreases accordingly.

While that’s fairly easy to understand, it creates a couple of problems.

First, there’s no automatic inflation adjustment.

That $50,000 won’t have the same purchasing power five years from now.

Second, it assumes your retirement spending stays relatively consistent.

For most people, that’s simply not reality.

Retirement spending tends to come in waves.

You may decide to purchase a vacation home.

Help a grandchild with college.

Replace a roof.

Buy a new vehicle.

Or finally purchase that motorcycle you’ve always wanted.

Those aren’t expenses you necessarily planned for on the day you retired.

Life happens.

Most retirement spending isn’t perfectly linear.

Nikki:

That reminds me of the client I mentioned earlier.

Less than a year ago, we sat down with him to decide whether retirement was really possible.

Initially, he thought he might go back to work—maybe full-time, maybe part-time.

After working through everything, the conclusion became,

“No… you don’t need to go back.”

Now he’s enjoying retirement.

But here’s what’s interesting.

As life continues, new priorities naturally emerge.

Maybe it’s a new motorcycle.

Maybe it’s replacing the roof.

It doesn’t really matter what the purchase is.

The point is that life keeps happening.

No one wants to reach retirement and then constantly tell themselves,

“No, I can’t do that because my model doesn’t allow it.”

That’s just not how people live.

Even disciplined people have unexpected expenses.

And they should still be able to enjoy retirement.

Jack:

Exactly.

And that’s one reason the 4% Rule became so popular.

It’s probably the withdrawal strategy most people have heard about.

Typically, people summarize it by saying,

“You can withdraw four percent of your portfolio every year and never run out of money.”

What many people don’t realize is there’s more to it than that.

The original research assumed that after your first withdrawal, your annual income would increase each year with inflation.

So if inflation were two-and-a-half percent, your withdrawal would also increase by two-and-a-half percent the following year.

The research itself dates back to 1994.

Financial researcher Bill Bengen published it in the Journal of Financial Planning.

His goal wasn’t necessarily to create a recommendation for every retiree.

It was really an academic exercise.

He modeled thousands of different market scenarios using portfolios invested roughly fifty percent in stocks and fifty percent in bonds.

The question was simple:

What withdrawal rate would have survived every historical thirty-year retirement period without running out of money?

The answer was four percent.

But here’s what many people don’t realize.

The four-percent rule is actually very conservative.

In many of those simulations, retirees finished retirement with significantly more money than they started with.

On average, many ended retirement with nearly three times their original portfolio value.

Some finished with more than six times what they originally retired with.

So while the four-percent rule provides peace of mind, it may also force unnecessary frugality for people who could have comfortably spent more throughout retirement.

Absolutely! Here’s the final section of the publication-ready transcript.

Nikki:

One thing that keeps standing out to me throughout this conversation is that retirement planning isn’t just about math.

It’s about people.

It’s about understanding what’s important to them, what they want retirement to look like, and what kind of legacy they hope to leave behind.

We have clients who tell us their highest priority is taking care of their children or grandchildren. Others say they want to travel while they’re healthy enough to enjoy it. Some want the peace of mind of knowing they can afford long-term care if it’s ever needed.

Those priorities become part of the planning process.

A Roth conversion, for example, may not seem exciting today. But if it allows your children to inherit tax-free assets instead of a large future tax bill, that becomes an incredible gift to the next generation.

Those are the conversations that really bring retirement planning to life.

Jack:

Exactly.

The technical side of retirement planning is important, but it should always support someone’s personal goals.

When we build a retirement income strategy, we’re not simply trying to maximize a portfolio.

We’re trying to maximize the likelihood that someone can live the retirement they’ve worked so hard to achieve.

That means balancing current income, future taxes, investment risk, healthcare considerations, and legacy planning.

It’s all connected.

Nikki:

And I think that’s probably the biggest takeaway from today’s conversation.

We started with what sounds like a simple question:

How much can I safely withdraw?

But as we’ve talked through it today, we’ve seen that the answer depends on so many different factors.

How your investments are allocated.

Which accounts you’re withdrawing from.

Taxes.

Social Security.

Required Minimum Distributions.

Healthcare.

Long-term care.

Legacy planning.

Unexpected expenses.

Even your own behavior and emotions around money.

There’s no single formula that works for everyone.

Jack:

Exactly.

The rules of thumb we discussed today—the Required Minimum Distribution method, fixed-dollar withdrawals, the Four Percent Rule, and guardrail strategies—they’re all helpful starting points.

But they aren’t complete retirement plans.

Every person’s situation is different.

Every retirement is different.

The right withdrawal strategy depends on the entire financial picture.

Nikki:

I couldn’t agree more.

And honestly, that’s why we spend so much time creating customized retirement income plans for our clients.

No two plans are exactly alike because no two retirements are exactly alike.

Jack:

That’s right.

The goal isn’t simply helping someone retire.

It’s helping them retire with confidence.

Knowing where their income is coming from.

Understanding how taxes fit into the picture.

Preparing for unexpected events.

And having the flexibility to adapt as life changes.

Nikki:

Well, Jack, thank you for joining me today.

As always, I appreciate how clearly you explain some very technical topics.

I hope our listeners can hear not only your knowledge but also how much thought goes into helping clients navigate retirement.

As we wrap up today’s episode, we always like to leave everyone with a helpful resource.

Since Jack mentioned Sequence of Returns Risk, we’re making that guide available as a free download on our website.

It does a great job of illustrating why the timing of investment returns can have such a significant impact during retirement.

If you’d like to download that resource, simply visit paladinfinancialtalk.com.

And if today’s conversation left you thinking,

“This sounds like me…”

or

“I’d really like a second opinion…”

we’d love to visit with you.

You can schedule a complimentary 15-minute, no-obligation conversation through our website at paladinfinancial.com.

You’ll have an opportunity to learn more about our advisors, including Jack and Jeff, and decide who you’d like to meet with.

Whether you’re approaching retirement, already retired, or simply looking for another perspective, we’d be happy to help.

You can also find us on YouTube, Facebook, Instagram, LinkedIn, and all of our other social media channels through our website.

Jack, thanks again for being here.

Jack:

Thanks, Nikki.

I really enjoyed the conversation.

Nikki:

And thank you to everyone who joined us today.

We’ll continue this retirement income planning series in our next episode, where we’ll take an even deeper dive into the strategies we use here at Paladin Financial.

Until next time, thanks for listening to Paladin Financial Talk.