Generating Retirement Income
With a lot of different strategies out there for generating income in retirement some are better than others and some best suit one individual case more than others. Today we talk about some of those strategies and one of our favorites.
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- Paul and Garrett
https://ascendinvestment.com/
(801) 476 - 1200
Full Transcript:
00;00;07;01 - 00;00;25;13
Garrett & Paul
Hello and welcome to your investment partners with Paul and Garrett, where we talk about all things financial, focusing on helping you plan, keep and grow for a successful future. If you're new to the podcast, welcome. And if you're tuning in again, welcome back and thank you for listening. Hello and welcome to the fourth episode of your investment partners with Paul and Garrett.
00;00;25;13 - 00;00;41;20
Garrett & Paul
Today we're going to be talking about generating income from a portfolio. We talk about what structures work well to handle market volatility, where the income comes from. And lastly, we'll touch on what to do if your situation changes and more or less income is needed. My name is Garrett Smith and we're excited to have you with us today.
00;00;42;20 - 00;01;19;08
Garrett & Paul
Well, Paul, we're at it again. Awesome. Excited to be here today. Let's talk about taking income, particularly in retirement. But really anytime out of a portfolio, I think first place to start is kind of how we get income. Where does it come from? Yeah. So income and retirement, the more sources, the better. Obviously, it definitely helps. So, you know, when when somebody comes in and they have, you know, Social Security and a pension and, you know, investment, that's maybe rental income, I mean, it it all just adds up to help.
00;01;19;08 - 00;01;41;17
Garrett & Paul
And so, you know, when we do our analytics, we look at, you know, just basically all the sources of income. What do you what do you have coming in from the various sources and how much it is and then how much do you need? And then we just figure out where the best place to take the other funds that you need for to, you know, to fill up the budget every month?
00;01;41;21 - 00;01;59;22
Garrett & Paul
Yeah, I think that's kind of the first question that we always try to answer is how much do you need and how much do you want? You know, there's kind of two different levels. You know, there's the basic living expenses, food, housing, you know, your car, whatever you need. But then there's also the traveling or the buying of the new car or redoing the roof or find an RV.
00;01;59;22 - 00;02;24;05
Garrett & Paul
And so I think there's kind of a balance between those two that we are always trying to trying to look at as well. How much do you need, you know, what's kind of on the lower end, what's also desired, what what do you want? And generally you kind of bounce back in between those two, depending on, you know, someone's situation, usually early in retirement, taking a little bit more for travel or other related expenses and maybe later in retirement, it turns to some more medical expenses.
00;02;24;05 - 00;02;42;18
Garrett & Paul
But like what you said were where all those different income sources come into play. And and I think that's why we look at it in those three, three overflowing buckets. You know, if you've been to our office, you see them. But it's you know, we kind of picture one bucket spilling into another bucket, spilling into a third bucket.
00;02;43;12 - 00;03;13;16
Garrett & Paul
That's that kind of represents short, intermediate and long term money. And as we have long term money, meaning generally, stocks, we don't when those grow, those feed the other two buckets with the shortest one being our cash bucket. And that's where we get that income from day to day. So we always picture three overflowing buckets. And that's kind of the overview that we like to use when we work with a client's income and everybody situations a little bit different.
00;03;13;16 - 00;03;38;27
Garrett & Paul
And so that's why the conversation is important. And each of those buckets has, you know, real advantages and disadvantages to the, the, the cash bucket where we get, you know, the day to day income from. The advantage there is that it's completely safe, you know, and it's there when you need it. The problem is it doesn't earn hardly any interest.
00;03;38;27 - 00;04;06;16
Garrett & Paul
I mean, right now, if you look at your bank statement, you're checking your savings, money market accounts. You know, you're still, you know, under a quarter of a percent really for the most part. And so it's good to have money there. But you can't put everything there because it's it just it doesn't earn anything. And then the second bucket where we put our intermediate money, that's where we put our bond ladder and we'll get to that in a second.
00;04;06;16 - 00;04;30;07
Garrett & Paul
But the the advantage there is you do earn you know, at least a little bit of interest on it historically, you know, probably at least enough to keep up with inflation. If nothing if nothing else, it fluctuates a little bit in price, but not enough that, you know, people can't usually handle that. And then, of course, the third bucket is the is the long term bucket.
00;04;30;07 - 00;05;03;08
Garrett & Paul
And that's where the stocks lie. And the the the cash bucket and and the bond bucket are what protect the stock bucket. What we don't want to get in a situation where we we have to pull money out in the and the market happens to be down at that time. That's the situation that we really try to avoid if at all possible for our clients because it's you know, you know, we know the market's going to go up and it's going to go down and we just don't want to have to pull a bunch of capital out while the market's down.
00;05;03;08 - 00;05;24;21
Garrett & Paul
We would much rather pull it up after it's recovered. And markets are at a high point and and that's when we you know, when the market hits a high point, that's when we fill those other buckets back up to appropriate levels to, you know, make sure that the cast cash position is is adequate for funding that, you know, the cash needs for a period of time.
00;05;25;01 - 00;05;50;07
Garrett & Paul
Yeah. And I like to think of it in terms of that inflation because taking income over time, right. Inflation, that's the real killer. The the ups and downs of the market obviously have a part to do with it, but things just cost more over time. And in relation to those three buckets that shorter term cash buckets usually losing to inflation, the intermediate term buckets right at about where inflation is and then that long term bucket, the goal is to outpace inflation.
00;05;50;22 - 00;06;11;14
Garrett & Paul
And so when you can work with all of those three together, it kind of allows you to to, in a general sense, kind of overcome the risk of inflation without needing to put put too much capital at risk and still be able to maintain kind of that peace of mind portfolio and not needing to sell when when the market's off.
00;06;11;14 - 00;06;31;26
Garrett & Paul
That's know, we always try to avoid that. You never want to be the forced seller. Yeah, for sure. So I think let's talk a little bit more about that intermediate term bucket of kind of how the bond ladder works. Yeah. So the the bond ladder is it's it's a a tool. I think it's fairly unique to to our practice.
00;06;31;26 - 00;06;56;28
Garrett & Paul
I mean, we've been using it for years and years and years. We think it makes a lot of sense. Essentially what that bond ladders is going to do is we're going to determine the amount of income that needs to come out of your portfolio. So, you know, we're going to we're going to find out what is the draw necessary for for a person's portfolio.
00;06;56;28 - 00;07;28;05
Garrett & Paul
And let's say a person needs, you know, $40,000 a year out of their out of their portfolio. We're going to buy a bond, these bonds, they're going to, you know, kind of look like an act, like a CD. If people are familiar with what a certificate of deposit is at the bank. But we're just going to buy a one year bond with 40,000 and a two year bond with 40,000 and a three year bond of 40,000, you know, out of five.
00;07;28;05 - 00;07;52;08
Garrett & Paul
And if you're super conservative up to ten years. And that what that means is when that when that comes mature or it's going to be worth right at that $40,000 area and that's going to fill that cash bucket for the year. And then all those bonds will slide forward that the the two year will become the one year, the five year will become the four year.
00;07;52;28 - 00;08;12;25
Garrett & Paul
And that's how that bond ladder works. So we just do not have to worry about where our income is going to come from in two years or three years or four years. And that really gives people a lot of peace of mind, particularly when we're in a market correction. Right now, as you know, we'll have people call us and say, well, you know, we've got six years worth of income.
00;08;12;25 - 00;08;38;13
Garrett & Paul
Do you think this correction is going to last six years and for the most part, people realize that, you know, this happens and, you know, sometimes it takes only four or five, six months, sometimes it takes a few years. Every once in a while it takes a little bit longer period of time. But for the most part, two or three years down the road, the market's recovered and and then we can kind of feel that that bond ladder back up from the stock market.
00;08;38;28 - 00;08;57;14
Garrett & Paul
Yeah. And I think another point to highlight on there is those bonds. They're priced every day. So they will move around depending on what interest rates are doing in the current market. So even though if we put a certain dollar amount in, it may be plus or minus that depending on market conditions. But the nice thing is we're buying them with with an expectation of a certain value at a certain date.
00;08;57;27 - 00;09;26;29
Garrett & Paul
And so so we can kind of ignore the short, short term volatility because we're looking at the long term, long term maturity value of how much we can get out of it. It's just kind of like setting aside your annual income in December every year that's ready for January one so you can keep going. Yeah. So the three buckets really work well together, each of them being very, very important in the process of generating income for people.
00;09;26;29 - 00;09;47;08
Garrett & Paul
And and, you know, we just I don't know, I guess the cash buckets, probably everybody's favorite because you know, that's what feeds the immediate need. But you know that's those other two buckets are super, super important also. Yeah. And I think just to kind of touch a little bit on the longest term bucket, the stock bucket, we're big fans of dividend paying stocks.
00;09;47;15 - 00;10;05;19
Garrett & Paul
We own a lot of them, clients on a lot of them. And and that just trickles down every year to can help refill the bond bucket which then refills the cash bucket. And so a lot of times those dividends can help buffer us that we don't even have to be full scale sale sellers of those equities over time because we're getting income.
00;10;06;01 - 00;10;34;25
Garrett & Paul
That's that kind of just that little stream that's always trickling from one bucket to the other. Yeah, for sure. I think. Be good to touch on one little point about how kind of how annuities and pensions fit into here. I that kind of any time somebody has outside income like that Social Security we generally take those those guaranteed sources first into account first because we know if somebody is retired they're on a pension system.
00;10;35;02 - 00;20;43;27
Garrett & Paul
You know, we're going to rely on that heavily right at the start and then we'll supplement it with the kind of the variable income. And that also helps kind of.
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