Show #370 Airing Sunday, 1/14/07
Remember the board game "Life?" By the luck of the spin you'd end up either in the poor house or on Millionaire's Row. Luckily, in real life, you can control your future through planning, not spinning. Here to explain how to be a winner in your person financial "life" is our financial quarterback, Jim Lineweaver. Jim is the founder of the Lineweaver Financial Group.
Question: Okay, Jim. You're the financial quarterback, but today you're going to tell us that our finances are similar to playing a round of golf. Can you explain?
Answer: In golf, an 18-hole round of play is divided into the front nine holes and the back nine holes.
Let's use that analogy with our finances. The front nine holes would refer to our financial "game" leading up to retirement-accumulating assets to supplement your retirement income and having a plan to get to this point. We've talked about this often on previous shows.
The back nine holes, therefore, refer to after retirement. And if you "play" the back nine holes right, you can prudently use your retirement assets to help maintain your current, comfortable lifestyle past retirement.
Question: What do we need to know about "playing the back nine"?
Answer: The paychecks have ended. Now you need to use your assets to provide income. This means you need to plan; most people have not looked at where their income is going to come from. Income planning becomes extremely important at this stage.
You need to understand the impact withdrawals from your retirement assets will have on your future. If you withdrawal too much, especially in the early years of retirement, you increase the possibility that you will run out of money. On the other hand, some people are too cautious, and unnecessarily reduce their lifestyle because they don't have a good idea how withdrawals will impact their retirement assets.
Three factors come into play:
- Withdrawal rates as a percentage of your overall assets.
- Investment performance
- Inflation
Question: Can you give us an example?
Answer: This hypothetical example compares 5% versus 7% inflation-adjusted withdrawals from a $1 million account earning a hypothetical 7% rate of return.
With the 5% initial drawdown rate, the account value would remain above $1.2 million after 25 years. With the 7% initial drawdown rate, the account would be depleted in year 22. (Emerald Publications)
Withdrawal less than your average earnings and your money will theoretically last forever. If you withdraw more that your assets are earning, you are actually dipping into principal each year. Therefore, at some point money will run out.
Question: What should we do?
Answer: Adjust your withdrawals each year to account for inflation. Or you can start withdrawals at a smaller percentage, or reduce the life expectancy of your money.
And again, what are you goals and objectives? Do you want to pass on a legacy? These answers will impact your income-needs planning.
The game's not over until all 18 holes are played. Are you prepared for the back nine? To learn more strategies to avoid treacherous traps, give Jim a call.
