The Monte Carlo Part 2: Different Income Planning Ideas
by SGL Financial
Our 2 Cents – Episode #129
The Monte Carlo Part 2: Different Income Planning Ideas
Continuing from last week’s conversation about Monte Carlo simulations, we’re sharing our preferred income planning techniques and why we feel they provide enhanced benefits, both financially and emotionally. But first, we’re flipping the script and starting the show with listener questions!
- Listener Questions:
- “I’ve talked to a financial advisor and I like him a lot. But how do you know if someone is trustworthy or not?” – Wayne
- “I’ve been stressed at work for a long time, and honestly would have left years ago. However, each year I receive a sizable retention bonus so then I decide to stick it out until I end up frustrated again, right before my next bonus. It feels like a viscous cycle. When should I walk away from this without feeling stupid?” – Larissa
- Different Income Planning Ideas:
- How “worst-case scenario planning” and stress-testing set the table for a good income plan
- The Bucket Planning Approach
- The Flooring Method
- Hybrid Planning
- Why we feel these planning methods are better than a Monte Carlo simulation and also offer greater peace-of-mind
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Podcast Transcript
Announcer: You are listening to Our 2 Cents with the team from SGL Financial, building wealth for life. Steve Lewit is the president of SGL Financial, and Gabriel Lewit is the CEO. They’re here to discuss all the latest and financial news, trends, strategies, and more.
Gabriel Lewit: Good morning and welcome to Our 2 Cents. Excited to talk to you today. This is Gabriel Lewit. We’ve got Steven Lewit here with us as well, of course.
Steve Lewit: Of course.
Gabriel Lewit: It wouldn’t be Our 2 Cents without him.
Steve Lewit: Yes.
Gabriel Lewit: Yes.
Steve Lewit: It would be maybe our one and a half cents.
Gabriel Lewit: You seem like you’re in a funny mood this morning. I don’t know-
Steve Lewit: I agree.
Gabriel Lewit: … what’s up with you.
Steve Lewit: I’m really in a weird, playful mood. It’s like I don’t want to get serious this morning.
Gabriel Lewit: Well, you got to focus-
Steve Lewit: I have to get serious.
Gabriel Lewit: … man. I got to slap you around a little bit here. Get you to-
Steve Lewit: Oh, ouch. Ouch.
Gabriel Lewit: Get you to pay attention. Boom. Boom.
Steve Lewit: Well, you know what we learned in the opera is when the curtain goes up, it doesn’t matter how you feel, you just sing your heart out. So I’m going to talk my heart out this morning.
Gabriel Lewit: Are you going to give us a tone?
Steve Lewit: (singing)
Gabriel Lewit: Pretty good.
Steve Lewit: All right.
Gabriel Lewit: Clap, clap, clap.
Steve Lewit: Yay. Yay. Yay.
Gabriel Lewit: Alrighty. Well, we’ve got-
Steve Lewit: Well-
Gabriel Lewit: … a good show for you here today. We said last time we were going to continue our discussion on, well, so I guess part two, if you will, of the Monte Carlo, the discussion that we started last time. And so we said we were going to talk about other ideas that we liked better than the Monte Carlo.
Steve Lewit: Yes.
Gabriel Lewit: So that’s one of the things we’re going to talk about here, so you got to stay tuned for that. We also promised-
Steve Lewit: We got a lot of feedback on the Monte Carlo, a lot of folks-
Gabriel Lewit: Yeah, some good comments back to us.
Steve Lewit: That they didn’t realize the weaknesses of that system, so that was good.
Gabriel Lewit: So, the other thing we mentioned is that we were going to actually answer a couple listener questions first here today, so we don’t inadvertently run out of time, and make sure we get a couple of those here covered for you. So we’re going to go ahead and dive on in. Before I do that, however, I’m just going to fix Mr. Lewit’s microphone, which is facing… There we go, buddy. All right, fixed for him.
Steve Lewit: I feel better now.
Gabriel Lewit: All right.
Steve Lewit: I don’t know if anyone can hear the difference, but you feel better now.
Gabriel Lewit: Well, I’m on the podcast a lot, of course, so I can hear the difference.
Steve Lewit: What was wrong with my microphone?
Gabriel Lewit: It was facing down from your mouth.
Steve Lewit: Was it?
Gabriel Lewit: Yeah.
Steve Lewit: All right. Okay. I feel-
Gabriel Lewit: Now, it’s facing up.
Steve Lewit: Now I feel better.
Gabriel Lewit: Perfect.
Steve Lewit: Thank you.
Gabriel Lewit: No problem. That’s what I’m here to do, to help.
Steve Lewit: Thank you, Dad.
Gabriel Lewit: Anytime, Son.
Steve Lewit: Okay.
Gabriel Lewit: All right, so listener questions, let’s kick these off here with us.
Steve Lewit: We have Larissa, and who is the other-
Gabriel Lewit: We’ve got Wayne.
Steve Lewit: Larissa and Wayne.
Gabriel Lewit: Yes. All right. So Wayne, I’m going to paraphrase these for easier reading, but you said you’ve talked to an advisor, you think you’ll like them a lot. You’re trying to figure out some due diligence before you decide to work with them. How do you really know if somebody is trustworthy?
Steve Lewit: Great question. So that’s the elephant in the room, isn’t it?
Gabriel Lewit: It’s a big elephant.
Steve Lewit: It’s a big elephant. Who can you trust? And how do you know if you can trust them? If I’m searching for an advisor, I think that’s the biggest problem. So do you want to start on this or should I?
Gabriel Lewit: You can go ahead. Yeah, by all means.
Steve Lewit: So, I think the first thing you do is you get a feeling for the person. And this is hard, because some folks that are devious can seem like the greatest people in the world. But the first thing is if you don’t like a person or you feel uncomfortable with them, then you don’t work with them.
Gabriel Lewit: Yes.
Steve Lewit: You agree?
Gabriel Lewit: Well, that’s definitely a first starting point. You have to have a couple meetings, you got to interview them. In fact, that’s very much what we do in our process, getting to know new clients. We have a couple of introduction calls and meetings and Zooms or in-person meetings. And the whole goal of that is to obviously learn more and ask questions, but to assess, do we work well together?
Steve Lewit: Number one, you have to have that comradery in financial planning, because it’s very, very personal. And you want somebody can relate to and be sympathetic to your situation, because everybody has a different situation.
Gabriel Lewit: Now, Wayne, you might be asking more about just the classic, well, just Google them, right? Look up their SEC profile, look up their… it’s called broker check. You can see if they have any background disclosures. You can see if their company has lots of one-star reviews. You can see if they have any complaints on the Better Business Bureau. So you can do a handful of things there to just do some quick due diligence as well as, if they’re in a registered investment advisory firm, you can request what’s known as their ADV documents. Which would also tell you many of those same things, if there’s any disclosures or regulatory issues to worry about.
And believe it or not, I’ve had clients come to me that she said, many years after working with their advisor, they looked them up, and, “Oh, this guy has 14 complaints against them.” And they were of course not happy with their advisor, which is why they were looking them up. In hindsight, those are some of the things you would probably do beforehand.
Steve Lewit: And some of those complaints, Gabriel, can be minor stuff, but some could be really major.
Gabriel Lewit: You’re looking for not “forgot to check one box on a form.” You’re looking for people that got put into things they weren’t happy with. They got into illiquid investments they can’t get out of. The stuff that really has some serious ramifications.
Steve Lewit: But I think the question goes deeper than that. I mean, that’s just like, okay, the guy can dot his I’s and cross his T’s. Or she can put the paperwork in the right way and keep a clean record. That doesn’t make him trustworthy. It’s a beginning. I mean, that’s the big tell. But trustworthiness is, oh, it’s what Kate and I were talking about this morning is when people say something, are they going to do it?
If a person says, “We’re going to do a financial plan,” what does that look like? If someone says, “We do tax planning,” what does that look… Are you really going to do it? Are you really going to be the fiduciary you’re supposed to be? And unfortunately, most people, I think, Gabriel, don’t dig deep enough in interviewing advisors. The advisor says, “Yeah, we do tax planning.” And they say, “Oh, yeah, oh, great.” And they never ask, “Can you show me one?”
Gabriel Lewit: So, trying to go a little bit under the surface to really, in other words, show me, don’t tell me. Show me an example, give me a more concrete, real idea of what it would be that I would receive. When does that occur? Just getting a little more into the specifics versus just very quick answer. Because, maybe, some people don’t like to ask these questions because it makes them uncomfortable, for whatever reason. Even though you’re interviewing someone to give your lifelong savings to.
Steve Lewit: Don’t be uncomfortable.
Gabriel Lewit: Yeah, take your time, ask away. Really make sure you feel like you’ve gotten the answers that you’re looking for.
Steve Lewit: The other thing I would look for in an advisor, do they have a bias? We often talk about, if you go down to one of the major brokerage houseses… Houseses, that’s not a word. Brokerage houses.
Gabriel Lewit: Brokerage homes.
Steve Lewit: Homes.
Gabriel Lewit: I don’t think that works.
Steve Lewit: Brokerage mansions. They are mansions.
Gabriel Lewit: Brokerage homes sounds like an old person’s home or something.
Steve Lewit: So, they’re going to take you money. They’re going to want to put it in the market no matter what. That’s a bias. You talk to an insurance person, they want to put your money in insurance. It’s a bias. So I would seek somebody that that seems as unbiased as possible, keeps their word, and doesn’t put pressure on you to make a decision.
Gabriel Lewit: Yeah. Well, Wayne, hopefully that’s a good starting point. I feel like we could have actually kept talking about that for quite a bit more.
Steve Lewit: Quite.
Gabriel Lewit: And so, in essence of time here, of course, if you’ve got follow-ups to that, or… I also recommend you talk to other advisors as well. You’re talking to some right now. So you could always explore, and I don’t just say that in jest, but in all seriousness, you should talk to multiple advisors, get a sense of how they feel until you feel really sure you found the right one. And if you get one of those inklings along the way that maybe this isn’t the right guy, sometimes, you should consider that.
Steve Lewit: Follow your intuition.
Gabriel Lewit: Yeah, exactly.
Steve Lewit: Yep.
Gabriel Lewit: Okay. Now Larissa, again, your email’s a little longer here, so I’m going to paraphrase this as well, and thank you for your patience as we got around answering the question on the show.
Steve Lewit: Finally, yeah.
Gabriel Lewit: Yeah. Basically the gist here, Larissa, is you want to retire because you’re frustrated and stressed out with your job. And you would’ve left years ago, except for every year that you work, they give you a very large bonus. And every time you think about quitting, you get another large bonus, which then you feel better about for a while. And then as you start to get frustrated again, you’re only X number of months away from the next big bonus, and you feel like you’re stuck in this vicious cycle.
Steve Lewit: Chasing that carrot.
Gabriel Lewit: Your question is, at what point can I just walk away from the next bonus without feeling bad or stupid?
Steve Lewit: Larissa that’s a great question, maybe never. Maybe you just need to walk away and say, “Oh, I feel bad about walking away, but I’d rather walk away than keep working.” Feeling bad about something isn’t necessarily a bad thing.
Gabriel Lewit: Well, the thought that came to my mind as I was thinking through this question here is-
Steve Lewit: You didn’t like my answer?
Gabriel Lewit: No, I was contributing an additional thought point.
Steve Lewit: Oh, okay. Because, usually, you’ll say, “Yeah, that’s a good point, Dad,” or something like that.
Gabriel Lewit: That was a phenomenal point.
Steve Lewit: Thank you.
Gabriel Lewit: The best.
Steve Lewit: I got nothing back. It was like, well, you didn’t like that.
Gabriel Lewit: I don’t think my point will even come close to competing.
Steve Lewit: Okay. I’m sure it won’t.
Gabriel Lewit: Well, what I was going to say, this reminds me of there are, I’ll call them, aging athletes, professional athletes that probably at 34 or 35 could get another contract for a million or $2 million just to sit on the bench. But a lot of people decide, “Nah, we’re just going to retire. We’re going to hang up the cleats.” And-
Steve Lewit: They feel bad about it because they love the sport, but it’s time to hang it up.
Gabriel Lewit: But I think the reason is they come to the conclusion, and I’m just guessing here, that they have enough money, and they don’t need the extra new contract, even if it could be another million, two million, $5 million, right?
Steve Lewit: Yeah.
Gabriel Lewit: Because it can be a grueling season and they might get tired, and they might miss traveling or miss their family because they’re traveling. They’re just kind of over it, and the money’s no longer worth it anymore.
Steve Lewit: And that’s a great point. I love the analogy, by the way.
Gabriel Lewit: Thank you. Thank you.
Steve Lewit: That’s really… I actually do. Yeah. I mean, everybody likes to get a bonus. I mean, we love bonuses and they’re always… Why do companies offer bonuses? To keep you on board and to keep you happy and to keep you coming back. So they’re playing the game from one angle, and you’re playing their game now is the way I see it. Is that you’re on their field buying into exactly what they want, Larissa, you to buy into, is that you can’t leave, because you’re going to get a bonus.
Gabriel Lewit: Yeah. I think in my mind, this is, certainly my opinion, pretty simple. If you have enough money and you’re going to be able to spend and enjoy and retire, and you don’t like your job and you’re frustrated and stressed out, et cetera, that’s an easy answer for me.
Steve Lewit: I was talking to a client-
Gabriel Lewit: I think you just got to reverse your mindset and feel like, “Hey, this is stressing me out. Money’s not worth it.”
Steve Lewit: Well, it’s a matter of whose game do you want to play? So most of us, especially if you’re an employee in a business, you’re playing the bosses or the company’s game. And the way to switch it, you always want the world to revolve around you rather than you revolving around the world, because that’s how you feel confident, and you don’t feel bad because you are getting what you want. And if you want the bonus, then work, then don’t complain. Then don’t complain about working, because you got what you wanted.
Gabriel Lewit: Well, that I think is trying to black and white the situation-
Steve Lewit: Am I being too harsh on Larissa?
Gabriel Lewit: No, I think it’s not that black and white-
Steve Lewit: Stop complaining, Larissa.
Gabriel Lewit: There’s a world of gray out there, Mr. Lewit, that exists. But I think, again, my thoughts is if you feel like you’ve got enough money-
Steve Lewit: Go for it.
Gabriel Lewit: … and you’re frustrated… Now, if you love the job, that’s a different story. I’ve got clients that actually tell me, “Hey, I work like 15 hours a week, they pay me like I’m full-time. It’s easy. I get a big bonus check. Why would I ever quit?” And I’m like, “Okay, well, that’s…” So that’s a very different example than what you’re saying, Larissa.
Steve Lewit: It’s like, me, I work 15 hours a week and I get a big bonus check-
Gabriel Lewit: Well, the difference here, you like what you do.
Steve Lewit: I love what I do.
Gabriel Lewit: Yeah, not just like. Okay, well hopefully that helps. And again, for you, other listeners out there, we love answering your questions. We get to them as soon as we can. So of course, email us info@sglfinancial.com or go to our website, sglfinancial.com, click contact us, or I think it’s get started, and send us your questions if you’ve got any. And of course, if you want to schedule a time to talk about them instead, you can just give us a call here at (847) 499-3330.
Steve Lewit: Good job.
Gabriel Lewit: All right.
Steve Lewit: Yes. So-
What’s next?
Gabriel Lewit: Continuation from last time.
Steve Lewit: Okay.
Gabriel Lewit: This is part two, round two.
Steve Lewit: Income, a Monte Carlo alternative.
Gabriel Lewit: Well, let me set the table for those that don’t recall what we talked about last week, or may be just tuning in for the first time. We talked about the Monte Carlo, which is a financial planning tool to help you examine how long your money might last in retirement, based on a thousand plus or 10,000 plus simulations of various market returns. Then we talked about why it can be such a bad use-
Steve Lewit: Misleading.
Gabriel Lewit: Misleading, if you will, for retirement income planning. Because there’s so many variables that you can put into it that will give you vastly different answers of whether or not your Monte Carlo analysis will be successful, which kind of defeats the whole point of feeling really good about your retirement income plan.
Steve Lewit: It’s the old story, you can make numbers do anything you want them to do.
Gabriel Lewit: True. True. You can. Yep. So we then said, “Well, we’re going to talk more about what we prefer.”
Steve Lewit: Yes.
Gabriel Lewit: Okay. So that’s what we’re here to do today. We’re going to talk a little bit more about income planning options that we do prefer. What we do a little bit differently than the Monte Carlo here. And we’ll dive a little deeper into all of that.
Steve Lewit: Yes.
Gabriel Lewit: Yes.
Steve Lewit: And who’s going first?
Gabriel Lewit: Well, I didn’t know if you wanted to say anything further there.
Steve Lewit: Well, I think… Yeah, I do.
Gabriel Lewit: Just staring at you.
Steve Lewit: You are. It’s making me a little uncomfortable. Is my microphone okay?
Gabriel Lewit: It’s good.
Steve Lewit: I’m just checking, or I did something wrong or not. So here’s the deal. When I’m looking at a client, Gabriel, and I know you look at clients in the same way, we’re saying, “What’s the worst thing that can happen to these people? What’s the worst that we perceive as the worst case situation for the folks that are sitting in front of us?” People come to us, let’s say, we always use the example, they have a million bucks, they’re retiring, and they’re going to need income, or they’re planning on retiring in five years, or they’re just retired five years ago.
And we’re saying, “Okay, what’s, what’s the worst thing that can happen to these folks? And if that happens, would they run out of money? Where would they be?”
Gabriel Lewit: Yes.
Steve Lewit: And I think that’s what Monte Carlo for me, doesn’t give me. It doesn’t give me their worst case scenario that I can put my finger on and look at them and say, “Here, if you catch the same market that happened between 2000 and 2013, which was 13 years in which the S&P made no money, no money. It went up and down, up and down, up and down, made no money over 13 years. That would be the worst market situation that could happen to somebody that just retires. Right?
Gabriel Lewit: Yeah.
Steve Lewit: So why not put that in the plan and see if the plan works?
Gabriel Lewit: Okay, well, so you’re-
Steve Lewit: Plus, taxes, plus-
Gabriel Lewit: To sort of put my paraphrasing hat on there for that-
Steve Lewit: That was a long answer.
Gabriel Lewit: Well, because it wasn’t an answer, we were… That’s not a new strategy. That’s a way of stress testing.
Steve Lewit: Well, it’s a way of looking at it.
Gabriel Lewit: Because if I was picking on you a little bit there with what you just said-
Steve Lewit: I was setting the table like you.
Gabriel Lewit: Yes. Probably one of the squiggly lines on your Monte Carlo, when you look at the graph, it shows you that the median line that’s usually in highlighted color, and then it shows you the 10,000 squiggly lines that are in gray, show you all the sequences. One of those is the worst of all those 10,000 sequences and probably shows them running out of money.
Steve Lewit: Might.
Gabriel Lewit: Might, right? So one could argue that there’s worst case sequences even in the Monte Carlo, but they kind of disguise the on you a little bit.
Steve Lewit: That’s the problem. You really can’t see.
Gabriel Lewit: And they say, “Well, you still have a good chance of success.” And again, what we were talking about here is, if we want to give somebody not just a good chance of success, but a really either guaranteed or extremely high probability of being right in a ballpark of a certain target number in 15, 20 years, not just a chance of having more than a dollar, right? Then we’ve got to employ different income planning strategies and then just say, “Roll the dice, Monte Carlo.”
Steve Lewit: Okay, let’s get at it.
Gabriel Lewit: So, I think we’ve set the table.
Steve Lewit: We’ve set the table. I’ve got my fine China out. I’ve got my sharpest knives, steak knives.
Gabriel Lewit: Steak knives. Perfect.
Steve Lewit: Okay, you go. You go first.
Gabriel Lewit: So, I know you know this, so I’m preaching to you a little bit here, the choir-
Steve Lewit: All right.
Gabriel Lewit: … but we provide people with a multitude of different ways to take income in retirement.
Steve Lewit: Yes.
Gabriel Lewit: And we find that most of these are preferable in our world to the Monte Carlo.
Steve Lewit: If you take the worst-case situation in all of these, ours works out better.
Gabriel Lewit: Yeah. So what are these options? So the Monte Carlo we talked about was based on a systematic withdrawal, where you take three and a half, 4% of your portfolio balance. That’s one way of creating income. The second way, which I’ll let you I guess talk a little bit further here, is the bucket planning approach that we use here.
Steve Lewit: Yes.
Gabriel Lewit: Do you want to chat a little bit about that?
Steve Lewit: Why don’t you do it? Because I do it all the time. I like the way you explain it.
Gabriel Lewit: Well-
Steve Lewit: You go. You take it.
Gabriel Lewit: … thank you for that.
Steve Lewit: Yeah.
Gabriel Lewit: Very kind of you. Well, bucket planning, my friends, is a way of structuring your income based on five year time segments. So you look at your cash flow needs, a very technical term if you’re interested in that kind of stuff, it’s called consumption based income planning, meaning you define in five year segments how much you’re going to consume in money. Those are your expenses that you project. So you map this out for five years, and then you map out the next five years, and then you map out the next five years, and so on and so forth. And now you’ve got your income needs projected out 20, 30 years in the future based on five year segments.
Steve Lewit: So, this first five years I need, let’s say, I spend a 100 and my social security and pension is 50, so I’m short 50.
Gabriel Lewit: So, 50 times five years?
Steve Lewit: 250,000.
Gabriel Lewit: You need 250,000 in your first segment.
Steve Lewit: Right.
Gabriel Lewit: And then maybe you need 270,000 in the second five-year segment and then 300,000, the thirds five year segment, so on and so forth. Okay? So the trick to this is, number one, getting your income plan, your cash flow plan mapped out, you need to have that. And of course, you would need that for anything like a Monte Carlo as well. And once you’ve got that, then you take your lump sum of money that you’ve got saved, let’s say it’s a million dollars, and you’re going to break that into different buckets based on those time horizons of when you’re going to need to use that money.
Steve Lewit: So, the first five years I need 250. Where am I… I’m not going to-
Gabriel Lewit: Well, imagine for a second you are going to put it into a 0% interest checking account, not that you would.
Steve Lewit: Like cash.
Gabriel Lewit: Like cash. Well, how much would you need to fund 250 over five years?
Steve Lewit: 250.
Gabriel Lewit: You’d need 250. Now, we find you can do much better than that. But the goal of bucket number one is always short term, the next five years. And the goal is for that to be very safe.
Steve Lewit: So, the time horizon is I need it liquid tomorrow.
Gabriel Lewit: Need a liquid now for the next five years, I don’t want to lose the money in the market, don’t want to be pulling money out of my portfolio that’s down. So we have some certain characteristics of bucket number one, and what we find out there is maybe you need to plug in $220,000 or $215,000 into that bucket based on different ways you can invest that money-
Steve Lewit: Because it’s going to grow.
Gabriel Lewit: … to meet that criteria. Yep. So that becomes bucket one as your safe, liquid, short term bucket. Bucket number two is your income bucket for years six through 10, the second segment. Bucket three is your income bucket for years 11 through 15.
Steve Lewit: So, let’s stop at bucket two. So let’s forget inflation for a minute, I need another 250 in five years, so what do I do?
Gabriel Lewit: Well, you use a fancy term called present value, which says, okay, if I can guarantee for example, over the next five years, which you can, say a 5.6% rate of return using a CD or a MIGO, or whatever, I don’t have the calculations in front of me, but let’s just say it’s $200,000 that I need to put in today, so that in five years I have a guaranteed $260,000 or $270,000 available to me. And then I’m going to now have that available to feed my consumption needs for years six through 10.
Steve Lewit: So, 10 years, I have all my income planned, all guaranteed, because I’m using safe instruments.
Gabriel Lewit: Yeah.
Steve Lewit: It’s all-
Gabriel Lewit: Now, number one thing that our clients love about this is what they worry about the most is the first 10 years of their retirement. 65 to 75, or 62 to… Now they can completely eliminate the market stressors on that portion of their retirement plan.
Steve Lewit: All guaranteed.
Gabriel Lewit: Now, this all has to go in combination with buckets three and four. These are your medium long and long term buckets, 10 to 15 years and 15 years and beyond. You don’t want to get super conservative here. These are the opposite. Now you get moderately aggressive and very aggressive in your long term bucket number four.
Steve Lewit: Because I have time on my side.
Gabriel Lewit: You’ve got time.
Steve Lewit: I can go through the ups and downs. I don’t need that money.
Gabriel Lewit: And because you’re not drawing your income from it, you feel better about it going up and down, relatively. You don’t love to see it go down, of course, but you do feel better about it. And that gives you better growth potential and more likelihood to stick to your plan. So there’s a lot of behavioral psychology benefits to the bucket plan.
Now, to your point, what do we then do with that? We do a worse case stress test of the same terrible sequence of returns that we might have used potentially even in a Monte Carlo. But what you find is by structuring your income this way, especially in the worst case scenarios, you will outperform in a major way by bucketing it out this way.
Steve Lewit: And the key behind that, folks, is it’s counterintuitive because we’re getting smaller growth… If I put all my money in the market, I can say, “Oh, I’m going to average 7%.” But doesn’t consider is that 13 years where you make no money, which is called sequence of return risk. So the bucket planning eliminates a good part of sequence of return. So the end result is actually more wealth with a safer way of going about it, which is counterintuitive.
Gabriel Lewit: In worst case scenarios, which is what most people worry about. Now, the truth is, in a super extended bull market run, if you happen to be lucky to retire right at the very beginning of a 13, 14 year bull market run, then a bucket plan would underperform a systematic withdrawal plan.
Steve Lewit: Absolutely.
Gabriel Lewit: But we have no clue of whether or not the next 13 years is going to be that extended bull market run.
Steve Lewit: Well, even-
Gabriel Lewit: And it’s not worth rolling the dice-
Steve Lewit: Well, even in a-
Gabriel Lewit: … to be more aggressive.
Steve Lewit: It might numerically work out better, but it won’t work out better peace of mind, because then you’re always worried in a bull market, when is it going to come down?
Gabriel Lewit: Well, in hindsight, we knew it was a 13-year bull market starting in, what? 2009.
Steve Lewit: I wish I knew that.
Gabriel Lewit: But in 2009, one year in, you don’t know, is this going to go another 12 years, or we can go down again? In year two, is this going to go another 11 years or is it going to go down? Year three, is this going to go another 10 years? You don’t know. So every year you’re worried about spending your money because you just don’t know, even though in hindsight, certainly you can see that.
Steve Lewit: So, in a bucket plan, what I hear you saying, which we’ve talked about before, there are two components. One is you build more wealth with more safety, and you do it with greater peace of mind.
Gabriel Lewit: Yeah. Now that’s true. That’s true. Now that’s one of the other alternatives we like to use. And in the… I’m cutting you short there because-
Steve Lewit: There’s another one.
Gabriel Lewit: I know. And we’re running low on time, so I didn’t want to spend too much time. We could spend an entire show just talking about the nuances of bucket planning. But the third approach that we like is called a Monte Carlo. Okay. Sorry. No.
Steve Lewit: I wondered where you were going here.
Gabriel Lewit: I was looking at the clock and then my brain went the wrong direction. It’s not the Monte Carlo, it’s the flooring.
Steve Lewit: I thought we had a new-
Gabriel Lewit: Oh, my goodness.
Steve Lewit: … strategy.
Gabriel Lewit: Yes. Actually, it’s called the Carle Monto.
Steve Lewit: Oh, the Carle Monto.
Gabriel Lewit: Yeah, it’s the new version of it.
Steve Lewit: I said, where’s he going, folks? Is he going back to Monte Carlo here?
Gabriel Lewit: My bad. My bad, folks. Flooring, flooring, method.
Steve Lewit: Flooring. Big deal.
Gabriel Lewit: That’s-
Steve Lewit: Yep.
Gabriel Lewit: … very different.
Steve Lewit: Explain flooring now.
Gabriel Lewit: Well, let’s see. Hopefully, I don’t fry my brain cells here, again. Well, flooring is the concept of whatever your expenses are in retirement, covering those with a certain level of guaranteed income that has no market risk, no longevity risk, and you can’t outlive it, forever. It just goes and goes, and goes and goes.
So what that means is you can count on this base or floor level of income for your entire lives and just never worry about it. Kind of pensions, social security, and of course, the other source is annuities with a guaranteed income. And those are the three available sources of guaranteed lifetime income or what we call floor-
Steve Lewit: Flooring.
Gabriel Lewit: … income. Now, the idea here is if you just don’t want to worry about the market ever, or you never want worry about how long you’re going to live, then you might gravitate towards this idea, because it’s safe, secure, and dependable.
Steve Lewit: And the newer income products which have rising income has a huge payoff if you happen to live a long life.
Gabriel Lewit: And so, what’s interesting is when you start to model these, you might think, because it’s safe, secure, dependable, that you’re going to have a lot less money left over in the future or something else to that effect. But what we find is when you include this in your plan as a component, again, this isn’t your entire world of investment funds. In fact, we combine this into what we call a hybrid plan using buckets and floor income, that perhaps the most evolved version of this.
What we find is that you actually get far greater results than just the bucket plan or Monte Carlo systematic withdrawal plan. You actually get even better results or just a safe, conservative annuity driven plan. You get better results in all of those by using a hybrid combination of all these elements for a variety of factors. And it’s really cool to see that play out.
Steve Lewit: It’s very cool for us and for our clients, I think, because again, it’s counterintuitive. You have more safety in the plan, yet you build more wealth out of the plan. And it’s like, well, how can you do that?
Gabriel Lewit: You do get people, we get people that look at us and say, “That’s got to be too good to be true, right?”
Steve Lewit: “No, that’s not true. No, how can you do that?”
Gabriel Lewit: And they talk themselves out of it, because it does seem so counterintuitive. But the truth is, I’ll give you a quick reason why. When you have the guaranteed income, number one, if you do live a long time, then it’s the most efficient form of income you can possibly have. Why? Because if you live forever, then you took four or 500,000 of your million, let’s say, you live to 80, eventually you whittle away that balance. It goes to zero for income. You spent all your own money, and now the next 10 or 15 years, all the income you need is coming from the insurance company’s pocket.
Steve Lewit: Folks, we look at everything and we can’t find a more reliable and better income source than through an annuity product.
Gabriel Lewit: Well, so let me finish what I was going to say there. Because the idea then is that if you don’t take that money from your own pocket, let’s say, you’re getting that from the insurance company, then that’s letting your other money just grow and grow and grow and grow untouched. Not only that, your other money can be invested, and we always recommend this, more aggressively up to your risk tolerance, whatever that might be, because you’ll never need it for income. And so if the goal is passing more money to beneficiaries, you’ll actually have more wealth to pass away using this approach than you would otherwise. It’s pretty cool to see.
Steve Lewit: So, it’s like, how do we get the best out of all the products? Look, there’s a whole array of products out there, and the question is, if we can find the product that is the best fit, we build a more efficient plan. Efficiency means we get more income and more wealth by using money in the right places. That’s what we do.
Gabriel Lewit: Yeah. So circling back here, because we’ve got to wrap things up here for today.
Steve Lewit: Because we didn’t talk about tax-free income, or any of the other plans either.
Gabriel Lewit: There are, again, multiple, multiple other options other than the traditional Monte Carlo that we’ve picked on quite a bit here, that we feel provide much enhanced benefit, and improvement to your plan both financially and emotionally, and give you greater peace of mind with less risk and volatility. And that’s why, as we mentioned on the last show, we’re not a big fan of Monte Carlos.
Steve Lewit: And the proof is in the pudding. Going back to I think Wayne’s question about trust, the proof is in the pudding. We have 700 families that we support, and I would say hands down, all of them, it’s hard to say all, but I would say all of them have greater peace of mind because of the way we plan. And we’re very proud of that. And thank you all for entrusting us with your money.
Gabriel Lewit: Hey, absolutely. Well, and thank you for joining us today on the show. And if you got questions, of course, give us a call (847) 499-3330, if you’d like to schedule time to talk. We would love to talk with you. Meanwhile, we hope you have a wonderful day. Stay well, and we’ll talk to you on the next show.
Steve Lewit: Be well, everybody. See ya.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions, questions about your finances, give SGL a call at (847) 499-3330 or visit us on the web at sglfinancial.com. And be sure to subscribe to join us on next week’s episode.
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