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Why It Takes More Than a Diversified Portfolio To Sustain Your Wealth in Retirement

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EVERETT, WA / ACCESSWIRE / April 20, 2022 / The act of retirement can feel exciting and nerve-wracking simultaneously. The ability to say, “I don’t need to collect a paycheck to support the quality of life I want,” is liberating. Therefore, if you choose to work, it’s because you want to, not because you need to.

The good news? We live longer than ever and can enjoy more years in retirement doing what we want.

The bad news? We live longer than ever and need to afford the quality of life we want for 30-plus years, so we can do what we want.

The financial industry is plagued by horror stories of wealthy individuals who thought they had it all figured out. One by one, they get blindsided and have to reevaluate and adjust their entire life mid-retirement. Interestingly, market crashes are rarely responsible for the tragedy. Most tragedies are preventable.

As the saying goes: “Failing to properly plan is planning to fail.”

Before you do anything for your retirement, consider the three rules that sustain wealth. These rules are not magical investment strategies, nor are they a particular investment. These three rules are guidelines that can help you enjoy the quality of life you want when followed and implemented correctly.

After, I’ll mention the seven areas that sustain wealth. At Madrona Financial, we have found that these seven areas, which I like to call “roots,” are essential to sustaining yourself and your wealth. Like a tree, if all seven of these roots are deep enough, meaning they have received sufficient preparation, prioritization, and planning, then the probability that you can enjoy the quality of life you want throughout your retirement is on your side.

In wealth planning, we believe that it takes an advisor and a CPA working together to design and build the wealth and retirement plan that can support the lifestyle you want. Consider the graphic below. This tree has two trunks that allow the roots to be deep, healthy, and strong.

Whether you have a significant amount of wealth or not, consider the importance of being “deeply rooted.” The Northwest is famous for its beautiful evergreen trees. Some of these majestic trees, up to one hundred feet in stature, tumble over during heavy windstorms. Unfortunately, it is usually after the storm hits that one discovers the water table that prevented the trees from sinking their roots deeper when observing their root system.

The analogy of being rooted applies to everyone. On the surface, the tree was well-nourished, flourishing, beautiful, and part of the ecosystem. But the inability of the tree to properly sink roots deep enough to sustain the harshest of winds led to its downfall. Over the years, I’ve seen mighty trees fall, and the smaller trees get washed away, figuratively and literally. Don’t settle for shallow roots.

Many people experience stress transitioning from the accumulation phase (working for a paycheck) to the distribution phase (creating a paycheck). Even though they can’t explain it, they can feel that something is off. The typical cause of stress can be a shallow root system, which makes them unable to handle unexpected windstorms.

Don’t ignore that feeling.

Whether you want to spend every last penny or leave a generous legacy, the process of developing a rooted system guided by the rules and principles is essential.

The following seven financial roots can help you sustain yourself and your wealth. As you prepare for retirement, we invite you to carefully study each root and assess your situation to determine if your roots are deep or shallow.

The Seven Financial Roots of a Successful Retirement

  1. A Lifestyle Plan
  2. A Growth Plan
  3. A Protection Plan
  4. A Tax Plan
  5. A Healthcare Plan
  6. A Gift Plan
  7. A Legacy Plan

It might sound like a lot, but in the end, you should be able to understand what it takes to sustain yourself and your wealth and enjoy the quality of life you want.

Before we dive in, let’s be frank about guarantees and absolutes. They are dangerous. All investments have risks. Life has risks. There’s no such thing as a perfect investment.

When you follow sound rules and principles, you have a higher probability of success. What you’re about to learn could be life-changing.

Rules To Sustain Your Wealth

The Rules to Sustain Wealth help people make good decisions and enjoy the quality of life they want. In everything you do, make sure to revisit these rules. They are:

  1. Prepare Your Wealth, so It Supports Your Quality of Life.
  2. Prioritize Your Wealth, so It Fulfills Its Purpose.
  3. Plan Your Wealth, so the Odds Are in Your Favor.

Prepare Your Wealth, so It Supports Your Quality of Life

Your quality of life depends on a steady flow of income, regardless of what the market is doing, what Congress does with our tax laws, or our quality of health. To sum it up, “always keep income coming in.”

Preparation comes from anticipation. If you know something might happen, it makes sense to have a strategy. For example, if the markets go up next year, you’ll probably be okay with taking income, right?

However, if the markets go down or crash, many people would be stuck making a difficult choice. If they take income from their assets while they are down, they could be compromising their retirement. The following scenario is an example of the consequence of pulling money out of an account that has lost money. This is called the sequence of return risk.

Let’s say you have $1,000,000 in retirement, and you need $40,000 a year to support yourself. Your account makes 6% ($60,000) in year one, and you take $40,000. No problem because the account went up. You drew income from an account that made money.

Now let’s do that again, but your account dropped 6%. Your $1,000,000 is now $940,000. On top of the loss, you take $40,000 as income, which puts your balance at $900,000. That’s a 10% total reduction.

If your account goes down 10%, it’ll take 11% or so to recover. If your account goes down 20%, it’ll take a 25% return to break even. Finally, if your account goes down 40%, which can happen, it would take a 66.7% return to get back to where you started. The bigger the drop, the more difficult the recovery. Now imagine if you had back-to-back annual losses while taking your $40,000 as income.

When you take income from an account that has lost money, you accentuate the loss and ultimately compromise your income for retirement. Hoping for a swift and strong recovery is wishful thinking. People win the jackpot in Vegas every day, but would you bet your retirement on those odds?

This principle does not suggest that you lock up 100% of your assets in Annuities, Bonds, CDs, or any other asset that can’t lose money. Instead, it suggests that when an account is down, you pull money from other sources (protected) until it has sufficiently recovered.

Prioritize Your Wealth, so It Fulfills Its Purpose

Years ago, I met a man who was in a situation where his pensions covered more than he needed to sustain the quality of life that he and his spouse wanted. They did not need any support from their investments (stocks, mutual funds, ETFs, etc.), so they decided to invest their remaining assets in the market. The final sum of their total assets would, upon death, pass to their heirs based on the instructions in their trust.

Some people may scratch their heads regarding the strategy; however, the couple followed rule #2. Their wealth was prioritized according to their desires. If they required those funds to support their quality of life, they would not have invested in that manner.

The takeaway is prioritizing your wealth based on what you want it to do.

You can protect appropriate boundaries and integrate balance into your life and retirement planning by following this list.

  1. You
  2. Your spouse/partner
  3. Your children
  4. Your grandchildren
  5. Your community (church, association, club, etc.)

Within each group, consider the following:

  • Is money moving in or out of your account(s)?
  • What is the asset qualification (qualified pre-tax, qualified tax-free, non-qualified)?
  • What are the tax consequences?
  • What is the risk exposure?
  • What is the timeline expectation?
  • Will this group affect other groups based on how it is being managed?

Beware of the “bleeding-heart” retirement. A bleeding-heart retirement is when too much is given to the children, grandchildren, or other groups, that the retirement goals, accumulated wealth, and quality of life are compromised. Prioritization can help you protect your quality of life while still getting the most out of your wealth.

Plan Your Wealth, so the Odds Are in Your Favor

There is only so much you can control. One step within this rule is to always plan for what you can control and develop a strategy for what you can’t control. The markets will do what they will do. Congress will pass what it will pass. No matter how hard you try, your health will eventually erode. All of this is a part of life.

When you focus on what you can control, you significantly increase your probability of success. For example, you can’t control the future tax rates and laws associated with them. However, you can proactively minimize your tax exposure, so possible future changes affect you less if or when they happen.

Planning for a down-turning market is encompassed in the rule, “Prepare Your Wealth, so It Sustains Your Quality of Life.” The market has a historical pattern of crashing every seven or eight years. Here’s an account of the major crashes since the year 19001:

  • 1903 – Rich Man’s Panic (-21%)
  • 1906 – General Panic (-34%)
  • 1911 – WWI / Influenza (-50%)
  • 1929 – Great Depression (-79%)
  • 1937 – WWII (-49%)
  • 1946 – Post War Bear Market (-37%)
  • 1961 – Cold War / Cuban Missile Crisis (-22%)
  • 1965 – Recession (-22%)
  • 1968 – Inflation Bear Market (-36%)
  • 1972 – Inflation / Vietnam / Oil Crisis / Nixon (-51%)
  • 1982 – Stagflation Crash / Paul Volcker (-27%)
  • 1987 – Black Monday (-34%)
  • 1990 – Iraq Invaded Kuwait Crash (-20%)
  • 2000 – The Dotcom Crash (-49%)
  • 2008 – The Housing Crisis (-56%)
  • 2020 – COVID-19 Pandemic (-34%)

In addition to market crashes, there also seems to be a historical pattern of the market going flat – producing 0% returns on average over ten years or so. Here’s the past one-hundred-year timeline of flat markets2.

  • 1909-1921 (13 years flat)
  • 1929-1944 (16 years flat)
  • 1965-1974 (10 years flat)
  • 2000-2010 (11 years flat)

No one knows when the next market crash will hit or when the next flat market cycle will start. If you end up enjoying a thirty-year retirement, there’s a good chance you will experience at least one flat market cycle and around three or four market crashes. The first step in this rule is to accept this probable reality.

Another step within this rule is to take a neutral position regarding your investment options when planning your wealth to have the right investments available, regardless of market direction. It’s not unusual for someone to complain about a specific investment and, in their frustration, cherry-pick facts out of context and inaccurately describe how the investment works. They focus on the bad and can’t explain the good. This creates a problematic shortlist of investment options.

There’s no such thing as a perfect investment. Everything has its benefits and its detriments. Being neutral or open about your investment options and plan allows you to see what is possible.

Remember, no one can make you do anything. You have all the power. Economists often point out that the “masses” are often without their “m.” Researchers have shown that few of life’s important decisions are logically made. Instead of blindly following the masses, pause, ask questions, stay neutral, be open to what is right instead of a strongly voiced opinion (who is right), and make the best decision based on your criteria for tomorrow.

Following well-grounded rules and principles gives you the highest probability of making sound financial decisions.

The third and final step of this rule is to stay focused on the solution. Giving all of your energy to the problem makes it worse. Anxiety is trying to predict tomorrow based on one’s immaculate perception. Stress is an over-focus on yesterday. It can be easy to worry about the next market crash or the pending tax bill, but there’s not much you can do to change it at the end of the day. Stay in the now, and prepare for tomorrow by following the proven rules and principles of finance.

Fear becomes a constant companion when one focuses solely on problems, and fear-based problem-solving usually leads to poor decisions. And not just in finances. /Solution-based preplanning gives you peace of mind knowing you have a strategy during the best and worst of times. Planning is a forward-facing activity. What does your future look like?

The Wealth Pyramids

When you implement the three described rules, you climb the Wealth Pyramid. We have found that those who don’t follow these rules typically travel in the opposite direction of wealth and security. Consider the Wealth Pyramids below.

Achieving wealth is insufficient if one doesn’t have a system to support accomplishing the goal. Wealth, by definition, is having enough-enough time, money, resources, love, kindness, fulfillment, friends, etc.

Let’s use weight loss to illustrate this point. Many folks eat as a source of comfort, and when trying to lose weight, their failure results in added frustration. The added frustration means they need to be comforted, so they eat to feel better.

The cycle of constantly failing to lose weight stems from failing to plan and implement habits to support the plan. In other words, without a plan and the habits to support that plan, statistically, people typically gain weight while trying to lose weight.

Those who follow the rules of wealth create a plan (proactive investing) that builds confidence in their way of living and eventually leads to wealth. On the other hand, those who fail to plan (follow the masses) move to reactive investing, which is fear-based, and commence down the pathway toward poverty. Poverty is defined as a “lack of”-a lack of time, money, resources, love, kindness, fulfillment, and friends. These individuals are not enjoying the quality of life they want.

As you read through this book, remember the Rules to Sustain Wealth.

  1. Prepare Your Wealth, so It Supports Your Quality of Life.
  2. Prioritize Your Wealth, so It Fulfills Its Purpose.
  3. Plan Your Wealth, so the Odds Are in Your Favor.

They can help you identify potential problems and blind spots and proactively move to a solutions mindset before it’s too late.

Now, it’s time to jump into the seven roots that sustain wealth.

The Seven Financial Roots of a Successful Retirement

In order to sustain yourself and your wealth, we believe you must have 7 strong and deep roots that are continuously nurtured and reviewed under the direction of qualified investment, insurance, tax, and estate planning professionals that work seamlessly on your success.

Let’s discuss them, one at a time.

A Lifestyle Plan

Whether you realize it or not, you are living your lifestyle plan right now. The quality of life you are experiencing today is the result of your decisions in the past and the confidence you have in your current situation and future.

Lifestyle Planning focuses on your income and expenses, now and in the future, and how you can achieve the quality of life you want to enjoy for the rest of your life. Lifestyle planning must be done with a distribution plan. It is a line-by-line account of all of your assets that also shows the inflows (income) and outflows (expenses, debt, etc.).

With a distribution (lifestyle) plan, you can organize and optimize your Social Security benefit, your pension (if you have one), and all other aspects of your life. Do you have a plan that quantifies and supports your quality of life?

A Growth Plan

There is no such thing as a perfect investment. The trick to an effective growth plan is to be able to use the different investments and their advantages while not allowing their disadvantages to cause any problems. Don’t fall into the trap of believing having a lot of different investments within the same type of investment (IE stocks, bonds, ETFs, mutual funds) qualifies as being appropriately diversified.

It may sound strange at first, but the act of growing your assets is only half the battle. Making sure that you grow the right assets in the right direction is the other half of the battle.

Too often, assets grow into a difficult situation, like a large tax bill. Having a strategic growth plan that also considers the other roots can help you sustain yourself and your wealth.

In the end, growth planning is dependent on the question, “what do you want your assets to do for you?”.

A Protection Plan

Most people seem to believe that a stock market crash is their biggest risk of losing their wealth. Though a market crash can hurt, it typically takes a couple of them to cause a significant lifestyle change.

One of the biggest blind spots that can destroy wealth in an instant is a lawsuit. Unless proper protection is in place, you could lose it all right before you need it. Luckily, there’s still time.

Protection Planning addresses what you need to protect your wealth. From umbrella policies to diversification and contingency plans, this “root” may be one of the most important when it comes to sustaining yourself and your wealth.

A Tax Plan

Taxes will most likely be your biggest expense in retirement. That means that effective tax planning could be one of the most effective ways to maximize your wealth. The less you pay, the more you keep. You can’t control the market, but you can control your tax minimization strategies.

This root often does not get the attention it deserves. This is because many people will rely on an advisor to do tax minimization planning. Advisors are not trained to the extent that a CPA is trained. Simply put, tax planning is most effective when you work with an advisor and a CPA who specializes in tax planning strategies and can work together.

A Healthcare Plan

How you want to address your healthcare is completely dependent on how you want to enjoy your life. Some want to stay in their home as long as they can while others want to move to a retirement community and enjoy the social aspect it offers.

Whichever you prefer, planning so that it can become reality is a critical component of your planning. Healthcare Planning is a deep dive into the different options you have available to you while looking at your Medicare/Medicaid plans so that you can be prepared for potentially rising medical expenses.

A Gift Plan

When correct planning is done, you may find that you have extra funds that you want to give. Whether it is to your family, the local church or charities, or something else, you don’t need to wait until you pass to give.

WARNING: Gifting cannot interfere with or compromise your quality of life. This “root” is only when there are extra funds.

Gift Planning focuses on efficiently passing your generosity while you are alive so that you can enjoy watching others receive your gifts. Strategies include CRUTs, CRATs, Endowments, and more.

Where do you want to send extra funds?

A Legacy Plan

Legacy or Estate Planning is for everyone. One of the kindest acts you can do before you pass is to get your estate documents in order so that your heirs don’t deal with probate.

Relationships can be lifted or ruined over how your legacy planning is done, or not done. Determine the legacy you want to leave without compromising others.

Another critical component of estate planning that is often overlooked is declaring your wishes before you become incapacitated. This includes your finances and healthcare wishes.

Do you have the necessary estate documents?

In Conclusion

In order to sustain yourself and your wealth for the rest of your life, and for generations to come, it will require you to look at the big picture. When you pay attention to the 7 financial roots that sustain wealth and follow the rules to sustain wealth, you significantly increase your probability of success.

Don’t wait for your financial professional to initiate these conversations. Be proactive. Ask. Hold them accountable. If they can’t answer, then bring in other qualified individuals to be a part of your wealth team. It is not uncommon for someone to bring in an advisor, CPA, and attorney to work on and manage their wealth.

May your wealth sustain the quality of life you want to live and leave the legacy you want to leave.

PS, If you want to read more about the 7 financial roots that sustain wealth, check out the book “7 Steps to a Successful Retirement – How to Confirm Your Retirement Is designed to Support the Quality of Life You Want for 30+ Years“.

About Madrona Financial Services

Madrona Financial Services is an independent registered investment advisory firm that helps individuals and families sustain themselves and their wealth through comprehensive financial planning, based on the seven roots that sustain wealth.

Contact Person: Mike Decker
Email: [email protected]
Phone: 844-MADRONA
Location: Everett, WA
Website: www.madronafinancial.com / www.bauerevans.com

Disclosure

Disclosure: The information, suggestions, and recommendations included in this material is for informational purposes only and cannot be relied upon for any financial, legal or insurance purposes. Madrona Financial Services, LLC will not be held responsible for any detrimental reliance you place on this information. It is agreed that use of this information shall be on an “as is” basis and entirely at your own risk. Additionally, Madrona Financial Services, LLC cannot and does not guarantee the performance of any investment or insurance product. Insurance products are offered through Madrona Insurance Services, LLC, a licensed insurance agency and affiliate of Madrona Financial Services, LLC. Madrona Insurance Services and individual advisors affiliated with Madrona Insurance Services and Madrona Financial Services receives commissions on the sale of insurance products. Clients are not required to purchase insurance products recommended or to otherwise implement financial advice through Madrona affiliates. When we refer to preparation and filing of tax returns, tax returns are prepared and filed by our wholly-owned sister company Bauer Evans, Inc. P.S., a licensed certified public accounting firm. Madrona Financial Services, LLC is a registered investment adviser with the SEC. Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training.

References

1: Notable Market Crashes

2: Dr. Robert Schiler Data

SOURCE: Madrona Financial Services

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