Financial Independence is having a passive income that covers expenses and gives you the freedom to enjoy life, enjoy your hobbies, and live a life that you choose. It’s not just about having a big nest egg or a big net worth.
The truth is, more and more people are realizing that a big nest egg doesn’t do you any good if you can lose half of it any time the market crashes, or if you must pay tons of taxes on it when you access it. In fact, INCOME or ‘cash flow’ is the new and correct focus for true financial independence.
There’s a fundamental fallacy in the Wall Street teachings that lead people to the conclusion they should be focused on a nest egg number. It’s called the 4% rule.
Let’s say I do have a 1-million-dollar nest egg, and I want this to provide an income for life…
The 4% rule says I should be able to take 4% of your nest egg in income and have it last for the rest of my life. Well, 4% of $1,000,000 is $40,000. I still must pay tax on this because it’s more than likely in a 401(k) or IRA. Assuming tax rates are the same, I’ll pay 15% federal and about 6% state, unless you live in a state with no income tax.
That puts me at about $31,600 or just over $2600 per month. I don’t know about you, but that doesn’t sound too exciting for a retirement income.
What happens if my $1,000,000 takes a 30% hit during a market crash during my retirement? Now I’ve got $700,000. My monthly income is down to $1843. Maybe I’m a bigger spender than you, but that’s just not going to cut it for me.
I’m not the only one saying the 4% rule is broken. Now even the investing publications are saying it doesn’t work.
The reason the 4% rule doesn’t work is because of something called “The Sequence of Returns.”
Your retirement income can vary greatly depending on whether the market goes up or down in the first couple years of your retirement.
CREATE LIFELONG CASH FLOW.
If you take the exact same sequence of returns, with some ups and some downs, the sequence with your withdrawals starting in an up market (high early returns) your money would last 37 years. If you started withdrawals in a down market (low early returns) your money would only last 24 years.
This means your retirement could have run out 13 years sooner, just by the luck of the draw.
You can’t guess what the market will do once you retire. You basically hope it goes up not down, once you retire. This is silly considering it’s an ongoing cycle that is basically guaranteed to go up and down.
So, following the retirement strategy mentioned above, at this point you are simply ‘hoping for the best’…and hope is certainly not a strategy.
If you are one of the unlucky ones to retire in a down market, it could cost you a ton of your cash flow.
When I realize what the “sequence of returns” means for retirement, my goal was no longer to just make a certain amount of income in my retirement accounts. It was to generate a passive monthly income that my family was able to live on should the worst happen.
When I discovered what a Retirement You Can Count On Plan could do using the index strategy that allows me to grow my assets with safety of market crashes, I was excited because I wasn’t hoping anymore, I had certain guarantees that my money wouldn’t be lost when the market went down.
Talking pre-tax money, the stock account produced $40,000, factoring current tax rates the $110,000 in tax advantaged money would be closer to $145,000 in pre-tax income.
This is why the Retirement You Can Count On Plan has become such a popular retirement strategy, plus the fact that it has an insurance and potentially a long term care benefit included, you are getting much more for your money.
A LOOK AT COMPARISON PLANS:
I wanted to compare how a $1,000,000 nest egg in the stock market compared to the cash flow in a Retirement You Can Count On Plan Indexed insurance policy that had $1,000,000 in cash value.
Remember the stock account after tax would produce about $31,000 after tax income to last until age 100 (assuming the best-case scenario in the sequence of returns).
Assuming 6.75% growth (which is pretty conservative for me) Retirement You Can Count On Plan would put out $110,900 tax advantaged (no income tax) cash flow until I hit age 100.