How do you turn your retirement savings into a reliable paycheck? In this episode, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, and YFP Co-Founder & COO, Tim Baker, CFP®, RLP®, RICP®, break down three common strategies for building a retirement paycheck — including how each works, who they’re best for, and the pros and cons to consider.
Episode Summary
How do you turn your retirement savings into a reliable paycheck? In this episode, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, is joined by YFP Co-Founder & COO, Tim Baker, CFP®, RLP®, RICP®, to explore three common retirement income strategies: the flooring strategy, bucket strategy, and systematic withdrawal strategy.
Together, they break down how each approach works, who they’re best suited for, and the pros and cons you should consider. You’ll also hear insights on the emotional and psychological shifts that come with leaving behind a steady paycheck and the importance of building flexibility into your retirement plan.
Whether you’re approaching retirement or just starting to think about your long-term goals, this episode will help you better understand how to create an income stream from your hard-earned assets.
📅 Ready to work one-on-one with a fee-only financial planner? Schedule a free discovery call at yourfinancialpharmacist.com to learn how our team can help.
Key Points from the Episode
- 00:00 Introduction and Episode Overview
- 00:39 The Importance of Withdrawal Strategies
- 02:18 Building a Retirement Paycheck
- 04:29 Emotional and Behavioral Aspects of Retirement
- 05:02 The FIRE Movement and Balance in Retirement
- 06:32 The Role of Financial Planning Credentials
- 09:52 Three Key Withdrawal Strategies
- 11:03 Understanding the Flooring Strategy
- 24:56 Understanding Risk Tolerance Over Time
- 27:10 The Bucket Strategy Explained
- 29:55 Advantages and Disadvantages of the Bucket Strategy
- 34:45 The Systematic Withdrawal Strategy
- 45:27 Flexibility in Retirement Planning
- 46:23 The Importance of Professional Financial Advice
Episode Highlights
“It is a shift because for 30, 40, maybe 50 years, if you’re an overachiever and you’ve saved very, very early in your career, you’ve been socking money away for future you. And now future you is here and it’s like, okay, what do we do? ” – Tim Baker [6:28]
“ One of the cardinal beliefs in retirement, and this can sometimes be hard to swallow, is be flexible. The more flexible that you can be when you retire – how much you spend in retirement, all that stuff – the odds increase of a successful retirement. And I define a successful retirement, at least at a baseline state of you don’t run outta money.” – Tim Baker [39:54]
“ Will we work part-time? Will we not? What’s the market doing? What are the goals that we have in retirement? All these things are a good reminder that whether it’s in the accumulation stage or in the withdrawal stage, this is not a set it and forget it, right? This isn’t the strategic plan that we forget about for five years of the organization. We’ve gotta set this plan intentionally. Then we want to be revisiting this because there’s going to be internal and external things that are going to be moving and changing over time.” – Tim Ulbrich [45:54]
“ Your balance sheet and your goals are going to be unique to you and what you’re trying to accomplish. So, I think it takes a tailored approach to get you to where you want to go.” – Tim Baker [48:01]
Mentioned in Today’s Episode
Episode Transcript
Tim Ulbrich: Tim Baker, back to back. Good to have you on the show.
Tim Baker: Good to be back, Tim. What’s good?
Tim Ulbrich: You know this, this episode is, is one I’ve been looking forward to because over the past seven plus years of the podcast, we’ve talked at length about the accumulation side of the equation, right? When it comes to
Tim Ulbrich: saving for retirement, we’ve talked about things like how do you determine how much is enough and what are some strategies. For investing when it comes to traditional retirement accounts. Think 401k, 4 0 3 B IRAs. We’ve talked about options for investing when you’ve already maxed out these accounts and, and we’re gonna link to those episodes in the show notes for folks that want to learn more about the accumulation stage.
Tim Ulbrich: But this episode is really about the other side of the equation, which is one that I don’t think we give e enough attention to, which is the withdrawal strategy. [00:01:00] Hey, we finally get to. This point in the future of retirement and whatever that may look like. And we’ve gotta be able to produce an income for ourselves in retirement that otherwise was provided to us by our employer throughout our career.
Tim Ulbrich: And as obvious as that sounds, I think it’s something we don’t think enough about. And I love how you frame this as a concept of, of building a retirement paycheck. So paint a picture for us of, of what you mean by that.
Tim Baker: Yeah. And, and I think even before I get into that, Tim, like I, I, I don’t think that we’re alone in kind of our ignoring the, you know, kind of the withdrawal phase. I, you know, one of the, one of the things in the CFP curriculum, I. Certified financial planning curriculum is, they don’t really talk about this too much.
Tim Baker: And I think there’s a gap. You know, it’s, it’s all about, hey, amass wealth as much as you can and you know, we’ll get these buckets of money and then when, when we retire, then what? Right. And I even remember the first firm that I ever worked with, it was almost like our clients were driving those decisions, which is not [00:02:00] a bad thing, but we would basically say like, how much do you need this year?
Tim Baker: And then we would, you know. Basically send that to them, distribute those assets in the most efficient way possible. But it wasn’t really us doing analysis of like, okay, what do we need to, you know, what can we spend? Or, you know, how, how do we make this, um, nest egg last us for time? Unknown, right? So. To me, the, there’s, there’s a gap there and I think it’s really important for us to understand that.
Tim Baker: So when, when I think about this, like re like building a retirement paycheck, you know, I, I really think of this as like a multifaceted thing. There’s so many things, you know, just think about it from the accumulation side. You know, we all the different things that go on, like obviously we get a paycheck, but we also have.
Tim Baker: Benefits from our employer, like health insurance. You know, we’re saving for retirement, which is not something we typically do in retirement, but it’s, it’s, you know, it’s the paycheck itself and how do we access these [00:03:00] buckets of money and spend them down in an efficient, a tax efficient way possible, but also like efficient in terms of like your life.
Tim Baker: I finally started reading the book, um, die With Zero, Tim, so I’m, I’m in the beginning parts of that and it’s such a different. Thought process of like, Hey, you get dividends to go on a tangent here. You get dividends from life experiences. So like if you, you know, one of the things I did after I got in the Army is I backpack Europe for, I.
Tim Baker: Four months, right? Just kind of went to the wind and like, this is awesome. You know, kind of a YOLO experience. And what he says in those types of things is like those dividends have paid you back in terms of memories over decades of your life. If you wait to do that when you’re in six, your sixties or seventies, and then you pass away at 90, you have a couple decades but not a lifetime.
Tim Baker: So it’s also spending down. The portfolio in a way that maximizes those types of things. So, you [00:04:00] know, it’s, it’s housing decisions, it’s long-term care planning. All all of those, it’s estate planning. All of these things are, are really important as we transition from accumulation to decumulation. But just in a different way.
Tim Baker: Everything’s still happening very similarly. It’s just, you know, instead of the employer giving you a check, you have to kind of figure that out yourself.
Tim Ulbrich: I am so glad you mentioned Die With Zero. We, we should probably do a whole, a whole separate episode on that. You know, I, I often tell people like, if you read Die With Zero, don’t only read Die With Zero ’cause you’re gonna like drain all your bank accounts.
Tim Ulbrich: Right. But it’s such, it’s such a different concept.
Tim Ulbrich: It’s, it’s so refreshing. Um, and to your point. There’s that dividend component, but it’s also a learned behavior. You know, we start to talk about the tactical side of withdrawals. We have to remember there’s a big emotional piece here. So we can talk about, you know, what’s the best tax efficient way and is it this strategy?
Tim Ulbrich: Is it that strategy and actually getting money outta your account? But that is a mental shift when for [00:05:00] decades. You’ve been putting money in, seeing those accounts grow outside of the, some of the volatility of the market, and all of a sudden we’re making a conscious choice to take money out and see those accounts go down. That’s a piece that gets left out so often as well.
Tim Baker: And, and I don’t, I don’t know why Tim, but for whatever reason, I feel like on my YouTube feed I’m getting a lot of like videos about like the fire movement and people abandoning the fire movement. And, and, and part of the, the struggle with the fire movement, and again, no hate on the fire movement, but is exactly what you’re talking about, but like two extremes.
Tim Baker: Where, you know, I am, I’m saving and saving and saving, and then I get to my freedom number or whatever, and then I’m like expected to be, behave, you know, the shift, be the behavior and spend down. And it’s like, uh, I, I don’t want to, so just like everything in life, it’s about balance, right? And you can’t, you know, we kind of talk about.
Tim Baker: You can’t, you know, do this your whole life. So, you know, listeners can’t see this, but I have an open [00:06:00] hand where you’re, where you spend, spend, spend, and you can’t do this necessarily your whole life where it’s a closed hand and you save, save, save. Because what’s the point, right? So to me, it’s really about finding the balance.
Tim Baker: And this again goes back to the idea, not necessarily of a plan, but planning. With the g on the end planning Corey, uh, Jenks out there. So to, to me, that’s, that’s what this is all about. And again, it is a, you know, it is a shift because for 30, 40, maybe 50 years, if you’re an overachiever and you’ve saved, you know, very, very early in your career, you’ve been, you know, socking money away for, for the, for for future You.
Tim Baker: And now Future You is here and it’s like, okay, what do we do?
Tim Ulbrich: Tim, I remember it’s probably maybe two, three years ago we, we did a retirement series and part of that, and again, we’ll link to some of those episodes in the show notes, but part of the motivation for that was you going through the RICP training. I. And, you know, we talk about [00:07:00] the alphabet soup of credentials behind
Tim Ulbrich: pharmacists.
Tim Ulbrich: I think you’re starting to compete with some pharmacists out there,
Tim Ulbrich: right? With the, the CFP, the RICP and the, the life planning.
Tim Ulbrich: Um, but I remember you going through that certification and despite the experience that you had, obviously the CFP credential, which we feel like has a ton of weight and value in how comprehensive it is in both the education and the experience. It really felt like the RICP for you unlocked. Some other resources, information that perhaps weren’t covered in the same level of detail with the CFP te. Tell us about that.
Tim Baker: Yeah. And, and to go to the CFP, like, like there is a retirement section in the CFP, but a lot of that I think is geared more towards, um, like retirement plans. Like what’s an IRA? What’s a Roth? IRA? What’s a simple, when do you use a defined benefit, you know, for like self-employed people defined benefit or defined contribution plan.
Tim Baker: So it’s, it’s very plan driven. So almost like product driven versus like. [00:08:00] What do we do when we get to the end here? And it’s like I, you know, and for me it was like, I want to be able to answer that question of, Hey, I’m 65, I wanna retire next year. Like, what does that look like? So the R-I-R-I-C-P really focuses on the transition from the accumulation to the de de accumulation phase in retirement and.
Tim Baker: It, it’s really trying to figure how to turn your savings into a retirement income for stream, for time, unknown, right? And the things that’s covered is obviously like rebuilding the retirement paycheck, retirement income planning, but it’s social security and Medicare. It’s tax efficient withdrawal strategies, um, annuities and guaranteed income, long-term care planning, estate and legacy planning and housing decisions, which is gonna be one of the biggest expenses for retirees.
Tim Baker: Um. You know, especially early, early on. So to, to me, it’s really, really important for, it was really important for me to do a deep dive in those things because again, I, I [00:09:00] think the CFP, which is great, and they can’t be, you can’t do a deep dive in everything. It’s almost like, um, you know, a PGY one is what, like a general residency to like a PGY two where you’re, you’re, you’re more specialization.
Tim Baker: I think this is more of the, the PGY two. So my, my belief is, is that if you’re working with a financial planner. They darn well, sure better be a CFP, but I think if you’re in that retirement, you know, close to retirement or in retirement, I, I would say RICP is, is something that they absolutely need to do.
Tim Baker: And some of the strategies that we’ll talk about really cover a lot of the things that I listed that, you know, the RICP goes through.
Tim Ulbrich: Yeah. And retirement income certified professionals. So that’s what the RICP stands for. For folks that are, are curious about that and, and it’s a timely discussion, Tim, because last week on episode 4 0 4, when we were talking about questions to consider when you’re evaluating hiring a financial planner, one of those big questions was, you know, what’s included in the plan and the planning process, and is there alignment with your.
Tim Ulbrich: Planning needs and the experiences [00:10:00] and credentials and education of the people that are leading those services. So before we jump into the three strategies, two important disclaimers. All right. First and foremost. When we talk about withdrawal strategies and approaches, of course there’s some foundational work that has to be done that will be critical to knowing which of these approaches may make the most sense, right?
Tim Ulbrich: So obviously, how much do we have saved? What buckets are those funds in? What are the retirement goals? What are the potential risks? How might social security fit in? So lots of work to be done before implementing a withdrawal strategy. The second thing that. Of course has to be said is, is every one situation is different.
Tim Ulbrich: Of course, there’s more than three strategies, and this is not intended to be advice. You know, we really feel like the work that we do, our team does one-on-one when we’re doing financial planning with clients. That’s where the application and the implementation of these strategies would come. Again, curious to learn more about their services, go to your financial pharmacist.com.
Tim Ulbrich: Book a discovery call. We’d love to have a conversation. [00:11:00] So, Tim, let’s jump into these three strategies, and with each one you’ll provide a, a high level overview of, of exactly what is the strategy, and then some of the advantages, disadvantages, considerations, and who it may be best for. So let, let’s start with the flooring strategy, which our first of the three strategies tell us about what the flooring strategy is.
Tim Baker: Yeah, so the flooring strategy is probably the most conservative, and it’s probably the most. Neglected is probably not the you use, but I would say one that’s, it’s probably more on the shelf collecting dust for a lot of people. And I, and, and we’ll go through why that is, but it’s a conservative approach, um, that involves creating a layer of guaranteed income, which we call the floor, to cover the essentials that the essential expenses.
Tim Baker: So we’re talking about housing, food, utilities. Healthcare, the things that are gonna go out the door regardless of, of anything. Right? And usually what, what we [00:12:00] use to build the floor are things that provide guarantee, hopefully lifetime income. So that’s typically social security, a pension, if you still have those from your employer or an annuity that you purchase on the market.
Tim Baker: So. This is the best solution to, to mitigate the risk of running out of money. Um, so you essentially, and it, and it, and it’s essentially using like obviously social security and a pension, you know, is something, a benefit, you know, that you, you basically bought into during your career and it’s provided by the US government and or a company.
Tim Baker: An annuity is typically where you’re working with an insurance company to say, Hey, here’s a chunk of money. I want this over my life, you know, over the extent of my lifetime. They don’t know how long you’re gonna live, but they use, you know, tables to kind of figure that out. How much do I get for this chunk of money?
Tim Baker: Um. So the discretionary expenses are then, so once we, once we, once we figure out, okay, these [00:13:00] are the essentials for me to live, then anything above that, the discretionary expenses typically are funded from your remaining investments. So it would be, okay, I still have some money in my 401k or my Roth IRA or a brokerage account.
Tim Baker: Um. So, you know, converting these assets, um, to an income stream, IE like an annuity, eliminates the possibility of like, you withdrawing too much, right? So one might be saying, Hey, this sounds great, what you know, so let’s talk about advantages, but we’ll talk about disadvantages. So the advantages here is that if you can create this floor, it guarantees basic living expenses for life.
Tim Baker: So if you think about that like that. To me, when I hear that is super like peace of mind,
Tim Ulbrich: Warm blanket.
Tim Baker: yeah. It’s the, it’s the warm blanket, right? It reduces the, the anxiety about market volatility. So right now, like if you had a floor in place and you know [00:14:00] that a check was coming from an annuity, a pension, and a social security, I.
Tim Baker: To pay the, pay the mortgage if you still have it or you know, all the buy food like you’re, you are inoculated from the craziness that is the market. Right. And that’s the psychological thing, I think is the biggest advantage because I always make this joke. I. You know, I think sometimes my dad thinks I like day trade.
Tim Baker: He is like, oh, what about the market? Every time I see him and I’m like, I don’t know. I don’t, I haven’t even looked at it. You know? And I think he’s kind of preoccupied by that. Right? And, and if you are retired, you’re like, you wanna live, right? You don’t wanna have to worry about the market and, and like where the next paycheck, you know, you know, figuratively speaking is
Tim Ulbrich: yeah. There can become an obsession with, with
Tim Ulbrich: tracking the market. Yeah, for
Tim Baker: Yes. Um, I think the other thing is that it reduce, it, it simplifies cashflow management. Um. And it actually, it, it actually also reduces the. The, um, risk for like elder care abuse. So sometimes, you know, if you’ve ever, it’s like, Hey, Mrs. [00:15:00] Jones, why are you getting, you know, why are you redoing your kitchen?
Tim Baker: Or, you know, why are you having solar panels, panels put on your house? Sometimes older people, I. Um, can be at risk for people to defraud them or to, or to sell them things that you don’t need. So if, if, if there’s less money available and, and your money’s coming from a, it’s just less to take, so to speak.
Tim Baker: So one of the things that we, we train on as financial planners is to kind of be aware of some of these things. So if I have a million dollars versus I have 200,000, because I, I, I put a, a large chunk into an annuity, that’s harder for someone to get to. Um. And then, you know, it’s, it’s the custom flexibility.
Tim Baker: You can com, you can pair this with, typically you pair the, you still pair this with a bucket strategy or systemic withdrawal strategy, which we’ll talk about. Um, so those are the big advantages and for a lot of people, you know, that peace of mind and not having to worry about the market. Is why they do this.
Tim Baker: Um, from a disadvantaged [00:16:00] perspective, Tim, it’s redu. It’s, it’s, it can severely reduce your liquidity. So once you purchase that annuity, you’ve taken a chunk out of your IRA or your 401k and given them that to an insurance company. Now what they give back to you is a steady stream of checks for the rest of your life.
Tim Baker: But in the event of emergency or things like that, like that money is not accessible.
Tim Ulbrich: So, uh, uh, a quick, for instance, Tim,
Tim Ulbrich: I, I might have say a million dollars round numbers, a million dollars in my IRA. And depending on, and we’ve talked about annuities on the show so people can, can check that out and lots of different things to think about there. But I might take or peel off, say, $300,000 of that IRA or 400 or 200, whatever the number is, and convert that to a guaranteed monthly paycheck essentially.
Tim Ulbrich: And we would know what that dollar amount is. And, and then you’re, you’re kind of looking at, uh, you know, what’s the opportunity cost there is what you’re referring to that. Hey, if I don’t have these dollars now, kind of investing and growing, because we’re not just gonna stop [00:17:00] investing our money when we get to retirement, we’re still gonna have some of those dollars
Tim Ulbrich: that hopefully are in a growth phase as well.
Tim Ulbrich: But we’re taking those dollars off the table and saying, Hey, instead, we wanna have this, this guaranteed in income stream.
Tim Baker: Yeah, so it’s really twofold. It’s, it’s the opportunity cost, um, and potentially lower returns. So, you know, what else, you know, how else could that money have grown outside of it just kind of coming to me in the form of a check, but it’s also like, hey, we have a flood or something goes out on the house and I don’t have enough liquid set aside to account for that.
Tim Baker: So now I’m dipping into. Maybe some of my more riskier, volatile investments to cover that. So it’s, it’s both the opportunity cost and then, you know, kind of the, the risk that you need liquidity to. Now again, I would, I would make sure that we have an emergency, you know, the emergency fund never goes away, but sometimes you know, that, you know, you’re an emergency can kind of outpace you know, what, um, what you have liquid.
Tim Baker: The other is inflation risk. So I would say. I don’t know [00:18:00] if it’s all, but I would say most annuities that you’re gonna purchase don’t include a cola, a cost of living adjustment. So if out, if inflation outpaces the growth of the grant, guaranteed income, um, purchase and power may erode. And this is why social security is so powerful.
Tim Baker: And one of the biggest decisions that you make is because every year it kind of keeps pace with inflation. Retirees would argue maybe not as much as it should, but. You know, the, the one of the biggest expense or riders that you could have in an annuity purchase is like some type of in, in adjustment that the, the, or the rate goes up and it’s typically not pegged to cola.
Tim Baker: It’s typically like, Hey, I want a 1% or a 2%, um, kind of arbitrary adjustment every year. And, and that’s expensive. So, you know, this, that’s a big thing is in inflation risk. The other big thing is loss of control. You know, it can feel restrictive. It’s like, hey, I was looking at a million dollars, now I’m looking at half a million dollars, or whatever the case is.
Tim Baker: Um, complexity and cost. So, [00:19:00] um, there’s lots of different flavors of annuities. I kind of believe if you buy an annuity, keep it simple. Um, so there are ones that are more, but you know, you’re gonna have complexity. You’re gonna have costs associated with that, just like you have in investments. Um. And probably the last thing is just kind of dependence on the insurance company and, and their solvency.
Tim Baker: So, and you know, social security backed by the full faith and credit of the US government. So you can argue how, how stable that is. But you know, the insurance company, you know, they’re typically a for-profit. You know, they’re, they’re not the federal government. And while most, um, you know, insurance companies have, you know, state guarantee associations and protections there, there’s limits there.
Tim Baker: So those are the big disadvantages.
Tim Ulbrich: So, Tim, if we just zoom out for a moment. I’m, I’m oversimplifying to kind of make the point here with the flooring strategy, and I thought you said something real important is to not think about these as necessarily three discreet strategies. Often we may have more than one approach, right? So as we talk about these, these three individually, but let’s say I evaluate my monthly [00:20:00] expenses and you know, I determine, hey, it’s gonna be $10,000 for Jess and I in retirement and of that.
Tim Ulbrich: Let’s say $5,000 are essential expenses, the ones you talked about, uh, housing, utilities, food, healthcare, et cetera. And the other five is discretionary things that we wanna be able to do. Grandkids, travel, whatever, right? Eating out, those kinds of things. So with the flooring strategy, the idea would be either between social security, a pension, which maybe some of our listeners might have, but many, many not, and or an annuity. I would try to replace that 5,000. Um, and then as you mentioned, through other assets we would account for, for the other 5,000.
Tim Baker: Yeah, so to kind of take that example, let’s say the, let’s say the floor that we have to set is five grand. So those are for the essential expenses, housing, food, gas, utilities, medical stuff, insurance, all that stuff. So let’s say it’s five. Let’s say social security covers three of that. Then we have a gap in the floor of $2,000.[00:21:00]
Tim Baker: Now. And this, I ran this example a while ago, so I don’t know if this holds true, but let’s say you’re a 65-year-old male in Ohio and you purchase a SPI a, which is a single premium income annuity. So basically that money, um, gets sent to the, that chunk of money gets sent to the insurance company, and then within a year, you, you can direct how this is, but at least within the, the years, um, you know, you start getting a check back.
Tim Baker: So if we were to, if we were to say, Hey, we, we need $2,000. Um, now this would just be for, if we use you as an example, this would just be for your life. We would probably want to set this up for, you know, basically second to die. So if you were to pass away, Jess would still get this. But for the purposes of this, let’s just say we want $2,000, uh, a month for the rest of your life, um, that would cost you about three, $310,000.
Tim Baker: So that means that we, out of your traditional, or Roth or whatever, your, um, your 401k, we would peel those dollars [00:22:00] off. Um, basically give that to the insurance company. 3000 would come from, your per month would come from your, you know, social security. So you’d get a check for that, and then the, and then the insurance company would send you a $2,000 check for the rest of your life, and then the other 5,000, um, per month or $60,000 a year.
Tim Baker: Would come from what’s left of your traditional portfolio or, you know, if you had other, you know, uh, real estate or things like that. So in that, in that case, those discretionary expenses, you might use some, some version of the bucket strategy and or the systemic withdrawal strategy.
Tim Ulbrich: I’m tracking, and since we’ve talked about annuities now a few times, uh, this was episode 3 0 5, we talked about understanding annuities, a primer for pharmacists. Check that out. Lots of good information in that show. So, Tim, as we, we put a bow on the flooring strategy, we started with the most conservative approach.
Tim Ulbrich: You mentioned that you talked through the the concept of, of essentially being able to replace, create a floor of those fixed [00:23:00] expenses. You mentioned the advantages, disadvantages. And clearly it feels like this would be best for those individuals that are on the more risk averse side of things. And there’s a prioritization over of security potentially over growth.
Tim Baker: Security overgrowth. Yeah. So if you’re, if you’re somebody that’s like, give me all the insurances. You’re probab. This might be more in your camp if you’re like, uh, I want to self-insure, or, I don’t want that much life insurance. Or, you know, I’m, I’m kind of using, you know, an analogy here, but like, this might not be best for you because you, you want more, you know, you’re, you’re more, you know, risk, uh, tolerant.
Tim Baker: So this is someone that doesn’t necessarily worry about, wanna worry about the market and just wants that steady check coming in, you know, for the rest of their life. And, um, you know, yeah.
Tim Ulbrich: Great. So, and I think, you know, I’m, I’m projecting a little bit, but I could see that a lot of pharmacists may, may like that concept or at least a portion of it. Um, I.
Tim Baker: Yeah. And I, I would say I have a pretty, pretty big appetite for risk, but part of me is like, man, if [00:24:00] I give up three 10 and I get 2000 for the rest of my life, just clockwork, and I know that combined with my social security is gonna pay the essentials. I’m not mad at that. You know, I know there’s some people that are like, well, what happens if like, I give three 10 and then I die the next day?
Tim Baker: You know, there, there are cer there, there are certain things where you can get like return of premium or, or different riders. Now everything, all these riders cost money. So, you know, if you add every rider that 2000 might be 1200. So, but there’s, there’s more protection there. But that’s, that’s the kind of the, the push and pull of this.
Tim Baker: So, um. I mean, I, I can see that and, and I’m trying to like project my, like my older self here, you know? ’cause right now I’m just like running gun and, you know, I’m, I’m, I’m more like risk, you know, Hey, all the risk and things like that, I have more appetite for it. But again, in our job is not to project our own risk tolerance on clients, right?
Tim Baker: We need to, you know,
Tim Ulbrich: Yeah, that’s, right.
Tim Baker: that’s best suited for them. But I, [00:25:00] part of me can kind of see the appeal of this now while I. You know, push that button to move hundreds of thousand dollars of over for that. I don’t know. I don’t know if I would do that.
Tim Ulbrich: I’m, I’m glad you said projecting your older self though. Right? Because this is important that I know. My tendency and I suspect maybe for others is, is we tend to think that our current. Risk tolerance, risk capacity is what we’re going to do also in the future. And may not, or in some cases should not always be the case.
Tim Ulbrich: Right. I’m thinking about, you know, as we’re working on our own individual financial plans and we’re taking a more aggressive investing approach, and perhaps there’s, you know, as we think about our, our plans, there’s some investment in real estate, there’s building to the business. If those things continue to, to grow and there’s fruit from the risks that we took, at some point you wanna really lock in. To some degree lock in the, the gains that have had. Uh, and there’s a different level of risk that I probably should be, will be thinking about at 60, 65 than we are at this phase of life in, in [00:26:00] early forties.
Tim Baker: Yeah, and I kind of think about it like. I used to be able to like, drive, take a road trip and drive for 12 hours and like not blink. And now I’m like, nah, nah, I’m good. Or even like playing basketball with Liam, like, I’m not, I’m not dunking on his head or anything like that. I’m like, I, I’ll shoot the j You know what I mean?
Tim Baker: Like, I like I, because I, I don’t wanna. Get hurt or do something dumb, which I got, I sound so old right now, but like, like I’m just projecting that out, you know, when I’m in my fifties, sixties, seventies, and you know, from a, you know, there might become a time where I’m just like, man, like let’s keep it simple.
Tim Baker: Gimme my check and I can like, you know, just chill and not have to worry about the market or things. I don’t have to worry about the hustle, you know? But I could also see on the other side of that, like we talk about identity and role like. You know, so much of, so some people get in trouble with during retirement because so much of their identity is, is wrapped up in the, in the role that they play.
Tim Baker: And, and, you know, professionally, whether that’s a pharmacist, uh, a financial planner. [00:27:00] So, you know, maybe part of that is still being plugged into the markets or the economy or things like that. But I think that, that, that, that’s a razor’s edge, right? ’cause you can become obsessive about it. Um, so, but obviously I work in this, that I might get to the point where I’m like, I just want to like.
Tim Baker: Flip burgers and like, not have to worry about that stuff. So, um, yeah.
Tim Ulbrich: Good stuff. Let’s shift to the second, uh, withdrawal strategy, which is the bucket strategy. Tell, tell us more about this one.
Tim Baker: Yeah. So, so the bucket strategy is essentially where you divide up your assets into buckets. Um, so the, your funds are segmented into time-based buckets, each with its own investment profile. So. If you look at bucket one, this might be for, you know, your next zero to five years worth of expenses. So these, this is the, the lowest risks.
Tim Baker: It’s basically cash and cash like investments, so might be cash, I bonds, [00:28:00] um, bonds in general money market. Um, think things like that, right? So if the market does what it it’s doing now, it’s not gonna affect, you know, what, what’s going on the second bucket. Bucket two is typically, you know, maybe six to 15 years out.
Tim Baker: So this is more moderate risk. You have more of a, a balanced, uh, um, asset allocation. So maybe like a 60 40, 50 50, um, uh, equity to, to fixed income. Maybe some dividend paying stocks where there’s, it’s, you know, the portfolio’s producing some income. So more volatility. A little bit more return though, um, but not.
Tim Baker: You know, not those huge swings that you’re gonna see, which you typ. They’ll typically get in bucket three, which is typically, you know, 15 plus years out. So this is where you put your higher risk, um, you know, equities, uh, stocks, that type of thing. So I. For, for a lot of people. Um, from an understanding, the big advantages here is that [00:29:00] it helps retirees mentally separate funds.
Tim Baker: So you’re kind of matching investments to the time horizons, time horizon, and this is, this is, I look at this, it’s like purpose-based investing. So we talk about purpose-based savings, like, Hey, what’s that money for? Like tie a purpose to it. Same with investing. Mo, it’s a little bit easier with investing because most of the time it’s in a 401k or an IRA.
Tim Baker: We know that purpose is for retirement. Like if we have a brokerage account that has $50,000 in it, I’m like, Tim, what’s that money for? And a lot of people are like, I don’t know, sometimes. And that could be for early retirement, it could be for the down payment on a, you know, a property in the, in the, in the future.
Tim Baker: So it allows people to kind of, it, it enhances their understanding, um, and increases their peace of mind. So as an example, um. Like if the market goes down, like it’s been going down lately and I have three years of expenses of cash for expenses, like in my mind, you know what the market is already is typically done, is that it, it bounces back [00:30:00] right in, in, in 2, 3, 4 years.
Tim Baker: So I’m inoculated to that, right? So I’m not, I’m not necessarily worried about it. Um, this, the, another advantage of this, it kind of encourages discipline withdrawals and. One of the disadvantages is kind of how you refill the buckets, which I’ll talk about here in a second. But it has, there’s a system for which you follow, um, the withdrawal, uh, uh, phase.
Tim Baker: Um, it reduces the need to sell volatile inve investments, uh, or volatile assets during market downturns, which mitigates sequence of return risk, which we’ve talked about in previous episodes. Um. Some say it supports higher equity, Al Al allocation. I don’t know if I necessarily agree with that, um, but potentially.
Tim Baker: That 15 year bucket should be pretty, you know, pretty, um, you know, uh, risk, you know, risk heavy for, for larger returns and, you know, it can kind of provide a built-in rebalances system. The, the, the disadvantage I would say to this is that it’s complex. It can be complex to [00:31:00] manage, so the rules for refill in your buckets can get confusing.
Tim Baker: And there’s the delayed, there’s the delayed approach, which, you know, basically nothing happens until the first bucket. Um, that that liquid bucket is completely depleted. The problem with that, Tim, is like, if that is now, like you’re, you have market risks, um, and sequence of return risk, like the timing of that can be tough.
Tim Baker: Another approach to refill in the buckets is the, um, automatic approach. So you refill the buckets, re regard, you know, each year regardless of what’s happening in the market. So again, it’s pretty rigid, so you’re just like, this is what I do. Right. Even if I’m going off a cliff. Um. The other, the other approach is the market-based approach, which the bucket is refilled based on what the market does.
Tim Baker: So you have a set of rules that says, if this happens, I do this. If that happens, I do that.
Tim Ulbrich: Mm-hmm.
Tim Baker: And then the last one that you typically follow or could follow is the capital needs approach, which you need to determine kind of what your critical path or how much wealth should remain in each year of [00:32:00] retirement to meet lifetime financial goals based on the the portfolio return.
Tim Baker: So it’s kind of like a plan backwards approach. So some of this, you know, you could be in a trough right now, which is kind of where we’re at, and you’re like. What do I do like this? This doesn’t seem like I should be selling, you know, some of my equities or even moderate, um, base, you know, I’m selling low.
Tim Baker: Um, so that can be, that can be tough. The, the, another disadvantage I would say is the potential cash drag. So if you’re, if you have, if you amass. One to three, one to five years of cash that could be harmful during inflationary periods because, um, that money, you know, inflation is, is eaten away at that. Um, and, and it can reduce the overall, um, portfolio efficiency.
Tim Baker: Um, another and others argue, argue that the time se segmentation is straight up arbitrary. So, um, if there’s a poor market or spending increase, the buckets may not hold up. There’s no guaranteed income in this. So you [00:33:00] have social security, obviously, but you don’t have a floor. So gu you know, your, your social security might cover.
Tim Baker: You know, a portion of your essential expenses, but it’s not gonna cover everything. So that’s a problem. And then I would say the sequence of return risk still exists and it can be challenging to rebalance just in volatile market. So it’s, you know, you could be doing things that you know you shouldn’t be doing, but it’s like, Hey, I gotta fill the buckets.
Tim Baker: I gotta make sure that the, the, the, the, the money cascades throughout the bucket system.
Tim Ulbrich: Tim, as you were talking about this, I sense that my, my feelings, and I suspect maybe others listening are is, is you describe the three buckets. It’s like, okay, I get it. That all makes sense. And then you start to think about some of the management of it and the different ways that you could do it. And, and it could be, as you mentioned.
Tim Ulbrich: More administratively complex, you know, especially if somebody’s trying to DIY it, or even if they’re working with an advisor, you know, there need to be some communication. Are we establishing rules? You know, what exactly are we doing? How are we doing it? Um, and for some there may be a comfort level of, of that, that may not be for others, which [00:34:00] is why this lives in the middle, not as conservative as, as the first, not as, uh, more dynamic as we’ll talk about with the third. But the example you gave is a good one when, when you said, Hey. I’m in a trough, like we’re we’re now, what should I do? What came up for me there is when you said that is how important it is to think through those things in advance of actually being in the trough and asking the question, what should I do? Right. So actually stress testing some of this of, hey, when the down market comes, not if, but when the down market comes. What are we gonna do? How are we gonna react to that? Are we gonna hold true to these real? And, and this is both numbers and feelings. Um, but I think a lot of the, the literature in our experience would tell us that it’s not in the moments of the market kind of falling out in the situations we’re having now where we wanna really put the test, what are we actually gonna be doing?
Tim Ulbrich: But can we work through that in advance or at least do the best that we can? Of course, reality, you know, may, may present itself to be a little bit different. All right. Let’s move on to the third strategy, which is the systemic [00:35:00] withdrawal strategy. Tell us more about this one, Tim.
Tim Baker: Yeah, so I would say this is probably the most popular, um. Strategy for, at least for financial planners. I think probably even for, for people that do it themselves, um, I would say the bucket strategy is probably the second most popular. Um, this was kind of made, um, popular, I guess, or or known by the, the 4% role.
Tim Baker: So. Um, it’s often associated with a 4% rule. And, and this method really involves withdrawn, uh, a fixed percentage from the portfolio annually adjusted for, potentially adjusted for inflation and market performance. So the, the 4% rule kind of came, um, from a study. It was, it, it was based on. 30 year, 30 year time period.
Tim Baker: So kind of rolling 30 year periods in the market’s history, determine, you know, in the worst 30 year, you know, rolling period. What was the safe withdrawal rate for, [00:36:00] um, an, an investor to withdraw so the money wouldn’t run out at the, you know, basically at the end. So from, from someone who was age 65 to say 95.
Tim Baker: In the study, the worst 30 years, and I think the study goes back to 1926, Tim, but in the study, basically the worst 30 year period was 1966 to 1995, which I guess at the end of that, I don’t know if that was like the, the.com bubble on 95. Yeah. So that was the worst Roland 30 year period. And what the study said was that the The safe, the safe maximum withdrawal rate.
Tim Baker: Of that portfolio, the worst one was 4.15%, and this, they used a
Tim Ulbrich: Adjusted for inflation,
Tim Baker: Correct. And, and they use, they use the, um, the 50 50 kind of stocks to bonds allocation, which I think most people would agree now that that’s not necessarily a great allocation over the course of your, of your retirement. [00:37:00] So what people, people saw that number and they’re like, great.
Tim Baker: 4%. So if I have a million dollars, I can withdraw 40 grand, um, for the rest of my life, you know, typically 30, 20, 30 years. And I, and I’m not gonna run outta money. Um. The, the problem with that is typically the, so the problem with the 4% rule is it’s, it’s rigid. Um, the allocation with 50 50 between stocks and bonds, I don’t think is, is great.
Tim Baker: Um, the, it’s, it’s very much focused on US stocks and a lot of people don’t think that US talks will perform as well as they did, you know, um, in the future, as they did in the past. Um, the, the longevity is a problem because, um. You know, he, the study says that retirement will last 30 years. And I think there’s gonna be a lot of people that follow this are gonna live a lot longer.
Tim Baker: Um, because, you know, life expectancies have risen and it didn’t really, um, the, the, the inflation [00:38:00] averaged a modest 2% in the study. So we saw it in 2022 as 8.3, and that can throw a major wrench. Um, the other thing that’s, that that’s problematic is that spending is not linear. Often we talk about spending in retirement as like a smile.
Tim Baker: So in your early retirement you’re like, okay, you know, yolo, I don’t have to punch the clock anymore. I’m traveling, I’m doing all the things. And then. Spending typically dips as you’re kind of more, you know, Hey, I don’t want to travel as much, I wanna be home. And then it typically goes up when, you know, medical expenses start to start to rise.
Tim Baker: So spending is not linear. So you, you should adjust like what, what, what a lot of, um, people that would say against the 4% rule is like, you should probably be spending a lot more in the beginning. Um, because, you know, spending’s gonna come down and then make sure we have enough, you know, and, and be, you know, more aggressive outside of a 50 50 allocation for, for later life.
Tim Baker: So, um, spending fluctuates, it’s not a straight line and [00:39:00] doesn’t account for taxes, doesn’t account for fees and things like that, which can also be, you know, uh, a major part of this. So. Proponents of the withdrawal, uh, systemic withdrawal strategy would say, Hey, the 4%, that’s cute. That’s a good place to start, but it, it actually needs to benu more nuanced to that.
Tim Baker: So guiding Clinger, um, two gentlemen basically did a study that, that, that, that, that established kind of more, um. Responsive withdrawal rules. So the, the one withdrawal rule, they, they basically said is like, Hey, we’ll start with four or 5%, whatever, wherever it is. And then each subsequent year, the withdrawal amount is increased by the prior year inflation rate.
Tim Baker: Unless the prior year investment return was negative and the New Year’s withdrawal rate would be above the initial withdrawal rate. So it’s, that’s a lot to kind of unpack. But the idea is that you, in this withdrawal rule, you are kind of, um, [00:40:00] flexible to what’s going on in the market, not just from an, not just market returns, but also inflation and probably one of the cardinal, um, beliefs.
Tim Baker: In retirement, and this is, can, can sometimes be hard to swallow, is be flexible. The more flexible that you can be with when you retire, how much you spend in retirement, all that, you know, all that stuff. The more success that the, the odds increase of a successful retirement, and I define a successful retirement, at least at a, at a baseline state of you don’t run outta money.
Tim Baker: You know, I don’t, obviously we want to thrive, not survive, but that to me is like, you don’t, we don’t run outta money. I. So flexibility here is key. The other one that they looked at was the capital preservation rule. So you kind of start at 4%. And then if the current year withdrawal amount is more than 20% above the initial withdrawal rate, you reduce the withdrawal, the withdrawal rate by 10%.
Tim Baker: So it kind of, so this reduces spending when the market returns are [00:41:00] poor. And typically once you get to a certain age, IE 80 or 85, like the, the role no longer applies. ’cause there’s, they’re, they’re assuming that. There’s such a, there’s a shorter window of time that you’re fine. And then the last one that they talk about is kind of the prosperity rule.
Tim Baker: So if the current year withdrawal amount is less than 80% of the initial withdrawal rate, um, so basically what happens then is that the increases, we increase the withdrawal rate, calculate it, um, by about like 10%. So this allows an increase in spending when the markets have done well. So, so you might listen to this and be like, Tim, what are you talking about?
Tim Baker: But what we’re doing, and it’s similar to the bucket rule, but what we’re doing is essentially we’re not, we’re not on a conveyor belt with a 4% rule, which is kind of like, okay, $1 million, 40 grand, you know, adjusted for inflation crate. But if the market is, you know, if the market tanks for three, four years in a row, that that could break.
Tim Baker: Right. [00:42:00] What we’re doing is that
Tim Ulbrich: Or you start working part-time or like all the things, right?
Tim Baker: So, so we’re looking at. We’re looking at the market returns or we’re looking at it inflation, and we’re making tweaks and adjusting your, your paycheck accordingly, right? So again, like it for, so I’ll, I’ll talk about advantages. So the advantages here, um, it, it can be somewhat straightforward to implement once you get your system down, right?
Tim Baker: So every, everyone is easy for us to understand. I have a million dollars, it’s 4%, or maybe I start at 5%. That’s kind of my baseline. And again, 40 or 50 grand, you might be thinking, Hey Tim, that’s not, that’s not a ton. But we’re also gonna make sure that, you know, social, like we, we make a really good decision from a social security, uh, claiming strategy.
Tim Baker: Um, you know, we’re looking at other streams of income, whether that’s part-time work or in, um, you know, income from an, an investment like a business or a real estate. All that stuff kind of plays into this, but. You know, we’re gonna take that 40, 50, 60, [00:43:00] 80 grand, whatever it is from the portfolio, and then in subsequent years, make decisions on, on how that, how that, um, fluctuates.
Tim Baker: Um, probably the biggest reason that people do this, because it does maximize flexibility in asset growth. So here. You’re, you’re looking, you’re really looking at, like to total portfolio return, right? You get a similar result in the bucket strategy, but you’re kind of looking at it in tranches, whereas this is, I have a million dollars, I’m trying to get the most return as I possibly can.
Tim Baker: Um, so you’re not an annuitizing assets, so that keep, that allows you to keep control. And there’s not that, um, irrevocable commitment of like, once I send that check to the insurance company, I don’t necessarily get it back out outside of the, the check that I get from them, um, from an income stream. So there’s potential for higher returns.
Tim Baker: Probably the biggest thing is tax efficiency. So if it’s managed well, um. You know, the, the, the location of [00:44:00] assets, how you pull from them, how you fill up tax brackets, capital gains, harvesting, Roth conversions, all of these things that can extend your portfolio. Um, that is part of this whole strategy. Um, it’s, it’s, you retain full estate value.
Tim Baker: So, you know, if I cut a check for $500,000 and that to an annuity company and that. Check turns off when I die, my kids don’t get that money unless I put that rider in that, um, and I get a reduced check. So this basically, I pass away, that money goes to Shea, she passes away, that money goes to my kids or whoever my beneficiaries are.
Tim Baker: Um, and it, and it’s really designed to kind of tailor to your risk. So advantages, the disadvantages, no guaranteed income outside of Social Security. Um, you still have market and sequence risk, so you’re still kind of playing that game, although the decisions you make. Kind of, kind of mitigate that a bit.
Tim Baker: It does require active monitor monitoring. I would say at least once a [00:45:00] year to kind of figure out, okay, what are we doing for this year? Um, there’s some psychology here. Again, you can be over, over. Um, uh. Attentive to the market because again, that that’s where the next paychecks come in. You still have inflation risks, although I think that’s mitigated if you’re, if you’re looking for total return.
Tim Baker: Um, and there’s potential tax complexity if you, you know, if you don’t do it. Uh, right. So, so this one I, I think, is the most popular. But, and there’s lots of advantages, but there’s also lots of disadvantages and I think the potential pitfalls for inefficiency and lack of optimization with regard to how best to build the, the paycheck.
Tim Ulbrich: Great summary, Tim. And then the thing that jumped off the page to me, which applies across the retirement planning and, and regardless of withdrawal strategy, although more important here as you mentioned, is the flexibility piece. Flexibility, flexibility, flexibility. And this is in part what makes, makes the planning a little bit difficult is we may in our mind say, Hey, I’m gonna retire at the age of 65 and we’re gonna stop working all together. Who [00:46:00] knows, right? What, what will happen in terms of, of health. And obviously as we get closer, things become a little bit more known. But will we work part-time? Will we not? What’s the market doing? What are the goals, you know, that we have in retirement? All these things are a good reminder that whether it’s in the accumulation stage, stage or in the withdrawal stage, this is not a set it and forget it, right?
Tim Ulbrich: This isn’t the strategic plan that we forget about for five years of the organization. We, we’ve gotta set this plan attentionally. Then we wanna be revisiting this because there’s gonna be internal and external things that are going to be moving and changing over time.
Tim Baker: Yeah, and I think, I think what I said last episode, um, about questions to ask your, your financial planner. You know, I, I, I believe that, you know, if you are a seven figure pharmacist like this requires I think professional attention. There’s just so many moving pieces with regard to, you know, how do [00:47:00] I spend down the seventh figure sum of money in a way that meets my goals and what do I’m trying to achieve, not just from a money perspective, but from a, from a life perspective, from a legacy perspective.
Tim Baker: Um, you know, there’s so many different things to kind of be aware of and, you know, I think, again, having that outside. Third party opinion that has your best interest in mind is critical. Now, again, I am biased, Tim. This is what we do. Um, but you know, I always make the joke, like when I first lived in Ohio, I file my own taxes and I lived in like a, like a Rita area.
Tim Baker: And for those that are outside of Ohio, they’re like, Tim, what are you talking about? I’m like, there’s no freaking way I did that correctly, Tim. There’s no way. There is no way
Tim Ulbrich: well re Rita will become, come knocking in like 2030 ’cause
Tim Ulbrich: they’re like three years behind
Tim Baker: Yeah, but like, this is kind of the same thing, right? Like, like hire a professional to [00:48:00] do these things because there’s just so much nuance and you know, I, I often hear like, uh, like, you know, my colleague’s doing this, or my uncle’s doing this, or my brother’s doing this, you are a unique snowflake.
Tim Baker: Your, your, your balance sheet and your goals are gonna be unique to you and what you’re trying to accomplish. So. I think it takes a tailored approach to get you to where you want to go. Right? And, and that would just be my, my soapbox, uh, for the, for this episode.
Tim Ulbrich: Tim, I, I couldn’t agree more. And, and I’m not shy about saying we’re biased because we, we see the benefit that this has in, in clients that are intentionally planning over a long period of time. You know, we know it in our own plans. I, I work with the team at, at YFP planning. Like there is real value there in a long term engagement.
Tim Ulbrich: And, and to your point, everyone’s situation plan different and we often wanna apply. General advice, and you know, here we’re talking again, withdrawal strategies. It’s not a one size fit. Fit fits all, and there’s so many conversations, as I mentioned at the beginning of [00:49:00] the episode. There’s so many conversations, yes, financially, but also about goals and emotions and all types of that need to happen. That inform the strategy
Tim Ulbrich: and why we’re gonna be doing what we’re gonna be doing from a strategy standpoint. So, you know, whether you’re hearing this and you, you lean towards the security of the flooring strategy or maybe some of the structure of the bucketing strategy or some of the flexibility of the systemic withdrawal strategy. The key again, is finding a strategy that lines with your goals and risk tolerance. And we believe working alongside a third party can be incredibly helpful. In doing that, we’d love to have an opportunity to talk with you more about your individual financial plan and your retirement plan. Uh, to learn more about our one-on-one fee only virtual financial planning services and our team of certified financial planners. Go to your financial pharmacist.com, you can book a free discovery call, that’s a 45 to 60 minute meeting, uh, with Tim Baker. We can learn more about your situation. Uh, you can learn more about our services and, and together we can determine whether or not it’s the right fit. And you know, for [00:50:00] some of you, if you’re currently working with an advisor and having that feeling of, Hey, I’m not sure it’s the best fit, we’d love to have an opportunity to talk with you as well, uh, to do a second opinion analysis and, and see whether or not the current situation is the right fit.
Tim Ulbrich: Or perhaps a move does make sense. Again, you’re financial pharmacist.com. Book a discovery call. Tim, great stuff. Thanks so much for joining today.
[END]
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