Navigating the Retirement Risk Zone

Today I'm going to explain how to
prioritize your retirement planning efforts,

if you are within ten years of retirement.

After building hundreds
of financial plans, I've learned that

there is an optimal financial order
of operations that,

when used, helps retirees
save time and reduce stress.

In this podcast,
I'm going to share the exact protocol

we use at our independent
financial planning firm to help

clients get the most done
with the smallest investment of time.

If I could summarize all the concepts
from this video into one sentence,

it would be,

a mediocre plan that you can
execute over long periods of time

is far better than the incredible plan
that you eventually abandon.

Now people abandon their
plans for two reasons.

Reason number one is that it's too costly,
meaning it costs too much in time

or too much in resources
or requires too much sacrifice.

The second reason people abandon
their plans

is because they're too complicated,

meaning that it is too demanding or too
difficult to execute reliably.

The problem for most of us is that it's
extremely unclear how to prioritize

what actions are both
simple and effective,

versus those that appear effective,
but are actually difficult or very costly.

As a result, too often in financial
planning, we run before we can walk,

and Roth conversions are, in my opinion,
a great example of this dilemma.

Roth conversions are, in my opinion,
a low leverage financial planning item

that seem effective when in actuality

they can be both costly and complicated
and not provide all that much value.

Yeah, we end up hyper
focusing on Roth conversions

when we may not be in

an appropriate position to use them
in a way that provides us actual value.

At Peak Financial Planning,
we break retirement planning down

into three phases.

The first phase we call the triage phase.

The second phase we call stabilization.

And the third phase we call optimization.

Each phase is then assigned
what we believe to be

the appropriate financial action items
that should be done while in that phase.

Once you complete

the actions in the triage phase, you
then move on to the stabilization phase.

And then once you complete the actions
in the stabilization phase,

you would move on
to the optimization phase.

And in this way, you move progressively
through your checklist

where you always know
where you are.

And at each point
in your planning journey,

you're focusing on the most important
and highest value action items.

Let's go through
the characteristics of each phase

so that you know how to identify
where you are in the planning process.

The universal first step
is always to perform a financial audit.

A financial audit
is when you enter all of your current

financial assets and behaviors
into a planning tool.

It's very important

to input only things you are currently
doing and currently have.

Don't use projections.

Do not add in ideas or changes
you are considering,

at least not at this point in the process.

Think of the audit like going
to the doctor to get a health checkup.

You go to the doctor and they weigh you.
They measure you.

They take blood results,

check your heart rate,
your blood pressure,

and then at the end, you tell them
you plan to begin working out

five days a week.

Despite not having worked out a day
in the last 20 years.

The doctor should not, in that case,

change their diagnosis because
of something that you plan to do.

If they did in fact change your diagnosis,
they would actually be

robbing you
of highly critical health information.

And the same can be thought of
in the case of the financial audit.

Now, if your a financial audit,
after you run it,

spits out a probability of success
or a Monte Carlo score beneath 60%.

You would be in what
we call triage territory.

If that probability of success
comes in between 60%

and 79%, you would be in what we consider
stabilization territory.

And then if you
if that probability of success

comes in above 80%,
you would be in optimization territory.

It's very important to know
something really quickly here

about our usage of Monte Carlo scores
or probability of success scores.

Monte Carlo scores
tell you the likelihood or the confidence

of completing your retirement
without running out of money.

Monte Carlo scores,
however, do not tell you anything

about what
to do to improve your probability.

Nor does Monte Carlo tell you
which actions

get you the most bang for your buck.

I did a whole video on this subject
several weeks back

titled Retirement
Planning Tools Will Ruin Your Retirement.

I'm going to put a link to that video
at the end of this podcast.

And once you complete this episode today,
I highly recommend

watching that one as well.

Now, the whole reason
we've broken retirement

planning down into these three phases
is because probability of success

tells you nothing about where to go
once you perform your audit.

And so we need a roadmap
that tells us where to go.

I'm going to go through
the financial planning goals

and the action items in each phase
with you here in this video.

But for both audio listeners and video,
viewers know that I will also include

a free PDF that has these listed,
and you can download that PDF

in the show notes
or the description below.

So starting with the triage phase.

The goal of this phase is to accumulate
sufficient financial assets

before retirement,
or at least to establish the behaviors

that will get you to sufficient
financial assets before retirement.

The actions items that get you
there are pretty straightforward.

Number one is to maximize your savings
rate.

Number two is to get cash off
the sidelines and invest it.

And then finally
the third is to work longer.

In most cases people will do some
combination of all three of those things.

The problem here, however, is
how do we know what dollar amount

is going to be enough?

Without knowing how much
is going to be enough,

we don't really know how much to save
and invest, right?

And the answer is the younger you are,
the less you should care about

what is enough, and the more
you should focus on the behaviors.

Meaning maximizing savings rate
and getting cash proactively off

the sidelines and invested.

Then once you're
within ten years of retirement,

you can do a much more accurate

calculation about what will be enough
and then refine your savings behaviors.

But you'll see that enter
the picture in the next phase,

which leads us to phase number two,
which is the stabilization phase.

The goal here is to craft
an income and contingency plans

so that you know how
you will produce a paycheck in retirement.

And when you should
or should not hit the panic button

once you are retired
and taking that paycheck.

The action items in this phase include
determining your optimal retirement age.

Evaluating and selecting the optimal
Social Security claiming option.

Refining your savings behaviors.

Crafting a dynamic distribution strategy.

Making portfolio adjustments.

Establishing monitoring systems.

And then documenting
contingency plans.

The stabilization phase
is filled with many smaller action items

that each individually
have smaller proportional effects

on your probability of success.

But really, these are the meat
and potatoes of making retirement work.

The challenge in the stabilization phase

is that it requires
a lot of education to get it right.

You can really get through the triage
phase, just kind of based off of force of will.

You know, just save more money
and you'll likely be okay.

Even if you don't really know
all that much

about investing
or about tax advantaged accounts

or even things like Roth conversions
or the 4% rule.

But the stabilization
phase is all about weaving together

a complex set of interlocking decisions
that determine

how the day to day of your actual
retirement is going to look.

The actions you take in
the stabilization phase

help you stretch your retirement assets,
and they obtain either

more spending flexibility or better
end of life legacy out of your assets

by creating a better plan.

In my opinion, the best way to stick to
a plan is to understand it.

So for that reason, I always recommend
people give themselves 5 to 10 years

during the stabilization phase.

To learn and model all of the actions

that go into this part of retirement
planning and execution.

In execution,

this really looks like buckling down
on your retirement planning efforts

at least five years before you suspect
you're going to want to retire.

And if you watch some of my other videos,

you may have heard this before,
but the average American retires

three years earlier than
they suspect they will.

So if you start planning five years
before you think you'll retire

and you end up one of those
people forced into early retirement,

hopefully you'll still have given yourself
at least two years of runway

to evaluate these things,
rather than being tight on time

and right at Retirement's
door, having to execute everything

and cross your fingers
that you don't make an expensive mistake.

And this leads us now

to the third and final phase,
which we call the optimization phase.

The goal during the optimization phase
is to plan for your financial surplus,

as well as any legacy wishes.

The stabilization phase is going to
teach you how much financial flexibility

you will have in retirement, and give you
a much clearer picture of the answer to

do you have enough?

Or maybe even
do you have more than enough money?

With that knowledge,
you can better evaluate the action

items in this third phase,
which in my opinion include things

like Roth conversions,
charitable gifting and estate planning.

Now I call these three retirement

planning action items
the Luxury Retirement Items.

And this is because all three
of these items only really matter

if you're going to have enough
financial assets

to get through the end of your life
and have money left over.

If you're not going to have money left
over at the end,

then both Roth conversions and charitable
gifting kind of end up, in hindsight,

being irresponsible, even if they were
well intended at the moment.

And if you're not going to have any assets

left at the end of life
to” dispose of”,

then there doesn't need to be plans
laid for assets that won't exist.

Now, to be clear,
because I know this is going to happen,

viewers are going to watch this video
and they're going to think

that I'm saying Roth conversions
aren't financially lucrative or valuable.

I'm not saying to ignore
these three action items.

Very clearly what I am
saying is that I believe

that they are last in
this order of operations,

because they should not distract you
from focusing on the actions

that will actually improve your likelihood
of having enough money

to last your whole life.

It's my personal belief
that by being laser focused

on securing your financial future,
you are more likely

to achieve the outcomes
where you have money at the end of life

and therefore earn yourself the capability

and the blessing
of being charitably inclined,

or maybe even planning for inheritance
for your kids or causes you care about.

Fundamentally, this process is all about
focus and leverage.

It's about moving from one action
to the next in the order

in which they provide the most value.

It's about ascending a retirement

planning hierarchy
that leads you to the best chance of you

having a financially stable and personally
rewarding retirement experience.

So to round things out,
here are a couple of final notes.

The first --

success with retirement planning
is about remaining fluid and adaptable.

I believe that by using a curriculum
or an order of operations type system

like the one I've outlined in this video,
you actually are more able

to remain flexible and adaptable
because you know where you are

and you know where you
are going to go next.

Admittedly, there are blurry
lines between the triage,

stabilization, and optimization phases,
and that's because of what's called

diminishing returns.

Diminishing returns
is when you've essentially tapped out

or maxed out a set of behaviors
or action items,

and you start to get less and less value
out of continuing to optimize those items.

And we learn when to move from
phase to phase when we start to notice

diminishing returns from the action
items in one phase, which usually indicate

that it's time to begin
working on action items in the next phase.

The second thing to note,

different viewers watching this video
will be starting in different phases,

and this is why it's so critical
to begin with the assessment and identify

where you should be focusing.

So ultimately, I hope you found
this exploration helpful.

If you'd like to learn more about

how we help our clients build
and prioritize their retirement plans,

you can visit our website at

www.thepeakfp.com.

As always,
thank you for your time and attention.

And if you'd like to watch that Monte
Carlo video I mentioned earlier

called Retirement Planning Tools
will Ruin Your Retirement,

you can click the
button right here.

Thanks again
and see you in the next video.