Stephanie McCullough (00:00):

You need to come up with your own number, not using someone else’s, because your situation is going to be different from someone else. Yes, it’s okay to come up with a number, but we need to do a little bit of work to come up with that number. Then kind of message number two is, and that’s going to change over time, and that’s still okay.

Stephanie McCullough (00:22):

Hey, dear listeners, we need to let you know that Kevin and Stephanie offer investment advice through Private Advisor Group, which is a federally registered investment advisor. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations to any individual. To determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision. Now, let’s get on with the show.

Stephanie McCullough (00:57):

This is Take Back Retirement, the show that’s redefining retirement for women. Retirement is an old-fashioned cultural concept. We want to reclaim the word so you can make it your own. I’m Stephanie McCullough, financial planner and founder of Sofia Financial, where our mission is to reduce women’s money stress and empower them to make wise holistic decisions so they can get back to living their best lives.

Stephanie McCullough (01:21):

Kevin Gaines is my longtime colleague with deep knowledge in the technical stuff: investments, taxes, retirement plan rules. He’s a little bit nerdy and quantitative, I’m a little bit touchy-feely and qualitative. Together, through conversations and interviews, we aim to give you the information and motivation you need to move forward with confidence. We’re so glad you’re here.

Stephanie McCullough (01:46):

Years ago, there was this commercial that used to make me so crazy. I think it was from one of the big investment companies. It was a city scene with all kinds of busy people going about their lives, walking around, but each of them had a thought bubble above their heads with a number in it, following them around. $1,739,582 was one of them. And the next one was $856,000. It was all these numbers. What the investment company was saying was “what’s your number?” The implication being that there’s some magic number out there for retirement, meaning that if you could just get to the point where you had saved that many of dollars, you’d be good to go. And today we’re going to talk about why that’s just wrong.

Stephanie McCullough (02:45):

Coming to you semi-live from the beautiful Westlakes Office Park in suburban Philadelphia, this is Stephanie McCullough and Kevin Gaines of Sofia Financial and American Financial Management Group. Say hello, Kevin.

Kevin Gaines (02:54):

Hello, Kevin.

Stephanie McCullough (02:58):

So, this is something that’s kind of driven me crazy for a long time, and I think there’s plenty of fodder for discussion, this idea of a number that’s the magic key to retirement. What do you think, Kevin?

Kevin Gaines (03:12):

Well, I understand why it exists, because we’re humans and we crave simplicity and a magic number is simple. Hey, I get this number and clear sailing, I’m done. As long as I can reach this number, I’m going to have a successful retirement. But if I don’t get this number, then all is lost and doom, despair, misery on me type stuff.

Stephanie McCullough (03:41):

We won’t start singing.

Kevin Gaines (03:45):

Yeah. That was actually going through my head as I was saying that. That’s how that last line came out. I loved Hee Haw. What can I say anyway?

Stephanie McCullough (03:53):

Me too.

Kevin Gaines (03:54):

Anyway, so this craving for simplicity, which allows us to segment that part of our life and then go on living our day-to-day existence. But I will confess, and you and I go back and forth on this a little bit, I actually believe a magic number could exist in as much as, yes, you’re going through this continuous planning process that we’re always talking about and evaluating all of the risks and goals and everything. Yeah, you can kind of get an idea of what this number could look like, but that’s the end result of… And it’s a moving target, but that’s the end result of all of these other conversations.

Stephanie McCullough (04:37):

Right. Right. And that’s, I think, part of the problem is that people… And I have no problem with rules of thumb as a starting point, as something to get people going and motivated. However, I think the issue is if you hear from somewhere, like the person who does your 401(k) presentation at the office, or your next-door neighbor, or your third cousin, that the magic number, the universal magic number is $1.5 million. For everybody everywhere, as long as you have $1.5 million, you can retire. That definitely drives me nuts because that’s just a number with no relativity to it. 1.5 million for one person might be more than enough and 1.5 million for somebody else might be not even close to enough.

Kevin Gaines (05:27):

We’ve used this analogy before, which is you may settle on that $1.5 million number, but if your retirement plan involves a global cruise every year, 1.5 probably ain’t going to cut it. But if you just want to move up into a cabin in the mountains, 1.5 is probably well in excess of what you need. Who knows? But that’s the thing, is there’s context with the number, even with just this little analogy we’re using.

Stephanie McCullough (06:01):

Right. What else are you doing besides that global cruise? Are you going on a merchant marine ship or are you going on the full five-star luxury liner, right? And that’s why a very common question we get, people come to us and maybe they’re five, 10 years out from retirement and they say, “This is what I’ve saved so far. This is what I’m putting in every year. Do I have enough?” That’s NOT going to be a short conversation.

Kevin Gaines (06:26):

No.

Stephanie McCullough (06:27):

Because we don’t know if that’s enough until we turn around and ask them 27 questions about what they want this next chapter of their life to look like.

Kevin Gaines (06:37):

So, what does that chapter look like? Well, here’s the annoying thing about that chapter even, is, let’s make it personal. I am 50 years old. I know what my retirement is going to look like when I retire at 70 years old. I know what I want to do.

Stephanie McCullough (06:55):

You do.

Kevin Gaines (06:56):

I do.

Stephanie McCullough (06:57):

What is that?

Kevin Gaines (06:58):

Basically, it is a lot of golf, a lot of travel and somehow still manage to sit and watch a lot of television. Not quite sure how they’re all going to fit in, but yes, secret bucket list item is I actually do want to go to every major league park, baseball park.

Stephanie McCullough (07:19):

Baseball park. Very cool.

Kevin Gaines (07:20):

Yes. And I’m way behind on that list. But yes, that’s my retirement goals. A couple problems, I’ve never actually discussed these with my wife. So yeah, Melissa, if you’re listening, yes, I know this probably means we’re going to have a conversation at some point. And there’s no telling if at age 55, these are still going to be my goals. I can tell you right now it’s in danger of flipping because I may want to either add or replace the baseball parks with hockey arenas.

Stephanie McCullough (07:50):

Oh, okay. All right.

Kevin Gaines (07:52):

So, it could just be that simple. But again, we’re not talking big changes in what I want to do, but yes, that would throw off my number as it exists one way or another a little bit.

Stephanie McCullough (08:06):

So that kind of gets back to our theme from episode seven, which we’ll link to in the show notes, which is with all this financial planning and doing the future projections, we’re guessing, and that’s still okay. It’s still worthwhile doing and making your plan to hit all the ballparks even if in five, 10 years, you want to like, “Oh, you know what, I want to add the hockey areas to that.” Okay. Great. But you’ve already been saving as though you wanted to go to the ballpark, so you’ve gotten somewhere.

Kevin Gaines (08:32):

Right. Again, a lot of this is guessing, educated guesses.

Stephanie McCullough (08:37):

Yes.

Kevin Gaines (08:38):

We’re thinking about and coming up with things, but at the end of the day, this stuff can change. And again, going back to episode seven, and that’s all right.

Stephanie McCullough (08:48):

That’s all right.

Kevin Gaines (08:49):

We know that it’s going to change. So, in as much as you do want to think about it, you are thinking about a number. We’re humans. We all think about a number. Just remember, it’s not a finish line.

Stephanie McCullough (08:58):

Right.

Kevin Gaines (08:59):

Yeah. It’s definitely not that, more of a mile marker or something.

Stephanie McCullough (09:03):

Well, I think our first lesson is you need to come up with your own number, not using someone else’s because your situation is going to be different from someone else. Yes, it’s okay to come up with a number, but we have to do a little bit of work to come up with that number. And then maybe message number two is, and it’s going to change over time and that’s still okay, right?

Kevin Gaines (09:21):

Absolutely.

Stephanie McCullough (09:22):

This is something you’re working towards. It’s probably going to adjust. That’s okay. But here’s my other problem with it, Kevin, is that this idea of…What we’re talking about is a number of dollars because we’re in the United States, so we’re talking about dollars. It assumes that all dollars are created equal, so that no matter what types of dollars you own in your assets and your personal net worth, they’re all the same, and that’s baloney as we know, as we’ve discussed in some other episodes, too. Let’s say, for example, I get to retirement and I’ve got $1.5 million in my 401(k), my traditional 401(k), or I miraculously somehow get to retirement and I’ve got $1.5 million in my Roth IRA. Why are those two things different?

Kevin Gaines (10:05):

I.R.S.

Stephanie McCullough (10:08):

Internal Revenue Service.

Kevin Gaines (10:11):

Quite frankly, every dollar gets taxed differently. The traditional pre-tax retirement accounts, they get taxed one way. Roths don’t get taxed. Your taxable savings that you accumulate afterwards, they’re going to have different tax treatments. Your social security income, as we touched on in our social security episode, at some point that’s subject to taxation if you earn certain amount of money.

Stephanie McCullough (10:35):

Right.

Kevin Gaines (10:36):

Yeah. So, it’s all these moving parts with the dollars that you can’t just add them all together and say, “This is the number.” Quite frankly, going back to the over-simplification problem, but to oversimplify, using your example, $1.5 million of Roth is worth a lot more than 1.5 of traditional pre-tax IRA.

Stephanie McCullough (11:01):

Yeah. Yep. I was having this conversation with a woman the other day. She was 52 and she has $1.2 million in her 401(k), which is awesome, and she has no Roth money. When I pointed out to her that she doesn’t actually own that whole $1.2 million, Uncle Sam owns some percentage of that, and we don’t actually know what percentage of that Uncle Sam is going to own, because Congress could change tax rates. We don’t know what tax bracket she’s going to be in. And she kind of was like, “Oh, right.” She was thinking, “Hey, I’m in decent shape.” And she is, don’t get me wrong, but she doesn’t actually have $1.2 million of spendable income. To be frank, taxes is only one piece of this. The other differentiation between the types of dollars we might own is the market risk that they’re subject to, right? You’ve got some stuff that’s maybe subject to stock market risk. Maybe there’s some rental property income that could be subject to real estate market risk or the risk of having vacancies for a while and not having tenants, or just bad tenants.

Kevin Gaines (12:06):

Even liquidity risk. You calculate the value of your investments and you come up with something. Understand, you’re not necessarily going to realize that value when you go to sell. If you’re going to use that money for retirement, you’re probably going to have to sell.

Stephanie McCullough (12:23):

Yeah. Or somehow find a way to make it liquid. So, these are the things. And again, we’re big proponents of diversification in all forms, so not just the traditional diversification that you might hear about in that group meeting they do at your 401(k) at work, where they say, “Yes, you want to own some stocks and some bonds, large companies and small companies, U.S. and international.” Absolutely, we agree with that. And you have to take it a little bit further on the diversification field. So, diversification in terms of taxes, when’s it going to be taxed? You don’t want everything, all of your dollars in something that has to still go through the IRS hurdles, and diversification of some things that are going to provide you income over time, social security, maybe a pension, other sources of income, part-time work, royalties, whatever it might be, and other things that are just pots of money. That’s another form of diversification. So, this is all the kind of stuff that we needed to get into and dig in the weeds to understand what makes up that number, that magic number of yours.

Kevin Gaines (13:25):

Right. Yeah. The big danger is just making blanket assumptions and saying, “There I am. What could possibly go wrong?” Feeding it back to your other point that it’s your own personal number, your neighbor, you may think is really successful and really smart, and assuming that is true, which is frequently a foolish assumption, but they don’t have the same goals you have. They don’t have the same mix of dollars of pre-tax, post-tax and already taxed in everything there. It’s very tricky to rely on somebody else’s pontifications of what the numbers should be. It’s not tricky. It’s dangerous.

Stephanie McCullough (14:11):

Yeah, I would agree. So, here’s the other part. I think my third big argument with this number idea is the psychological aspect of it, and I think there’s almost two different pieces of this. Psychologically, it could be dangerous in that, let’s say I’m mid-life and I’ve gone through a divorce, and all of a sudden, I’m starting again. I’ve now gotten maybe 10, 15 years until I’d really like to retire, and I keep hearing that this number is some giant number, back to maybe 1.5 million, and that’s so far from where I am, that I might get discouraged and give up and just spend all my money now, right? I think there’s that psychological aspect of if the number’s too high, that’s not achievable, so I’m not going to start.

Kevin Gaines (14:57):

That throws a lot of people. It gets intimidating.

Stephanie McCullough (15:00):

Yeah.

Kevin Gaines (15:01):

Especially think you’re a millennial and you’re just starting saving and you’re accumulating a little bit, and you’re only putting in 10,000 a year into your 401(k). Let’s assume that you developed this 1.5 number in your head. At age 30, that’s going to look really intimidating. Fast forward, you’re 50 years old, going back with your example, Stephanie, which is you haven’t made a whole lot of inroads as far as accumulating this retirement savings. You only got 100,000, 200,000 in savings. It’s still really scary. Understand that, like you said, the number keeps changing and it’s not an absolute, that if you have less than this, you can’t retire. No, you can change your plan. Worst comes to worse, you make changes.

Stephanie McCullough (15:59):

Yeah.

Kevin Gaines (16:00):

I mean, we have free will, let’s use it if we get to that point. But there’s one other point that’s really important to make. Assuming you do all the work and you come up with something vaguely resembling an accurate number, you don’t have to have all those dollars in your hand day one of your retirement. Here’s the thought. You’re going to be spending. That number represents all the money you’re going to be spending for the rest of your life, whatever that is. Well, you’re not taking it all out on day one of your retirement and spending it all at once. No, you’re going to be spending it over 20, 30, maybe 40 or 50 years. So, the money will continue to grow over that time.

Stephanie McCullough (16:47):

So, you’re saying I’ve taken a little bit out to fund year one of my spending. The rest of it is still in there. A lot of it’s invested for growth. So even though there’s going to be some ups and downs, it’s not like you’re going to cash on day one.

Kevin Gaines (17:01):

Correct. There’s still going to be some accumulation. If nothing else, social security, you’re probably going to get cost of living adjustments. So, you’re going to get a little bit more income coming in that way, because when you’re working on your retirement planning, you’ve factored in inflation. These dollars you’re planning on spending 20 years from now, you assumed that inflation was two, 3%, whatever. If nothing else, social security is going to some version of keeping up with inflation. So, there’s going to be some few extra dollars coming in. Like I said, no other way just from that. Yeah. So, understand that your number on day one of retirement is not your final number.

Stephanie McCullough (17:45):

Yeah, that’s true. So, another psychological aspect is that it’s kind of the opposite, right? So, people feel like, “Oh, I got to my number. I’m good.” I worry that people feel like it’s a guarantee that you’re going to be fine no matter what. No. All of these numbers, all these projections, we do have certain assumptions built into them, and there are plenty of things that could still throw it off, not to sound too negative. But if you live to be 125, and all of a sudden you have to raise your grandkids because of whatever might happen or you have other unexpected expenses that go on, yeah, maybe no guarantees.

Kevin Gaines (18:26):

Or let’s go positive. I just want to move up into that cabin in the mountains and just hang out for the rest of my life. This is what I want to do. And then all of a sudden, two years from retirement or two years into retirement, you watch… No movie is coming to mind, which is unusual for me, but you’re inspired to travel around the world. Well, now all of a sudden, your goals have changed and that means your numbers changed. So, there’s nothing wrong with it. It’s your life. It’s your retirement. You’re going to live it the way you want to live it, as you should. But if you are just fixated on this number, things have changed. And that gets back to, I guess, one of the overriding themes of this conversation is things change so you really don’t want… This number isn’t set in stone because life changes. Good or bad, life changes.

Stephanie McCullough (19:21):

Here’s the other psychological danger to having a number. I have seen people work their whole careers so long to try to get to this retirement savings. And then they get to retirement and they can’t bring themselves to spend it, because you’re like, “No, no, no, no, no. I need my 1.5.” But they’re forgetting that the purpose of the 1.5 was to fund their retirement lifestyle, but they’re so anxious about seeing the balance go below that number because for so long, they worked for it. They can’t bring themselves… Now, they’re reluctant to spend it and actually live their lives.

Kevin Gaines (20:02):

And that’s a big issue. There’s been this theme throughout the history of financial planning, and not necessarily among practitioners, although a few of us have fallen into this trap. I’ve got a client who’s very adamant about this. He doesn’t want to dip into principal. He’s willing to spend the earnings, whether it’s dividends or interest or capital gains, but he doesn’t want to spend the principal. It’s a conversation we continuously have to understand that this money is just a tool. You have this money for a reason. Don’t lose sight of the reason.

Stephanie McCullough (20:40):

It’s not “he who dies with the most dollars wins.”

Kevin Gaines (20:44):

Not very often. Let’s face it, even that analogy is “whoever dies with the most toys wins.” Well, there’s only one way to get the toys, you got to spend the money. So, if you do subscribe to that particular theory, thesis, you still got to spend the money.

Stephanie McCullough (21:01):

Overall, like lots of rules of thumb, having some magic number in mind for your retirement goals is not a bad thing. We’re saying that it can be a useful goal to have up there to strive towards. You’re trying to put money towards that while you’re still working. At the same time, we’re saying that it needs to be your own personalized number, that you’ve actually done some work to come up with, not a number you’ve adopted from culture or some well-meaning person who knows nothing about your life.

Kevin Gaines (21:33):

Yeah. Your parents’ retirement is not your retirement. Your siblings’ retirement is not your retirement.

Stephanie McCullough (21:39):

Just to reinforce, we keep saying retirement, the word retirement is in our podcast name and we always still do use it with air quotes, right? Don’t forget, retirement is on your terms. The way we define retirement is getting to the point, where working for a living is optional. You get to do what you would like to do. Perhaps you’re choosing to continue to work because you want to, but not because you must for the dollars, right? So, retirement is not necessarily stopping everything and playing golf and traveling like Kevin wants to do. That’s a great option, but I know plenty of people who really want to work for a nonprofit and make a big impact in the world with the skills they’ve accumulated over their career, and they don’t want to have to worry about getting the health insurance and making a ton of money. They want that to be set. Or they’re dying to start something new. They want to write a novel or they want to try their hand at starting up a business. That’s all awesome. We include all of that in this discussion of retirement.

Kevin Gaines (22:41):

Something we’ve said before, I know we’ve definitely said this several times before, is this whole idea of planning your retirement and how your retirement income is going to provide for you is like a jigsaw puzzle, trying to get all the pieces to fit together. The magic number isn’t going to get those pieces to fit together. So that’s right there why you don’t want to look at the magic number, because you don’t know what the puzzle looks like yet, so how can you know what the number is?

Stephanie McCullough (23:09):

Yeah. Yep. The work we do with clients is looking at all the pieces of the puzzle and maybe asking some questions they hadn’t thought of, trying to gather it up and making today’s guesses and putting some action plans into place, and then we update them as we go along.

Kevin Gaines (23:26):

Right.

Stephanie McCullough (23:27):

So, then the other piece of the work, as we mentioned, is looking at the types of dollars that you own, the types of dollars that you’re accumulating. It’s not just how many dollars, but what are the characteristics of those dollars. When you’re looking at your stuff, do you have too much in one type and not some of the other types that might address some of the risks of retirement a little bit more effectively? One of those risks being taxes could go up. Another risk being markets could be against us. There’s lots of risks which we’ve talked about and we’ll continue to talk about, but having those different types of dollars is going to stand you well.

Kevin Gaines (24:05):

Right. At the end of the day, diversification gives you flexibility.

Stephanie McCullough (24:08):

Yeah.

Kevin (24:09):

And that’s key in retirement because your desires are going to change, so how you’re situated should be able to change with you. That’s what the diversification gives you, and that’s why we continue to talk about that, which again goes back to why the magic number can be extremely misleading. If you don’t know what that number is made up of, it’s not a good number.

Stephanie McCullough (24:36):

Thanks so much for listening. We appreciate you tuning in. We’ll talk to you next time. It’s goodbye from me.

Kevin Gaines (24:41):

And it’s goodbye from her.

Stephanie McCullough (24:45):

Be sure to subscribe to the show and please share it with your friends. Show notes and more information available at takebackretirement.com. Huge thanks for the original music by the one and only, Raymond Loewy through New Math in New York. See you next time.

Narrator (25:00):

Investment advice offered through private advisor group, LLC, a registered investment advisor. Private advisor group, American Financial Management Group, and Sofia Financial are separate entities. The opinions voiced in this material, are for general information only and are not intended to provide specific advice, or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor, prior to investing. This information is not intended to be substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.