“Retirement is not the end of the road. It’s the beginning of the open highway.” In this week’s episode of Retire in Texas, CEO and co-founder of PAX Financial Group, Darryl Lyons, explains the innovative concept of pivot planning. The goal, to provide a flexible framework that helps retirees transition smoothly into their next chapter without feeling like their life’s value has diminished.
Key show highlights include:
*An explanation of how pivot planning was born from collaborative efforts among PAX’s Certified Financial Planners.
*Analysis of the five buckets of pivot planning, including comfortable cash, emergency funds, and legacy investments.
*A discussion on the principles of behavioral finance and how they are integrated into pivot planning for a more personalized approach.
*Understanding the importance of a cash flow worksheet and how it helps retirees maintain financial stability.
*Valuable insights into how retirees can better organize their finances to navigate the complexities of retirement.
Retirement should not be looked at as the end of something, but rather as an exciting new beginning. Tune into this week’s episode to learn how you can pivot into a new chapter of your life with confidence and ease. Be sure to share with a friend, family member, or coworker!
Transcript:
Hey, this is Darryl Lyons, CEO and co-founder of PAX financial Group. And you’re listening to Retire in Texas. This information is general nature only. It’s not intended to provide specific investment, tax or legal advice. Visit Paxfinancialgroup.com for more information.
Okay, so I want to talk to you today about pivot planning. Some of you guys might have heard of that before, but I need to make sure that we provide clarity. Pivot planning was developed years ago. There was, I don’t know, 4 or 5 certified financial planners in PAX that got together, and we cussed and fussed over the nuances of retirement planning. And then when we took those conversations and it collided with this idea of behavioral finance that we were deeply entrenched with and real-life experiences working with retirees kneecap to kneecap, for years.
We developed this pivot planning to help give retirees a framework of what the organization of the money should look. Now in this framework. It’s an ideal framework, so the idea is that very few people will develop it in such a way that it’s exactly the pivot planning. And I get that because we’re all different. But it gives you a framework, a model to say, this is how I want to organize my retirement.
And so, you look at this model and say, that’s the model that makes sense and then how do I customize it for my unique situation. So that’s called pivot planning. We’d like to do it five years before retirement so we can practice some of the pivoting. The very essence of it is that we don’t want to retire because retirement by definition, hear me out, is the disposition of an asset over its useful life.
So that would make the assumption that your life is no longer useful. Rather than retiring, we want to pivot into the next chapter. One of my clients told me that time ago, and I anchor to it and never forgot it and adopted it myself. So, the idea is we want to pivot into the next chapter with vigor.
And so, there’s a process to be able to construct and organize your money to where it makes sense. That’s the main thing. I just want your money to make sense and so when your money makes sense and you have more confidence and you have more peace in the ups and down. So, at the end of the day, if pivot planning isn’t right for you, that’s okay.
But ask yourself, I’m going to go through this framework in just a minute. I’m going to go through this framework and just ask yourself, does it make sense. And if it makes sense, then work with your advisor wherever you’re at to just organize your money in this way. And so, let’s go through those steps in pivot planning. I did write about this in my book 18 to 80 and I actually have it in front of me to reference as we go along here.
I did a whole course on this, by the way. Online course, and I went to North Carolina and filmed this whole course on it. It was really a lot of effort, a lot of research. It was online for like 100 bucks. And I think three people bought it. It was like one of those colossal failures. But, you know, retirement is fickle that way.
Sometimes going online for a course, it doesn’t scratch that itch. It doesn’t give us confidence. And so, I think for me, it was a good exercise because I wanted to find a way, originally to make it easy for people to capture this pivot planning. And what I realized is that people just need advice. They need to sit down with somebody they can empathize with them and give them direction and use good judgment.
Let’s go with the first bucket. I use buckets. Buckets, the analogy I’m using. Sometimes I use steps because sometimes they feel like steps, but I’m going to use buckets today. So, the first bucket, the number one bucket is a comfortable cash operating bucket. Now this is making sure you have enough money in your checking or savings to cover your bills. You might have $1500 a month in bills, maybe car insurance if you pay that monthly, or groceries.
Just normal bills. But an important part of establishing how much you need each month. Okay, hear me out. If you need to know how much you need each month, you’ve got to create a budget. At least a budget, I say at least a budget. At least having a pulse. A budget would mean that you’re going to hold steadfast to that amount of money each month.
Some people do. Some people just need kind of a loose framework. So how much do you need each month is basically what you’re asking yourself. So, we developed a cash flow worksheet, that’s at PAX Financial Group, that really organizes your expenses in such a way that makes sense. It’s an Excel file, but it’s been stress tested through, I don’t know, maybe thousands of clients over the years.
And so, use that. Go to Paxfinancialgroup.com and grab that cash flow worksheet and just look at how much you need each month. You have to do this periodically in retirement seeing how much you’re spending. And then that basically goes into your comfortable cash account. It’s very important you take inventory of your spending each and every month.
In business, we call it burn rates. So how much you burning through money each month? You got to know that. And until you sit down and crunch the numbers through a cash flow worksheet, you just don’t know. So, you got to know that number. And that’s really the first bucket that we established in using the Cash Flow worksheet.
Second bucket is a super-sized emergency fund. This is really important for a whole bunch of reasons. The super-sized emergency fund in retirement, you know, when you’re working and you’re working years, you need about 3 to 6 months of expenses. But I think in retirement you need about 12 months, and here’s why. Because the challenge is the market’s going to go up and down. It really is during your retirement.
In fact, you think about it, you’re going to have every five years maybe a 20% pullback in the market. That’s kind of scary. You look at it as a mature person, that’s cerebral and you say, well, 20% I can handle that. But when it happens, it’s like the world is coming to an end. So, this is why it’s so important to have 12 months, because if you’re taking money out of your investments to support your standard of living, having a super-sized emergency fund allows you to listen to me pause your investment distributions, pause them, and take money out of your super-sized emergency fund.
By pausing your distributions you’re not eating your seed. Because in retirement, this is called sequence of return risk and it’s been very well studied, if you’re withdrawing money from an investment portfolio while the market is going down, you’re eating your seed, making it much more challenging for your portfolio to go back up when the market recovers. I don’t want you to eat your seed.
That’s why I want you to have 12 months of an emergency reserve. That’s why. We call that a super-sized emergency fund. Put in a CD (Certificate of Deposit). That’s fine. Put in a money market account. We got a bunch of money market accounts. Ask your advisor. Even a CD, if you break it or whatever. It’s bummer. You lose some interest, but you want it to be liquid and you want it to be stable.
You don’t want it to have a lot of volatility in it. Next one, the third bucket. This is your needs bucket. “How am I doing on time here? I have to check my time; I couldn’t see it because I have a chair in front of my clock.” Okay, the needs bucket. I’ve seen research on this that says. I don’t have it in front of me. Maybe I referenced it in my 18 to 80 book. I’ve got a lot of research, but this is just anecdotal, and I think you’ll probably appreciate it at least in concept. People who have a guaranteed income typically are less anxious in retirement, when they know that their checks are coming in. And those are typically people with pensions, government pensions, teacher pensions, the old steel pensions.
A lot of these pensions are gone, going away. There’s only three ways you can get guaranteed income for the rest of your life that you won’t outlive. There’s pensions which a lot of us don’t have anymore. There’s Social Security, say what you want about it going away. Right now, we don’t have that information that it’s going to go away.
That’s another podcast. So, Pensions, Social Security and the third one are annuities. Now, you might feel very uncomfortable when I say the word annuity. Please understand when it comes to PAX Financial Group, our portfolio of over 700 million, the amount of annuities we have used over the years is way less than 10%. We are not an annuity sales shop.
Absolutely not, 100%. But I do recognize they have a place. And the place is, what we do is we look at your cash flow worksheet and we look at what your needs are. Needs are housing, food, things that if they were to go away completely, you’d be in a world of hurt. So, let’s say your needs are $1,500 a month.
Then I want your needs to be covered by one of those three investment solutions: Social security, pension or an annuity. So go into your cash flow worksheets. If your needs are $8,000 a month, you might have half of that covered by Social Security, but then you have a gap. And I’d like to cover that gap with annuities. Does that make sense? Now, most of y’all will be able to cover your needs with Social Security.
Most of you guys will, so you won’t need an annuity. Some of you guys might. That’s between you and your advisor, but I think it’s worthy of consideration of making sure that your needs are covered by guaranteed resources for the rest of your life, and that can only be done through pensions, Social Security or annuities.
Okay. Fourth bucket the wants bucket. I call this the wants bucket. When we go to your cash flow worksheet, we see your needs and then we see your wants. This is travel, this is dining out, this is collectibles, this is alcohol. This is all the stuff that you just want. Your wants bucket comes from your investments, your diversified investments. Your diversified investments are developed between you and your advisor.
It’s not anything fancy. It’s spread-out asset allocation based on a certain risk profile. Usually it’s about 60% stocks, 40% bonds or some variation of that. And you can take out, research says this, it’s debatable research, but it’s really reasonable research. It’s reasonable. Okay. I’ve seen other numbers, but reasonable research says you can take out 4% off of your investments and be comfortable.
You can Google for the 4% rule. It’s exhaustively debated. I don’t even look at the research anymore because the debates are just annoying. But 4% generally a good rule, I’ve looked up enough to feel comfortable with. If you’ve got a wants bucket in your investment portfolio, you can take out about 4% and then that 4% becomes the cash flow that covers your wants.
And basically, what is done, it’s replacing your paycheck. Every month, your financial advisor will set up an automatic deposit to hit your bank account, just like you’re getting paid from your investment portfolio, and it’ll hit your bank account whatever day you want, the first or the third. It’s automatic. You and your advisor check and make sure it’s working.
That’s how the wants bucket works. Okay, last bucket, the legacy bucket. This legacy bucket is awesome. What happens is, is your advisor will look and say, this is a scenario that doesn’t work for all of us. All of us are in this situation. You actually know if you’re in this situation or not. And this is when they look and they run the numbers and go, man, you guys have killed it over the years.
And I’m looking at the probabilities of life. Y’all live into 95, 100. I’m looking at your spending rates, looking at your giving. And you know what? You are probably not going to run out of money. This is an advisor conversation. The advisors says my gut isn’t just telling me that. I mean, my gut probably would have told me your gut would probably would have told you.
But we’re running a thousand different iterations and scenarios, and the probabilities using what’s called a Monte Carlo simulation are telling us that it’s very, very, very unlikely that you run out of money. It still exists. The world could do whatever, but it’s very unlikely you run out of money. In that scenario, this is what I love. You say, well, let’s pick at our investments a little bit.
What if we take $50,000, making up that number, and we just squirrel that away and we decide we’re going to make that the legacy bucket. Well, why is it important for us to do something different with the legacy bucket? Why? Here’s why. Because if you can identify a certain amount of money, that becomes the legacy bucket, then you can invest it differently.
You can be aggressive with that money because that money has a 20- or 30-year time horizon. You can actually construct your wheels in your trust around that legacy bucket. And when you invest it aggressively over 20- or 30-year time horizon and forecasting the compounding rate of return that comes with an aggressive posturing, it will allow your inheritance to grow at an exceptional rate.
Obviously, nothing’s guaranteed, but it really gives you what I would consider a ticket to be aggressive. This does something else psychologically, though. This does something very important psychologically. Not only does it allow your money to grow, but when markets are really taking off, the bullish markets, you get to participate in that. And most retirees don’t because you’ve got stuff conservative spreading out, not taking any big bets.
I believe after working with clients over the years, having just a little money in the aggressive stuff with an intentionality is good for you. It really is. And so, I believe, and this is the studies through behavioral finance and my experience constructing the portfolio in such a way that you have a good cash reserve, you’ve got a good little aggressive investments, and then most of your stuff is spread out pretty well.
This is healthy and it intentionally is designed to give you peace in retirement. Now obviously there’s stuff that’s going to happen. The unknowns, they just happen all the time. Historically we have no idea how things play out, but it’s my conviction that if you’ve gotten in front of this chaos. Again, life exists this way, where either post chaos, pre chaos or in chaos.
So, knowing that constructing a plan accordingly to weather those types of storms, I think will put you in a good position so that you can enjoy life, not run out of money and leave the world better than you found it. So that’s the pivot planning process. I hope it was helpful if you want to unpack it more with your advisor, please do that.
Thank you for listening and remember you think different when you think long term. Have a great day!
Resources:
18 to 80: A Simple and Practical Guide to Money and Retirement for All Ages
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