The Expert Podcast

Imagine you're going to go on a long trip or a vacation with your car, and you're told you can never stop for gas. You can never fill up your tank. Now, you're allowed to fit as big of a gas tank as you can on your vehicle, but you can't refill it. Whatever you start with, that's what you have. How does this relate to retirement? Well, in retirement, it's kind of like you can't refill your tank because you're not getting income or not getting a lot of income. If you retire, that means you stop working at your job.

Certainly, you may have a pension, you may have social security, but these aren't really high-probability high-income sources. Now, you might say, "Well, that's why I'm saving money for retirement, right? I have a 401k, I have an IRA, I have retirement funds." Well, that's great, but that's like your gas tank. That's not the same as income. Okay, so if you make, use round numbers, $100,000 a year, you're making $100,000 a year. Every month you have income coming in, all of a sudden you retire, and that stops. Now, whatever you have to spend for the rest of your life has to come from that gas tank—your 401k, your IRA, your savings—and that's going to dwindle down. You're not putting more money in every single month. So, in retirement, you have to look at it like you don't need savings, you need income. Income is much more important.

So, how can you have income if you don't have a job? That's the important thing. Do the math: even if you have two million dollars, two million dollars sitting in the bank, cash, if you want to take out the same $100,000 per year, that's only going to last you 20 years. Now, that might be enough when you retire, right? But you have to do the math. Right, if you retire at, let's say, age 60, now 20 years puts you only at 80. Okay, you might— that might be enough. What if you retire at age 70? That's only going to put you to age 90. Some people live to later than 90. The other thing is, that's assuming that your expenses are going to be the same. You're making $100,000 a year now. If you take $100,000 per year out now, it might work. Ten years from now, there might be inflation. Your healthcare costs might go up. You might not have health insurance, you have to pay out of pocket. You might have more expenses for repairing your house, your roof, that don't come up as much, you know, in earlier years. And that's assuming you have two million dollars, that's cash, right?

So, the key to it is not trying to have savings but trying to have income. How do you have income if you're not working? Well, there are things you can do to set that up. One could be you buy passive income, like you buy real estate to rent out. However, there are some risks involved. There's a lot of things happening with the laws about rental price caps, rent increases, rent caps, and the rules about tenants being able to be evicted or not, and you might not want to be dealing with that when you're 70 years old, right? There are other passive income sources that are less capital intensive, like dividend stocks or bonds, but those are very low rates of return—two or three percent. So, that's not going to really offer that much.

Another way to do it is to have some type of a business venture that doesn't require a lot of work where you have to go to an office every day and spend eight hours working with other people. It could be your own enterprise from your home. This is something you need to set up early. It's not something you can start doing when you're 70 because a business enterprise may take five or six years to get up and running to the level that it's going to produce income, and it may require a few attempts. The first one might not work, and then the second one might not work. You might have to take two or three tries to get there, but it's extremely important because now you're giving yourself an advantage. If you have some income, even if it's three or four or five thousand a month, now your two million can last you longer. Instead of lasting 20 years, maybe it lasts 30 years because you don't have to take out the whole $10,000 every month.

Now, look, we're making some big assumptions. We're assuming you have two million dollars in the bank. What if you have no money in the bank or a very small retirement? If you only have a couple hundred thousand in the bank for retirement, it doesn't matter what your income is, it's not going to last long. Even if your income is $50,000 a year, if you have $200,000 in the bank, right? What's the math on that? Four years, you're done, you're out of money. So, you need income more than you need savings, and creating that income is something you can start early. You can start that when you're 40 or 50 or 55 or 60. And there's things you can do to create it. It's going to take some work, but it's like investing time instead of investing money. It doesn't cost you anything or very small amount, a few hundred dollars for some costs, but generating that personal income that will last forever, you may have to do a little work to it.

Look, we have people we know that their income is from little woodworking projects. They make little, you know, art things or practical things in their garage or shop that they sell, and they make two or three thousand a month. And you could do that until you're 80 if you want. There's lots of people that are handy. Maybe it's something you do that's crafty that you sell. You may have to pivot and change that over time. The important thing is doing the math on your retirement savings. How much are you going to have in savings when you retire? Divide it by the number of years you think you're going to live and see where that puts you. If you have some income stream, even if it's relatively small, it dramatically extends out that range.

It's kind of like the metaphor of going on vacation, and instead of using all the gas in your tank, you can refill it every year, every week, every month a little bit. It still may drain down over time, but at least it's extending your range, and you can make it farther on that tank of gas. Income is more important than savings in retirement, and creating that income source now will put you in a place where you can be more safe and secure in retirement, and you don't have to worry about running out of money and eating cat food.