DISCLAIMER: Disclaimer: This podcast is not personal, legal, tax, or financial advice. The discussion of these issues is for general information only, does not proport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. For individual advice, you should consult your qualified legal, tax, and accounting services professionals as you deem appropriate. In his financial planning practice, Michael Lynch offers securities and investment advisory services through MML investor services, LLC. Member SIPC. Barnum Financial Group, Six Corporate Drive, Shelton Connecticut, 06484, telephone, 203-513-6000.
Americans today face retirement with a mix of hope and trepidation. Hope that their health would hold out long enough to let them do what they want for decades and trepidation that they might not have enough wealth to fund it, but creating a viable, sustainable retirement plan is easier than you think and it’s all about the income.
Award-winning financial planner and best-selling author, Michael Lynch, lays out a simple, straight forward system for determining when you really have enough money to call it quits. Learn how to turn those savings into a steady stream of reliable, inflation adjusted income. You can count on for life and get ready to enjoy a long, healthy retirement on your own terms.
This is The Author Hour Podcast, and I’m your host, Frank Garza. Today, I’m joined by Michael Lynch, author of a brand-new book, It’s All About The Income: The Simple System for a Big Retirement.
Michael, welcome to the show.
Michael Lynch: Well, great to be here, Frank, great to be here.
Frank Garza: To start, I’d love to just hear a little bit about your background and how that led you to writing this book.
Michael Lynch: All right, well, I’ve been a practicing financial planner now, certified financial planner. I think I’m in my 20th year or just under my 20th year. It’s been a fantastic journey, spent our days actually working with real people, all income ranges, all backgrounds, even some united nations employees as a matter of fact. I was going to say, all Americans but not even everybody in the American retirement system and helping them solve real problems.
So you know, there’s a lot of information out there on retirement, how much money you can take off your portfolio, how much money you need and a lot of it I just think is wrong. I think it’s designed to scare people, to prevent them from enjoying their lives and really, to prevent them from using their money effectively, and so I said, “Well, let me focus in on this in my second book and come on a really targeted topic,” which is how do you know you have enough to retire and then how do you make sure that you’ve doubled your income in retirement and maybe double or triple your assets at the same time?
Frank Garza: Yeah, so how do you make sure you have enough to retire? I think that is going to cover pretty broad audience, most people are going to be interested in that, but as you were writing the book, was there a more niche or target audience that you had in mind? Who’d you write the book for?
Michael Lynch: Yeah, for sure. I mean, people really start worrying about how much they have to retire typically in their 50s, right? They’re – you know, I was on a meeting, just yesterday with a fella and doing well. He was well educated and a great paying job and you know, kept his head down and for 30 years have put his money in his retirement plan and had a good pile and so why was he talking to me?
Well, he’s talking to me, he says, “So far, that’s all I needed to do. I was in accumulation phase —” he didn’t say the accumulation phase but — “I’ve just been piling it in but now, I really need a plan. Do I have enough to retire? If I do, I want to retire and how do I make smart moves so I can minimize taxes on the way out, make sure that I have enough income for the rest of my life,” and more importantly, it’s today that income keeps up with inflation, that is real adjusted income.
My first book, I wrote was really targeted for a general audience that could have gone from anybody from starting out to somebody that was just prepared to retire, was very broad, this book is very targeted and this book is for somebody that’s probably within 10 years of retirement and is really looking to put a gameplan together to how are they going to use their money, maximize their money, to really get the most out of their money, the most out of their life.
Frank Garza: In the intro of the book, you tell the story of a woman you met, Maria, who is struggling with her retirement, and then you kind of continuously refer back to her story throughout the book. Could you please share more about Maria’s story and why it’s had such a big impact on you?
Michael Lynch: Sure. You know, Maria came into my office post-financial crisis and this financial crisis for listeners is back 2008-2009 with the housing bubble, and Maria had spent her years working in factories and local town here in Bridgeport, Connecticut. Never made a lot of money, she had a couple of thousand a month for social security, she had a half a million dollars in the local bank.
Prior to the great recession, prior to the government policy deciding that we don’t need to have interest rates for people, she was getting $2,000 a month from her $500,000. By the time she came in my office, interest rates had collapsed to zero. She was getting $2,000 a year so not quite zero but just above zero.
Imagine having your income drop from $2,000 a month to $2,000 a year. That’s a crisis and the theme that I take to the book is what Maria thought she was doing was safe. She’d been taught the formula for safety, where it always worked before, get a good job and keep it, spend less than you earn, save the money in a safe place, live on the interest, never touch the principle. That’s the formula but what’s the problem with it now?
Once Maria learned, there was no interest on her principle. She needed a redefinition of safety. What Maria had been taught and millions of other people that are her age, in their 50s and their 60s, their parents and grandparents went through depression. What they were taught was safe, was government bonds, FDIC banks, stuff that was stable, principle was stable and what she learned quickly but too late, unfortunately, too late was that we live on the income, not on the principle.
And vehicles, the financial instruments that tend to protect the principle, allow the interest to fluctuate. Interest rates collapse right over 90%. People live on interest, that’s crazy. If stocks collapse by 90%, we’d be in crisis of the principle value date. So that’s the story of Maria, and I follow her through the book because I think what we need to do is have a little bit – what’s going to really help retirees is reorient it, reorient to a more modern, sophisticated, appropriate definition of what’s really safe when we talk about assets and income to generate retirement income.
Frank Garza: Yeah, you touched on there what seems to me, or what seemed to me, to be the most important thing on your book is that income is more important to consider than assets when planning for retirement. Can you maybe break that down a little bit more? What are some examples of income that people should be considering when they’re retired?
Michael Lynch: Well, so the issue is again, when we’re going to come in to retirement in the United States, typically we’re going to have at least two out of three income sources and potentially all three. The first is most Americans are going to have social security, and if they do not have social security, they will typically have another government-sponsored pension that delivers at least as much money as social security would have delivered, okay?
And that is an annuity. It’s an income annuity and it’s inflation-adjusted in most cases, certainly social security is, and so that’s money that keeps coming every single month until we’re no longer there to cash a check, correct?
The next source that somebody may have, and a lot of people still have these by the way, are corporate pensions and corporate pensions or employer-provided pensions might be a nonprofit, it might be a church, it might be a hospital, it might be a company, a big company. That’s also going to be an income annuity, it’s going to be money that comes every single month. That typically will not increase with inflation, very rare that it will and so, that gives you, rolling over time by inflation.
So then, the type of income that we’re typically talking about, generating for clients is coming from investments, from assets, from piles of money. So we’re managing the 401(k) and IRA and investment account and the issue becomes where do we – we now have the responsibility to invest that money, we have to put it somewhere, and then we have to somehow turn that lump of an asset into a stream of income or into chunks of the income, similar to what the pension and the social security’s doing.
What makes this generation, you know, the boomers that are coming into retirement now, different perhaps from their grandparents, is they have hundreds of thousands and millions of dollars that they need to turn in to income. They’re going to retire better than their parents and their grandparents did but the task is what vehicles, what instruments, what investments do we use and what structure do we use to take our piles of money and turn them into streams of income?
So that’s what I talk about most in the book, are different ways and different tools and different techniques to take our cumulative money and turn it into income that we can live off for the rest of our lives.
The System: Safety, Reliability, and Growth
Frank Garza: In chapter five which is called, “Win by Winning”, you talk a lot about the history of the stock market and you started the chapter off with a quiz question that was, over the last hundred years, what is the most frequent annual return of the broad US stock market? I don’t want to steal the punchline here but the answer is, 20.1% or more and that was something that really surprised me.
Can you talk about why you’ve included that quiz questions in that chapter and spend so much time talking about the history of the stock market?
Michael Lynch: Yeah, so, one of the things that makes my book different and my view different is I believe that experience, history, and logic dictates that we want to retire, we want to tie, attach our retirement income to an investment or an asset class or vehicles that have a history of both increasing in value and increasing in income, okay?
Only in broad, diversified equities, whether to exchange rate funds or to mutual funds or variable annuity sub-accounts, someway where you are broadly diversified, you are not making bets on any one company, anyone technology is the best way to do this for proponents of the assets and the reason is because the value both, the value increases and the income increases overtime and so we know that’s good.
As we are recording this podcast, the market is in a slump. I mean, it is going down where tech stocks are down 20% and the Dow Jones and S&P is up I think more than 10 and so the stock market is clearly volatile, prices change every single day month to month and year to year but it is shocking that the most common year by a long shot is going to be up over 20% and you know we have seen this recently because you can go look, ‘19, ‘20, ‘21 all very, very strong years.
So one of the big things in the book is it’s not put everything in the stock. No, no, no, no, but it’s at if you want a system that is vulnerable, double your income and double or triple your assets over your retirement, broad diversified equity for a significant portion of money is statistically going to be safer, going to generate better outcomes then the traditional notions of safety that quite frankly ruin Maria’s retirement, right? That took $2000 a month and turned into $2000 year.
Frank Garza: So chapter seven is called, Building Blocks of Success, and you’ve already given me a few of those building blocks just in our discussions so far, but big picture overview, what do you consider the building blocks of success for creating a successful retirement plan?
Michael Lynch: Well, I think all retirees or all people that are going to live off of their assets, they typically need three things. We need safety of principle. Maria is right, she needs money in the bank, we all need money in the bank. We need to be able to write the biggest check that we’re going to need to be able to write without having to sell an investment that may be down 50%, agree?
So we need one building block is going to be safety of principle and people typically don’t need convincing of that but since my system so heavily weighs assets whether the price will go up and down, I make that clear and usually when we talk, you know, your listeners will be familiar with a cash reserve, and a cash reserve is what you have so that if a bad thing happens, you don’t have to go borrow money at really high-interest rates or sell something that you don’t want to sell so that you can get a new heater, you can get a new car, whatever the case maybe.
Everybody’s cash reserve needs are a bit different but most people are most familiar with a cash reserve. Once we’re in retirement and we’re taking income from our assets, I believe we also need an income reserve. We need to have some stable money that we are not going to get much return on. In fact, probably negative by inflation standard returns ,but that is not going to be negative, it’s not going to be affected by poor stock or bond markets as we are experiencing now. So sort of three to five years of payments over there and that’s going to sleep at night on you, okay? So that’s one building block.
The second building block that we need is we need reliable income. You know, most people, they go to work and they work for a living their entire lives and they get paid weekly by weekly semi-monthly or monthly or used to having the same amount of money coming in at regular intervals. They’re not like as business owners where you might have a big year and a bad year. That’s not good for you, they want regular income and so we need reliable income.
We’ve already talked about those vehicles, that’s your income annuity vehicles. That is your social security, that might be a core for pension and in many cases, that could be a private annuity that kind of look either income or deferred that will come from an insurance company, been a contract between a person and an insurance company. Then of course, there’s restrictions, there’s pros and cons, you want to read all the literature and know what you’re doing and do that, but those are designed to provide reliable income for retirement, and that’s the second thing people need, is reliable income.
The third thing is where I really focus on and that we need to grow our income. We need to grow our income. You know, inflation over time is going to radically erode the purchasing power of any assets that are not at least growing at its rate. So a corporate pension for example are fixed annuity. At 3% over 24-year retirement, you know, it is a thousand dollars as the same as 500. It gets cut in half mathematically.
So we need our money to grow for us. We need both growth of income and growth of assets, and that’s where we talk about the investments, that’s what leads back to that quiz that I showed you before. Don’t be scared of broad diversified equity. All wealth is owning, wealthy people own stuff, they tend to own businesses. The beauty of the modern shareholder capitalism is we can all own the entire economy.
It’s absolutely fantastic but it’s understandable. Stocks drop and if you look historically, we over a four-year period, about one decline and three ups, that’s how it’s been historically, but it’s always in that order and it can’t be predicted and so to hedge that we use that building block again that we started with in that income of that income reserve.
So that’s typically it’s three things, you need safety of principle, you need reliability of income, and you need growth of income, and there is no one thing that does each of those things and everything that each one of them won’t do another. So we need the system, we need the combination.
An Example in Action
Frank Garza: Is there an example that you could give me of a client you work with, either a person or a couple who has done these three things right and how they did that just so people can kind of see what each of those three components look like in the real world?
Michael Lynch: Yeah, sure. So you know, we could just use a composite because then the example I use will always be a composite because we don’t disclose real clients due to privacy, but say you’re coming into retirement and I mean, the book will have a bunch of different examples in it. So I go through this and that is a big part of the book but if I start with somebody here and I start with one couple, and what they have is they both work for big companies.
She worked for Utility, he worked for Disney, okay? Now, if you work for Utility and you work for Disney, you end up with big corporate pensions, and that corporate pension is money that comes every month. So then we have $54,000 in corporate pensions and then they also had social security, so they had another $54,000 in social security. So this couple already has a $108,000 of guaranteed income.
Now, they have five kids and like, how did they get five kids? Well, we had two boys and then we wanted a girl and then we had triplets. I say, well that will do it, you know? That’s the answer, now you get five and you got five kids. I don’t really care how good your job is, there is not a lot of money left over for investing, right? You know, you look at what the food costs and everything costs and college and that’s that.
So they were coming into retirement with $400,000 and they were feeling like, “You know what? We’re short. Bob at the water cooler says he’s got a million in that sign-off. How are we going to get it done with $400,000?” Well, they came in and the first thing we’ve always start with is expenses. You know, when you are working your life is income-driven, how much income you make tends to define the possibilities.
How much you can save, where you can live, you know what you can spend, right? You’re income-dependent, but when you’re retired, your expenses really matter because it’s your expenses that determine how much investments and piles of money and pensions and annuities that you need to meet those expenses, and two people with the same income while they’re working can have very different expenses and therefore, very different retirement structures.
So in this case, they had with the $108,000 of income, guaranteed income coming in and $400,000, they only needed to generate $12,000 or a thousand a month in their income. So at $400,000, $12,000, 1% is $4,000, so that is 3%. So all they needed to do is generate three percent. So for them, they did not need any private annuity solutions. They didn’t need, they already had enough reliable income because they had corporate pension.
Corporate pension and social security, so they needed liquidity. So with them invested $350,000 in a portfolio dominated by equity, right? Mutual funds and exchange rated funds and kept $50,000 in a liquid CD and US coming back money market pocket, so $50,000. So they are taking $12,000 out a year and they have five years. You know, they have over four years of safety in that bucket that if that stock market bucket goes down, they can just move over to the liquid bucket. So that’s an example of one with corporate pensions.
Frank Garza: Well, Michael, writing a book is such a feat, and now you have done it more than once, so congratulations. Before we wrap up, is there anything else about you or the book that you want to make sure our listeners know?
Michael Lynch: No. I mean, what I would encourage people to do, I wrote this book to be very accessible. I think it is about an hour’s read on the beach. It has pictures, it has graphics, it has real numbers and I think it’s very – and it is real stories with real people. I think it is very accessible and what I hope is that people can read this book. It is a system that if they are analytical and they want to create it themselves, they can create it themselves.
If not, they can reach out and my team can help them create it. You know, the thing that I find is that more people are financially independent than they realize it because there is such a wide range of income out there. There is such a wide range of assets that we think oftentimes that we’re not there, and when clients come into our offices and we talk and we examine them, we say, “Look, you’re in good shape. Here is all you need to do.”
We’ll arrange this, arrange this, arrange this and you’re really going to be good for the long haul. So what I would encourage people to do is to pick it up. Also, if you contact the book with the offices, we did a video course. It is also can be very similar and track it because some people like to learn visually and in that way instead of read. I think my hope is just going to do some good for people.
Frank Garza: Michael, this has been such a pleasure. The book is called, It’s All About The Income: The Simple System for a Big Retirement. Besides checking out the book, where can people find you?
Michael Lynch: You can get me online at simpleandbig.com, so www.simpleandbig.com. That’s our platform, you can email me at [email protected]. So go check us out at simpleandbig.com, you can sign up for our newsletters, the video course is going to be housed up there. You know, this is a second of what’s probably going to be five books, so keep coming back. If you like the sell, if you like the information, we plan to keep the good stuff coming.
Frank Garza: Thank you, Michael.
Michael Lynch: My pleasure, Frank. Thanks for having me.