Putting assets, income, and taxes on the same team…

In order to retire comfortably, you must have a nest egg that is big enough to generate income to replace your paycheck. That means having enough savings to cover 25 years of retirement expenses.

That’s personal finance guru Suze Orman talking about retirement. Orman hosted her own show on CNBC from 2002 to 2015 where she offered advice on money, investing, and retirement planning.

The problem is, this approach to retirement makes no sense if we stop to think about it.

The “nest egg” approach to retirement tells us that we need to pour our savings into financial assets – stocks and funds – every time our paycheck hits. The goal is to work up to this mythical retirement number.

What’s Your Number?? Iremember old commercials promoting this idea.

In the commercials, people would be going about their life with a text bubble following them around. That bubble depicted their personal retirement number. Then the pitch was to go talk to a financial advisor who could help us get there.

But here’s the thing – this approach forces us to choose between assets and income.

Because we’re investing exclusively for capital appreciation, we don’t build passive income with this method. So when our assets are going up, we don’t have the income. Then when we do need extra income, we have to sell our assets.

And it gets worse.

This approach pits us against the tax code. It doesn’t matter if our financial assets are in 401(k)s, IRAs, or regular brokerage accounts, they are going to get taxed in the end.

That means our true “number” would be materially lower than the figure depicted on our account statements. Because the moment we want to turn our nest egg into income we’re going to have to pay taxes on that money.

I’d like to use an example to demonstrate just how fragile this is.

Let’s assume we build a financial nest egg of $1 million dollars. Just for easy numbers.

Then we get to retirement and we decide we want to draw $70,000 a year from our nest egg to live on. And let’s assume a conservative tax rate of 15%.

That means we would have to sell about $83,000 worth of assets to generate $70,000 in income. We would lose $13,000 to taxes each year.

If we run those numbers, we’ll find that our $1 million nest egg would last for twelve years. That’s it.

And the more we drawdown our assets like this, the more fragile our situation would become. We would quickly get to the point where we couldn’t afford any emergencies or extracurricular activity.

To me, this makes no sense.

If all we are really trying to do anyway is make sure we have enough income to live on in retirement… why not just build the income streams right now?

And we do that by acquiring assets that produce income. Assets that throw off cash flow.

This way we put assets and income on the same team. When our assets go up, so does our income.

And when we want more income… we just buy more assets. It’s a far more robust approach.

And guess what?

We’re no longer talking about traditional retirement here. If we can work up to having monthly income that supports all our needs and wants… well, we can retire any time we want. It doesn’t matter if we are 65 or 45.

All we have to do is build up the income.

And the more we can do this in a tax-efficient manner, the better. We’ll talk more about that tomorrow.

The key point is that it’s time to rethink financial planning 101. The old way is too fragile.

That’s where our flagship course Finance for Freedom comes into play. It lays out a framework for building a robust asset portfolio that’s in tune with the current macroeconomic climate.

More information on the program right here: Finance for Freedom Course Page