In our practice, we have a unique approach called LIP, or lifetime income process, which we demonstrate on paper for every client. We believe that the money coming into a household goes to two primary places: it is either spent or saved. When we talk about savings, we're referring to long-term retirement savings, not savings for immediate wants like a sunroom or a jet ski.
- Income is categorized into two areas:
- Spent (consumption)
- Saved (retirement savings)
Managing Consumption and Inflation
We explain to our clients that their current standard of living, or consumption number, has to adjust for inflation over time. This means their consumption graph line must rise to account for inflation, ensuring that a dollar today feels the same as a dollar tomorrow, even if it means it will cost more.
The Retirement Challenge
Many aspire to retire but do not realize that upon retirement, income usually drops, leading to a financial gap. This gap can worsen due to pensions and social security not keeping pace with inflation.
- Identify your consumption number.
- Account for inflation to maintain your standard of living.
- Plan for the income gap in retirement.
The Green Line vs. The Red Line
The red line represents your financial data, while the green line represents your consumption number adjusted for inflation. The goal is to have your financial data (red line) keep pace with your consumption needs (green line) throughout your life. In 95% of cases, the data shows a significant drop-off if not properly managed.
Modelling Your Financial Future
Using minimal data inputs, easily model and test different financial scenarios. This allows you to experiment with variables such as retirement age, income sources, savings rate, and rate of return on investments.
- Input basic information (e.g., age, income, savings).
- Test assumptions (e.g., rate of return, consumption changes).
- Observe how changes impact the financial model.
Conclusion: Accountability through Simplified Financial Planning
Our simple two-line model allows for effective financial planning and accountability, ensuring you can live comfortably throughout retirement without financial surprises. Don't wait until retirement to adjust – plan now to achieve financial security and happiness.
Full Transcript
| This is what people don't do. Here's the secret sauce and I hope everybody steals this. I do this for every client by the way. So I get the philosophy on paper, we call it lip on a napkin for lifetime income process, but this is what we do every single time. I always show people, it's like, look, there's a certain amount of money that you make and these words are distinctively important, you know, make and consume or what we call spin. The money that comes into the household, the gross amount, I don't care what it is. We believe it only goes two places, okay? You either spend it or you save it. That's basically it. And when we say save, we mean, you know, way out there for retirement. We don't mean for the sunroom or the jet ski, that's called consumption, okay? So this is the make part, which is important. We want to make a bunch of money. That's all good. Then you come over to the whole philosophy of lip and here's what's cool about it. This works and my story doesn't change for any age. See, a lot of people were talking about money at different ages. It doesn't change. There's things that change. We get that. But this is the way you do it. You say this number here, this dollar sign is what you consume. So what we call the consumption number, that's the standard of living number, right? That pays federal taxes, medical insurance, a dinner, you know, Mexican meals, whatever it is, that's our fun. That's how we use money. Well, we know if we drew this little level line out here, a level line is not going to be okay because there's this thing. The thing gets more expensive. That word called inflation. And we get our clients to say the word. So we know this consumption number, the standard living number graph has to kind of look like this. And all that is is the line relative to inflation. So a dollar today is going to feel like a dollar tomorrow, which might take, you know, a dollar six cents and a dollar twelve cents and two dollars and eight cents down the road. So this is the measuring line of your current standard of living, just maintaining it. Well, people have this little box out here called retirement. One day, Dave, I want to retire. I don't know why they say that. I ain't found retirement in my Bible yet, but just keep on working. But people want to retire. And we ask this question, when people retire on Friday, come Monday, does they typically have more income the same or less? Well, income's hard to replace. Most people have less. So this line drops off. Now that's not just the bad news. Going forward, typically pensions and Social Security do not keep up the real cost of inflation. So people that get out there on fixed income, this line starts to drift away from that line and this gap gets worse and worse and worse in retirement. And we see it all the time. In fact, on all the models we've done in our firm and other people using the software, we can comfortably say 95% of most financial models will fail this test. Right. That's a bold statement, but that's just that's what we see at all kinds of wealth levels, too. It's not just, you think that's just poor people know, you get somebody making a half a million dollars a year and doesn't get this balance right. They're going to fail too. Right. So what we want is typically on our model, it's a green line red line, we call it. So if we have a red line, we don't want the red line to follow. We want the red line, which is your financial data. We want it to stay on this graph your whole life. We don't want this to happen. I love it. So the two lines one represents your current consumption and you include inflation to that. And then the other line represents the assumption because you don't you don't have a magic bullet. You don't know exactly what the future is going to hold, but you take someone's financial assets and their information that you give them and you take their assumptions. And then you just model that out and you're able to see in 95% or more cases that though they're the line drops off. And a lot of times drops off significantly, which means that there will be a time not changing what you're doing that there's going to have to be a great awakening or and so you're able to wake people up before that happens. Is that is that another good way to summarize it? Yeah, we bullet down to the green line is really your consumption number because look, when we take data and we know what you're saving and saving is account of 401k, whatever you're saving money is. So that's being saved. The rest is being spent. I don't need a 10 page budget. It's either spend or saved. And then you want to be able to make sure you can have that the rest of your life. So we say the green lines what you want, the red lines what you got are you happy or sad? And we want people happy. Yeah. So I mean, we can we can play with the software real quick on the very basics of how it's kind of cool. It's built to where you can have very, very little data and make a lot of sense out of something. Are you can be as detailed as you want to be depending on how you know, you plan inside your firm? Yeah, I would let's let's look at look at the data when I would I love about this because I'm very like, you know, when I first heard this, I was pushing back and forth and the key here's a cool thing is if you want to spend less than retirement, if you want to intentionally do that, you can do that. You can you can tell the model like, Hey, I'm I want to spend less and then your your green line will show that. And if you want to but but in a lot of cases and you can you can share this because you've seen a lot more people go through your term than I do or I have is it's just like you you think you're going to spend less, but that's a great lie. When every days are weekend, you you don't spend less, you potentially spend more. And so that is that's one one thing, but it just it just zooms out to saying like in this model, you either can work longer, can make a greater return, you can change your consumption like there's only so many variables and it's really cool when you're start blowing it down to a very simple model, you can test different scenarios and you can see firsthand the model adjust and it's not so complicated. It's two lines and those two lines are very easy to understand once you get the concept. And so that's why I'm a fan of this and that's why many people and they see it they're like, I need to do this with my clients because this is a really easy simple way to model what's happening. Well, look, we could we could take something real quickly basically for the whole financial industry and give away the secret sauce, right? It's like it's not it shouldn't be a secret. So let's take a I'll do two things really quick. So I just put in John Doe 30 year old, right? So all I did was put a name and we need an age to start with. And then if we go to his income and let's just say his salary, he's just getting started out, he's making 85,000. The thing is it doesn't matter. You just put the number in whatever the number is and he's going to get a three percent or he hopes he gets a three percent cost of league adjustment and he wants to work until full retirement age and social security which today is 67. And then he's going to get a social security, you know, some people say it won't be there to be there, whatever. But what we do is even though it's indexed up, all we're going to put on the model is what we know today and will update the model year in and year out. That way we stay accurate. We're not hypothetically throwing something out there that may or may not be. Even though we know it's probably going to index higher, as I modeling stuff along the way, I keep adjusting and then it'll just balance itself out as it indexes up on your model. That's the key that people forget. So let's just say he's going to have 40,000 hours of social security income. Social security typically increases about 2%. He's going to get that 38 years from now when he's 67 for the rest of his life from 67 to age 100 and say he has no pension. So let's just say that's his income sources. Okay. Now he could be a business owner. He could have real estate. He could build up, but that's just get a point across. Here's income and timelines and cost of living adjustments. And let's say most people are saving money. They're 401k. So here's his company 401k. And let's just say he's just starting out and he's going to put 10% because everybody told him to save 10% $8,500 a year in. He may or may not get an employer deposit. We want to deal with that. Very, very simple. I'm not going to walk through all the other tabs. I'm going to kind of go lip on a napkin with the software so you can see real data. If I go over to the lip model, let's shrink this down where you can see. I'm say, okay, he's going to retire at 67. That's like 37 years from now and he's in a 22% tax bracket. But here's the key. So all this says is he has 85,000 of total income right here. He's consuming 76. Well, remember the software says you either spend or save it. I'm only saving 85, 100, which is 10% of your income like the books and magazines told you to do. You know, so this graph just starts at the 76,000, the consumption number and increases with the inflation numbers I put in here. And there's two numbers for pre post-retirement, no big deal. And then we ask people what rate of return, just a hypothetical rate of return, that you can model. The way we ask it is what rate of return do you want to bet on your financial future? Their number, not mine. I'm not influencing this in any way. And most people will say 56, 7, 8, they don't get bold and say 10 or 12 and you know what the market may or may not do or whatever. But even a reasonable return of of eight over a long period of investment. And then a lot of people tell you you have to comment down in retirement because you can't take as much risk. And some of that's true depending on how you do your retirement planning. So whatever the numbers are, the point is don't get hung up on we can put any number in there. But this is typically what we see and what people believe in and all kinds of stuff. So now the magic sauce is okay, that's what I want. And I'm doing what the magazine's told me to do. I'm saving 10% of my income. And before we show the red line, we like to show this spreadsheet looking view of what actually happens. So you're saving $8,500 then $8,700 because you're saving 10% of your income, your income's increasing, your savings is increasing or it should. Yeah, you're getting. So you're assuming that as they make more money, they're staying true to the, the model of 10%, which means they need to save more. Yeah, 10% of their gross income like the scenario shows or whatever the modeling is. And we actually freeze these models. Every time a client leaves, we freeze and date the model. We duplicate it and we edit a new model. So we can always go back and say, here's what was projectors. Are we on target or not on target? That's it's accountability guys. The whole thing on both sides of the table, whether you're an agent or a consumer, have accountability to math, don't run from or hide from it. That's what's wrong. We're trying to hide from things. Don't do it. Let's be accountable. So if you run this out, it's going to go down here to $2.4 million saved up hypothetically. It's all hypothetical. This is not promises or guarantee or any kind of advice. We'll just claim this thing to death. It's just a concept and everybody does calculate concepts and future values and whatever. Well, how many people do we typically see that save money? They're 401k this way that's got $2.5 million saved up. I've never seen it in my lifetime. Yeah. Yeah. Because there's what we see. Caleb. Caleb was about to experience this, y'all. Here's what he's doing. Caleb was doing good and he married April. They were doing good. Now the baby comes. Okay. Most families, what they do is like, okay, now the baby's got to get into gymnastics and horseback riding and we got to get a jet ski and a pontoon boat. Now I got to save less money because I got to raise my kid and then we get a second kid. We have a tendency to start to get out of balance with life. It's not not to do those things. It's to stay in balance and that's our goal. So it looks good. Here's what's surprising to people. So we think, man, that's great. I saved up. I did the books and magazines. So here's what happens to most people. They truck along through life. Life happens. It doesn't really work this exact. It usually goes down to people, save less and they're never measuring it and then they get the retirement and it's too late. That's what we want to avoid. So I'm going to hit this little box and it's going to put the red line on the green line and we're going to see how we do. All right. So they retired at 67. That $2.4 million is going to 81 and they're down to a security check. This is what we see 95% of the time or more. It's just out of balance. And no matter what age we take the data in and we just take people's data, put it in here and show the graph based on their assumptions and their data. We're not assuming or telling them anything. All right. So then here's the miss. Here's the quick miss. And I've done this when I've trained financial professionals. Yeah, but Dave. Okay. But Dave, I've heard but Dave to me times. When they retired at 67, their houses paid off and their kids are raised. Well, that's bull crap anyway. You know, their house ain't paid off. They got a lake house. They got kids and now they got grandkids. It gets more expensive. Don't tell me all that. But let's say we'll do what the magazine says again. You can live on 87% of your income, 88%, 85, some number the magazine say, well, they don't ever model it. So I dropped your green line, 13% and your model moved from 81 to 84. It's crazy. Okay. So then you say, well, what about 70% of my income? Red line doesn't cover the green line. What about 60% now we're getting close. We will see the red line. Green line page 100. Yeah. Yeah. But to be fair, whether this is a debate or not, there's many people that only plan through 90, which as people live longer, that could be a flaw in the scenario as well. But they're, you know, just 91. Many people would be like, I could do planning out to 91. You know, there's a hallmark card, right? For your 100th birthday, they don't make those if people don't get there. No, I'm with you. I'm totally with you. But this is, yeah, that's pretty crazy. Reducing spending by 60% and you still aren't able to reach year 100. Well, but this in two, people forget to this is this everything works perfectly and all my assumptions hold true, etc. It could be better or it could be worse than this, who knows? Yeah. But here's the thing we know about longevity. Yeah, you're probably not going to make 100. But here's what we do know. There's, there's like greater than a 50% chance that one of the spouses are in my office at the age of 92. And we're seeing people all the time down there, 80s still traveling and cruising and doing all kinds of stuff. So we're living a long time. But but here's the thing. Why don't you build a model of this imbalance so you don't worry about it, right? Instead of skimping all the time. And this is, this is nothing going wrong. What if you got disabled? What about long-term care? And then even if somebody does this, so we say, we don't want this. I'll model what everybody wants. But so people say, well, what can you do? Well, you can raise rate of return. Okay. So now we go to 10%. Well, now you got to get a very high rate of return at that savings level. And now you're risking the success of your financial future. All right. So if you use a reasonable number and that a reasonable number is what everybody says. I'll use whatever number they want is their model not mine. I'm just modeling the data. Yeah. So what about what amount? This is what people don't do. Here's the secret sauce. And I hope everybody steals this. This would be great. It's ratio savings. It's not a static number. The more you make, if you're a doctor making 500,000, you need to save way more than 10%. You probably need to save like 30% to be able to sustain that lifestyle in the future. So most people are not dialing in the right ratio relative to that individual or that couple or whatever it may be. So what we do is just say, what if you saved $6,000 more year? Well, that gets you out there pretty good. Well, instead of doing a budget, I can say, look, you're making 85. You need to live on 70, thousand five hundred grows. I can get an salary of 70,000 five hundred and make your living and save the difference and your models pretty much in balance. That's how fast and easy it is. To get the core number right, then we can get in all the strategies and all the stuff that people sell and do in their practice. And that's fine. But if we don't get the baseline feed of the model right, all we're doing basically folks is selling something and not modeling it to the result. Yep. And I think we should model it to a result. And day, this will be for a future video. This is more like a teaser, but you can model the power of life insurance on here. You can kill somebody off and show them like, hey, instead of asking you, how much life insurance do you want? You can model how much life insurance their model needs to stay in balance. You can model disability income insurance if someone gets disabled. You can model, should you, what is your business actually worth to your cash flow, your personal economy? You can model, should you sell that real estate? Should you keep that real estate? You can model all kinds of decisions. And again, it's not investment advice. It's just modeling with data A versus scenario B kind of deal. And it's just like, it's very, very powerful. And it also takes away the emotion because it's like, well, my business, I feel like it's worth X or I feel like, you know, real estate is the best investment or I feel like a million dollars is the lot of life insurance. And we're able to take that emotion out and just say, okay, based on your model, this is what the data says. And going back to the people that are in more trouble are the ones that are making $304,000. Because they're not saving. They're not even saving 10%. They feel like they're saving a lot of money. But they're in a lot of cases, they're not. And their model gets train wrecked. So this doesn't, it's not like if you're in the top 1%, you get a pass. In fact, this could even look worse if you're making a lot of money and not saving because it literally shows you the power of inflation, like your lifestyle could be a runner-way train. Well, Caleb, you know, it's what's aggravating is the the wealthier people get matter when you show them this. I said with an oral surgeon one time, he wanted to run his numbers and he had all the people, right? Yeah, and you know, he had an advisor and insurance agency pay attorney and all that and I just came into this model data. I'm not telling him anything. And I said, what do you make? It's about this quick too. He goes 1.2 million. I said, great. How much you saving? He goes 180,000. I put it in. How much you saved up? 2.2 million. Great. And then we had a business valuation. We put in the model as well too because he had partners. You're going to sell that. And you know, so his basic lifestyle, even though it was a million, you know, we have goes to taxes and all, but he was living on about a 400,000 dollar lifestyle and he wanted to sustain that. Well, he wouldn't have near enough money when he quit producing that million dollars of income to produce that number. And his red line was nowhere close to his green line and he was sick to a stomach. And he wasn't mad at me, but he said, David, nobody is telling us this. I said, yeah, but somebody sold you a bunch of widgets, didn't they? You got a guy doing your investments. You got insurance, proxies, which are all great. And you need them. But it wasn't coordinated to the thing that matters most to put this money cash flow ratio balance. Sounds technical, but it's kind of garden easy. Yeah. Right. So yeah, we can, we can, we can model anything because we have a page here that says life events and life events are just, you know, money coming in and out of the model kind of like this guy say he's in balance, but then he comes up doing says, Dave, I want to do college planning for my kids. Okay, you got a one year old. Okay, how much is going to call us 40,000 a year day? College is going up 4% of year, 5% of year. Kids going to go to school, 17 years for now for four years. Okay, there's a scenario. That's how easy it is. It could be an inheritance, a business sell. It could be a negative or positive number. So your model is in balance, but now you want to pay for college. Well, there's the impact of that. Now you're back out of balance because you had this spike of expenses. Now I got to readjust the model to get the red line back on the green line if you want to fund your kids college. Now get people all the time say, well, Dave, I thought I wanted to fund my kids college, but they better get a grant. So the key is to your point, Caleb is just model it. And we're just facilitating a model. I'm really not giving any kind of advice, 90% of the time. I'm just asking questions and modeling what they want to do. And then, you know, for me, I'm insurance and securities license. So if they need something that falls in my wheelhouse, of course, I can advise on those things. But typically I'm trying to get the model right. I don't want to sell something that I know is not appropriate for somebody. If I don't have an idea what's going on with their financial model. This is why I believe, you know, if you're in the financial business at all, you should have some kind of model on people, not just some basic data to be able to make a sell. I just don't think that's the way to do it. Yeah. Well, this is, is there anything else that you wanted to say before we wrap this thing up? No, I was trying to, you know, me, I could go all day. So we were trying to do, you know, 20 or 30 minutes to get a highlight, you know, like this, like we do years of training. It goes on and on and on and on and on and on as everybody knows. But I think we did enough to get the concept of a balanced model within increasing income. Hopefully, hopefully this makes sense. Please please comment below if you have thoughts, you have questions, if you have a video that you really want Dave and I to do. We're going to read all the comments and your feedback matters. And here's what I'll say. If you are watching this and you are an advisor, if you're in the life insurance base, you help people when it comes to money and you want to learn directly from Dave, if you want to use a software, if you want to be part of the community, we have a link for you down below. And I highly encourage you click that and and and and go through that process. And you'll even most likely be able to meet with Dave Anderson himself. And so there's a link for you there. And if you're a consumer, just to be very clear that Dave and I are not giving investment at advice. We're just talking about a software that he founded and created. And if you're watching this, you're like, I'm really interested in potentially learning more about this. We'll have a specific link for you that will go to to our company and we can, you know, ask, ask more questions and take you through this process. And so those are those are the two those are two called actions for you watching. And I'm Dave, I'm looking forward to doing more videos on calculators. I'm looking forward to doing more videos using the power of a lip. And I think there's a lot of the futures bright. Let's just put it that way. It's very bright. And I'm very excited to see more light bulb to go off and see the ripple effect that will be created through the work that you've done. Well, you know, the whole concept Caleb, the more we can teach and learn because we're continuing to learn all the time. And the more we can share and build a good community, the more people we can impact. And, you know, that's our thing. We want to encourage people to have a good life, a balanced life and a joyful life. And if we can do that by putting money in his place, then we're glad to serve that very well. Yep. |
