Total Financial Solutions President/CEO Arif Halaby is talking about the importance of remembering that retirement accounts like 401(k)s and 457 plans are not savings accounts, and have a specific job to do.

“Here is where (retirees often) make the mistake — and I don’t mean a little mistake. You think that that big chunk of money is a savings account, meaning, ‘I’m just going to take out chunks of money whenever I want,’” explained Halaby, a Certified Estate Planner. “You’ve got to understand this: it is not a savings account; it is, very simply put, an income-generating machine.”

Halaby compared a retirement account to a chicken that lays an egg every day. The owner of the chicken can either accept the guarantee of an egg every day, or can kill the chicken, enjoy an amazing meal and then have nothing afterward.

Related: Total Financial Solutions: The Importance Of Considering Taxes In Retirement Planning

“An egg is not filet mignon … but you’re going to get that egg every single day, aren’t you?” Halaby said. “Or you can choose to kill the chicken… It’s an amazing dinner, and then it’s over. And tomorrow you are hungry, and the next day you are hungrier, and a week later you’re starving. In the retirement world, that means you go back to work, that means you sell off assets like your home.”

Halaby continued that this doesn’t mean a retiree can never make a big purchase or plan a vacation; it simply means that the financially responsible way to do it is to save from their allotted monthly income until they’ve set aside enough for their purchase.

“You may think, ‘Oh well, why do I need a budget? I’m not bringing money in… I basically am on a fixed income,’” said Jeff Girard, Halaby’s co-host on the KHTS show “Total Financial Solutions Safer Money Hour.” “Well even more so why you need a budget. You have to be able to say, ‘Okay, I need tires on the car, I need to buy a new refrigerator, I have to put a roof on the house,’ and if you take it from that nest egg, that retirement account, remember, that’s what replaced your income. That is supposed to replace your job.”

In the same way that the $20 in your pocket is different from the $20 in your savings account and the $100 in your child’s college fund is not the same as the $100 in your retirement account, Halaby noted the job of a retirement account is to distribute money to a retiree every month for the rest of their lives, not to be used in large chunks for big purchases.

“It’s a different status,” he said. “Each account has a job to do. I think why wealthy people are wealthy is because they understand the different status, and the different places that money sits.”

Halaby suggests what he calls a “safe” withdrawal rate for retirees, even if they’ve accumulated a large sum of money by the time they retire.

“There is a rate of money that you can take out each and every month that’s said by the experts that should guarantee, or at least as close to it as possible, that you will have money for the rest of your life to draw on for retirement,” Girard said.

If a person estimates they might live to be 100 years old, they can take 100 and subtract their retirement age to figure out about how many years they will need to fund their retirement.

For someone who retires in their 50’s, Halaby noted 4 percent is typically a safe withdrawal rate, while someone who retires in their 60’s can consider going as high as 4.5 or 5 percent.

“Why is that the case? Because when you do the math and you’re pulling out money each month and you just take the whole account and divide by 100,” Halaby explained, “you’re going to pull that account value out every month so it now lasts for the rest of your life.”

Certain accounts where a retiree’s money is not at risk can take accrued interest into consideration with these numbers, while some accounts can be expected to go forward or stay the same depending on the market.

Girard cautioned against withdrawing extra money when the market is up, instead recommending holding onto it to balance out the years when the market is down.

“What about the years when the market is down or when your account is down? Are you still pulling that same amount out, or are you going to live on less?” Girard said. “You can’t have it both ways, where you’re pulling out more when it’s doing well, unless you’re going to pull out less when it’s doing worse.”

Anyone with questions about their retirement and planning for retirement is encouraged to take responsibility for their future today by contacting the financial professionals at Total Financial Solutions for guidance on their individual situation.

Halaby said, “You have to understand that your future, your retirement is your responsibility.”

Total Financial Solutions offers assistance with preparing for retirement in Santa Clarita and the surrounding valleys. Santa Clarita financial professional Arif Halaby, a Certified Estate Planner, and Total Financial Solutions staff work with people of all ages, helping them protect, grow and preserve their assets through an individualized approach. As a well-known financial professional, Arif Halaby is also the host of “Total Financial Solutions Safer Money Hour” on KHTS AM-1220. Launched in 2004, the show offers listeners retirement planning tips and guidance for dealing with today’s ever-changing financial needs.  

Total Financial Solutions, Inc.

24322 Main Street

Newhall, CA 91321

661-753-9683

800-990-7344

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Arif Halaby, Total Financial Solutions, Financial Planning, Planning for Retirement, Retirement Planning