Countdown to Financial Freedom: Your Path to a More Meaningful, Active, and Vibrant Retirement

Countdown to Financial Freedom: Your Path to a More Meaningful, Active, and Vibrant Retirement

by Mark Avallone


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Product Details

ISBN-13: 9781504361903
Publisher: Balboa Press
Publication date: 10/03/2016
Pages: 224
Product dimensions: 6.00(w) x 9.00(h) x 0.51(d)

About the Author

Mark Avallone is the founder and President of Potomac Wealth Advisors, LLC, an independent financial advisory firm, serving clients through holistic financial planning and wealth management. Avallone writes on a variety of financial topics, and his contributions have appeared in the Wall Street Journal as well as in Forbes where he is a regular contributor. His insights have also appeared in USA Today, U.S. News & World Report, The Washington Post, and other leading publications. Mark and his wife, Christine, reside in the Washington, DC, area with their daughter Abigail.

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Countdown to Financial Freedom

Your Path to a More Meaningful, Active, and Vibrant Retirement

By Mark Avallone

Balboa Press

Copyright © 2016 Potomac Wealth Advisors, LLC
All rights reserved.
ISBN: 978-1-5043-6190-3


Million-Dollar Poverty

Millionaire Misconception

If you ask a group of baby boomers, "Who is the first millionaire you ever heard of?" there's a good chance they'll say, "Batman." As we know, Batman, under his famous black cape, was really Bruce Wayne. He was the only son of Dr. Thomas and Mrs. Martha Wayne, two very wealthy and charitable socialites living in Gotham City. Bruce was brought up in a happy, wealthy, and privileged lifestyle in Wayne Manor until he was 8 years old when his parents were killed by a small-time criminal. After his parents' death, Bruce vowed revenge on all things evil — that mostly included members of Gotham's criminal underworld. What helped make his promise of revenge possible was the fortune he inherited from his wealthy parents. Bruce's wealth provided him with the necessary seclusion (i.e., the Batcave), physical means (e.g., crime fighting equipment, crime labs, Batmobile), and flexible schedule (no 9-to-5 job in a cubicle for Batman) he needed in order to fight crime. So what's Batman got to do with the middle class? Plenty.

A million dollars back in 1939, when the comic book character first appeared, was an enormous amount of money. Even well into the 1960s and 1970s, when the Batman television series was at its height, having a million dollars seemed like the answer to all of life's financial struggles. Most Americans never imagined they could accumulate a million dollars, let alone need that much to retire. The world was a less expensive place to live, and many people had reliable lifetime pensions once they retired. In today's world, however, millionaire Bruce Wayne might be just another affluent, upper-middle-class guy facing the challenge of enjoying life while not running out of money at some point.

This is because being a millionaire or having a million dollars in your various accounts — checking, savings, investments, 401(k) plans, and so on — may not be enough to maintain an affluent or even a middle-class lifestyle. You may not own a car as cool as the Batmobile, wear a leather cape, or live in Wayne Manor luxury, but if you are accustomed to a middle-class or affluent lifestyle during your working years, you may need more than a million dollars in order to continue the same lifestyle during retirement. If you are young or even approaching middle age, adjusting for increases in the cost of living over the next 20 years or longer, you may need several million dollars at retirement in order to remain middle class. If you are still of the mindset that, in 20 or 30 years, $1 million will buy you a middle class retirement, you might be very disappointed. In the future, the income generated off of $1 million may not be able to cover even a lower-middle-class budget! That is what I refer to as "Million-Dollar Poverty."

Unfortunately, most of us will not inherit anything like stately Wayne Manor or millions of dollars from a well-to-do family. The fact is the vast majority of us will be solely responsible for accumulating the millions of dollars needed to maintain the middle-class or affluent lifestyle we have achieved or aspire to achieve. The good news is with a solid understanding of your current financial state and a commitment to create and follow a well-thought-out plan, you can begin to visualize the financial freedom you want. You'll see the term "financial freedom" a lot throughout this book. For many people, and for the purposes of this book, financial freedom is the ability to work only because you want to, and not because you have to. Accumulating enough assets to allow for that freedom is the challenge millions of Americans face.

Middle-Class Poverty and Million-Dollar Poverty

I use the term "Middle-Class Poverty" to describe the unwanted, dramatic drop in lifestyle experienced by some middle-class or upper-middle-class retirees, due to the lack of adequate investment income to sustain their lifestyle through their retirement years. When this happens to a family with $1 million or more of investable assets, I call it "Million-Dollar Poverty."

Let's say you've saved $1 million. That may sound like enough to enjoy your financial freedom, but as I will explain in detail later, applying a 4% withdrawal rate to your $1 million generates only about $40,000. You can also hopefully consider additional social security income — but even so, will that be enough to afford your desired lifestyle? If you are a current retiree, the $40,000 plus your social security payments may amount to a reasonable income, especially if you have a home with no debt and a modest lifestyle. But for future generations, after considering the impact of inflation, this may not be the case.

Let's look at what retiring with $1 million might mean for a young baby boomer, a Gen Xer, and a Millennial.

* Baby boomer: If you are 52 and you estimate retiring in 15 years (at age 67) with $1 million saved, when we adjust for a hypothetical 3% average annual inflation rate, your $1 million will be worth about $641,861 in today's dollars. Using a 4% withdrawal rate, your $641,861 will generate only $25,674 in today's purchasing power for your first year of retirement. (Note: if you stick to a 4% withdrawal rate, your actual withdrawal amount may increase or decrease, as the invested amount in your account will fluctuate. But using a 4% withdrawal rate is a good rule of thumb.)

* Gen Xer: If you are 42 and estimate retiring in 25 years (age 67) with $1 million saved, it will be worth even less. Adjusted for that same hypothetical 3% average annual inflation rate, your $1 million will be worth only $477,605 in today's dollars at retirement. Using a 4% withdrawal rate, your $477,605 generates only $19,104 in today's purchasing power in your first year of retirement!

* Millennial: If you are 32 and estimate retiring in 35 years (age 67), then your $1 million will be worth far less. Adjusted for the same 3% average annual inflation rate, your $1,000,000 will only be worth $355,383 in today's dollars at retirement. Using a 4% withdrawal rate, your $355,383 generates only $14,215 in your first year of retirement as measured by today's purchasing power!

So you can see why I call it "Million-Dollar Poverty" and how it can be a reality, especially for younger people. Let's say you are 32 and want to retire on an income equivalent of $80,000 in today's dollars (not counting social security). Adjusting for an average annual 3% inflation rate over the next 35 years, your $80,000 of income will be worth about $28,430 in today's dollars. Therefore, at retirement, in order to live off an inflation-adjusted income of $80,000, you will need to generate an income of about $225,109 in your first year of retirement. And how much money, using a withdrawal rate of 4% is needed to generate your target income of $225,109? The answer is a whopping $5,627,725! And this is just to retire into an inflation-adjusted, middle-class income of $80,000. For families who have been living on a combined household income greater than $80,000, their need to save may be even higher if they want to maintain their current lifestyle.

These hypothetical examples demonstrate the impact of inflation and the magnitude of the challenge for younger people. Remember: the future level of purchasing power generated by $1 million can decline every year, and eventually you may need to be a multimillionaire in order to remain in the middle class at retirement. It's hard to visualize a multimillionaire struggling to maintain a middle-class lifestyle, but this may well be the case in the future. This idea of Million-Dollar Poverty comes as a surprise to a lot of people; however, once they get a sound plan in place, they get a better sense of the concept and express relief in seeing that they can plan and try to avoid it.

Sustainable Withdrawal Rate

Earlier, I noted that having $1 million today in retirement could generate $40,000. How did I arrive at this figure? I used the "4 Percent Rule." Widely attributed to financial planner William Bengen, who first wrote about it in 1994, the rule states, in simplified terms, that 4% is a rate at which to withdraw annually from your investments without running out of money throughout your retirement. Let's apply the 4 Percent Rule, and let's assume your money remains invested during retirement in a diversified portfolio while you are withdrawing from your accounts. In this case, $1 million can generate $40,000 of income in the first year (considering market conditions, rates of return, and other factors that potentially affect future amounts). While you are withdrawing money, it is important that your assets stay invested; otherwise you would be withdrawing principal and rapidly depleting your account value. Market conditions, changes in your asset allocation, and the timing of your retirement (e.g., if you retire just before a market crash) can change your individual results; but overall, 4% is a good place to start when considering how much income your portfolio can generate.

Since Bengen first wrote about a 4% sustainable withdrawal rate to fund a 30-year retirement, subsequent research has backed it up. For example, the 1998 "Trinity Study," so called after Trinity University where it was conducted, closely replicated Bengen's findings. The Trinity Study tested stock/bond mixes under various historical market conditions and concluded, in simplified terms, that 4% is a sustainable withdrawal rate that will maximize income during retirement over 30 years. (This is based on historical data and is no guarantee of any future rate of return for each specific example.)

Another study in 2015 further reinforced the 4 Percent Rule. Applying Mr. Bengen's asset allocation of 50% stocks and 50% intermediate-term government bonds, and analyzing the results over 60 rolling, 30-year periods between 1926 and 2014, the study generated similar results to those of the Bengen and Trinity studies. Of these 60 rolling, 30-year periods, the number of times that a withdrawal rate of 5% allowed an investor to avoid running out of money was only 68%. This is hardly high enough to give an aging retiree a lot of comfort. However, with 30-year time horizons and a 50% stock and 50% bond allocation, the success rate was 100% with a 4% initial withdrawal rate. These results show that unless you expect to die within a few years or are willing to risk running out of money, you should target no more than a 4% withdrawal rate from your retirement assets.

Metaphorically, a sustainable withdrawal rate is like the "two-drink limit," the common sense credence that it's wise to limit yourself to only one or two drinks before getting behind the wheel of a car. Drinking more than that could put your (or someone else's) physical life in peril. Similarly, withdrawing more than 4% per year in retirement could potentially put your or your family's financial life in peril!

My goal in this book is to educate those of you who are striving to attain financial freedom. Understanding the amount of money you will need to retire, the impact of inflation and taxes, and the concept of sustainable withdrawal rate are essential to identifying how you will achieve and maintain financial freedom. Applying the concepts in this book can help you prepare for a sound financial future. In this book, I offer examples of people who, in the face of challenges, were able to apply sound strategies and achieve their goals. I also describe how others fell short. Below are two stories I think you'll find interesting.

Charles and Leslie Dougherty

Charles and Leslie Dougherty are an upper-middle-class couple who live, well, wherever they want. While I have not had the pleasure of working with the Doughertys, I am impressed with their personal story.

After years of careful planning and following a well-developed savings and investment strategy, they were able to retire somewhat early when Charles turned 50. Their plan was to live off their savings and investments until they hit the "official retirement age" of 65, when they would start drawing on pensions, investments, and 401(k) savings.

To kick off retirement, they bought a live-aboard sailboat, gave up their condo, car, and furniture, and never looked back. They sailed the waters of the Chesapeake Bay, the Caribbean, and the Intracoastal Waterway from Annapolis to Florida for 15 years. But this story doesn't only have Charles and Leslie sailing carefree into the sunset. Unfortunately, they hit rough waters a few years into their adventures when they found that unexpected expenses and some extravagant lifestyle choices were critically jeopardizing their nest egg.

Charles holds an MBA degree and is an engineer, lawyer, and author of 17 fiction and nonfiction books. He considers himself well versed in personal finance strategy, but even he admits that inflation, stock market declines, and unexpected expenses caught him off guard. He hadn't planned, for instance, on the need to spend $5,000 for a broken navigation system for the sailboat. Furthermore, he and Leslie didn't realize they were spending more than $2,000 per month dining out at pricey marina restaurants. They were making excessive withdrawals from their savings in order to cover these and other expenses that fell outside the careful planning they had put in place years before. In a nutshell, the Doughertys were not adhering to a sustainable withdrawal rate. To compound matters, a decline in the stock market meant slower growth in their investments than they had anticipated. The Doughertys were at risk of running out of retirement funding too early. Once they took time to consider this reality, they were very concerned.

Charles and Leslie understood that their ability to adapt in the present would pay off in the future. With some forethought, creativity, and discipline they found ways to reduce spending while not having to compromise too much on their lifestyle. Instead of the $5,000 navigation system, they bought a $1,000 depth finder that met their needs. They better managed their monthly cash flow and started cooking more at home — it cost less than going out, and it was a fun way to spend time together. Once Charles and Leslie took the time to understand the concept of sustainable withdrawal rate, it was easier for them to remain disciplined and committed to their plan.

Soon after, the Doughertys' retirement plan was back on track. With continued commitment to their new strategy, they were able to resume living the retirement of their dreams. After living for 15 years on their boat, they decided that, while they would continue to sail occasionally, it was time to buy a car and tour the country sight-seeing and visiting friends and family, especially their six grandchildren — which they now do often and without worrying about how to fund their trips!

The Doughertys don't consider themselves to be rich, but they do consider themselves financially free. As a couple, they started saving and investing early and remained committed to a well-thought-out financial plan, even adjusting their strategies when needed. Thanks to sound planning principles — that we will cover later in this book — the Doughertys have been able to afford to keep life's pleasures rolling during retirement.

The Doughertys' story can be a reminder to younger couples that if you start early and focus on your goals, you have a better chance of reaching them. Their experiences also show us that a couple needs to anticipate potential obstacles at every step of their financial life. This is true even later in life when you are drawing down on your assets (the distribution phase).

Retirement planning is not an exact science, even for the most educated among us. Especially in light of all of the economic challenges Millennials and Gen Xers will face in order to remain middle class, let alone affluent, there is a heightened need to make a commitment and develop the discipline to save and remain on plan. Families should be prepared to get creative with their spending choices — and also be prepared to make some tough decisions in order to afford the lifestyle that they will want in retirement.


Excerpted from Countdown to Financial Freedom by Mark Avallone. Copyright © 2016 Potomac Wealth Advisors, LLC. Excerpted by permission of Balboa Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Table of Contents


Chapter 1. Million-Dollar Poverty, 1,
Chapter 2. The Middle-Class Challenge, 17,
Chapter 3. What Is Your Unique Formula, 41,
Chapter 4. Four Hurdles on Your Path to Financial Freedom, 59,
Chapter 5. Avoiding the Middle-Class Traps (EASY), 87,
Chapter 6. Avoiding the Four Enemies of the Investor: BITE, 103,
Chapter 7. Avoiding the Financial Devastation of the Three Ds, 119,
Chapter 8. 401 Not OK, 137,
Chapter 9. Countdown to Financial Freedom, 163,
Chapter 10. What's Next?, 191,
Calculation to Determine,
What is Your Unique Formula?, 203,
Sample Cash Flow Worksheet, 207,

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Anonymous More than 1 year ago
"I have just completed Mark Avallone's Countdown to Financial Freedom. What I most appreciate is the clarity and coherence of the case he presents. This is an important book with an important message, and not written in "industry-speak." I found it of such value that I just ordered 2 copies for our daughters." Jeff Miller, President, Jeff Miller Consulting Alliance