15 Years of the Perennial Income Model: What Have We Learned?

Unlock the Benefits of Roth Conversions – Welcome to the Webinar (0:00)

Scott Peterson: Welcome, everybody. Let’s get this thing started. My name is Scott Peterson. I’m the managing partner of Peterson Wealth Advisors.

We appreciate the time you’re willing to spend with us today. I know we have a mix of existing clients familiar with our processes and a group of non-clients wondering what this presentation is all about. I promise that both groups—both non-clients and existing clients—will benefit from this presentation.

Clients will be reminded how their money is invested and how their income is being created to support them during their retirement. Our non-clients will be introduced to a unique, proprietary retirement income plan that will change the way you look at retirement, a plan that could significantly enhance your retirement experience.

The big reason we’re presenting this webinar topic today is because I recently released the revised edition of my book “Plan on Living,” which outlines the Perennial Income Model™, our process. It also discusses what we’ve learned over the last 15 years since its implementation. I have a whole chapter dedicated to our lessons learned and another chapter on some of the tax savings opportunities we’ve discovered using the Perennial Income Model.

Here’s a bit of background. In 2007, we created a process to provide a stream of inflation-adjusted cash flow to our retired clients, which we named the Perennial Income Model. This year, the Perennial Income Model is turning 15 years old. We now have more than 500 retired households depending on this model for their retirement income.

We’ve experienced a lot over the last 15 years, including stock market ups and downs and two bear markets, so we’ve learned many things. The question is, how has the Perennial Income Model performed? What have we learned since creating and adopting this methodology back in 2007? We intend to answer these questions for you today. But first, let me take a couple of minutes to remind you or maybe introduce you to what the Perennial Income Model is and how it works.

I think the best way to understand the Perennial Income Model is to take you back to 2007 and explain how it was created. Back in 2007, this was me before I involuntarily joined the Shrek lookalike contest. I was a lot younger back then.

Anyway, it was a frustrating time for me, to say the least. Those of you who were with me back then remember what was going on in 2007. We had just come off the dot-com bubble bursting in 2000, started to gain some traction, and then 9/11 happened. Those years were tough.

I was frustrated with the investment process because I was managing money for many retirees. I recognized that the investment process was broken. It just didn’t work. Prior to 2007, I felt like I was expected to do the research, follow the right economists, accurately guess the future, and invest my clients’ money in the best investments, getting them in and out of the stock market at the right time. It was an impossible task, and it remains impossible today.

How do you successfully guess and invest in the future when unforeseen events like terrorist incidents and pandemics get in the way? The simple answer is that you don’t. Investing by attempting to guess the future didn’t work in 2007, and it still doesn’t work in 2022.

I understood in 2007, and it is still true today, that retirees need safe money to draw income from when the stock market drops. They also need to be invested in stock-related investments or equities to keep up with inflation. There’s a delicate balance to strike, and how do you possibly strike that balance without having a plan?

I recognized in 2007 that most retirees were going through retirement without any formal plan for creating and maintaining their retirement income. Working without a plan is dangerous. Fear and greed become the greatest influences in our investing, and emotionally driven investment decisions never produce good outcomes.

In 2007, and still today, there were and are many rule-of-thumb guidelines thrown about, but I didn’t find any specific plan to help retirees know how to invest, how much they could and should distribute from their IRAs and 401(k)s, or a plan to minimize both risks and taxes in their situation. I was looking for a plan to match retirees’ current investments with their future income needs, but no such plan existed.

During this frustrating time, I did a lot of research and came across a paper written by Nobel Prize-winning economist William Sharpe, a Stanford guy. I found his paper particularly compelling. In his paper, he introduced the concept of time-segmented investing to provide retirement income. He suggested that when a person retires, their investment funds should be divided into 30 separate investment accounts, with each account responsible for providing income for one year of a projected 30-year retirement. There would be an account for the first year of retirement, a second account for the second year, and so on until the plan is built out over 30 years.

Okay, so the value of such an approach to investing was obvious to me because the money set aside to provide income in the first year of retirement needs to be invested much differently than the money you won’t need for 30 years. In my opinion, at the time, I thought his relatively simple and straightforward academic approach to investment management for retirees beat all the market timing and future-guessing methods used by the investment industry.

To help you understand this a little better, the money set aside in the account to provide income during the first year of retirement has to be absolutely safe and stable. It can’t be invested in the stock market, as it would be subject to significant market fluctuations. Neither fighting inflation nor getting a large investment return is a concern with account number one because of its short duration. So, safety and stability are paramount. First-year money should be held in ultra-conservative investments and should not be subject to much volatility.

On the other end of the spectrum is the money designated to provide income during the 30th year of retirement. The objective of this account is to keep up with the erosion of purchasing power due to inflation. Dollars within this account will have to be invested in inflation-fighting equities. Short-term volatility is expected but irrelevant in this account because the money won’t be needed for three decades. Collectively, equities have never lost value and have always beaten inflation over time.

The 30 separate accounts would start as very conservatively invested and then progressively become more aggressive as the need for income from these accounts is pushed out over 20 and 30 years. By following this program of investing, the retiree’s short-term risk of market volatility is dissolved, and the long-term threat of inflation is managed.

As much as I liked Dr. Sharpe’s concept in theory, it wasn’t practical to implement. I didn’t want to create and manage 30 separate accounts for each of my retirees, and certainly, my retired clients didn’t want to monitor 30 separate accounts either. The hassle and expense of this endeavor rendered the academically solid idea of time-segmenting retirement funds nearly impossible.

Not long after reading Dr. Sharpe’s paper, I visited a Christmas tree farm where you cut down your own tree. At the tree farm, I walked by the saplings, then the two-foot-tall trees, and then various progressively larger pine trees until I reached a group of trees prepared for harvest that year. The smaller pine trees in their various stages of growth were there to provide future income for the Christmas tree farm. The farm had planned years in advance for its future income needs.

That day, I thought that the process of segmenting today’s investments to match future income needs is very similar to how this Christmas tree farm operates. The farm had implemented a time-segmented approach of its own. I remember thinking, if the Christmas tree farm can figure out how to do this, I should be able to do the same. There must be a way of transforming the concept of time segmentation into a practical model of investment management.

As I thought more about this, I realized that I needed to adjust the length of time for each account. I changed the time each account had to provide income from a one-year period to five years. Managing six accounts that provided income for five-year segments versus the original one-year timeframe was workable and followed the original objective that Sharpe expressed.

I ended up with accounts that covered the first five years of retirement, a second account that covered the second five years of retirement, and so on until 30 years of retirement were covered with six manageable investment portfolios. In my office, we call these five-year periods segments. Once all the wrinkles of transitioning an academic idea into a workable methodology were ironed out, we launched our trademarked version of time segmentation, which we call the Perennial Income Model.

Let me share with you the Perennial Income Model and how it works. Here’s an example using a 25-year versus a 30-year plan for the sake of saving a little time today. We start with a million dollars and end with a million dollars in 25 years. That’s the goal of the plan.

We’re going to divide the million dollars that this person has into six different segments. Each segment is responsible for creating income for a five-year period of retirement. Segment one takes care of the first five years of retirement, segment two the second five years, and so on. We also have a legacy segment at the end. The responsibility of the legacy segment is to replace the money we started with. So we start with a million dollars, and the goal is to end with a million dollars in 25 years.

As you look at this, I want to point out a couple of things. First, we use very conservative assumptions.

As far as growth rates go, we’re the only people I know who invest like this or use this model. So, what advantage do we have to use unrealistic assumptions? All we would do is make our clients unhappy and make this whole program unrealistic. Therefore, we use very conservative assumptions.

Notice in segment one, we’re only showing a 1% growth rate, segment two, 3%, and so forth. Have we done better? Are we doing better? Absolutely. But again, what good will come from using aggressive growth rates here? So, we are very conservative. The idea is to underpromise and overperform, which, in fact, we have done.

The second thing I want to point out is in this model, we have a design where every five years, you get a raise to keep your money in line with inflation.

The third thing I want to point out is the total value column. When you look at segment one, we’re spending all of $220,979 to provide income for the first five years. We’re putting $220,000 of the original million dollars there, and it’s going to provide $3,774 per month in income for the five-year period.

We truly are spending all of that $220,979 to give you income for the first five years, so you would think the total value of the account would be going down. However, notice the total value column. While we’re spending segment one, segments two through your legacy segments are all growing and invested, so your total account value stays relatively flat, around a million dollars.

Next, look at the total distributions over 25 years. This client would take out $1,562,336 as income. The idea is to start with a million and end with a million dollars. So, the client would have $1,562,336 in income and still have the million dollars they started with.

Now, the question is, can we pull more income out of the model? Absolutely, we can. There’s no rule saying we have to end with a million dollars. Some people are very concerned about leaving a legacy, while others are not. We do like to leave some money there as an insurance policy because you don’t know what’s going to happen at the end of life. There could be nursing home expenses or other costs that could deplete your accounts, or you might live to be 105 years old. So, we want to leave some money as a safeguard. Any leftover money would go to your heirs or charity, as you see fit.

Now, let me talk to you about harvesting. It’s funny when I show this screen at Education Week, that’s when all the cameras come out. I’m sure there have been some screenshots today, and that’s okay. But I want to warn you that there’s much more to this than creating a spreadsheet. Sometimes I feel like the negligent adult who tosses the keys to a brand new sports car to a 16-year-old and says, “Here you go, this is all you need.”

Even though you may be very adept at creating spreadsheets or able to put together a plan following this pattern exactly, please don’t think that you’re done. Quite the contrary, you’ve just begun. A time-segmented distribution plan takes a couple of hours to create, but it takes 30 years of discipline to successfully implement. Those who create spreadsheets, invest, and then forget about their investments or abandon the plan will not have a successful outcome. When investor discipline fails, the plan will fail.

The essential step of harvesting in a time-segmented program is where the rubber meets the road and makes this thing work. Harvesting, in financial terms, is simply transferring riskier, more volatile investments into a conservative and less volatile portfolio once the target or goal of each segment is reached.

The Perennial Income Model is very goal-based. For each segment, we change more aggressive investments into more conservative ones once we hit our target numbers. Harvesting adds order and discipline to the investment process, resulting in better investment returns, less risk, and less emotionally driven selling.

Without harvesting, the time-segmentation model becomes more aggressively invested as the retiree ages, which doesn’t make sense for 80 and 90-year-old retirees to have all their money in equities. Thankfully, because of harvesting, that doesn’t happen.

I will tell you, the processes of monitoring and harvesting at the right time are imperative to the success of a time-segmented model. We have developed computer programs to manage the 500 clients we have. We closely monitor and harvest every segment of each client’s portfolio to maintain order, reduce risk, and ensure the plan works.

On the screen here, I want to point out that this is an actual Perennial Income Model we put together for one of our clients very recently. We started with one and a half million dollars, and the idea is to end with one and a half million dollars in 30 years. We had to add that extra segment, but what makes this more real than the previous screen is that I included other income in this model. This other income includes this gentleman’s pensions, Social Security, and his spouse’s Social Security.

The Perennial Income Model spins off the income, and then we add the other income (Social Security, pensions, etc.) to come up with a total income column. This way, we can project what the future income for this client will be and solve for the total income. We add the other income, know the starting amount of money, and let the computer solve to maximize the total income for the client.

The Perennial Income Model truly has withstood the test of time. It’s a goal-based program that provides a framework for investing. Frankly, I wouldn’t know how to invest people’s money unless we had a method to match their current investment portfolio with their future income needs. The Perennial Income Model does that. It provides a framework for distributing the right amount of money throughout retirement. It helps us know how to manage risk and market volatility and how to take care of inflation.

As you will soon see, it is an excellent tool for organizing and implementing tax-saving strategies. The initial goal of the Perennial Income Model was to provide a logical format for investing and generating inflation-adjusted income from investments during retirement. We accomplished this goal by projecting a retiree’s income over multiple decades. Initially, we did not fully anticipate all the accompanying benefits that would result from projecting a retiree’s income over a long time period.

Unique planning opportunities have manifested themselves, and our eyes have been opened to several benefits we could not have foreseen before creating and using the Perennial Income Model. As we’ve projected income streams for our clients throughout their respective retirements, we have found that the Perennial Income Model satisfies many roles for retirees that few systems or investment programs can provide.

We want to share with you some of the advantages that we have seen our clients benefit from since implementing the Perennial Income Model back in 2007. So, let me turn some time over to Alex Call to go over some of these.

The Perennial Income Model is a Guide (22:17)

Alex Call: Thanks, Scott, for setting up everything. As we fast forward 15 years, we can see what some of these benefits are that Scott has been talking about. What we want to do here is, as Mark shows the slides, understand how the Perennial Income Model works as a guide and what we’ve learned from the past 15 years.

The Perennial Income Model will be a guide in four different areas. The first is distributing the right amount of money from your investments through time segmentation. Then we’ll touch on how withdrawing income from the proper accounts can maximize tax efficiency, and Mark will talk about this in more detail. The Perennial Income Model helps us determine when to start Social Security benefits, pensions, and other sources of income, and how they should fit into your overall plan. Lastly, Alek will discuss how the Perennial Income Model serves as a guide to managing inflation and volatility risk.

You can see that we will focus on tax efficiency, Social Security, managing inflation, and volatility. Mark, if you go to the next slide.

So Scott primarily talked about how the Perennial Income Model offers guidance in distributing the right amount of money from your investments. However, as we look at those different spreadsheets, I want you to know that the Perennial Income Model is not something set in stone. It offers flexibility.

One of the most important considerations an investment advisor should be advising their clients on is whether their clients have sufficient funds to make major purchases and sustain certain lifestyles. Having the Perennial Income Model helps us achieve that. For example, let’s say you are five or six years into the plan and you’re taking out that stream of income, but you need $30,000 to $50,000 for a new car, kitchen remodel, or roof repair. With this guide, we can determine where that lump sum should come from and how it will affect your income moving forward. We can weigh the pros and cons and see the consequences of taking out large lump sums of money.

Other examples include needing less income in the first few years of retirement but wanting more later, or wanting more income in the first 10 years of retirement for travel or other activities. The Perennial Income Model provides the flexibility to accommodate these situations. Every situation is different, so we don’t want to get too specific here, but just know that there is a lot of flexibility within the Perennial Income Model.

Next, I want to talk about how the Perennial Income Model helps us minimize taxes. The first step of the Perennial Income Model is to maximize income, but we have also noticed that it allows us to minimize taxes. Mark will talk more about this in depth. Essentially, the Perennial Income Model helps us determine how much we can pull from our accounts and which accounts we should pull from.

As we work with clients and prospects, we often see that they have a “junk store” of investments. It’s not that their investments are junk, but they are unorganized. They might have a couple of 401(k)s from old employers, a Roth IRA, a trust, or a joint account that isn’t a retirement account. The Perennial Income Model allows us to organize these accounts into a tax-efficient stream of income designed to minimize taxation throughout every stage of retirement. We look at it from a 30-year perspective, aiming to minimize taxes not just in year one of retirement but throughout the entire period.

Mark will dive deeper into the tax aspects, but the next portion I want to cover is how the Perennial Income Model serves as a guide to know when to claim Social Security. You might think the goal is just to maximize Social Security, but that’s not the case. If you want to maximize Social Security, you would postpone benefits until age 70, with the break-even point being your early eighties. However, the question is not just about maximizing Social Security but about maximizing total income in retirement.

For example, if you retire at 65 and take Social Security at 70, what money will you live on during those five years? Is it worth liquidating a large chunk of your 401(k) to maximize Social Security? Also, consider your spouse’s age difference and work history. When will they take their Social Security? These factors must be considered. The Perennial Income Model allows us to look at the big picture, not just one aspect of retirement.

The same principles apply to pensions or other mailbox money, such as rental properties. Should you continue with a rental property? When does it make sense to sell it? The Perennial Income Model helps us make these decisions by maximizing your total income in retirement.

Things like that really give us the guidance to know what to do in these instances. Now, Alek is going to talk a little more about that final area where the Perennial Income Model can be a guide.

The Perennial Income Model is a Behavior Modifier (30:55)

Alek Johnson: Perfect. Thanks, Alex. Today, I’m going to talk about how the Perennial Income Model is a behavior modifier. To start, I’m going to say something that may catch you off guard: in theory, investing is actually easy. Now, I know what you may be thinking—easier said than done, right? But when you think about it, all you need to do to be a successful investor is to match your short-term money needs with short-term investments and your long-term money needs with long-term investments. If you can do that, you can be a pretty successful investor.

So, what gets in the way? Because as we all know, actually implementing this type of strategy can be much more difficult. There are many reasons, including misinformation, distractions, and perhaps the biggest one—our own emotions. We often get in our own way, and our emotions cause us to be naturally horrible investors.

In general, we are shortsighted, prone to panic, and have more biases than we are often aware of. One of the biggest biases we have is loss aversion. Studies show that the fear of losing is a much more powerful emotion within us than the satisfaction of gaining. In other words, we feel almost twice the pain when we lose $100 than the joy we feel when we gain $100. This predisposes all of us to be bad investors. One bad experience in the market, which unfortunately is often self-inflicted, can cause a person to shun the explosive growth of equities over their lifetime. There are millions of people today who have missed out on unbelievable market gains because of the fear of seeing their accounts experience a temporary loss.

On the flip side, when investors recognize the reason for owning a specific investment, understand how that investment fits into their overall plan, and know when that specific investment will be needed to provide future income, investors can become quite rational. When the crash of ’08 and ’09 occurred, about half of our clients had transitioned to the Perennial Income Model, and half had not. The investors who had the date-specific, dollar-specific structure that the Perennial Income Model provided made better decisions than those who didn’t. They didn’t panic because they knew why they were holding onto those volatile equities. The therapeutic organization of the Perennial Income Model is extremely important because the decision not to sell during a future market decline may end up being the most important investment decision you will ever make.

Now, let me show you specifically how the Perennial Income Model can modify behavior. We know that getting the needed return while taking on the least amount of risk possible is the foundation of successful investing. The two main types of risks retirees face are volatility and inflation. Volatility refers to the constant ups and downs in the market, while inflation is the rising cost of goods and services, which erodes your purchasing power.

To give you an example of inflation, if we assume a 3% inflation rate, a dollar’s worth of purchasing power today will only purchase 41 cents worth of goods and services in 30 years. These two risks are very prevalent for every retiree, but the Perennial Income Model helps us solve and manage both of these risks.

Using our example, we address volatility within the first few segments of the model by investing very conservatively. We know that your short-term money can’t be subject to the daily fluctuations of the market. In a down market, if you had all your money invested in stocks when you are drawing your income, it would be horrifying to be forced to sell your positions at extreme discounts due to needing that money for living expenses. In segments one and two, we are only assuming a 1% and 3% growth rate as this is your conservative money. When the market is down, the world will tell you to sell all your holdings and salvage what you can from your portfolio. The Perennial Income Model, on the other hand, tells you to hold your positions and wait out the market as your income needs are protected.

We address inflation with the latter segments of the model. You can see here that we assume much higher growth rates as these volatile equities are traditionally higher-yielding investments that can beat inflation and maintain your purchasing power over a 30-year retirement. While your loss aversion bias will tell you to avoid investing in stocks now that you’re retired, the Perennial Income Model tells us that we need to invest in equities to beat inflation.

I’m now going to turn the time over to Carson to discuss how the Perennial Income Model serves as a guardian.

The Perennial Income Model Serves as a Guardian (36:00)

Carson Johnson: Thank you, Alek. I’m happy to be here and excited to share a couple of ways that the Perennial Income Model serves as a guardian for our clients and retirees.

Protects us From Future Selves

First, the Perennial Income Model can protect us from our older selves. Studies have shown, and in our experience, we have seen that as our mental capacity declines and our memory worsens, our financial decision-making abilities also decline.

Many of you have endured bear markets and haven’t allowed yourselves to panic or make rash investment decisions, but that doesn’t mean you’ll continue to do so. Cognitive ability decline in retirement is a very real challenge.

We’ve seen multiple times that a confident newly retired 65-year-old can morph over time into a less confident and slower-to-comprehend 80- or 90-year-old. Sooner or later, this happens to all of us to some degree or another, and it’s crucial to be prepared.

It’s also valuable to become familiar with and have your money managed within a well-defined and goal-specific structure, a retirement income plan, while you’re mentally on top of your game. Just like Alec mentioned, having a logical guidance system for those of us in retirement is important. An even greater advantage is the knowledge that you have a plan in place that you can stick with for the balance of your life, even if your cognitive abilities decline.

When a Loved One Passes Away

The second way the Perennial Income Model serves as a guardian is when a loved one has passed away. An important question I suggest all retired couples ask themselves is, if you’re the designated money authority in your household, who will support your surviving spouse in making important financial decisions once you slip away from this life?

It is a cruel reality that all widows and widowers have to make important decisions immediately after the passing of their loved one. New widows and widowers are often in shock, facing depression, and struggling to get through their day-to-day lives, let alone trying to manage their finances or the ups and downs of the market.

Experience tells me that there is more fraud committed against this group than any other group we’ve seen. For instance, we’ve seen situations where new widows have been approached by buyers to purchase, for example, a motor home worth $100,000 and ended up selling it for $19,000 because they were desperate for cash and worried about their future income needs. Likewise, we’ve heard of situations where houses and cabins were sold for hundreds of thousands of dollars less than their actual value.

We often hear that, because a loved one has passed away, survivors feel like their lives have turned upside down. By having a plan like the Perennial Income Model, it helps ensure safety and peace of mind, so their financial lives don’t have to be turned upside down as well.

Now, don’t get me wrong. When a loved one has passed away, there will certainly be changes. There will be documents that the surviving spouse will have to sign to move accounts from the decedent to the surviving spouse’s name. But overall, that surviving spouse follows the same Perennial Income Model that they had established many years prior. It provides that peace of mind for our clients.

One of the lessons we’ve learned over time is that we will all make important financial decisions during these vulnerable times. During these times, it’s vital to have a plan in place. As the markets go up and down and our life situations change, having a properly implemented and executed Perennial Income Model provides tremendous reassurance and peace of mind to our clients that their income is taken care of and that they have a plan in place.

I’ve realized when working with clients that it turns these major events into something manageable and that they have confidence in an inflation-adjusted stream of income that will last throughout their retirement. Now I’ll pass the time over to Daniel.

The Perennial Income Model can be a Bad Luck Insurance Policy (40:24)

Daniel Ruske: Awesome. Thank you, Carson. Very important. Perfect. In this portion, we will cover how the Perennial Income Model can be a bad luck insurance policy for retirees from an unfortunate sequence of returns. In other words, it can protect you if you are unlucky and happen to retire around the same time as a stock market crash.

As we have already discussed, every stock market correction is temporary, but that knowledge is only helpful if you are well-positioned and able to select which investments to liquidate during a stock market correction.

Let me give you an example about Mike. Mike is 60 years old and has carefully planned for his anticipated retirement. He’s had a very good career and saved over a million dollars in his retirement accounts. Mike also understands that it is important to have a portion of his money in equities to keep up with inflation, but also have a portion in bonds to protect him from volatility. After doing a little research, Mike has decided to go with a Vanguard 60/40 balanced mutual fund. What this means is Mike has his money in a single fund that has 60% stock and 40% bonds.

The day finally came, and Mike retired. He started taking a monthly distribution from his mutual fund. Each month, he simply sells a share of this mutual fund to support his monthly living. For the first few months, Mike is very pleased with his investment choice, as the market has done very well. He is very comfortable liquidating the proportional amount of 60% stocks and 40% bonds for his monthly needed income.

However, after just four months, his worst fears came to pass. The stock market dropped by 50%. Unlike during his working years, Mike could not just wait for the stock market to recover. He had to withdraw a portion of his money every month from his mutual fund just to pay the bills. As Mike withdrew his monthly stipend, he realized that he was liquidating a proportional amount of his stocks and bonds each month from his balanced mutual fund. This meant that he was systematically selling stocks at a loss every month that the stock market remained down.

Mike was frustrated and thought to himself that he was probably the most unlucky person on the planet. Unfortunately, Mike is not alone.

This exact scenario happens and will continue to happen to millions of new retirees every time there is a stock market correction. It is important to understand though that Mike’s mistake was not in being too aggressively invested. Because a 60% stock/40% bond portfolio may be a very reasonable allocation for a new retiree. Mike’s mistake was failing to have a time-segmented income plan, that allowed him to only liquidate the least impacted non-stock portion of his portfolio to provide his monthly needed income during the stock market downturn.

To further illustrate this point, I want to introduce to you Mr. Green in the green shirt and Mr. Red in the red shirt. Both of these investors have decided to retire at the same age of 65. They both saved up the exact same amount of one million dollars for retirement, and they both plan to withdraw 5% of their initial balance each year to have an annual income of $50,000. They have both averaged the exact same return of 6% per year over their 25-year retirement.

The only difference between these two investors is that Mr. Green experienced higher returns toward the beginning of his retirement, whereas Mr. Red experienced the same returns but at the end of his retirement. Although both averaged 6% per year, Mr. Green ends up with more than $2.5 million to pass on to his heirs, while Mr. Red runs out of money about halfway through his retirement. Every aspect of their retirement experience is identical except for one thing: the sequence or the order of the investment returns.

As you can see on the chart, Mr. Green gets the higher returns toward the beginning and the negative ones toward the end, whereas Mr. Red experiences the same returns only in reverse. You can see on the chart once again how big a difference this makes.

The good news is that it is possible to set ourselves up to be successful no matter what the market does year by year. The Perennial Income Model is a bad luck insurance policy that can protect you from the pitfalls that Mr. Red experienced. Now, I’m not suggesting that following the Perennial Income Model will guarantee that your account will never go down or that it will never suffer temporarily, because it will. What I am saying is that by following the Perennial Income Model, you should not find yourself having to sell stocks at a loss during the next stock market correction. Mr. Red’s losses are realized as he liquidates equities in a down year at a loss to cover his expenses. If Mr. Red were to have his portfolio organized according to the Perennial Income Model, he would not be in a position where he would have to liquidate these stocks in the down years to provide income. He would have a buffer of conservative investments to draw income from while the more aggressive part of his portfolio has a chance to rebound when the stock market temporarily experiences turbulence.

The Perennial Income Model is designed to give immediate income from safe, low-volatility types of investments. At the same time, it furnishes you with long-term, inflation-fighting equities in your portfolio—equities that will not be called upon to provide monthly income for many years down the road. As you may remember, market corrections typically last for months, not years. So even if you are the unluckiest person on the planet and your retirement coincides with a market crash, your long-term retirement plans will not be derailed as long as you are following the investment guidelines found in the Perennial Income Model.

I’ll now let Mark continue with some of the tax benefits provided by the Perennial Income Model.

The Perennial Income Model is a Tax Planner (46:30)

Mark Whitaker: Thank you, Daniel. I’ve enjoyed the presentation and thought, “Wow, this is a really good summary of all the benefits of the Perennial Income Model.” Over the last several years, I’ve enjoyed helping retirees implement this investment process in their own situations. Let me tell you a little bit about myself. Before joining Peterson Wealth Advisors, I was a combat engineer in the United States Army.

Why am I sharing this? As a combat engineer, your role is to shape the battlefield. Your role is to decide when and where to engage the enemy. We want to face the enemy on a ground that’s favorable to us. We want to face the enemy in a situation where we have the advantage. I share this because that’s how I think about tax planning. Because we have the Perennial Income Model, we can map out and look at a retiree’s income and tax situation from a bird’s eye view, giving us a broad view of what’s likely to happen. This allows us to decide when, where, and how much taxes to pay in order to do it in a way that is most advantageous to the retiree.

I love this quote from Morgan Stanley, found in some of the information here from the second edition of “Plan on Living.” At a high level, we should ask the question, why tax planning? Why saving taxes? When it comes to tax planning, every dollar we can save in taxes is an additional dollar that can be used towards something more important to you, whether it be retiring earlier than expected, having additional money to live on and enjoy life, or giving and helping others by donating and putting money towards a meaningful purpose. Every dollar saved in taxes is something that can enhance and benefit your retirement.

Let’s get down to tax planning and what we’re going to cover in this section. I want to identify specific ways that the Perennial Income Model provides a framework for excellent tax planning. For retirees, there are tremendous opportunities as well as landmines, things to avoid. We’ll then put it into an example and show you what that might look like.

How does the Perennial Income Model allow us to do great tax planning?

We’re going to organize asset types as mentioned in Alex’s section. He talked about mapping out your income and breaking it down into separate account types, with different tax treatments: retirement accounts, tax-free accounts, and after-tax investment accounts. We can organize these as well as your income streams. Do you have a rental property that generates income? Do you have a pension? What does your Social Security look like?

The Perennial Income Model maps all of this out, allowing us to take a bird’s eye view of retirement and decide where there are opportunities to minimize taxes and improve retirement outcomes. These strategies are not unique to Peterson Wealth Advisors. Any competent financial planner, tax planner, or wealth advisor can implement them. The advantage we have with the Perennial Income Model is the framework that allows us to do these things exceptionally well.

Some of the opportunities include managing your tax brackets. Many of you have probably heard of making tax-free distributions from your pre-tax retirement accounts, like IRA accounts, known as Qualified Charitable Distributions. You may also have heard about taking money out of an IRA and converting it to a Roth IRA, intentionally paying taxes now to benefit later, known as Roth conversions. We can manage the cost of Medicare Part B premiums through tax strategies. Additionally, every retiree has the potential to receive at least a portion, if not most or all, of their Social Security income tax-free.

These are some opportunities to be aware of in retirement. There are also landmines to avoid, such as underpayment penalties and Required Minimum Distributions. You have to take money out of your retirement accounts starting at age 72. One common issue is people reading about Roth conversions and how they are a great idea, but without a full understanding of their income projections, they convert too much and unnecessarily pay taxes. Penalties for not taking Required Minimum Distributions can also be an issue. If your income is too high, you may have to pay more for Medicare Part B premiums. Capital gains taxes can also vary significantly based on when you sell an asset and how long you’ve held it, affecting whether you pay a high or favorable tax rate.

Proper planning can prevent paying extra taxes on Social Security income that you might otherwise avoid. With the foundation set, let’s take a look at a retired couple. This couple, as shown on the screen, has a retirement portfolio of approximately $1.2 million in IRA assets and about $300,000 in a brokerage or trust account, totaling $1.5 million. They are ready to retire and also have a pension that will start at age 65, along with Social Security income. How can we map this out?

Here’s the battlefield: the scope of their retirement. Knowing the laws today and what income looks like now and in the future, what can we do? What are the opportunities? First, we have an opportunity at the beginning of retirement where these retirees have a couple of years. Even though their pension and Social Security are not starting for a couple of years, we have the visibility to know they can retire sooner than when these benefits begin.

Because of their investment portfolio makeup, we know we can draw from their already-taxed portfolio. This will facilitate Roth conversions, moving money from their IRA to a Roth IRA, so that money can be enjoyed later in retirement tax-free. With the Perennial Income Model, we can project a legacy for this retired couple, leaving a legacy for their children and grandchildren to support education and service, which is important to them. How much better to leave a legacy that is completely tax-free to maximize that gift for their family?

Now, the way we do this is by living on after-tax assets, allowing them to make Roth conversions at very low tax rates. While this couple is charitably inclined and will make donations to their church and other organizations for the rest of their lives, we must ensure not to convert too much into a Roth IRA. Instead, we map it out and rightsize the strategy so they don’t miss out on making tax-free transfers from their IRA once they reach age 70 and a half for the rest of their lives.

This strategy reduces the amount of taxes they pay on Social Security, lowers their tax rate, and ensures they are not forced to take out extra money from their IRA that they don’t actually need.

So what does this all look like? If we were to summarize it, I put this table together, looking at someone who is a Utah taxpayer. We are examining the federal and state tax benefits from implementing the strategy based on the information for this couple. By managing their tax brackets, using Qualified Charitable Distributions, and implementing a smart, right-sized Roth conversion strategy, the Perennial Income Model has helped us save this client over $500,000 in tax expenses over the course of their retirement.

In summary, to put this all together, the Perennial Income Model allows us to do tax planning in a way that it really ought to be done—avoiding mistakes, taking advantage of opportunities, and doing it at the time and place of our choosing when it’s most advantageous to the retiree. I’ll turn the time over to Scott now.

Conclusion (56:50)

Scott Peterson: Great. Thank you, Mark. Well done. Advisors, you know, we’re very fortunate. Living and being based in northern Utah, we have UVU, which I think has the best financial planning program in the nation. We also have BYU. Whenever I need a new employee, I can contact the professors of either BYU or UVU, ask who their best and brightest are, and we bring them here.

You have to remember, I turned 60 yesterday. So I’m not just thinking about my clients; I’m thinking about myself also—who’s going to manage my money when I decide I don’t want to do this anymore? I have the best and the brightest, as you’ve seen, working for our company, and I’m very thankful for them and all they do for our clients.

So let’s talk a little bit about the Perennial Income Model to wrap this up.

1. The Perennial Income Model is goal-specific. It matches your current investments with your future income needs. You know what you own, you know why you own it, and you know when it will be needed for your future income stream.
2. It creates a framework for investing. Because you have a goal-specific plan, you know specifically how to be invested, the purpose of your investments, and when to sell your investments. It allows you to invest with confidence. We have found time and again that a plan is the antidote to panic. A time-segmented plan aligned with a program to harvest gains, as we talked about earlier, reduces investment risk if the plan is followed. I honestly don’t know how one would go about determining how to invest retirement money without having a plan like the Perennial Income Model. Again, what we see is a lot of rule-of-thumb advisors saying, “Yeah, well, you know, let’s put half in stocks and half in bonds.” There’s no idea as to how to harvest the money and what to do when the markets go down, where to take income from. This creates a framework for investing.
3. It provides a distribution framework. You know how much money you can and should take out of your investments. The plan not only helps with investment discipline but also helps with distribution discipline. It helps you monitor your own behavior. It allows you to spend with confidence. Additionally, it helps you know which account to take your money from for the maximum tax benefit.
4. It creates a framework to recognize and manage risk. Your greatest short-term risk is stock market volatility, and your greatest long-term risk is inflation. The time-segmented plan addresses both these risks. Less volatile investments provide for immediate income needs, while your more aggressive, higher-earning investments keep up with inflation in the long run.
5. There are additional benefits we didn’t anticipate when we created this plan back in 2007 that some of our advisors have talked about. It works as a bad luck insurance policy. I think Daniel covered this well. Some of you may know people who were unfortunate enough to retire in 2007, right before the financial crisis of ’08 and ’09. Remember what happened back then? Stocks plummeted 50%, and many retirees were forced to sell their equities at a loss just to provide for necessary retirement income. These retirement accounts were devastated during this time period. If you happen to be one of those unlucky people who retire at the beginning of a bear market, you are protected by having the Perennial Income Model in place. Your income will not come from equities, giving time the opportunity to work on your behalf, allowing your equities to rebound as time goes on.
6. It also protects you from your older self. I’ve been working with retirees for over 35 years, and I’ve seen it time and time again. We are not as cognitively sharp in our older ages, and we’ve found tremendous help in having our clients follow the same plan throughout their retirement as they age.
7. This ties into the next point: it will leave your spouse with a plan to follow upon your death. I can’t tell you how much comfort it brings to a surviving spouse to know that there’s a plan in place. They will follow the same plan they’ve been following for years as a couple, without shaking things up or moving things around. We’ll just keep the plan going that’s been working well for them for years.
8. And lastly, there are tax reduction strategies available to the retiree that can significantly reduce their tax burden. But these tax opportunities don’t happen by accident. They have to be carefully planned. We found that the projection of future income that the time-segmented approach provides is a game changer when it comes to tax planning. By thoughtfully mixing the various accounts that are taxed differently from each other—such as Roth IRAs, IRAs, and after-tax brokerage accounts—you can really enhance your tax efficiency. We do this because we can map out your income over a long period of time.

Now, I just want to conclude and say, as a company, we realized that we were given something very special when we created the Perennial Income Model back in 2007. In it, we have a retirement income plan that has exceeded every expectation, benefiting hundreds of our retired families in ways we could not have originally imagined.

The Perennial Income Model provides a framework for investing, distributing, tax planning, and risk management. It helps coordinate and maximize pensions and Social Security benefits. It provides a buffer from having to liquidate stock-based equities during negative markets. Finally, it provides guidance to the aged and gives direction and reassurance to the surviving spouse if you follow its precepts.

So I just want to thank all of you for attending today. We appreciate the time you spent with us. Whether this was a good review or a new concept, we trust that you benefited from our information. Again, I’d like to give a shoutout to my colleagues. I am thankful for their contributions today and for their daily efforts in taking care of our retirees.

In conclusion, tomorrow we’ll send out an email to everyone who registered for this webinar with a recording that will be available to rewatch for the next couple of weeks. Also, if you’d like a copy of my new book, you can head to our website to request one or email info@petersonwealth.com. If you are a client of ours, you can simply pick up a book the next time you’re in our office, and we’ll have one set aside for you.

I’m sure many of you have questions about how your personalized Perennial Income Model would look. We offer complimentary consultations, and in tomorrow’s email, we will include a link to our calendar to sign up for a time if you want to discuss what your Perennial Income Model would look like in your situation. If you’re an existing client and would like to review your Perennial Income Model with your advisor, please reach out to your respective advisor or call our office, and Becki will help you set something up.

At the end of this webinar, we’ll be asking you to take a short survey because we always appreciate your feedback to continually improve our content and future webinars for you. Thank you again for spending time with us today. We hope you have a wonderful day, and we look forward to talking to you soon. Bye.