Working with hundreds of people on their retirement plans has taught me one clear lesson: financial success doesn’t come from scattered knowledge. It comes from organizing that knowledge in a way that’s unique to your life goals. At Root Financial, James Conole developed a framework called the Sequoia System to help people organize their retirement planning. This system works for anyone, regardless of net worth or financial background. It ensures no stone is left unturned so you can focus on living the life you want.
The Seven Steps of the Sequoia System
This framework consists of seven essential steps that build upon each other to create a comprehensive retirement plan.
Step 1: Create Your Vision
Financial planning isn’t just a math formula. A good financial plan results in a life well-lived. Start by asking yourself: “When I’m 90 years old and looking back on my life, what would have to happen for me to feel I got everything I wanted?”
This has nothing to do with Roth IRAs or Social Security. It’s about who you want to spend time with, what activities you want to do, what trips you want to take, and what impact you want to make.
Step 2: Define Your Costs
Once you know what you want, determine what it will cost. You can use either a “bottom-up” or “top-down” approach:
- Bottom-up approach: List all your expected expenses in retirement, including necessities (utilities, food, insurance) and the activities you defined in Step 1 (trips, hobbies, charitable giving).
- Top-down approach: Start with your current income, subtract expenses that won’t exist in retirement (mortgage principal/interest, retirement savings), and add new retirement expenses.
For example, if you currently have $10,000 monthly income, minus a $2,000 mortgage payment and $1,000 retirement savings that will end, you’d need $7,000 monthly. If you want to add $2,500 monthly for travel, your total becomes $9,500 monthly.
Step 3: Project Your Cash Flow
Next, determine where your retirement income will come from to meet those expenses. Sources might include Social Security, pensions, rental properties, and your investment portfolio.
For example, if you need $10,000 monthly and will receive $6,000 from Social Security, you need $4,000 monthly ($48,000 annually) from your portfolio. Using a 5% withdrawal rate, you’d need a $1 million portfolio ($48,000 ÷ 0.05 = $960,000, rounded to $1 million).
Step 4: Define Your Investment Allocation
Your investment allocation should be tied to your cash flow needs, not based on generic advice. If you need $50,000 annually from a $1 million portfolio, consider setting aside five years of withdrawals ($250,000) in more stable investments. The remaining $750,000 could be in stocks for long-term growth.
This approach might result in a 75% stocks/25% bonds allocation designed specifically to meet your income needs in both up and down markets.
Step 5: Optimize Your Tax Strategy
Only after understanding your vision, expenses, cash flow, and investments can you effectively plan your tax strategy. This might include:
- Roth conversion strategies based on projected required minimum distributions
- Tax gain harvesting in your brokerage account
- Healthcare subsidy considerations
- Charitable giving strategies
- Asset location optimization across different account types
Remember that tax savings shouldn’t come at the expense of living the life you want. The goal is to optimize taxes without sacrificing what’s most important to you.
Step 6: Review Insurance Coverage
As you enter retirement, your insurance needs change. You may no longer need life or disability insurance but might need more liability protection as your net worth grows. Consider:
Health insurance options if retiring before Medicare eligibility, Medicare plan selection, long-term care insurance versus self-funding, and appropriate levels of home, auto, and umbrella coverage.
Step 7: Update Estate Planning
Ensure your estate plan protects your loved ones and assets. At minimum, have updated will, trust documents, and advanced directives. If your net worth approaches estate tax thresholds, consider more advanced strategies like gifting or specialized trusts.
By following these seven steps, you transform scattered financial information into an organized plan that helps you live the life you want. While your plan will evolve over time, this framework provides a strong foundation for retirement success.
Frequently Asked Questions
Q: How far in advance should I start planning for retirement?
Ideally, you should begin planning at least 5-10 years before your target retirement date. This gives you enough time to adjust your savings rate, investment strategy, and develop a clear vision for retirement. However, it’s never too late to start organizing your finances using this framework.
Q: Do I need a financial advisor to implement the Sequoia System?
While the framework can be used by anyone independently, a financial advisor can provide valuable expertise, particularly for complex situations involving tax strategies, investment allocations, and estate planning. Many people find that professional guidance helps them avoid costly mistakes and optimize their retirement plan.
Q: How often should I review and update my retirement plan?
Your retirement plan should be reviewed at least annually and whenever major life events occur (marriage, divorce, inheritance, career change). Market conditions, tax laws, and personal goals change over time, so your plan should be dynamic rather than static.
Q: What if my vision for retirement changes over time?
This is completely normal and expected. The Sequoia System is designed to be flexible. When your vision changes, simply work through the steps again, adjusting your cost projections, cash flow needs, and other elements accordingly. The framework remains the same even as your specific goals evolve.
Q: How do I balance saving for retirement with other financial goals?
The vision-first approach of the Sequoia System helps you prioritize what’s truly important. For many people, retirement is just one of several financial goals alongside education funding, home ownership, or travel. By clarifying your vision for all aspects of life, you can allocate resources appropriately and make informed trade-offs when necessary.
