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Episode #492 - Listener Questions: The K.I.S.S. Concept for Investing

Roger: I don't really care how much you read about retirement, how much you listen or watch a webinar. How much you talk about it, what action are you going to take to make it? So, the only way you're going to learn is by doing it, falling down and getting better. 

PRACTICAL PLANNING SEGMENT: WHAT OTHER LISTENERS SAY

Hey there. Welcome to The Retirement Answer Man Show.

My name is Roger Whitney. I am your host, and this is the show dedicated to helping you not just survive retirement, but to do that work, take that action, to be bad so you can get on the road to getting better so you can rock retirement. You're never going to feel like you're good enough. Trust me, I don't. It's a fun game to play as long as you keep the right attitude.

You can do this. I have no doubt. Take action on rocking retirement financially and non-financially. I'm here to try to help you, but I want to make sure I help you take action. We recently posted some of the results of our survey of listeners, and you are one of those because you hear my voice.

So, I thought I'd share some of that. You can actually find it on the homepage at rogerwhitney.com. We have some slider buttons there that tell a little bit about who listens to the show from the thousand or 2000 people that answered our survey. So, you might want to check that out at rogerwhitney.com. I'll share a little bit here.

By the way, if you go to the homepage, you just have to scroll down. It's right below the most recent episodes.

We have over 8 million all-time downloads. I know we're coming up on the 500th episode. We're going to have some t-shirt action and sticker action going on, no doubt. 

92% of people like you are between age 51 and 70.

45% of you are female, which has been growing, which I think is awesome. 

The top five things that you look forward to in the survey. Time freedom, spending time with loved ones, volunteering less stress, and reinventing myself. Ooh, I like that one. Try to do that every day, a little bit. 

Retirement status of the listeners, 40% retire within one year. 26% are retired, and the rest of you are a few years out. 

What hobbies do you plan to pursue in retirement? You have a guess of what the number one hobby is that people want to pursue in retirement? I'll give you a second. Getting healthier, that's a great project to have.

Visual Arts is one. Reading, gardening, hiking are the bigger ones. We have like a little bubble cloud, I guess you call it. I don't know. We got ham radio in there. Church, baking, cooking, fishing, dancing, cycling, crafting, bird watching, photography, coaching, running. Cool. 

What is your number one concern about retirement?

Why don't you answer that for yourself? What's your number one concern? What do you think of the average listener, who's probably a lot like you, what do you think their number one concern is? 

66%, the big number, is money. 

In second place is everything else, but also purpose is 12.5%. Health is 9%. Money, money, money, money.

That's a big one. We want to try to help you with the four pillars of building a plan you can have confidence in to manage your money.

What is your state of mind when you think of retirement? So, close your eyes, assuming you're not driving, what is the state when you think about retirement?

What is your state of mind? We have a word cloud from a listener survey standpoint, freedom and then excitement and happiness, distressed, peace, time, joy, adventure, hopeful, energetic. We got some caution in there, but these are smaller words. If you look at it. We got a chillax. Somebody wrote chillax, relief, flexibility, uncertainty, longing, unpressured, tumbling. Ooh, that's a rough one. have to work through these. 

So, you can check that out at rogerwhitney.com. Scroll down a little bit and you can see these graphics on listeners. But here's the thing, and I try to remind myself of this every time I step in front of this microphone, this tin can I'm talking into to chat with you, is I am talking to you.

Your journey is the most important one, and I want to make sure when we answer questions, when we're doing the Bring It On segment that you are the focus, not what I have to say, not what Bobby or Kevin or Mark or some guest has to say. It's about you and helping you think a little bit differently, find a tool, get a concept that you can take to take some action.

Now, I'm not saying we do that great all the time. It's easy to think you're talking to people, but I don't want to talk to people. I want to talk with you about these things and help you take action on these things. 

With that said, let's go talk about some questions around that big one. Money.

LISTENER QUESTIONS

Now it's time to answer your questions. 

If you have a question for the show, go to rogerwhitney.com/askroger, and you can type in a question or you can leave an audio question. Alternatively, you can click on the Ask Roger a question link in our 6-Shot Saturday email, which we send out a summary of the show every Saturday morning.

You can get that email at sixshotsaturday.com

WHAT IS THE DIFFERENCE BETWEEN A FINANCIAL ADVISOR AND A WEALTH PLANNER?

All right, so our first question is a very short question. You would think it would be an easy question, but alas, it is not. 

Rick wants to know, 

"Hey, Roger, what is the difference between a financial advisor and a wealth planner? Are they the same?"

Rick? It is a bloody mess when it comes to advisor titles who can call themselves the financial advisor, a wealth planner or a wealth advisor, or a financial planner or an investment advisor.

Really anybody in the industry, as long as their compliance department approves it. There isn't a qualification to be a wealth planner or a financial advisor or an investment manager, or even a financial planner. Anybody can call themselves those terms. If you work at an insurance company and only sell insurance products, you can call yourself a financial advisor or a wealth planner, as long as their compliance department says yes, and most of them do, so it's a bloody mess.

You would hope that it would be like the medical community right, where you have a doctor, we know what an MD is. We have a general practitioner, a surgeon, an ENT, we have a neurologist, and we have an orthopedic surgeon or an orthopedic, so if I'm having problems with my knee or my shoulder, I know who to go to, right? Usually, my GP will send me to the right specialty. 

Doesn't work that way in our industry, which makes this really difficult for you, Rick, because you're sitting there, and I don't know what issue you're trying to solve for in looking for an advisor. But it would be good if you could identify, this is what I'm trying to fit, get answered for me, or create, maybe it's, I'm trying to create a paycheck and you find somebody that is a wealth planner, but they work for an insurance company.

Well, the toolbox they're going to have to create your paycheck is going to be insurance products. They're going to have that built-in bias and conflict. 

If they work in an investment firm, it's probably going to be a portfolio approach that they're going to use to solve this create a paycheck problem.

That doesn't help you.

You just want somebody to be agnostic and just help you think through this and solve the issue. 

Now, there are designations, like certified financial planner™ or retirement management advisor, where the advisor has to go through an educational process, agree to a code of ethics and continuing education to be able to use those marks. I have a number of them. 

That is one way that you can navigate this, but it's still not going to guarantee that you're getting somebody to just simply help your process, right? Because somebody that just simply works at an insurance company can be a certified financial planner. 

So, what is Rick and all of us to do?

Well, on the plus side, Rick, you have a lot more power than you used to because you can actually go source advisors anywhere in the country. You're not confined to your zip code or area in terms of the pool of advisors that you can talk to, and there are plenty of advisors, whether it's a podcast or blogs or YouTube, and there are search engines to help you find those advisors that you could at least interview.

But the best way to approach this, Rick, is one, know what you're trying to solve for. What is it I'm looking for? If I have a shoulder injury, I don't really want to talk to an ENT. If I have a paycheck problem that I have to create in retirement, you don't want to talk to somebody that works with Gen Xers that are just growing their wealth, so you can source these on the internet, and I think what you need to do, Rick, is when you find a few that you want to talk to, schedule a time to interview them. They're going to want to interview you as well. It's natural for an advisor to want to understand a potential client in this case.

We actually have a framework called Finding a Trusted Advisor. It's a PDF worksheet that we will share in our 6-Shot Saturday email. If you're not signed up for that email list and you want to get it, you can go to sixshotsaturday.com or rogerwhitney.com and sign up there. The pre-interview research that you want to do is you want to take a look at their social media profiles, review them, make sure you like their personality, maybe read their articles or blogs or interviews that they've done to get a sense of their spirit and their focus.

Then you want to search their professional history. You can go to FINRA.org, or sec.gov. To review their professional and disciplinary history so you can get an idea of how many firms they've worked at, what kind of firm do they work at, do they have any disciplinary issues, et cetera. Then schedule a time to chat with them.

Now, traits that I would suggest that you look for, and this is all in this framework, Rick, that you can get, will send to you in our 6-Shot Saturday email, is you want to find somebody with experience and consistency in their work, you want to get an idea whether they're a lifelong learner, and I think these certifications go a long way there.

There are a lot of BS certifications, but there are a lot of really meaty ones, what their specialty is, and you can glean that from your research on their website, et cetera. Do they work with everybody? Are they focused on Gen Xers? Are they focused only on retirement or are they sort of a Swiss Army knife?

Are they process or product focused? You've probably listened to the show enough, Rick, to know that process, process, process, process trumps outcome. You want somebody that's process focused. Do they have the heart of the teacher? Is there a lack of pressure? Are they positive? Realistic outlook on life and the world, or are they doomsday or are they one dimensional? Then when you actually have the interview with them, Rick, on that framework, we have interview questions to help prompt you to interview them. 

Now, normally when you're meeting with an advisor, they're going to want to find out about you, right? because they're doing their due diligence as well, and they have their own process.

My suggestion on that is that you run your process and you interview them before they interview you. Because I think you should be in the power position here because you want to know how they work before they necessarily know a lot about you. And some questions as an example, would be, how many relationships do you have? How many clients do you work with? Describe your ideal client? What is your specialty? Describe the process that you use with your clients and then poke around at that process. Is it well thought out or is it a few inches deep? Describe your investment philosophy, your planning philosophy. Ask these questions. How are you compensated?

So, you can get all of this on the worksheet, Rick, but I would suggest that you look outside your geography. Don't worry too much about titles. They might give you some indication, but the ones you share, financial advisor, wealth planner, they don't mean anything. They really don't. Then explore their blog and their website to see if they focus on the issue that you want to solve for.

because you don't want to go to an ENT if you have a shoulder problem, right? You want to go to an orthopedic somebody. 

So, you can grab that worksheet. And as much as I can, I'm doing my best to help create an industry that is much easier for you to navigate. 

THE K.I.S.S. CONCEPT FOR INVESTING

So, our next question comes from Lisa. 

Lisa says, 

"Hey, Roger.

I love your podcast. My husband and I are 63 and thinking of retirement in five years, besides some quote unquote cash-like funds, what are your pro con thoughts on the Old Navy term? Keep it simple, stupid. The K.I.S.S. Concept with regards to investing, basically three types of ETFs or index funds.

International domestic bond fund with periodic rebalancing of course. What percentage would you recommend for our age?"

It's a great question, Lisa. 

So, let's unpack this here. I want to go to your last question. What percentage would you recommend for our age? I would not approach it from the premise that your age is going to determine what your allocation is, especially in retirement.

That is an older way of thinking of it. A one asset allocation premise is implied in that, so your age is irrelevant. 

Let's assume you have a million dollars, and you want to allocate those funds when you are in retirement. Now you're five years out, so you have a little bit of time here, but you want to have multiple allocations for your life.

If you have those million dollars, the first allocation is you want to have a contingency fund, which. Is an emergency fund or monies that we want to have as excess liquidity for the unknowns, your financial airbag of life. So that's going to be allocation number one, and that would be cash like investments.

The second would be, especially in retirement, we want to have money set aside to fund the outcomes life wise that we want. In the near midterm, the default near midterm is going to be five years. There's no magic to five years, so you're five years out, so you might not need a lot of that right now, but as you get closer, you'll want to build up this tier, and that's going to be money that is invested to fund the spending that you need to fund that isn't covered by other sources of income, pension, social security, part-time work, et cetera. 

So, let's assume you need $50,000 a year in the first five years of retirement, Lisa. Well, you're going to want to make sure that money is available to you each year that you need it. In year one of retirement, you have to have 50,000 because that's needed to supplement your other income sources to fund the life that you want, and that's not coming from your full-time paycheck anymore. 

Same thing for year two and year three, and year three maybe you have, you need a little bit more because you have an extra trip you're doing or a purchase that you have to make.

You'll want to have all this mapped out prior to retirement, and these funds will be very simply allocated. They're going to be on CDs or individual bonds. That mature around the time that you need them, just like a bond ladder, and you don't want to use bond funds because those can go up and down and you might have to sell them at the wrong time and lose money. These are things that in a default world, are going to mature right when you need it. 

The third allocation. Let's say these million dollars is going to be for five years plus. because that five-year income floor or bond ladder, you can make those eight years, you can make those three years. That's going to be stylistic based on a lot of things. We don't need to get into that here. 

This allocation, Lisa, is going to be more of probably what you think about as an investment portfolio. In this allocation, I do think you need to keep it simple; I won't call you stupid. You're going to have an international stock fund. You're going to have an emerging market stock fund. You're going to have a US core stock fund, and you're going to have a bond fund. Now, those can be indexed based, they can be ETFs, they could be open-end mutual funds, and those allocations will range anywhere from 80% stock to 20% bond to a 60/40, a more traditional 60/40 allocation. And you're thinking of that allocation separate from those other two layers.

So as an example, let's assume that you decide that you want to have a 60/40 portfolio. 40% of that would be in your US core equity portfolio just as a default. And that I would say you don't want it to be like the S&P 500. You want something that's going to have a more robust representation of mid and small companies.

The international core is going to be about 14%. Emerging markets are going to be around five-ish percent, and then 40% will be in intermediate investment grade funds. Now, I don't know if that added up to a hundred or not. I'm just using this as an example. That's going to be the allocation subject to your specific situation.

It could be more equity centric. There's a good argument that it might be, depending on how funded you are, of that third tier only. So, you're going to have this aggregate allocation of your cash, your income floor, and your long-term asset portfolio and then you're going to have an individual allocation for each of them.

But I don't think you have to make it much more complicated than that and that's what, four funds? Then you can rebalance those as you walk life and also manage the liquidity that you have in those layers of one and two based on how your life is going, based on the world, and based on the different sources of social capital or other capital or income that are coming in and out of your life. This is what we teach you, and this is what we talk about. 

This is in the resilient pillar of building a plan. So, once you figure out that it's feasible, then it's like, okay, how do I make it resilient? That's essentially what we're talking about here, Lisa and I do think we want to keep this as simple as possible.

We don't want to get bogged down in too many alternative investments or should we lean this way because of the economy and what I just read in Wall Street Journal, et cetera. We don't want to get into those conversations because those will distract us or distract you here, Lisa, from the more important work of managing the process, you're going to have enough to do to rock retirement that can actually have an impact on your life.

This is not one of them. Whether you have four funds or 10 funds, or you add a sleeve of real estate, et cetera, that's not going to likely have a material impact on your life, whereas thinking about tax management, thinking about your identity and what you're going to do and thinking about how you're going to fund these experiences that you want to have. Those are the things we want to spend time on. 

So yes, keep it simple, not stupid. Lisa. 

ON USING DIRECT DEBT LENDING ORGANIZATIONS

Now this is related to the next question that comes from Jesse.

Jesse says, 

"Hey, I love your show. It has been very helpful in my recent retirement. So, here's my question for you, Roger. What are your thoughts on using direct debt lending organizations that focus on lending short term capital, six to 30 months to small businesses for working capital bridge loans, acquisition funding, et cetera. They also provide GP loans to private equity funds. Their sweet spot is 500 to 50 million loans, mezzanine debt with flexible structures. They require a minimum investment of 250,000. I'm financially secure in the short term and the long term.

I'd appreciate any of your preliminary thoughts on these investment options."

Okay, Jesse.

This is going to be in the optimization pillar of taking the K.I.S.S. Portfolio and adding some bling to it. Some of this is going to depend on your outlook. The question you need to ask yourself is, what is your ultimate intent in adding this layer of complexity to your plan?

What is your intent in doing it? 

So as an example, I am going to purchase private debt in order to what? 

Identify that, and then how important is that what?

Is it important to your life? Is it going to help you have a different outcome from a retirement standpoint? Is it simply just trying to make a bet on maximizing returns relative to individual bonds or treasuries, et cetera.

What is it that you're trying to accomplish? Understanding that intent is going to be key here. 

So let me use an example. So Heroic, which is a training platform I have an investment in. What is my intent for that investment? Because this is a complicated thing, right? 

It's a private equity deal. It's actually a convertible debt. I purchased it. What is my intent in purchasing that debt? 

Part of it was outside the core funds that I have in my plan to help me generate the outcomes for my family. So, this is money that I can afford to lose. We'll use that as an example, and I am choosing to take a bet that I can have an outside return.

So, my intent is one, to have an outside return in something that I really believe in that's had a big impact on my life. My other intent is that I believe in what their mission is, and I believe that the team is the team to really take action on this mission. And I want to help support it and be part of it.

So those are my two intents. One is, this is money that's outside my normal plan. So, I'm willing to take a risk with it, and two, I'm taking a risk on something I really believe in, and I want to fund and support because I want it to be successful. 

So, for you, Jesse, if you're going to go outside the K.I.S.S. Concept, just understand your intent. Is this money you can lose?

Okay, let's assume it is. Then, what are you trying to accomplish by putting it into this type of debt? Is it an outside return? How much of an outside return is the upside? So, we know the downside is you lose it all. So, what's the upside? 

Like I think of the heroic investment as an example. It's a convertible debt to equity. Upside could be really, really big if they're successful. The downside is, lose it all. 

With this, what is your upside? So, we're looking at private debt here. Let's assume you're getting 9% internal rate of return, and then you would say, okay, my potential is I could get 9% on debt.

I don't know what the number is. I'm just making this up. Let's assume that's what it is, Jesse. Then you have to compare that to what is the risk-free rate of return that you can get on debt, and right now we'll call that the six-month T-bill, which is about 5%. 

So is the potential upside of whatever interest you think you can get, or whatever the return expectation is of this debt relative to what you can get with taking no risk at all.

Is that spread worth the potential downside? This is the foundational thing I think, Jesse, you want to think through before you approach doing this, that way you can feel comfortable with it. 

Now. What do I think specifically about direct lending organizations focused on this? I think there are a million of them.

Typically, their fees are really high and the biggest risk you take is execution risk. Can they repeat what they've done or is their process sound enough to navigate this.

Statistically? No, it's not worth the risk. It's not worth the fees. It's private, so that means it's probably very illiquid. Rarely have I seen these things work out, and it sounds like you've already won the game.

So, if you're just intellectually interested in it and you believe in them and it's money that's not going to put your vision of your retirement at risk. Fine. But just make sure you categorize it that way rather than thinking that it's somehow going to boost the portfolio. I would say this is an outlier.

So that's my approach to that. I would keep it simple, otherwise, Jesse. It's okay to do these things, but you want to understand your intent and you want to understand that this is money that you could potentially lose, because generally with these things, when they go wrong, they go really wrong. 

THE DIFFERENCE BETWEEN BANK CDS AND BROKERED CDS

All right.

Our next question comes from Genevieve, and it's an audio question. 

Genevieve: Hi, Roger. This is Genevieve. Been listening to your podcast for years. Love it. 

I have a question about the differences between bank CDs and brokerage CDs. Could you talk a little bit about that and what are the advantages and disadvantages of both?

Thanks. 

Roger: Well, thanks for leaving an audio question, Genevieve. So brokered CDs versus bank CDs. 

Bank CDs are pretty straightforward. You go to your bank or your credit union, they issue a CD for a specific period of time, and they pay you an interest rate, and as long as you hold it for that period of time, you get your money and your interest if you need to sell it early.

There's some type of penalty involved in most cases, but not all cases, and that penalty tends to have to do with the interest, and then you hold it at the bank, and then when you're done with it and you get your money back, they either renew it or you grab your money and go do something else. 

What is a brokered certificate of deposit?

Well, on a high level, this is just a CD that you purchased through a brokerage firm such as a Merrill Lynch or Charles Schwab, et cetera. rather than from a bank. The bank still initiates the CD, but it's structured as a security more so than a traditional CD. So, if you're at, say, Charles Schwab, You could buy a CD, you could have a choice of CDs from various banks throughout the country.

That's the fundamental difference, is that you're buying it from a brokerage firm, and it's going to have a little bit more of a security type or bond-like attribute than your traditional CD. 

In theory, brokerage CDs will yield more than your regular CDs at a bank because there is a more competitive market.

Your local credit union, they're right down the street from you. You go in there to do an ATM or a deposit. They have a captive audience, and the theory goes that well brokered CDs because they're sold by a big firm, it's got to be a lot more competitive because they don't have that captive market. I generally have not seen that in looking at yields. Now there may be periods of time where that's the case. 

Brokered CDs are more flexible, and they come in different styles, or more flavors than a traditional CD, meaning that they're going to have different maturity dates. You can sell them in the secondary market, either for a profit or for a loss.

Generally they're still insured by FDIC Insurance, so that's the same, but because they are a security, sort of like a bond that if you bought, say, a 20 year brokered CD and interest rates went up significantly, the value of that CD would go down because interest rates have risen, and you will see that on your statement, just like you would see a bond go down or a bond fund that goes down during big rises in interest rates. 

That can be disconcerting. Means if you wanted to get out of that CD early, you'd have to sell it at the market price just like you would a bond and you could lose money. Whereas a bank CD, you're not going to see the fluctuations in price, and if you wanted to break that CD, you already have the predefined terms of how you could get out of it. So at least you know what the terms are prior to going in. 

Well, with a brokered CD, it's really, it's going to go up, down, just like an individual bond, and then brokered CDs generally have callable CDs. So callable, a call feature, is something related to bonds.

You can see they're more like bonds in that, let's say you buy a 20-year CD from a brokerage firm, that's a brokerage CD. Your maturity date is 20 years, and you put in a dollar. You have a dollar in it. So, you bought it at par. What a call feature does, and let's assume they're paying you 10% interest. Ooh, that would be cool. So, you have a 10% interest bearing CD that matures in 20 years, what a call feature is it gives the bank, the issuer of the CD, the right to pay you back your money early and break the contract. 

So, an example would be you buy a 20-year CD, it has a coupon of 10%. In year five, the bank can say, eh, I'm just going to give you all your money back and we're done. I'll pay your interest up till now and we're done, and you have no choice in the matter. And why would a bank do that? 

Well, probably because interest rates have gone down relative to that CD and they can easily take that money back and issue to another person a CD at a much lower rate. So, it's not necessarily a positive thing. 

They're not bad Genevieve, but they can be a little bit tricky when you look at the features, like the call features, and they're going to have some interest rate risk if you wanted to get out of them early. 

Luckily today with online banks, you can search brokerage CDs at your brokerage firm, but also go directly to banks, literally all over the country.

So, you are in control here. I generally have not used or looked at brokerage CDs. I've not seen the rates being that materially better than online banks or treasuries, except in certain situations, so I don't know if it's worth the complication. 

The nice thing though, I guess, Genevieve, is that if you already have a brokerage account at Schwab, you don't have to go open accounts in different places so there is some advantage there. 

HOW TO MAKE YOUR RETIREMENT PLAN RESILIENT

So, our last question today comes from Jennifer related to resiliency.

"Hey, Roger, you inspired me to figure out how resilient my plan is. I've been obsessively playing with a retirement calculator that does Monte Carlo simulation with three scenarios for the market. Average return, below average return, that's the 25th percentile and significantly below average return, that's the 10th percentile. 

Depending on what I choose, I'll either live to a hundred with 8 million left over or run out of money at age 80. Do I need to make my plan resilient to even the worst options? Making my plan resilient to the worst option means I have to work another five years, but I could retire today if the market, quote unquote, remains average.

Thank you so much for all you do." 

You've used a Monte Carlo simulation and you did average, below average and significantly below average. So, you looked at the downside distribution and that makes sense because that's the thing that we're worried about. The upside is that takes care of itself, doesn't it? 

Number one is to make sure you understand the allocation that it's modeling. When you say "the market" what do we mean by that? 

Is that the stock market? Is that a 60/40 portfolio? What does the market mean in terms of the simulations that you're running? Here's why that's important, is that when you're doing these simulations, what's going into each simulation is the average annual return of the portfolio, assuming you rebalance in a very rigid way, but also the standard deviation of that portfolio, which is essentially how volatile it is going up and down.

If you're modeling, say the S&P 500 as the "market", well, we know what the average is, it's about 17.9%, and I know that's not really meaningful in this conversation, but that measures the rate of change or the volatility around the average. So, think of it like weather, right? In Texas, we have roughly the same average temperature as San Diego.

The difference is Texas's average has a larger standard deviation because we get consistent hundred days, and then we get days in the thirties and forties depending on time of year. So, there's a big distribution around the same average temperature as San Diego, where the temperature doesn't vary very often.

That's important to know and depending on the fact set here, Jennifer, counterintuitively many times a more conservative portfolio with a lower average return, but with a much smaller deviation can create better outcomes in the decumulation phase. 

So the first thing you want to know is what kind of portfolio you are modeling, number one, and number two, what kind of, and this is going to get a little geeky, what kind of Monte Carlo simulation engine are you using? They're all not made the same. 

Now that is difficult to navigate and maybe we should do a whole month long on retirement planning engines, because depending on the kind of modeling it's doing, it can really change what the results come out at. So bigger conversation than we can have today. 

But one is what kind of portfolio you are modeling, and then number two, you have to understand when we have a success ratio, usually it's a percentage of the trials, Jennifer, that were successful. 

So, you mentioned one. You would run out of money at age 80. One thing you want to look at is the distributions in those percentiles because when you have, say, an 85% success ratio using a Monte Carlo engine, that success ratio is binary, right? You're either successful or you are not. Well, you might not be successful by a dollar at age 97, and that's going to be counted the same way as the failure of running out of money at age 80. 

So, it doesn't distinguish the severity of a "failure" and the engine assumes that you make zero adjustments for every single trial. So, you might have a lower success ratio, but the severity of those failures, the vast majority of them are just missing it by a little bit. You still end up roughly in the same direction, destination, and you still have some money left, especially if you've made some little adjustments.

So that's one nuance there that you want to look at when you look at these distributions, this actually needs to be a YouTube video or something, doesn't it? Okay. Note to self, Roger. 

Lastly, Jennifer, you have to be careful when you're modeling your spending in these scenarios. 

Generally, the default is I need a hundred. I'm just making this number up, $125,000 inflation adjusted, and you use that number for modeling, and I need to spend an additional. 20,000 a year on travel. When you model in that way, which is a normal way that I see people do it all the time, is they ignore the seasonality and frequency and rhythm of spending, because if you take $125,000 and you inflate it year by year, between now, let’s assume you are age 60 to a hundred. 

Well, that's 40 years of compounding spending. That $125,000 when you're 90 is going to be a really, really big number, which is going to potentially overestimate how you'll actually spend. So, you want to understand that, and you also want to think of the seasonality. 

Let's first secure the base great life. What kind of spending do we need? Let's say that it's that $125,000 a year. And then potentially we make some tweaks to that to model, well, I'm thinking you're estimating, you're spending on what you need today, Jennifer. But if you're age 60, you think like Jennifer, age 60. 

You have to think a little bit about the future Jennifer, at age 75 or age 80, is she going to be living a 60-year-old Jennifer life? No, she's going to have a different life. It's probably going to be a little bit milder than the rocking 60-year-old Jennifer. So maybe you make some adjustments to that, and that could be simply spending down in a reasonable fashion that requires a lot less of the plan.

You're making guesses about the future, but these little nuances we can forget and they can have a big impact when you're trying to model 30, 40 years using the Monte Carlo scenario and the cost of not going a layer too deep in your spending and the volatility of the portfolio that you're managing the cost of not doing a little bit more of this extra work, well, in your case, Jennifer, it could cause you to work another five years when it might not be necessary.

So I would explore what exactly are you modeling, model different portfolios, get a better understanding of what your Monte Carlo engine is doing that you're using, and I don't know which one you're using, so it's difficult for me to comment on it, but I've seen some bad ones out there that I don't like the way they're doing it, and I don't think the outcomes are intuitive, are clear enough or realistic enough to count on, and then think about your spending and how you can be more nuanced in what a base great life is versus the more discretionary things.

Because if that 125, in my example, Jennifer, includes things that you're just guessing on or you might not actually want to do, like a lot of travel and things like that, that could force you to work five more years unnecessarily. That's why you have to have a really thought-out process that you follow and work through. 

That's where I would start. Jennifer, if you want to email me and tell me the engine that you're using, if I'm familiar with it, I can come back on and make more comments around that. I'm just not familiar with the one you're using and maybe we explore engines like this and what they tell us and also what they don't tell us so we can understand how to read these things because it takes time and I know this isn't what our job is or your job is, and we're always bad at things until we get better, but it definitely is worth the effort here because it could save you five years of your life outside retirement. 

With that, let's go on and talk about tiered retirement when it comes to passion, the projects that you want to have in retirement with Kevin Lyles.

BRING IT ON

Now it's time to bring it on and address the non-financial areas of our retirement, and we're going to talk about passion and work today with a retirement coach. Kevin Lyles. Hey, Kevin. 

Kevin: Hi, Roger. 

Roger: What do we have on deck today? 

Kevin: Well, I want to talk about something that I was looking forward to as I retired. I ended up really not doing it, I think, but that's starting a business in retirement.

A lot of us who have worked a career, and especially if we've worked a long time at one place, we have those entrepreneurial itches that we need to scratch. 

Roger: Why do you think that is? 

Kevin: Well, I can tell you in my case, I think I was a little too conservative. I wasn't a risk taker. I liked having a steady job, steady income, didn't have to think about it too much, and I just never made the leap to start my own business.

Roger: Okay, and so how should we approach this subject? 

Kevin: Well, I think it's important to think about what you want to, if you've always had this urge as you enter into the retirement phase, and really, we're talking about a new type of work, but I think what you want to do is you want to tailor this business to meet your new needs in this new phase of life. 

So, think about the things starting a business can do for you. It can add purpose and meaning to your life, help you with time management, create goals and ambitions for you. But the downside of it is it becomes another full-time job or as you know, as an entrepreneur yourself, Roger, more than a full-time job.

So that's the balance that I think as you go into retirement, you need to think about.

First rule. Don't put your financial stability at risk. Don't empty your 401k plan to buy a franchise. Most new businesses fail, most new businesses will fail. That's the reality of life. So, you want to make sure you're not putting your financial stability at risk.

So that's going to dictate what type of business I think you should pursue. You can't do one that has huge capital needs upfront. At least, I don't think it's a good idea to do that when you're on the verge of retirement. 

Roger: Well, I definitely agree with you there, and what I have observed and seen in my practice and just in the club and others is entrepreneurism has this attraction to it and it's easy to romanticize it if you've never done it.

That's why people buy bars and open restaurants and set up shop, its so much fun. But yeah, definitely don't put your financial resilience of your plan, dependent upon the business working, it should be independent of it.

I think also, Kevin, and I'm curious where you're on this is, I think it's important to really define, is this a vocation or an advocation? How much of it is passion and how much of it is wanting to make money? 

Kevin: Absolutely. And that will help you decide what kind of business you're going to start. 

Let's say you want to get out there and paint houses. You love to be outside and paint houses. You did that maybe as a college job and you just want to start a painting business.

Well, don't create such a big painting business that you're never out there painting houses, which is what you wanted to do. You don't want to be the one back in the office sending out bills and taking customer complaints all the time. Right? 

So really what you said, Roger, is so important. Have a clear picture in your mind of what you want out of this and then structure it and size it accordingly. 

Roger: I remember a conversation with a client years ago who had a ranch and he loved mowing yards, so he was still working full-time. He had these dreams of building a yard mowing service business with teams of people servicing a portfolio of houses, et cetera, and he was really enamored with all of the equipment that you'd get and the trailer and the website, and getting your team together, all of the setting up house parts of it. That was the exciting part. 

My counsel to him was just go mow someone's yard. Just get one yard and do this while you're still working. Just mow one yard and do that for a while. Then let it pull you to add another yard and pull you to add another yard, which may pull you to bring in someone to help you. Start the journey from the beginning of the yellow brick road rather than the end, and he ended up not pursuing it, but I think that's a healthier way to approach business.

Kevin: I think that was great advice. When we think about business, and especially starting a new business, we think the number one objective needs to be growth, right? You need to grow that business. That's not the case when you're in the retirement phase. That's not your objective. So, you don't always say yes to every opportunity.

You have to say no. That's the most important word probably you can learn when you're a retiree trying to start a business, and maybe that's the wrong term, maybe you're no longer a retiree, but you have to say no.

That's another important aspect of it, which is don't let it crowd out all the other areas of your life.

Maybe you did that in your first career, and it just comes naturally to you that work comes first. Well now, hopefully this business you're starting is a passion of yours, something you're really interested in. But don't let it crowd out your family, your faith, tending to your own health and wellness. It needs to have an important role. It can be your passion in retirement, but it can't be your whole life. 

Roger: You said that you had an entrepreneurial desire, are you willing to share how that's evolved? 

Kevin: Well, yeah, so when I was leading up to my retirement, I thought I might go into business with one of my children. They're both fairly entrepreneurial and so I just thought that'd be something I can sort of help provide some guidance, but I won't be the lead.

One of them would be the lead. We could do a business and it just, they started their careers and are doing great, and their goals were not the same as mine and so we just never did it. I got involved with you and through the Rock Retirement Club and so that's how I scratch those itches now. 

Roger: Now I know you work periodically with individual clients. I've never actually heard you talk about that. I know you do work in the Rock Retirement Club, and we get to work together. You seem to have balanced, keeping your life in check while working with individual clients and your obligations within the club and with Wade and his group.

How do you do that? 

Kevin: I say, no, I really do. If it's not something that really interests me. It's something I want to do. It's intellectually stimulating. If it's not, I say no. I say no more often than I say yes in this phase of life and for 30 years practicing law I didn't know what that word meant. 

Roger: Yeah, you're good at it. You're good at your boundaries, in my observation. 

Kevin: I hope so. I've learned something over 35 years.

Roger: So, what's a good step someone could take if they're interested, and they have this entrepreneurial desire? 

Kevin: Yeah, I think the first step is just to create a two-page business plan. This isn't the financial business plan you're going to take to a bank to try to get a business loan.

This is just, here's what I want to achieve. Here's why I'm doing this. It probably needs to have some financial parameters. Here's how much money I will invest or will put at risk for this, or if you need the income, here's how much money I intend to make. The financial side you want to cover. 

You want to make sure you've cleared this with your spouse. Again, you don't want to get to retirement and have competing visions for what the retirement phase of life is like. Make sure you and your spouse are on the same page. With a business, you don't want to underestimate the level of commitment and time it's going to take, especially a new business.

So, you just have to go into that with your eyes open. But that's part of this business plan. I'm willing to commit this much time. Here's the parameters, and just like with your friend, with the grass cutting business, I'm willing to cut grass three days a week and no more. Build in those parameters and what you want, and then try to create some guardrails for yourself.

If I find my new business is getting out of balance with other things, other important goals I have in life, then I'm going to pull back. So, I think if you create a two-page plan like that, you can start to think about all these issues and come up with what you want. 

Roger: Sounds like a plan of record. And I think this is actually a topic that could easily be a month-long theme, starting a business from retirement.

Kevin: Yeah, and how to do it right, because there's a lot that we could talk about there. 

TODAY’S SMART SPRINT SEGMENT

On your marks, get set,

and we're off to set a little baby step we can take in the next seven days to not just rack retirement, but rock life. 

All right, in the next seven days, I just want you to take action on something. Take action, take action, take action, take action. Take a little baby step, whether it's on your Monte Carlo engine, whether it's on simplifying your portfolio, whether it's calling a long lost friend or actually scheduling and doing the activity that you've been noodling on. 

Just take action.

CONCLUSION

Been thinking a lot about the podcast over the last month or so. They'd be coming longer with the Bring It On episodes. I'm loving those episodes. I think they can be tighter, but I want to make sure we always focus on you, and answering your specific questions and making sure we dial in the financial part of retirement as well.

All this other stuff is really important and there's just so much to think about, but when you ask a question and we're answering on the show, and I want to make sure that I don't use every question as a learning exercise for everybody. I want to make sure I answer your question, Jennifer's question, Rick's question.

I want to use that as an opportunity selfishly for me to clarify my thinking, to sharpen my saw as a retirement planner. So I don't ever want to miss the point that this is about you, whoever you are, and helping you take one little baby step to your journey. It's easy to forget that when you're sitting here blind behind a microphone.

So, we're here for you. I hope you have a wonderful summer, and I'll see you next week. 





The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All performance references, historical and do not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax or financial advisor before making any decisions.