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Episode #495 - The Rules for Roth Conversions

Roger: So, the main thing I understand is to keep the main thing, the main thing. You get it? 

Welcome to the Retirement Answer Man Show.

Hey there. My name is Roger Whitney. I'm your host. I'm excited that you're here with me. I'm excited to be here with you. This is a show dedicated to helping you not just survive retirement but have the confidence because you're doing the work consistently to lean in and rock retirement. 

Today, we're going to talk about Roth conversions, what they are and how to do them. Next week, we're going to talk about withdrawing from Roths. And then in the first episode of August, we're going to talk about a. framework or considerations to consider deciding whether you should do Roth conversions. They're very popular to talk about today. 

Before we get started, I just wanted to share a random thought regarding an email I received about the world, and I'm not going to share their email just to protect their privacy, but I'm going to share some of my response to it. Their email essentially had to do with wow, look at everything going on and it's hard to see a future and they had a comment in there that based on some comments they felt I made that they had an idea of my view on these topics, political, social, economic, regarding the media, etc.

Those are really, really important topics that all of us should be involved in, in a very proactive way, in an intentional, informed way. For sure. There are a lot of political, social, and economic forces at play that can have potential impacts on what society and the world looks like. I'll share part of my response to him.

I intentionally sequester my views in these areas on the show and in the club and how I serve individual clients so that I can focus on my primary mission, which is to empower you to create a great life by improving the quality of your decision making, by thinking about how we make decisions and having processes and frameworks to make those decisions. This is what I replied to him, partly. 

I said, If I am laser focused there and successful, you and others will be better able to help change the world for the better. My tongue has been bloodied many times in efforts to keep this focus. I do care about the political, social, and economic forces at play. I work to have very informed opinions about those things, and act personally to try to make a better world.

But when I'm here with you, or in the club, or working with a client, I try to sequester those to focus on helping you empower your life. My opinions are of these things should not taint those things. I try to keep the main thing, the main thing, and the main thing is you being empowered to create a great life so you can have the energy, the finances, and the confidence to help create a better world.

Just some thoughts on that. With that said, we're going to move on and talk about Roth conversions.

PRACTICAL PLANNING SEGMENT

Last week, we talked about how to contribute to Roth IRAs to try to build up a tax-free bucket and better diversify your balance sheet. But for you and I, and the vintage of humans that we are, we are likely behind the curve on this area of planning because we were told that pretax contributions were the best contributions and for a long time, we didn't have access to a tax free vehicle like a Roth IRA.

So, is there another way to get money into a Roth IRA? There is, and we're going to talk about that today. Something called a Roth conversion. Now, Roth conversion has been around since 2010, and it essentially is taking money from a pre-tax IRA and converting it and moving it to a tax-free Roth IRA, which sounds like a great deal, right?

I get to take money that I haven't paid tax on that is going to grow tax deferred and move it into an account that will never be taxed. Whoa, what a bargain. Well, hold your horses there. When you do a Roth conversion, the amount that you convert over from a pretax IRA to a Roth is going to be taxed as taxable income because the IRS needs to be paid!

So, that conversion will be taxed, and there are a couple different ways you can do that, which we'll talk about. But once you move it over to the Roth IRA, it will grow tax free forever and have all the other benefits we talked about in terms of no required minimum distributions, when your heirs take it out, it wouldn't be taxed, etc.

Another advantage of Roth conversions over contributions is the amount that you can do is really unlimited. It's not limited to the annual contribution limits of Roth contributions. You can do any amount, and unlike a contribution, you don't need to have earned income in order to do a conversion like you do a contribution.

So, if you're retired and you have zero earned income, you can do as much in Roth conversions as you want to, and conversely, if you have very, very high income and don't qualify for Roth contributions, you can still do Roth conversions. So, there's a lot of flexibility here as a tool to get money into a tax-free bucket on your balance sheet.

All these cool little features are why if you google retirement planning or Roth IRAs there is a lot of content on the internet talking about how awesome Roth is. Oh, Roth is so cute. There are a lot of positive attributes to it, but is doing Roth conversions especially right for you? We're going to explore that in two episodes from here.

So next week, we're going to talk about the rules about drawing money out of Roth’s as well as some of the strategies around that. But in the bonus episode the first week of August. We're going to talk about a framework to help you work through. Should you seriously consider doing Roth conversions in your particular situation?

Because the general rules are a helpful guide, but they don't necessarily apply to you. So back to Roth conversions. Let's understand what we're talking about. How do you actually do a Roth conversion? So, if you have a IRA, which you have made contributions to, or perhaps you have a rollover from a 401k, and let's assume you have a million dollars in a pretax IRA, and you want to convert a hundred thousand dollars of that pretax amount into a Roth IRA.

So, you're going to pay tax on those hundred thousand dollars, and functionally the way that you would do this is you would go to the custodian, whoever is holding the asset, Merrill Lynch, Vanguard, Schwab, etc. And there is a protocol, there's paperwork, that you would complete, that would instruct them to "convert", take a withdraw from the IRA, and move that money into a Roth IRA, assuming you have one set up. If you don't, you'll need to set one up and they will handle the conversion just through some standard paperwork. 

Now on that paperwork, they're going to ask you, do you want to withhold taxes from the amount of the conversion, and we're going to get into that in a minute. There’s can do this with Individual retirement accounts to a Roth IRA and there's a standard protocol for paperwork to shepherd this over. In addition to that, you can do 401k pretax amounts converting to a 401k Roth. Now that's a very rare thing. I've only seen it once or twice, so we don't really need to talk about that too much. That's not that common. 

But the key question in this process is going to be, how do you want to pay the tax? Because if you convert 100, 000 in this example, and let's assume that you're in the 22% tax bracket, that 100, 000 is going to become taxable income. which will generate a tax in this scenario of 22, 000. So, you're going to have to come up with 22, 000 to do this 100, 000 Roth conversion to get that money from a pretax account to a tax-free account.

You essentially have two options to pay this tax. Option one is you can pay the tax from the 100, 000 in this scenario that you're converting. So, when you're filling out your paperwork at the firm where your assets are to do this 100, 000 Roth conversion, you could tell them, hey, withhold 22%. You do a basic calculation of what your tax rate is, and just go ahead and pay that to the IRS, and have that money come out of my conversion. So, you start with 100, 000 in pretax assets. You are doing 100, 000 Roth conversion, you pay 22% or 22, 000 out of the conversion. So, what ends up going into your Roth account will be 78, 000. So, you start with 100, 000 in an IRA, you end with 78, 000 in your Roth IRA. So, when you look at it, you're like, wow, my wealth just went down by 22, 000. So, when you do your net worth statement, you went from 100, 000 in an IRA. as the value to 78, 000. Yeah, that doesn't seem that great. 

Part of that is when you look at your IRA, that pretax accountant, if it's worth a million dollars, you put it on your balance sheet as a million dollars, and that is the value of it in whatever statement you look at it. But behind the curtain, is that money has never been taxed. So, is that million dollars really a million dollars? You could argue the case that no, it's not because you have this phantom tax liability lurking behind it that you're going to have to pay at some point, either in incremental amounts, when you take money out of your IRA, or it's going to be passed on to your spouse or to your children, this tax liability is lurking out there. So that million dollars from a net perspective, is it really a million dollars? That can fool us, so when we see this amount go down, that 78, 000, even though it's a lot less, 22% less, it's real money.

There's no tax boogeyman lurking behind it and growing as the assets grow as there is with an IRA. So that's one thing we have to get our mind around. Now, that doesn't necessarily mean it makes sense to take the money out of the Roth conversion. You do have other options. 

So some of the pros of taking the money from the Roth conversion itself is you don't have to come up with the cash from your bank account, your savings account, etc. Although it pains you to see the value go down on your net worth statement, you essentially made the decision to prepay your taxes, which locks in the rate that you paid on those taxes. So, you don't have any tax risk, in theory, on the monies that you converted. Bird in the hand, I know I paid 22% and I feel good about that, and then you've lowered the future required minimum distributions for the money that's left in the pretax account. Now, some of the cons of that is now you only have 78, 000 growing over time rather than 100, 000 growing tax deferred. So, you can see some tradeoffs there.

Now, what's the other way that you can pay the tax on this? 

So when you're filling out that paperwork with the custodian or whoever holds the assets, you can say, withhold zero taxes when you do this conversion of this hundred thousand dollars So if they withhold zero taxes, you'll have a hundred thousand dollars in your pretax IRA You'll convert it to the Roth a hundred thousand dollars going to the Roth and that hundred thousand dollars will be able to grow tax free forever It should grow to a higher amount than the seventy eight thousand right? However now you have taxable income of 100, 000 and you're going to have to pay that 22, 000 when you go and file your taxes because that's the tax liability.

So, when you're doing your personal accounting, you're going to want to account for the fact, hey, I got this extra hundred grand in income from this Roth conversion that isn't going to show up in my W2 or my K1 or my 1099 over your paid, you're going to want to account for that. So, when you file your taxes, you'll have an extra line or two on your tax returns showing this conversion and this extra hundred thousand dollars in income where they'll apply all the tax code. 

Now one note there, you want to be careful about that because if you do the Roth conversion in the first quarter, that is realized income in the first quarter so you may want to file a quarterly tax payment accounting for that. One just to clean it up so it's not this boogeyman that jumps out at tax time, but two that might help you avoid some penalties and interest because you realized it in the first quarter, but you didn't pay taxes until you filed your taxes. 

Okay, so what are the pros of paying it from your after-tax assets?

Some of the pros are, one is you have more money growing tax free in the Roth.

That's 22% more growing and compounding over whatever period of time you're able to keep it in there for you or your beneficiaries. You've bought future optionality because now you've increased the diversification of your balance sheet from a tax perspective, so you'll have more money in the Roth to potentially do strategic withdrawals later on to help you solve for some other tax issue or opportunity for your future self, whether that's 10 or 20 years down the road. 

Another pro could be if you are already saving and investing in after tax investments. So, let's assume you have 100, 000 in a growth mutual fund in your after-tax investments that are already long term, growth-oriented assets. Well, those assets that you have in that, say, mutual fund in your after-tax account, you're paying taxes on the dividends it receives, on the capital gains it realizes each year, etc. Then as it grows, there's another little phantom cloud, tax cloud hanging out there of capital gains. Assuming you have growth, when you go to sell that after tax investment, you're going to have to pay tax on the capital gain of the amount that you sold and right now we know what those capital gains rates are we don't know what they're going to be in the future, so there's that little boogeyman hanging out there.

One opportunity you could have is to take 22, 000 of that after tax investment, use that to pay the tax on the conversion, and essentially you turned 22, 000 of investment money that is growing after tax and now change the tax treatment forever on those monies to tax free. So just some opportunities there. Then if you refer back to episode 494, you can get some more. understanding of the opportunities of Roth accounts in general. 

Now, what are the downsides of paying tax with after tax money? The clear downside is, you're out 22, 000. Poof! It's gone. Yes, you'll see it over in your other accounts, in your Roth account, but you're out after-tax dollars and if you're normal from a perspective of where your money is, most people are heavily over weighted in pretax 401k IRA dollars, generally very low to having no Roth or tax-free dollars. Then the after-tax assets, for the majority of people, are not in investments. They're cash, right? They're CDs, they're emergency funds, etc. because for decades, we've been told to defer, defer, defer by going in 401ks and IRAs, etc. So, there are a lot of people that don't have a lot of after-tax cash to come up with a 22 grant, and if you pay the 22 out of your after-tax assets, that's going to take money away from today. So that's going to limit saving, investing, debt reduction, consumption, or gifting. You will not have that 22 grand today to do any of those things in an after-tax way. So that's one of the downsides of doing this. 

So, this is a lever or a tool in the toolbox that's pretty powerful. If you want to take advantage of the Roth opportunity, you can do as much as you want. You can do it anytime you want. There aren't any restrictions on your income or whether you earned income, et cetera, on the high end or the low end. So, this is a really powerful tool to capture some of the opportunities of the Roth for retirement and also for legacy planning. 

So, the question is, do I pull out this big jackhammer of a Roth conversion?

This is where we see a lot of free content on the internet talking and promoting how awesome this is, and it is. It's awesome. But it's not as crystal clear as you t plan as to whether you use it, and to what extent do you use it and whether there's enough meat on the bone for you?

That's what we're going to have to get to in this series. So next episode We're going to talk about the rules and logic of creating a withdrawal strategy And then the episode after that we're going to try to build a framework to help you think through this So you can get to a judgment call for you that it's not going to typically be crystal clear It's going to have to be a judgment call so you'll want to be very logical about it.

So, for now, let's move on to answer some of your questions.

LISTENER QUESTIONS

Let's answer some of your questions. If you have a question for the show, go to askroger.me, askroger.me, and you can type in a question or leave an audio question, and we'll do our best to help you by answering it on the show. 

A RULE OF 55 CLARIFICATION

So, our first question comes from Scott, related to the Rule of 55. 

Scott says,

 “If I turn 55 this year and quit, On December 31st, 2023, does the Rule of 55 apply to all the funds in the company 401k, even those funds rolled into it after my termination date?

I will receive a sizable lump sum ESOP distribution in mid-2024, six months or so after I separate service. Can I still roll that into my company 401k and enjoy penalty free distributions?"

So, the rule of 55, just to set the table here, says if you separate service from your company after you're 55 years old, so after you've turned 55, That you can take money out of your 401k and not pay the 10% early withdrawal penalty because you're under 59 and a half. So that is definitely within the regulatory structure of 401k plans. That's what the rule of 55 is. 

Now, the key here, Scott, number one is you definitely want to confirm that your plan allows for the Rule of 55 distributions. Just because the Rule of 55 is part of the regulatory structure, it doesn't mean that the plan elected to follow that rule.

That's a key issue here. Will they actually honor that, and you can find that in either in the summary plan description of your 401k plan or by talking to the benefits department. Did they elect that option for you to do in your plan? Because if they didn't, we don't even have to talk about the rollover aspect of it because they don't allow for early withdrawals after separation at 55.

You have to wait until 59 and a half. So, you want to check that first.

I've run into instances where we were looking to do that, but when we actually went and did the research with the corporate plan, they never elected it and they weren't willing to amend their 401k plan to accommodate for it. So first do that.

Now assuming they allow the distributions. under the Rule of 55. I would definitely suggest if you had old employer plans, old 401ks, that you roll those over into the 401k prior to separation. It's likely you're not going to be able to roll those over after separation, so get all those in there prior to separation so you can take advantage of the Rule of 55 if that's part of your strategy.

Now, when it comes to this ESOP program, you're going to want to check with your employer as to whether they will actually accept a rollover from your ESOP into your 401k after you've separated the service. If they will, then it should fall under the Rule of 55 and be eligible for those types of distributions because there isn't really any way of tracking it. So generally, if you leave an employer, you separate service, they don't allow you to roll anything into your 401k, partly because of this tracking mechanism. 

So those would be the two things I'd suggest that you check, Scott. One, do they allow for the rule of 55, and then two, would they actually even accept the rollover after you've terminated your employment?

WHAT HAPPENS IF MY INCOME IS TOO HIGH TO CONTRIBUTE TO A ROTH?

Our next question comes from, ooh, Anonymous. 

Anonymous says, 

"Thank you, Roger. I understand that I have to open up a Roth and put some money into it so it will be there for five years. But what if I'm still working and my income is too high to qualify for a Roth? I'm 53, so would it make sense for me to open up a Roth now so I can use it at age 58 if I retire then?

But how can I start a Roth? I make too much money to contribute to a Roth." 

So, Anonymous, we're going to talk about withdrawals in this five-year rule in, well, next week's episode, it looks like. So, we'll talk about the rules around the five-year rule, so I'm going to address that then. But how can you open up a Roth IRA if you make too much money to contribute to a Roth IRA?

Well, what you can do, Anonymous, is establish a Roth IRA and convert some amount, even up to a dollar, into that Roth IRA from a traditional IRA so you can start that five-year clock when it comes to distribution. So even though you aren't eligible because you make too much money, the two ways you can get money into an IRA, I didn't mention the second one here, is doing a backdoor Roth contribution, which we talked about last week, or establish the Roth and convert even a couple dollars into it so you can start that five-year clock. 

So that would be the way that you do it, and we'll talk about what the five-year rule is next week when we talk about distributions from Roth accounts. 

HOW TO CREATE A FIVE-YEAR CASH BUCKET IN DOWN MARKETS

Our next question comes from Michael about building an income floor to cover the early part of retirement, the five-year income floor, which we use as default, and at least in our strategy.

Michael says, 

"Hey Roger, you've got me convinced. A five-year short-term slab of a pie cake is wiser than pursuing maximum potential return. My question is, when do I build out that five-year fund in the current market, including the last, latest round of financial crisis? 

We are in our early 50s, no debt, two kids, with ample 529 plans, are currently well funded for our base great life, and I am working part time and would like to fully retire in two years.

It seems to be a bad time to convert stock and bond holdings to cash because I'm selling in a rocky but generally down market compared to one to two years ago. On the other hand, we've held our non-IRA assets for five to twenty years and they are still at a substantial gain over purchase price. Also, because of mutual fund liquidations by others in those funds, we've already paid off a lot of the capital gains tax on those funds over the last two years.

We have kept only six to nine months cash reserve up until now. Should I dollar cost average and start building my five-year fund with CDs or cash now? Or just take the hit, and build it more quickly? I'm trying to be objective and realize that neither method is right but it's a bit of a bitter pill to swallow."

This is an awkward stage. This is like the teenage years when we were kids where we were used to one frame of life and now, we're getting ready to move into another, but we're not quite there yet and we're just caught in between our accumulation and our decumulation phase of life. So, you're going to retire in two years fully.

The way I would approach this, Michael, is first, build out what is the five-year cash flow plan for the date that you retire going out five years. What, if any, income is you going to have come in? How much is it going to cost year by year for your base life? How much is it going to cost for discretionary spending throughout those years? What are your base tax estimates for those years, and how much do you actually need from your financial assets? You want to know that first. 

The second thing you want to know is how feasible is your plan overall? Are you well overfunded from a long-term perspective when you run your feasibility test? Or are you constrained and you're trying to make this work? That's going to influence this decision as well. 

So as an example, if you're extremely overfunded, For the long-term trajectory of your financial future, given the withdrawals that you'll need to do from your financial assets, you potentially could lean more towards a systematic withdrawal approach and not build as big of an income floor of this pie cake. You have that option because you have this excess of money to weather bad markets. But if you're more normal and constrained, that can become much more problematic, and it's going to make sense to have more security. 

A lot of the logic around this five year floor, Michael, is that not only does it pre fund the spending, so you don't have to worry how the first half of the game or the first quarter of the game is going to go, but it also gives you a lot of financial flexibility with all of this liquid assets, which is going to help you better adjust to transitioning from teenager to adult or from accumulation to decumulation because it's not just the financial aspects that are going to change, but it's you don't even know what life was going to look like then and what your preferences are going to be. So, it's going to give you a lot of liquidity to adjust as you figure it out, and that can't be captured on a spreadsheet. 

It's also going to help you have some shock absorber for all the incorrect assumptions you have on your spending because you've never retired before. 

So, when do you start this, Michael? I think you start it now and it can be a gradual thing. Now, if I were doing it, I would highly recommend you at least get the first three years funded now, because that gives you a longer runway, and then start to redirect your free cash flow while you're still working to begin to build this up and refine your estimates.

This idea of given, I'm looking for the quote here, the quote of, it seems like a bad time compared to one or two years ago, and essentially given this situation, I don't buy that argument at all. It is what it is, where the markets are, you want to be aware of it, but what's more important, that you try to peg the top or get back to where you were two years ago, or that you secure the outcomes for this major life transition?

Which one's more important? I would argue it's much more important that you secure your cash flow for the life outcomes during this major transition. You've benefited from amazing markets and the fact that we didn't get to sell it a year or two ago prior to that bear market. Yeah, that sort of sucks, but hey, you're never going to hit the top.

Just because we've had some rebound here this year, maybe that makes you feel a little bit better in doing something like this, doesn't mean we couldn't roll right back over. Your life outcomes when you're retiring a lot of your superpower of earning income is a big deal. So, let's secure the outcome and do it as tax efficiently as possible.

This will also allow you to keep the rest of the money "at risk" in markets and not have as much angst once you leave your job in terms of how you're going to pay your bills and will this all work out because you've already built out this floor, it's actually going to set you up better to stay the course with those at risk assets because you have this floor when you don't have any income. So, it'll set you up for success and not feel like you have to make major life decisions and go back to work because we roll over into a bear market, et cetera. 

Michael, I get it. It's a pill. We're never going to avoid pain and uncertainty.

The key is the outcome and the outcome for you is in two years’ time, you want to be fully retired, and you want to have confidence going into that so you're not always playing defense. 

ON CREATING A BOND PORTFOLIO LADDER

Next question has to do with an optimized question around implementing the bond portion of a portfolio from Christopher.

Christopher says, 

"Hey, Roger, thanks for your work. Here's my question for you about the pluses and minuses of a new investment strategy I've incorporated since last December. I was tired of seeing bond prices do nothing but fall. At the same time, though, this year, interest rates for T bills and CDs have been rising.

So, in January, I began moving nearly all of my bond investment allocation in my 401k out of bonds, and I began building a ladder of T bills whose maturity dates are six months and out. I now have a ladder of six runs. One matures each month, and I just rolled my first T bill into another that will mature in December at 5.3%. I will continue doing this until the market turns south, so I am out of bonds for the moment and into government guaranteed interest, even though 5% might be barely keeping up with inflation, this is better than the losses the bond funds were taking. What's good about this strategy? What potential downfalls?"

Okay, Christopher, let's think about this. What are we trying to accomplish with bond allocation? That's the central question here in this optimized question. I'm going to assume, Christopher, that this money is 5 years plus money. This is your long-term investment portfolio, not your income floor part of the pie cake that we talked about previously. So, I'm going to make that assumption.

In December January, you converted from selling your bond funds that likely lost value, 12% or so, probably last year, because we've had rising interest rates and now you can buy guaranteed 5% T bill rates and you're rolling those over a six to seven month, it sounds like, ladder.

What's good or bad about that? The potential pitfall here, Christopher, is now you've set yourself up for making lots of decisions that you probably don't have to make. If this is five years plus money, Then you're going to have lots of decisions to make on keep rolling my T bills, keep rolling my T bills. If the markets go down or interest rates in bond funds seem attractive now, do I go back into my bond funds after the interest rates in those have risen? 

What happens when interest rates go down? Now that we are at more normalized interest rates, what's going to happen is if interest rates start going down, you're going to see the T bills start to earn you less and less as you roll them out month after month, and you'll see bond funds start to pay more and potentially rise in value. Now you have got to figure out the tricky timing of all of this. What if interest rates start going down, you convert back to bond funds, and then interest rates start going back up again, your bond funds go down, and you go back into T bills.

It's a scary game to play, and it sets you up for a lot of decision making in an area that's not going to have a material impact on your life assuming these assets are invested for a 5-to-10-year time frame. Yes, your bond funds have gone down in value. You sold them in December and, yeah, they've gone down a little bit more because of some interest rate rises.

But you left after all the horses were out, or most of the horses were out in terms of interest rates rising. So, you locked in those losses on the bond funds in order to go into these T bills. So, it would have been better if you could have timed it perfectly and that's an example of how difficult this is and why I don't think it's worth it if it's long term money.

Because long term with bond funds, what happens internally in those bond funds? Yes, during rising interest rates, the value of the fund goes down because of the maturity of those bonds, and the value will go down depending on the maturity profile of that bond portfolio. But all the while, internally in that portfolio, bonds are maturing, money is being deposited into the portfolio, and the maturing money and the deposits that are coming into those funds are having to buy new bonds at today's interest rates. So that portfolio is naturally regenerating itself. whether interest rates are going up and interest rates are going down.

So, if you have a long-term time frame, this all washes out, even though it's painful right now. In a proper asset allocation, because you're trying to diversify your risks, you're always going to have things that you hate, right? Your bond funds are going right now. If you believe in asset allocation and your bond funds are going down and you're doing an annual rebalancing, in theory, you're supposed to be buying more of the things that you don't like. Because that's how you buy low. You sell things that are doing a little bit better. You buy the thing that has gone down, which brings your asset allocation back to the risk profile that you've targeted for your long-term portfolio. So, an asset allocation strategy, by design, is making you sell the things that you want to buy more of and buy the things that you want to sell, and that's how you, over long periods of time, buy low, sell high. That's why you have to have a proper time frame for these assets. 

Now let's address the bond ladder. A bond ladder is a good strategy to do. For a bond portfolio, it's definitely a good, viable way to optimize your bond portfolio where you avoid bond funds completely and you build out your own bond ladder. 

What a bond ladder is, for those of you that might not know, is let's assume you have 100, 000. You buy a bond that matures in a sequence of maturities, like a ladder going up. In this case, Christopher bought a one month bond and a two and then a three and then a four month bond and a five month bond out to ten month bond, and then when the one month bond matures, you go buy The next 10 year or the next 10 month bond and you just keep building the latter out ahead of you and the logic being that if Interest rates are going up, you always have some short term money that you can buy at the current higher interest rates and if interest rates are going down you always have longer bonds that you can hold, that should rise in value because interest rates are going down. Over time, that works out mathematically and can give you a fairly resilient bond portfolio. That's what a bond ladder is. 

Now, Christopher, if you were going to switch to a bond ladder, it sets you up for having to manage it. So, you have all these decisions you have to make, and the trading you have to do, but if you were to do that, and again, assuming that, Christopher, that this is a long-term portfolio, I would suggest that you have a bond ladder that's going out to 8 to 9 years. I think the sweet spot, at least for us, where we try to focus is an intermediate bond portfolio, whether it's a fund, or an index, or a bond ladder, which is going to have a duration of around 5, 5 and a half years.

So, T bills are definitely attractive. I hadn't bought a T bill up until about a year and a half ago in my 30 years in this industry, and I've bought, I don't know, millions and millions of dollars in T bills. I don't know how many T bills with clients. 

Yes, T bills are attractive as a cash management tool. It's the risk-free rate of return. But if this is a long-term portfolio, I think a bond ladder is totally appropriate for the bond portion, if that's the complexity you want to add to your management, but I would suggest that you target an intermediate bond ladder rather than the short-term bond ladder.

So those are my thoughts. 

With that, let's move on to the Bring It On segment.

BRING IT ON

Now it's time to work on the non-financial part of your retirement and today we're going to talk about the relationship pillar and how do we maintain and build better relationships as we get older, and it's just me today. We have a pretty quick one. I just have a couple thoughts here on some recent experiences.

So, I have two specific ones. I recently got back from a cruise to Alaska with my wife and my children, which was awesome. It was great to spend so much time with the entire family. We also had about 50 RRC members that went on the cruise, 50 with their spouses, et cetera. You felt like you were walking around the ship with all your friends, because most of us were meeting for the first time in person, but you felt like you knew each other because we've seen each other online and had discussions, et cetera, and that was really special. 

But one thing I discovered, because I'm not a big cruiser, I think the last cruise I had gone on was my honeymoon, like 33 years ago, was how easy it is to make friends when you're doing something with strangers that has some common thread to it. 

In this case, an Alaskan cruise, we flew into Anchorage and we took some bubble train out to some port that was like a couple hours long and I was sitting with my kids and across the table from us was a couple that I knew from the club, Tony and Tina, and they had people sitting with them that nobody knew and conversation just sparked up because we're all excited about the cruise and we made new friends just by being there. Everybody's much more open to being social and making connections when they're all doing something together just like kids do when they go to camp.

While we were on the cruise, they had this trivia night every day at like four they did trivia, and it was teams of eight and it's in this common area and my kids would go and my wife would go, and we'd have some RRC’ers come in and out of the team but we met this guy Mike and his wife Connie from Chicago. He was our ringer. He's just a random guy that we befriended in the card room who ended up being on the trivia team the entire cruise. Because we were in the same place playing together, we were able to make a new friend, Mike and Connie. They're out in Chicago. Howdy, Mike, if you're listening to the show, because he had no clue about the show.

But my point here is that when you're traveling, part of travel is to see the world, et cetera, and get you out of your normal routines, but the other part is you're much more open to saying hello to somebody or making a seed of a potential new friend, if not for the moment, maybe for a lifetime, and that's a spirit that we need to have.

That's an important reason to travel, whether it's local or however you do it. 

The other observation I had that I want to share with you that you can confirm or maybe try is my normal routine on a Saturday, is I sleep in a little bit more than usual, and then I drink coffee and usually watch a little golf with Shauna as we're waking up.

This Saturday morning, literally today, because I'm recording this on a Saturday, I decided to get up early and walk Sherlock. Right when the sun was rising, because it's been so hot here in Texas, and so we were walking Sherlock, and I tend to wave to cars, and it was just pleasant to be outside. It's so easy not to be outside.

So, by getting up early, it got me outside and then I decided rather than have coffee at the house, I went to Starbucks. My daughter works at Starbucks, maybe three, four miles away, and I'll go up there and journal sometimes. I usually keep to myself, but because I went to Starbucks rather than sat on my couch and drank coffee, I bumped into a neighbor who I've waved to a million times, but never actually talked to. He and his wife, they're from Bosnia originally, he hangs out, he has like his man cave in the garage, that's why we always wave to him, and we probably had a 20-minute conversation, just about the neighborhood, and we had a utility bowl that got knocked down the night before, and told me about his kids, and he knew Emma because they came into the Starbucks every day.

My point here is, I got out of my normal routine, I got out of my house, and just played in traffic by going to Starbucks. Those little things prompt a seed for making connections, and it's easy not to do those when we set up our house for comfort. As we get older, it's important to go to restaurants, go to cafes, to go on cruises, to play in traffic, and be open to saying hi to someone or waving to someone you see because if we don't, our universe is going to get smaller and smaller and smaller from a relational standpoint, which is going to make us smaller as a person. 

We have to guard against that. So just some thoughts about making connections and playing in traffic. With that, let's move on and set a smart sprint.

TODAY’S SMART SPRINT SEGMENT

On your marks, get set.

and we're off to taking a little baby step that you can take today to not just rock retirement, but rock life. 

Well, you know what it's going to be. Get out of your normal routine. You drink coffee at the house on a weekend, go to a cafe. You don't eat out much, go eat out at the local place, maybe start to see some common faces and say, hi.

CONCLUSION

In that vein, this show is all about you, and we try to focus on you and your journey, being authentic, being curious, being free from big finance, products, and gimmicks. This is me trying to sharpen my saw for myself and for my clients and for you, and you're trying to sharpen your saw for you, and I want you to take action.

That's what it's all about, not intention, take action. So if you are signed up for 6-Shot Saturday, hit reply and say hi. I'll say hi back. 

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 are historical and does 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.