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Episode #502 - Should I Realign My 401K Now That I'm Retired?
Roger: "There are two ways that you can live your life. One is as though nothing is a miracle. The other is as though everything is." -Albert Einstein.
Hey, Roger here.
Welcome to the show.
This is the show dedicated to helping you not just survive retirement but have the confidence because you're doing the work to lean in and rock retirement.
Today, we're going to talk about wonder as well as answer a number of your questions.
In our Bring It On segment today, retirement coach Kevin Lyles and I talk about wonder, maintaining wonder in our lives. It was a fun discussion. And after we finished having that chat, which I'm going to share with you here in a moment, a few days after, actually, I had a conversation with two clients, husband and wife, who I've had the honor of knowing pre-retirement, navigating into retirement, and now they are full time RVers.
In their words, they're free-range fun hogs. I'll explain that in a minute. When we have our check ins, it's like, where in the world is Carmen San Diego? I think that's the reference. They're always someplace different and we go through every place that they've been and all of these amazing journeys and experiences that they've had as they have traveled across the country and actually a little bit internationally in their RV.
They are on fire with their enthusiasm and joy. It's really inspiring. These people have so much wonder in the stuff that they're experiencing, in that they are an exemplar that a lot of us could emulate and learn from.
Now, it doesn't mean that they don't have troubles. That they don't have aches and pains because they're retired and they're of that age. But they still maintain wonder and enthusiasm. Recently, earlier this year, they started to post photos and small commentary on their exploits in exploring this country in little crooks and crannies that I'd never heard of, and maybe you haven't heard of, and I got their permission to share their blog with you, and we'll have a link to it in our 6-Shot Saturday email, it's called Free Range Fun Hogs.
I think they told me the origin of that name, free range fun hogs, happy, fun adventures, wherever we roam, and on it, they have done a great job of hosting a lot of video and photos of these little nooks and crannies and really, I mean, I've not seen a lot of these places and it's going to be maybe an action list to go do some similar exploits.
So, we'll have a link to this in our 6-Shot Saturday email so you can maybe get inspired and either reignite or flame the wonder that you have in your life with that. Let's go talk to Kevin Liles about wonder and then answer some of your questions.
BRING IT ON WITH KEVIN LYLES
Now it's time to bring it on and talk about mindset and how that plays into you rocking retirement and to help us is Kevin Lyles, coach in the Rock Retirement Club. What's going on, Kevin?
Kevin: Just enjoying summer.
Roger: It's hard to say that here in Texas. We're trying, we're trying. I'm keeping a good mindset.
Kevin: Ohio has had a pretty moderate summer, so it's been really nice.
Roger: So, what do we need to work on with mindset to rock retirement?
Kevin: Well, Roger, I finished a book and I want to talk about the power of wonder. This concept comes from the book, The Power of Wonder, The Extraordinary Emotion That Will Change the Way You Live, Learn and Lead by Monica Parker.
I enjoyed the book, and it made me think, as children, we spend many wonders filled days. The whole world is a wonder to us as we learn new things, but I think as adults, we can become jaded and really stop looking for wonder. I think that's something we need to work on and try to change when we retire.
Roger: So, what do you mean by wonder? Is that like gratitude? Define wonder for me.
Kevin: At its most basic to me it's a sense of awe at something, but it's sort of when you have rapt attention or astonishment at something. It can be something in nature could be learning something new, but it's just that sense of awe we get where we're fascinated with something. We realize there are things bigger than us. More important than us and that's a great sense to have and research tells us that wonder is even more beneficial to us and frankly more achievable than happiness, but we have to be open to it.
Roger: I just had something that made me wonder that I was like, wow, that's Incredible and I shared it with Graham my nephew the other day who had dinner with he's going off to college. It was on the Huberman Lab podcast, who's a professor, he knows Peter Attia, and I forget the gentleman that was talking about this, and I'm going to really butcher some of this, but I was blown away by it. So, this researcher studied primates in Africa for 20 plus years, as well as being a Stanford professor on Neurobiology or something like that.
He talked about this specific compound in the human that makes humans human in terms of rational thought, et cetera. I can't remember the name of it because I was listening to it on a podcast. But when you look at it under a microscope, you can't distinguish this thing, whether it's from a fish, or from a human, it's in everything, but you can't distinguish which one's human and which was not. He said there's like five people in the world that can do it.
His point was the way he explained it was if you take an ant and you put the ant on a table, it's just going to wander around randomly. If you put 10 ants on a table, they're going to wander around.
But if you put a thousand ants on the table, they're going to start to organize and build a colony and they're going to enslave aphids and have this huge organizational structure. So, this thing that is in all of us that's indistinguishable, the thing that makes humans different is a matter of volume.
We have billions of these things that are organized in ways you could never imagine if one thing was just there by itself. That just blew me away.
Kevin: Yeah. I've read the debates as to whether or not animals are self-aware. Some people think that's what distinguishes humans. We're self-aware. Animals aren't. I don't know what I think about that.
I've read a lot. Do you have an opinion on that one?
Roger: Very uneducated opinion, I think. I don't know. I don't know. I was just amazed at the fact that his argument was, it's just the volume of these things that allow us to be self-aware and connect all these things and organize in ways. Just like one ant or ten ants can't do it.
So, if you take a fish, It just has maybe a million of these things. We just happen to have an X percent more, but I was like, wow.
Kevin: That's what we're talking about, Roger, because to some people, that would be completely uninteresting. Wouldn't it? But it created a sense of wonder in you, and what gives us wonder is going to be very different for each of us.
Many people find wonder in nature. I've mentioned before. Walking on a beach, I'm filled with wonder, always, just seeing the tides, the waves coming in, the wildlife, just the vastness of the ocean. That, to me, or hiking in the mountains, the Grand Canyon is awe inspiring to me. But others will find wonder in travel, seeing new places, meeting new and different people.
Or it can just be simple things like you talk about. You listen to a podcast, and we're filled with a sense of wonder. Maybe it's a trip to a museum or just tinkering with a car engine in your garage, and it can be very different. I know you took a couple of big trips this past summer, one to Alaska, one to Europe.
Did you have some wonder there?
Roger: I did, and I had some things that everybody else looked at with wonder that I was like, eh, that's sort of cool. Like one on the Alaskan cruise, the glaciers. The boat, like, went down just to go look at this glacier, and everybody was taking pictures and talking about it, and I'm like, Eh, yeah, it's a bunch of ice.
Cool.
Kevin: Were they calving? Were they breaking off into the water?
Roger: They were not. Maybe that would be wondrous, but I'm like, Eh, it's a big thing of ice. Even in Murren, there are glaciers, the glaciers that basically big, compacted things of ice, right? Even if it's on a mountain. Right. Okay. There's a bunch of those you could see.
I'm like, Eh, okay, cool. A lot of ice. But they were wondered by that. What was the most wondrous thing?
For me, it was the history around us. Like the cathedral that we went to in Cologne, the gentleman that guided us through it was a professor at the University of Cologne in ancient history. So, he provided the wonder.
It took like 400 years to build and so, if you think of all the craftsmen, the architects, they all were working on it knowing they would never see its completion. To me, that's wonderous. Yeah.
Kevin: Well, and what brings us wonder, changes of the original seven or eight great wonders. There's only one still existing.
Earthquakes and fires and things have destroyed most of them and we replace them. Things like the Grand Canyon or man-made things like the Eiffel Tower. It's just whatever it is for you. If you can seek it out more, you'll do better, and there are some proven benefits of wonder. Increased wellbeing. Better relationships. Enhanced memory. That one surprised me. We become more empathetic, imaginative, and flexible when we experience wonder. Research has proven that.
So, three things we can do to help us to experience wonder, and these sort of came out of this book by Monica Parker.
Number one, watch, observe. Just be open to experiences. Too often we go through life, and we don't pay attention, so pay attention. Allow yourself to daydream a little bit.
Two, and this one is the big one for me, is curious. There are a couple kinds of curiosity that scientists talk about. There's surface curiosity, which is when you're curious about closing a specific knowledge gap. You want to answer a specific question so you're curious about it, you answer it.
But that's not wonder. Wonder is when we have deep curiosity, when we experience enjoyment, just learning for learning's sake. That's what we want. We want to be curious about the world and things we don't understand or outside the world by thinking of astronomy and all the wonder that's in space.
Then number three, allow yourself to become absorbed in something or in a task. Get so engaged that you commit your total attention to it. Then you've got a chance of experiencing wonder.
So, those are my tips for experiencing wonder.
Roger: I was listening, and it seems like wonder doesn't have to be something amazing.
It can be watching literally an ant walk across the pathway. It doesn't have to be wondrous in the epic sense.
The other thing that comes to mind, I'd be curious in your thought on this, is it's hard for a lot of us to build relationships because we're so set in our ways. Judgment is the enemy of curiosity.
But if you are looking to build a bigger social network, you have to be interesting. Interesting people are curious because they learn things, and they connect dots, and they're exploring, which makes someone interesting, which actually makes someone more attractive to be their friend.
Kevin: Yeah, and on some level, it's almost like you've got to allow yourself to be vulnerable enough to express wonder.
It's not cool, right, to be in awe of something, so you try to pretend that you're nonplussed about things. If you're willing to open up yourself and be vulnerable in your relationships and say, yeah, I'm really astonished by this, then your relationships can deepen. So, I think experiencing wonder can help us in so many ways.
Roger: I'm going to check out the book. I'm going to put a link to it in 6-Shot Saturday. And I am in awe of you, Kevin Lyles.
Kevin: Have a good one, Roger.
LISTENER QUESTIONS
Now it's time to get to your questions. If you have a question for the show, the easiest way to ask it is to go to askroger.me and you can type in your question, leave an audio question, and we'll do our best to answer it on the show to help you take a baby step towards rocking retirement.
We're going to have a number of Q&A focus segments here this month and in September. So, it's a good time to ask your questions and we'll try to get it on the show so we can help you on your journey.
SHOULD LIZ REALLOCATE HER 401K?
So, our first question comes from Liz.
Liz says she is 69. She retired this last year. Her husband and her are living comfortably on social security and his salary.
He is going to retire within a year. They have an emergency fund of one year and they don't anticipate having to touch her IRA until her required minimum distribution starts.
Liz says they have no debt, and right now, she says her 401k has 23% stock, 33% bond, 44% short term reserves.
Liz says,
"I know I'm too cash heavy, at the same time, I'd like to simplify this mix.
On a scale of 1 to 10, I would say my risk tolerance is a 4. What would you recommend?"
I'm assuming, Liz, that that 4 means that you tilt slightly more conservative, 1 being the most conservative, so, just so I have my thoughts correct. So how should you, or should you, reallocate this 401k based on the fact that you just retired and your husband's going to retire?
That question, standing alone, Liz, can get a little bit confusing because you have all these thoughts that float around it. I don't need the money. We're living comfortably. Oh, my husband's going to retire, and it's easy to not know where to start in determining whether to reallocate this account or not.
Obviously, I can't give you a recommendation because I don't know you, but hopefully we can build through how to think through this so you can come to a decision for yourself.
So given that you're living comfortably on your social security and his salary, that's awesome. You're paying for the life that you want and it's comfortable and you have these payments coming in that are covering it.
Now within a year his salary is going to go away. So that's going to create a drop in your income. Now, I don't know if he's going to start social security after he retires, and that will make up for all or at least part of it. But if you want to think through how, you should allocate the 401k to support you and your husband for whatever period of time, you're alive and feel that it's simplified and you understand why it's invested in what it's in, I suggest creating some simplified plan of record.
Now you can get as detailed as you want on how you do this but now what might be a good time, Liz, to create a simple spreadsheet or budget of okay, this is the income that we're going to have over the next five years. Now, we know you're going to have your Social Security. You may have the first year have your husband's income, and then the second year his income is going to go away, and if Social Security starts, you want to put that into this five-year cash flow forecast. This way you have some visibility of the income you're going to have during this big life transition.
Below that, you want to estimate each year how much money you're going to need to live comfortably, as you describe it, or your base great life. So that's the spending you need to just have a base great life, plus health care, plus any extraordinary spending that might come up over the next five years.
Maybe you need to replace the car in three years. So, you would put that into year three. Maybe you're going to do some gifting, etc. You’re going to put that into whatever year you're going to do that.
Then you can do a very simple tax assessment based on your income and then subtract your total spending from the income you're going to receive and do that for each of, say, the next five years, Liz, and it's going to show you, oh, even though he is retiring because of his social security, we're still going to be able to live comfortably with the income that we have, or there's a gap. Meaning I don't have enough income over the next five years to cover the money that I need to spend for my husband and I to live comfortably. You'll identify what that gap is year by year.
Let's assume that when he retires that you need 20, 000 each year to fill the gap because his work income has gone away, just as an assumption, Liz, but just go through this step by step. So, if we assume it's one year, you're fine, and then years two, three, four, and five, you have a gap of 20, 000 a year.
Well, 20, 000 times four is 80, 000. So now you know that absent other income sources coming in or money coming in, you're going to need 80, 000 of your money, your investments, your bank accounts, et cetera, to fill the gap over these next five years. because your income is going away. So that 80, 000 I think is important here, Liz.
Then in this example, and your numbers will be different, then you need to identify where am I going to get that 80, 000? Where am I going to get my extra 20, 000 that I need to fill the gap in years two through five? Then you would list your accounts. All your after-tax accounts, your bank accounts, your emergency fund, et cetera and you would list out your tax deferred accounts, your 401k, whatever assets your husband has, and then you would map out where does it make sense to pull the 20, 000 a year from, or that 80, 000. It may be a different account each year, or it may all come from the same account. The point of this exercise, Liz, is to identify where you're going to get the money because we want that money safe for at least the next five years.
Now if you're very conservative You could actually extend that and do that over seven years or over eight years and have that money safe. Obviously, you're not going to touch your emergency fund and that money is there as a known protect you against bad assumptions or just life events or things that you just don't know are going to happen. So, I would keep that out of the mix.
Then let's assume that it's your 401k that it's going to come from Liz, then that means you're going to want to have that amount of money in that short term reserve category that you mentioned.
The key to this amount of money, Liz, is that you get the money back. It's not at risk of going up and down. So that could be an insured cash account. It could be a money market. Thankfully, one of the upsides of interest rates going up is that we can earn money on those safe reserves. It wasn't that way a few years ago.
So, I'll stick with my example. So at least 80, 000 of that 401k in this example would go into that short term reserve if that's where you're going to pull the money from, and then the rest of the money could be a mix of more cash, bonds, or stocks. That money we know has at least a five year time frame or longer if you do this out longer in terms of being invested so we don't have to worry day by day or month by month once the markets are doing. It statistically is set up for better outcomes in markets that go up and down, whether that's stock or bond markets.
By the way, Liz, this entire process is under the pillar of making your plan resilient, meaning that when he retires and his income goes away, you two can feel confident in living comfortably for a long period of time. It gives you a lot of liquidity to adjust if you guys adjust what living comfortably means, because now you're both retired. So, this is under that resilient pillar.
Then with the rest of the money, it's a little difficult in this form to say what you need to do with it. In theory, this is money that is going to be for your future self, five to whatever number of years now, and we want to protect against inflation, but I am a big fan of If you're very conservative, the minimum effective dose of risk, meaning that if you could do all of this and just earn 5% right now or interest, and you don't want to take investment risk and you're fine for the trajectory of both of your lives, then fine.
I think for most of us, it makes sense to have investments in equities, even if we're risk adverse, because the risk with equities is the near short term, losing money now, but long term, meaning for your 80 year old self or even your 90 year old self, equities provide income in the form of dividends, and over a long term, they are a very good inflation hedge, whereas bonds and cash like investments are not.
But I think Liz, if you get your floor in place, you and your husband have this liquidity bucket to know how you're going to live quote unquote comfortably over the next five to eight years, then you can feel a lot more comfortable of having some equities and some bonds.
Now, one tributary that you can take on this, I'll just put this as a footnote here, is if you're very risk adverse and would prefer to simply have guaranteed income you could explore trading part of your assets, whether it's your 401k or other assets to supplement your social security, yours and your husband's social security with guaranteed payments so that you can quote unquote live comfortably without having to worry about markets and allocations, et cetera.
I think that is a valid path for some people and that involves giving up some control of portions of your money, your cash and your 401k or rather to essentially buy a pension via some type of annuity product. I think that is a viable option for someone that is, we'll call it risk adverse or safety first. They would prefer just to have a guaranteed income. If they can forecast living comfortably on that, then, hey, that's a win, right?
But you want to think through it in a logical way to get to what the allocation would be. Because if you just approach, how should I allocate these assets by itself, it can get really confusing, and you're basically going from the wrong direction in the thinking hierarchy.
So, I would go through what we talked about in building a plan of record, whether it's a robust one or a simplified one, and let that lead you to how you should allocate these assets.
SHOULD BARRY BE CONCERNED ABOUT HIS ASSET ALLOCATION?
Our next question is an audio question from Barry related to the diversification within common indexes.
Barry: Hey Roger,
My name is Barry. I live in Athens, Alabama. Me and my wife are both 55 years old, and we have roughly about 3 million in investments, mostly mutual funds and ETFs and few stocks.
My question today is most of our funds are in a S& P 500 fund, specifically SWPPX. It's the SWAB S& P 500 fund. I was reading an article the other day about Roughly 26 to 27% now of the money that's invested in the S& P 500 fund is in IT investments. Just curious to get your thoughts on, is that an issue going forward?
My wife and I don't plan to take money out of our accounts to probably when we were 60 or 62 when we planned on taking Social Security at age 70. Our house is paid off. We don't have any bills, but again, just curious. What are your thoughts?
Any concerns about 25% of our money going into the S& P 500 fund being in IT?
Thanks again for your help and enjoy the show. Thanks. Bye.
Roger: That's a great question, Barry. The S& P 500 is the index which most. U. S. stock mutual funds are based off. Not most, I'd say it's the most common, and you have a significant portion of this 3 million, essentially in the S& P 500 index.
Is that a concern or not? Possibly, but not necessarily.
So, if we think about how you have this 3 million allocated, and you're actually at a good age to go through this process, Barry, of getting to your plan of record of how exactly life is going to work when you get to 62 and where you're going to pull money from so you can slowly start to readjust or realign your assets for not simply accumulation. Which is the season that you've been in probably for decades where you're just contributing to assets, taking investment risk, and have a huge time frame, which is perfect.
Now you're getting close to changing strategies to focus on the outcomes for you and your wife that you want from a life standpoint, the harvesting season. Doesn't mean that you won't still have assets growing for sure. It just means that it's, there's a slight adjustment here.
So, let's talk specifically about should you worry about the S& P 500 index of what you have a large position being so concentrated in it, which is information technology, technology stocks.
It's helpful to understand how the S& P 500 is constructed. So, there are a number of sectors that the S& P 500 makes sure that it has exposure to, and some of the basic ones are basic materials, consumer cyclical stocks, financial services, a lot of banks, real estate, communication services, energy, industrials, technology is one of them, consumer defensive, healthcare, and utilities.
So those are essentially sectors that you will have exposure to in the S& P 500. So first it defines those sectors, but the way the S& P 500 is created is there's a Standard Poor's company, manages this mathematical model, this portfolio that's meant to represent United States economy in terms of the public stocks, and it's created in what's called a cap weighted fashion, meaning that cap is short for capitalization. Which essentially is all the stock that's out issued, multiplied by the price of the stock. So, the larger the stock is, the more weighting it receives in the S& P 500 index.
So as an example, Apple is I believe the largest stock in the S& P 500 index. It has the largest market capitalization of about, actually it's back off of Apple, and let's just look at the S& P 500. I'm just looking at an exchange traded fund. I think it's the iShares IVV. And if we look at their holdings and IVV is an exchange traded fund, that's meant to mimic the S& P 500 model. Apple is the largest position, which is 7% of the portfolio, and then Microsoft, which is 6.
4, Amazon is 3. 1, NVIDIA. is almost 3%. Google is 2% and on downward. And so, you can see, if you look at these top stocks, they're all technology stocks. Some of them are very volatile stocks. Tesla's in there and then you have Berkshire Hathaway, and then you get down to United Healthcare group, and then if I go, keep going down, then we get into Johnson & Johnson, which is 1.
2% of the portfolio. JP Morgan is 1% of the portfolio. So, let's take that. Johnson Johnson's 1. 2% of the portfolio. Apple is 7% of the portfolio. And Microsoft is 6. 5%. Because they are larger companies, their stock price multiplied by their share of stocks creates market capitalization, and as stocks increase in value, over time, they get a bigger share of weighting in the S& P 500 index because it's cap weighted. It's going to give much larger weighting to the largest companies.
In theory, although there are about 500 companies in the S& P 500 index, if I go to the bottom of the index, you have a number of companies that have like 0. 01% weighting. There's News Corp, let's see what else, Fox, Comerica. Mohawk Industries, Sealed Air, all of these are minuscule ratings relative to the top weightings, Apple.
So, in some ways it becomes a momentum investment. As technology stocks do extremely well, they start to have more and more and more influence. There are still roughly 500 companies in there, but when you have such a high weighting in one particular sector, it can really dominate the performance of the portfolio.
Is that a risk? Potentially.
What goes up comes down. So as those come down, that can bring the index down more 500 stocks. Most indexes are weighted in a market cap way.
What are the alternatives? Well, there are what are called equal weighting indices, where they give an equal weight to every one of the companies. I'm not necessarily a fan of those because that is actually going to overinfluence very minor players in the economy.
My preference is to use index like investments that are a little bit more thoughtful in how they're created. They put a profit screen overlay onto the general index, but they act very much like say the S and P 500 index, but there are some thoughtful things happening behind the scenes, profitability screen being one of them, as well as leaning towards what historically the drivers of return a little bit more valuated, a little bit more smaller cap, but still maintain the core thing that you get with index based investing, which is very low turnover, which makes them tax efficient, and very low expenses.
Expenses are a big driver here, and one of the biggest advantages of a mutual fund or an ETF that, say, tracks the S& P 500 is that they don't cost very much relative to active management. There are more thoughtful Index like investments that build their index a little bit more thoughtfully, in my opinion, than, say, the S& P 500.
As an example, in our practice, we use a lot of dimensional investments, which is DFA, and I'm not recommending them to you, because they build their own index to try to achieve exposure to an asset class in a little bit more thoughtful way than, say, the S& P 500.
So, as an example, when I look at, say, one of the core U. S. equity, I'm looking at an ETF that we use that is based off of that methodology. Information technology is weighed at 20.85 percent, whereas the S& P 500 is 26.39. So, underweighted information, but still. A lot there. They have 8% energy verse 4% in the benchmark, the S and P 500.
So, there are some difference in weightings, but they build it from the ground up in a different way, and they're not as cap weighted as some of these be 500 is Barry.
A lot of inside baseball here, Barry. When I have this conversation with clients on what are we going to use to implement the portfolio my preference is to use these more thoughtful broad based diversified portfolios that still have very low fees and very low turnover because that's what I care about. I usually care about those three things, broad exposure to the asset class, low fees, low turnover, but some clients have a preference for the S& P 500 or Vanguard, Total Market, pick your poison here. They have a affinity for those, or they have positions that have very large, unrealized capital gains so to pivot from one to the other could be a major tax bill.
At the end of the day, it’s not going to make or break your retirement. This is a stylistic thing of just trying to think thoughtfully in the optimization stage of your retirement planning, Barry.
Long story short, I wouldn't be too concerned about you using the S& P 500. What I would say is the bigger decision that you need to focus on is whether your plan is feasible or not. Not just your investment assets, but your total assets? Do they support your forecasted lifestyle once you hit age 62? Is that feasible? 62 to say 92.
Then secondly, start to make the plan resilient so your life isn't as dependent on markets going up and markets going down.
As an example, if you're in a, let's say a 60 40 portfolio, 60% stocks, 40% bonds. I'm guessing you're probably more aggressive than that. Just my intuition going there. And you have 3 million and let's say it's 60% stocks, 40% bonds.
If we were to go through the great recession of the 08 era from October of 07 to March of 09, that type of allocation, assuming you stuck with it, from the peak of the market, which was October 15th, 16th, around to the bottom, which was March 9th, I believe, of 2000, that kind of portfolio would've gone down about 24% peak to trough.
So that $3 million would've become $2.28 million from peak to trough. Now. So, if we went through that again, between now and retirement, is your plan still feasible?
Now is a good time to start making your plan feasible so you don't have to worry about the market so much, regardless of if it happens. Whether you use the S& P 500 or some of these thoughtful indexes that are out there, that's optimization.
I would focus on feasibility first and then making it resilient. You do those things; I wouldn't worry about the S& P 500 being tech heavy.
A RULE OF 55 ISSUE
Our next comment comes from Don related to the rule of 55, which says that if you retire from a corporation after the age of 55, you are able to take withdrawals from your 401k, not IRAs, from your 401k without the early 10% withdrawal penalty. That provision is in the code.
Now the caveat to that is the plan must allow it. So even though the code says that if your 401k plan doesn't allow you to do it, you wouldn't be able to take money out and avoid that 10% penalty. Don had a wrinkle that he ran into that he wanted to share.
Don says,
"I wanted to share a wrinkle that I ran into in exploring this option that brought things to a screeching halt.
While my 401k plan does allow for transfers and early withdrawals after separation, it does not allow for partial withdrawals. Therefore, the benefit of sidestepping the early withdrawal penalty, even though I retired after age 55 and separated service is negated by the lack of flexibility in my plan."
Just because the rule of 55 is there doesn't mean your plan allows it. You got to check that if you're planning on taking money out of your 401k to help bridge you to 59 and a half, and then if the plan does allow it, as Don ran into, some plans won't allow you to do partials like his.
They say, yeah, you can do it, but you got to take it all out. So, you want to check these things, so you don't make a false assumption in your cash flow plan and realize you got to pivot in some way.
So, Don, thank you for sharing that. I know we've talked about that, but these are wrinkles that you read a rule and it's like, oh, that means I can do it.
No, no, no, the 401k has to elect it. So, thanks for sharing that, Don.
GETTING CONFLICTING ANSWERS FROM THE SOCIAL SECURITY ADMINISTRATION
Our next question comes from Lira related to getting conflicting answers out of the social security Administration.
Lira says.
"Hey, we have a question for Roger.
We have called the social security administration several times to get an idea of our spousal benefit and the answers are all over the place. Sometimes a 500-dollar difference per month.
With some information being incorrect, I checked the Social Security website. What's the best way to get an accurate benefits estimate? Can we file now and get an answer and then withdraw the application?
Also, I think it would be good to have a Retirement Answer Man episode to review the rules for working while getting Social Security benefits.
How does that all work?"
Good question. We'll take that under advisement as a deep dive at some point. So, let's help Lira with this question, how can you get the best answers on Social Security Benefit?
I will refer you, Lira, to podcast episode 493, where I think we go into this. While your idea of applying to get the answer and then withdrawing your reply is a creative answer, there probably are easier ways.
Now, you can run a bunch of scenarios through the Spousal Benefits Calculator if both of you make MySocialSecurity accounts, and we'll put a link to where to use that calculator in our 6-Shot Saturday email Lira, so you can find it easily. If you're not signed up for a 6-Shot Saturday email. By the way, you can go to 6ShotSaturday.com or rogerwhitney.com.
It's our weekly email where we do a summary of the show. You can listen to the show, I believe, right in the email, and then we share links to things that we talk about. On that site, on that spousal benefit, it has a checklist of the steps to run the estimate yourself.
But basically, one spouse logs in and gets their primary insurance amount, PIA.
Then the second spouse logs in, enters the first spouse's PIA along with a few scenario details. Exactly how you do this is different depending on whether you're already eligible or not, but you can run scenarios that way and document the results.
Another option is to use a free online tool which is called opensocialsecurity.com. That's a third-party site. Another low-cost online tool is maximizemysocialsecurity.com which I believe there is a cost for.
A fourth option is that you can hire a consultant for a one-time social security analysis consultation where the advisor will plug in your details with similar software to understand the input.
Getting a hold of the social security administration, whether it's on the phone, or making an appointment can be extremely difficult depending on where you live. Now I know some people in rural areas it's actually really simple, but hopefully these resources and we'll have links in our 6-Shot Saturday email can help you make sense of all this.
ON DEALING WITH FOMO AND BUILDING HEALTHY CASH RESERVES
Next question comes from Jennifer related to some FOMO of missing out in the markets.
Jennifer says,
"I am 53 and would like to retire at 57 to 58. I've been diligently putting money into my 403b, 457 brokerage account since my late 20s. All of my money is in index funds and target date funds. However, I haven't built up my emergency fund because I always put my money into index funds.
It's not realistic for me to save up to five years of expenses in the next few years. Is it okay if my emergency fund is in a brokerage account invested in index funds? Should I de-risk by selling or moving my money to bonds? I have FOMO, fear of missing out, because I don't want my money sidelined if the markets go up.
Thanks for your help."
FOMO, I get it.
Your accumulation muscles are very big, Jennifer, and you still have some time, and it sounds like your retirement isn't as high def. You're not quite sure what age. Should your emergency fund be invested in index funds? I'm assuming equities.
Some people would say that your emergency fund isn't so much about having cash but having access to cash. A lot of times what they mean is HELOCs, home equity lines of credit, or credit cards, etc. It doesn't mean having cash available. It's having access to cash through some of these lending tools.
There is some validity to that, especially for people that are well overfunded for their life or wealthy. Proper use of debt can be a tool to help magnify growth if used properly. It also adds a layer of complexity and risk.
Jennifer, my initial thought when I saw, no, you don't invest your emergency fund in index funds or equities, why take the risk? I think of your emergency fund as a financial airbag. I don't know how much an airbag costs. I think it's a couple grand, adds a couple grand to the cost of the car. You never, God willing, use it statistically. So, it seems like a waste of money unless you need it. Like most insurance, it's really expensive. In this case, having an emergency fund, not invested in the markets, unless you need it, then it's the best decision you ever made.
I like to focus on the outcomes, and for you, if you're three to six years from retirement, I would start having some money de risked to help you fund your life. And I would do that via building a plan of record in the way that we've talked about consistently on this show.
We have a whole series on doing that and Nichole possibly could link to that and 6-Shot Saturday.
The fear of missing out. You're still going to have a lot of money invested in index funds, assuming equities, you're not missing out. You're just slowing down a little bit to solve other problems that are starting to come on the horizon, mainly replacing your income when you do retire.
We think a good benchmark to start from is having five years of what you think you're going to need de-risked. I'm not suggesting that you do that now because you're a few years away from retirement, but I would start thinking about that. If you can't save up that money, you can focus on how I slowly build a roadmap to reallocate to get there over the next four years because it's become outcome based.
Yes, you will miss out on market returns if they go up. You will also miss out on market returns if they go down, and luckily for all of us, one upside of where interest rates are is we can earn five-ish percent in T bills. Now that can go away with interest rates for sure, but we can earn relatively reasonable rates in T bills, CDs, et cetera. So, we're not earning zero.
So, I get that feeling of FOMO, but the main thing, the intent of this whole exercise of having built up all this wealth, Jennifer, is to support your life. This is all deferred income that you could have spent, and you're getting closer to the time when you're going to need to spend that deferred income.
Time horizon from a risk standpoint is, if assuming you're diversified, one of the main factors in possible outcomes, so I wouldn't put my emergency fund in equities Even if you could use debt to have access, I just wouldn't do it. Keep it simple.
HOW TO GET INTO RETIREMENT PLANNING AS A CAREER
Our next question is an inside baseball question on, I guess getting into retirement planning. Let's hear from Walter.
Walter: Hey Roger.
This is Walter from Arkansas. Interesting question for you.
I'm an aspiring career changer who would like to learn how to do retirement planning and specialize in helping people with retirement planning. I started down the road of taking the CFP coursework and I hit a point where it was so dry that I actually stopped for a while and gave up for a couple of years and then got back into it, finished it, and now working on the material to pass the Series 65.
So my question for you is, should I go forward and spend the next three, six, nine months or whatever it takes to go ahead and pass the CFP as a kind of ticket of entry and to doing retirement planning, or would it be more important that I just pass my Series 65 and find the network or some way I could start working part time with folks, and see how it goes?
I guess the crux of my question is for myself or other career changers out there who wants to just specialize in helping other people with retirement planning? What is a pathway that you would suggest or recommend for people like me?
Roger: Great question Walter and this can apply to not doing retirement planning, but some other business So to answer your question get your CFP.
You did the work you dropped it. You went back to it. That is putting in the reps to build a larger foundation of real understanding of some of the complexities that are going to come up in any kind of financial planning engagement. Get your CFP. That's putting in the reps.
In fact, I would argue as soon as you're done with your CFP, get your RMA, your retirement management advisor certification. I happen to be on the curriculum committee for that through the investment wealth Institute. So full disclosure there, although I don't have any vested interest financially.
Get retirement specific education, and I think the retirement management advisor is, there's only two that I would suggest that are the RICP, but I think the RMA is less academic and more practical. That is part of getting your reps and how you actually do this. I think that's table stakes.
Now, getting your 65 is a separate question. Getting your 65 will allow you to actually get into the business of advice. So, these are two different things. One is competency, and the reason I say finish your CFP and then get your RMA, It's so you're not unconsciously incompetent. I say that nicely. You need to know the things that you don't know. That way, you become consciously incompetent. And you can work on that. That's part of the progress to mastery, and if you're going to advise other people, I would suggest that you get on that progress to mastery. Because things are a lot more complicated when you're actually advising other people to do it than they are when you're thinking about things.
Now, the 65 doesn't mean you can't get the 65, which allows you to get into the business of financial advice. There are two paths I see that you have. There is retirement coaching, which is unregulated, and you don't need the 65, and that's an emerging industry.
Generally, it is related to not giving advice, but to coaching and those lines are really undefined and unregulated. There are some amazing retirement coaches. We have some on the show, and then there are a lot of people that are unconsciously incompetent or consciously incompetent, but not willing to do anything else.
So that's a wide-open field where you can actually coach people and not specifically give advice, especially on investments, particular investments, but help them build retirement plans and coach them through that.
Getting your 65 leads you to become a free only financial planner where you're going to be associated with a registered investment advisor and actually be in the business of giving advice and managing assets if you choose to do so.
Those are two very different things. You'll have to decide which one of those paths you want to go on and also how much of a vocation is this and how much of an avocation is this, meaning how much is this about money and how much is this about just happy people have projects, you enjoy doing it, you want to help and give back, that will help you define which path you go on.
But I would say get your CFP and I would highly recommend you get your RMA or RICP. To me, that's the table stakes if you want to actually help people do retirement planning.
Now with that, let's go set a smart sprint.
TODAY'S SMART SPRINT SEGMENT
On your marks, get set.
and we're off to set a little baby step you can take in the next seven days to not just rock retirement, but rock life.
All right, in the next seven days, I want you to keep your eyes peeled and find some wonder in something around you.
It could be as big as the sunrise every morning. Pretty amazing. It could be as small as, you probably have one of these devices maybe in your hand right now, a cell phone. You know that you can send a video and it will get to somebody almost anywhere in the world. Like, right away, we know that that can happen, and we, at least I, intellectually understand cell networks and bits and bytes and data going up and down, but how does it put that all together and happen so quickly?
When you start to really think about it, it's like, that is incredible. It could be that small or it could be about all the processes of me just moving my finger up and down, up and maybe do it. Put your finger up and down, up and down. Just think of all the things that are happening that I don't even really understand how to make happen.
My point is, in the next seven days, keep your eyes open for something to appreciate the wonder of it.
CONCLUSION
I am in awe of the number of great emails I receive from you, the great questions, the thoughtful questions, the challenging questions, and the fact that we get to hang out here every week and have a productive conversation in a positive way without worrying about being sold stuff or getting into politics and all the side issues.
We're committed to having a safe place to talk about adult things and how to rock retirement, focused on you actually doing stuff, and we're committed to working to help you in whatever way we can on that journey.
I am all in on that for the rest of my life. So, let's go do this.
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 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.