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Episode #530 - What Is True Retirement Planning? With Christine Benz
Roger: This show is a proud member of the retirement podcast network.
The biggest thing that's happened over the last 10 years of doing this podcast is I've gotten outside my industry bubble, and it's a bubble to have conversations with people like you real people on the journey towards rocking retirement, and that's made all the difference.
Welcome to the Retirement Answer Man Show, Roger Whitney here. 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.
It's very clear that the financial services and financial planning industry is in a bubble. It is designed to focus on helping you accumulate assets. That's been the number one goal for the last 20, 30 years because you've likely been in that stage. You may be a baby boomer, or close to it. It’s about accumulating assets, which means that it's focused on not having a purpose for every dollar, but saving the dollar and investing the dollar as wisely as you can with the idea of building wealth for some yet unknown purpose.
One of the biggest insights I've had in having real conversations with you over the last 10 years and receiving thousands of emails and interacting with is that traditional financial planning doesn't quite get retirement planning. They can go a mile deep on investment strategy and allocations, but unless you're dealing with a true retirement planner, which is different than a financial planner, a lot of the advice received seems to be very surface level. You start to go deeper and it gets a lot lower resolution.
Now, this is not the case for everybody. Obviously, there are amazing retirement planners out there, but just from the thousands of emails I've received from you and the people that I chat with, retirement planning is a subspecialty. As an industry, we talk about retirement planning, but we don't go deep into the craft of retirement planning. We're already thinking about the next generation of people that are building wealth. Which is fine from a business standpoint, but that doesn't serve you who is near retirement and needs to have a purpose for every dollar. This is a big insight that I've had, and it's important for you, I think, because as you search for true retirement education, there's a lot of it out there that's surface level, but there's a lot less out there that is from true retirement planners doing it on a deep level and thinking of it as a craft. That's what you need, I think, to really have the confidence to rock retirement.
Anyway, that's one of my aha moments. I would love to hear what some of your aha moments are about retirement planning, maybe the show. I can share these on the show. I think that would be fun. I'm going to continue this journey. I hope you continue it with me.
Today on the show, we're going to answer your questions, as we always do. We have one about children and Roth IRAs, the five-year funding strategy, rule of 55 for business owners, and a few other questions. But before we get to that, we have Christine Benz on the show, a good friend, the director of personal finance and retirement planning for Morningstar.
She is a great observer and writer on the topic of retirement planning, long term care planning, and has a wonderful, curious spirit, which is one thing I really like about her. So, she and I are going to talk about the state of retirement planning to hopefully help you have a better perspective to navigate how and where you find information.
Without further ado, let's get to Christine Benz.
PRACTICAL PLANNING SEGMENT WITH CHRISTINE BENZ
We're here with Christine Benz from Morningstar, as I stated. One of my favorite people that I've never actually met in person. We just have never been at the same conference or in the same city, and every time I invite her to speak at our conference, she has another conference she's speaking at. So, we're going to get that down at some point, Christine.
Christine: I hope so, Roger.
Roger: I was really excited to talk to you about the state of retirement planning because I think you have a really unique perspective, and obviously the research and articles that you do at Morningstar, but you also get to talk to a lot of people across our profession on the Longview podcast, which is an amazing podcast.
I think you have a different perspective than, say, Roger and his individual trench of working with clients. So, what do you think about talking about the state of retirement planning? You open to that?
Christine: I would love to. It's such a fascinating area with so many different tentacles. We could, I think, talk all afternoon.
So absolutely.
Roger: I divided this up. I figured we'd talk about planning process, investment and products, long term care insurance, because I know that's one that you've written a lot about and what the state of that is at the moment. Then blind spots that someone who maybe is three to five years out might want to start thinking about.
From your perspective, how would you describe the state of retirement planning as a process?
Christine: Well, I do think it's gotten much more holistic, which I think is a change for the better. Part of that is just an outgrowth of the investment environment that we've found ourselves in over the past couple of decades, where I think probably in my dad's era, it would have been not so difficult to make do on a portfolio that kicked off. Income producing security. Certainly, pensions had much greater penetration back then.
I think that retirement planning has really evolved for the better over the past couple of decades to be more holistic, to be from an investment standpoint, more total return oriented where the idea is just to construct a portfolio that makes sense given your time horizon and then not really obsess over specifically how you extract the cash flow from the portfolio.
I think developments have mainly gone in a positive direction because I think most serious retirement planners are more holistically than they once did.
Roger: Yeah, I know you had Dan Halett on the Longview podcast, one of my favorite human beings, who is very much on the human side of retirement planning. He and I are actually speaking at a conference next month in March.
What I have found interesting is we're leaning into the human side and you could call it a merging of coaching and the hard numbers of retirement planning, right? But there's very little education. I was debating on getting a master's degree. I'm like, what would I get a master's degree in? Would it be finance? I don't think I need finance. I'm thinking it might be psychology because so much of what I do ends up being negotiation, maybe counseling between spouses or even helping someone negotiate between themselves.
I worry a little bit as we merge it to more humanistic is that we're not really trained in that way.
Christine: Yeah, no, and I think a lot of financial advisors kind of pull back for that reason that they maybe feel that they don't have the training or think that the client's getting that coaching from some other advisor, spiritual advisor, whatever the case might be. They might just not think it's their purview.
I think the problem is, is that a lot of older adults are not getting that feedback from anyone, especially about the importance of, okay, you're ready to retire, your numbers line up, your finances line up, but nobody's talking to them about, well, how are you going to replace that sense of purpose that you might have had from your work when you're retired? What will you do with your time? Literally, like, how will you fill your days? and importantly, the relationship piece as well.
For males, the research really suggests that that's oftentimes kind of a blind spot, as men and women certainly step into retirement, that they had these great relationships with colleagues, and they may maintain them through retirement, but they may not, and they may not have other relationships that can fill that void, and relationships are just such a key component of human happiness and satisfaction.
Roger: Yeah. The four pillars that we've identified and I'm building a masterclass on now is energy, which is that physical aspect. People like Peter Atia, there's a lot of interest in, I need to build energy and then passion, like you mentioned, relationships and mindset. Still having a growth mindset on that relationship piece.
A good friend of mine, Dan Miller, who passed away last month, was the master at this. He always had friends downstream. He was in his mid-70s. He was very intentional about building younger friends. That's something I think, like, your, my parents probably didn't really do very much.
Christine: Yeah, no, it's something that I talked with Laura Karstensen about at the Stanford Center on Longevity. She made that precise point. She's like, there's so much attention paid to diversification across asset classes, diversifying your investment portfolio. Well, we should be diversifying our lives in other ways and across friends of different age bands makes all the sense in the world, which is.
One deficiency when you think about some of these communities that are very centered around older adults, it's a drawback. Unless the older adult has some specific sort of entree into a world where they're rubbing shoulders with people of different ages, it's just not going to happen in their naturally occurring community. It's definitely something I've been thinking about.
Roger: I had a conversation on this, Christine, with a client and we were talking about this subject because they want to pursue this and what I said is it's actually a good dynamic because it's obvious what a younger person might be able to bring to us, you know, fresher ideas, help with technology, all those type of things, but it also, and this, sort of like he had to think about it for a second.
I said, well, it also puts pressure on you because you have to be interesting enough to want to be someone younger person to want to be around. Right?
Christine: Very much so I love that.
Roger: Yeah. It's like the old dog, new dog. They both help each other. If you've ever owned dogs, I often refer to my clients as dogs, I guess.
Have you read Die with Zero by Bill Perkins?
Christine: No, we've wanted to get him on the podcast. I've not yet read the book, but I'm super intrigued by the concept. Have you had him on the podcast?
Roger: I have not. I just finished the book. It had been on my list for a while to read. I don't agree with everything he says.
He comes from a position of significant wealth, and there's some stylistic things. One thing I really like, Christine, when it comes to this retirement planning, is the idea of all years aren't created equal. I'm sure you've seen this and in retirement planning, Dan Crosby and I were talking about this the other day, we are really good as it from a planning process to help people decumulate, but we're not good at helping them spend money.
We actually have a little bit, depending on how the compensation works, a disincentive to have them spend money and the concept from Die with Zero was that you need to think of all the things that you want to do, and then you need to group them because you may not be able to do them. I think a lot of people feel that pressure. I think that's an area in the retirement planning process that. We could probably improve a lot on this, helping people get over their frugality. I call it overcoming frugality, especially those that have been blessed to be able to accumulate enough for because of hard work and serendipity and everything else.
Christine: I love how you talk about this, Roger, in your work. I think it's an important issue and really a problem for a lot of older adults. I suspect I'm going to have the same problem when I get to the decumulation phase because as you kind of cruise through your life and if you've been an assiduous saver, it's really hard to make that transition to spend from your portfolio.
I was talking to Jamie Hopkins about this problem and he said that he likes the idea of just test it out a little bit like buy your next car with cash, see how that feels to take that amount out of your portfolio because you're going to have to get used to it. I also think that the term spending is itself a little bit off putting for some people that I think it has to be all about like me, me, me, greed. I'm going to suddenly go out to dinner seven nights a week or do whatever I consider to be sort of lavish and unnecessary. When in fact, it can be much more encompassing, these portfolio withdrawals that you might make, and the whole idea of doing smaller lifetime gifts, for example, I think can be just incredibly energizing for older adults and also impactful.
I wrote about a gift that my husband and I had received from my mom and dad when we were just kind of getting our lives off the ground shortly after we got married and we're putting together a home down payment, and we had a nice sum, you know, we had. Probably 10 percent of the home we hope to buy. I remember my dad said, well, what if we gave you a little bit extra to buy a better home than some of the things that you're looking at right now? It made all the difference to us. It was not a huge sum, certainly it was much, much smaller than the amount that I eventually inherited from my mom and dad, which is not to say I inherited a fortune, but I inherited a nice sum, but it was just at the right point in time, it made such a difference.
I think if people think about gifts like that, whether helping children get launched or helping grandchildren pay off student loan debt, even knocking out 20, 000 of that debt could be such a tremendous gift.
Roger: It has a much bigger impact than if they receive it when you were 60.
Christine: Exactly, exactly. So those smaller gifts early in life, and I credit Mike Piper for really opening my eyes to this whole idea. Mike wrote a great little book called More Than Enough about people who are in that luxurious spot of having saved more than they need for their own lifetimes. How seeing their money work in this way to help alleviate people's worries and help them achieve smaller financial goals can be just so incredibly satisfying.
Roger: We have this one crisis. Well, I think you'll enjoy that book, by the way. I enjoyed it. Die with Zero.
Christine: I plan to read it.
Roger: I actually, for some reason, I had it and I'm like, I don't really feel like reading that, but I enjoyed it a lot more than I thought I would.
We have this one crisis. of people. I think it is a crisis. It's a first world problem crisis of overcoming their frugality and the options people have and leaving life on the table and impact to society. Then you have the real retirement crisis, which is the macro one of people not having enough, and we don't even really need to go into the reasons why people won't have enough.
I know from a financial services perspective, they’ve been trying to figure out how to serve normal folks in an effective but also profitable way. I don't have my finger on the pulse of that, maybe not as much as you, I don't know if you do or not, but do you see any headwind? Because I worry about this sort of bifurcation of wealthy people getting served and then people that really need help. Have you seen anything happening in the financial services industry and planning industry to address that?
Christine: Well, first, I'm so glad you mentioned that healthy sized cohort of people who are coming into retirement hurtling toward retirement and may not have enough, likely won't have enough.
I would say one very positive development, well, maybe there are a couple, but one is that there does seem to be a fairly healthy trend toward retirement. Employers wanting to keep retired employees assets in the plan, and I will say, you know, if there was one sort of actor in the whole retirement services space that does have sort of a benevolent interest in helping this person, it's employers. Of course, they're not always acting out of the goodness of their hearts. They're not always the most knowledgeable folks in terms of making decisions.
But generally, I think that that's a healthy direction rather than sending everybody out in search of financial advice on their own about how to do retirement decumulation, can we think about embedding some features in retirement plans to help people who stay in the plan, get sort of figure out how much they could reasonably take and so on down the line.
So, I think that that's somewhat positive in terms of. outcomes, retirement outcomes for people who are, maybe have tighter plans. Then I do think the automation of advice, the uptake of robo advice of solutions that tried to deliver some degree of device cheaply. I think that's a healthy development as well.
Roger: I've been thinking about this a lot in the last 12 months or so. I've concluded I don't know if the financial service industry is going to solve it.
I think if it's going to be solved, it's not by design and investment issue. That's the core of most financial planning is investments and assets. Well, if you don't have assets and you don't have much free cashflow, there's not much you can do.
I'm thinking that, and I'm hoping that the emerging industry of coaches that are not advisors or affiliated with a financial firm, now there's certifications for financial coaching. It's a very unregulated industry and the lines are very blurry on that. But I'm wondering if that might be a place that can help more because it's not making financial assets the hub of everything. I don't know.
Christine: Yeah. Well, certainly starting earlier, starting that sort of coaching earlier, seems like it has some potential. I love the idea of even secure 2. 0 brings in some features that are more holistic, like this idea of embedding an emergency savings account alongside your 401k account and allowing people to contribute to that on autopilot, just as they do with those 401k contributions. I think those are some healthy steps in the right direction to help people at a younger age improve their finances.
So maybe.
Roger: I definitely agree.
Well, let's move on to the state of investments and investment products when it comes to retirement. I'm a very organic person when it comes to investing, so I have my biases. But from your perspective, what have you seen there that seems to make sense to you or seems like good trends?
Christine: Well, I think I haven't seen like the killer retirement income, retirement cashflow product. Frankly, I think the closest to the ideal product that I've seen would be sort of the managed payout type of funds, which really fizzled in terms of ever attracting investor flows, but I think something that takes a bundle of assets and delivers sort of a paycheck equivalent in retirement is the closest thing that I can think of to an ideal retirement decumulation product. I just haven't seen it from the major financial services providers. I think they're all trying to crack that nut.
Part of the problem is that people bring so many different accounts into retirement, so it's really difficult to productize. I guess I have concluded that maybe sort of a service that does that for you is a better direction that maybe it's just too difficult to productize.
Roger: Maybe it isn't a product, I like that word productize, maybe it isn't a product. It is the planning because everybody is so different in how they approach things. When I think of investing and withdraw strategies, obviously the one that everybody talks about probably too much is the 4 percent rule, right? Just having something that works around whatever the latest research is on that, even the difficulty with that, that seems like an outside in. Let me define your box of life, and then you have to stay within the box, right?
That doesn't sound very attractive, and I don't know, rhythm wise, people want to spend that way because they're so worried about the go-go years. So, it'll be interesting to see how that plays out.
Christine: Well, exactly, and, you know, the more we work on this research about, you know, retirement income and safe withdrawal rates, the more I do realize that the sort of fixed real withdrawal system is just not the way people spend that actually they do spend just as you suggested, Roger, where they spend earlier in retirement, and then that tapers off. The 4 percent style guidelines just don't jibe with that sort of real-life spending pattern.
Roger: Yeah, my audience is going to roll their eyes probably but one of the things that I'm Been thinking way too much about when it comes to retirement planning, Christine. And we had Rick Nason on who is a professor who wrote a book on this a couple of weeks ago is, I think we tend to approach retirement as a complicated problem and complicated problems can be solved mathematically. You can create the algorithm and it's solved.
Really what it is, is a complex problem, which by its nature cannot be solved. It can only be managed because of so many variables that interact. I think things like the 4 percent rule and a lot of the geekier math out there, that's always very helpful and we need the math, but it's not solvable.
So, we need to realize that and it probably will save us a lot of headaches.
Christine: Yeah. I love that. Yeah.
Roger: Speaking of something that's not solvable, it doesn't seem that long term care insurance is.
Christine: That's true.
Roger: I know this is something that you've written a lot about, one, because of personal experience and your exploration of it.
It's something that people think about a lot, and it's very difficult to find solutions. So, what's your latest perspective on that?
Christine: Well, I will say from an insurance perspective, thanks to rising interest rates, things look a little better in terms of pricing of insurance and potentially, these premium hikes that people who have long term care policies have experienced that rising interest rates do make that better for insurers. So, if they're taking in these premiums and they can invest it in something safe that also has a decent return attached to it. It just makes the whole product just much more tenable than was the case when interest rates were so low for so long. So, I think the insurance landscape is improving a little bit.
I think people want to think about having a plan regardless of what's going on in the insurance market. If they've set aside the idea of purchasing insurance because they haven't liked what they've heard about claims or about premiums going up or claims being denied or whatever the case might be, it’s still important to have a plan.
I often talk to, I think about sort of our Morningstar demographic, where you've got people with investment portfolios, maybe in the neighborhood of 1 or 2 million or more, and they want to set aside kind of a long-term care fund where they want to self-fund long term care. I think that that's a viable way to go about it, but I think it's important to Really right size that fund, look at the data on the typical long term care stay, for example, is in the neighborhood of one and a half years or so.
If you're a healthier person, you'd probably actually want to set that number a little higher. because you're more likely to experience cognitive decline within a healthy body, which is a terrible combination from the standpoint of long-term care.
Roger: I didn't think about that perspective of it. That's true, isn't it?
Christine: Yeah, it is something that came out in a conversation that I had with Carolyn McClanahan, where she made exactly that point. Her point too, was you see these data points about long term care usage, and she's like, someone's bringing those numbers down and it's people who aren't that healthy. If you're a healthy person thinking about a long-term care plan, you might want to plan for a sort of a larger long term care fund, whereas someone who has had perhaps more health issues in the years leading up to retirement might be a little closer to the averages or below average.
We know that women are more likely to have a paid long term care need than men because women are often the caregivers for their partners and then the partners predecease them and no one's there to care for us. So, women, especially single women, I think it's super important for them to have a long term care plan.
Roger: I guess it's the same way with longevity, right? You have the average longevity and you're going to skew. Some people are bringing it down and some people are bringing it up demographically. It would be the same way. That makes total sense.
When I think about retirement planning, we think of sequence of return risk, interest rates, the economy, the year of the election, life circumstances, whether it's spending shock or family need, et cetera, lack of pension. It is truly overwhelming and interconnected. How does someone begin if they have been saving all their lives or three to five years from retirement, and they're just trying to get something in place?
How do you prioritize? Because you can't fix everything or think about everything at once.
Christine: I would say get some advice. Right?
I mean, maybe it's just that I encounter so many DIY types through Morningstar and through groups that I'm involved with like Bogleheads. I think that sometimes people underappreciate the complexity of retirement decumulation versus doing a financial plan in the accumulation years, which is comparatively so much simpler to create a sane plan for your accumulation years.
As much as people might have done really well as DIY type investors, this is a place where you need a sounding board on whatever plan it is that you've created for yourself. You need someone to kind of check potentially whether you've got blind spots in your plan, whether there are risk factors that you've underappreciated.
I'm a big believer, even if you're not signing on for a regular Advice engagement, if you're not paying the advisor on an ongoing basis, just get another set of eyes on your plan rather than trying to go the DIY route for your retirement. You may decide, well, I'm okay from here. Once I've got this check, I'm okay managing, but I think just having that set of eyes on your plan is absolutely essential.
Roger: Couple questions around that.
One is I like the way that you said, even if it's not forever, right, because I think a lot of times when people think about engaging a planner, their perception is it's the Hotel California, right? You check in anytime you want, but you never leave. Even if it's not just one time planning, I know like in our firm, we have clients that will actively say, you don't need us anymore and you're through whatever you are and it's, you got this. Then they can come back when they want. So not thinking of it as an all-in or all out decision helps change it a little bit because good planners aren't cheap. A lot of them, right? There's a capacity constraint.
One thing I wanted to ask you, though, related to that is I get a little worried because I think financial planning generalists, there's a difference between that and a retirement planner. I think it's like the difference between a surgeon and a general practitioner. There's so much difference about decumulation, not just simply in taxes, which is one of the biggest levers, but the tax law and withdrawal sequence of return, front loading life, et cetera, that are very specific. I have encountered, and I have just anecdotal evidence of people in our rock retirement club or people that email me have just horrible experiences with advisors that are financial planners that either they can't talk about taxes or they don't know anything about taxes. I just worry that just going to a generalist financial planner could almost be a disservice in some way.
Christine: Yeah, no, I could see that perspective on that. I could see that. I do love the trend toward people getting virtual advice versus, oh, I've got to find a planner in my community or whatever, because that's inherently going to restrict you, especially if you live in a smaller place.
Roger: Very good point. Very good point.
Christine: I think it's super important for people to interview planners, perspective planners about so what's the average age of your client base if it's nothing like what my age is, well, then maybe you're not the right person for me So to get quite clear on age asset level of that planner's typical client I think those seem like perfectly valid and important questions to ask.
Roger: Yeah, it brings to mind So we'll put in our 6-Shot Saturday email, we have a worksheet of interview questions, how to search for and how to interview. One of them is to tell me about your process in detail because they should have a repeatable process.
Christine: I love it.
Roger: Christine, I can't wait for the moment that I get to see you face to face.
It's going to happen. It's going to happen, and then we can geek out on retirement planning all night long. So, but for now you're down in Florida, so I'm going to let you get back to the fun and sun.
Christine: Thank you so much, Roger. It's great to see you. Thanks for having me on. It's always an honor.
LISTENER QUESTIONS
Roger: Now let's get to your questions. If you have a question for the show, go to askroger.me and you can leave an audio question, which we'd love, or you can type in your question. Really just say anything you want to say to us, but be nice, okay?
ABOUT OPENING A ROTH FOR A CHILD
All right, our first question comes from, I believe, Diane regarding Her child and contributing to a Roth IRA, and it's an audio question. So, let's get that going.
Diane: Hi, Roger. Thank you for your inspiration with your podcast. It inspired me to start my children out at a young age and saving. My question has to do with my 19-year-old daughter who worked a few jobs in 2023. However, she had an earned income of less than 13, 500, so because of that, we did not file taxes on her behalf.
My question is, am I still able to open a Roth account under her name for her to start contributing to since she did not file her income taxes in 2023?
Also, was that a good decision to hold off on her filing, or is that something you would recommend us doing regardless of her income?
Thank you so much. Appreciate your help.
Roger: Love the intentionality, Diane. I'm going to challenge you on a couple of your phrasings. You cannot open a Roth on her behalf. She can open a Roth IRA. Now you may facilitate all the paperwork, but she's going to have to sign the paperwork. It's all as if she's filling it out. I would challenge you to have her own that even if you're doing this side by side. But I think that language matters, personally. This is her Roth IRA.
So, the answer to your question is yes, she can contribute to a Roth IRA for 2023 because she had enough earned income. In terms of her filing a tax return, you're correct that she doesn't need to because she hasn't reached the limit. But I would suggest that you still have her file a tax return. I think online with TurboTax, etc., it's pretty much free for them to be able to do that. Just make sure if she's still a dependent on your tax return that she does not claim as a dependent on her own.
The reason I would suggest, even though you don't, aren't required to file a tax return, the reason I would suggest that you do, or she does, let me use my language right is that that will create the record of her income. Otherwise, you're going to want to have to track for her or she's going to want to track, use my language right, that the fact that she did have earned income in a year when she didn't file her tax return. So just by her filing one it's getting in reps of filing a tax return because she's going to have to do that anyway, so that'll help her get into that it's free with a turbo tax or something else like that. It also will be the record of the fact that she had income to support the Roth contribution that she made. So that would be how I would approach it.
You can still set up a Roth up until April 15th and contribute for 23 because she can still do a tax return for 23 so you can do that if you want it.
Thanks so much for the question and the nice words.
HOW TO CREATE A 5-YEAR INCOME FLOOR WITH FINANCIAL CAPITAL
Our next question comes from Trinidad. I think Trinidad has Submitted questions before. Thanks for hanging out with us.
Trinidad says,
"I'm about two years away from transitioning into the next stage and have a plan of record and funding strategy."
Huzzah. Good job, Trinidad. Having a plan of record, which we'll have to do a show what that actually means, because we talk about it a lot, but you may be new here. So essentially a plan of record is what your current plan is that you're going to iterate off of. It's going to change many times, but maybe we will do a show about that.
Trinidad says,
"I have the first five years covered with short term investments, cash and cash equivalents. My wife will continue to work for the next five years, which will provide a benefit coverage for us.
As I look beyond the first five years. I'm assessing the best ways to transition longer term riskier assets into shorter durations that will provide a high likelihood of return of my capital to fund my lifestyle."
He's talking about the five-year income floor, which is our default in the feasible stage of a retirement plan of record which is have a cash emergency fund, contingency fund and then prefund the amount that you need from your financial capital or your money in assets that will earn a yield, but you get the money back here.
It's not at risk with markets in the economy, etc.
So, Trinidad says,
"I've been wondering if the five-year funding strategy that you referred to in the podcast, is\ meant to be rolling annual replenishments each year in order to build out that five-year floor in front of us. Is it okay to use the approach I've been planning for to replenish every five years?
I don't like having the idea of liquidating some of my longer-term assets each year while my wife is still working, but I recognize that over those five years, my short term cash is going to dwindle and I'm going to have to replenish this."
Trinidad, the answer is, whatever you want. Either way. You can make the decision on this; you can manage this.
It does not have to be a hard, every year I rebalance and build out 100 percent of the five-year income floor ahead of me. You don't have to do that.
You can do this in spurts. You can do this every other year. You could do these every three years. You could do it as part of your rebalancing process for your riskier assets because if you have riskier assets and you're rebalancing them in a traditional rebalancing, you sell the things that have done well and are two higher percentages and you buy the things that are lower percent that didn't do as well to get it back to that target allocation.
Well, another way of rebalancing is just simply selling the things that have appreciated that have too high, and not buying the things that have done low and you get back to the same percentages. You can do this however you want. As long as you have some systematic way of revisiting this and being intentional about it.
That's the key. It's not here is the algorithm, do it on January 1st every single year. It's you, having the intention to revisit this. You're going to have to anyway because your wife's income May increase. Maybe she gets a big bonus, which means that you don't need as much from your financial capital. You actually have preserved more or vice versa. So, this is something you're going to have to manage anyway. I would argue that you don't need to have hard rules on exactly how you do this. The point is, is that you're intentional in doing it and thinking about it in some systematic way. Trust yourself on this.
By the way, Trinidad, there's nothing special about five years. It's an adequate amount. That's what I determined. That was my judgment call. If the broad picture of your retirement plan, is we are way overfunded, meaning we have more than enough assets and income that our plan is highly feasible, overfunded, you can have three years.
If you psychologically like to have more, you can have eight years. So, there's nothing magical about the five years. You mentioned that you have an emergency fund that is at least a year. So, you have that buffer as well so, trust yourself. Just make a judgment call but be intentional about it.
ON USING BONDS TO FUND THE 5-YEAR INCOME FLOOR
Another question from Dirk related to this five-year income floor, which is part of building a resilient plan, which is the third pillar in a plan of record.
The three pillars being a vision, a feasible plan and then a resilient plan.
Dirk says,
"Hey Roger, thanks so much for all the work. I apologize if the question has been addressed in the past. As it relates to the five-year income cushion, can it be filled with the bond portion of your portfolio?
For example, let's say I have 200, 000 gross income need in retirement, and I have 100, 000 in pension, deferred compensation, and annuity income.
So, my total five-year gap is 500, 000. Do I need access to 500, 000 liquid, i. e. cash equivalents, or could it be the bond portion of my portfolio?"
First, on answering questions, even though they've been asked before, we've always debated this internally, and what we've discovered over the last 10 years is, one, we may have asked a question under a certain context before, but it's not been your question, Dirk, in this instance, and your question is the most important one to you.
Two, it's not like I have this all figured out and I'm a done project. I am constantly evolving my thinking on this as I actually do this in practice with multiple people and teach it in the Rock Retirement Club so I evolve my thinking as well.
Dirk, to answer your question specifically, I would suggest that you not use your bond allocation within your upside portfolio to fund whatever the gap is in your income floor. This goes back to the difference between accumulation and decumulation. In accumulation, you can just have a target portfolio and you don't have to have a lot of purpose for every single dollar other than just to grow over time.
In retirement, I think it's best practice to put a purpose for every dollar. So, in this case, Dirk, if you were to take whatever your asset level is, and let's say you have this 500, 000 gap for the next five years that you need to get from your money that's not covered by these other sources that you outlined. If you take your entire financial capital, all your investment assets, it needs to be divided between three buckets.
One is my contingency. What is my buffer that I want to have my emergency fund just for to help me cover for unexpected spending shocks, bad assumptions, etc. That's the first purpose you want to put a name to the actual account and the actual investment.
The second is this income floor, and in this case, five years, we're talking about the 500, 000 that you mentioned. You want to identify the account and the specific investments within that account or accounts that are funding your life to fill the gap of that 500, 000. The investment objective of those assets.
Number one priority is return of your money. Second is, some return on your money, meaning interest and being efficient, whether it's T bills or CDs or treasuries, but you want to match when those mature to when you're going to need the money over those five years. That's job number one.
The third purpose is what we call the upside portfolio, which is money that you know you're not going to need for at least five years. This is your longer-term investment money. This is going to be a target allocation focused on accumulating and building more wealth to help battle inflation, to help battle future spending shocks, to give you hopefully more options later on because it's grown over time. that allocation will likely have some bonds.
It might be a 20 percent bond, 80 percent stock portfolio. It might be a 60 percent stock, 40 percent bond portfolio. You will decide that separately, but I do think it's very important that you have those sharp lines around those three buckets. Otherwise, it's easy to get loosey goosey and you start to have, say, a bond portfolio, as you discussed, well, that can go down. That is going to move up and down based on interest rates and forecasts for the economy, etc.
I like to have a purpose for every dollar because this is the harvest season of life. So, hopefully, that answers your question clearly.
SHOULD YOU KEEP INVESTMENT ACCOUNTS UNDER THE FDIC AND SIPC LIMITS?
Our next question comes from Philip.
Philip says,
"I heard the other day a question on consolidating accounts.
Here's a follow up. With banks, they say, always stay under FDIC limits. How does SIPC insurance work? Should one keep accounts under this limit?"
That's a good question, Philip. So, let's set the table for this. So, FDIC insurance is for banks. This is a federal deposit insurance corporation which is an independent agency of the U. S. government that protects you against the loss of your deposits in an FDIC bank, so savings accounts, checking accounts, etc. And they're protecting against if the institution the bank falls, goes away, that some of your deposits, your money, will be covered. FDIC has managed where those are right now.
I think the standard deposit insurance is 250, 000 per depositor, per bank. For each case of ownership, it's different. So, a single account is insured up to 250, 000, a joint account is insured for both parties, etc.
Now, in the investment world, the non-bank world, you have what is called SIPC, Securities Investor Protection Corporation, which is a nonprofit membership corporation created by a federal statute back in the 70s that about 3, 500 brokerage firms are a member of. I'm just reading this from a site that explains all this so I can make sure I have my facts correct.
SIPC insurance, all the broker dealers, which the firms you use, the Merrill Lynch's and Schwab's, et cetera, they deposit into a fund at SIPC. If the financial firm fails, Merrill Lynch, as an example, or Schwab, SIPC steps in and covers up to 500, 000 in securities and up to 250, 000 in cash.
The way they calculate, let's assume you have a bunch of accounts at Schwab, just using Schwab as an example. They have what's called separate capacities, meaning, basically titling of accounts. If you have an individual account that receives the 500, 000 in securities, if you have a joint account, then that's a separate account. If you have an IRA, that's another separate account that has its own 500, 000. If you have a Roth IRA, et cetera, et cetera, et cetera.
Then the question becomes, should you keep, whether it's bank deposits or investment accounts, under those limits, wherever you're having money managed? In theory, it might be best practice in the sense of belts and suspenders if the worst of the worst happened and you were asleep at the wheel.
In practice, few if any people actually do, and I actually think that's okay. All of the firms have. private insurance beyond SIPC that generally protects up to tens of millions of dollars through Lloyd's of London and other private insurance companies. Typically, none of this happens overnight, like a light switch.
We can think of 08 as a perfect example, right? 08, we had banks going under. I remember that happening and, in this case, FDIC insurance actually kicking in for those people. We had Merrill Lynch that would have gone under had it not been bought by Bank of America. They were going to be a failed investment firm except for the fact that Bank of America purchased them. I'm sure that it's more nuanced than that and in the marketing, but bailed them out, brought them into the bank, and now it's Bank of America Merrill Lynch or whatever it's called.
Generally, what's going to happen is either a failing firm is going to get bought and consolidate into another firm, not always. The other thing is that those things happen not overnight. Generally, you can see the financial stress in the system.
In practice, Philip, I don't know anybody that does this, and it would be very difficult to manage. You can imagine if you have two, three million in investment assets, and you have it at different firms, and you're trying to coordinate building a retirement plan.
The question is, is it worth the complication for the protection is a decision that we're all just going to have to make, but those are the basics. We'll put a link to how these things work. I think schwabmoneywise.com has a good understanding that just goes through the facts, and we'll put a link to that in our 6-Shot Saturday email.
By the way, if you're not signed up for our 6-Shot Saturday email. It's as good or better than the podcast. We put links to everything that we talk about. Summaries of some of the questions. Usually, I'm putting something in there of what's going on and what I'm reading and what I'm noodling on in this crazy head. If you're not signed up for our 6-Shot Saturday email, you can go to sixshotsaturday.com.
SHOULD I HAVE A SIMPLE IRA AND SOLO 401K?
Our next question comes from a business owner, Brandon.
" I'm 50 years old. I own my own business, which is set up as an escort. My wife and I are the sole W2 employees. I currently use a simple IRA retirement plan. I'm considering moving to a solo 401k since my wife and I are the only employees.
However, now that the Secure Act 2. 0 provides a tax credit to defray the cost of establishing and maintaining a traditional employer sponsored plan, I am wondering if I should establish one of those instead. If I did, would we be eligible for the Rule of 55, which is not available for solo 401ks or IRAs, but is available for employees of an employer sponsored company? Or would the IRS look askance at this since my wife and I are the only employees?
Can't find the answer. I would like your help."
It's a good question. This is related to just employer plans, Brandon, because I walked this journey. The admin overhead is minimal.
The next step is, if you don't have employees, is a solo 401k where you and your spouse can do a streamlined 401k and pretty much get all the benefits of a 401k without a lot of paperwork or administrative overhead. Allows you to save a lot more, potentially make profit sharing contributions, but you're right on the rule of 55. The IRS isn't real big fan of allowing you to do a rule of 55, which is essentially if you were to separate from the company after age 55, you would be able to take money out of pretax assets, that 401k specifically, without having a withdrawal penalty of 10%.
The next step beyond that. is where I'm at the moment, which is a safe harbor 401k, and that's what you would do if you ever had employees because you can't have employees in a 401k solo. You'd go to a safe harbor 401k and the overhead from an administrative standpoint is, let's call it 2, 000 a year ish. But to your question, I would advise obviously with the solo 401k, the IRS isn't a big fan of you doing a rule of 55 provision in that because it's just you and your wife.
Now, if you went to a safe harbor 401k, could you put a provision in that plan that says after age 55, if an employee separates, that you could draw money?
In theory, yes. The IRS is clear as mud on this. So, let's just use an example.
Let's say you and your wife are the owner operators and only W2 employees of this safe Harbor 401k. You leave the company after age 55, she still runs the company. Could you do that? Could you take money out of your 401k without tax penalty? I think you'd be right on the edge and you might open yourself up to some liability if the IRS looked around and made it an issue. I would have a very competent tax person that has depth in this area to be your advocate if it ever came to that and to make sure it's all set up properly.
I personally, I wouldn't think about it. I think that it could set you up for having to manage something bigger to potentially do something that the IRS is not giving a lot of great guidance on and I wouldn't want to be the test case.
That said, Brandon, some people are a lot more aggressive than others. That's just not me. I like to keep things as simple as possible, not simplistic. That's a line that everybody's going to have to draw for themselves.
With that, let's get to our smart sprint for the week.
TODAY’S SMART SPRINT SEGMENT
On your marks, get set,
and we're off to take a baby step you can take in the next seven days to not just rock retirement, but rock life.
In the next seven days, if you are still employed, I want you to look at your 401k and assure that your contributions are going to hit this year's increased 401k contribution levels.
We've had some increases in 401ks and other things. We will put a link to important numbers in our 6-Shot Saturday email so you can see what those new limits are, but it's good practice just to make sure you can tweak that contribution level so you can maximize your savings.
CONCLUSION
Wow, in my smart sprint today, I really felt like I had radio voice for a second. I'm sorry. I try not to have radio voice. This is pretty much how I talk. Maybe I amplify a little bit more, but I don't want to have radio voice, which, wow, that sure felt like it was. So honored to do this journey with you.
We'll try to do this with as much integrity as we can and focus on serving you and sharpening my saw. This is our lab. Let’s improve together.
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.