transcript
Speech-to-text transcription can look a little quirky. Please excuse any grammar or spelling errors.
Episode #586 - Retirement Basics - Asset Allocation
Investors like you, financial planners, retirement media spend way too much time thinking and talking about the markets, the economy, investment selection and products. This can have a significant negative impact on you rocking retirement.
Roger: Hey there. Welcome to the show dedicated to helping you to not just survive retirement but have the confidence to lean in and rock it.
Today we're going to continue this theme on basics and talk about asset allocation. A lot of this gets wrapped into time allocation, which I'll explain. In addition to that, we're going to answer some of your questions, tell a Rocking Retirement in the Wild story from someone just like you out there doing the work and creating a great life. Then, last but not least, we'll share our latest segment from my grandfather's Journal of flying in a B-17 in World War II.
Now next month is May. I can't believe it's almost May. We are going to have another Retirement Plan Live case study coming in May. I have some ideas. Haven't put it all together yet, but I'll keep you up to date on that. If you want access to the resources that we share in the case study, in addition to the exclusive videos and resources we share each week on the show, we share those within our weekly email The Noodle. It's a great way to give you links to videos as well as other resources. Send it out every Saturday morning. If you like the show, you'll love The Noodle, and you can sign up at thenoodle.me.
With that said, let's get down to the basics.
PRACTICAL PLANNING SEGMENT
Time is your most precious resource, even more so if you're near or in retirement. Let's assume you're 60 years old and you have 30 years’ time because you're going to live to 90. That's awesome. 30 years is a long time. But as we get older, time seems to move a little bit faster. One of the things we realize but we don't really label is that time isn't as symmetrical as it was when we were younger. When we were 20, we could wait till we were 30 to do something. Or when we're 30 we could wait till we're 40, at least we felt like we could because physically, mentally, we had all the time in the world. But when you're 60 and I'm 58 and I feel this right now, when I think of me between now and 90, my 80 year old self is not going to be the same version of Roger at 58. Maybe your 60 year old self or whatever age you are if you think forward about your 80 year old self, that's not going to be the same person. You're going to be awesome, God willing. But you likely are not going to be as strong, you're going to slow down a little bit, you're going to have a little less energy. We are battling that through our energy pillar. But right now, you're going to be as young as you're ever going to be and maybe as healthy as you're ever going to be. Time isn't symmetrical. That means we don't have a lot of time to waste if we want to rock retirement and have a great life.
Now, how does that apply to the basics of asset allocation? Well, retirement planning is a means to an end. It's not meant to be your new job in retirement. You can do it as part of your retirement, but you, you don't want to spend too much time on this. When I think of retirement planning as a process, I think of it as like a dashboard, right? Maybe a pilot cockpit where there's a ton of different levers and buttons that you can use to influence the plane. Not all of them are equal. That is true in retirement planning as well. We want to make sure we spend most of our time on the most important things. Unfortunately, when it comes to retirement planning, usually the most interesting levers, the ones that are all blinged up, bedazzled, saying click me, click me, click me, are the ones that are talked about the most. There's a lot of reasons for that.
Historically the value proposition of financial planning is all about investment management and products ultimately. I mean, that is, you know, the industry is a distribution engine for those historically. So, we are wired and trained to talk about those things and they're much more interesting than the basics. Also, the financial media talks about the markets, the economy, investments, predictions, investment products, partly because it's cool, it's stuff to keep our eyes going, and also because their main advertisers are the people that manufacture the product. So, there's whole lots of reasons for this. My point is we spend way too much time on this. These are the cool, sexy levers that likely will have the least impact on your retirement as long as you just get the basics right. That's important to understand because you only have so much time. Not just time to do things, but time to worry and think about things. That's where asset allocation comes into play. We don't want to waste our time trying to predict the future and make sure we're right. We want to spend our time on more important things.
So, what are those more important things that could actually have a bigger impact on your life? Well, one important thing is spending time on and in your life, doing the vacations, doing the hobbies, mentoring younger people, helping other people, making memories, all those things we got to have time for.
Retirement planning is for the future. Where do we spend time there? Well, we're going to spend time on the basic building blocks. Number one is having that vision for your life and keep iterating on. What do we want? Is this still important to us? That vision pillar? Second, organizing the resources to fund that life. That's the feasibility pillar. Here's what we got. Is it still feasible? What are different directions we could maybe go? We have got to spend time there. The third pillar, we have to make sure it's resilient so we have some margin to absorb. Bad markets, bad life events, changes in priorities, etc. Those are the basics where we need to spend our time. Those are the buttons on the dashboard that are critical, but they don't have a lot of bling to them. It's doing the basics. It's doing the basics. It's doing the basics.
So how does asset allocation fit into this? We're not going to go on a deep dive into asset allocation because I'm not going to teach a course on it. I just want to talk about the basics. Asset allocation is a basic building block under the resilient pillar because we need to build out how you're going to fund your life. When you're allocating your financial assets, your 401ks or savings or whatever, you have two fundamental risks that you're trying to manage. The first risk is really obvious. We're experiencing it right now. Holy cannoli. The market's go down and I could lose money and if I have $100,000, I lose 10%. Now I only have $90,000. Losing money is one of the fundamental risks that we have to take. If you have losses of your money early in your retirement, that can have a very significant impact on your entire retirement journey just because of the way math works. If I lose 10%, it doesn't have to go up 10%, it actually has to go up a lot more just to get back. It is important that we manage losing money, especially early in retirement, because it can really have a bad impact in financial speak. We call that sequence of return risk. We have to manage that risk. That's one of the fundamental risks in retirement. The second fundamental risk. Well, one is that that risk is actually very easy to manage, right. We can just put it in a CD or in a bond or in a savings account. We could just not invest in things that go up and down and we've solved for sequence of return risk.
The problem is, and this is where the tension comes in, is that there's another one of two foundational risks when allocating assets in retirement. One is the ups and downs sequence of return. The second one is, is inflation. Inflation is the natural increase of the cost of living overtime.
Recently we have been talking a lot about inflation because over the last four years or so we've had higher than normal inflation, which has come out in talking about the price of eggs is usually the thing that we've hit on, right. In COVID it was toilet paper. In the last three years or so, it's been the price of eggs. Inflation definitely has an impact on the short term. Wow. I'm going to get these prices wrong. I could buy a carton of eggs for $2 and now I have to at times pay $9. Another place we see inflation is in the price of gasoline, right? It cost me $2 for a gallon of gas. Now it costs me $3. That goes all over the place.
In the near term, we feel what I'll call the inconvenience of inflation. It's annoying. It may make us buy different steak cuts or replace things to try to manage it. That's not really the inflation I'm talking about. The inflation I'm talking about is the longer term inflation. That is a big risk to retirement. If we solve for the market ups and downs by just not investing in equities and other things, we just put it in CDs or in a money market or in a savings account, we've solved losing money today, which makes us feel good because we live in today. That's how we're mentally wired. But inflation, I think Reagan said, and I'm going to paraphrase it, is that thief in the night that you don't really see happen, that takes. It takes away your money in a different way.
As an example, let's just look at the last 20 years ending 2023. If you retired in 2023 and I actually had clients that retired in 2023 and before, let's assume you needed to spend $6,000 a month in 2023. Well, in 2023, if you were spending $6,000 a month just for your base great life today, you would have to spend $10,000 a month just to get the same thing. If you manage market downturns by just putting your money in a savings account or CD, over time that money will lose its purchasing power and cause you to be less wealthy later in life. Given that I'm using a fictitious 60 year old, that is a 30 year plus time frame potentially for my grandfather, who we're sharing his story at the end of the episodes, his retirement time frame was less than 10 years or so. This wasn't as big an issue for him because inflation compounds over time and inflation on average has been about 3%, but we've had periods where it's been, well, in the 70s it was 7% a year. The cost of things increased by 7% a year. So, we can see the tension between not wanting to lose money today, but making sure you have enough purchasing power later in life to cover health care costs, to cover basic spending, to cover all those things, health care, etc. You can see the tension between the two of those. The reason there's a tension is, Jeremy Siegel in a conversation said, the perfect hedge, or solver for inflation, is equities, which are stocks, which is the thing that is the most volatile in normal allocation in terms of markets going down. That's what we're seeing the S&P 500 do. Those are stocks. We can see the tension between making sure we have our money and making sure we have our purchasing power later in life. This is the hard part. So, we can go down the rabbit hole of trying to be a trader essentially with markets and economy and investment selections and sector investments and do all this stuff. We can build foundational building blocks of asset allocation which we'll explain briefly to solve for this as best we can so we can spend our time doing other things that can have more of an impact on our life.
Let's talk about the basics of asset allocation without going down the rabbit hole. What is asset allocation? It is a methodology that focuses on two things. It assumes that we're dealing with rational long term investors and it says, what's a rational long term investor going to do? Well, for a given level of risk, they're going to want to maximize the return that they can get for that risk or for a potential return. A rational person is going to try to minimize the risk that they take to get that return. That's what a rational investor would do and that is what asset allocation attempts to do by looking at what mix of different asset classes. When I say asset class, it's just a classification.
Let's take a look at basic ones. Cash bonds, which are lending money and getting interest and then getting your money back, or equities, which is owning a portion of a company and participating in the growth and the dividends, et cetera. Those are asset classes. let's assume those are the three asset classes that you have. I can invest in stocks, cash or bonds. Those are my choices to invest in. What asset allocation tries to do with a mathematical model is, well, given a certain level of risk, we know what the historical return has been on all of these and what the historical risk has been, which is the way they move up and down. What is the optimal mix of cash stocks and bonds? Maybe it's 2% cash and 38% bonds and 60% equities. You can see all the different combinations you could have. Harry Markowitz, modern portfolio theory, created a model to help build what's called an efficient frontier. Which is the optimal mix of those three cash bond stocks. What is the optimal mix to try to minimize risk for a given level of return, or vice versa. Makes sense. Right? That becomes what we call a pie chart. Right. You can see the different pieces of the pie and how big they are. That is essentially asset allocation. It's a long term investing strategy to try to control the controllables part of asset allocation.
When we get to these different asset classes, let's take equities or stocks, we incorporate a concept called diversification. So, if I buy Apple stock, I've taken on what's called specific risk. I have risks based on how Apple executes on their mission. I have risks to whether consumers like their products or not. I have risk to their sector. Maybe people just don't like electronics in general. But even if Apple's the best one, nobody likes the sector. We have political risks. Maybe the rules change around what Apple's allowed to do and that impacts your business. So, if we're going to invest in equities or bonds or cash, asset allocation says, well, instead of buying an individual equity, we need to eliminate all the risks specific to that company, like an Apple. The way you do that is through diversification. By owning a big bucket of all the stocks, say in the United States. Now we have energy stocks, consumer goods stocks, electronic stocks, and basic material stocks. We've eliminated all the specific risks to one individual company. So now we own the market. That is part of asset allocation. Stop trying to pick the winners and losers. Just buy the market of that particular class. It could be the same with bonds or cash, actually. Once we know the optimal mix, that pie chart, we want to make sure we're not taking risks unnecessarily. That's essentially what asset allocation tries to do. What it's not is trying to make money all the time. It's not about always being right and making money. It's about betting on long term averages with the right mix for you and understanding that things are going to go up and down over time. It's not about picking the best, investments that are performing well, all that stuff. It's a basic building block so we can get on to more important things that we can actually have control over. The reason that asset allocation is used is that it reduces the crazy ups and downs because we don't just own equities and we don't just own cash. We own a mix of a lot of things. It can limit severe losses because we have different asset classes, right? Bonds don't move like stocks. Cash is a lot less volatile than equity. It limits severe losses and simplifies the process.
So, what is asset allocation best used for? Well, for younger folks or people that are accumulating, they can build one asset allocation portfolio. There's a lot of software that does this. This is essentially what a target return fund does or a target allocation fund does. Let's use my daughter as an example. She's 27 years old. She'll be 28 in September when she invests in her 401k, is just looking to grow her money. She's like, I don't need this money at all so I'm not worried about losing it on the short term because I don't need it for 20, 30, 40 years. In fact, I'm contributing, so I would prefer the markets go down. So, for her, she has one objective and that is growth. She wants that money to grow over a long period of time. Her allocation will likely be 80, 90% stocks because she can handle the ups and downs and her time frame is long enough, so she just has one allocation.
Now let's go to you or me, who are closer to retirement or in retirement. This is where it gets a little bit different, where there's some debate in the industry about the best path. One path says we should still have one portfolio of an asset allocation and we just should make it more conservative and then do withdrawal rates from it. I would argue, and I'm in the camp, that in retirement you should actually have multiple portfolios that are designed for the specific time frame and purpose of the use of the money.
So, if you need money in the next 12 months, that would go to cash. If you need money in the next five months, that would go specifically to bonds. That's the income floor. Then if you need money that's longer term, that would be an asset allocation that's more traditional to stocks, bonds, and cash that's trying to grow. You segment it out in order to try to have the money you know you're going to need, and not risk losing it. Now, money will take on inflation risk, but it's such short term that it's a nuisance, it's not devastating. Then have money that you don't need for a long period of time trying to maintain its purchasing power and battle inflation. This is the foundation of asset allocation.
Now, there's a lot of nuances to how this is implemented. How do you like an example? How do you decide which pie chart of a mix of stocks, bonds, cash should you have? Well, there's a debate about that. The traditional way is to take a risk tolerance questionnaire, which gets scored in the background, which makes mathematical models easy. That's one way, but probably one of the. Well, two of the biggest determinants of where your asset allocation should be is going to be one, just your psychological preference of risk versus reward. But probably, I would say, even more important in practical terms is going to be your time horizon. The shorter the time horizon, the more comfortable we are with inflation risk as a trade for making sure our money's there. The longer our time horizon, the more comfortable we are with the markets going up and down so we can battle inflation risk. That is where I came up with the silly name, the pie cake, which is just we have these pie charts and we have layers based on the time that we're going to need them. That is the basics of asset allocation. If we can build out in retirement, take our million dollars and allocate it in a diversified portfolio so we don't have to worry about winners and losers and all of that stuff, and if we can allocate it based on when we're going to need the money practically. It's going to help us manage that inflation versus losing my money now trade off. In addition, it's going to help us not think about this stuff so we can go think about creating a great life, taxes, what we want in life, stress testing, all the other stuff that we have to think about. The more we waste time trying to predict the future and be fancy, the less we can do the important things. Asset allocation is a critical component of time management so we can focus on the things that matter most.
Now let's get to some of your questions.
LISTENER QUESTIONS
All right, let's get to some of your questions.
Oh, by the way, in April of 2021, we did a month long series on asset allocation starting in episode #372. We will have links to those episodes in our weekly email, The Noodle. If you want to go back and do a deeper dive on asset allocation, you can go back to those episodes and we'll share those in The Noodle. If you're not signed up, you can go to thenoodle.me.
STEVE ASKS WHETHER TO USE A SINGLE VENDOR OR DIVERSIFY
The first question comes from Steve related to whether they should use a single vendor for all of their accounts or diversify where they have their money housed. In terms of investment firms.
Steve says,
“Hey Roger, I'm drawn to the idea of moving money from my wife and my retirement accounts to only about one and a half million to a single vendor like a Charles Schwab with an aim of simplifying things. Is there an extra risk incurred by doing so?”
Essentially it sounds like, Steve, you and your wife have accounts in different places and you're thinking, well, let's just put them all in one place. In this case, you name Schwab, she has her IRA, you have your IRA and maybe joints accounts, et cetera. Is there an additional risk? Technically yes, because if you're holding them all at Charles Schwab and Charles Schwab gets into issues, that could impact your ability with the assets in your account.
Now there is insurance similar to FDIC that all investment firms contribute into. It's called IPC, will have a link to the basics of security. I believe it stands for the Investor Protection Corporation. So, it's similar to the FDIC, but it's not technically backed by the federal government, implied or otherwise. So yeah, there's a little bit of an additional risk.
I would argue, Steve, that it's minimal relative to the alternatives. The advantages of having it all simplified in one place in terms of coordination of management, clarity of what's going on, the ability to access and transact far outweighs the risk of having it at a particular investment firm. Now, my only caveat to that is it's one of the major investment firms. Doesn't mean you can't go to a regional or a smaller one. But you want to make sure that they're reputable, that they have systems in place and that they're legitimate and not trying to make their way. I think that's important.
So, yeah, I don't think that's a big issue. In fact, I think it's preferable to consolidate as best you can.
NICK’S QUESTION ON ASSET ALLOCATION
Next question comes from Nick related to asset allocation.
“Hey, Roger,
Thanks for all the information you provide. My wife and I decided at the beginning of 2025 that we will be retiring in 2030 when I turn 65. Because of our ignorance, we've been heavily invested in stocks. Now that we've learned about sequence of returns, we want to change our investments to something more compatible to our age.
We've been looking into target funds. We created a spreadsheet to compare the returns of hypothetical $1 million portfolios from 2007 to 2024. The only time that the 2020 fund would be ahead is if it started in 2008. Am I missing something? Do we still need to switch to a target fund or do you have a better recommendation?”
It's a really good question, Nick.
Let's talk about one, target date funds and two, how you're comparing alternatives. You mentioned that we create a spreadsheet to compare returns of hypothetical million dollar portfolios over a very long m time frame. There's only one timeframe. We're using an allocation fund. I'm going to pivot from the target date. That can be a different conversation of using an asset allocation versus being in all equities or heavily in equities, as you say. Well, you're not comparing apples to apples. This is something that can be a struggle for us as we get closer to retirement. So essentially, you're in transition. You have got about a five year time frame and you're pivoting from a portfolio that my daughter Emma would use because she has all the time in the world and she needs growth so she can handle the ups and downs. Well, you're 60 now. You're going to be 65 when you retire. You've probably invested like that for a long period of time and it's been very, very good to you. Right? It's worked. If you've invested in equities long term, sure, you had some huge ups and downs or big downs, a couple of them, but you were still investing and you had a long time frame and it's been very, very good to you and your assets have grown. Well, that's what we're dealing with here, Nick. You can't compare an apple to an orange. Equities will, at least statistically, always outperform allocations that are more moderate with bonds and cash over a long period of time. They just will. That's the beauty of equities. That's why we need to own them to battle inflation.
But in your case, yes, Nick, yes, yes, yes. You need to start pivoting your thinking on investing. It's not about taking the most risk from a volatility, going up and down to get the highest average return. It's becoming more of a game of having more consistent returns. That's one thing that having bonds or cash or using some of your money to buy guaranteed income can help you do. Mathematically, when you get to the point, Nick, that you're starting to draw money from m your assets, the math is going to change where the consistency of your returns is going to be potentially more important than the average return we can easily do. I've seen many math simulations of a portfolio with a lower average return outperforming a portfolio with a higher average return if there are withdrawals coming out. The consistency becomes more important. So that's where the spreadsheet that you create, it doesn't capture that because you're doing withdrawals. You're missing something here.
Now, is a target date appropriate? Potentially. We may have to do a whole deep dive on target dates. They can be good, I think, earlier in retirement. They can definitely help you be more moderate in your investment approach based on the year that you choose.
Essentially what a target date is, people, is that it's an asset allocation. It has a mix of stocks and bonds, but as you age, it will slowly increase the bonds and lower the equities to mimic getting more conservative, actually getting more conservative the older you are, depending on what target date you choose. The problem I have with target dates, Nick, and I think in your case this would be true, is that it treats the portfolio as one homogeneous portfolio. As you enter retirement, you don't want to think about your portfolio as one portfolio. You want to create multiple portfolios that are targeting specific time frames. That's where the pie, cake or a bucket. That is the approach that I have found in practice works best, not just from managing cash flow, but managing the psychological parts of feeling confident that you can go live a great life. I wouldn't use target dates. I would build within your 401ks or your accounts at the moment. Start focusing on building out how you're going to actually fund your life starting in 2030. I love that you're doing this right now because now you can start to learn the new dynamics of the problem of managing assets in retirement. There we go. We'll have a link and I'll ask Nichole to find this link to an episode or two that we did on building out a portfolio in this way.
QUESTION FROM AN RRC MEMBER ABOUT VANGUARDS OFFER OF DIRECT CONVERSION
Our next question actually comes from a member of the Rock Retirement Club and we were having a conversation and he allowed me to share this on the show.
He says,
“Hey Roger,
I hope you're doing well. I have been a Vanguard customer for many years with both brokerage and IRA accounts comprising index mutual funds.”
So, an index mutual fund is essentially that bucket of diversification that we talked about in asset allocation. He goes on to say,
“Vanguard is offering a direct conversion from my open end index mutual funds to their exchange traded counterparts without incurring a taxable event from the transition. When I compare the ETF to the index fund version, I see that the year-end distributions are the same or higher with the index fund. So, I'm wondering if converting the ETF version is really worth the effort. I understand that they're traded daily, et cetera.”
So essentially what he's asking is Vanguard has what are called open end mutual funds, which are the old school mutual funds that do have some benefits in some situations and many firms, and this has been a trend for 25 years now, are moving from open end mutual funds. These are usually ones that have a ticker of five symbols and we can go into the difference of these at another time. But I want to answer this gentleman's question on what are called exchange traded funds which trade like a stock. There are some significant advantages to exchange traded funds from a tax efficiency standpoint, cost standpoint, trading flexibility, investment minimums, et cetera, and many investment firms. It sounds like Vanguard is doing this is they have an open end version of an index fund, let's use their S&P 500 index fund and they're moving more to exchange traded funds. The problem is if we've been investing in these open end mutual funds forever, we have all these capital gains built up and we would like the flexibility and tax advantages of an ETF, an exchange traded funds, but we don't want to sell one to buy the other. So many firms, Dimensional and Vanguard, it sounds like, have created with the regulators a pathway to convert from this open end fund to an exchange traded fund. In this case, The S&P 500 index fund for Vanguard has an expense ratio of 4 basis points and their ETF version has an expense ratio of 3 basis points. Okay, great. You save a basis point. Likely not going to make a difference materially. But there are a lot of advantages to exchange traded funds. You can trade them like a stock, you know, up and down in the middle of the day. Whereas an open end only trades once a day. The expense ratios on an exchange traded fund are generally lower. There's generally much more tax efficiency in an ETF because of how they build your portfolio. You own more of your portfolio versus owning a portion of it. Just one big portfolio. So, I would say that I don't think you're missing anything. I think it is totally fine to do the exchange from an open end mutual fund to an exchange traded fund. I don't think you're going to impair yourself in any way.
LEAH’S QUESTION ABOUT USING IRA CONTRIBUTIONS WHEN BUILDING OUT A PORTFOLIO
Okay, we got two more questions before our rocking Retirement in the wild. And these are audio questions.
Leah: Hello, Roger. I took to heart your recent recommendation in your episode on creating our resiliency plan. And I began dipping a toe into treasuries, which is new for us. That's said, I still have my m contribution for 20, 24 and 25 to my IRA before April 15th. Is it wise to use this 8000 to build a CD or treasury or bond ladder inside my existing Vanguard traditional rollover account? Right now, that is one equity position. I'm not sure if I can, you know, start something new this year with the 8,000 in that. and whether you think that's a good idea or not, we get hit every year with huge tax liability because at the end of the year we have one particular account that always shocks us. Then for some reason it loses all of that in January. But we've gotten penalties many times, so last year we decided to pay ahead. I like your idea of just paying ourselves and then at the end of the year submitting it to the IRS before the end of the year. That's about it.
Thanks.
Roger: Thanks so much for the question, Leah.
The question is, should you use your 2024 and 2025 IRA contribution because that deadline is coming up on the 15th of April to start building out your bond ladder or that shorter term allocation that we're talking about?
The answer is, Leah, that you have to do a little bit of work to get to that answer. That's where process comes in. Once you know you have a feasible plan, this is the work of making it resilient. Yes, you want to make it resilient by building out an income ladder so you have money to make your paycheck. That's important. But a step before that is to map out where you're going to create that paycheck from. The traditional hierarchy is, first it comes from your after tax assets, monies and joint accounts and bank accounts or investment accounts. Then it comes from your tax deferred assets, traditional 401k, traditional IRA. That is the hierarchy. That's the default. But you want to map this out year by year.
Let's assume, Leah, next year you need $100,000 to live and you don't have the income you should map this out to. Okay, what account exactly am I going to get my $100,000 out of? That could be $50,000 from your savings at your local bank and $50,000 from your IRA. that would be based on where the money is? It would be based on a lot of tax considerations, actually, Leah. it would be based on, well, if I just got it from my after tax account, I'd have to sell a bunch and get all these capital gains or I'm in a really low income tax year, so maybe I do take it from my IRA. That has to be figured out first, Leah, before you decide whether these contributions are where you build your ladder. There is a decision tree that you have to follow.
So, the answer is, I don't know. You first have to identify where you're going to get your paycheck from. Another way to approach this that might be simpler, Leah, is do you need money from your IRA over the next five years to pay for your life? If the answer is no, then you probably don't need to build a bond ladder here. If the answer is yes, if it's not already secured in CDs, Treasury, Money Market, whatever, then maybe you do.
Let's get to our last audio question from Patty before rocking retirement in the wild.
PATTY ASKS HOW TO CHOOSE AN ADVISOR WHEN ENTERING RETIREMENT
Patty: Hi Roger. I recently retired and need to decide what to do with my 401k assets as well as address our overall portfolio's asset allocation issues. Our other investments are split between two separate financial managers. I have an inherited IRA that is with my father's original manager which is full service but low fees due to his company benefits and my husband's IRAs. Our other personal assets are in an AUM arrangement with the fiduciary financial manager that my husband pretty much self directs and mostly uses for guidance and support. I also have access to financial planning services through my 401 at my old company at no charge.
Currently my 401k is what is in most need of adjustments as I have approximately a million dollars parked in a brokerage account and just waiting to make a decision and another 800k in equity. My question is how do I go about deciding which financial planner if either to move the 401k money to going forward? There are pros and cons with each.
In the meantime, would it just be best to address my brokerage account on my own or with the help of my company's 401k manager?
Roger: Patty, you have two essential questions.
One is which advisor do we choose? The second question is whether you should address the million dollars parked in your 401k.
Now, before you make the advisor decision, I would say on the second question, ideally you would have a plan of some sort in place with the advisor you choose which would determine what to do with the 401k. So that's a downstream decision that probably is best to table until you figure out the first one.
Let's talk about the first one. First thing I want to say is you've defined your situation with three choices. You have this advisor that was your father's manager that's low fee, full service. Not sure what that means, but we'll put full service. That's option one.
Option two is you have your husband who has his money with a fiduciary advisor that charges an asset under management. But then you qualify that saying, well, your husband basically self directs it and the advisor is there to answer questions and for support.
Then your third option is some financial planning services within your 401k provider.
Okay, so that's the way you define the problem. I would say first off, don't limit yourself to those three choices. A better way to approach this, in my opinion, is to start with what we are trying to solve for here in hiring an advisor. Because you could definitely not hire an advisor and walk the do it yourself path. Many people do successfully. But assuming you want an advisor, before you determine which one to choose, ask yourself, well, what are we trying to do here? Why do we want an advisor? What is it we want them to do for us? A good question to use is, what am I trying to solve for here? Or what do I want to have in place? Or have better clarity on within the next six months if I were to hire an advisor? That's the question we want to begin with, Patty. That could be, I just want an asset allocation in place. That makes sense to me. It could be, I want to have clarification on whether to do Roth conversions or manage taxes. Maybe I want to have a clear understanding of how I'm going to receive income or our paycheck from our assets. I want to have that in place. Could be I want to make sure my husband and I have a coordinated plan. Could be that we want to have things simplified. You get the idea. Defining what it is you want will help you filter through finding an advisor that matches the issue that you're dealing with. If you just want a general asset allocation, then you might be able to use a general, A generalist advisor. You might not need a specialist. Understanding what you're trying to accomplish with an advisor can set yourself up for success with whom you hire and making sure you choose the right one. We don't want to hire a generalist. If we need plastic surgery, that is not a good match. It's good to know what we're trying to do. If I just have a cold or I have a bad cut, I can go to a generalist because I'm trying to solve for my cold or my bad cut. But if I'm trying to build a retirement plan, a generalist probably isn't the person that you're going to want to go to. That will help clarify your thinking.
I have these three options which are known to me at some level. I have some level of rapport with my father's manager. My husband has a relationship with his advisor. So those are two good options to start with. But don't limit yourself there because they still might not be the best choice. If you're looking to build a retirement plan, Patty, and I'm going to make that assumption because you're listening to a retirement podcast, then I would argue that you should hire a retirement specialist, someone that specializes in retirement planning that is very different than just a generalist advisor. Not that they can't talk about retirement planning, just like a generalist doctor can talk about cancer treatment or plastic surgery, but it's not something they do every day.
Ideally, you want to find an advisor. It could be one of these two or someone yet to be determined that does what you're trying to solve for every single day and they've done it for a while. So as an example, if I'm getting knee surgery, I would prefer to have the doctor that has done knee surgery for a long period of time. This is all that they do. If I have a hip problem, they're not the ones to talk to. That's going to give them a cumulative base of experience and mastery because they probably have had things go wrong, they've dealt with odd situations, so they're not dealing with it for the first time for you.
I would get a retirement specialist and then what I would do is interview the advisors. You can interview your father's manager, interview your husband's manager. We're going to share in The Noodle newsletter an interview format, the pre work you need to do before you meet the advisor and how to interview them to see if they have the expertise or knowledge to solve for what you want. That's a better way to do it, in my opinion. Understand what you need. I just need to fix my cold, so I don't need a specialist. I just need to go to the doctor, get a script or I need knee surgery now I have to find a specialist in that area. This worksheet will help you do the prescreening to help filter for bad actors. Then it will walk you through the questions to ask them to find what you're looking for.
Do they specialize in the problems I'm trying to solve? Are they process oriented rather than product oriented? Do they have a well thought out process or protocol to address my problems and the experience of using that and building that? Is there some personal comfort with them where you can have a collaborative relationship and build up? Obviously, you want to identify nefarious actors. Are they safe? Are they transparent in how they charge me? Do they think they have all the answers? Are they really curious but skeptical?
Number one is, do they solve the problems we have? Number two is, do they have experience and do they have a protocol that they've developed so they do it the same way every time? Three, is there some connection there and do you feel comfortable with them? Are they listening and not just speaking? Then four is how do they charge you and are they a safe place from a manager perspective? That is how I would suggest. It sounds like a lot, but really, if you just know what you're trying to solve for and start to look for someone that can actually solve those problems, that's going to help you find someone that you're comfortable with that's worth the money. Yes, you can use these two advisors that you have a relationship with, but I wouldn't limit yourself there because there's many amazing advisors all over the country now.
ROCKING RETIREMENT IN THE WILD
Now let's go tell a quick Rocking Retirement in the Wild story.
James emailed in and said,
“Hey, I have been listening for a few years and find your podcast both interesting and educational. I tend to listen while doing exercise, walking at the gym, et cetera.”
Awesome. That's what I do as well. James.
“I admit that I've been careless in refilling my payroll pie cake because of market returns over the last decade.”
I mean, yeah, we've had great returns. It's hard to want to rebuild that when we're making so much money when markets are good.
“I am overfunded for my base great life even with a 10 to 15% market correction. So, no big deal, but I aim to do better.”
Well, James, now we've had a 15 to 20% correction. Hopefully we'll bounce back quickly, but I would give yourself some grace there.
Basically, what I emailed James was,
“Hey, thanks for the note. It is the human condition. We stumble and aim to do better. The great game is collecting turnarounds as fast as we can. There's nothing magical about five years. For many, three years can be appropriate for some eight years. The goal is to continue to pay attention and be intentional about rebuilding the pathway forward so we have some clarity and we have some strength in our position to navigate when we have markets like we're having right now.
So, James, well done. Thanks for the kind words. Hope you're rocking retirement buddy.”
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 we 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 think about your asset allocation and think about it within time segments.
So, if you have, say, $2 million. Do a simple exercise and divide that $2 million into categories. This is the money I need in the really short term, this is the money I need over the next five years, and this is the money I need for my future self. Just draw some lines, write some numbers, and then look at the allocation for each one of those to make sure it matches the objective for each individual bucket or pie cake.
BONUS
Now we're going to continue on with the journal from my grandfather, Zigmund Canceller, who was a technical sergeant in a B-17 in World War II. I believe we are on mission number 37. We're sort of in the doldrums right now. He's sort of in the middle, like doldrums. Can you have doldrums when you're doing this? Anyway, mission number 37,
“August 26th. Ship number 916. Sortie 24th, Italy. Bombed an important railroad viaduct which was being used in main supply route for the Germans. Target destroyed. No flak or fighters. Sun, a lovely one. Carried twelve 500 pound bombs. Mission was 6 hours 15 minutes. Altitude 16,200ft.”
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.