Investing / Podcast

YFP 325: Retirement Roadblocks: Identifying and Managing 10 Common Risks (Part 2)

Posted on September 14, 2023September 14, 2023 by Tim U

YFP Co-Founder and CEO, Tim Ulbrich, PharmD and YFP Co-Founder and Director of Planning, Tim Baker, CFP®, RLP®, RICP®, wrap up a two-part series on 10 common retirement risks you should plan for.

Episode Summary

Key Points From the Episode

A brief recap of part one.
Frailty risk and what its major financial effects are.
How a good support system and a clear living situation can be a solution to frailty risk.
Financial elder abuse risk, why it often goes unnoticed, and how to mitigate it.
Why unity among siblings is important to avoid financial abuse of elders.
Insight into investment risk and its subsections.
How ensuring that your paycheck isn’t tied to the market can solve market risk.
The value of flexibility and inflationary protection to protect yourself from investment risk.
How liquidity risk plays a role in investment risk.
Sequence of return risk and how it can damage your overall retirement sustainability.
Work risk and some of the reasons that you might have to retire early.
How planning for retirement readiness at different ages can assist with work risk.
What re-employment means and how it affects work risk.
How the loss of a spouse affects the person left behind financially and how to mitigate this.
Ways that having unexpected financial responsibility can affect your retirement plan.
Why having a third party you can trust to help with unexpected risks is helpful.

Episode Highlights

“Studies have shown that, the longer you retire, the more your mental health decreases over time.” — @TimBakerCFP [0:03:25]

“Involve trusted family members [to avoid elder financial abuse].” — @TimBakerCFP [0:10:16]

“You mitigate market risk when a lot of your paycheck is – not tied to the market.” — @TimBakerCFP [0:14:12]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.8] TU: Hey everybody, Tim Ulbrick here, and thank you for listening to The YFP Podcast where, each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, Tim Baker and I wrap up our two-part series on Ten Common Retirement Risks to Plan For. Now, in planning for retirement, so much attention is given to the accumulation phase but what doesn’t give a lot of press is how to turn those assets into a retirement paycheck for an unknown period of time. When building a plan to deploy your assets during retirement, it’s important to consider various risks to either mitigate or avoid altogether and that’s what we’re discussing during this two-part series, where today we cover the five remaining retirement risks, including frailty risk, financial elder, abuse risk, investment risk, work risk, and family risk.

Make sure to download our free guide that accompanies this two-part series, Retirement Roadblocks: Identifying and Managing 10 Common Risks. You can download that at, yourfinancialpharmacist.com/retirementrisks. Again, that’s yourfinancialpharmacist.com/retirementrisks.

Before we jump into my conversation with Tim Baker, let’s hear a brief message from YFP team member, Justin Woods.

[YFP MESSAGE]

[0:01:11.5] JW: This is Justin Woods from the YFP Team with a quick message before the show. If you listen to the YFP Podcast, you may learn something every now and then, either from Tim Ulbrick, Tim Baker or one of our guests. A lot of people listen to this show but they may not execute or implement the things they learn. As pharmacists, we know the impact of non-adherence on patient outcomes and their overall well-being.

As a pharmacist myself and part of the YFP Team, I talk with pharmacists every day who are confused about how to implement financial knowledge. Pharmacists share with me that they are treading water financially, maybe took a DIY approach, reached a plateau, and are confused about what to do next, or those who work for decades can see the light at the end of the tunnel and feel uncertain about how the next chapter will unfold.

If that sounds like you, one, it is not uncommon to feel that way, and two, does it make sense for us to have a conversation to see if YFP Planning can help you? Visit yfpplanning.com or follow the link in the show notes to find a time that works for your schedule.

[INTERVIEW]

[0:02:16.9] TU: Tim Baker, welcome back.

[0:02:18.7] TB: Good to be back Tim, how’s it going?

[0:02:20.1] TU: It is going well. Last week, we started this two-part series on 10 common retirement risks to be planning for. We talked about things like longevity risk, we talked about inflation risk, we talked about excess withdrawal risk. Listeners can tune back to that episode. We’ll link to that in the show notes if they didn’t already listen, and we’re going to continue on.

So number six on our list of 10 common retirement risks to plan for, number six is frailty risk. Tell us more about this.

[0:02:49.0] TB: Yeah, so this is more related to – it’s a risk that as a result of either mental or physical deterioration of your health, mental health, physical health that you as a retiree might not be able to have sound judgment in managing your financial affairs or care for your home, those are the two big ones.

So just like we talked about in the last episode, like, with long-term care and a long-term care risk, this is one that people are like, “Oh yeah, this is important but it’s not going to happen to me” and you know, what studies have shown is that you know, the longer that you retire, the more your mental health decreases over time.

So this is going to be, you know, where we really want a good support system. So a solution here is if we work longer, obviously, our mental acuity, our mental sharpness kind of stays intact longer. We’re not as isolated, there’s lots of studies about depression and loneliness, Tim, you know, creep in.

A lot of things that have not really been talked about as regarding retirement in the past and I think a lot of this points back to some of the frailty risk. So having a good network involving your family to have help, whether it’s with decision-making or chores, hiring someone to manage money or a trustee is another good solution here.

Set up a power of attorney for you know, the financial situation. It can even be you know, things like healthcare. Probably a big thing that I often hear is having a good discussion and analysis of like the living situation, right?

[0:04:40.9] TU: Yes, yes.

[0:04:41.1] TB: So a lot of people as they age, they might not necessarily want to move out of the house where they raise their family. A house that might be three, four, or five bedrooms that has a big yard, lots of yard work, lots of housework. Maybe stairs to go up and down and because of the – you know, kind of the emotional attachment to the house, it’s just hard for the retiree to move on and you know, potentially downsize or you know, move into a townhome or a condo or a community that is different.

That’s probably has one of the biggest effects on the frailty risk. You know, if you’re less likely, I think, to kind of be exposed to this risk if you have, again, more people around you that are dealing with the same thing. We mentioned a trust, so potentially putting assets in the living trust that are basically managed by the trustee which could be used as a retiree and then you could have a successor-trustee, which can be a family member or family members.

But the whole thing I think is to kind of you know, plan for this. You know, we want to make sure that we don’t necessarily have to go through the courts that we can kind of do this preemptive, even simplifying the finances. So things like you know, direct deposit, you know, automatic withdraw for bills, you know annuities, checks coming in the door rather than you know, having to make decisions regarding, “Okay, how much should I withdraw this year?”

These are all things that I think would help, you know, simplify and make this risk, not avoidable but mitigated, Tim.

[0:06:14.2] TU: Yeah, and as we wrap up the previous episode, part one, talking about the importance of planning for this early, right? So here, we’re talking about potentially deteriorating mental or physical health. You know, obviously, if and when that happens, guess it’s just a matter of time, right? For all of us but if and when that happens, we don’t want to be making these decisions in that moment, right?

So, how can we be having these conversations in advance? You talked about an important one that often comes up around housing, what’s the desire? You know, I’m thinking about things like legacy folders and making sure you’ve got good systems and documentations in place. I think the housing one comes up so often, you know? I’m thinking about even my own family. Like, sometimes it’s just hard to cut through the noise on this because you know, you gave one example where people may want to stay in their own home, I think that’s a common one.

The other one that I see as well is where people are adamant on like, “Hey, I don’t want to be a burden on the family. So, just put me in a facility.” It’s hard sometimes to cut through the noise of like, where does the true desire and how is that being projected and you know, maybe there’s an interest and a willingness and the financial means for children, you know, to be able to care for their elderly parents and that’s a desire, you know?

For them to do but you know, you can’t get through some of those conversations. So just again, I think in a point of advocacy for talking through as much of this as possible, as early as possible, and for those that are listening where you know, maybe they have adult children that are going to be important caregivers, you know initiating that conversation with your adult children and those that are the children that have aging parents, you know, initiating those conversations as well.

[0:07:49.6] TB: Absolutely.

[0:07:50.8] TU: Tim, number seven, one that’s not fun to talk about, one that we have to just given, you know, the reality of what it may be, which is financial elder abuse risk.

[0:08:00.5] TB: Yeah, and this is the risk of being – basically being taken advantage of because of frailty. So these are kind of linked, Tim, and I saw a stat out there that this can cost anywhere from like, three to 36 billion dollars a year or something like that. It’s insane and probably the biggest culprits of this is people that the retiree knows and knows well. So that could be an advisor, financial advisor.

It could be a family member, so adult children are probably the bigger abusers of this but 55% of these cases are family members, friends, neighbors, or caregivers, and the crime or the abuse can be anywhere from bad advice to fraud, barred against the person’s home. Theft, which could either be, you know, cash, taking money out of accounts, using credit cards, embezzlement.

You know, misuse of power of attorneys, and unfortunately and I think it’s why it’s so hard to kind of like put a number to this, in terms of like what the losses are is that the abuse often goes unnoticed because you know that retiree can be embarrassed. They really don’t want to punish those that are close to them or they have fear of losing care that is being provided even though they’re being abused or even reprisals.

And it’s one of the things that you know, as an advisor, even though we’re on that list of abusers, that we’re kind of trained to look for and ask questions in terms of like, “Okay, is there something going on? You know, what is the cognitive ability of this person? Are they making sound judgment? You know, who in the family is involved?” That type of thing.

And there’s been you know, I’ve heard of cases where it’s like, Mr. Jones is having USD 50,000 of work you know, done to his kitchen at 85 years old and that doesn’t necessarily make a lot of sense but it could be a contractor that’s kind of taking advantage and sometimes, Mr. Jones, it’s a little bit of – it’s being taken advantage of but it’s also could be like they like the company, you know?

So I think you know, a major solution for this, I would say is you know, involve trusted family members and I underline trusted and I underline the asset members. It’s a little bit of checks and balances. You know, if you have you know, two siblings that are kind of looking after, hopefully, they’re not both, you know, criminally minded but I think it’s good to have a few people that are you know, over-watching so to speak, the situation.

I think as much as the person, the retiree can protect themselves by staying organized, tracking possession, tracking their assets, you know, as much as they can open their own mail, sign their own checks, manage their investment, manage their statements, their investment accounts, their bank accounts, you know set up direct deposit as much as they can for social security checks or annuity payments.

That can again, help, not necessarily avoid but mitigate some of the exposure to this risk. You know, screen calls, solicitations, you know, get second opinions on, you know, we come across things even with clients where like, “Is this legit?” You know, like clients that are in their 30s, 40s, 50s and sometimes are like, “Uh, it’s not.”

So you know, get a second opinion and make sure that we’re kind of hyper-aware because this is a big problem unfortunately and it’s tough to kind of diagnose and see and you know, at every angle, you know, because often the person that’s being abused is like for what I mention, is not necessarily willing to kind of come forward with this.

[0:11:54.5] TU: Tim, I have to bring it up since you mentioned siblings. I think this is an area where there’s so many dynamics, right? Every family’s different but you know I think that when you’re dealing with assets and estates and you know obviously, one, at the end of the day, is going to get assigned as a power of attorney and you know, people that are in are not in the will and whether those conversations are transparent or not.

I feel like, any sibling dynamics, you know, you can just put a magnifying glass on them here. So you know, Cameron Huddleston, who we were referenced in a previous episode and we had her on a few episodes ago about initiating some of these financial conversations with your parents, talks about the importance of sibling conversations in unity, ideally, easier said than done, to then be able to obviously translate that with parents as well.

[0:12:40.4] TB: Yup, absolutely.

[0:12:41.9] TU: Tim, number eight, investment risk, we talked about this briefly in the first part of this two-part series but I think it warrants going a little bit deeper.

[0:12:50.8] TB: Yeah, so, investment risk, I’m kind of going to break this down into kind of sub-risk to this. So what I really want to kind of address here is market risk, interest rate risk related to the investments, liquidity risk, and then kind of come back to the sequence of return risk. So if I take these in turn, market risk is really the risk of financial loss resulting from movements in market prices.

So, unfortunately, Tim, the market just doesn’t kind of increase steadily. As we go, we have lots of you know, ups and downs and twists and turns with regard to the market which often makes us kind of queasy as – and I would say, even more. I feel like for me when I first started to invest back in my 20s, you know, I would kind of feel those investments and I’ve kind of got to a point where I get zen and I try to like not pay attention to it because again, it’s not going to affect me until hopefully 30 years in the future when I do retire.

[0:13:46.6] TU: You should do some market meditations, right? Like –

[0:13:48.6] TB: Yeah, exactly but for a retiree, who you know, like their paycheck and their livelihood is kind of tied to the market, I could see how that could be overwhelming and distracting. So a solution here is I think, I really strive for balance and flexibility. So, we kind of mentioned in the past, like a flooring strategy.

So you mitigate market risk when a lot of your paycheck is not coming or not tied to the market. So that’s where we you know, are essentially, we’re looking at essential expenses and we’re saying, “Hey, my essential expenses or my basic needs are covered with an annuity” or social security or very low risk, you know, government securities like treasury bonds. You know, treasury bonds, notes, that type of thing and we’re good.

The other part of that is allocation. So obviously, a lower percent of your portfolio in equity, you know, particularly leading up to retirement is going to be important to kind of mitigate market risk. So even in some of the – you know, the dot com crisis, the subprime mortgage crisis, you know, the COVID crisis, like the market is still doing this but if you have less equity exposure, it might not be Rocky Mountains ups and downs.

It might be Appalachian Mountains ups and downs, where it’s a little bit smoother but I think, knowing what your allocation and what your glide path is, actually approach retirement is going to be important and then you know finally, I think for this particular risk is kind of going back to flexibility.

So if you’re in a year where the market is down and maybe inflation is up, you know, inflation is up, like maybe we say, “Okay, we’re not going to take that USD 15,000 out to go travel.” you know, do this huge cruise or make this, “We’re going to forego that and see when the market kind of recovers and then we’ll kind of assess it from there.” So flexibility of like, what you’re withdrawing and when I think is going to be important with regard to market risk.

The other ones, Tim, interest rate risk. So this is related to investment risk. So this is the risk of the change in value of an asset as a result of volatility in interest rates. So what does this mean? This essentially means that when interest rates go up as they have been over the last couple of years, the price of bonds go down. So there’s an inverse relationship. So, the price of individual bonds and bond mutual funds decreases.

So when interest rates go down, the price of bonds go up. So this is not necessarily a concern when bonds are held to maturity or what I was mentioning in the last episode, a bond ladder. So if I buy a year, a bond, or six-month bond that basically, you know, comes up at the end of the next or at the end of this year or a year, 18 months, or whatever that looks like, if it holds maturity, the fluctuation in interest rates do not affect the bond price.

So you’re kind of inoculated from that. It’s when you kind of are coming in and out of bonds, that’s where it becomes problematic. The other risk associated with this is and I’ve seen this, so one of the things that I – because I’m a nerd, but one of the things I do with my emergency fund is I buy 12 months CDs every quarter. So I have a quarter one CD. So let’s pretend I have USD 20,000 in my emergency fund.

10,000 might be in the high-yield savings account, 10,000 might be split up between four CDs and you can kind of think of these as like bonds. So Q1, I have 2,500, January one. Q2, April one, so on and so forth. So as prices, as interest rates have gone up, if I look back 12 months ago, man, I look at that interest rate, I’m like, “Man, that’s really low”. So when I renew, Tim, the – what I’m getting in terms of interest is a lot higher.

The opposite came true, and this is what’s called reinvestment risk. I could have this bond that I just bought at five or you know, the CD or bond that I just bought at 5% but in a year or two years, it could be at 3% and then that’s the reinvestment risk. So that’s another risk that we have to, you know, kind of be aware of. So I think the biggest they hear is, again, things that are inflation-protected.

So any type of income stream or investment that has inflationary protection like tips or strips, any type of COLA protection that’s going to really – what’s going to be to help reduce that risk and then finally with – or not finally, the third one is liquidity risk. So this is just basically the inability to have assets available to financially support unanticipated cashflow needs. I don’t think that this is a risk that’s really inherent just to retirement, we all have this at all times.

It might be a little bit harder to overcome because we don’t have – we don’t necessarily have cash flow from like a set job but planning for this, you know kind of plan as best you can for what could happen. So what are the situations and then what levers can we pull? What are the assets that can be sold? You know, what are things that can’t be sold, which you know, assets that can be sold.

It could be things like stocks and bonds and things like that. Maybe not so easily, it could be a business interest or real estate. You know, what are some other things that we can talk about to pull? Whether that’s life insurance, a HELOC, a reverse mortgage, and then one of the best reasons to employ a systemic withdrawal strategy is because of the flexibility.

Because you have this pot of money that you can reach into and say, “Okay, I didn’t think needed USD 30,000 for X but now, because that money is there and I can put it into liquid form and pour it” then you know, that’s one of the things, versus, if you were to say, “Hey, I’m going to put all my money to an annuity” that’s not flexible and that’s not liquid.

So it allows you to change your strategy in the face of you know, new information, new situations, and finally, the last one here and again, Tim, we could probably do a whole episode on sequence of return risk is this is the risk that the timing of your withdrawals from a retirement account will damage your overall return and really like sustainability.

So when you withdraw from a bare market or when the market is down, it’s more costly than if you draw – you make that same exact withdrawal in a bull market. So this is – so what we’re saying is that a large negative return during retirement, so during that risk zone, that eye of the storm of you know, 10 years before retirement, 10 years after retirement, has a much bigger impact on wealth accumulation and success in retirement than a negative return outside of that.

You know, so that’s why I’m saying that at 40, you know, I get zen because I’m like, “It doesn’t really affect me if the market goes down 40% because I know I have 30 years for it to recover” and it’s going to go down 40% a couple of times probably over the next 30 years but if I’m retiring in five years, I’m worried, Tim.

And again, like that’s where we have to be as safe as we can, you know, throughout our wealth accumulation journey is right in that zone, you know, five to 10 years before and five to 10 years after and this is when your retirement accounts are most vulnerable to investment returns and if you think about it, it kind of makes sense because this is typically, Tim, where you have the highest balance.

[0:21:29.9] TU: That’s right.

[0:21:31.2] TB: So wealth rises rapidly as you approach your retirement date due to the fact that you’re putting in probably the most in contributions you ever have because you know, a lot of people are like, “Oh, I didn’t do enough of this, I need to make up, I got to catch up” because of investment returns and compounding.

So that’s when you’re – you know, and the research says that in a defined contribution plan, say, like a 401(k), this is interesting, you accumulate half the value of the account in the final 10 years of savings. So we say save early and often but what moves the needle most is in the last 10 years. In the early years of savings, additional contributions can replenish account losses but later, the contributions are a much, much smaller needle mover than it is like investment losses or gains.

[0:22:21.2] TU: Yeah, and Tim, just to put – you know, I was thinking about this because I think it’s harder, especially if folks are earlier in their career to understand kind of the numbers of this. If you’re nearing retirement, you have a three-million-dollar portfolio, as you mentioned, one part that’s going to keep driving that up is typically your, maybe you feel like you had to play catch up or you’ve got more discretionary income at that phase.

You’re hyper-saving, trying to max that account but even if we just look at that three-million-dollar portfolio and assume something like a 5% return in that year, you know, USD 150,000 of growth that’s going to happen in that portfolio in that year, right? And you know, people that are early saving, the timeline to get to 150 can feel like forever, and here, we’re talking about 150 of growth in a portfolio just in that single year. So I think that makes sense.

[0:23:05.4] TB: Yeah, and if you compare that to what you can legally contribute, that’s the big thing.

[0:23:11.8] TU: Oh my gosh.

[0:23:12.7] TB: Whereas like, you know now, you’re like, “Oh, 20,500, that’s like, that might be a third of my savings.” So it’s huge. So really, what the research shows that the magnitude of the impact of a large negative investment return or shock grew as the shock occurred closer to retirement.

[0:23:34.8] TU: Yeah, exactly.

[0:23:35.7] TB: So it’s like if the epicenter is – if the epicenter of that shock is close to age 65 when you retire, the consequences are greater than if it were at 58, which makes sense. So for sequence risk, the order of returns becomes a far more important concern in that span of time over the breadth of the entire portfolio, particularly in accumulation, it’s the average return that matters, right?

So one of the things that I often say is like, “Hey, you don’t need a lot of bonds in your 20s, 30s, 40s” and I would even say even your 50s unless you’re retiring in your 50s, you don’t need a ton of bonds. So you want to almost have like a cliff, where you’re very much like pedal to the metal, you know you’re primarily in equities and then when you get to that 10-year, that’s where you start shifting, downshifting considerably.

So like a hard break versus what a lot of people do is they kind of glide into it. So in their 40s, they put a little bit more bonds, in their 50s they put a little bit more bonds and so on and I just think that and I understand why, you know, you’re kind of easing into it but I just think you leave a lot of meat on the bone with regard to investment returns but the same is true is like you kind of have to like you know, you kind of have to get into that period of 10 to 15 or 10 years pre-imposed retirement date and then start adding equities back in, which a lot of people don’t do.

So the solution for this is asset allocation and whether you follow on collide path or not in terms of you know, percentage of equities to bonds. Knowing what that is, we often see in the accumulation phase I think not the proper asset allocation, so too heavily in bonds and then closer to retirement, actually too heavily in equities. So if you have one of those shocks where the market is down, that’s where we have to have real conversations of like, “Hey, maybe we need to push out retirement to the market.”

[0:25:34.3] TU: Retirement date, yeah.

[0:25:35.6] TB: The market corrects. Again, flexibility; allow for changes and what is what’s wrong. So if it’s a down market, you know either decrease the amount that we’re withdrawing or actually that the entire – shift the entire equation where you know, we’re not retiring this year or next year, we’re retiring when the market recovers and then another solution is to kind of get out of the game or at least partially convert a portion of the portfolio to an income annuity, which essentially you know, means less overall volatility because you have that income for in place.

[0:26:10.7] TU: Yeah, Tim, great overview. The investment risk to your point, we probably can and should cover this in more detail in future episodes and I think flexibility keeps coming back as a theme but I want to acknowledge how hard that can be, right? When you talk about something like, “Hey, maybe shifting your retirement date” makes a whole lot of sense objectively, right?

If I had planned a retirement age, I’m listening of you know, 2026 and we see the market tank in 2025 like I’ve been mentally preparing for retirement in 2026, that’s a hard thing to consider but I think that open-mindedness and the options to be able to pursue some of those things that gives you more of that flexibility to maximize your portfolio is going to be really important. The other thing I just want to mention that we see a lot because especially folks that are maybe introductory in terms of investing or learning or aren’t working with a planner.

I’m thinking about a lot of folks that are investing heavily in target date funds, where we maybe see some of that conservative investing happening too early, in my opinion, in the portfolio, yeah.

[0:27:12.5] TB: Yeah and just to go back to what you’re – yeah, I completely agree it is and again, not every target date fund is created equal. We actually crack those target date funds open and you can see the allocation, you know something then might be 2035. You know, if you stack up a 2035 or 2055, you know target date fund, what is in target date fund A is going to be, you know 2035 is going to be a lot different than what’s in a target date fund B that’s in 2035.

But to go back to your other point, you know like and we’re going to get into this in the next couple of risks here, sometimes like you’ve mentally said, “All right, I’m going to work for another two years” sometimes that decision is made for you and that could be hard. So then what do you do?

So I think a lot of these risk is like if you can kind of maintain as much control over your destiny and I think part of this is having options, particularly with things related to work, it allows you to kind of pivot and adjust and kind of parry some of these things that are thrown at you because I keep saying, “I want to retire at age 70” you know? I mentioned earlier in the first episode of this is like that might be out of my control and you know, that’s something else we have to account for.

[0:28:36.5] TU: Yeah, if Mike Tyson were listening, he’d say, “Everyone has a plan until they get punched in the mouth” so yeah.

[0:28:41.0] TB: Yeah, exactly.

[0:28:42.4] TU: So let’s talk about that, work risk is number nine on our list. What is that?

[0:28:46.5] TB: So again, I’m going to break this down into some sub-risk. So the first one would be forced retirement risk. So this is the risk that work well and prematurely because of poor health, disability, job loss or to care for a family member because of some of these issues and this is an eye-opening stat, Tim, is 40% of retirees retire earlier than they plan and it’s really because of one of those issues, health, job loss, caring for a family member.

This happened to my dad. My dad tells the story, you know, when we try to talk about this, you know his company was bought by another company. He was kind of duplicitous, you know, kind of at the tail end of his career and he was laid off. So it was – so if he was planning to retire by X and his portfolio and all, we had to kind of reconfigure, jostle things around, and make sure that we’re planning accordingly.

So I think having like a pulse on kind of your retirement readiness at different ages, “So okay, what happens to my plan if I have to retire 10 years before I want to?” So for me, it will be 60, right? 65 like what happens.

[0:29:54.8] TU: Yes, zero, one, two, three.

[0:29:56.3] TB: Yeah and you know, what happens to my lifestyle, you know, what do I have to – like are there things that I, other levers that I can pull? So one of those I think is career. So I think staying current, you know learning new skills. You know I think, Tim, like we’re naturally like this as like lifetime learners and always trying to you know, self-improve. That’s not everyone’s cup of tea but I think maintaining your network.

I don’t know the last time I actually put my resume together, Tim but I think that would be something that you would want to do. It is a lot easier to kind of brush that up every year or so versus kind of cracking that open every decade. Are there – is there opportunities to pivot to consulting, to kind of work on your own? I think a lot of people paying attention to severance policies and negotiating benefits related to your career is going to be important.

Another thing to kind of you know, mitigate the health stuff is maintaining a healthy lifestyle. So you know diet, weight, sleep, exercise, and potentially reducing stress by cutting back hours. So we kind of mentioned of like a glide path of going from a one to a point eight to a point six, you know to work in a couple of hours here and there. So I think that can potentially allow you to work part-time longer into retirement by maintaining a healthy lifestyle, maybe meditation, all that kind of stuff.

The second work risk we talk about is re-employment risk. So this is the inability to supplement retirement income with employment due to kind of down job markets, poor health, or if you’re caring for others. So I think for my dad, you know when I happened to him you know I think it was hard for him because he had worked for the same company for 40 plus years to actually go into market and interview and do something else.

So for him, it was kind of more about like comfortability and he really didn’t have anything else outside of that where he could consult or do part-time. Like I’ve heard people like drive a bus for a school and liking that because you know, they’re connected to kids or turning hobbies into profit-making activities. I was talking with my brother and his fiancé last night because we were actually talking about, “Hey, when do you want to retire, and when is that?”

You know, one of the things that he brought up that I thought was interesting, he’s like, “I think I’d love to do like a bed and breakfast.” That’s cool. You know, he likes to cook, he likes to host, so I think that would be something that would be good for him.

[0:32:37.3] TU: That is cool, yeah.

[0:32:39.4] TB: Planning on earning significant income in retirement may be unrealistic for a lot of people. There are certain industries where it’s very easily, you can very easily kind of pivot to a consultant role and make just as much money as you would working full-time but that’s not necessarily the case for a lot of people.

So I think kind of again, planning for this, talking through this, and understanding you know, what are some things that you can potentially lean on or pivot to in the event that what you thought was a short thing, which was like your employment is not so much and again, I think this often is one of those things where it’s like, “Hey, that’s not going to happen to me.”

[0:33:25.4] TU: Yeah.

[0:33:25.8] TB: I think this has probably evolved over time, right Tim? Because again, it’s rare where you find someone like my dad that’s worked for the same company for 40 or 45 years. So I think our eyes are a little bit more open to this risk but I think what maybe might not be is the fact that like, “Hey, your health or someone close to you” or something like that could affect your timeline, so to speak for retirement.

[0:33:50.1] TU: Yeah, and as you’re talking Tim, I’m thinking about many people in our community of which many of them have been on the podcast where you know I think they may intentionally or unintentionally are preparing themselves for something like this and the risk you’re talking about, right? They’ve got you know, maybe they’re investing in real estate in a variety of ways, they’re working a full-time job.

They’re doing some consulting, they’ve got a side hustle, they maintain an active network, you know, they’re constantly developing their skills, right? Just multiple strategies of diversification that I think help mitigate against some of the risks that you’re talking and maybe they’re not even thinking about it in that way, it’s coming from an area of energy and passion but it can be really helpful as we talk about strategies to plan for this type of risk.

[0:34:33.3] TB: Yeah, absolutely.

[0:34:35.0] TU: All right, number 10 on our list is family risk. Take us home, Tim.

[0:34:41.4] TB: Yeah, so the two kind of sub-risk that we would talk here is kind of the loss of spouse risk and then unexpected family financial responsibility risk. So the loss of spouse essentially is where you know, I’ll use myself, I retire at 70. I think I’m going to live at least to 87 or 95 and I pass away unexpectedly at 72, right? So the problem often with that is you know, you’re often, for many spouses, you’re kind of known two social security income streams, right?

You know, so one of those goes away, you keep the highest one but the problem – so you still have all of the assets. The spouse will inherit all the assets that are in their name obviously but what typically doesn’t reduce is a lot of like living expenses, right? So your food might go down but you’re still going to have to pay if you have a mortgage.

[0:35:41.9] TU: Property taxes, yeah.

[0:35:42.8] TB: Or you know, rent or things like that, tax, all of those, your utilities are going to be very similar. So just because your income or a good chunk of your income could be cut in half or even a third, your expenses don’t and what we’ve seen at least with baby boomers is that you could be a widow or a widower for 15 or 20 years. So it’s not like you know one and this happened where one spouse dies and the one will die within a year or two.

I mean, but that does happen but you could have long periods of time where you’re by yourself. There was a stat that I saw that was really interesting Tim, was within five years of a death of a spouse, 40% of widows become impoverished.

[0:36:29.9] TU: Wow.

[0:36:31.1] TB: That’s insane to me and I think if I had to guess, I don’t know this Tim, but if I had to guess, I would think that that’s probably again, people that are lower income that might like a huge chunk of their livelihood is in disability. So if a good chunk or not, disability, social security, so a good chunk of that goes away, so you have two paychecks is now one, you know that could be very problematic for kind of sustainability of overall wealth.

But that to me was eye-opening and I’ve heard that before with husbands will say like, “I just want to make sure my wife is taken care of if I’m gone” and again, I don’t want to get into much of like gender roles and things like that.

[0:37:17.4] TU: Sure.

[0:37:17.8] TB: But I still think that that exists in a lot of relationships, particularly older couples where you know, one partner handles the money and the other one doesn’t or has an interest in the other one doesn’t. So you know I think the solution for this is and I’ve talked to people in the past is like, “I want a relationship with like an adviser where I trust them because even when I’m gone they’re going to take care of the person, you know, my spouse.”

So I think having a relationship with that, with like a planner I think can be important. I think involvement, you know I often say this with couples of all ages, you know the more that you are involved with your plan.

[0:38:00.6] TU: Absolutely, yes.

[0:38:02.0] TB: And the more you are engaged with the plan like both of you, I think the better the results will be but I also understand that there’s some like, there’s some couples that there might be engagement in the front end and then maybe one spouse kind of you know drives the train after that but then often what happens is like again, if that spouse dies like they kind of have to reengage is necessarily like the easiest thing.

So you know, what are the contingency plans if this were to happen? Even sometimes like when we – so if we were to say, “Hey Tim, you know we’re going to peel off a quarter million dollars of your portfolio to provide an income for you and Jess.” What’s attractive about those payoff schedules is like the one that just pays your lifetime is the highest but we would want to say, “Okay, let’s have a joint life payout.” So it would pay you as long as one of you are alive but that benefit is going to be lower.

[0:38:54.8] TU: Yeah.

[0:38:55.4] TB: So decisions like that, you know if you have second-to-die policies or you know again, social security claim, and there is a lot of people that they don’t look at the layers of that decision that says, “Okay, even if Tim is in poor health than Shay, if I have a larger benefit that I want to defer that I should defer, that benefit grows and then when I pass away, Shay takes that on.”

So some of that, some of those nuances aren’t necessarily you know, evaluated. So those would all be things that you know again, it’s not just the abrupt, “Okay, the husband is gone or the wife is gone,” these are things that we have to bake into the plan as we go because you know, things like social security or you know, payouts and things like that have to be decided. So it’s not just the abrupt, “Okay, what happens once that happens in that moment?”

It’s the multitude of decisions that you have to make potentially leading up to that and then lastly, it’s the unexpected financial responsibility risk. So this is kind of the risk of failure to launch, Tim. Like, “Hey, I’m 40 years old. I just lost my job” or “I’m divorced. I’m moving back in with mom and dad” or you know, care of a grandchild or because parents have problems with the law or drug addiction.

These things happen you know and sometimes, we can kind of put this thing in like a liquidity risk of like unanticipated events but I would say like those would be things that I would want as a planner to know like, “Is there a possibility for this and if this were to happen, what do we do?”

[0:40:40.8] TU: Yeah.

[0:40:41.3] TB: So that’s another you know, risk associated with family. Families can be great obviously but sometimes, you know that’s kind of my biggest fears. You know, I want to make sure that as I’m raising my kids and I know it’s the same, it’s true with you, Tim, like they can be contributing members of society that can you know, be self-sustaining but sometimes that’s even out of their hands, right? So we want to make sure that in the event that that happens, we can plan accordingly.

[0:41:11.4] TU: Tim, as you talk about loss of spouse, a couple of things are coming up for me. One that’s timely, you know where Jess and I are working on, just updating your legacy folder that we created several years back but in our planning with Kelly from our team. You know, it’s a part of the process that we need to go back to and update it and you know to you comment about the importance of joint planning and all parties being involved ideally.

Even in this situation where Jess and I feel like are both very well informed, I do take a little bit more of the lead but it is very much a shared agenda and execution and both of us engage with Kelly and the planning. You know, instructions on that legacy folder, while they’re spelled out as much as possible, you know for either one of us or in the event that both of us were to pass away, for our parents or whoever it be taking care of the finances and the boys, it’s, “Go call Kelly.”

Like someone we trust that knows this plan inside out, that has these documents, that understands all of the nuances and what is going on and that is so reassuring. Again, assumption is you have someone you trust. It’s so reassuring to know you’ve got a third party that not only is there to help you develop the plan but is there in the event of some of these challenging situations that may come up to make sure that we’re executing how we wanted it to be executed.

[0:42:29.1] TB: Yeah, and I think what’s not covered in that like I love the idea of like, “Okay, Kelly is a safe haven. She has the documents, she knows your situation” I think it’s hugely, hugely important but I think what’s also not necessarily discussed in this is kind of like the emotional or social like you know, my parents were in town this week, last week and this week. It’s been cool because my brother has been in town too. So the three of us have been spending – my dad just turned 77.

[0:43:04.9] TU: Baker pow-wow.

[0:43:05.7] TB: Yeah, and we’re joking with my dad that like if mom passed away like I don’t think my dad knows how to do like a load of laundry. I love you Dad but he’s very much dependent on my mom over you know, decades and decades of marriage. If something were to happen to them like I think he would have to move in with one of us to live and I’m sure a lot of people are thinking about their parents and they’re like, “That’s my dad” or “That’s my mom.”

You know, I think even that of the loss of spouse not just from a financial standpoint or like where are the documents or things like that, it’s kind of a day-to-day living in terms of like what am I doing or what can I do or what can I not do and who am I leaning on and you know, I think that kids are probably the first people that are in that role but I think like having those conversations before that happens where maybe there’s less emotion involved is smart.

So it’s not just the numbers, it’s what’s the quality of life? What are the things that we’re going to do to move forward? And unfortunately, it is part of life and I think the more that you can kind of get in front of things just like anything else, I think the better result you’ll have.

[0:44:28.6] TU: Yeah, the other thing to your point about the emotional journey that’s coming up is a throwback almost four years ago now but we had on episode 127, we had on Michelle Cooper, who wrote the book, I’ve Still Got Me: A Widow’s Journey to Love, Happiness & Financial Independence, lost her husband to suicide and talks about not only the importance of joint planning and shared understanding of processes and documentation but also navigating that in the midst of that emotional loss.

Great interview, great resource. We’ll link to that in the show notes as well. Tim, this has been fantastic as we’ve covered in two episodes now 10 of these risks we need to be planning for and mitigating the best that we can. For folks that are listening, you know you heard a theme here of early planning. Obviously, we would love to have the opportunity to talk with you if you are interested in working more with one-on-one with a financial planner that you can trust.

We’ve got a team of fee-only certified financial planners, tax professionals that work with pharmacists households all across the country at all stages of their career. You can learn more by going to yfpplanning.com and you can book a free discovery call from that site. Again, yfpplanning.com. Tim Baker, as always, great stuff. Thanks for the contribution.

[0:45:41.4] TB: Yeah, thanks, Tim.

[DISCLAIMER]

[0:45:42.4] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 324: Retirement Roadblocks: Identifying and Managing 10 Common Risks (Part 1)

Posted on September 7, 2023September 6, 2023 by Caitlin Boyle

On this episode, sponsored by First Horizon, YFP Co-Founder and CEO, Tim Ulbrich, PharmD and YFP Co-Founder and Director of Planning, Tim Baker, CFP®, RLP®, RICP®, kick off a two-part series on 10 common retirement risks you should plan for.

Episode Summary

While a lot of emphasis is placed on the accumulation phase when preparing for retirement, there is considerably less focus on simple strategies for turning assets into retirement paychecks, for example. This week, Tim Ulbrich and Tim Baker kick off a two-part series on 10 of the most common retirement risks you should be planning for. Today, Tim and Tim cover five of these risks, including longevity risk, inflation risk, excess withdrawal risk, unexpected health care risk, and long-term care risk. You’ll find out why thinking about retirement as “half-time” is a good idea, the different options for taking out annuity payments, and why it is important to think about your withdrawal strategy, as well as what a bond ladder is and why you should consider unexpected medical expenses. Whether you are nearing retirement or are still in the accumulation phase, this episode is full of valuable insights.

Key Points From the Episode

Introducing our two-part series: 10 Common Retirement Risks to Plan For.
Background on why this topic is so important.
A couple of important disclaimers before we dive into the first risk: longevity risk.
Viewing your retirement as half-time.
Setting realistic expectations and planning as best as you can.
Lifetime income: a careful analysis of Social Security claims and strategies.
Options for taking out annuity payments.
Thinking about your withdrawal strategy to mitigate longevity risk.
The risk associated with inflation.
Defining what a bond ladder is.
Why social security is one of the most important things to evaluate in retirement.
How higher rates of inflation have influenced Tim and the planning team’s models.
Whether or not there should be a glide path from a work perspective.
Excess withdrawal risk: depleting your portfolio before you die.
A quick recap of the bucket strategy.
Healthcare risk: facing an increase in unexpected medical expenses in retirement.
Different Medicare plans: Part A, B, C, D, and Medicare Advantage plan.
Long-term care risks, misconceptions, and potential solutions.
The tough conversations we need to have.

Episode Highlights

“You get to the end of the rainbow and you have hundreds of thousands of dollars, millions of dollars. The question is how do you turn these buckets of assets into a sustainable paycheck for an unknown period of time?” — @TimBakerCFP [0:04:02]

“Longevity risk is the risk that a retiree will live longer than – they expect to. What this really requires is a larger stream of lifetime income.” — @TimBakerCFP [0:06:48]

“There’s a whole other race to run after your career.” — @TimBakerCFP [0:09:44]

“The more flexible you can be with your withdrawal rate, the greater the portfolio sustainability will be.” — @TimBakerCFP [0:18:15]

“Essentially, in retirement, inflation could erode your standard of living.” — @TimBakerCFP [0:21:57]

“Abrupt retirement sounds sweet, but in reality, it’s really hard.” — @TimBakerCFP [0:29:37]

“It’s less about the actual return and more about the sequence of when that return comes that can affect the sustainability of [your] portfolio.” — @TimBakerCFP [0:35:55]

“You don’t want to get to a point where you’re having to go through the courts to get the care that your loved ones need. If you can avoid that at all costs, even if it means having an uncomfortable conversation – I think it’s needed.” — @TimBakerCFP [0:48:07]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, Tim Baker and I kick off a two-part episode on 10 Common Retirement Risks to Plan For.

When planning for retirement, so much attention is given to the accumulation phase, but what doesn’t get a lot of press is how to turn those assets into a retirement paycheck for an unknown period of time. When building a plan to deploy your assets during retirement, it’s important to consider various risks to either mitigate or avoid altogether. That’s what we’re discussing during this two-part series, where today we cover the first five common retirement risks, including longevity risk, inflation risk, excess withdrawal risk, unexpected health care risk, and long-term care risk.

Now, make sure to download our free guide that accompanies this series, that guide being the 10 common retirement risks to plan for, and you can get that at yourfinancialpharmacist.com/retirementrisks. This guide covers the 10 common retirement risks you should consider and 20-plus solutions on how to mitigate these risks. Again, you can download that guide at yourfinancialpharmacist.com/retirementrisks.

All right, let’s hear from today’s sponsor, First Horizon, and then we’ll jump into my conversation with YFP Co-founder and Director of Financial Planning, Tim Baker.

[SPONSOR MESSAGE]

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First Horizon offers a professional home loan option, AKA doctor or pharmacist home loan that requires a 3% down payment for a single-family home, or townhome for first-time home buyers, has no BMI, and offers a 30-year fixed rate mortgage on home loans up to $726,200. The pharmacist home loan is available in all states, except Alaska and Hawaii, and can be used to purchase condos as well, however, rates may be higher and a condo review has to be completed.

To check out the requirements for First Horizon’s pharmacist home loan and to start the pre-approval process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[EPISODE]

[0:02:36] TU: Tim Baker, welcome back to the show.

[0:02:38] TB: Good to be back, Tim. How’s it going?

[0:02:39] TU: It is going. We have an exciting two-part series planned for our listeners on 10 common retirement risks to avoid. I think as we were planning for this session, just a lot of depth and great content, that we want to make sure we do it justice, so we’re going to take five of these common retirement risks here in this episode. We’ll take the other five next week. Tim, just for some quick background, one of the things we’ve talked about on the show before is so much attention is given when it comes to retirement, is given to the accumulation phase as we’re saving, especially for those that are maybe a little bit earlier in their career.

It’s save, save, save. But I even think for all pharmacists in general, that tends to be the focus, but we don’t often think about, what does that withdrawal look like, both in the strategy, which we talked about on the show previously, but also in what could be some of the risks that we’re trying to mitigate and avoid. Just give us some quick background on why this topic is so important as we get ready to jump into these 10 common mistakes.

[0:03:39] TB: Yeah, I think to your point, I think a lot of the, even the curriculum in the CFP board standards is very much focused on the accumulation phase of wealth building. I think there’s a lot of challenges and a lot of risks that you have to deal with during that phase of life and during that phase of wealth building. But I think what doesn’t get a lot of the press is like, okay, you get to the end of the rainbow and you have hundreds of thousands of dollars, millions of dollars. The question is, how do you return these buckets of assets into a sustainable paycheck for an unknown period of time?

While navigating a lot of these risks, I don’t know if it’s risk avoidance, Tim. I think it’s just planning for the risk. We’re talking about avoiding risk. Some of these, you can’t really avoid. You just have to plan for it. I think that what we’re finding is, I think the whole general rule of like, “Oh, I’ll get to the end and I’ll have a million dollars and I’ll put 4%, $40,000 a year for the rest of my life.” There are a lot of pitfalls to that. I think that hopefully, this discussion shines a light on some of that. I think it is just important because we think that the – the hard part is, hey, I just need to put assets aside, but I think equally as hard as, okay, how do I actually deploy these assets for a wealthy life for myself in retirement?

[0:05:04] TU: Yeah, good clarification, right? Some of these, as we talked through the 10. Avoidance isn’t necessarily possible. It’s the planning for, it’s the mitigation, minimizing the impact, however, we want to say it. I think, what you articulated is just spot on, right? I think when it comes to retirement planning, saving for the future, we tend to view that nest egg number, whatever that number is, 3, 4, 5 million dollars, whatever is the finish line. So many other layers to consider there.

Not only getting there, which again, we’ve talked about on the show previously, and we’ll link to some of those episodes in the show notes and the strategies to do so, but how do you maintain the integrity of that portfolio? How do you optimize the withdrawal of that portfolio? If we’re doing the hard work throughout one’s career to be saving along the way, we want to do everything we can to get as much juice out of that as possible.

That’s the background as we get ready to talk through some of these 10 common retirement risks to plan for. Just a couple of important disclaimers; We’re not going to talk about every retirement risk that’s out there, of course, Tim, so there’s certainly more than 10. You’ll notice them overlap as we go through these. This is not meant to be an all-encompassing list. Of course, this is not advice, right? We obviously advocate that our listeners work with a planner, no matter what stage of your career that you’re in to be able to customize this part of the plan to your personal situation.

For folks that are interested in learning more about our one-on-one financial planning services, our team of certified financial planners and tax professionals, you can go to yfpplanning.com and book a free discovery call to learn more about that service.

All right, Tim. Let’s jump off with number one, which is longevity risk. What is that risk? Then we’ll go from there and talk about some potential solutions.

[0:06:48] TB: Longevity risk is the risk that a retiree will live longer than what they expect to. What this really requires is a larger stream of lifetime income. We’ll talk about that in a second. The hard part about this whole calculation, Tim, is that there are lots of unknown variables. Unfortunately, or fortunately, I guess the way – depends on how you look at it, I don’t know when I’m going to pass away. Social Security obviously has a good idea of what that is. When I was preparing for this episode, Tim, I looked at, I went onto socialsecurity.gov, and put in my – basically, my gender and my birthday. It comes back with a table and it doesn’t factor in things like health, lifestyle, or family history. But it essentially says that for me at 40 – oh, man, it’s tough to look at that, Tim. 40 years old in 10 months, that my estimated total years, I’m halfway there.

[0:07:47] TU: Halfway. I was going to say. Yeah.

[0:07:49] TB: I’m 81.6. Now, once you get to age 62, then it starts to go out. At age 62, it says I’m going to live to 85. If I make it age 67, then it says, hey, I’m going to live to 86 and change. Then at age 70, which is when I think I’m going to retire, Tim. That’s my plan, at age 70, 87.1 years. I think that for a lot of people, this is an unknown. I overlay like, okay, when did my grandparents pass away and things like that.

Some general stats, one in four will live past age 90 and one in 10 will live past age 95. I think these stats fly a bit in the face of Social Security, but maybe not. I think they factor some of this in. One of the big discussions that we have in our community is like, what should we plan to? What should we plan to? Should it be age 90? Should it be to age 100? We default to 95, which is right in the middle. For me, being in my 40s, it says 87.1-years-old.

I think, this unpredictable length of time really puts a huge unknown out there in terms of like, okay, because there’s a big difference between I retire at age 70 and I pass away at 87. That’s 17 years of essentially, senior unemployment retirement. Or if I live to 100, which is another 13 years. It’s huge. I saw a visual table recently, not to go on too much of a tangent, but it was like, your youth and then your college years was – If you imagine a square, was a shade on the square and then your career and then your retirement and your career and retirement in this visual were pretty close.

[0:09:33] TU: Which we don’t think about it like that, or I don’t, at least.

[0:09:36] TB: No, I don’t either. But I saw that. I’m almost eyeballing them, like, they’re pretty close. People think of like, “Oh, rat race and things like that,” but there’s a whole other race to run after your career. I think we overlooked the time on that. I do think that people will, because especially with a lot of the economic things people may be joining the workforce later, starting families later, maybe starting to save later, we’re living longer that it could push everything to the right a little bit. I think that could be one of the things that they do with Social Security is that maybe we don’t get our for retirement age of 67, then we get the for all credits at 70. Maybe they push those back a little bit. But it’s still a long time, Tim, is what I’m saying.

[0:10:23] TU: Yeah. It really is. As you’re sharing, Tim, it reminded me of a great interview I had with a retired dean and faculty member, Dave Zgarrick on episode 291. He talked about exactly what you’re saying in terms of that timeline perception. He was really encouraging our listeners to reframe your retirement date as essentially, half-time, right? We’ve got some opportunities to reset, reframe, and figure out, but it’s not the end of the game. There’s a whole other half that needs to be played. Obviously, here, we’re talking about making sure that we’re financially prepared for it, but there’s certainly much more to be considered than just the financial side of this as well.

I think the piece here that really jumps out to me, Tim, when people think about longevity risk is there’s really a lot of fear that I sense from individuals of – and the last thing I want to do is run out of money. I don’t want to be a burden to my family members. I really want to make sure I plan for this. The challenge, I think, here is there’s a balance to be had, right? We also don’t want to get to the end of our life and we’ve been sitting on this massive amount of money that maybe it’s been at the expense of living experiences along the way. I think this is just a really hard thing to plan for. To your point, I think a general number is a good place to start. So much of this literature on longevity comes down to family history, lifestyle, and other things that are going to help inform this.

[0:11:44] TB: I don’t think that you can – oftentimes, when we work with particularly younger pharmacists, we’ll get to a point and they’re like, “Hey, I got it from here. I’m good.” It’s almost like, they chunk the next five or 10 years of their life is autopilot. I always be – if I look back at the last five or 10 years of my life, it’s been anything but that. What I would say to, even in retirement, you have to take it year by year and you have to assess this year by year. I think, hitting the easy button and saying, okay, for the next five or 10 years, it’s going to be like this, is not great for your plan, right?

I think that’s probably if we talk solutions, we’re probably going to say this on repeat with a lot of these is like, you have to plan for this as best you can. Whether it’s set in a realistic expectation. For me, I think it would be irresponsible for me to say like, okay, 87 years old. I’m going to retire at 70, have set – and again, we’ll talk about this, too, is I might not retire at 70. I might have to retire a lot sooner than that. If I say, “Hey, 70.” Then I have to plan for 17 years, I think that would be really irresponsible. I think, set in realistic expectations in terms of life expectancy. Consider personal and family health history.

I think, you do pay a price, Tim, for a longer plan horizon, to your point, because you need more resources, which means that you have to save potentially more in your accumulation phase. Then when you’re in retirement, you have to be more conservative with what you’re withdrawing. That could lead to, again, you forgoing things today for a longer future, I guess, or being all sustained. That’s definitely one thing. It’s just, how do you best plan for that longevity?

[0:13:32] TU: You know, the other thing that’s coming up for me, Tim, as you’re just sharing this solution around planning for longevity is if folks end up erring on the side of your example, right? Social Security says one number. Maybe we’re planning 10 years further than that. Then there’s an interesting – certainly, you’re mitigating one risk, but you’re also presenting another risk, which is potentially having excess cash at the end of life, which obviously, there has to be planning done for that. What does that mean for the transfer of assets? Is there philanthropic giving that’s happening?

Then there’s a whole tax layer to that as well, right? In terms of, how are the taxes treated on that if we’re planning, perhaps, to not die was zero, but we may have additional funds that are there at the end of life. Just another great example, I think, of where financial planning comes together with the tax plan, and obviously, everyone’s situation is going to be different.

[0:14:21] TB: Another solution that would bring up for this risk, Tim, would be lifetime income. This is where I think, really a careful analysis of Social Security claims and strategies is needed. Because I think a lot of people, they’re like, “Okay, I’m 62. I’m eligible for my Social Security. I think, my parents died at 80. Probably going to die right there.” There’s a lot of things that I think we just blow through. One of the biggest retirement decisions is just going to be this decision on how and when you’re going to claim. Social security is a lifetime income. If you start claiming at 62, you’ll get that until you pass away. Start claiming at 70, and you’ll get a much greater benefit until you pass away.

There are not very many sources of income like that. Pensions might be another thing, but that would be one of the things that we would want to make sure that if we need X per month, or per year, a good percentage that is lifetime income, meaning not necessarily out of your portfolio, on a 401k.

Another way to do this is to transfer the risk of longevity to an insurance company by purchasing something like an annuity, so you can provide protection from the risk of dying young by purchasing a term certain. You could say, “Hey, I want this annuity to pay me for a lifetime and I’ll get a lesser amount, or for the next 10 years and I might get a higher amount.” But a lot of people are really not crazy about that, because they could give an insurance company $100,000 and then get one or two payments and die the next month or whatever. There are refund riders and things like that, so I think looking at that is something that definitely in the lifetime income.

I think, one of the things that people don’t know of, is if you have a 401k, a lot of people, they’ll take a lump sum and they might put it into an IRA. One of the things that you could do is take annuity payments for life out of that plan. What they essentially do is go out, most of the time they go out and buy an annuity for you. That’s a way to do it, instead of taking a lump sum, you can buy, basically, annuity payments from a 401k, that type of 403b. You can get lifetime income from insurance contracts, so cash value, life insurance, death benefit, there’s an annuity option.

This can even be true for a term policy. If I pass away and shay, most times will elect a lump sum, but you can say, “Hey, I want this payment for life, or for X amount of years.” Those securities are probably going to be the biggest ones, but then an annuity or something like that would probably be a close second to provide lifetime income for you to negate some of the longevity risks that’s there in retirement.

[0:17:04] TU: Yeah, a couple of resources I want to point our listeners to episodes 294, 295, you and I covered 10 common social security mistakes to avoid, along with a primer we did back on episode 242 of Social Security 101. Really reinforces what Tim’s talking about right here. Then we covered annuities on episode 305, which was our understanding of annuities, a primer for pharmacists. Certainly, go back and check out those resources in more detail. Probably lots of avenues to consider, but any other big potential solutions as people are trying to mitigate this longevity risk?

[0:17:37] TB: I think, probably the last one, and I mean, there are others, but probably the last big one I would bring up is probably, what is your withdrawal strategy? We’ve mentioned the rule of thumb of 4%, but I think that’s limited in a lot of ways. One is a lot of those studies are based on a finite number of years, i.e. 30 years from age 65 to 95, and we know that people are living beyond that 30 years that that’s been planned. That’s one thing.

For longer periods, the sustainable withdrawal rate should be reduced, but typically, only slightly. What’s left out of that, the 4% study is flexibility. The more flexible you can be with your withdrawal rate, the greater the portfolio sustainability will be. When the portfolio is down, and you can withdraw less, that allows you to sustain the portfolio a lot longer. Then, I think, the other thing that’s often overlooked with this is that typically, and we’ll talk about sequence risk, but typically, once you get through that eye of the storm retirement risk zone, you want to start putting more equities back into your portfolio.

I think, just the proper allocation strategy, which is where you’re considering portfolio returns, inflation, what your need is, what your flexibility is. Again, I think that becomes a lot easier, or palatable if you have, say, an income floor, or if you have a higher percentage of your paycheck coming from Social Security. All of these things are kind of, just like systems of the body are intertwined, but just your withdrawal strategy and allowing for that to sustain you for a lifetime is going to be very, very important along with some of the other things that we mentioned.

[0:19:19] TU: Yeah. Tim, I think there are a couple of things there that are really important to emphasize, that I think we tend to overlook when it comes to the withdrawal strategy. One of which you mentioned was that flexibility, or the option to be flexible on what you need. When we show some of these examples, we just assume, hey, somebody’s going to take a 3%, or 4% withdrawal every year, but depending on other sources of income, you’ve mentioned several opportunities here, depending on other buckets that they have saved, right? That flexibility may, or may not be there, which ultimately, is going to allow for us to be able to maximize and optimize that even further. All right, so that’s number one, longevity risk.

Number two is inflation risk. Tim, I think this is probably something that maybe three, four, five years ago, people were asking, hey, what inflation? Obviously, we’re living this every day right now. We’ve seen some extremes, although our parents would say, we ain’t seen nothing yet from what they saw growing up. What is the risk here as it relates to inflation?

[0:20:16] TB: We’re going to talk about inflation a few times in this series. What we’re talking about with regard to this risk is this is really the risk that prices of goods and services increase over time, right? The analogy or the story I always give when I talk about investments is that the $4 latte that you might get from Starbucks in 2020, 30 years might be $10, $11, or $12. If you look back at, I would encourage a lot of people that, hey, I had a conversation like this with my parents like, “What did you buy our house back in New Jersey?” I think they said, it was $41,000.

Now, when they – because they were – we were talking about what we bought our house at and the interest rates are like, it’s unbelievable. They don’t understand. I think this is a huge thing, especially with retirees, you’re thinking, or you’re dealing with a fixed income, more or less. The larger percentage of your income that’s protected against inflation, which social security is, which is another reason that it’s also very valuable is because it’s lifetime, but then basically, it gets adjusted by the CPI.

When you work, Tim, inflation is often offset by increases in salary, right? The employer has to keep pace as best they can –

[0:21:42] TU: Hopefully. Yeah.

[0:21:43] TB: Yeah. Or they’ll lose talent. In retirement, inflation reduces your purchasing power, so you don’t have an employer to raise. Now, like I said, you can think of social security like that, because they’re going to do that adjustment every year. But essentially, in retirement, inflation could essentially erode your standard of living.

Again, the first solution here is to plan for this. I would throw taxes in here, but even inflation is often overlooked in terms of like, how do we project these numbers out? What is a realistic estimate of inflation over the long term? I would encourage you, again, I’m a financial planner, so I’m biased, but I think using software and accounting for inflation almost by category of expense. We know that things like medical expenses, and the inflation for medical expenses is going to outpace a lot of other things, whether it’s fuel, utilities, or food, that type of thing.

That would be the big thing. I think overlaying some type of inflation assumption into your projections and seeing how that affects your portfolio, your paycheck is going to be super important. Another solution to this, Tim, would be going back to longevity. We talked about lifetime income. I’m going to say, not necessarily lifetime income, but inflation and adjust in income. Social Security, again, is the best of this. That we saw last year, I think it was – someone might have to correct me. It was like, 9% year over year. That’s pretty good.

If you were to buy an annuity, a lot of insurance companies won’t offer a CPI rider. They might say, “Hey, your payment in your annuity, you can buy a rider, which is going to cost a lot of money,” that it says, it’ll go a flat 2% or 3%. The insurance companies are not going to risk saying, “Okay, it’s with whatever the CPI is, because they’re not going to be able to price that accordingly.” Inflation-adjusted income.

Some employer-sponsored plans, like a pension, could offer some type of COLA increase. This is more typical in government pensions, government plans than it is with private plans. Like I said, you can purchase a life annuity with a cost-of-living rider, but it’s typically very limited and very, very expensive. You might get, for kicks, Tim, these are just round numbers. You might say, “Hey, give me straight up $1,000 as my benefit.” But if I add a, COLA rider, or something like that, it could cut it down to $800. Again, that’s not real numbers. That could be the cost there.

Then the last thing for this is to build a bond ladder using tips. A bond ladder is essentially, and we could probably do a whole episode on this, Tim, but a bond ladder would be, hey, basically, I want to build 10 years of income, say. Let’s say, I’m retiring in 2024, or let’s say, 2025. My first bond ladder might come due at the end of 2024. Then that’s going to give me $30,000 or $40,000. At the end of 2025, going in 2026, the second run of my bond ladder is going to pay me and basically, do that for the next 10 years.

Then essentially, what you do is you try to extend that ladder out. You might go to year 11, might go to year 12 as you’re spending that down. A good way to do that is with tips, which is an inflation security, an inflation-protected security. That’s one way to inoculate yourself from the inflation risk.

[0:25:14] TU: I looked up Social Security while you were talking there, you’re spot on. 8.7% in 2023. Yeah, that’s significant, right? I think especially for many folks and hopefully, as our listeners are planning, that won’t be as big of a percentage of the bucket for retirement. The data shows that across the country, it really is.

[0:25:33] TB: Yeah. I think, again, I think, when we’ve gone back to my own, it was something like, if I claimed at 62, I have to remember the numbers. If I claimed that 62, my benefit would be $2,500. If I claim at 70, I think it’s over $4,000.

[0:25:49] TU: Something like that. Yeah.

[0:25:50] TB: But then, if you then tack on the inflation on that, it’s just huge. Again, I think, that is going to be one of the most important things that you evaluate in retirement is the social security stuff.

[0:26:01] TU: One of the other thoughts that have gone to mind, Tim, as you were talking with inflation is just rates of return. We tend to, at least on a simple high level, right? We think of rates of return and a very consistent 7% per year. We know the markets don’t obviously act like that. We have huge ups, huge downs. We’re seeing that with inflation as well, right? We tend to project 2%, 2.50%, and 3%. But we lived in a period where inflation was really low. Obviously, we’re now seeing that bump up. My question for you is, as you beat this up with the planning team like, has this period of high inflation, at least higher than what we’ve seen in our lifetime, has that changed at all? Some of the modeling, or scenarios that you guys are doing long term?

[0:26:42] TB: I think, we’ve ticked it up a bit. I definitely think it’s probably too soon to say like, hey, for the next 30 years, we got to go from 3%, which has typically been the rule of thumb, to 5%. I think as we get a little bit further from quantitative ease in and putting a lot more money in circulation and we’re seeing the result of that, that I do see some modification of models and that’s going to be needed.

One of the things that the government and the Fed try to do is keep inflation at that 3%. I just don’t know if they’re going to be able to – the new norm might be keeping it as close to 4%, or 5%, right? I would say for me, and again, I try to keep on this as best I can, but I think for me, I think it’s a little too soon to tell. To your point, the reality is that I would say, less so for inflation, because I think there is a little bit of the thumbs on the scale with the government and the Fed, but we do see fluctuations in market returns. We’re seeing now more fluctuation in inflation.

I think, a lot of what I’m reading is that we’re probably at pretty much the end of rates going up. But I’m interested to see is like, okay, when they start to potentially reverse, or normalize, what is the new normal? I think if you put as much money in circulation as we have, I think this is one of the side effects, and we’re paying for that now.

[0:28:15] TU: The thing that’s coming to mind here as you’re talking about inflation risk and even tied to longevity risk is we often assume retirement is a clean break, right? You were working full-time, you’re no longer working full-time. For many folks, either based on interest, passion, or financial reasons, there could very well be some type of part-time work, right? Whether that’s consulting, whether that’s part-time PRN work, or whatever. To me, that’s another tool you have in your tool belt, when you talk about inflationary periods, or what’s happening in the market and whether or not we need to draw from those funds. Having some additional income, if you’re able and interested, could be an important piece of this puzzle.

[0:28:57] TB: We often think of a glide path in retirement. Meaning that, the closer we get to retirement, the less stocks we have, the more bonds we have, safety, that type of thing. I think, we have to start talking more about a glide path, like a work perspective, where you go from 1 to 0.8 to 0.6 to 0.2, or whatever. Then maybe, it’s just 10.99 PRN, or something like that. This is for a variety of reasons. It’s for the reasons that you mentioned market forces, and inflationary forces, I think even more so for mental health.

[0:29:29] TU: Mental health. Yeah, absolutely.

[0:29:31] TB: IR, like we talk about our identity and role and things like that and a soft landing. I think, abrupt retirement sounds sweet, but I think in reality, I think it’s really hard for, if you’ve been in the workforce for 30 years and there might be people that are like, “Nope. You’re crazy, Tim.” I talked about this and some retirees will probably roll their eyes. When I took my sabbatical, it was just a month, right? It wasn’t a ton of time. I literally was like “All right, I’m not going to touch work.” I’m like, “What am I doing?”

I guess, my thought process was I could see how it could be where you’re directionless, right? I spent a lot of time planning for just that month and I’m like, it was an interesting test case for me to be like, all right, I just need to make sure that when I’m positioning myself, I still have availability for meaningful work and other interests and things like that. Yeah. I mean, everything that you read is that the best thing to combat a lot of these risks is actually not to retire. It’s to work or work at a reduced – If you’re working and you’re not drawing on your portfolio, then problem solved. Obviously, we know that’s not necessarily the best solution.

I think, having the ability to do that, there’s from a mental health perspective and a lot of these other reasons. I think pharmacists in particular are positioned with their clinical knowledge and things to do things with their PharmD that provide value in retirement and that are not necessarily stressful, or strenuous. So —

[0:31:04] TU: Yeah, I think that feeling of contribution is so important. I just listened to a podcast this week with Dr. Peter T on one of my favorite podcasts, The Huberman Lab Podcast, and he was talking exactly about longevity and some of the risks to longevity in that context of mental health. He was talking about the value of contribution, the value of work. I think for all of us, it’s natural in those moments and seasons of stress. That feeling of contribution can get overlooked, right? I mean, I think it’s a natural thing to feel. Really, really good discussion. I think, it highlights well. We’re obviously talking about X’s and O’s in terms of dollars. But when it comes to retirement planning, so much more than that.

Number three, Tim, we talked briefly about, but we can put a bow on this one, would be excess withdrawal risk. Tell us more here.

[0:31:52] TB: Yeah. This is really just that you’re withdrawing at a rate from the portfolio that will deplete the portfolio before you die. Which is one of the biggest fears and one of the biggest risks is like, “Hey, I just want to make sure that I have enough money to last me throughout retirement.” I think, the biggest thing again for this is to have a plan, have a strategy and be flexible with that plan.

There are ways that you can build your retirement paycheck, and we’ve talked about this before, where it’s coming from a variety of sources. At the end of the day, there is still going to be a portion of your paycheck, the retiree, you are pulling the string. You’re saying, “Okay, I’m going to get X amount from Social Security, potentially X amount from maybe a floor, an annuity, but then the 60%, or whatever it is has to come from these buckets that I’ve filled in the accumulation phase.” Like I said, the default that a lot of people use is, hey, it’s the 4% rule. There are other strategies, like [inaudible 0:32:54], guardrails that are more, look at market forces, look at inflation, and then basically, adjust your portion of your paycheck accordingly.

If you do that consistently and you stick to that plan, you’ll basically see the portfolio sustained for 30-plus years. I think that’s probably the big thing that in all the research says is that if you can adapt your spending, which is hard, right? It’s hard for us to do that in the accumulation. It’s often hard for us to do that in retirement, but if you can adapt your spending with the ride the roller coaster of market volatility inflation, it lands in sustainability. We’ve also talked in the past about the bucketing strategy. You make sure that you have the next five years, basically, in very CDs, money markets, very safe investments. Then that allows you to inoculate, at least for the next five years to do more mid-risk type of investments. Then for those 15-plus years, more risky investments with regard to the portfolio.

The bucketing strategy is just a take on the systemic withdrawal strategy but allows the retiree to understand more and compartmentalize and say, “Okay, if I have the next five years planned out, if I need 40,000 times five years, I had that in that bucket. I don’t really care what the market does. If the market goes down today, I know that in most cases, it’s going to recover in the next three and a half, four years and we’re good to go.”

Again, a lot of people, I think will say, “All right, well, this year, regardless of what’s going on in the world, I need this. Then the next year –” Then they wake up and they’re like, “Man, I had a million dollars, seven years in retirement, I have 200,000 left. This is no bueno.”

[0:34:51] TU: Yeah. Another important point you’re bringing up here and you mentioned earlier in the show, I think we tend to oversimplify, especially when we’re thinking accumulation of, “Hey, I’m going to save two, three, four million dollars. Maybe I’m going to be moderately aggressive, or aggressive. Then I retire.” We don’t think about what is the aggressive to moderate to non-aggressive strategies of investing in retirement, right? We’re not taking a portfolio of two, three, four million dollars, and also just moving it into something that’s liquid. We still have to take some calculated risks, to your point earlier, that we’ve got potentially a long horizon in front of us.

Tim, what I think about is the double whammy of potentially, when you retire, which depending on where the markets are, you may or may not have control of that. I think about people that may have retired pre-pandemic, not knowing what was coming and then the markets did their thing. The double whammy I’m referring to is if you retire and start withdrawing at a period where the market’s down significantly and you’re dependent on that draw, we’ve got a double effect of what we’re getting hit there.

[0:35:52] TB: Yeah. We’ll get into more of that in the sequence risk, in terms of, it’s less about the actual return and more about the sequence of when that return comes. That can affect, basically, the sustainability of that portfolio.

[0:36:06] TU: Since you mentioned the buckets and building retirement paycheck, as you call that, we did cover that previously, episode 275. We’ll link to that in the show notes. That was one of four episodes that we did, 272 through 275 on retirement planning. All right, so that is number three, excess withdrawal risk. Tim, number four on our list is unexpected healthcare risk. Tell us more here.

[0:36:29] TB: Yeah. This is the one we haven’t really covered much. We probably should give it a little TLC, maybe in future episodes. I think that Medicare and the decisions around Medicare is also another huge decision to make in retirement. This is the risk of facing an increase in unexpected medical expenses in retirement. One of the things that people often get wrong is that it’s like, okay, I qualified for Medicare at 65, I’m good. All my medical costs will be taken care of. That’s not true.

The decision of when to enroll and whether to choose the original Medicare or Medicare Advantage plan, choosing the right Part D plan for drug prescription is really going to be important. The figures, they’re not overly impressive, Tim. In 2019, they said, the average male at age 65 is going to spend about $79,000 to cover medical, or healthcare costs in retirement.

[0:37:25] TU: That’s lower than I would have thought, to be honest.

[0:37:26] TB: Yeah. Now, I think it goes out – I mean, again, you can see for if you look at the tables, what did it say for me at 65? I was going to live to – does it have at 62 to 67. Let’s say, it’s another 20 years. Yeah, it seems low to me. I mean, females, age 65 is a lot more, a $114,000 to cover healthcare expenses in retirement. It doesn’t seem a lot in terms of your – it is outside of housing. It’s going to be one of the bigger things, especially when you’re in the phase of older retirement.

I think, probably the default here is how – it goes back to planning and understanding what’s available to you. I think, choosing the appropriate insurance is going to be important. One of the things, and we’ll talk about this in the next for us, but a lot of people think that long-term care is covered by Medicare. It’s not. Another thing that a lot of people don’t know is that Medicare doesn’t have a cap on out-of-pocket expenses. If you have large amounts of medical expenses, you could be paying in perpetuity, that’s where a supplemental plan, or a Medigap plan will be important.

Part A, to break these down, covers a lot of hospital visits and inpatient stuff. Part B is more, I think, outpatient, like covers medical necessary services, like doctors, service and tests, outpatient care, home health services, durable medical equipment, and that type of thing. Then part C is going to be the drug. Then there’s going to be lots of variations of part D. Then what people then assess, Tim, is, should I get a supplemental plan, or a Medicare advantage, which is not to say under traditional Medicare, but it’s more of a reimbursement through a private medical, or private insurance company.

This is one that I think that is often overlooked. It’s hard because every state and area of the country is going to be different. What you can get if you’re a resident of Florida is going to be different if you’re a resident of New Jersey or Ohio. I think, going through this and probably on an annual to reassess is going to be an important part of making sure that you’re mitigating, as much as you can, the risks of those increased, or unexpected medical expenses while retired.

[0:39:44] TU: A couple of things are coming up for me, Tim, here. Obviously, one would be, if we’re factoring this into the overall portfolio nest egg. Certainly, that’s one strategy. The other thing I’m thinking about, if folks have access to an HSA and are able to save in that long term, without needing those for expenses today. Obviously, if you need them, you use them. That’s what it’s there for. If not, the opportunity is for these to grow and to invest and invest in a tax-free manner, such that it could be used for six-figure expenses right in retirement.

We’ve got an exciting – October is all going to be about healthcare insurance costs. We’re going to have several episodes all throughout the month. One of which is going to be focused on Medicare. We’re also going to be talking about healthcare insurance for those that are self-employed. Then we’ll be talking about open enrollment, other topics as well. Looking forward to that, that series that we’re going to do in October.

Tim, number five on our list, which will wrap up our part one of this two-part series is long-term care risk. Now, we did talk about long-term care insurance previously on the show. That was episode 296, five key decisions for long-term care insurance. You just mentioned not something that Medicare is going to cover. Tell us about this risk and potential solutions.

[0:40:56] TB: Yeah. This is the risk of essentially, not being able to care for oneself. It basically leaves you dependent on others to perform, or help you perform the activities of daily living. These ADLs are called activities of daily living, are bathing, showering, getting dressed, being able to get in and out of bed, or in and out of a chair, walking, using the bathroom, and eating.

Typically, if you need help with two or more of these things, this is typically where a long-term care insurance policy will actually trigger. These could be cause for a variety. It could be chronic diseases, orthopedic problems. Alzheimer’s is probably the biggest one that is the biggest threat for this particular risk. Planning for this is huge. It’s funny, Tim, because – not funny, but it’s interesting is that this is one of the risks where it’s like, it’s not me, right? It’s someone else. Most people see this as an important thing to plan for, but not necessarily for themselves.

The reality of the situation is that in most cases, family members will provide the care, which is about 80% of the time in the home, which is unpaid care, averaging about 20 hours per week. If you imagine that, Tim, if that were laid at your feet, how that could affect your health, your finances, just your career. That’s the effect that it has on the family. Like I said, most people think that Medicare covers long-term care costs. It doesn’t. Many people think that this is a risk, or a concern in retirement, but not necessarily for them, it’s for somebody else.

I think, one of the misconception is like, if you look at things like insurance, a lot of people think, “Hey, it’s too expensive.” In that, I think, that reputation is probably earned, because I think when they first priced these policies, when they first came out, there were a lot of policies that were not priced expensive, or the right way, so they got more expensive year over year. There was a study that said that less than 10% of people that were age 65 and older had long-term care.

Really, the need is not as long as you think. The average time that a male needs long-term care is about a little bit more than two years. For females, a little bit less than four years. Solutions for this is plan for this. Understand what are the risks and costs associated with it. Again, every state is going to be different in terms of what these costs and what is the cost for something like, anything from being able to age in place and have care given in your home, to a nursing home. Understand, what is that in your area? How do you want to pay for long-term care? I mean, how do you want that care delivered?

A big part of this is just getting organized with, okay, if this were to happen, where can we get this money from? Is it insurance policy that we purchased? Is it family members? Is it something like a reverse mortgage? Are there government programs, like if you’re a veteran, there’s some programs for that. Could be Medicaid. That is a program that’s probably the largest funding source of long-term care, but you have to be impoverished to do so. A lot of people will purposely spend down their estate to become impoverished, to get care, which there’s a lot of hoops and things that you have to be careful of.

But insurance is probably, and I know we did an episode on this is like, that’s another one to really look at is when to purchase a lot of people, we should really start talking about this in late 40s and purchase in your 50s. I think 55 is the average, if I’m not mistaken. If you wait longer than that, Tim, that’s when you have increased instances of the coverage being denied and it gets really expensive. You have to thread that needle a bit. What is the amount needed?

I think at a minimum, we should be pricing and we say, okay, for us to be able to age in place, so have someone come in 20 hours a week, five days a week, or whatever that looks like, is that $3,000? Is at $6,000? Find that number and be able – A lot of the study says, the longer that you can stay in your home and not in a facility, the better. What’s the amount? Is that inflation-protected? What’s the elimination period? Is it a straight-up long-term care insurance plan? Or is it linked to an annuity purchase or a life insurance purchase?

Or if you go through all that, you’re like, “You know what? I got this and we sell fund, which is probably the most popular sell fund with the family as ad hoc caregivers.” Unfortunately, I think that’s really more of a lack of planning than anything. But that is a solution as well to say, okay, if that’s the case, again, looking at funding sources and things like that. This is another thing that I think is often overlooked, because, I think, some of the misconceptions about long-term care. But if you can get a policy that pays you $3,000, $4,000, $5,000 a month for care, to be able to stay in the home, I think for a variety of reasons, that’s worth looking into.

[0:45:57] TU: Yeah, Tim. I agree. I think that this is often overlooked, perhaps from a misunderstanding, or evaluating the risk. The other thing that comes up for me often here is just the difficult conversations that need to be had to really navigate this. We just, a few episodes had back on the show, Cameron Huddleston, who is just fantastic. She wrote, Mom and Dad, We Need to Talk, how do you navigate difficult financial conversations with parents? Some listening to this are thinking about it for themselves, certainly. Others may be working with aging parents and trying to navigate these conversations.

Who wants to initiate a conversation of, “Hey, Mom and Dad, what are you doing for long-term care insurance?” Or, maybe that age window has passed, where a policy makes sense. Now, we’re back to, okay, what’s the game plan? What does this look like financially? What does this look like in terms of the ability of our time to be able to care and care well? I think, there’s just a lot to navigate here that is not just financial, but that is emotional as well. She does a great job in that book, in the episode, we just recorded as well, of how do you initiate these conversations in a loving and respectful way? But more than anything, to get out in front of the planning. Again, whether you’re planning for yourself, whether you’re planning for aging parents, so important to be thinking about this.

[0:47:14] TB: This is a little teaser into our next few risks that we’ll cover in the next episode, in terms of just tough conversations that need to be had, so we can prevent things happening in the future. It’s just a byproduct of old age and being able to care for oneself. That can be hard to broach those subjects with your children, even adult children. There’s some vulnerability. I think, just the way you approach that, and obviously, people have different relationships with parents, and some people are really close. Some people brought up in a house where you don’t talk about money, you don’t talk about some of these things. It can be really hard.

I think, one of the things that really stuck with me with Cameron’s work and her writings is like, you don’t want to get to a point where you’re having to go through the courts to get the care that your loved ones need. If you can avoid that at all costs, even it means having an uncomfortable conversation, or maybe it’s not a conversation, maybe it’s a letter to break the ice and you go from there, I think it’s needed.

[0:48:25] TU: Yeah. Whether it’s the courts, or in her instance, and we’re going through this right now with my grandmother as well. But in Cameron’s instance, she had a mom who is struggling with memory loss and Alzheimer’s that her message, and one of her main messages, hey, you want these conversations and planning that be happening before those instances are in question, where you’re now dealing with more challenges of, is someone in the right state of mind to be able to make those decisions, and what are the legal implications of that?

Great stuff, Tim. That is five of the 10 common retirement risks to plan for. We’re going to be bringing the rest of this list back on the next episode, so make sure to join us here next week. Of course, for folks that are listening to this and thinking, “Hey, it’d be really helpful to have someone in my corner that really can help me plan for retirement, as well as other parts of the financial plan,” we’d love to have a conversation with you to have you learn more about our one-on-one fee-only financial planning services, as well as to learn more about your individual plan and the goals that you have. You can book a free discovery call by going to yfpplanning.com. Again, that’s yfpplanning.com. All right, we’ll see you next week.

[END OF EPISODE]

[0:49:33] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacists Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% down payment for a single-family home, or townhome for first-time home buyers and has no BMI on a 30-year fixed-rate mortgage.

To learn more about the requirements for First Horizon’s pharmacist home loan and to get started with the pre-approval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[DISCLAIMER]

[0:50:18] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment, or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation, or offer to buy, or sell any investment, or related financial products.

We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archive, newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 314: RMDs: What They Are & Why They Matter

Posted on June 29, 2023June 28, 2023 by Tim U

Tim Baker, CFP®, RICP®, RLP® discusses RMDs: What they are, why they matter, and factors to consider when building a retirement paycheck.

Episode Summary

No matter where you are in your career journey, it’s never too early to start optimizing your retirement plan. One important factor to consider when building your retirement paycheck is Required Minimum Distributions (RMDs). RMDs refer to the minimum amount that you must withdraw from certain retirement accounts each year after reaching a certain age.

On this week’s episode, YFP’s Co-founder and Director of Financial Planning, Tim Baker, CFP®, RICP®, RLP® unpacks the many intricacies of RMDs, like which accounts demand RMDs, which ones don’t, and what to consider when planning how to build your retirement paycheck. You’ll learn about how RMDs are calculated, the penalties you can expect when you don’t fulfill RMD requirements, how to optimize and reduce the impact of RMDs, and why optimizing your retirement strategy starts in the accumulation phase.

Key Points From the Episode

Introducing Tim Baker and today’s topic: Required Minimum Distributions (RMDs).
Planning for retirement and the taxes you typically need to pay.
The importance of understanding RMDs, even if you aren’t near retirement age.
How the IRS defines RMDs and a run-through of the accounts that typically include RMDs.
An overview of a Roth IRA and how it is contributed with after-tax dollars.
How contributing after-tax dollars allows your retirement to grow tax-free.
A rundown of what happens if you inherit a Roth account.
The primary benefit of Roth accounts: control.
Why traditional accounts are still beneficial despite RMDs.
A breakdown of how RMDs are calculated in various scenarios.
The rules and penalties if you don’t fulfill your RMDs.
What to consider when planning how to build your retirement paycheck.
Why optimizing your retirement strategy starts in the accumulation phase.
How to optimize and reduce the impact of RMDs.

Episode Highlights

“The government doesn’t really care because they’ve already taken their bite of the apple. With Roth IRAs, and then Roth 401Ks, 403Bs (especially heading into 2024), you’re not required to take RMDs.” — @TimBakerCFP [0:10:53]

“With Roths, it’s about control. It’s the control of when you’re paying your taxes or a known quantity of what your tax bill is going to be but then it’s also [that] I don’t have the burden of being forced to distribute the account when I don’t want to.” — @TimBakerCFP [0:13:03]

“So much of building a retirement paycheck (and all this strategy we’re talking about) really starts with ‘in what buckets are you saving?’” — Tim Ulbrich [0:27:16]

“I would still advocate for the use of these accounts because the long-term benefits of having tax-deferred growth is a huge benefit. – I don’t want people to think ‘I don’t want to use these accounts because I don’t want to have to pay RMDs’.” — @TimBakerCFP [0:30:01]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey everybody, Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome YFP co-founder and Director of Financial Planning, Tim Baker, to talk about required minimum distributions. Also known as RMDs. We discuss what they are, how they’re calculated, strategies to optimize, and why this topic matters to building a retirement paycheck.

As a supplement to today’s episode, make sure to download our free checklist; What Issues Should I Consider When Reviewing My Investments? You get a copy of that resource by visiting yourfinancialpharmacist.com/investmentreview. Again, that’s yourfinancialpharmacist.com/investmentreview.

Okay. Let’s hear from Justin from the YFP team and then we’ll jump into my interview with Tim Baker.

[00:00:55] JW: This is Justin Woods from the YFP team with a quick message before the show. If you listen to the YFP podcast, you may learn something every now and then, either from Tim Ulbrich, Tim Baker or one of our guests. A lot of people listen to the show but they may not execute or implement the things they learn.

As pharmacists, we know the impact of non-adherence on patient outcomes and their overall well-being. As a pharmacist myself and part of the YFP team, I talk with pharmacists every day who are confused about how to implement financial knowledge. Pharmacists share with me that they’re treading water financially. Maybe took a DIY approach, reached the plateau and are confused about what to do next. Or those who work for decades can see the light at the end of the tunnel and feel uncertain about how the next chapter will unfold. If that sounds like you, one, it is not uncommon to feel that way. And two, does it make sense for us to have a conversation to see if YFP planning can help you? Visit yfpplanning.com or follow the link in the show notes to find a time that works for your schedule.

[INTERVIEW]

[00:02:01] TU: Tim Baker, welcome back to the show.

[00:02:03] TB: Good to be here, Tim. How’s it going?

[00:02:05] TU: It is going well. Last week we talked about four reasons that we believe you should have your financial planner manage your investments. Great episode. If you haven’t yet, check that out. I hope you will do so. We’ll link to that in the show notes.

This week we’re going to be talking about a topic that we have not really covered before at length or in depth. And that is around required minimum distributions or RMD.

Tim, maybe not the most exciting topic to talk about. But considering some of the questions that we’re getting considering some of the rule changes have come around this with the Secure Act and, obviously, an important part of the retirement planning, a topic that we need to address.

[00:02:43] TB: Yeah. It’s one of those overlooked things until you’re kind of right up against it, unfortunately. And we kind of talk about it at a high level more with regard to your investment assets and what has yet to be taken by Uncle Sam.

I always kind of talk through, if you have a million dollars in a traditional IRA, a million dollars in a Roth IRA and a million dollars in a brokerage account, like how much money do you have? And unfortunately, it’s not $3 million. Because at least in the traditional IRA, when that money goes in pre-tax, it’s tax coming out. So if you’re in a 25% tax bracket to keep the math simple, you have 750,000 of that and Uncle Sam has 250,000. So you’re in a partnership with Uncle Sam in that account.

The big difference or when where RMDs come into play is that, just like when we retire, or how we retire, or things like that, we’re not always in control of how that money is to be poured into retirement. And, essentially, what the government says is, “Hey, remember all of those years that you were able to defer? Now we’re kind of requiring you to distribute those assets over time based on a table in terms of how much you actually have to do or actually have to distribute.” So we’ll kind of talk about that in this episode.

[00:04:16] TU: Yeah. And I really do believe, while this is a topic that I think tends to focus more on those that are nearing retirement planning, to build that retirement paycheck. Really, for folks at all stages of their career, even if I’m early on in my journey, really understanding how RMDs can be helpful in understanding, as you mentioned, the different bucket than how you’re saving and even some of the early investing strategies. So stay tuned regardless of where you are throughout your career.

Tim, let’s start with the definition. What exactly is an RMD? Requirement minimum distribution?

[00:04:49] TB: So this is the minimum amount that you must withdraw from your retirement account each year. I think that’s how the IRS defines it. And essentially, what it means is that if you have that million dollars in your traditional IRA that we talked about, you don’t have to pour all million dollars out in one year and Uncle Sam gets 250,000 and you get 750,000. That’s just used for kind of illustrative purposes.

But depending on your age, you have to pour out a portion of that million dollars. And essentially, what it’s doing is it’s forcing you to pay the tax on those pre-tax retirement accounts. And this has moved over time.

I think, Tim, when I first started learning about studying for the CFP and things like that, the age four required minimum distributions was 17 and a half years old. Now it’s 72. And this is part of the changes of the Secure Act. It’s going to move to 73. And then I think starting in 2033, the age will be 75. That’s a benefit for us. Our required minimum distribution at present will be 75 years old.

What that means is that we can hold on to these investments in the tax-preferred account longer. Now what the government is saying is that, yeah, you could hold on it longer. We also know that you’re living longer. So that’s one of the things that you’re trying to do.

The accounts that are in question, Tim, that often require – not often but do require minimum distributions are the 401K, the 403B, the 457, the TSP, the traditional IRA, SEP IRA, SARSEP IRA and then the simple IRA. These are the ones. Again, most people don’t have SARSEPs these days.

And then what’s weird is most Roth accounts do not require RMDs, which is one of the main advantages of a Roth. However, today, in 2023, and this will change in 2024, if you have – with YFP, we have a 401K with YFP. Part of the dollars that I invest into our YFP 401K goes to a pre-tax, a traditional 401K. But a good chunk of my dollars go into a Roth 401K.

If I were 73 and I had a balance in that Roth 401K, technically, I would still have to take an RMD from that account. In 2024 and Beyond, RMDs will no longer be required from those designated Roth 401K, 403B. So another little quirk in the –

[00:07:34] TU: Tim, just to highlight that for a moment because I think that’s point of confusion that’s going on right now. Roth IRAs have been like that. If you have a million dollars in a Roth IRA, as you highlighted, the buckets, a little bit earlier, you’re not required to draw from that in terms of what would come out of it with taxes. And we’ll talk about how that could impact beneficiaries if that money was transferred here in a moment.

And so, really, the change you’re referring to is for what has been a more popular employer-sponsored account. We see more and more people that are in these Roth 401Ks or in Roth 403Bs. Where the Roth is a part of an employer-sponsored account. And up until – coming up in 2024, those would have required an RMD even though they had the Roth term. But that’s going to change. Correct?

[00:08:22] TB: Correct.

[00:08:22] TU: Okay.

[00:08:23] TB: Yep.

[00:08:24] TU: So will that be a part of it will, part of it won’t? I’m thinking about my situation, right? I’ve got all this Roth 401K money that’s sitting in that bucket that’s pre-2024 and then after 2024. So some of it will be subject to RMD. Some of it will not?

[00:08:43] TB: No. When you’re in retirement, the only thing that’s going to be subject to an RMD for you would be what’s in your traditional 401K and any – if you still have a 403B, if you have a 457, a traditional. So it won’t be – that rule, you’re not going to have to take a little bit out of the Roth in 401K in the future. No.

I guess, in 2024, no one will be taking any money out of a Roth 401K or 403B for the purpose of an RMD. It was just one of those weird rules that kind of just needed to be satisfied. And I think that was put into the Secure Act 2.0.

[00:09:21] TU: Got it. Okay. So talk to us about Roths. And one of the main advantages I often – I guess debates I often hear around Roth is the whole tax rate today, tax rate in the future. But I think what we don’t talk enough about is the benefit of Roth’s not being required to withdraw that money until after death. So not only not having an RMD, right? Which is a positive. But also, that there’s not a requirement of those monies being withdrawn. So tell us more about that.

[00:09:49] TB: Yeah. So as part of the Roth – and again, you think about it from the government’s perspective. So the government, although we joke inefficient and like why the heck are we doing this? Or why is it written this way? From the government’s perspective, they’re looking to access tax dollars where they can. And for a Roth, they’ve already taxed those monies.

A Roth IRA is contributed with after-tax dollars. Again, the example I use is if I make $100,000 and I put I put $5,000 into a Roth IRA, the government taxes me in that year as if I made $100,000. So I don’t get a deduction for that. So it goes in after-tax and then it grows tax-free.

As those investments – as that $5,000 grows to 10,000, 15,000, I’m not paying capital gains tax on those dollars. When I pour that out in retirement, that doesn’t hit my 1040. I don’t get a 10 – like I’m not reporting that as taxable income. So the government doesn’t really care because they’ve already taken their bite of the apple. With Roth IRAs and then Roth 401Ks, 403Bs, especially heading into 2024, you’re not required to take RMDs.

Now if you inherit a Roth. Say you inherit a Roth from a deceased spouse, essentially, what you’re going to want to do is roll that over into your name and then no RMD will be required. If you inherit a Roth, say, from like a parent or something like that or any type of non-spouse, typically, there is an RMD required and it’s typically over a 10-year timeline. And that’s just the kind of exhaust the legacy account and close that out.

That’s one of the major bene – so I think one of the major benefits of the Roth and probably not talked about it directly is control, right? Because in a Roth, you are controlling when you’re paying the taxes, today. Whereas in a traditional, it’s kind of you put your finger in the sky. You don’t really know what your tax – your marginal tax rate is going to be in the future. We have no idea.

The government, the Congress could say, “Hey, these are the new –” the IRS could say, “Hey, these are the new tax brackets.” They’re a lot more than what they are today. Or they could go down. I think most people think that taxes are going to go up. That’s one of the benefits of like, “Hey, pay the tax now and go from there.

But the other thing that often doesn’t get talked about is, if I’m going to retire in Florida, Tim, we know that Ohio – one of the reasons I put a lot of money into Roth now is because – because we’re business owners, one of the weird nuances is that we don’t get hit with taxes for the first set amount of dollars that we make as business owners.

Right now, I’m like, “Okay, that’s a good opportunity for me to kind of circumvent.” It’s almost like I live in Florida or Texas from a – but if I didn’t have that and I was going to retire to Florida or Texas, where I don’t have state income tax, and I’m going to pour that out then, then that’s another thing that we have to kind of consider.

With Roth, it’s about control. It’s the control of when you’re paying your taxes or a known quantity of what your tax bill is going to be. But then it’s also I don’t have the burden of being forced to distribute the account when I don’t want to.

That is a huge benefit to a lot of people, is being able to have control over the tax rate and the time. And again, that’s not to say that these traditional accounts are bad. They’re not. They’re good, in fact. But when we kind of get the question of like where should I have my money? It’s a little bit in pre-tax. It’s a little bit in after tax. And it’s a little bit in tax-free. And I think all of those are going to play an important part as you approach retirement.

[00:13:53] TU: Yeah. And Tim, I wasn’t aware of the difference between the spouse versus non-spouse with a Roth being passed on to a beneficiary.

[00:14:03] TB: They’ve changed those rules like recently too. Yeah. Because it used to have stretch. And the stretch IRAs and inherited IRAs. And there’s lots of different nuances with that. And even the rules around inherited IRAs are pretty complex. Like they’re not straightforward if you’re an entity, versus a non-spouse, versus a spouse, versus keeping it in the decedent’s name or your name. There’s lots of different things that are going on there.

[00:14:31] TU: This too is another example we just talked about in the last episode of how we don’t want to look at any in a silo, right? For our younger practitioners who are listening that may be working through something like a student loan, forgiveness strategy, right? Implications here of traditional versus Roth contributions on the student loan equation.

We’ve talked about that before. We don’t need to go down that rabbit hole now. But when we talk about like Roth or traditional, another example yet where it’s not just a blanket, this one is better than the other, right? It really does depend in someone’s whole situation.

[00:15:03] TB: Yep.

[00:15:04] TU: Tim, how are the RMDs calculated?

[00:15:07] TB: The required minimum distribution for any year is – essentially, the way I learn this is that you look back for the balance. So this is the balance of your 401K, your IRA, your SEP IRA. So you look back at 12-31 of 2022 as an example. And then you look ahead, essentially, the year of – so if I’m turning 76 this year, that I look at that year as the year that I need for the IRS’s uniform lifetime table.

What do I mean by that? Let’s do an example to kind of flush this out. Let’s pretend it’s June 2023, which it is. And I’ve just turned 76. Or I’m about to turn 76. Essentially, when I look at age 76, the IRS uniform lifetime table returns a column. It’s distribution period in years of 23.7.

As a 76-year-old, essentially, I have 23.7 years to distribute the account out. So that’s the factor that I use. I go and I pull my statement from the end of last year and I see that, in my traditional IRA, I had $250,000. I take that $250,000 and then I divide it by that factor from the IRS table as a 76-year-old. $250 000 divided by 23.7. And it says that my required minimum distribution for that year is $10,548.52.

That is what I’m required to distribute to kind of – to not be penalized by not taking the proper RMD. Essentially, I would work with my advisor and I would say, “Okay, at a minimum, I need to, either in a lump sum or in payments over the course of – we would probably just build this into the retirement paycheck. That, hey, we need to essentially allocate this amount of cash from the IRA and make sure that that satisfies the RMD requirement. That’s the first example, Tim. Did you have a question?

[00:17:18] TU: Yeah. And so, in that example, 10,548, right? You mentioned $50,000 balance in your traditional IRA. [inaudible 00:17:25] 10,500, that would be the required minimum distribution. That 10,500 is then taxed as ordinary income, correct?

[00:17:34] TB: Correct. If the custodian is what we use that TD Ameritrade, which is TD Schwab. Essentially, TD Schwab would send me a 1099R and it would show that distribution. And essentially, I would be working with Sean, my CPA, when I go to file my taxes. And that would show up as income. I might still have some W2 income or I might have some other 1099 contract income of doing some consultant and when I’m 76. Maybe I’m doing that for YFP in the future.

I might have some W2 income. I might have some 1099 income. And then this 1099R our income would be recorded on my taxes. And then depending on what tax bracket I’m in, that’s when I would be taxed.

Right now, if I’m in a 25% tax bracket versus maybe when I’m 76 – I know I’m conflating years and everything. But maybe when I’m 76, maybe I’m in a 12% tax bracket. So that would be benefit to essentially – let’s say I’m earning less than $90,000, which is the 12% bracket for married filing jointly. That’s kind of what’s at play here. You basically get the 1099R and record it in your taxes in that year.

[00:18:50] TU: Okay. Got it.

[00:18:52] TB: Another example of this is let’s pretend, Tim, that I have a traditional IRA, a SEP IRA and a 401K. Same fact pattern. It’s June 2023. I’ve just turned 76. And that distribution period in years is still 23.7. When I look at my statement, I see that, okay, I still have the $250,000 IRA. But I also have $100,000 in my SEP IRA and I have $500,000 in my 401K.

My RMD this year, if I take 250,000 and divide it by 23.7, it’s still at 10,548. The SEP IRA, $100,000 divided by the same factor, 23.7. The RMD for that is now $4,219.41. That’s still in addition to the 10,500 from the traditional.

And then the 401K of half a million dollars I have to distribute. So, $500,000 divided by 23.7. I have to distribute 21,000. We’ll call it 21,1000. $21,000. My total RMD across all three of those accounts is $35,865.

Now just to make this even more complex, Tim, with the traditional and the SEP, I could take all of that out of my traditional. That’s the bigger account. Or I could take that all out of the SEP if I wanted to. With the 401K, I have to take it out of the 401K.

Or let’s say I had a 403B. I would have to take it out of the 403B. So those that are administered by the employer, or in my case, a previous employer, I have to take it out of those plans if I have those IRAs that I’m managing. Or an advisor is managing for my benefit, I can aggregate those and have that come out of one. That’s one of kind of the nuances there.

[00:20:53] TU: That makes sense. So the I in IRA is an individual account, right? It stands for individual. In that example, we had a traditional and a SEP. You could take the RMD out of one of those accounts. Either the tradition or the SEP. But since the 401K was an employer-sponsored account, that RMD has to come directly out of that account.

[00:21:11] TB: Yep. Correct.

[00:21:12] TU: Okay. Got it. So we’re going to talk in a little bit about why this topic really matters and some of the strategies to reduce CRMDs. But let’s talk about the penalty side of this. What happens if, Tim, I don’t take an RMD? So maybe I’m not familiar with the rules. I’m DIYing this and just not paying attention to logistics or something gets overlooked. What happens in that case?

[00:21:33] TB: In the old rules, before the Secure ACT 2.0, it would be basically 50% of what you fail to take that would be taxed. In the case that I was saying, it’s like if I had to take 10,500, 5,200 of that would be basically the penalty. And then you’d have to file form 5329 in your federal tax return for the year that the RMD was not taken.

With the new rules, it’s basically they tried to make this less – they try to soften this a little bit. So now it’s 25%, which is still substantial. And then if you correct it within two years, it’s 70 – it’s 10%. Excuse me. One of the things – again, one of the weird nuances is let’s say I’m turning 72 this year. Technically, I don’t have to take the R in the first year. Don’t ask me why is this, Tim. In the first year, I don’t have to take the RMD until April of next year.

But then every subsequent year I have to take it before the end of the year. Let’s pretend I say, “Oh, I didn’t take it. I’m taking it April 15th right before I file my taxes.” But then in that same – if I have to take that 10,500. In that same year, I have to take another RMD for 73. That’s another one of the weird nuances. Yeah, it’s 25%. But 10% if it’s corrected within the first two years.

[00:22:54] TU: I mean, even 10% is no joke though, right?

[00:22:58] TB: Yeah. I mean, some of these rules is like if you over contribute, it’s like a 6% excise. When you go from 50% even down to 25% or 10%, it’s – and the dollars get bigger. I mean, your balances are supposed to get smaller. But every year – so when you go from like 76, where the factor is 23.7, the next year at 77, it’s 22.9.

And one of the things that the IRS has done is they extended it out. I think it goes all the way up to like age 120 and older. But at 110, as an example, the factor is 3.5. If you have a million dollars at 110, about $300,000 and $400,000 is what you have to distribute in that year. The factors get smaller, which means that the RMD gets bigger as you age. Again, if you’re not doing it properly, the penalties can be quite robust.

[00:23:54] TU: Whether we like the rules or not, Tim, they are what they are, right? We’ve got to factor them in. We’ve got to plan for this. And my mind is spinning around, “Okay, I’ve got all these different buckets of funds that I’ve been building throughout my accumulation phase.” Right? We’ve talked about some of the alphabet soup here in this episode. And now there’s this strategy of how I withdraw not only from those buckets. But also, how do I factor in the RMDs? And in which order? Which priority?

At the end of the day, the topic matters, I think, as you try to build a retirement paycheck and think about the order of withdrawal and how you’re going to put together that paycheck in retirement.

[00:24:33] TB: Yeah. I mean, if you look at what are the sources of income that you’re going to have in your retirement paycheck, one of the big ones is going to be Social Security, which, as we continue to go on, more and more people, their Social Security will be taxed. Because a lot of the phase-outs for that have not been adjusted for inflation.

But if you think about it, the average today, Social Security check, per month, per recipient, it’s like $1,780. Just about 21,000 and change per year. That might be your baseline. And then for most people, if I need $80,000, then 60,000 is going to come from your traditional investments.

And what we’ve seen here is, in this example, 35,000 of that has – in this example, has to come from the traditional, right? So then you’re playing the game of like, “Okay, if I’m trying to get to 60,000, that still puts me in a 12% tax bracket.” Again, if I’m just looking at myself and not necessarily Shay.

What is she getting from Social Security? What does her RMD look like? Are we going to try to fill up the 12% tax bracket? Are we looking at the 225 tax bracket? Are we pulling anything from Roth at all?

I think, again, having the ability to pull from pre-tax, you have to, especially with the RMDs. But then to then move to something like a brokerage account, which is after tax to a tax-free, which is a Roth. All of those things are going to be in play to make the most efficient play at building a retirement paycheck.

And depending on where – again, if you have certain assets in certain accounts, they are not going to be optimized with kind of the strategy. You have to be wary of that too. What are the things that are going to be most volatile or higher risk, higher return? Most capital gains, things associated with that. Those are all going to be important when you’re kind of building this out.

Is there an annuity? A lot of annuities if you buy a qualified annuity. If you take some money out of your traditional IRA, so to speak, to buy an annuity, those have RMDs. And a lot of that can satisfy the RMD or delay it. There’s some strategies there. There’s lots of tax implications. But also, how does this relate to your investment allocation? The location of certain assets? It’s all very nuanced.

[00:27:10] TU: Yeah. And Tim, the place that I’m thinking about right now, I’m 15 years into my career. I put myself in that mid-career bucket. But so much of building a retirement paycheck and all this strategy we’re talking about really starts with ‘in what buckets are you saving’, right?

I think sometimes there’s a tendency that, “Hey, we need to save whatever big number.” Right? Two, three, four million dollars. And we just start saving, saving saving.

And saving is good, especially if we’re doing it over a long period of time. But saving intentionally so that we’re thinking about this from a distribution sense, I think we often disconnect that accumulation and decumulation phase. And, really, prioritizing that. Really, the accumulation, optimization, and the strategy around that, especially in a tax-efficient way, really starts back in the accumulation phase.

[00:27:58] TB: Correct. Yeah. It’s kind of building – we talked about building a foundation of an emergency fund and getting the debt – the consumer debt in line and having a plan for this student loan. But this is right there in terms of, again, bucket selection. But then inside of those buckets, what assets are we actually put in? And are they the best for the long run? Yeah, those are definitely in play.

And again, I think it’s often an overlooked thing. And this is where – and again, it’s not necessarily like if you’re required to distribute your account, that doesn’t necessarily – it doesn’t mean that you have to consume it. You can always direct those dollars elsewhere. Whether it’s a brokerage account or it could be real estate. It could be paying for a grandkid’s education or something like that. There are things that you don’t necessarily have to like move those dollars off your balance sheet.

But, essentially, what’s in play here is the efficiency related to tax. And, again, in the context of like, “Okay, what is it that I need to sustain a retirement paycheck for from now until age 95, 100, 105, 110?” And that’s difficult to do.

[00:29:13] TU: Yeah. And I’m thinking about this from a household perspective, right? Tim, you mentioned you’ve got, often, two people, multiple accounts. So now you’re talking about additional layers of complexity. Maybe different timelines of retirement and when they need those funds and goals that they have. This is where I really want for Jess and I. I want the two of us with our CFP and the CPA in the same room whiteboarding and kind of masterminding this to make sure that we’re really thinking about it from every angle.

[00:29:43] TB: Yep.

[00:29:45] TU: Finally, I know many of our listeners are thinking what I’m thinking, which is, “Hey, what can we do to optimize this? What can we do to potentially reduce the impact of the RMDs?”

[00:29:55] TB: Yeah. So there are a few things. RMDs are inevitable, right? If you use any of these accounts – and again, I would still advocate for the use of these accounts because the long-term benefits of having tax-deferred growth is a huge benefit. I don’t want to say it’s not. I don’t want people to think I don’t want to use these accounts because I don’t want to have to pay RMDs.

There’s a few strategies that you can employ. If you are still employed and you’re kind of within that RMD age. Let’s use 72, 73. You can delay your 401K RMDs. Not necessarily your IRA RMDs. But your 401K RMDs from your employer until you retire. You just can’t be a 5% owner, Tim, for you and I. Like that wouldn’t imply. We would still have to take RMDs.

Probably one of the biggest things that you can do is just get money out of those buckets. So this would be things like Roth conversions. Essentially, over your career, you can identify times that it makes sense because of lower earning years. You’re still paying the taxes on it. But you’re doing it in more of a controlled way versus here’s the balance, here’s the factor, and then that’s your RMD.

One way that you can do it is just manage the distribution. So most people take RMDs either in a series of payments or through like a lump sum at the end of the year. One strategy that you can, which, again, we bring up annuity, which is sometimes a bad word for people. But you can invest in a QLAC.

A QLAC is a qualified longevity annuity contract. This is the deferred fixed annuity that you purchase with funds from your retirement account. Like a traditional 401K or a traditional IRA. And typically, because there is a promise in the future to pay out those funds, one of the special things about this is that there’s no required distributions until 85. Until age 85. You can push that out for a decade or so.

The big selling point for this is, if you’re looking at – in the example I gave, “Hey, I had $500,000 in my 401K.” And that means that the RMD for this year is 21,000. I really don’t want to do that. I can peel off 100,000 or 200,000 and put that into a QLAC. And that lessens the burden from what’s coming out from the 401K. That is a strategy that you can use.

Charitable donations. So you can either – you can do this one of two ways. And I think it just depends on the tax situation. You can make a QCD, a qualified charitable distribution, which is a direct transfer from your retirement account right to a qualified charity. And this will be basically excluded taxable income, which will lower your tax bill. Or you can use your RMD to make charitable donations and kind of get a – that’s typically where, again, you’re going to use the itemized deduction and maybe want to do a bunch in strategy or things like that to get the most benefit. So those are ways to kind of reduce or delay or get around the RMD, which at the end of the day is inevitable.

[00:33:17] TU: Tim, great stuff. I feel like we’ve covered a lot of length in a short period of time a topic, again, that we haven’t talked about in great detail. We’ll certainly be coming back to this more as we talk about some of the retirement planning strategies. But again, a great episode regardless of what stage of career that you’re in.

For those that are listening and say, “Hey, I’d love to have someone in my corner really thinking about this from an investment, retirement planning strategy,” we’d love an opportunity to talk with you further about the financial planning services that we offer at YFP planning. You can learn more and book a free discovery call at yfpplanning.com. Again, that’s yfpplanning.com.

Tim, great stuff. We’ll be back here in the future.

[00:33:57] TB: Thanks, Tim.

[OUTRO]

[00:33:58] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists unless otherwise noted, and constitute judgments as of the date publish. Such information may contain forward-looking statements are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacists.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

[END]

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YFP 313: 4 Reasons Your Financial Planner Should Manage Your Investments

Posted on June 22, 2023October 5, 2023 by Tim U

Tim Baker CFP®, RICP®, RLP® discusses the 4 reasons why your financial planner should manager you investments on this podcast episode sponsored by First Horizon.

Episode Summary

Financial planners often get a bad reputation because people either don’t trust them or they feel like planners are a waste of time — they could be doing the job themselves. So on today’s episode, sponsored by First Horizon, YFP’s Co-founder & Director of Financial Planning, Tim Baker is here to discuss the four reasons why having a financial planner is crucial for managing your investments. From our conversation, you’ll gain a better understanding of the type of accounts that a financial planner could manage on your behalf, what an Investment Policy Statement (IPS) is, and why it’s vital for your financial plan. Then, we dive into the 4 reasons why, if it is the right fit, having a financial planner manage your investments is a good idea. Spoiler alert…hiring a financial planner to beat the market didn’t make the list!

Key Points From the Episode

Introducing Tim Baker and today’s topic: Financial planners managing your investments
Taking a closer look at the investment accounts that a financial planner could manage for you.
What an investment policy statement (IPS) is and why it’s important.
How having a financial planner will save you time and bring you peace.
The importance of an integrated financial plan, and how a financial planner can help.
How a financial planner will ensure that don’t fall victim to behavioral mistakes and biases.
Using a planner to avoid technical mistakes, and the common technical errors that Tim sees.
Why the role of a financial planner is not necessarily to help you beat the markets.
What you can look forward to in the next episode.

Episode Highlights

“On my time off, on the weekends or whatever, I would rather pay a professional that knows what the hell they’re doing — they’ve done it, it’s not their first rodeo — than me waste a weekend.” — @TimBakerCFP [14:33]

“The more that you continue on and accumulate wealth; working with a coach [or] a planner is in line with that. The management of the investments and the stress of it should be delegated to someone else.” — @TimBakerCFP [15:31]

“If we don’t have the assets and the investment management integrated with the plan, it’s almost like we’re trying to fight with one hand tied behind our back.” — @TimBakerCFP [19:13]

“I often say that with investment, you often want to do the exact opposite of what you feel. But the statement that you have to make, even before you make that, is that investment is an emotional activity. It is. [And] a lot of that has to do with our aversion to loss.” — @TimBakerCFP [25:12]

“[Go] by the market, don’t try to beat the market, and the market will take care of you — if you invest in it consistently without bad behavior over long periods of time.” — @TimBakerCFP [36:46]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome YFP co-founder and Director of Financial Planning Tim Baker to talk about four reasons you should have your financial planner manage your investments. Spoiler alert, beating the market did not make the list. As a supplement to today’s episode, download our free checklist, “What Issues Should I Consider When Reviewing My Investments.” You can get a copy of that resource by visiting yourfinancialpharmacist.com/investmentreview. Again, that’s yourfinancialpharmacist.com/investmentreview.

Now, at YFP Planning, our team of fee-only certified financial planners pride themselves in helping clients manage their investments in a tax-efficient, low-fee manner. While that in and of itself is a win, that’s just one part of the financial plan. Our planning team that services more than 280 households in 40 plus states guides clients through the entirety of the financial plan, including retirement planning, debt management, wealth protection, and more. All centered around our philosophy of helping you live a rich life today and tomorrow. You can learn more about our one-on-one planning services while visiting yfpplanning.com. Again, that’s yfpplanning.com. Okay, let’s hear from today’s sponsor, First Horizon and then we’ll jump into my interview with Tim Baker.

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[INTERVIEW]

[0:02:40] TU: Tim Baker, good to have you back on the show.

[0:02:42] TB: Good to be back, Tim. How’s it going?

[0:02:44] TU: It is going well. We’re going to be doing back-to-back episodes focused on managing investments. Next week, we’re going to talk about RMDs or required minimum distributions. We’re going to get in the weeds a little bit over the next two weeks, which I’m excited to do as we talk about some of the investing side of the financial plan. Tim, today we’re going to talk about four reasons you should have your financial planner manage your investments. Now, before we get into those four reasons, I want to make sure we’re all on the same page with what we mean by this. So, having your financial planner manage your investments. Talk about this at a high level, so we can have the right context throughout the show.

[0:03:23] TB: Yes. My attitudes have changed about this over time. Really, this is because of just working with pharmacists on their financial plans and just some of the things that we’ve come up against with regard to being effective and efficient with the financial plan. When we say we feel that your advisor, your planner should manage the investments, what we’re talking about are the investments that you’re managing, that you don’t necessarily need to. This means – these are things like your traditional IRA, your Roth IRA, your brokerage account, old 401(k)s, old 403(b), TSPS, 457 Plans. These are things that you’re not actively contributing to as part of like an entire employer-sponsored retirement plan.

What we found over the years, because I used to be more location agnostic, meaning, my viewpoint was, it didn’t really matter where it was. We either manage it or help your management. I think, in theory, that sounds nice. But in application, it’s not, it’s messy, there’s lots of hands in the cookie jar. There’s lots of moving pieces in regards to the financial plan that the investments are absolutely part of that. Our belief is that if there are held away assets, so held away are defined, you know, when advisors talking about this or assets that are not at their custodian. We use that YFP Planning, we use TD Ameritrade, which is recently merged with Charles Schwab. Schwab will be the predominant brand there. We feel that those client assets that can be managed by us, the advisor should be managed by us. We’ll get into a few reasons of why that is. That’s held away piece.

[0:05:25] TU: Let me give a for instance to define these just a little bit further, and hopefully put something that people can hook on to. Tim, if I, let’s say, I’m working with Kroger pharmacy right now, and I’ve been with them for five years, contributing to their 401(k). Then prior to that, I worked for, let’s say, CVS for five years. Once I left CVS, that money, I moved into a traditional IRA, let’s just say for that example. I’ve got $100,000 in an IRA, and then I’ve got this, let’s say, another $100,000 in my current employer, Kroger, with the 401(k).

When you say held away, that Kroger, my current employer count $100,000, would be a held away asset through my current employer and the contributions I’m making. When we talk about today, managing why you should have your financial planner manage your investments. We’re talking about that previous $100,000 that’s sitting in an IRA that maybe I’m self-managing right now, or it could be someone’s listening to another advisor that’s managing for it. But that’s a differentiation we’re making, correct?

[0:06:33] TB: Yes. You’re going to have held away accounts that some are going to be eligible to potentially be moved over for us to manage. That would be like the old employer, and then you’re going to have some that aren’t because you’re actively contributing to said account. Yes, that would be the distinction I would make.

[0:06:50] TU: Okay. An assumption I want to put out there before we get into the weeds here is that when we say why we believe your financial planner should manage your investments. The assumption we’re making is that that planner, from our perspective, best practice is, there’s a fee-only with a fiduciary responsibility. They have a really thoughtful approach to how they’re managing their investments, which would include an investment policy statement, an IPS, where you’re really spending time with the client to understand their goals, understand their risk tolerance. All of that is informing the direction that we’re taking with the investment. Let’s spend a moment just to break that down a little bit more in terms of what is an IPS, and why is that important? Obviously, the context here of fee-only as well.

[0:07:37] TB: Yes, IPS is not something that every advisor has or even employees. I think regulators like this because it’s kind of a set of instructions for them to see how they are managing client accounts. When I was in my first job in financial services, we didn’t have an investment policy statement. We knew, based on a risk tolerance assessment that we give them, that, “Hey, they’re conservative, or they’re a moderate, or they’re an aggressive investor,” but that was essentially it. We had it in their file that that was what they were, and then we try to match up their portfolios at such.

The way that we do it is, before we invest any dollars on behalf of our client, so let’s pretend that we moved that $100,000 over to a rollover IRA at TD Schwab for us to manage for the benefit of the client. Before we do anything with those dollars, we essentially go through a risk tolerance and questioning goals about the investments. And we issue an investment policy statement, so this is something that we send to a client via DocuSign. In the investment policy statement, it’s essentially an executive summary. What the purpose of the document is, and it’s really to outline investment goals, expectations, strategies, and responsibilities related to the portfolio? It’s to create reasonable objectives and guidelines in the investment of your assets.

We outline things like, what was your risk tolerance, what portfolio do we agree to, what is the asset allocation. Is it a moderate 60-40, or is it more aggressive 90-10, or an all-equity portfolio? What is that investment objective? Is it aggressive growth or growth with income? Are there any type of liquidity needs, any type of tax considerations that we should be aware of? What is the time horizon?

If Tim, you’re the client, and you have 25 years left to retire, then the time horizon is 20, 25 years. What type of accounts most of – a lot of our clients will have an IPS, an investment policy statement for retirement accounts, but they might have something that is related to a tax bomb or a more near-term goal. So we have a different asset allocation. We outline what are the duties and responsibilities of reporting. I think one of the fears that people have, if they’re having their advisor manage their asset is, I think they fear that the money’s not theirs. One of the things that I’ll say is that we don’t have necessarily access to the money. We trade the account, but I can’t go in there and say, “Hey, Tim, you move from this part of Ohio to this part of Ohio.” You have to do that yourself. Because they want to make sure that the chain of custody from where they’re sending account statements is not broken. We used to be able to do that recently.

It’s very, very much like we have very deliberate and specific responsibilities related to the portfolio, but we’re not – it’s not our piggy bank, which I think sometimes people get afraid about that. So, we do know the custodian does all the reporting with statements. We talk about what our responsibility is with rebalancing, how often we’re going to review the count if we take discretion or not. Then, part of our IPS is we outline the different positions that we’re in. So we go through what’s our large cap, or mid-cap, and all the different positions that we’re in related to the portfolio, what the allocation is, some nerdy stock analysis.

What parts of the world that we’re invested in, so whether that’s North America or Asia developing, Asia emerging, Latin America, what the bonds look like, so if they’re double A or single A, we show performance. We look back one, three, five years and show the annualized return, the risk, some charts. We’ll show what the income is on this portfolio. It’s a look back in terms of what the yield is, the stress test, which is a big thing. In the subprime mortgage crisis, this is how the portfolio would react, or when coronavirus happened, or the tech bubble? So, we show some of the stress testing on that. Then, the expense, which often is a huge driver in the overall ability for the portfolio to grow, what does the expense of the overall portfolio look like? That’s our north star, Tim. That’s the document that we use to trade and manage the portfolio as we go here.

[0:12:44] TU: I think that’s time really well spent, right? Because I think for folks, as you mentioned, especially I would say for people who have maybe not worked with an advisor before, who have gone through this type of process or experience where you have someone that is helping to manage your investments. This can feel scary, it can feel big, it can feel — at least as you hear, for the first time, a little bit like a black hole. I think when done well, and that’s the backdrop. We’re assuming as we go through these four points here today. When done well, as you just described in great detail, there’s a lot of time spent, a lot of thought, a lot of attention to make sure that there’s alignment and the decisions that are being made.

Obviously, that’s an important part of the trust process as you’re working with a financial planner, and that should be something that you feel good about, number one. And that you understand and make sure you understand as you’re reviewing those documents and having the conversations with the planner.

[0:13:34] TB: Yes, absolutely.

[0:13:34] TU: With that in mind, let’s talk through four reasons that we believe you should have your financial planner manage your investments. Tim, number one, perhaps most obvious on the list is saving time. I’m busy; I don’t have to worry about this, maybe less stress involved as well. Tell us more about this.

[0:13:50] TB: Yes, I definitely think it’s a time thing. Obviously, this is something that we often talk about, less is more. But I think having your hand on the wheel with regard to this is important. I probably even more so than time; it’s just the brain capacity, Tim. I think sometimes we often really undersell or overlooked fee, the things that drag on our mind that don’t necessarily need to. I always – we’ve kind of talked about how the two of us were not necessarily the most handy people in the world. Could I go out and learn basic plumbing and things like that? Yeah.

But I look at that as, like, on my time off, on the weekends or whatever, I would rather pay a professional that knows what the hell they’re doing; they’ve done it; it’s not their first rodeo. Than me waste a weekend, and either complete it at an hourly rate that is well below that than what I would make during my day job, or that it’s half done or not done. That’s the thing, is like –

[0:14:58] TU: With some curse words.

[0:14:59] TB: With a lot of curse words, and stress, and things like that. That’s just my mentality. I think that becomes more of a thing. The more you look at yourself as a professional as pharmacists should, right? To me, this is an area. We talked about this with small – it’s kind of a no-brainer with small business owners. The first thing that probably needs to go is bookkeeping. It’s one of those things, and I would say that the more that you continue on and accumulate wealth, this thing, working with a coach, a planner is in line with that. And the management of the investments and the stress of it should be delegated to someone else. Obviously, again, it assumes you trust the person, the team that you’re with, which is not something that I take lightly, or anyone takes take lightly. One on our team takes lightly.

One of the things that I really like about being a financial planner is that you’re in that position of trust, and I think pharmacists can relate to that. Again, not taking that lightly, I think is important. But just think about the convenience, and ease of management, paperwork that’s involved. I would love to be more paperless than we are now. We’re getting there. But it’s a slow go. But the ongoing account maintenance, rebalance, and other strategies that you’re going. If you can delegate that to others, I think that’s a huge time savings, but just a brain capacity savings. Then, I think you see this with people in the accumulation stage. But I think, even more so, retirees. I’ve joked about this with my dad, like when he retired, he was no longer doing his day job. He knew that I was, obviously, building out my business and I’m a financial planner.

It was almost like every time that we talked, we talked about the market. He almost preoccupied this, and it was almost a substitute for his job. His livelihood is very much connected to what the market is doing. But I think if you’re doing it correctly, you want to inoculate yourself as best you can. Those near-term ups and downs should not really affect your overall well-being. So to me, a lot of people miss the mark on that. I think that’s where a professional can help you as well.

[0:17:22] TU: Tim, that’s a really good example in terms of the retirement and the preoccupied nature of investments. It’s funny, my father, father-in-law, every time we visit, this comes up within 10 minutes prior. We’re talking about the markets and trends. I think it’s just human behavior that now you get more time available than you did, obviously, than when you’re working. But you’re thinking about things like distributions and strategies, especially if you’re DIY’ing this and not working with a planner.

The ups and downs of volatility, especially the period we’ve been in here the last couple of years that can weigh on you. I think having someone in your corner to help talk you through that, coach you through it, making sure that we’re sticking to the plan, and that we have accountability to stay to that plan, it’s important all the way throughout, but probably even more important than that time period, where you just have the time and it’s front and center top of mind.

[0:18:14] TB: Yes, and I probably should give my dad less of a hard time. He’s probably just trying to find ways to engage me and talk about my business and things like that. But I know for a lot of retirees, definitely one of the things that they talk about quite a bit.

[0:18:29] TU: Number two on our list is ensuring an integrated approach, that we’re not considering this in a silo. Something we talked about often on the show, Tim, that it’s really important we look across the entire financial plan. When we’re looking at investments, retirement planning, debt pay down, insurance, any part of the financial plan that we’re really looking in its entirety, and we’re not just focused on one part of the plan, perhaps at the expense of other parts. Tell us more here.

[0:18:58] TB: Yes. I think, just like we talked about systems of the body, everything’s interconnected. I think one of the things that we’ve learned over from my time at script financial and now, YFP Planning is that if we don’t have the assets and the investment management integrated with the plan, it’s almost like we’re trying to fight with one hand tied behind our back. What we’re really trying to do here see the full picture. We want to make sure that the investment philosophy and management of such assets is aligned with your goals and your life plan. I’m a big, big believer in purpose-based investments. Another buzzword. But what I often find with people that are coming in the door, even do-it-yourself investors is, I’ll say, obviously, Roth 401(k), a Roth IRA, a traditional IRA, we know that those are for retirement by and large.

But I’ll often will see brokerage accounts and accounts like that. I’m like, “What is this money for?” It’s like, “Well, I don’t know.” Why do we even have it? So really aligning and drawing clear lines of distinction between what this bucket of money is for and executing to that. But probably – so you have that, which is more broad to the overall financial plan, but then making sure there’s alignment with other technical areas of the plan. Whether that be debt, the tax situation, retirement. It could be estate and charitable given. All of those things are interconnected. I think if you don’t have eyes on our hands on that, again, it makes our job a lot easier. From the depth perspective, Tim, we know this with regard to PSLF, and non-PSLF, that these things are interconnected. Oftentimes, they are disconnected if they’re not managed, I think, by a QB, one person that is overseeing the plan.

We know that tax is another thing. Is there synergy with the financial plan and the tax plan? By and large, most advisors will say, “Hey, that’s a tax question, go talk to your accountant.” Which is like nails on a chalkboard for me. That’s one of the things that we do differently. We have YFP tax that works in concert with YFP planning. We have a CFP, that is your financial planner, that is working in tandem with a CPA, which is your tax accountant. Looking at things like, are we going to have a big refund? Are we going to owe a lot of taxes at the end of this year? What are the tax loss harvesting strategies as we get more advanced multi-year tax planning? It might be bunching for charitable giving.

We know that retirement and the investment strategy is intertwined. In the accumulation phase, which a lot of our clients are in, that simply bucket creation, so having the different buckets. But then, where are we putting different assets? A lot of people don’t think that probably in your Roth, you need your most appreciable assets, which might be small cap or emerging market. Should probably go there. Where do we put tax advantage accounts that are in the brokerage, or is that somewhere else?

Just knowing where to actually put the investments that you’re putting in that bucket is important in the accumulation stage, where a lot of people overlook that. Then in the deaccumulation, or the withdrawal strategy, whether you’re using a foreign strategy, a bucket strategy, a systemic withdrawal strategy. All of these have rules, Tim, that are clearly linked to the traditional portfolio, and how we either refill bucket one with bucket two or refill bucket two with bucket three. Or how we’re going to with inflation and the gains on the portfolio. How are we going to essentially send that paycheck to you in concert with social security in 2024? How do we create the floor? What are the tools that we’re going to use, and then how are we going to supplement from the investment strategy, and give those dollars to you in retirement?

Then, just overall, how do we manage the liquidity needs. There’s lots of things that happen in real-time. Over the course of many years, that if we’re managing through the client by proxy, is a is a challenge. We’ve had instances where clients will be upset because they’re trading their own accounts, and this is related to tax, and they’re generating lots of short-term capital gains. Then they’re upset with us because our projections are off. It’s like, “But we don’t have any visibility or vantage point of what you’re doing in these accounts that we’re not controlling or we’re not overseeing for you.”

It’s one of those things that, this is what we do. We do this for our clients across the board, and we think we do it well. So working in that way, I think, is important for us, and I think for the effectiveness of the overall financial plan.

[0:24:22] TU: Tim, I think for folks that are hearing some of these terms for the first time, when you talk about things like flooring, bucket tragedy, systemic withdrawal. We talked about this on episode 275 of the podcast, where we had a month-long series on retirement planning, and that episode specifically. We talk about how to build a retirement paycheck. I hope folks will check that episode out in more detail. That’s number two. Ensuring that we have an integrated approach. I think you explained that well, Tim. Number three, which is one that maybe our DIYers are going to get a hate, that we’re challenging this. But this is avoiding behavioral mistakes and biases. Tim, I tend to fall under this – I’ve come to appreciate where I need help. But perhaps, I’m over overconfidence, and really understanding the behavioral mistakes and the biases that we may fall victim to.

[0:25:11] TB: Yes, I often say that with investment, you often want to do the exact opposite of what you feel. But the statement that you have to make, even before you make that is that, investment is an emotional activity. It is. A lot of that has to do with our aversion to loss. Sometimes, it can be also chasing a big payoff if we’re doing things like chasing hot stocks. The market volatility, I think, really plays on our emotion. I always joke, like when the market took a downturn during the Corona Virus or during the subprime mortgage crisis. As you’re seeing your portfolio go from X to X minus 30%, 35%, you want to then take your investment ball and go home, Tim. It doesn’t feel good to see your balance get sawed off like that. But it often leads to bad behavior, and that’s typically where we’re doing things like selling low and buying high.

When we sell to avoid that pain, then we wait on the sideline and buy when the market seems like it’s returned to normal. All of that upside. Again, l think people don’t see this in themselves. I would say that, Tim, that this is true for advisors as well. It absolutely is. But I would say that, if you’re, again – I’ve talked about this, related to the any type of salary negotiation. The big disadvantage that you have as an employee of a company when you’re – or a prospective employee of a company is that you might have a dozen times during your life where you’re negotiating on your behalf with an employer. Whereas your counterpart, whether it’s a hiring manager, an HR manager, they might do it a dozen times in that week. You’re at a disadvantage just because of reps. I’m not saying that we as humans or as advisors, we don’t have these. It’s just that I think we’re more aware of it, and we try to mitigate that with the way that we build out our portfolios.

The behavior thing is huge, and that can be again, it can be chasing hot stocks, it can be trading too much, trying to time the market, which we talked about the buying high, and selling low. Ignoring diversification that’s another issue. Sometimes we see portfolios that are overloaded in tech stocks or one particular security or even act on unreasonable expectations. I still frequently we’ll talk to people who are super confident in their prowess as an investor. But they will say things that just are not in line with reality. Like, “Hey, within the next year, I really want to start making passive income off of my portfolio.” I’m like, “That’s not a real thing in any time in the near future.”

We have to be aware of our common biases, and I think a lot of the ones that you mentioned are things like overconfidence. I probably see that the most. Typically, that is more male than female. It’s just the reality of situation. But even things like hindsight bias, like, of course, the market went down, and this is why. Or herd mentality, or overreaction, these are all biases that I think that we don’t see in ourselves that really can affect our ability to grow our portfolios consistently over time.

We always cite Vanguard. Vanguard has done an advisor alpha study. Vanguard doesn’t have advisors. They’re kind of – they don’t necessarily have a horse in the race, but they basically said that an advisor can add 3% per year in return to your assets. Half of that Tim, 1.5%. I think it’s 2.9 or it might be three. But essentially half of that, Tim, is related to behavior. Paul Eichenberg, he talks about – he does manage some cash, or some investments himself. But he basically said, the core of his investments, what he talks about is, there’s a wall between him and his investments. It’s just so he doesn’t do anything foolish or crazy. That’s part of this as well, is sometimes, something – it’s the overreaction, something happens in the market and it’s like, part of our job is to say, “Hey, we’re okay here. Let’s continue to execute to the plan that we have in place.” The behavior and the emotion drives so much of this, and it can either be bad behavior or you can, again, delegate that out to help you with that.

[0:30:19] TU: Yes. I think, Tim, the time we’re in right now with the volatility, we talked about this a little while going in Episode 213 of investing considerations in a volatile market. But we are living at firsthand the ups and downs, the announcements from the Fed, the anticipation, the reaction to that, the inflation numbers. I mean, it’s just June, June, June. More than ever, I think there’s that risk of access to information volatility on top of that. Obviously, there can be some fear that’s layered on top of that, as well. All of a sudden, we’re feeling that edge to make a move, make some decisions, move our investments. Obviously, there’s tax considerations. There’s timing of the market; you talked about those considerations that can have a negative impact as well.

Great explanation there. Number three on the avoiding behavioral mistakes and biases. Number four probably the favorite of our team. Right, Tim? As it relates to clean these up, is avoiding some of the technical mistakes. You’ve talked about this at length on the show as it relates to backdoor Roth and some of the mistakes. I think one of the challenges here, and we even talk about this behind the scenes that we love putting out content and education. We do a lot of it. But as I often say, in presentations, one of my fears is that I’m oversimplifying information to try to explain and to do in a short period of time. And that someone may run, make some decisions, and maybe not have the full understanding. We just saw that, as we talked about some of the changes that are coming to tax laws and different things. We may not understand the whole picture. Talk to us about avoiding technical mistakes and some of the common ones that we see here.

[0:31:54] TB: Yes. I mean, it’s most base. Sometimes it’s just understanding what accounts that you have. I still hear investors that will say, “I have this mutual fund account.” I’m like, “Well, mutual fund isn’t an account, it’s a type of investment.” That’s very extreme. But then, understanding what are inside of those accounts, those investment accounts, which could be a mutual fund, an ETF, a stock. Again, this is not to – this is not to belittle anyone or make anyone feel bad. Again, I always joke that when I first got out of the Army, I was picking the investments for my 401(k). I looked at all 50 investment choices, or whatever, I’m like – Investing for Dummies, and I bought that book, and I read a few pages, and I’m like, “No, thanks,” and I just picked whatever.

This isn’t something that necessarily is – we know this, Tim. It’s not taught in school or anything. It’s not to make anybody feel bad. It’s just that – this is what we do. It could be the types of accounts that you have, what are in those accounts, transfer accounts wrong. Sometimes this happens where accounts are moved between custodians, and they’re not performed accurately, and that can cause a lot of problems. You have the hyper investor, so it can be someone that’s trading in and out of positions that’s triggered in short-term capital gains tax.

Then, we have issues with the tax bill at the end of the year or other things that are going on. I’ve seen portfolios that have 20, 30, 40 positions, and I’m like, “What the heck is going on? What are we doing? What is the goal of this?” Sometimes it’s just overheard a stock, or I heard this, and I just bought it. Yes, overconcentration. That’s a technical mistake. Is there too much cash in the accumulation, too little cash when you’re in the withdrawal stage?

But yes, one of the things that you’re talking about that, I think, is, again, we gloss over is just things related to backdoor Roth. Most of the people that we are working with are in that Roth IRA eligibility phase-out. So even us managing this as a team, it’s a project. It’s something that we have to be on top of. It’s difficult to do when you have to factor in phase-outs, pro rata rules, you have to look at other accounts that you have, the step transaction rule. There’s lots of things that go into that.

On the technical, I always joke like – kind of related, but unrelated, Tim. When I lived in Ohio the first time, there’s no way that I filed my own Ohio taxes correctly. This is impossible. There’s no way that I did it correctly because of the nuance there. Even some of this stuff is kind of in the same breath; it’s like there’s no way that if I had a similar savviness with regard to investments that I did back in the day, that I would be able to do this correctly without mistake.

There could be a mistake with RMDs for retirements, obviously fees and things like that that are less technical but more an awareness thing. So the list is long with regard to this. Again, what often happens is we read a blog or a podcast. Some say, “Hey, that’s really easy,” and then we do it. Then, the reality is that it’s much more nuanced than – it depends on your particular situation in terms of how to execute some of these strategies.

[0:35:31] TU: Tim, we just talked about four reasons that you should have your financial planner manage your investments. What’s not on the list perhaps is something that everyone is thinking about of, “Hey, I’m going to have my planner manage my investment so that I can beat the market. Isn’t that why I’m hiring you after all? Where’s that on the list?”

[0:35:49] TB: Yes. I mean, I think it’s not on there. I think the reason, Tim is that, in order to beat the market, in order to beat the S&P 500 consistently, and there’s still no guarantee of that, is that you have to spend so much time, effort, energy, and money to do that. They say, we look at the most active mutual fund managers out there. By and large, the research and the studies show that, though, that type of active management in an effort to beat the market does not pay off on a consistent basis.

The strategy that we employ that I feel like a lot of fee-only financial planners employ is more of a passive by the market, don’t try to beat the market, and the market will take care of you if you invest in it consistently without bad behavior over long periods of time. It’s more of a singles and doubles approach versus, “I’m going to hit a home run in 2023, and then strike out for the next three or four years, and then maybe the home run in 2026, 27.” It’s kind of the singles and doubles approach to invest in. And over time, I think that’s a good equation for success.

[0:37:13] TU: We’re going to talk more about that. We have an episode plan for the near future on passive versus active investing, so we’re going to dig into that a little bit more detail in the future. Tim Baker, great stuff. For those that are listening to this episode, and would like to talk with us about the financial planning services at YFP planning and what we offer. Obviously, we’ve talked about managing investment, just one part, an important part, but just one part of financial plan. We would love to have that conversation. You can book a free discovery call at yfpplanning.com. Again, that’s yfpplanning.com.

Whether you’re in the early stages of your career, in the middle of your career, nearing retirement, whether you have an advisor, you don’t have an advisor; we’d love to have a conversation to learn more about your situation so you can learn more about us and determine whether or not what we offer is a good fit. Again, book a free discovery call at yfpplanning.com. Tim Baker, great stuff, and looking forward to talking about R&Ds next week.

[0:38:06] TB: Thanks, Tim.

[END OF INTERVIEW]

[0:38:07] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacist Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% downpayment for a single-family home or townhome for first time homebuyers and has no PMI on a 30-year fixed-rate mortgage.

To learn more about the requirements for First Horizon’s pharmacist home loan, and to get started with the pre-approval process, you can visit yourfinancialpharmacists.com/home-loan. Again, that’s yourfinancialpharmacists.com/home-loan. As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide, and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacist unless otherwise noted, and constitute judgments as of the dates publish. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

[END]

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YFP 286: YFP Planning Case Study #5: Modeling Retirement Scenarios and How to Handle a Large Cash Position

Posted on December 15, 2022March 10, 2023 by Rose

YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® is joined by Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Christina Slavonik, CFP® to discuss retirement scenarios and how to handle a large cash position in this YFP Planning Case Study.

About Today’s Guests

Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®

Kelly Reddy-Heffner, CFP®, CSLP®, CDFA® is a Lead Planner at YFP Planning. She enjoys time with her husband and two sons, riding her bike, running, and keeping after her pup ‘Fred Rogers.’ Kelly loves to cheer on her favorite team, plan travel, and ironically loves great food but does not enjoy cooking at all. She volunteers in her community as part of the Chambersburg Rotary. Kelly believes that there are no quick fixes to financial confidence, and no guarantees on investment returns, but there is value in seeking trusted advice to get where you want to go. Kelly’s mission is to help clients go confidently toward their happy place.

Christina Slavonik, CFP®

Christina is a Certified Financial Planner™ located in Texas and has over 15 years of financial planning and industry experience. She received her Certificate in Financial Planning from Southern Methodist University.

Christina is passionate about helping clients live their best lives now while not losing sight of the future. She enjoys the collaborative approach of creating a custom financial plan with her team at YFP.

Episode Summary

YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, is joined by Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Christina Slavonik, CFP® to discuss various retirement scenarios and how to handle a large cash position in this YFP Planning Case Study. Tim Baker introduces the fifth case study, examining the fictitious couple, Jane Smith and Tyra Lee, from Westchester, Pennsylvania. Jane, age 59, is a Certified Registered Nurse Anesthetist, and Tyra, age 60, is a pharmacist working part-time. Jane and Tyra also have two teenage boys, Thomas and Robert. During the discussion on this case study, listeners will learn about the couple’s plans to retire in three to five years, earlier than previously expected. Tim, Kelly, and Christina discuss options for care and long-term care insurance concerning Jane’s elderly mother, college plans, and a recent car purchase for their children. The discussion leads to considerations for how the couple might handle their massive cash position and whether or not to pay off debts with their reserves. Tim, Kelly, and Christina talk through the couple’s housing situation as they transition to retirement, their plans for purchasing a cabin or potential forever home, and how that may impact the financial plan.

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TB: You’re listening to the Your Financial Pharmacist Podcast, a show all about inspiring you, the pharmacy professional on your path towards achieving financial freedom.

Hi, I’m Tim Baker and today I chat with two important team members at YFP planning Kelly Reddy-Heffner and Christina Slavonik, both CFPs.

In this episode, we discuss our fifth case study of a fictitious couple Jane Smith and Tyra Lee, and their teenage kids Thomas and Robert. Jane is 59 and is a certified registered nurse anesthetist while Tyra, age 60, is a pharmacist working part time. We cover a bevy of topics that include in retirement in three to five years, where we model out different scenarios using our financial planning software. We chat about long-term care insurance, how to handle their massive cash position, and whether they should pay off some debt, their housing situation as they transition into retirement, college planning for the boys, and potentially how to handle care for Jane’s elder mother.

[INTERVIEW]

[00:00:58] TB: What’s up everybody? Welcome to YFP planning case study number five. So, I am joined today by Christina Slavonik and Kelly Reddy-Heffner, two of our CFPs on the YFP planning team. So, Kelly and Christina, welcome.

[00:01:14] CS: Thank you, Tim.

[00:01:15] KRH: Thanks, Tim.

[00:01:17] TB: So, we are recording this right before Thanksgiving. So, excited to get this recorded in the books and then enjoy some time off with family. I just would like to say that we are very thankful for all the listeners out there, thankful for the community that we’ve built, thankful for the two of you, Christina and Kelly being part of the team. And yeah, just really excited for the upcoming holiday season. Let’s jump into it.

So today, we are exploring a couple in Westchester, Pennsylvania, Jane Smith, and Tyra Lee. So, Christina, you’re going to take us through the first part of the fact pattern, Kelly is going to get into goals. And then, I’m going to talk about the wealth building, wealth protection tax and some of the miscellaneous stuff. And then we are going to dissect this client case study and see what are some planning opportunities? What are the things that should be discussed with the client, that we should really get in front of to make sure that they are on track with their financial plan? So, Christina, if you please kick us off on Jane Smith and Tyra Lee.

[00:02:18] CS: Sure. So, the clients we’re looking at today are Jane Smith, who is a CRNA, aged 59, makes about 194,000 a year and Tyra Lee, who’s a part time pharmacist, age 60, salary is 65,000. They are married filing jointly. They have two sons. I have Thomas, who is age 17, and is currently a student, and Robert, who was 14 and currently a student as well. They reside in Westchester, Pennsylvania, annual gross income is 259,000, which breaks down into monthly around 22,000, and then net after taxes and whatnot, 15,000.

Expenses for these people are fixed at about $5,977 a month. Variable expenses are the 4,500 a month, and the savings of about 4,400 or so. Their current living situation is they’re in a five-bedroom, single-family home outside of Philadelphia. They apparently have a great first floor master. And if Jane’s mom had to move in, they could accommodate her as she is ill and cash resources are currently limited.

[00:03:37] KRH: Complicated, right? This seems like a scenario that we’re seeing a little bit more of with some of our like pre-retiree clients, just that intersection between nearly adult children, but not quite adult and parents kind of having some needs as well. They both would like to retire over the next couple years. But they are thinking through making sure the children are taken care of, parent needs are also taken care of. They have a fairly large cash position and are not sure if they should leave it in cash or pay off some things. They have that home in Philadelphia that they like, it’s functional, but they’re not sure that this is the forever home where they want to stay indefinitely.

With the kid’s college tuitions, one tuition has is about to start, I think based on the age. One is a little bit further in the future, but they kind of want to see what the 529s are going to cover, and what they can maybe do out of pocket and what they simply can’t do. They’ve asked about long-term care insurance, kind of understanding the premiums and how those could change in the future. They might want to buy a lake cabin, maybe that could be the forever home or the primary residents. If they wanted to retire earlier, they had started at age 65. Could they do it like 62, 63? They’ve got a little bit of debt. They have a car note for their own vehicle, 1.9% interest rate. There’s three years left on that note. They also bought a car for the teenage children, so there is a payment of 545 per month, interest rates 2.25, three years also left on that. Obviously, they made those purchases prior to our current interest rates, or it would be much higher. They also have a reasonable interest rate on their mortgage at 2.75. But it is a pretty recent purchase. So, the amount left on the mortgage is pretty high and that monthly payment is 2,858. So, early in that, and that’s one of their questions.

[00:05:58] TB: So, picking up on the asset side of the of the ledger, Kelly had mentioned that they do have a good amount of savings tucked away. So, 143,000 in a joint savings account, 3,000 in check in, and then another 9,000 in an HAS that’s Jane’s. From a 401(k) perspective, looks like Jane is putting in 11%, which is the max for 2022, 20,500 into her fidelity 401(k) through her employer that’s invested in a target date fund for 2030. Tyra also has a 401(k). She’s putting in 31.5%, which is also max amount of 20,500.

Now, for the two of them, one of the things we’ll talk about that you have a catch up available if they want to do that, but she’s also her Vanguard, she’s in a Vanguard target date 2030. Jane has a Roth IRA. This is from a previous employer. It’s invested in a Vanguard 2030 fund. She’s not contributing anything to that presently. Tyra has a SEP IRA from her previous consulting work as a pharmacist. It’s 100% in the S&P 500. So obviously, there’s some little bit differences there in their allocation. And then they also have a taxable account that they’re putting in about two grand a year, $167 a month into a Vanguard target date 2060 fund.

So, it looks like this is going to be maybe a retirement fund, maybe for the boys. We have to kind of get some clarity on that. They do have a primary home that’s valued at 920,000 versus the 683,000 and change that’s left. And then, looking to potentially, maybe buyout another property that they could transition to. We’ll talk about that in a bit.

Overall, you’re looking at total assets, about 1.9 million, total liabilities of just over 725,000. So, net worth is about $1.25 million. We look at the wealth protection stuff. Jane has an individual policy, 1.5 million that expires at age 65. She also has a group policy through employer which is one-time income 194,000. Tyra has a $750,000 policy that also expires at age 65. And then she also has a onetime group policy through employer which is 65,000. They both have short term and long-term disability through their employer that pays out a 60% benefit for short term and long-term disability. They both have their own professional liability policies. And the estate planning documents are up to date.

But one of the things that they’re not sure of is if Jane’s mother has anything, which obviously can affect their financial plan. From a tax perspective, they use YFP Tax. So, thank you very much for that. They’re concerned about their pretax retirement investments and when Roth conversions might be helpful, so obviously there could be time where they’re maybe sunset into retirement, so they might be in a lower tax bracket. So, it might be beneficial to convert some funds over to the Roth. And then Tyra is willing to work more over the next several years if both can retire early. They’re wondering if they should pay off their debt based on the interest rates, and they also want to make sure that they are maximizing the FASFA for their sons.

So, a lot of stuff to talk about. What are the big things, I guess for you, Kelly, that jump out, that you would want to tackle first with regard to Jane and Tyra?

[00:09:07] KRH: Probably the first two is just like the taxable account, the cash position, like having a good understanding of what they have those in place for. Is it a future expense that’s very short term? Is it something more intermediate where we could do a little bit more with those resources? I do think for the wealth building, probably three of the investments are okay-ish, like the target date funds of 2030. I would want to just double check what’s in those funds, make sure they’re close to the right asset allocation, but the SEP IRA for retirement is a little bit more aggressive than it should be for their age, and I suspect the Vanguard target date 2060 potentially could be as well. That seems to make it seem like it’s for retirement, if it’s in the target date fund, but something that I would agree should be confirmed, for sure. But also, what Jane’s mother’s need is, I think, if some of the cash has been earmarked towards helping with some of her care, that would make a difference in kind of the recommendations for how to best put it to work, short term, midterm or long term.

[00:10:27] TB: My thoughts on the on the estate plan documents. I definitely would run out would want to run those to ground. We had some content about a book about how your parent’s estate planning or lack thereof can really affect your own financial plan. “Mom and Dad, we need to talk.” We can link that into the show notes. But I think that’s a vulnerability, and we want to make sure that that’s lined up. So, we’re not having to sue for conservative ship or do things that, if those documents are in place, are really going to put us in a bind later on.

From an asset allocation perspective, Christina, how would you broach this subject? Because obviously, there’s, Kelly’s point, digging in to fidelity 2030 target date fund, Vanguard target, not all target date funds are created equal. We have one that 2030 is probably a little bit – we’re going to be a little bit more conservative than the S&P 500, or the 2060. So, what would be your process to kind of get them in the right model right now, three to five years from retirement, they’re probably going to want to be the most conservative that they ever want to be. Because if the market dips now, it’s very hard to uncover, and that’s where we have to start having conversations of potentially pushing retirement age back, which is not a fun conversation to have. So, from an asset allocation perspective, how would you tackle that with Jane and Tyra?

[00:11:46] CS: Sure. So, first thing I’d want to look at is taking a deeper dive, like what exactly is built into these target date funds? How are they allocated? Mostly looking at the ratio of equities to bonds. So, someone who’s about three to five years out, they can be a little risky, but we want to see more of the bond exposure. Things starting to dial back, their savings years, so maybe looking more at a 60% equity, 60% to 70%, equity 30% to 40% bond allocation for them. And yeah, and then revisiting the S&P 500, for sure, since that is definitely a lot more aggressive than we would want them to be invested at the moment.

Also, another thing to consider too, Tim is we got to get people thinking too, what does my cash needs? What are those going to look like, as I’m getting closer to retirement? So, yeah, we might have some money earmarked that we could be investing, but we still need to have money set aside for emergency fund. Maybe, as you get closer to the retirement date, like have at least a year or so of cash saved up, that is one thing that we’re considering keeping it in a money market, or high yield savings type of environment as well.

[00:13:06] TB: Yeah, for sure. I mean, I think really looking at our processes to really look at the investments by approaching the client with a risk tolerance and seeing what comes out there. And then kind of comparing that to what we think their risk capacity is. So, risk capacity being like, what is the risk that they should be taking? The risk tolerances, what is the risk that they want to take? And they should be taken to your point, Christine, a lot less risk, because we want to really protect that principle. We don’t want to lose anything, and potentially have to push back the retirement or do something different because of where the markets are going.

So, I think foundationally, making sure that that’s there is going to be really important. And to Kelly, your point, 143,000 in cash money savings is a good chunk of change. Christina, you mentioned like, you didn’t say the bad word, but the bad word would be like, what is the budget had been through retirement, which is going to shape the emergency fund. It’s going to shape a lot of things, what’s the retirement paycheck going to look like? The clarifying questions I would want to have is like, what is that 143,000? Is that to pay Thomas’s tuition next year? Do we run that money through the 529? I don’t see a 529 on the balance sheet. But the benefit that PA residents get from a state tax deduction is pretty generous. I think it’s 16,000 per beneficiary, 30,000, 32,000 per filing jointly.

So, if you can shelter some of that, that would be great. But what is the savings account for? What’s the taxable account for? Is the taxable account, is that earmarked for retirement? They’re in a position right now where I’m assuming Jane, if she’s not beyond 59 and a half, she will be sued. So, all of these 401(k)s, Roth IRAs, SEPs, like they can be accessed and used for whatever purpose so we can use some of that money for things that are other than retirement, but I would just want to clarify, what’s the savings account for, what’s the taxable account for, et cetera, before we kind of get into how to deploy these accounts, and again, making sure that, we need an emergency fund, let’s not invest it in a risky way. But we want to get that yield. I think, high yield savings accounts are now at 3%. You can get CEs at 4%. Even the eye bond is still attractive. I think it’s 6.8% plus a fixed rate at point 4%. So, there’s some liquidity issues there. But that might be a good place to park some dollars. You can put up to $10,000 a year there.

So, Kelly, if they’re asking, are we on track for retirement? How do we best answer that question? I’m a visual learner. So, are there things that we can show the client to kind of model that out a bit? What’s that look like on your end?

[00:15:50] KRH: I think these are very, very good questions that we do get from clients. And we ask clients to work on uploading and linking documents to eMoney. So, it’s a software tool that we use, that can be very helpful and looking at where things are at. Even to answer the question about the 529, they’re not listed on their spreadsheet. But they do have –

[00:16:17] TB: Oh, they do have. Okay, good.

[00:16:19] KRH: – do have them. And actually, they don’t pull across on a balance sheet either. So even when we’re working with eMoney, because they’re technically assets for the beneficiary. So, there are the two 529s in place. And you’re right, that Pennsylvania is quite 529 friendly with the rules. But when we get that question, like, good, not good, like we do a nest egg calculation, but then we can also go in the eMoney and look at goals, just to see overall. I’m going to pick one of the scenarios that they were kind of asking about the retire early. The baseline facts is like, based on now how things look towards retirement, and they originally had an age 65.

So, we’ve got the 65 in here, this 95% would suggest like, looks pretty good for being able to retire at that age. We have a couple expenses embedded in. We’ve got college costs, but we can add in college, I mean, we could probably spend the whole rest of the day and Thanksgiving, turkey dinner, talking about things we can do in eMoney. But just to give a high-level overview, we can enter education as like only the 529s cover that expense or do they want to pay out a cash flow a certain amount to help with that goal. We can enter specific school, so they wanted to see public school, public state school, and they wanted to see a private school just to have a comparable.

So, we’ve added in both of those. From here, I like to look at some cash flow reports, so this gives you a like, this looks reasonable and doable. Even the retire early like looks pretty reasonable, but then it is good to see the layers just to make sure things are input pretty well to reflect what the client wants to accomplish. Do the expenses. Tim, you’re right, spot on, are the expenses accurate for what the client is looking to do? So, we entered in living expenses, their liabilities, going to be the mortgage. They have some other expenses added in so they have car purchases every couple years. This is the 529 expense coming across.

So yeah, we do like to take the information that the client provides. Our data is only as good as what accounts are linked. But then we can go back in and run some of those scenarios too. Can they buy the lake cabin? Now, it’s entered as an additional property, not instead of their primary residence. This is less successful. We do like to see above 80%. I guess, I probably on the conservative side like to see 85 to 90. I think when Christina and I look at scenarios, because there’s things that can happen in between that really do impact. Like this really does not include Jane’s mom. Does a certain amount need to be embedded to help Jane’s mom and what is that amount per year? But we can add that? Is it an extra $1,000 a month for her care? Is it 500? Is it something different? But those are important combo situations like what do Jane and Tyra collaboratively think they can do? The conversation is really important with both of them. They have to be on the same page about what they’re willing and able to do and maybe make tradeoffs about to help in that scenario.

[00:20:19] TB: Yeah. So, for those of you that are listening to this, maybe in the car, don’t necessarily see the visual, if you’re not watching us on YouTube, on our channel, what Kelly is really presenting here is an illustration of what ifs. If we buy a lake house to retire early, what is the probability of success, if we have to use these monies for different goals that we have? Are we still going to have money at the end of our plan?

So, what the tool does is that it uses simulation, it uses 1,000 randomly generated market returns and volatility, called trial rounds to say, okay, 95% or 950 times out of 1,000, there’s going to be money leftover of the plan, and anything above the threshold of 80% or 82%, is good. And typically, if it’s lower, we’re going to adjust the plan as we go to make sure that there is money left over. So, the idea is to keep, there is money, between now and then when you when you pass away.

So, the nice part about this is it allows us to kind of toggle on and off different scenarios, to see how it affects the overall nest egg, so to speak, and provide some math behind it. So, the nice part about this is that, you can kind of talk to the client, and you can talk to Jane, you can talk to Tyra and you say, of all these different things that we’ve extracted from your goals, whether it’s a cabin, or being able to take care of your mom, or retire at this age versus this age, what’s the most important? And then basically turn those on and off to see, okay, once we get to this threshold, then the plan might be in jeopardy and we can adjust from there.

But I think this is great, and a visual perspective, and this is the way I learned. I think, like from a client impact, I think, this is huge. Yeah, this is great modeling Kelly. Christina, when you look at this particular client, at least from some of the models that we’re seeing, are there things that you would want some additional information, whether it is Jane’s mom, or maybe more additional information on what is the goal for the education planning? Is it the put the boys through four years of school? Is there a certain percentage? Are we using some of that? Are we counting on scholarships? Are we counting on debt? What are some of the approaches that you would take with the client to kind of refine this out a bit?

[00:22:39] CS: Yeah. So again, just digging more into the weeds. And to your point with the education. Yes, are they going to be relying strictly on loans? Or are there scholarships involved? Or is it a combination of all three? Are they going to be funding, maybe a third of it, from their cash flow? Some from the 529, others from scholarships?

So, we’d like to see some diversity, so to speak, when it comes to funding college needs, especially if 529 is not going to carry the weight. And then looking at savings and withdrawals for the education expenses, as is it does look like there is going to be a shortfall. So, having more of those conversations, again, what is the 143,000 saved for? Is part of that going to help Thomas and Robert. But then again, looking back at what they had given us with the 529, how is it invested? Kelly, when you had shown us that it looked like it was probably just in the money market at the moment, and I would be more curious to see, well, A, is it linking properly. But B, is it indeed invested? You have to have a good solid allocation in there, if you want that money to work for you, over the period of time they have left.

[00:23:53] TB: And probably a good chunk of that money for Thomas, who’s the 17-year-old should be for a money market. It’s almost like you were saying like you want, maybe, like a year’s worth of cash for retirement. That might be true for the first year or so for tuition. But then the balance of that should be invested. I think Thomas had 45,000. So, a good chunk of that should be either in a balanced fund or something like that. For Robert, who is 14, and he saw us four years until the first year, we probably can be a little bit more aggressive. And then, as we get closer, same thing with retirement, we’re having more of a bond allocation, less of an equity allocation. The money mark is going to do well today just because of inflation, but you’re also being killed by that purchasing power that’s kind of being eroded every year.

So, what Kelly is showing right now on the screen is kind of the shortfall, the projected shortfall for the education expenses and it basically showing us what percent is underfunded, which is not necessarily a bad thing. We kind of talked about the rule of 33% and where we want, if we’re saving for a kid, a kid’s college, and we don’t really know what our goal is, it might be okay, we’re going to try to get x amount into a 529, pay x amount from , in that year, that’s the salary in that year for college. And then maybe the last third comes from scholarships, student loans, et cetera.

So, this is kind of showing us what has been underfunded so we can kind of plan for that and know what to do, so great stuff. Kelly, can you shift back to the case study real quick, I want to have a discussion that we really haven’t had much discussion on. We talked about Social Security in the past, I think, again, pulling their statements is going to be really important to see where they’re at. But I really want to talk a little bit more about the long-term care, and then Medicare decisions. So, walk me through, how would we approach those? Obviously, these are two things that, I think, there’s a lot of kind of negative press around long-term care insurance. It shouldn’t be something that we sell fund. What is long term care insurance? Why do I need it? So, I guess, let’s start there, how would we approach this particular risk that Jane and Tyra have to their financial plan?

[00:26:12] KRH: I will admit, it is a little bit newer territory for us, like typically, with our client base, we’re not having a ton of conversations about an immediate need. So, we have done some work recently, just to be better educated and to kind of get up to speed on some of the products. So recently, talking through kind of two products. One is a pretty traditional, like, pay a premium, get a policy, and it covers a certain amount of care per day, calculated out on an annual basis. And one of the biggest issues with those policies is like premium goes up. We had some education that I found to be very concerning, and enlightening, just so we know the premiums can go up. But with state regulations, there’s not a ton of regulation on how much the premiums can go up. So, that’s one of the challenges is like, if you buy a policy, you have it for like 10 years, your age 75, and the premium goes up and it becomes unaffordable. Pay 10 years into it, but you have to stop, that’s a concern.

So then, there’s a hybrid product that has some insight into that premium piece, but also provides a death benefit. Because the other concern is you never need the long-term care. You’ve paid for this premium, you have, unfortunately, a death event, without any care happening, and all that money has not been allocated anywhere else. So, there are some things out there. I think that’s kind of one of the things we’ve been working through, is understanding those policies, and then write the comparable, like many insurance products, is like if you paid for it out of pocket and funded it yourself. So, kind of running some scenarios like, that’s one of the things we started to build out, and that eMoney scenario was, if you take the premium and put it away, like how much could that grow? Because it seems like the premium, happy medium timeframe is like age 60 to 65 to start a premium then.

But again, a lot of things that we are learning about too, because there’s been a lot of movement. I think there used to be the person that was talking with us about it, like thousands of long-term care providers, like insurance providers, and it’s down to a very small quantity now, so a lot has changed.

[00:28:46] TB: Yeah, when I was first getting into the industry, it was that and it was tons of providers, premiums going up. I think the industry didn’t have enough information, because this is kind of a newer product, and some of these policies were priced, not correctly. They were – I think it was like low interest rate environment, which makes it makes it tough for them. People are living longer, or they’re alive longer with conditions that pay out a policy, because our medicine is better. I think though that, we’ve kind of gone through the burst of the bubble. I think a lot more of these policies have stabilized. I think you can still see increases I think the hybrid model is good in a sense that there are – it’s guaranteed, so your premium is fixed. Whereas, that’s not necessary for long term.

To back up, for those that are thinking like what are we talking about, long-term care, really what it is, it’s a broad range of skilled custodial and other types of care that’s provided over an extended period of time, due to things like chronic illness, physical disability or some cognitive of impairment. And the scary number of this is like roughly 60% of Americans are going to need some type of like long-term care in their life, and I think that number is continuing to go up. So, this is where, I think, a lot of people think of like nursing home, and that’s not we’re really talking about. I think the idea behind aging in place and keeping you in the home, as long as possible.

So, if you are getting older, and you’re starting to have problems bathing or dressing or with personal hygiene or eating, you would have someone come in and help and aide. For a lot of people, it’s a family member, or it’s a spouse, which can take a toll on their own mental, physical and financial health. I think, my perspective on this is evolving, but I think that studies have shown that couples, when they look at this type of care, are willing to spend, on average, in the range of $2,500 to $3,000 per year to get some type of policy, and you can get pretty decent coverage by doing that. I think it’s establishing a baseline at least to cover like home care. So, to have somebody come into the house and 80% of care that is provided through these policies, is homecare.

I think conversation, is what really what we need with Jane and Tyra. I think it’s to kind of demystify it a little bit, maybe not make it as scary as I’ve been led to believe or has seen. Because this is a major risk, like if you can – this can be a major drain on the financial plan if you don’t have that large reserve of cash or investments, or a policy in place. So, I think it’s important to kind of get in front of it, and just have a have a good conversation and at least have a baseline policy for homecare, I think would be a good starting point. And then see like, what are the social like, is Thomas, is Robert, are they going to be a safety net? Or my dad always says, “Just put me on the ice float and give me the Eskimo retirement.” That’s kind of what he’s looking for.

But I think, some of the social networks that you have, in terms of talking through this is going to be important as well.

Christina, how about Medicare? What’s your take on this? Obviously, they’re a couple years away from enrolling in Medicare. But how do you approach this with Jane and Tyra in terms of how that works?

[00:32:21] CS: Yeah, so I think it’s just giving them a high-level approach to what to expect like a year in advance. So, when you reach age 65, the window opens up three months before their 65th birthday, and they have until three months after their 65th birthday. So, in essence, is a seven-month period. You can go in, enroll your Part A, Part B, if necessary. Most of times, it will be, because if you’re retiring, you’re going to be off of your employer’s medical plan, and you may not have to worry about correlating benefits at that point. So, it’s really not that scary. And then, on an annual basis, once they are involved with Medicare, there’s ways you can change up your plan or your drug plan as you need to, and there are resources and people to help you with that.

[00:33:12] TB: Yeah, the enrollment period is going to be super important, right? It’s typically three months before you’re 65, and then three months after you turn 65, so it’s like a seven-month enrollment period for initial. You want to do that so you’re not penalized later, that can happen, so you don’t want to blow through that enrollment period. I think that you get a ton of mailers for that to remind you.

But I think the big decision from there is like do I do Original Medicare A and B? Or do I do a Medicare Advantage plan which is a kind of more like private insurance HMO that Medicare reimburses for on a per participant basis? There’s I think, hundreds of plan Ds, which is the prescription. Do you get a Medigap policy with Original Medicare? There are so many things that go into this. And that’s going to go into like, what’s your view on, do you want convenience? Most providers will accept Medicare insurance, but it’s not necessarily as simple as maybe like a Medicare Advantage. If you’re going to be a snowbird, like if they decide, “Hey, we’re going to buy this cabin, but we also want to buy a place in Florida.” Having care coordinated between those two, if you’re in a Medicare Advantage is more like an HMO. So, if you’re out of network, that can be problematic.

There’s lots of different things that go into this. At the end of the day, this is probably one of the bigger concerns, I think, that people have is like, what does this look like? If there is a gap, if they decide to retire before age 65, what do they do? Is that something like Cobra? Does the employer offer anything that’s becoming more and more of a dinosaur feature of late? The other thing that we didn’t mention that, Christina, we were talking about off mic was like, even long-term care insurance, I think we’re seeing that show up on an employer benefit. So, really taking a look at that and what’s provided there. The big things with long-term care, just to circle back to that is like, when we’re looking at this, what is the monthly benefit that we’re targeting? If we are trying to cover home care, you can – Christina was telling me about this awesome calculator that you can find at your state, this is what it costs. So, it’s 5,000, it’s 6,000, like, we’re going to target that. What’s your deductible period? So, that’s the elimination period or the time you have to wait before you have benefits. So, a lot. It’s just like disability insurance, a lot of them are built as 90 days. How long is the benefit going to pay out? And then like, do you want an inflation rider?

So, to circle back on those things, those are the conversations we’re going to having concert of like, what do we do with Medicare? If there is a gap in Medicare, what do we do, et cetera? But I think Kelly, the only other thing that we probably should discuss briefly, that the client brought up, I think this is the one thing that I have outstanding here is the debt. So, one, is should they be concerned about the amount of mortgage debt? Should they use some of that cash set savings for the car note and pay it off? Obviously, interest rates have moved a lot, over the last year or two. So, what would be your answer to that question? Obviously, we probably need some more context with what’s going on in different parts of the plan. But how would you approach that with them?

[00:36:07] CS: Right, so it is interesting, like, I think just baseline, high level, the mortgage, usually, it’s more desirable to not have a mortgage in retirement to have the cash flow be less. But I am intrigued by like, this is not the forever home. It’d be nice to know, well, like how long? When would the transition take place to either a smaller home or to that cabin? We see a lot of people talk about being expats too, which is kind of interesting, depending on what happens with Jane’s mom and the kids in college, is that on the radar as well?

So, like the mortgage, I feel like normally would be a priority to not have on the table. But in this case, I don’t have as much of a concern about it, if there is a potential for a transition that we can talk through, to see what is affordable. Is the 2858, is that affordable in retirement with the rest of the expenses? The cars, I would say that interest rates are lower, which is good. I wonder if maybe the kiddos would like to contribute and pay off if they’re going to eventually take ownership of the car. I feel like having the kids have some type of responsibility, some piece of the puzzle that they have to take care of, whether it’s paying part of their car insurance, definitely upkeep, maintenance gas. I personally think it’s an important piece for them to feel some type of responsibility. So, I guess I’d be curious as to their student jobs and the college, and can they help take care of the one vehicle. I guess, I’d be inclined to maybe pay off the other depending on what the other goals with the cash flow is.

[00:38:03] TB: Yeah, mathematically, I wouldn’t be in a rush to pay off the notes if you can get 3% in a high yield and both these notes are 1.92, 2.25, doesn’t necessarily make sense. But some of that is just kind of peace of mind to clear the balance sheet on the liability side. But the mortgage is I think the bigger one, the bigger shoe that we’d have to figure out, like how it’s going to drop because there’s some equity in the primary home, what it’s valued at, versus the mortgage. My big thing is if they buy the cabin, they would have essentially two mortgages, that if they sold the primary house, they could pay off the original mortgage and maybe apply some of that back to the cabin. It’s just a matter of like, what’s their comfort level in terms of carrying a mortgage debt into their 70s, 80s, et cetera.

So, there’s nothing concerning about, I think they’re on a fixed rate for the mortgage, so it’s not like it’s a variable rate or an arm or anything they have to worry about, but it’s just kind of the comfort level and then how is that, to your point, that 2858 go into play on a fixed income when we’re talking about generating a paycheck from Social Security, from the retirement assets and maybe any part time work or whatever they’re doing, so that would be the main concern.

What did I miss guys? I feel like we covered a lot of ground here. This was great. This is a great case study. Did we did we miss any question?

[00:39:30] CS: FAFSA, Tim, which is –

[00:39:31] TB: Oh, yeah.

[00:39:33] CS: I mean, it’s mostly income in the formula and probably like that cash might be a little bit of – if you’re planning to use it for college expenses, like running it through the 529. Yeah, I guess if they retired, there’s the two-year look back period. So, at least Thomas would be pretty well through school. I think by the time, if they retired, but they might have an impact on Robert’s last year or last two years. But we get questions about maximizing the FAFSA and again, with the income being the biggest component, we don’t know what the kids’ assets are, those aren’t entered in the eMoney, usually don’t ask about those. But I guess I’d inquire about those too, make sure if they have an UGMA and UTMA that they spend those down first before the 529s, since they count different in the formula.

[00:40:34] TB: I think one of the things that I would say is I think some sometimes people are, because of the formula, they detract it from putting money into the 529. But I think, having that pot of money there that’s grown tax free, if it’s used for education expenses, is more valuable than I think not doing it because you think that the FAFSA equation is going to change.

So, just like, what we talked about, sometimes people do weird things that are out of character because they’re trying to like save on taxes. If going to college is a big part of the plan for your kiddos, the 529 is going to be one of the best – it’s depending on your state, but it’s going to be one of the better vehicles to do that and I wouldn’t let the FAFSA formula detract anybody from doing that. But I think, yeah, probably looking at some of those assets. I know you can also put assets in. I think grandparents’ name, and I think that doesn’t necessarily capture in the equation. So, definitely something that we want to look at as we’re tackling the other parts of the financial plan, so good stuff guys. I appreciate the chat here. I think very, very productive. And yeah, just look forward to doing more of these in the future and thanks for lending your opinion and how this client is shaping out. So, enjoy the holiday.

[00:41:55] KRH: Thank you.

[00:41:56] CS: You too. Thanks.

[00:41:57] TB: All right, take care.

[OUTRO]

[00:41:58] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analysis expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 275: How to Build a Retirement Paycheck (Retirement Planning)

Posted on September 29, 2022March 14, 2023 by yfpadmin

How to Build a Retirement Paycheck (Retirement Planning)

In the fourth episode of the four-part series on retirement planning, Tim Ulbrich, PharmD, and Tim Baker, CFP®, RLP®, discuss how to build a retirement paycheck.

Episode Summary

In this week’s episode, Your Financial Pharmacist Co-founders Tim Ulbrich, PharmD, and Tim Baker, CFP®, RLP®, wrap up our four-part retirement planning series by discussing how to build a retirement paycheck. Highlights from the show include a discussion on retirement income planning and how social security claiming strategies fit into retirement income planning. Three critical issues addressed include how to replace your paycheck with your retirement income that meets your retirement expense needs, how to plan for large one-time expenditures in retirement, and how to mitigate the risks one faces in retirement. Tim Baker shares three approaches to building a retirement paycheck, The Flooring Strategy, The Bucket Strategy, and The Systematic Withdrawal Strategy. Tim dives into the theory behind each and how to put them to use in your retirement planning. When it comes to retirement, the value of a financial planner throughout the timeline of your life is tremendous, not just in the accumulation phase of your retirement planning. It is valuable to take stock of where you are now regarding the social security statement, cash flow, budget, and net worth, in addition to plans for retirement. Tim Baker explains how life planning plays an integral role in retirement planning, often ahead of financial planning to build the retirement lifestyle you envision with a paycheck to match.

Links Mentioned in Today’s Episode

Episode Transcript

[INTRO]

On this week’s episode, Tim Baker and I wrap up our four-part retirement planning series by discussing how to build a retirement paycheck. Highlights from the show include discussing what retirement income planning is, three key issues when determining a retirement income plan, how Social Security fits into retirement income planning, and three different approaches to use or consider using when building a retirement paycheck.

Before we jump into the show, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 250 households in 40-plus states. YFP Planning offers fee-only high-touch financial planning that is customized to the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call by visiting yfpplanning.com. Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

Okay, let’s jump into my conversation with certified financial planner, Tim Baker.

[INTERVIEW]

[00:01:17] TU: Hey, everyone. Welcome to this week’s episode of the YFP Podcast. We are on our fourth and final part of our series on retirement planning. On episode 272, we talked about determining how much is enough, building that nest egg. Episode 273, we discussed the alphabet soup of retirement accounts. What are the different options or at least the tax favored accounts that we’ll focus on potentially? Then last week on episode 274, we talked about risk tolerance versus risk capacity and determining or beginning to determine our asset allocation plan.

So this week, we’re going to talk about how to build a retirement paycheck. Ultimately, we’re at the point where we’ve accrued that nest egg we established at the very beginning, and the question is now what, right? How are we going to distribute those funds and ultimately replace what was our W2 income and be able to replace that with the various investments and buckets of savings that we’ve accrued over the years?

So Tim, this feels like an overlooked topic and one that is not often discussed. You recently shared with me that, really, up until more recently, it has not even been foundational in the Certified Financial Planner training. So why is that the case with what appears to be such an important topic?

[00:02:28] TB: I think it’s kind of rooted in for a long time, the predominant advisor that was out there was – I’m not going to say an advisor was a broker. So when you work with a financial advisor back in the day, it was kind of more to transact investment trades. So it was you calling your broker and saying like, “Hey, I like this stock,” or, “I like this mutual fund,” or whatever. Like, “What do you think?” Then that would be the exchange. Really, it was more about placing the orders than kind of looking at something more comprehensively.

The problem, though, is that even like in the CFP’s like curriculum, I feel like most of it is really geared around the accumulation stage of like gathering assets, and this is how to understand modern portfolio theory in investment, all that kind of stuff. But it’s kind of like when you get to the end, it’s like, “Okay, now what?” Like, “What do you –” We have these buckets of money that are separated between a Roth IRA a 401(k). You might have money in a pension.

What we’re really trying to figure out is like, okay, how do we convert these pools of money into a steady, sustainable retirement paycheck that’s going to last the rest of your life? It’s really hard to do. It’s really hard to do. Again, like, I’ve worked with firms where the conversation is, “Hey, Tim. You’re the client. We’re going into 2023. What do you need next year?” I think that like if you’re in that relationship of like you’re kind of just advising on stocks or investments, maybe that holds up.

But I think like what we’re seeing, like if I’m the client, the first question I would ask to that question was like, “Well, what can I take?” Like, “What can I take, so I don’t run out of money,” advice. Or like –

[00:04:19] TU: Shift of conversations. Yup.

[00:04:20] TB: Yeah. Tell me that like. It’s nice that – That’s kind of like what we talked about in previous episode is like investments are really important. But I think if you’re working with someone comprehensively, it shifts more to like, okay, what are the investments and less about the tactical and more about the strategic approach of like, “Okay, now that we’ve accumulated all these assets, like how can we do this with the mountain risks that we face?”

Because one of the really hard parts about this, Tim, is like you could live to your 72 or you can live to your 102. We have no idea.

[00:04:54] TU: That’s right. Yeah.

[00:04:55] TB: Without that major variable of like the duration of the plan, which is connected to your life, super hard, right? So I think the industry is changing, where it’s trying to equip advisors with more tools and more education around this shift from the accumulation phase to withdrawal phase and really have meaningful conversations with clients because this is only going to get more important, right? The data says that roughly 10,000, baby boomers turn age 65 every day, and half of them have never really calculated where they’re at with what they need to maintain their lifestyle.

So it is kind of a little bit of like flying by the seat of your pants. Like I said, it’s just a complex thing. If you’re looking at how do we convert assets to income streams while keeping the tax man in mind, and those income streams could be Social Security. It could be working part-time in retirement. How does that affect your Social Security paycheck? It could be distributed money from a 401(k) or a taxable account or a Roth IRA. There’s very strict ways you should do that to maximize your taxes or minimize your taxes, I should say.

It could be a pension or like you convert part of that bucket of money into an annuity, along with – We’ll talk about that more with the flooring strategy. How does your home play a part in this? A lot of people kind of discount the home, even when that’s going to be the biggest expense of any retiree is your home. That’s typically at any phase of retirement, except for maybe like old old, where it might be more of a health – Those people that are kind of 90s plus is more medical expensive.

So it is a complex thing to basically tackle, and you wouldn’t think it would be that hard because a lot of people are like, “Oh, $1,000,000. Four percent, $40,000. We’re good.” Kind of wipe your hands of it, and you’re good to go. But it’s a lot more complicated than that.

[00:06:59] TU: Yeah. I think it’s a good reminder, and I’m glad we’re digging into this topic, really, for the first time in detail. I think we’ve certainly spent a lot of time on the show talking about the accumulation phase. But to your point, we very much tend to oversimplify this, right? You need 3.2 in a nest egg. Or you need – Based on the four percent rule, you can draw so much per year.

Well, what about all the various asset pools that are out there, right? What about your home, whether you’re going to work at all during retirement? How does that impact how and when you withdraw? What about all the tax strategies? What about taxable accounts versus tax-deferred accounts? I mean, just so many different layers to consider here. Then, obviously, Social Security is another one to put on top of that as well.

So important that we’re thinking not only about the accumulation but also what’s the strategy and the optimization. I think this is another great example where like, in my opinion, obviously, bias, like the value of a financial planner is a lifelong journey. So early on, we’re working on accumulation, getting started, really understanding our options and our vehicles, doing it at a tax-efficient way.

Here, we’re talking about a whole another host of things that when you look at advisor fees and other things that are involved, like if done well, the return on investment there is very strong, not only numerically in terms of tax saving optimization, but also in terms of having that third party, having somebody affirming and making sure that you’re feeling comfortable and confident in the distribution of all the hard work you’ve done to accumulate along the way.

[00:08:30] TB: Yeah. I think the big thing that I would say along those lines is that I think the difference between advisors today and then advisors of your, like it’s more of a collaborative process. Before, it might be like, “Hey, what do you need?” Or this is like what you get type of thing. Whereas more it’s coming from like a place of like what’s going on and like what are the things that are going on in your life and then basically constructing that from that approach.

I think it is more of a collaborative approach versus like us saying this is what it is or waving our finger or whatever. So like I think that’s a big distinction to make too.

[00:09:12] TU: Tim, what are some of the key issues? So here we’re talking about retirement income planning. Ultimately, we’re discussing how to build this retirement paycheck. What are some of the key issues that folks need to be thinking about when it comes to building this retirement income and planning for this?

[00:09:29] TB: Yeah. So the three big things that are out there are how do you replace a paycheck with kind of a stable source of income to meet your basic retirement expenses, which, again, can be a tough thing to figure out because you snap your fingers, Tim, and like you’re not going to work. So like how are you spending your day?

For some people, it might be you’re just sitting in a room because your spouse is still working. For other people, it’s like your guys are both retired. So it’s like, “Hey, school’s out.” You’re kind of throwing your books in the air. You’re traveling. You’re dining out. You’re doing all those things that you didn’t do. So like maybe your expenses go up.

So I think sitting down and looking at like what does retirement look like for you and trying to sketch out. We talked about budgets with clients, younger clients, and like they don’t go away like because like a big part of this equation is like how much you’re going to spend. So how do we give you a paycheck that’s going to meet your basic retirement expenses, number one?

The second thing is how do you plan for those one time, large, large expenditures that are planned? So that might be like a car purchase, like big vacations. It could be –

[00:10:42] TU: Second properties, right?

[00:10:43] TB: Second property. It could be paying for a son or a daughter’s wedding. Like those types of things are big. Then the last part is like how do we start to not inoculate but mitigate the risks that you face in retirement. The risks are many. There’s lots of potential potholes that are out there that can trip you up. One is like life expectancy. We don’t know how long you’re going to live. So a lot of people, they base their Social Security decision making on, “Well, my uncle died at this age, and my dad died at this age, and I’m just going to take it,” which is typically not –

Sometimes, it’s advisable. But sometimes, it’s not because the other thing that we have to remember is that in Social Security, your spouse gets the larger of the benefit that you’re collecting. So if I claim early because my life expectancy in my mind is lower, my benefit is going to be reduced. But it still might be better for me to wait and defer, so that benefit grows. So then like maybe I collected for four or five years, but then Shea would get that when I kick the bucket.

So those are things that people just don’t think about. So life expectancy, big risk. Inflation. So sources of retirement income need to increase at the same rate as the cost of goods and services, which right now is tough, right? Because we were seeing a spike in inflation. So how do we combat that, the inflation, and how do we how do we make sure that the – So that’s another reason that Social Security is great because it gets cost of living adjustments every year, most years, that keeps pace with inflation. Most products out there do not. Even if you buy an annuity on the street, Social Security is going to beat that every single time.

The other one is a death of a spouse. So income needs don’t necessarily go in half when your spouse dies. So how do we – Is that looking at things like insurance or second to die policies? The things like that to make sure that you are okay that you had two Social Security income streams, and now you only have one. It’s the greater one. But like how do we plan for that?

Health care. So we know that’s increasing exponentially. How do we plan for that long-term care? So this is the possibility of needing care for those everyday activities like eating and bathing and using the bathroom, those types of things. I think the majority of people, they use family members. But do you buy a policy to help with that?

Investment returns. We talked about, Tim, the stock market is volatile. Fixed income portfolios, which are often retirement portfolios because we want more of that safety in principle, like those things changes over time. So right now, it’s probably good to look at things that have something with inflation tied into that.

Then probably the last one, which I think is the most dangerous one, is the sequence of returns risk. So this is the risk of receiving a lower or negative returns early in your retirement when withdrawals are made. That’s what I talked about last episode. If your portfolio goes from a $1 million to $600,000, and then you’re taking 40,000 or 50,000 dollars a year out of that, it’s almost impossible to overcome both of those.

So that’s where it goes back to like is your asset allocation right when you get into that eye of the storm before retirement. If it isn’t, maybe the hardest conversation that we have to have is like we have to wait for the market to recover because, ultimately, you might have to go back to work anyway if you go out and then you have to go back because we just don’t have enough money to sustain you for the rest of your life.

So those are probably not all of the risks that are out there, Tim, but a good amount of the risk that you’re facing as you’re kind of saying, “Okay, how do I take this pot of money that I have and make it last for the next 30 years or so?”

[00:14:40] TU: Yeah. The example of that last one, Tim, the sequence of returns, I think about folks that have retired in the last, what, 12 to 24 months, right? If there wasn’t kind of a change of asset allocation in the eye of the storm, as you talk about. Some folks might be feeling that in the moment, right? I saw the portfolio drop significantly, and maybe that did or did not change. If they had more than enough saved, maybe that didn’t matter as much. But maybe that means going back to work for a little bit of time or elongating the timeline to retirement.

Again, so important that we’re really planning this from beginning, all the way through the actual withdrawal phases.

[00:15:15] TB: Yeah. One thing to note is that sometimes this is out of your control, like when you’re going to retire. Sometimes, it’s like –

[00:15:22] TU: That’s right.

[00:15:23] TB: When there is a downturn in the market, it’s also because the economy is bad. So companies could be looking to either get you out the door or force retirement, and that can be really, really bad for your – I talk to my dad a lot. Like his company was bought by another company, and he was kind of winding down. But he was not ready to retire yet. But he was kind of duplicitous. They’re like, “Hey, you’re kind of on the chopping block here.”

So that is the other thing is like sometimes we assume. Just like what I was talking about, some people assume they’re going to die early, so they take – Most of the time, they like outlive what they think. But the other part of that is we assume that like when I asked you the question, “Hey, Tim, like when do you want to retire,” and you say, “Hey, I will retire at full retirement age.” For us, it’s 67. That that’s actually going to be an option.

[00:16:12] TU: In our decision, right? Yup.

[00:16:14] TB: Yeah. Sometimes, it’s either because of job, or it’s because of the health of yourself or a family member that causes you to retire earlier than you expected. Something like 40% of people kind of fall into that bucket.

[00:16:29] TU: That’s a good point and a good reminder. Before we get too deep into talking a little bit more about Social Security and then specifically three different approaches and strategies to build your retirement paycheck, I want to reference folks to a resource that they can use to download, follow along with some of the discussion, as well as provide some other information. That resource is What Should I Consider Before I Retire. It talks about some of the considerations around cash flow, assets and debt, health care and insurance, tax planning, long-term planning, and other topics as well. You can download that at yourfinancialpharmacist.com/retire. Again, yourfinancialpharmacist.com/retire.

Tim, we can’t go too far into this topic without talking about Social Security. You’ve dabbled in it a little bit already. We talked about it in episode 242, which was Social Security 101, history, how it works, why it matters. One of the most common questions for good reasons is when. When should I begin to withdraw or begin to have access to Social Security? We all know. We’ve heard it before that the difference is significant between if we take it early at 62 or we wait until the age of 70.

So give us some more information here on why this is such an important topic, what the differences can be in those numbers, and obviously the role that Social Security can play and will play likely in building retirement paycheck.

[00:17:47] TB: Yeah. I would even back up before we even talk about that, Tim, because I think it’s going to play into this. I think it’s kind of like people want to talk about like, “Oh, what do you think about this like stock or this investment or whatever?” I’m like, “I don’t know. Where are you at? Where are you going?”

So I think the first thing, even before we talk about Social Security, is to take stock of those two things. Where are we at, and where are we going? So like, to me, I think the two biggest things to look at, and Social Security is part of this, is look at your Social Security statement. I’ve done this recently. You can go on to socialsecurity.gov and put in your Social Security number and create an account. It’ll basically pull up your benefits estimate. So like it’ll say – Like for me, if I retire early, like this is the benefit that I get, 2,200 bucks. If I retire at full retirement age, for me, it’s 67, my benefit’s 3,300 bucks. Then if I wait till 70, which you get deferral credits, 4,220.

[00:18:54] TU: Wow, big difference.

[00:18:55] TB: Yeah. Socialsecurity.gov is actually pretty – They have some good calculators and like – So it’s pretty decent. So I would say like take stock of where you’re at, which means looking at the Social Security statement, looking at your cash flow statement, i.e. budget, like what’s that look like? Then the big one is the net worth statement. So what are the assets? What are the liabilities?

From there, I think we have a conversation of like where are we going. I think that’s like when do you want to retire. Some people might be like, “I want to work forever.” Some people are – They’re like, “Now. I want to retire now. I’m 45. I want to retire now.” So I think going through some of those exercises, like I’m a huge proponent of life planning. It’s like changed my life. But actually sitting down – I think so much of the emphasis on retirement is kind of this oasis of like, “I’ve made it. I have some type of financial independence. My calendar is back, and it’s like this destination.” But it’s really more of an ongoing journey of, okay, so you wake up. The retirement party’s over. You just got back from your Hawaii trip to celebrate your retirement. What are you doing? Are you by yourself? Is your spouse still working? Like how are you spending your day?

So actually write down like what is an ideal schedule. What are the things that are still on your – Things that if you were to die today or tomorrow that you have left undone. What are the things that you’re passionate about? So sometimes, unfortunately, our passions might not necessarily align with like our ability to earn and make money. So sometimes, those things are left for retirement to say, “Hey, I always want to volunteer to do this,” or, “I always wanted to help kids here,” or whatever.

So I think really having a plan for that. Because to be honest, like the finances are almost – They’re not almost. They are. The finances are secondary. The financial plan in retirement is secondary to like the life plan in retirement because so much of our identity is tied up in our job as director of pharmacy here or pharmacy manager or whatever it is. That it’s hard for us to like wake up one day and be like, “Okay, I’m not that person anymore.” Well, you are that person. You’re just not working in that job anymore.

But it’s even hard for spouses too because so much of your time is at work, right? So kind of to relearn and do – That’s a real thing. A lot of retirees struggle with addiction, with depression, with kind of like a loss of sense of self and things like that, that I think needs to be addressed. More and more people are talking about this, which is good. So I think like once you get an idea of like, “Hey, where are we at numbers wise and like where are we going life planning-wise,” then I think it’s really important to start getting to things like Social Security and claiming strategies and things like that.

So to answer your question, Tim, I think that it is one of the most important, if not the most important, decision that you make in building out your retirement plan. Actually, Morningstar did a study that said that – So I think it was based on working with an advisor. It helps you with better decision making can increase your retirement income by 37%. Nine percent of that, which is the highest one, was the Social Security claiming strategy. Of the 37%, 9% of that was that alone.

You could see, when I rattled off my numbers, 2,200, 3,300, 4,200, that’s a huge difference. For so many people, for a long time, they’ve looked at it as like a breakeven. So they say like, “Okay. If I take 2,200 versus the 3,300, then I have to live to this age to breakeven on what I would be given up.” The problem with that is that the biggest risk that Social Security combats is longevity, meaning that your money doesn’t run out. So if a good chunk of your income is coming from Social Security, which gets cost of living adjustments and never runs out because it’s backed by the full faith and credit of the US government, like that’s huge.

It really doesn’t matter if you leave some money on the table. But even in most cases, that calculation is typically early 80s for a lot of people. So unless you are thinking that you’re going to live less than that, and you don’t have a spouse because we talked about the spouse gets the higher benefit, then maybe you look at that. But it really needs to be looked at from I think more of an insurance. Like a safety perspective is when you’re looking at that.

As we said, 78% is basically the amount of your Social Security benefit increases each year from age 62 to 70. So what that means is that every year you defer, you get a 7% increase, a raise in your retirement paycheck. So if you think about that as a working person, if I can lock in seven or eight percent as a raise for eight years, like that’s huge. But for whatever reason, we look at this as like, “If I don’t take this as soon as possible, I’m going to lose out. I’m not going to get the money back.” I think it’s a framing of the decision that we have to relook at.

So I think the big thing here is like it’s kind of getting away from the water cooler. I think a lot of people claim benefits as soon as possible. I think it’s sometimes greatly influenced by family members, coworkers. It’s the same thing we say with like student loans, where people are like, “Oh, my classmates are doing this.” I’m like, “You’re not your classmates. You have your own financial plan. You do you type of thing.”

Sources of income in your retirement paycheck do not have an inflation protection as Social Security does. So that’s also hugely important, especially in the times that we’re living in right now. So I think the steps to optimize your claiming strategies, one is to educate yourself. Determine what your benefit is and the implications of claiming at different ages, which means pulling your statement.

I think that before you even get there, Tim, this is kind of in the get organized of like where are we at. One of the things that you’ll see on your statement is like all of your years. So it looks at 30 years, 35 years, I should know this, of earnings. You can actually say like, “Okay, this is right or this is wrong.” So if you have a beef with what they’re reporting, then you can basically say, “Hey, let me pull my 2008 return.” I can say I actually didn’t make 100,000. I made 150,000, and that will change your benefit. So that’s also a big thing.

Then take the steps to figure out what is the best solution for you in terms of claiming, and that’s going to be so huge with kind of a jumping off point of how you’re going to build your retirement paycheck.

[00:25:34] TU: Tim, can you read your numbers again? I think those were really powerful. So you gave the early full retirement. I’m looking at mine as well, but they’re skewed a little bit because I worked at universities for a while, where I wasn’t contributing to Social Security, so much lower. But you gave your early number, your full 60 to 67. Then you’re delayed. What were those numbers?

[00:25:52] TB: So my early at 62 is $2,211. If I were to wait until my full retirement age, which for me is 67. Anybody that’s born after 1960, I think, the benefit goes to $3,325.

[00:26:15] TU: So almost a little over 1,000 more. Okay. Then what about 70?

[00:26:18] TB: Then at age 70, the benefit goes to $4,220, and there’s no benefit to defer past that. That’s the range, so again – It’s getting better. People are most – You can see like people are delaying claiming now, which I think it means more people are educated about this. But I think for a majority of the people that are out there – Even if I don’t work, my plan is to not to claim Social Security until and unless barring some unforeseen things, is I’m going to be claiming that 70, and I’m going to collect – Again, this will change between now and then because my earnings will change.

[00:26:58] TU: Numbers will change. Yup.

[00:27:00] TB: But you can see the impact is huge. Again, the other thing to remind ourselves is that this is inflation-protected. So at the end of this year, retirees are going to get a major bump in their retirement paychecks because of how inflation has been this year. Whereas if you buy a commercial annuity on the street, so you say, “Hey, I’m going to take $200,000, and it’s going to be paying me a paycheck,” you might get some type of like 2% or 3%, which you’re going to pay a lot of money for.

[00:27:30] TU: I get 9%, though, when inflation’s up.

[00:27:32] TB: No, new. So that is off. That’s another thing. Again, it doesn’t really hit home for a lot of pre-retirees or even before that because like the world is your oyster, right? Like when you’re accumulating, you can always earn more money. But like for retirees, especially if they can’t work, which it’s a fixed income, so if you can make a greater percentage of your retirement check Social Security that is inflation-protected, it’s just going to greatly improve your longevity. To mitigate longevity risks in the money running out.

[00:28:12] TU: So in your example, there’s round numbers, about $2,000 difference between your early and your delayed, 62 and 70. So just some rough math. So $2,000 a year, I’m looking at eight years difference between 62 and 70. So basically, if you were to take it at 62, by the time you got to 70, there’d be a little over 16,000, 17,000 dollars that you wouldn’t have otherwise had if you delayed, right?

Now, if you wait and delay till 70 and it’s 2,000 extra per month, you can kind of see the math there of how many years it’ll take to essentially breakeven, right? Now, what we’re not including there is, obviously, the inflation component. Someone could argue, “Hey. Well, there’s an opportunity cost. If you pull money earlier, you could do other things with those.” But again, it goes to really show the difference and how if we’re planning early on, as we’re working on our nest egg kind of coming full circle where you started the series, if we’re planning for a delayed withdrawal from Social Security, well, then we’re going to be able to mitigate that feeling or need at 62 of, “Hey, I’ve got –” Or whatever the age would be for individuals that I got to have this money at this point in time.

[00:29:21] TB: Wade Pfau, who is the professor of retirement income at the American College of Financial Services, one of the things he stated, because I’m going through a certification for retirement income certified professional, his quote is, “Deferring Social Security is the cheapest annuity money can buy.” So he’s done that study, where from 62 to 70, and then if you take that money and you were buying annuity, like it’s not even close. So you could do it like, hey, if you were to invest this for eight years, but it’s not even close like to basically do a one for one if you were to buy like an annuity on the street.

That’s the big thing here because, again, if you put the money in the market, if you’re putting into an S&P 500, you’re risking that money, and it goes back to the sequence of returns. If you’re eight years and you needed that money, it’s going to be very, very conservative. You’re not going to be able to get the return. So you’re talking about a seven to eight percent raise for yourself year over year, and that is also inflation-protected, which is huge.

Again, like one of the things that we should address is that if you’re a 30-year-old or even a 40-year-old, a 20-year-old, and you’re saying, “Social Security, I get it,” it’s going to be there. Social Security, I think, is one of those things, and I hate to say this, but it’s too big to – It’s not going to fail because so many people rely on that as their every day. So there’s a lot of things that says like the trust will be depleted. But you’ll still be able to sustain payouts at a reduced benefit.

I think that’s what’s going to happen. I think people – I think the Congress is going to be forced to raise like payroll taxes to fund the trust. But I think that we’re also going to either see a step back in benefits in some way or

[00:31:00] TU: Yeah, combination. Yeah.

[00:31:02] TB: But at the end of the day, even a reduced version of Social Security is still going to be your best. I’m still going to encourage to – If your retirement paycheck is 1,000 bucks theoretically, I still wanted that to be – If we can get that to be $400, $500, $600, the most of that paycheck needs to come from Social Security because of its safety and the inflation protection.

[00:31:27] TU: Yeah. Again, when you’re working with someone who kind of is helping you build the next egg, you can run it with it. You can run it without it. You can run it in a middle ground, to your point. So maybe it’s not the full benefit or numbers we’re seeing there, but we think it’s a reduced amount and kind of see how you feel with what shakes out in terms of whether you’re on track or not and what you need to do.

[00:31:47] TB: Well, one last point to make about Social Security is really looking at this as an insurance decision versus like an investment decision. So typically, like wealthier people or people that don’t necessarily look at or need Social Security, they look at it more as like, “Okay, how do I get the most out of my money?” Most of the times, they’re going to defer. But for a lot of people that are really relying on this to make sure that their retirement paycheck is sustained for at least 30 years or their lifetime, it needs to be looked at as an insurance decision.

If you look at the different risks like longevity risk, which is the risk of your money running out, the larger – This is a larger stream of lifetime inflation-protected risk. Like that’s important. Long-term care risk, so you have like more resources later than life. So if you’re getting a bigger paycheck, so if I’m getting 4,200 at 70, versus if I would have taken the 2,200 at 62, that means I have to deplete my portfolio more later. Inflation. We talked about the larger percentage that’s protected by inflation.

The other big thing is reality risk. Like as you get older, if a majority of your paycheck is just coming straight from the government, it simplifies decision making. You’re also less at risk for like elder financial risk, which is you want to have a greater stream of income. It’s more about income streams versus assets. You have less opportunity for people to defraud you. Unfortunately, like financial advisors are top. They’re not top of the list. Actually, family members are at the top of the list for that.

But the big thing is like excess withdrawals. So like if your greater paycheck is coming from Social Security, you don’t necessarily are going to deplete your assets faster. Eliminate some market risk because, again, you’re not relying on your assets as much. Then that whole risk of like early loss of spouse, deferring that larger benefit that then your survivor would get.

So in the case of like, Shea, let’s say Shea has a benefit that’s $2,800, and I claim it 2,200 because I feel like I’m going to, I’m going to pass away early, that’s a big mistake because she is stuck with her $2,800 because my 2,200 is less, whereas if I were to defer and say, “At 70, I’m collecting 4,200.” Then even if I die at 78, she gets the 4,200, and then 2,800 goes away. Those are some of the things that we’re talking about in practice. It just makes sense to really look at this closely before kind of just doing whatever your coworker is doing.

[00:34:14] TU: Great stuff, Tim. We’re going to come back to this topic more. We’ve touched on it here. We talked about it previously in episode 242. But, man, there’s so many layers of Social Security to consider, and I think regardless of where someone is at in their career journey, an important topic and part of the financial planning that probably doesn’t get enough attention. Or it maybe just prematurely gets kind of ruled out, especially for folks that are early on in their journey.

Let’s wrap up this series and this episode by talking about at a high level the three approaches to building your retirement paycheck. I love when you talk on this topic because I think we’re starting to get a little bit more granular on how are we actually going to build this retirement paycheck. How are we going to produce this income? We all are familiar with the W2 income, the paycheck we get it once or twice a month. Now, we’ve got to find a way to build that same type of paycheck in retirement.

So Tim, walk us through three approaches, certainly not the only ones that are out there, but three approaches to building the retirement paycheck.

[00:35:11] TB: Yeah. So the three are going to be the flooring strategy, the bucket strategy, and the systemic withdrawal strategy. So to start with the flooring strategy, so it’s probably going to be the most conservative approach of the three. Critics of this approach will say like, “I don’t want to survive. I want to thrive.” But what the flooring strategy does is it builds an income floor to meet essential expenses with things like Social Security or like an annuity. So the essential expenses might be housing, food, gas, utilities, medical expenses, insurance, maybe debt.

So that is basically – If we determine that those expenses are, say, $5,500 a month, and we know that Social Security is going to pay us, say, 3,500, then we need to buy, essentially, like an annuity. So think of an annuity as like a private Social Security. So you give an insurance company a sum of money, and then they’re going to pay that back. Usually, it can be for a term certain, but it’s usually for the rest of your life. So you would buy a stream of income to make up the rest of that floor. So that if something were to happen, you always have the essentials met.

Then the discretionary expenses, there are things like travel and gifts and dining out and entertainment and hobbies, are then basically funded by the portfolio. So you have $2,000 a month of discretionary. Then that money would basically come from the portfolio or could come from like part-time work or something like that. So the flooring strategy is for those that are very conservative, and they want to ensure that for as long as they are alive, they have money to basically keep the lights on and feed themselves. What that typically takes, which is hard for a lot of people, is parting with potentially a good chunk of your income.

If we use this example, and I don’t know what it would take to get $2,000 worth of income, but say you have a million-dollar portfolio, and you get $2,000 worth of income based on your age, your gender, maybe to part ways with $300,000 or let’s say $300,000 that all of a sudden, you wake up one day, and you have the income stream. But your million-dollar portfolio is now $700,000 that you’re now drawn on for those discretionary expenses. Now –

[00:37:28] TU: You’re trading some of that nest egg for an income stream. Yeah.

[00:37:32] TB: Exactly. Now, psychologically, they say that that’s tough to get over that hump. But it’s a lot better to do that, versus someone who is in a systematic withdrawal strategy. We will talk about it. That’s drawn down every year. Their portfolio is going down and down and down most years. So just to have that paycheck coming in is from a mental perspective good.

Now, the bucket strategy is essentially where you set up separate pools of investments with the lowest risk investments in the near term time horizon or segment. Then you have like a middle bucket and then a longer term horizon bucket. The idea is that you would say, okay, bucket one is going to be funded with X amount of dollars, and it will say it’s like five years of spending. So it might have $250,000 in there that is going to be super conservative, and that’s going to be with cash, things like tips, which are inflation-protected bonds, a bond ladder, whichever year creates some type of income for you.

Then the medium term bucket is going to be more moderate. So that might be for like a 6 to 15-year time horizon, and that could be in like income stocks or like utility stocks and maybe some bonds. Then you have a 15-plus year bucket. That might be the balance of your portfolio that’s more aggressive. So that’s going to be more growth stocks and things like that. The idea is that once the first segment is depleted, so that zero to five-year bucket, that $250 is spent over five years, then the bucket two kind of replenishes bucket one, and then bucket three kind of replenishes bucket two. There’s lots of different rules that you can put into place of how you do that.

From a conceptual perspective, one of the advantages of this is that clients are like, “Okay, I get this,” and like, “All I’m really worried about is like do I have enough money in bucket one,” and knowing that, although like the market can be crazy, and bucket three is not good right now, I’m not going to touch that for another 15 years. So it’s a way to kind of bucket or segment different money for different purposes. This is one that a lot of advisors use.

Probably the predominant one is the last one, is systemic withdrawal strategy. So this is based on essentially the work of William Bengen, who researched the all 30-year time periods, and he gets the 4% rule. So the idea here is that you look at your portfolio balance. You look at like what the market – How the portfolio performed and then inflation. Then you essentially – Like if you start the first year and you say, “Okay, it’s a million dollars,” and you get $40,000. Then that year, the market returns 6%, and inflation was 2.9%. Based on those inputs, you then adjust the paycheck, the $40,000 for the next year.

So you might say when the market is up and inflation is moderate, then you basically give yourself a raise with maybe some caps. If the market is down and inflation is such, maybe you freeze it. Or maybe you actually reduce spending. So it’s a very rule-based way to kind of use the 4% rule as a guide. But to work dynamically year to year with the portfolio and with the market factors that are inflation and those types of things, to make sure that year to year, you’re given the client a paycheck that is sustainable for the longevity of the retirement period.

Again, there’s a million different ways to kind of skin this as well. But the idea is that you’re working more dynamically with market forces, and it’s based loosely on the 4%. Now, a lot of researchers have said that like the 4% rule won’t necessarily hold up in the future because of when that was done, you have low inflation and really high equity valuations. So that’s important to take note of. Although he did his research, it’s not necessarily indicative of what’s going to happen in the future.

So you have the flooring strategy, you have the bucket strategy, and then you have the systemic withdrawal strategy, are kind of different approaches on how to build out their retirement paycheck on a year-to-year basis.

[00:41:35] TU: Tim, great stuff. I’m just reflecting on the journey we’ve come over the last four episodes, and we’re going to dive into all of these topics in further detail on future shows. We’re going to be doing webinars. We’re going to have blog posts. Make sure to check out information at yourfinancialpharmacist.com.

We understand the needs that are out there around retirement planning, wherever someone is at on their financial journey, a new practitioner midcareer, pre-retiree, or those that are even in retirement. So whether you have yet to work with a planner, and this is an opportunity to do so or perhaps you’re working with a planter but are wondering what might else be out there and interested in a second opinion, we’d love to have an opportunity to talk with you in terms of learning more about the one-on-one comprehensive financial planning services that are offered by the team at YFP Planning.

We’ve got five certified financial planners and in-house tax team. That includes a CPA and an IRS enrolled agent, soon to be two IRS enrolled agents. So we’d love an opportunity to learn more about your financial goals, learn more about your situation, and determine whether or not those planning services are a good fit for you.

You can learn more and book a free discovery call at yfpplanning.com. Again, that’s yfpplanning.com. Thanks so much for listening to this series, and we hope you have a great rest of your day.

[END OF INTERVIEW]

[00:42:47] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 274: Risk Tolerance vs Risk Capacity (Retirement Planning)

Posted on September 22, 2022March 30, 2023 by yfpadmin

Risk Tolerance vs Risk Capacity (Retirement Planning)

In part three of the four-part series on retirement planning, Tim Ulbrich, PharmD, and Tim Baker, CFP®, RLP®, explain why it’s critical to evaluate how much risk you are able to stomach versus how much risk you should take to achieve your long-term savings goal and considerations for setting asset allocation in alignment with your risk capacity.

Episode Summary

YFP Co-founders Tim Ulbrich, PharmD, and Tim Baker, CFP®, RLP®, explain the difference between risk tolerance and risk capacity in this episode, the third part of the four-part series on retirement planning. Tim and Tim explain why it’s critical to evaluate how much risk you can stomach versus how much risk you should take to achieve your long-term savings goal, and considerations for setting asset allocation in alignment with your risk capacity. Tim and Tim break down some strategies to employ when your risk tolerance and capacity are not in alignment. They connect the topic of the retirement nest egg to asset allocation. What we determine we need for the nest egg, combined with risk tolerance or risk capacity, will guide asset allocation. Tim Baker shares the value of a financial planner as an objective third-party in making retirement planning decisions, explains how preconceived notions about money impact the financial plan, and mentions early and ongoing financial literacy to increase risk tolerance. The five to ten years leading up to retirement can be a period of uncertainty, and Tim and Tim explain the sequence of returns risk during that time frame. They close with a reminder to revisit asset allocation percentages over time to maintain the amount of risk initially planned.

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey everybody, Tim Ulbrich here and thank you for listening to The YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

On this week’s episode, Tim Baker and I continue our four-part retirement planning series by discussing the difference between risk tolerance and risk capacity, and how this impacts your asset allocation plan. Highlights from the show include why it’s critical to evaluate how much risk you’re able to stomach, versus how much risk you should take to achieve your long-term goals. discussing strategies to employ when your risk tolerance and your risk capacity don’t jive and some considerations when setting your asset allocation plan to be in alignment with your risk capacity.

Before we jump into the show, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one on one with more than 270 households in 40 plus states. YFP planning offers fee only, high-touch financial planning that is customized to the pharmacy professional.

If you’re interested in learning more about how working one on one with a certified financial planner, may help you achieve your financial goals, you can book a free discovery call by visiting yfpplanning.com. Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission on how pharmacists achieve financial freedom.

Okay, let’s jump into my conversation with certified financial planner, Tim Baker.

[INTEVIEW]

[00:01:25] TU: Welcome everyone to this week’s episode of the YFP, podcast excited to have Tim Baker alongside me again as we continue our four-part series on retirement planning. On Episode 272, just two weeks ago, we talked about determining how much is enough when you’re saving for retirement. Last week, episode 273, we talked about the alphabet soup of retirement accounts with a focus on those tax advantaged accounts. In this episode, we’re going to focus and dive into further on how to differentiate risk tolerance versus risk capacity, which ultimately leads to how the funds are going to be allocated within your various accounts as you’re putting together your savings strategy, also known as asset allocation.

So, Tim Baker, let’s start with why this topic matters and the connection to the nest egg ultimately, that folks may need to take just about the risks they think two or perhaps even more or less.

[00:02:18] TB: Yeah, I think this is one of the probably the most important concepts to understand. Because I think once you understand it, it’s kind of the easiest thing to adapt to better improve your financial situation, especially for like long term investment for the sake of retirement. So, I think a lot of people leave a lot of meat on the bone with regard to opportunity to improve their financial planning, because they either lack the experience or they don’t understand it, or it’s scary. But I think understanding this concept between what your risk tolerance is and what your risk capacity is, and then adapting that to your portfolio is huge. Again, we’ll kind of talk about conservative Jane versus aggressive Jane and really, all of the factors that are involved in that. One of the easiest ones to kind of change your dial up has to do with risk and ultimately, your asset allocation, which we’ll get into today.

[00:03:08] TU: Yeah, and I think this is a topic, Tim, where like, just being honest with yourself and having some self-awareness on how do I feel about the risk that I’m taking. Obviously, we’re going to talk about the importance of putting that alongside of your goals, do those jive, do they not jive. And I think this is really where the value of a third party can come in as well, when you’re looking at whether it’s one individuals, two individuals doing the financial plan, but often we might need to be both pushed and or held accountable. Obviously, an objective third party can play a really valuable role there.

So, I think we’ve all been told before, at some point or another that, hey, we’ve got to take some risk, if we’re willing to achieve, those big lofty, long term goals that we have. We talked about in episode 272, we need this big number 2, 3, 4 or $5 million, that seems way off into the distance, or perhaps for folks that are a little bit closer to that, not so far off in the distance. But regardless, it can feel overwhelming. And so, we’ve got to take some risk to get to that goal. But I don’t think we often differentiate this concept of risk tolerance versus risk capacity. So, Tim, let’s start there, break these two down in terms of definition of tolerance versus capacity.

[00:04:16] TB: Yeah, the tolerance is what we’ll start with, and this is typically the one that most people understand and know about. When I think of risk tolerance, I think of like the questionnaire. So, probably a buyer’s perspective, one of the things that we need to do to make sure that we’re doing our due diligence with a client is to ask them some questions about their experience, their outlook on the market, their understanding of how stocks and bonds work. If x loss, how they would feel about x loss or x gain and what their actions would be.

So, it’s really based on a questionnaire. From the advisor perspective, it’s really based on what we think the client can handle in a down-market. So, we’re trying to build out the best, and again, what we’re trying to do here, ultimately, is to get the best possible return for the least amount of risk, and that’s what asset allocation is. So, from the investor’s perspective, or in our case, the advisor or the client’s perspective, it’s the amount of risk that you want to take. It’s more of an emotional thing.

To me, that is basically the starting point for the conversation at least. And there are a lot of ways to get about, like what your risk tolerance are. So, one of them is kind of the rule of thumb, and I think I misspoke on a couple episodes back when we talked about this, because I think they’ve actually adapted it, the general rule of thumb. So, the general rule of thumb is that, to get your risk tolerance, you take 110, and then you subtract out your age, and then that gives you the amount of stocks or equities that should be in your portfolio.

So, if you’re 30 years old, 110 minus 30, you should have an 80% of your portfolio in stocks, or equities, and then the remaining 20% in fixed income or bonds. I think that that is a terrible rule of thumb myself. I think that’s a rule of thumb that doesn’t like necessarily hold up. But it’s what a lot of people use to kind of get started. The other way is to kind of go actually go through like a risk questionnaire, and I know Vanguard is one that – you can do that for free, go to their website and basically answer a few questions and it says, “Voila, you are 60/40, or you’re 70/30”, whatever that is. And I would actually start there before using any rule of thumb.

So again, the risk tolerance team is basically what we think you can handle on a down-market, or what you think as a client, you want to take. It’s more of an emotional thing.

If we shift over to risk capacity, this, from an advisor perspective is based on what you can actually handle on a down-market. So, this is actually using some numbers and looking at time horizon, and things like that. So, from your perspective or the investor’s perspective, it’s how much risk you should take. It’s more objective, and factors, and savings rate, goals, time horizons, think things like that. Again, it goes back to that amount of the risk that you can handle.

To give you an example of a risk capacity, versus risk tolerance, say we’re both 40-year-old pharmacists, and me close closer to you, and I’m not a pharmacist. Say, we’re just –

[00:07:23] TU: Coming up. It’s coming up.

[00:07:24] TB: So, if we both take a questionnaire, you could take that questionnaire and be a very savvy investor, have read up on the topic, and you can come back with a very, say, aggressive allocation for where you need to be. And I could do the same thing and come back very, very conservative. So, I could be a 50/50, you could be a 90/10. That’s risk tolerance, is basically based on our inputs in a questionnaire. For risk capacity, it does have to do with the individual itself, but it’s really about, I think, kind of where you’re at in life as well. So, in the same breath, if we’re both 40 years old, and we have 25 years left in the workforce, and we both kind of have the similar amount saved or earning potential, our risk capacity is so much higher than, say, my risk tolerance because I’m scared of the market, because I just have a longer time horizon.

So, where risk capacity is typically the lowest is right at the point of retirement. Because that is typically your longest time horizon, where you have a fixed dollar amount, i.e. your nest egg to work with. So, you just don’t have a lot of room capacity to take a lot of risk. You have to be somewhat conservative. Whereas if you have a longer time horizon, you have good earnings, a good savings, your capacity is a lot, a lot more. Maybe a convoluted way to say it, but to recap, tolerance is kind of like what you feel or like what you want to take. Risk capacity is what you can or what you should take. One of the things that often happens in this, is that those two things are not often equal. So, what we do as a third party is kind of have a conversation about this, and educate a client and sometimes that is over years, because sometimes they’ll say like, “Hey, Tim, I understand what you’re saying, but I just want to be safer.” I’ll say, “Okay, I’m going to bug you about this again.” The next time it’s like, “All right, well, my head didn’t fall off when the market went down 20%. It’s doing what it’s doing. Maybe I’ll be a little bit more aggressive.” And I think that is all the difference when it comes to long-term investing, is making sure that you are – again, you keep expenses low. We’ve talked about that numerous times with regard to your investment portfolio, but your asset allocation, which is based on your risk tolerance, and your risk capacity is set where it needs to be and then the big proponent of that.

[00:10:00] TU: Yeah, this is Tim, where I think the rubber meets the road of what we started this series on, with the nest egg calculation and looking at how much is enough, right? Because you and I could punch numbers in a calculator, or like, “Great, we need 4.2 million 3.7”, whatever the number is, but then we start to get a layer deeper. We talked about the tax advantaged accounts of how we might get there. But the next layer of which we’re getting into today is really that how are we going to invest within these types of accounts, which is the asset allocation. Which, as you just mentioned, comes down to, ultimately our risk capacity and the potential friction that may or may not be there with the risk tolerance.

So, I think that my question here, let’s lean into that situation where there’s a disconnect, where there’s a rub, where I understand what you’re saying, risk tolerance is what I’m able to stomach, risk capacity is maybe what I need to be able to do to get to that nest egg number. So, let’s say I punch in my numbers in the nest egg, they come out at $4.2 million, but then I realized, like, based on the rate of return and the level of aggressiveness that, those numbers are determined upon. I’m not comfortable with that. So, play that out. Is that a scenario where, as you just mentioned, we’re kind of working towards this and getting more comfortable in the long run? Is it adjusting down that nest egg goal? How do you begin to work through this with a client?

[00:11:20] TB: Yeah. The nest egg is a multivariate problem. So, the two defaults that I would always go to is like, if you’re not comfortable with taking more risk, and again, I would say, investing is definitely risky. Of course, it is. But what I would say over a 20 plus year time horizon is actually fairly predictable. We have enough data points that says that the US market, and again, there’s not necessarily any – it’s not past performances are indicative of future performance. But I think we’re not gambling here, we’re not speculating.

So, we’re not taking a bet all on like one stock. But I think if you’re uncomfortable with that, I think, the second thing I would say, is you have to save more though, you have to invest more. When we talked about conservative Jane versus aggressive Jane, and we kind of said, “Hey, conservative Jane, she makes $120,000. She gets 3% cost of Living raises, she saves 10%. She has a 30-year career. And then this is her nest egg.” What’s your income? What’s your cost to live? What do you actually save? And then the time horizon, 30 years. So, the other thing that you could say is like, “Okay, well, maybe we’re not retiring at 65 in 30 years. Maybe we’re retiring at 70.” So, it’s a 35-year career. And that’s the thing is like, you can always work longer.

One of these things have to give, and that’s why I say like, the easiest thing for me, is to say like, “Look, if you’re 30, 35, 40, even 45, and you have 20 years, left until retirement, who gives a crap if the market goes down in 2022?” But, we as humans, we feel that loss, we’re like, “Man, my portfolio was $200,000 or $20,000, and now it’s $140,000 or $14,000.” You feel those losses. But again, this goes back to like what I was saying, it’s hard for us to conceptualize time, and when the market went down during the pandemic, I don’t even think about that and a lot of people freak out about that. But we know that the market is going to do this, and this is like on a podcast, I’m just waving my hand up and down like a roller coaster. But typically, it’s going in a positive trajectory. You’re just going to have some of those ups and downs.

What I would say is that, if you can stomach those ups and downs and lean more towards equities, you’re going to be better off. I think what people do is they put more bonds or fixed income in their portfolio, to smooth out those rides, even those rides are still the same. But what they do is they make themselves feel better in the near term, at the behest of like long-term performance.

So, on the other side of this, Tim, is like, if we’re talking to the pre-retiree, the person that’s going to retire in the next five years, sometimes you look at that portfolio, and it’s looking at him like, “Whoa, we’re taking way too much risk.” Because if the market does go down 40%, then we don’t have enough time to recover from that. So, it’s really indicative to like, say, “Hey, I’m glad you took risks throughout your working career. But now we got to start protecting the principal.” And this is where you probably want to be the most conservative with your portfolios is kind of that right in the eye of the storm, which is 5 to 10 years plus or minus, your retirement date. And people get that wrong, too. That’s where you almost – you’re at risk for like sequence of return risk, which means that if the market is down, say 20%, 30%, 40%, and then you’re taking 40 or 50 grand out of your portfolio to live on, the failure rate, meaning you’re going to run out of money is so much higher than anything that you could be doing leading up to that.

So, it’s really, really important to know where you are in space and time, and ensure that your portfolio is positioned in a way that’s going to, one, get the best returns, but also protect you. For a lot of us, it’s kind of not knowing. And I would say it’s one of the major missteps that I see, looking at people’s portfolios is a misalignment of that.

[00:15:31] TU: Yeah. Tim, one of the things I’m sensing, at least anecdotally, and talking with pharmacists, about this in various settings, is that the mid-career pharmacist, so I’m thinking about the group that is maybe 10 to 25 years into their career, they’re not yet feeling the retirement date right around the corner, but they’re certainly past kind of the early part of their career. I think there’s a real risk here, as you highlighted. Some of the limitations of the rule of thumb, to get too conservative too early. And I think, in this moment, we’re in a period of volatility right now in the markets. And depending on when people graduated and started investing, this might be the real first significant downturn that they’re feeling in the market, right? You look at even some of the start of the pandemic. That was very short lived. It was significant, to drop. But it was pretty abrupt and recovered quickly.

So, I think this is really – I graduated in 2008. I’ve talked about this on the show before. This is the real first test for me in my portfolio to say, “All right, am I really adhering to my asset allocation plan and what I need to be doing, and the rub potentially the tolerance capacity.” And I think it’s different than a new practitioner, because you have worked hard for 10 or 15 years, you have built up several $100,000 or more of savings, and you’re looking at this saying, “Man, this hurts in the moment.” But if we’re looking 20, 30 years into the future, as you said, over and over again on the show, the worst thing we can do is buy high and sell low. So, the third party here, I think, it’d be really helpful making sure we have a plan to kind of weather the storms. But I specifically am thinking about that mid-career group right now, in this period we’re in of volatility, and they’ve done hard work, they’ve built up some savings, and this might be the first test, of that happening.

[00:17:12] TB: Yeah, I mean, and when those numbers get bigger, you feel that even more, right? I’m human. When I do catch a glance at my portfolio, I’m like, “Oh, is this really?” But I had to step back and look at the long term. I almost have to like detach myself emotionally from it. Because what happens, and I say this all the time is like, when the market just does this, and it’s just a downward plunge, your first reaction is you want to take your investment ball and go home. You don’t want to play anymore. Oftentimes I say, is like, you want to do the exact opposite of how you feel. So, that’s when I reassure myself and I say, “Hey, Tim, you know what, you are putting in x amount of dollars into your 401(k) at every pay period. And now, what you’re buying with those dollars is going. It sets the dollar cost averaging.” So, when it’s up, I’m not buying as many shares, but I’m still like, patting myself on the back, because I’m like, “Yeah, my portfolio is up.” But when it’s down, I have to basically say, “Look, if I’m putting money into my portfolio systematically, on a recurrent basis, which is typically what people do in their 401(k), your dollars are just going farther.” So, then when it does rebound, you’re going to see that impact even more.

So, it is one of those things where it’s, again, it’s not getting caught up in the moment, and it is really looking at the long term. But when you hear the news, or you hear other people talking and there are things that – it gives you pause, and you start to doubt yourself. But I think at the end of the day, what I always say to myself is like I trust the market. I trust what the data has showed. Again, maybe it’s not always going to be 10% when you just sit down for inflation, it’s 6.87%. But always not be that. And sometimes people go to the catastrophic thing. I’m like, “Then we have other problems to worry about, if that’s the case.”

I really believe that, if you look at all this all the things, whether it’s you can make more money, and then potentially save more or you can work longer. To me, the easiest thing to do is to kind of like surrender yourself to the market and say, “Look” – to your point, Tim, like the rule of thumb, it’s this gradual, and I have – I’ll share the camera here, which I’ll be on the video, but this is like a really terrible sketch. Because I was trying to like sketch this out conceptually, because I’ve never showed this. I’m a visual learner. In the rule of thumb, it has you go in and say like, “Okay, if you’re 30, then how do you start in 80% equities?” And then when you go to 40, you’re at 70%. In my mind, I’m like, “No.” Hell to the no. Because it’s just so much lost opportunity.

Whereas mine is more like, my belief and this is more of a capacity thing, is more of a cliff. So, you should be very much mostly equities, and there’s a lot of criticism against an equity portfolio. And again, this is not investment advice. This is not investment advice. But it should be typically closer to the equity or equity portfolio. And then when you get close to that eye of the storm, that’s when you start to basically divest out of equities, and go more to the fixed income, the bonds, and then you go through that eye of the storm where you’re here, and then you start to gradually, as you get to 75, 80, and you’re really looking for combating its longevity risk, which is the fear of the money running out. You need that to last into your 90s, 100, that type of thing. So, you’re going to take more risks on the back end, but typically, you have a more of a handle on spending, and things like that, post eye of the storm time.

So yeah, I mean, no matter where you’re at in life, this is an important conversation to have. And there is no right answer. But I would say that there are wrong answers in my estimation. But I also think it’s important to say that, at the end of the day, we say this about student loans, but at the end of the day, if you’re like waking up and you’re like sweating bullets, because you’re worried about how your investments are faring, especially in a volatile market, then we talk about this with the emergency fund, it’s just not worth that.

[00:21:20] TU: But, something’s got to give.

[00:21:21] TB: Something’s got to give. That means you either have to save more or work longer, and there’s a lot of –

[00:21:27] TU: Spend less.

[00:21:28] TB: Spend less, yeah, which, which is really hard. That’s the one I didn’t mention, because that’s really, really hard to do, for most people. And I think I said on a previous episode, some people look at a 60% to 80% of their income, and that’s basically what they need is. Some advisors just look at what the tax return says, and if you’ve earned $180,000, leading up to retirement, that’s what they plan for, because that’s basically the money that’s flowing through. So, there’s lots of different ways to kind of look at that as well.

[00:21:59] TU: Tim, I think one of the interesting things here is for folks, again, I mentioned the self-awareness thing. I think they really dig deeper about like, where might these beliefs come from. Wherever you are, on kind of the risk tolerance, what you’re able to stomach scale. You mentioned earlier in the show, some folks might be like, “Hey, I’m scared of market. I’ve heard that multiple times. I have no interest kind of investing in the market. Don’t trust it. Not comfortable with the risk, whatever the case may be.” And then there’s obviously the other end of the spectrum, which is like, I’m all in on whatever investment strategy could be equities, could be cryptocurrency, could be real estate, could be a combination of things. I don’t even feel the risk. It’s like, “Man, you could have two people at the same point in their journey, and are just dichotomously in very, very different directions.”

I’m just curious from your life experiences working with clients, is that coming from some of the money scripts and things that were growing up in? Is that coming from experiences like, “Hey, I lived through the 2008 recession. I saw my parents lose a significant amount of their nest egg or grandparent”, whatever be the case. Obviously, the pandemic could have an impact. Where does that come from?

[00:23:13] TB: I think it’s a combination of all those things. I mean, you even look at it, the Great Depression, that generation didn’t put money in banks, because they just didn’t trust banks, and then that can kind of filter through later generations. I think it’s a combination of, kind of your – I think your upbringing, like I would – I talked to my parents, and they’re older now, but even when younger, I think, my mom opened up a Roth IRA for me when I was really, really young, but I think it was like, mainly in cash, or like, very, very conservative bonds, or something like that, that we actually invested in which , again, doesn’t really make any sense if it’s going to be used for 14-year-old in retirement, 50 years later or 60 years later.

So, I think it is a lack of understanding and kind of, I think, a lack of education, or financial literacy around investments is part of it. That’s not anyone’s fault. I just think it should be more part of the curriculum and the things that we talk about as students in grade school, in high school. And again, we kind of talked about you can take out hundreds of thousands of loans, but not really not understand like the financial implications of that. So, I think we need to do a better job of that. I think, again, to go back to my own experience, Tim, we didn’t talk about money growing up. It was very much a taboo thing. So, it was kind of just something that was hands off, which I think kind of does lead to stunted growth in that regard. I think that a more openness to kind of talk through some of these things, and some of like the head trash, I think, a lot of it goes – it does come from your experience. I think there is a curiosity for a lot of people and we see it, where we kind of talked about maybe some missed prioritization of like, you’re invested in penny stocks or individual stocks, but you’re not necessarily taking your match for 401(k) or you have zero emergency fund.

I don’t hate on that too much, because I think it’s someone’s willingness to kind of learn and understand, like how markets work, right? I’ve been in that boat. But I think over time is like, the market is very, very humbling, where you – it’s almost like going to the casino. No one ever says, like, “Oh, man, I lost all this money.” It was like, “I had a great” – those things get lost in the fold. I think that over time, I think people’s experience with the market is, even professional. I just read a headline somewhere that Warren Buffett says, like a monkey could pick stocks better than most financial advisors, which I would agree with. Because there is a lot of randomness with that. So, it’s, again, buy the market, don’t try to beat the market.

I think it’s a little bit of that. It’s experience, it’s education. So, people that are nerds about this, that read up, I think kind of understand what to do. But I think a lot of it is the fingerprints of what our families put on us, and sometimes those things are overcomeable, and we are aware of those things, and sometimes they’re not. Sometimes it takes someone to say, “Maybe we need to look at this a different way.” Because if you want to get to where you need to go, and for a lot of pharmacists, especially if they’re a lot of pharmacists out there, they might be the first person in their family to have graduated from college. They might be the first person that make a six-figure income.

So, with that, comes, I think, a different set of issues and things to think about as you’re – because, again, typically, the higher you are on the income scale, we look at like Social Security, less of your retirement paycheck is coming for security. The lower you are on the income, the majority of your paycheck is going to come from security. So, you just have a different set of issues and things to think about, as you make more money and have that paycheck. So, I think it’s all of those things that can shape your money script, the things that you’re saying to yourself, but I think it also is even deeper than that. It’s kind of the caveman, cavewoman approaches like you don’t want losses, right? So, you want to protect yourself in any way that you can to shield yourself from those losses. So, we do sometimes irrational things just to protect that pain. I think that’s just in our DNA. We’re here today because our ancestors have survived, some didn’t. But as the evolution of sorts is that you are programmed to do things that maybe don’t necessarily make sense in here now.

[00:27:45] TU: Tim, that’s so true. I think it’s human behaviors, you mentioned. But as you’re talking, I can and always will, I think vividly remember the significant losses in my portfolio. You feel more in the moment, but I don’t remember the significant gains in my portfolio. The long-term trend is up in a positive direction, and the significant ups have been bigger than or equal to some of the significant downs. But I don’t remember those. Like I do the losses.

Let’s wrap up this third part of our retirement planning series by connecting all of this to the asset allocation plan. So, what we determined we need is the nest egg. We talked about that in the first episode. What our risk tolerance or capacity is, those two things combined is going to then help us inform what our asset allocation plan is. So, how we actually are going to distribute these dollars within the accounts, the various alphabet soup of accounts we talked about in the last episode. So, what is asset allocation, Tim? Just to find that a little bit further, and then what are the main variables. We’ve obviously talked about one in terms of the risk, but other variables that can impact our asset allocation plan?

[00:28:51] TB: Yeah, so the asset allocation is basically the art, or you can say, even the science of construction of portfolio with a mix of stocks and bonds to achieve the most amount of return for the least amount of risk. That’s what you’re really trying to do. So, at a very strategic level, there’s basically two buckets or two asset classes. There are stocks, which are basically where you own an equity share and a company, and you’re afforded things like dividends and capital appreciation. These are the things that we need to outpace things like the inflation monster, the tax man, et cetera. And then the second part of the portfolio are bonds or fixed incomes, and these are typically IOUs or notes that say, “Hey, government, I’m going to lend you the money.” Or, “Hey, corporation, I’m going to lend you my money. Give it back to me sometime in the future, but give me an interest payment as we go.”

Between the two, typically, bonds are more like a linear growth. Stocks are more exponential growth, but there’s typically more risk with stocks and less versus with bonds. That’s asset allocation in a nutshell. And then what you could do is, you can kind of go more granular in terms of like, “Okay, well, if I have this” – if 80% of my portfolio is going to equities or stocks, you can divide that up between things like large cap, mid cap, small cap, international, emerging market, real estate, that type of thing. And then same thing with bonds, if 20% of your portfolio is going to bonds, you can divide that up between junk bonds or international bonds or short duration bonds, long duration bonds, government bonds, that type of thing.

So, it is more granular. But at a very high level, to tie risk to asset allocation is, either using the rule of thumb, or using some type of risk tolerance, gauge or questionnaire, you can say, “Okay, I’m going to answer these questions. It’s going to say I’m an 80/20 portfolio, maybe a more balanced 60/40 portfolio.” And with that, if you have kind of an unexamined, approach, meaning like, most of the time, I think a lot of people will take that, and that’s how they invest. And I think, what we, as an advisor would do is say, let’s say, “I’m you’re 35, I know what saying you’re at an 80/20. But here are some numbers to show you that you should probably should be more aggressive.” We’re not going to spend this portfolio for another 30 years. Who cares what it does for the next 20, for the next 10, whatever that is. But let’s take a little bit more aggressive.

So, that’s where you kind of get that talk about risk capacity. And then what you do is say you say, “Okay, we’ll compromise. We’re going to like a 90/10.” Then essentially, if you have $100,000, we’ll just say you’re a government employee with a TSP, if you have 100,000, know that 90,000 is going to go into some type of equity portfolio. So, the big one in TSP would be the C fund, which mimics the S&P 500. And then 10%, would go into the bond fund. That’s basically it. That’s where you connect the risk of where you’re at which again, is partly derived from the things that we just talked about, your upbringing, the head trash that you have, your experience. If you’ve experienced any pain, et cetera. And then, it should be then examined from where you’re at in terms of your time horizon, what you have saved. You’re working with an advisor, obviously. If you don’t have experience, you have a little bit more cred there to come up with, you know, what your final number is for your asset allocation. And then you put that into practice.

And then the idea is that over the course of a year, five years, 10 years, that portfolio is going to drift. So, say you are at 90/10, it could drift to a 95/5. It could drift down to an 80/20 or an 85/15, and you really want to make sure that you rebalance that over time. Because if you don’t, then if you’re an 80/20 portfolio, and you drift to something like a 90/10, if the market was then to go into a spiral, you’re taking more risk than what you signed up initially. So, sometimes when I say to rebalance, it just means to basically lock your percentages back to what you originally had agreed upon with your advisor or with yourself. That’s the big thing. So, you are kind of just resetting the percentages.

[00:33:12] TU: Again, this is a really important connection, as we bring this all together and talk about the value of a third party and the value of a planner that can really help your –it’s not – the value is not coming from picking stocks or picking investments that are going to beat the market. We’ve established that, what you’re describing is more passive investing strategy and here, we’re just talking about investing, which again, is just one part of the financial plan. The value really comes from okay, what is the game plan? What is the life plan? What is a wealthy life look like now? What is retirement life look like? What’s the number for us to get there? What does that mean today? How much do we need to be saving today to get there? We talked about that, in the first part of the series. What accounts are we going to leverage? How do we optimize this tax strategy? And within there, how do we begin to pick the investments, rebalance those portfolios over time.

Again, just such an important reminder, there are a lot of nuances in there alone, but investing is one part of the financial plan. So, we need to take that step back out of this silo that we’re in retirement planning and say, “Okay, what else is going on? What are all the other aspects of the financial plan that are happening? And does that impact or does that change potentially how we’re going to approach our investing plan?” I think, sometimes, we can hear this and hear the passive investing strategy. We can hear the nest egg calculators and think like, I can do that, I’ll just rebalance every once in a while. And you certainly can do it yourself. But let’s not lose sight of what can happen when you bring a third party into the equation, and we also have some value in zooming out and making sure this is fitting in correctly with the rest of the financial plan and the other puzzle pieces that are involved.

[00:34:56] TB: Yeah, the act of investment is a necessary, I don’t want to say evil, but it’s a necessary thing that we need to do to, again, get in front of things like inflation and taxes. A lot of advisors make that the central part of their practice and it is important. I don’t want to say it’s not important. But it typically takes a backseat to a lot of the other things that are going on in life, whether that is, “Hey, I need to pull money out of this investment, because we have to put an additional on our house, because I’m taking care of an aging parent.” Or, “Hey, we have a kid that’s going to college. So, we need to, again, change some things around.” Or, “Hey, I lost my job, so I’m not going to be able to invest like I was.”

The thing with a financial plan is that, the value is more in planning, not the plan. And the investment piece is very important, and it can be as complicated as you want to make it. But even in the simplest version, it can be complicated, because again, if we’re talking about an asset allocation, the example that I gave is in a TSP, but if you’re trying to do that across a brokerage account, an IRA, a Roth IRA, some of the task, it can very quickly, when you add layers, get more and more complicated. But I think that the – yeah, the value, I think, with working and this is at any part of the financial plan, not just the investments. It’s almost like an am I crazy type of – am I crazy to be doing this? Should I give myself permission to do this? And sometimes, because of the environment or the way that we live today with social media, like there’s so much gaslighting. You can almost start to doubt your own judgment. So, it’s sometimes good to have a rock or a steady influence, and this is at, really, any part of your life, but I think finance is what we’re talking about here to just say like, “Hey, am I crazy? Or what do we do here? Or this is a variable or this is a bump in the road? Or this is an opportunity, like what’s the best way to proceed?” Again, super biased. But I think that’s really the value. It’s not necessarily saying like, “Hey, we’re going to beat the market and all that nonsense. It’s like, life has happening, and are we living a wealthy life or not?

[00:37:20] TU: Yeah. And so, to that point, whether you are a new practitioner listening, early on in this journey of saving for the future, mid-career pharmacists wondering, “Hey, am I on track? Are there other things I should be thinking about? How does this fit in with other goals that I’m working towards? Or, pre-retiree, retiree thinking about more the distribution stage and building that retirement paycheck, which we’re going to talk about on our fourth and final part of the series. Regardless of where you’re at in the financial journey, our fee only financial planning team of five certified financial planners, in-house tax team that includes a CPA and an IRS enrolled agent. They’re ready to work with you to build your retirement plan, among work with you on your other financial goals.

So, you can book a free discovery call, learn more about our one on one financial planning services that is customized for the pharmacy professional. You can book that call at yfpplanning.com. Again, that’s yfpplanning.com. Thanks for listening and have a great rest of the week.

[OUTRO]

[00:38:09] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analysis expressed herein are solely those of your financial pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 256: Why YFP Planning’s Lead Financial Planners Are All CFPs®

Posted on May 19, 2022November 2, 2022 by yfpadmin

Why YFP Planning’s Lead Financial Planners Are All CFPs®

On today’s episode, sponsored by Splash Financial, YFP Planning Financial Planner, Kimberly Bolton, CFP® discusses why the CFP® designation is the most valuable credential when providing comprehensive financial planning, why the term financial planner in and of itself doesn’t mean a whole lot, what questions you can ask to find a planner who is a good fit for you, and what someone can expect when working with a financial planner.

About Today’s Guest

Kimberly Bolton, CFP®, is a Financial Planner at YFP Planning. Along with her team members, Robert Lopez, CFP®, and Savannah Nichols, she strives to help YFP Planning clients on their financial journey to living their best lives. To go along with her CFP® designation, Kim has a B.S. in Consumer Sciences with a concentration in Family Financial Planning and Counseling. When not working, Kim enjoys being in the sunshine, hitting the gym, hiking, traveling, taking her dogs Nugget and Toot on adventures, being a food enthusiast with her husband Allen, and spending time with her bonus kids Brianna and Brady.

Episode Summary

This week, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, sits down with YFP Planning Financial Planner, Kimberly Bolton, CFP®, to discuss why all of the lead financial planners at YFP Planning are CFPs®. In their discussion, Tim and Kim cover why Your Financial Pharmacist believes the CFP®, CERTIFIED FINANCIAL PLANNER, designation is the most valuable credential when providing comprehensive financial planning. Kim shares her personal story of becoming a CFP®, the rigorous education and experience requirements to become a CFP®, the comprehensive nature of the CFP® exam, the ethical standards associated with the credential, and why the CFP® is considered the most prestigious financial designation in the industry. She digs into why the term financial planner, or financial advisor, in and of itself doesn’t mean a whole lot, what specific questions you can ask to find a planner that is a good fit for you, and what someone can expect when working with a financial planner. Kim also explains common fee structures in the financial planning industry and why YFP Planning uses a fee-only structure. Tim shares a little bit of his own experience as a YFP Planning client himself, echoing Kim’s sentiment that the partnership between planner and client is an intimate one and that as a client, feeling comfortable with your planner will make an incredible difference in your experience. Kim closes with an awesome client success story, sharing how one couple was able to make their home-owning dreams come true years earlier than planned.

Key Points From This Episode

Background on Kim’s professional journey to becoming a CFP®.
What inspired her to pursue a career in financial planning.
We find out about the work that Kim is currently involved with at YFP Planning.
Why the YFP team believe so much in the CFP® designation.
Some examples of how comprehensive the CFP® training is.
How working with a certified CFP® is beneficial for the client.
Kim tells us what is required to enter the CFP® course.
What people taking the CFP® board exam can expect.
Learn about the experience requirement needed after passing the exam.
The expected ethical standards once you are certified.
Differences in the types of CFP® planners in terms of fees and services.
A brief breakdown of the different fee structures associated with CFP® planners.
Examples of good questions to ask a financial planner to ensure they are the right fit for you.
Kim shares a success story about working with a CFP®.

Highlights

“If you do any research on it, you’ll see that [being a Certified Financial Planner] is titled the most prestigious financial designation that you can have within the industry.” — Kimberly Bolton, CFP® [0:10:02]

“Here at YFP, it’s really important to us that our clients are comfortable with our recommendations. We want the clients to feel that the recommendations we make are made because it is in the client’s best interest.” — Kimberly Bolton, CFP® [0:11:58]

“Talking about your finances is a very intimate conversation. You want to make sure you are comfortable with your financial planner, because you’re going to have some intimate talks about your finances!” — Kimberly Bolton, CFP® [0:22:33]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast where, each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I had a chance to welcome YFP Planning financial planner, Kim Bolton, onto the show. We discuss why we believe the CFP, Certified Financial Planner, designation is the most valuable credential when providing comprehensive financial planning. We also discuss why the term financial planner or financial advisor in and of itself doesn’t mean a whole lot, what questions you can ask to find a planner that is a good fit for you, and what someone can expect when working with a financial planner.

Now, before we hear from today’s sponsor and then jump into the show, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 240 households in 45 states. YFP Planning offers fee-only high-touch financial planning that is customized for the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

Okay, let’s hear from today’s sponsor, and then we’ll jump into my conversation with YFP Planning financial planner, Kim Bolton. This episode of the Your Financial Pharmacist Podcast is sponsored by Splash Financial. With interest rates on the rise, it’s a good time to evaluate the refinancing of your student loans. If you’ve ever considered refinancing your loans, check your rate now through Splash Financial. If you qualify, refinancing could help you get a lower monthly payment on your student loans or get a lower interest rate. Splash helps you shop and compare loan refinancing offers across lenders nationwide.

Browsing rates through Splash Financial is fast, free, and won’t impact your credit until you complete a full application. Now, when you successfully refinance $50,000 or more, Splash Financial will give you an extra $500 in cash bonus using our link, splashfinancial.com/yfp. So check your rate today and see what you might be able to save at splashfinancial.com/yfp.

[INTERVIEW]

[00:02:21] TU: Kim, welcome to the show.

[00:02:22] KB: Thanks. Thanks for having me. I’m really excited to be here.

[00:02:25] TU: Well, this has been a long time in the making. We just celebrated your two-year anniversary here with YFP. So Kim is one of our financial planners that works with the team at YFP Planning. Today, we’re going to be talking all about why our financial planners are all CFP, certified financial planners, and why we believe so much in the CFP designation. The reason we’re putting Kim on the hot seat to talk about this topic is Kim just completed all of the components of the CFP to be able to use those marks. So, Kim, congratulations officially. Exciting to see that to the finish line.

[00:02:57] KB: Yeah, thanks. Thanks so much. It was a long journey. It took me – If you counted like my school and everything, it was about a six-year journey that it took to have the three little letters put behind my name.

[00:03:11] TU: We’ll talk about why that takes so long and why those three letters are so important. But before we jump into learning about the CFP requirements, a certified financial planner requirement, tell us more about your career journey leading up to and including the work that you’re doing with YFP Planning.

[00:03:26] KB: Yeah. So my career journey in the financial planning industry actually began with YFP. YFP is the first financial firm that I have ever worked for. Before Tim found me, I had applied and interviewed with a couple of big corporate financial firms, and I had just realized like that’s not really where I want to be. Like that didn’t feel like home to me. Prior to the financial planning industry, I actually worked for the University of Alabama. I was an office administrator in their maintenance department. So I kind of already had experience with like the customer service piece and like invoicing and paperwork and the admin part of the job.

[00:04:03] TU: Where did that interest come from, Kim, in terms of that pursuit of a career in financial planning?

[00:04:08] KB: So I was actually four months from graduating from college with an English major when I realized I want to be a financial planner, not an English major. So it started way back probably when I was like 16 and first started working. So I learned at a pretty young age how to semi-manage my finances since I had a car payment and insurance and things like that. Then I went through college thinking I was going to be an English major, and I realized in my thesis analysis class that that’s not where I wanted to be.

So I went and talked with my college advisor. Just through like brainstorming different jobs that I could have, I had kind of come up with the idea of a finance major. A finance major and a financial planning major are – It’s similar, but they’re very different. The finance major is more broad than the financial planning major. So you get pretty like concentrated when you do just a financial planning major. So when I had first mentioned finance to my advisor, we were going through the different jobs that I could have with that degree and everything, and we eventually just realized that I wanted to help people with their finances, and I wanted to help people be able to retire and live a financial-free life.

Then that’s when we decided that financial planning is what I wanted to do. So four months before graduating, I changed my degree to be financial planning. It added a year and a half onto my schooling, but it was completely worth it, and now here I am, being a financial planner.

[00:05:39] TU: I think for those, Kim, that have not worked with a planner, it can be hard to understand, like what do I expect? What is actually involved in that relationship? What does it look like? One of the things we’re going to talk about is how different this service can be. Certainly, that term financial planner, that term financial advisor, wealth manager, lots of terms that are used, it does not mean that all things are created equal. So there’s a variety of ways that it can be done.

But I think for folks that have not worked with a planner, it can even just be hard to wrap your arms around what does this actually look like. So as it relates to your work with YFP Planning and working alongside lead planner, Robert Lopez, give us a sneak peek into what your day-to-day, what your week-to-week looks like, as you help support the financial planning process for over 100 pharmacist households.

[00:06:23] KB: Right. So day-to-day, we’re pretty much in the nitty-gritty financial planning. So day-to-day, I’m helping Robert get prepared for meetings, making the presentations for him. So if you are a client of YFP and you’ve ever seen any kind of slideshow or slide deck, that is definitely me and Savannah, working behind the scenes to kind of put that together for him. Working with Robert to help make any kind of recommendations, usually like the two of us brainstorm together to make the best recommendation for the client based on their certain situation.

Then from a week-to-week perspective, that’s kind of when you get a bigger picture, and you have like more projects coming in. So right at this moment, it looks like transitioning our clients into like a quarterly meeting schedule and kind of what that looks like for them, what that involves from us from like a workflow perspective, and really kind of catapulting that into existence and moving clients into a quarterly schedule.

Overall, I directly support Robert and just make sure he’s prepared to give the client the recommendation, and I help him do any kind of research that is needed so that we can make sure we’re making the right call on different financial scenarios.

[00:07:37] TU: Robert, for folks that have not heard him on the podcast before, Robert Lopez is one of our lead financial planners, along with Kelly Reddy-Heffner. We had Robert on the podcast most recently on episode 248, where he talked about some public service loan forgiveness, PSLF, success story. So if folks are wondering, “Who is Robert,” that is who Robert is.

I think you highlighted well, Kim, that there’s a lot of work that goes on behind the scenes. I think about as we bring on a new client into YFP Planning, there’s a lot of work involved in terms of the onboarding, making sure we have all the information and then, of course, in the ongoing basis, preparing for meetings, following up for meetings. There could be transactions that need to happen, tasks that we need to make sure that we follow up on.

Even as one example, myself that you help, so I’m a client of YFP Planning, and Tim Baker is my financial planner. As I made the transition from Ohio State to working full time at YFP about a year ago, I had to do a rollover of my 401(a). So I had some questions as I looked at those forums. I wanted to make sure I did it right. I wanted to make sure there was no implications in terms of taxes or penalties. So you helped me execute that transition and that rollover. Lots of things that are happening that people may not see at face value, even for those that are engaged with the planning, where they jump onto an hour meeting or so with the lead planner.

Kim, one of the things we’ve touched on in the past is the importance of understanding, as I mentioned just a few moments ago, that not all financial planners are created equal. So they can have varied educational experiences. They can carry different designations. They can be regulated in different ways. They can charge in a variety of ways. We’re going to link to in the show notes an important resource that we have available to download for free, and that is the nuts and bolts of hiring a financial planner that I would encourage listeners to check out.

In that resource, we cover what are the different types of planners, how do they get paid, what are some questions that folks may consider asking when they hire a planner. Again, that’s the nuts and bolts to hiring planner. You can get that and download that at yourfinancialpharmacist.com/nutsandbolts, and we’ll link to that in the show notes as well.

So we’re going to focus our time on the CFP designation, the certified financial planners. We believe that that is the credential that’s an important criteria to do comprehensive financial planning and to do it well. We’re proud to have five CFPs on the YFP Planning team that collectively serve over 250 pharmacist households for one-on-one planning. Kim, let me punt this to you since you’re the most recent designee of the CFP on the YFP Planning team. Why does YFP believe so much in the CFP designation?

[00:10:10] KB: So the CFP designation, if you do any kind of research on it, you’ll see that it’s kind of titled the most prestigious financial designation that you can have within the industry. I really think that YFP believes in the CFP designation the way that we do, simply because when you have the CFP designation or you’re working towards that designation, you’re really proving to yourself and you’re proving to others how high of standards you have for yourself. So when someone is either in the process or has a designation, they are being extensively tested and quizzed on their knowledge of financial planning.

The questions and the coursework that you go through, it really digs deep and it makes you apply those financial planning concepts to real-life scenarios. So even though like you may be answering a multiple choice question when you’re being tested or when you’re doing like practice quizzes and everything, if you don’t understand how to apply the concept to a real-life scenario, then chances are you’re not going to be able to answer that question correctly. So the CFP designation really just sets you aside from everybody and shows how serious you are about your career in the financial planning world.

Another part to that is CFP designation requires that you be a fiduciary, which in short means you put the client’s interest above your own, even if that recommendation doesn’t necessarily benefit you. It just benefits the client. This would come into play, for example, like if a financial planner had recommended that somebody go out and get like a $1 million life insurance policy. There are scenarios where if you’re not a fiduciary, you could be recommending that to that client because it’s in your best interest, because you possibly get a commission off of that.

Here at YFP, it’s really important to us that our clients are comfortable with our recommendations. We want the clients to feel that the recommendations we make are made because it is in the client’s best interest. We don’t want that client to think like, “Hey, are they just making this recommendation because it benefits them, not because it benefits me?” So that’s really the big picture why I think YFP takes the CFP designation and so serious, is because it gives our clients that peace of mind. It gives them that level of comfort with us that we are working in their best interest, and we are doing what’s going to benefit them more than what’s going to benefit us.

[00:12:35] TU: Yeah. That was a great explanation, Kim, the fiduciary piece. We’re actually going to link that in the show notes. If people want to learn more about what the fiduciary standard is, why it matters, how it’s different from what’s known as the suitability standard, John Oliver has a great segment on this topic, and we’ll link to that in the show notes. Kim, you explained it well. So I think the highlights there would be the fiduciary piece, the rigors we’ll talk about in a moment, what makes up the CFP designation.

As Tim Baker often says, “The bar of entry into financial advising and hanging a shingle to be a financial adviser is fairly low.” So being able to have some rigor, some documented evidence of the work that’s been put in, the seriousness of that training, and obviously being prepared to then provide comprehensive financial planning, that’s something we see often that traditional financial planning services might not necessarily be serving at folks in all different phases of life. Are they well-versed in things from retirement planning to debt management and everything in between? I think if you look at the CFP curriculum, very intense but also very comprehensive.

So to that point, in terms of the rigor and the intensity, Kim you mentioned several years it took you to obtain that designation. So talk to us about the requirements that one must go through in order to be able to use those three letters by their name.

[00:13:52] KB: Right. So there’s a couple of different ways that you can be qualified for the CFP exam. The most common is for someone to go through the CFP board’s coursework. In my situation, my college degree qualified me for the CFP exam. So you either have to have a bachelor’s degree that qualifies you for the exam, or you have to go through the CFP board’s coursework. Then once you have completed the education piece, you were then allowed to sit for the exam. The exam is 170 questions. They give you a six-hour limit, and it’s broken into three-hour segments. So three hours and then they let you leave for 30 minutes, and then you come back for the remaining three hours. Yeah, it’s pretty brutal.

When I was taking mine, the lady that was working the front desk at the testing center when I left or when I was leaving, she told me, she said, “You’ve been here a long time today.” I’m like, “Yes, I just took a really long test.” Then once you pass that exam, which again during that exam, you’re tested on the ability to apply financial planning to real-life scenarios, and then you’re given a few different case studies where you have to dig through. It’s like a multiple answer question that you have to really look at.

Then once you have passed the exam, you are then required to fulfill an experience requirement. So if you are working directly underneath another CFP, which in my case, I was working directly under Robert and Tim Baker, so working underneath them, I was required to get 4,000 hours of experience, which comes in at almost two years of work in the financial planning industry. Once all that is complete, then you basically sign your life away, saying you will be a fiduciary from here on out, and you will uphold to the CFP board’s like ethical standards and their standards of conduct.

Then every year, we have some CE courses that we have to do. It sounds simple, but it’s really complex. After you’ve done all that, so the education, the exam, the experience, and then once you agree to the ethical requirements, you become a CFP.

[00:16:02] TU: Yeah. So I think pharmacists, they can relate to this, right? You described an educational component, you described an examination, and then you described what I would consider like an experiential component. So you mentioned 4,000 hours of practical experience and not until all of those have been completed and plus the acknowledgement that you’re going to uphold the fiduciary standard. Then at that point, you can use the certified financial planner marks.

We think about pharmacy education. You’ve got the doctor pharmacy program. You’ve got the experiential rotations, which are typically throughout school, and then the final year of pharmacy school. Then we have the licensure examination. So we have a NAPLEX exam, and then we have a state law examination. However, what I’ll point out here is that I won’t say the NAPLEX is easy, but the pass rate of the CFP is much lower than the NAPLEX. I’m looking at the March 2022 examination of the CFP, and the pass rate was only 65 percent, so a very rigorous exam.

Typically, we see board pass rates in pharmacy – I think the last I looked at it, we’re closer to 85 to 90 percent, so very rigorous exam. Then to my comment earlier, it’s a great benchmark, certainly not the only thing folks should be looking at as they’re shopping for a planner, but a good indicator that someone has gone through a rigorous process, educational component, examination, and an experiential piece that demonstrates their ability to do planning.

Kim, I mentioned this briefly earlier, but I want to talk more about it in this concept of are all CFPs created equal in terms of types of services and how fees are assessed. Really, when you get the CFP marks, you have demonstrated that you’ve gone through all the things that you just talked to, but that may not mean that all CFPs are operating in the same way in terms of the services that they offer or as well as in the fees that they’re charging, correct?

[00:17:44] KB: Yeah, that’s right. So it’s really a wide range of like different services and different fee structures that you can have. Kind of to be brief with it and not go down a rabbit hole, you can have CFPs that are comprehensive planners. So that’s like us here at YFP, where we go from one end of the spectrum to the other. We can help you buy a house, we can help you invest your 401(k), or we can help you improve your credit score, anything along the lines. So it’s really everything under that financial planning umbrella.

Or you can have CFPs that strictly do just investment management. This is going to be CFPs that worked directly with your investments, so like that employer retirement plan or that traditional IRA or Roth IRA that you may have. Just another different spectrum that you could be on is you could simply work at an insurance company, and you could be the financial planner that is selling the insurance, whether it’d be life insurance, disability, umbrella insurance. It’s a big world out there, and so your options are kind of limitless on what kind of services you provide.

Then as far as fees go, so really the three most common that most people have probably heard is a fee-based, commission-based, or a fee-only. So fee-only is what we are here at YFP. I’m sure we’ve mentioned it a few times on the podcast but fee-only basically. When you come on board with us, and we quote you your price to work with us, that is the price. That is what we are paid. We don’t get any kind of commissions or any kind of kickbacks or anything like that. Whereas with commission-based fees, that planner is going to work strictly off of the commissions that they make from selling you products.

Then fee-based gets a little sticky because it is where it can be a flat fee, but then you also receive kickbacks off of people’s investments or insurance policies or things like that. So fees and services can get a little bit sticky and can be a tad complicated, but that is in short are like the major ones that are the most common.

[00:19:44] TU: Yeah. As you described, Kim, it really is the Wild Wild West in terms of how services are constructed, how often you meet with a planner, what to expect, what they’re managing, what they’re doing, as well as the fees, and how those fees are assessed and charged. So that really means there’s due diligence on the client side to be asking the right questions as they’re conducting that search. We talked about this in detail in episode 54. Several other resources we have as well available at yfpplanning.com. Folks can look for more information there. But it really talks more about the model that we do at YFP Planning, as well as the concept of fee-only.

I want to just for a moment give an example, Kim, of fee-only and why we believe that matters. So you gave the definition of it. Let’s say you’re working with a client, Kim, and you determine that there’s a need for, let’s just say, long-term disability insurance on top of some employer coverage they may have. Well, under the fiduciary standard, under the fee-only model, as you work with that client to determine what the benefit need is, you’re not selling the insurance policy, number one, and you’re not getting any direct kickback for the recommendation of any specific product that you would be recommending.

In that case, you can really help evaluate objectively what does the client need, what does the client not need, and then help look at a variety of different options as they shop those policies around. So I think that many pharmacists that will resonate with them in terms of wanting to have unbiased recommendations as possible. To that point that I made that it’s important, we’re asking good questions to understand what do people do in terms of services and how do they charge. What are some questions that you would recommend, Kim, folks ask as they’re looking for a planner that is hopefully a good fit for them?

[00:21:25] KB: Yeah. So I think the first question you should ask is are you a fiduciary? Because simply, you want somebody that is going to give you advice based on your best interest, not the planner’s best interest. The second big one is like what qualifications do you have. You want to make sure that your planner is qualified to actually be giving you financial advice, and it’s not just somebody like posing as a financial planner. Then how are you paid is going to be another big one. So that’s going to tell you like, “Do they receive commission off of me like. Is this a fee-only relationship?” So how are you paid is a big one.

Then another one would be like how is our relationship going to work. So you want to make sure that you and the financial planner are on the same page about how the relationship will work between the two of you. So like how often will you meet? Like how will you manage my assets? How do you plan to help me buy a house? Like kind of what does the relationship look like? Other than those big questions, I would simply just make sure that you jive with that financial planner.

Talking about your finances is a very intimate conversation, so you want to make sure like you are comfortable with that financial planner because you’re going to have some intimate talks about your finances. So you want to make sure that you’re comfortable opening up with that person and that your personalities kind of go together. In that way, you feel comfortable talking to them, and you feel comfortable sharing details about your finances, and you don’t feel like you have to hold back because either personalities clash or because you’re not really comfortable opening up with them.

[00:23:03] TU: Great overview. As we always say, shout out to Justin here who does our business development and our discovery calls on the front end, it has to be a good fit from both ends, right? If you as a client are going to make an investment of time and money, and our planning time is going to make an investment in that relationship as well, there has to be a good fit, and that starts with expectations in terms of folks being on the same page. I think that starts with making sure you’re comfortable what that relationship looks like and by asking some good questions, as Kim just highlighted there.

Kim, do you have an anonymous success story or two that you can share of clients of YFP Planning that really highlights the impact that a CFP can have and that the planning team can also have at large?

[00:23:46] KB: Yeah. I actually have a really good example. I had even mentioned it to Robert to make sure he was okay with me sharing. When I told him the example that I was going to use, he was completely on board with it, so I’m excited. But we had these long-term clients. They’ve been around with YFP I think longer than I have, but they had gone through residency. The wife had already graduated, and she was in her career. But the husband was still in residency. It was cool to be able to watch him finish his residency program.

Then once he had finished, they moved states to be closer to where he had received a job. They were living in a townhome, and they had done a couple of budgeting meetings with us, make sure they were saving correctly and make sure that they were saving enough for retirement. Then the question came about. They were like, “Well, we want to buy a house.” Behind the scenes, they had done all the math to figure out how long they needed to save in order to have that 20 percent down payment that we always hear about when it comes to home buying.

They had figured out that it was going to take them five years to save a 20 percent down payment, and they were really in the dumps about it. Like they enjoyed where they live, but they also wanted to be homeowners. They wanted to get that next chapter in their life started. So we had a call with them. We could kind of tell that they were down in the dumps about it being five more years before they could even really begin to seriously look at houses and put in offers and everything. Then we made the recommendation to them. We told them like, “You are eligible for a doctor loan, which with the doctor loan, you don’t have to have the 20 percent down payment.” So we went through the whole process of educating them on what a doctor loan is and what those terms look like and like why they don’t need the 20 percent down payment.

Then it was literally like 30 days to the mark after that conversation. They were closing on their first house without a 20 percent down payment. At this point, they’ve probably moved in. I haven’t talked to them lately, though. But it was awesome to be able to help them realize like, “Hey, we don’t have to wait five years to buy a house. We can buy a house now.” So they were over the moon, they had found a home and that the home ownership chapter was beginning. It was awesome to watch, and it also just made me realize, and they even mentioned it. Like without the YFP Planning team, like who knows if they would have ever even known what a doctor loan was, and that it could have been five more years before they actually got in the home. So it was awesome to be able to help them make that transition into the next chapter of their life.

[00:26:24] TU: I love that story. Thanks for sharing. What I love about that too is when we think about the pharmacists home loan, doctor loan products, we’ve talked about them on the podcast before, one of the I think challenges that can be there is if folks aren’t really evaluating that home purchase in the context of the rest of the financial plan, is that home-buying can be exciting. It can be emotional. It can be stressful. We can easily find ourselves down a path of the home purchase that may not jive with the rest of the financial plan.

You are here. Robert is with a client and not only being able to open up a new avenue that maybe wasn’t considered to make this home purchase a reality, but also considering and evaluating that and the rest of the financial plan. So how does a home purchase fit with also making sure we’re progressing for retirement and with other financial goals as well? So really cool story to share, and I think one of the things that you and the planning team do so well is striking this balance between taking care of our future selves but also living a rich life today. Both are really important, and that’s a great story and example of why it is.

Kim, thank you so much for taking time, number one, to come on the show, and excited to get you in front of the YFP community, if folks don’t know who you are, aren’t familiar with you yet. Again, congratulations on all the hard work that went into getting the CFP. I would remind folks that we’ve got a great guide an overview of the nuts and bolts to hiring a financial planner. You can download that for free at yourfinancialpharmacist.com/nutsandbolts.

Then for folks that are hearing this and saying, “Hey, I’d love to learn more about the planning services offered by Kim and the rest of the team at YFP Planning,” you can book a free discovery call with Justin Woods, our Director of Business Development. You can do that by going to yfpplanning.com. So, Kim, again, thank you so much.

[00:28:11] KB: Yeah, thank you for having me.

[END OF INTERVIEW]

[00:28:13] TU: Before we wrap up today’s episode of the Your Financial Pharmacist Podcast, I want to, again, thank our sponsor, Splash Financial. If you’ve ever considered refinancing your loans, check your rate now through Splash Financial. If you qualify, refinancing could help get you a lower monthly payment on your student loans or get a lower interest rate. Splash helps you shop and compare loan refinancing offers across lenders nationwide. Browsing rates through Splash Financial is fast, free, and won’t impact your credit until you complete a full application.

Now, when you successfully refinance $50,000 or more, Splash Financial will give you an extra $500 in cash bonus using our link, splashfinancial.com/yfp. So check your rate today and see what you might be able to save at splashfinancial.com/yfp.

As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the date published. Such information may contain forward-looking statements which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 251: Zero to One: How to Get Started in Real Estate Investing

Posted on April 14, 2022November 2, 2022 by yfpadmin

Zero to One: How to Get Started in Real Estate Investing

On this episode, sponsored by Insuring Income, Nate Hedrick and David Bright, co-hosts of the YFP Real Estate Investing Podcast, share their top tips and strategies for getting started in real estate investing.

Episode Summary

The concept of real estate investment can be so broad, with many different avenues you can choose to take, that getting started can feel like a daunting task. One key concept to ensure that you can weather the storms that may come when investing in real estate is to, first and foremost, get your own financial house in order. By building a firm financial foundation, risk-averse pharmacist real estate investors can be more confident with the ups and downs in this ever-changing market. This week, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, welcomes David Bright and Nate Hedrick, co-hosts of the YFP Real Estate Investing Podcast, back to the show. Top moments from the episode include David discussing the main categories of real estate investing and why he and Nate have favored buy and hold investment strategies. You will also hear a frank discussion on the individuals you should consider surrounding yourself with as a part of your real estate investing team, plus a few strategies for finding and evaluating an investment property. Nate and David also take a few moments to answer some frequently asked questions about real estate investing for those getting started in their real estate investing journey.

Key Points From This Episode

An update from David and Nate regarding their coaching program.
The importance of having a strong personal financial foundation.
How to break down real estate investing.
Categories best suited for first-time investors.
Nate shares the team aspect of real estate investing to bring down the stress and reduce the barriers to entry.
Where to find a good investment property: off-market.
The importance of being able to define and state your criteria to a real estate agent.
Using math to evaluate an investment and what that looks like; setting up categories.
FAQs you’ll hear when starting in real estate investing.

Highlights

“Getting your [own] financial house in order, [is] such a critical first step before you go on that journey to invest in real estate.” — Tim Ulbrich, PharmD [0:05:34]

“Having a firm financial foundation beneath you means that you can weather some of those storms and deal with some of those ups and downs of real estate.” — David Bright, PharmD, MBA, BCACP, FAPhA, FCCP [0:07:13]

“We’re investing in houses that are far enough away that we’re not going there and we’re not in that day to day aspect of the investing, which is really helpful when you work a full-time pharmacist job and you don’t want to be distracted by your real estate investing.” — David Bright, PharmD, MBA, BCACP, FAPhA, FCCP [0:22:02]

“To be considered a good investment property, it needs to pay for itself every single year, year in and year out, and put money back in your pocket. Running [those] numbers is important and not just looking at the simple things but truly diving into the details.” — Nate Hedrick, PharmD [0:24:30]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] TU: Hey everybody, Tim Ulbrich here and thank you for listening to The YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I had a chance to welcome back onto the show, David Bright and Nate Hedrick, co-hosts of the YFP Real Estate Investing Podcast. During the interview, David, Nate, and I talk through zero to one, how to get started in real estate investing and make the hardest move, which is that first move.

Some of my favorite moments from the show include David talking to the main categories of real estate investing and why he and Nate have favored buy and hold investment strategies, a discussion on individuals you may consider surrounding yourself as a part of your team as you begin your real estate investing journey and strategies for finding and evaluating an investment property.

Make sure to hang with us to the end of the show when I ask David and Nate frequently asked questions for those getting started in their real estate investing journey. Now, one of the things that we talk about on today’s episode is why getting the financial house in order is such an important and crucial first step before diving into real estate investing.

That is a great opportunity to highlight what I think many folks may not be aware of, which is the incredible work that the team at YFP planning does and working one-on-one with more than 240 household in 40 plus states.

YFP planning offers fee-only, high touch financial planning that is customized to the pharmacy professional. If you’re interested in learning more about working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com.

Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

Okay, let’s hear from today’s sponsor, and then we’ll jump into my interview with David and Nate.

This week’s podcast episode is brought to you by Insuring Income. Insuring Income is your source for all things term life insurance and owned occupation, disability insurance. Insuring Income has a relationship with America’s top-rated term life insurance and disability insurance companies so pharmacists like you can easily find the best solutions for your personal situation.

To better serve you, Insuring Income reviews all applicable carriers in the marketplace for your desired coverage, supports clients in all 50 states and make sure all of your questions get answered. To get quotes and apply for term life or disability insurance, see sample contracts from disability carriers or learn more about these topics, visit insuringincome.com/yourfinancialpharmacist. Again, that’s insuringincome.com/yourfinancialpharmacist.

[INTERVIEW]

[0:02:40.9] TU: David and Nate, welcome back to the show.

[0:02:43.8] DB: Hey Tim, always great to be here.

[0:02:45.7] NH: Yeah, thanks so much.

[0:02:46.8] TU: First of all guys, congratulations on the work that you’ve been doing with the YFP Real Estate Investing Podcast. You’ve crossed the 50 episode threshold, which is really an incredible accomplishment and I think it just speaks volume to the commitment of time and energy and effort that you guys have put in so thank you so much for that and it’s been fun to see the reception among the pharmacist community in terms of the focus here on real estate investing and the community of pharmacist and I think that’s a good segue.

I’d love to hear from you guys, just for a moment, an update on what you’ve been up to. When we talked last at the turn of the year, you guys were just getting started with the none to one group coaching program to help folks begin their journey in real estate investing. So, David, Nate, we’d love to hear the update of how that course has gone and what you’ve been seeing.

[0:03:34.7] NH: Yeah, we had a ton of success with that. It’s been really fun to bring together this group of pharmacist that are really eager to buy their first investment property. We actually ended up taking on 10 pharmacist and we are meeting every Sunday for the past two months now, David, and it’s been going really well. It’s a really cool class of individuals, it’s been a great time to talk to everybody and learn along with them, right?

We’re there to teach and kind of coach but at the same time, there’s always more that we can learn and so it’s been really interesting to have problems brought to us and we’re dealing with people all over the country, so it makes David and I expand our horizons a bit. It’s been really enjoyable.

[0:04:08.0] DB: Yeah, it’s also been a lot of fun to see the victories come out too, right? The problems are one thing and the problem solving is like inherent to pharmacist so we enjoy that, right? The victories are also a lot of fun seeing folks who get offers accepted and move through inspections and conquering that investing world has just been really inspiring to see other pharmacist jump into that and do that.

[0:04:27.0] TU: We’re excited to hopefully share more of those stories into the future and be able to offer that out to other pharmacists as well so we really appreciate you guys and the commitment you’re putting enough time, we’re recording here on a Monday, early morning, you guys are up last night with that group. I know it’s got energy and enthusiasm that you’re putting into it as well but it is an investment of time, so thank you guys so much for that work.

This is a follow-up to episode 241. We talked before and we’ll link to that in the show notes about some common objections and barriers to getting started in real estate investing and the idea with this episode is that for those that have worked through or are working through some of those objections and are ready to make the move, what should they be thinking about in terms of going from none to one, right? That hardest move that we often hear folks talk about in the real estate investing journey.

Let’s get started, I want to jump in and talk about the importance of having a strong personal financial foundation, it wouldn’t be a YFP podcast if we didn’t talk about that. Getting your financial house in order, such a critical first step before you go on that journey to invest in real estate. Let’s start there, Nate. Tell us more about why you and David emphasize this concept so often on the YFP Real Estate Investing Podcast as well as for your own personal journey why this has been so important.

[0:05:49.4] NH: Yeah, it’s something we reinforce all the time, right? Even the very speaking in the none to one, the very first half of the first class was all about, like, “Okay, you need to establish your own financial house and if you don’t then we need to take a pause and reset,” because without that, right? Nothing else can really track from there, right? We need to make sure that our own financial house is in a state where we can feel comfortable investing and that that investment decision is not going to be make or break, right?

We are very risk-averse, safety-oriented pharmacists as David and I like to say and with that, comes the concept that you need to be in a position where if things don’t work out perfectly, you’re going to be just fine financially. These are decisions we’re making not in a do or die situation, right? We’re trying to buy these properties or invest in a way that it supplements our financial plan, rather than, is the make or break piece of it.

[0:06:39.3] DB: Yeah, and there’s a lot of just potential instability or seeming instability in terms of real estate investing versus a lot of other types of investing. Kind of like in your personal budget, if you’re saving up for a car, you might be putting away money every month and eventually that car happens. There’s same kind of thing with the real estate investment if you may need to save monthly for a roof replacement or save monthly for furnace placement that’s coming at some point though those kind of things maybe a little harder to plan for.

So those evictions, late rent, there’s just a lot more instability and so having a firm financial foundation beneath you, means that you can weather some of those storms and deal with some of those ups and downs of real estate, knowing that in no month is it ever coming out perfect, that all of the bills just perfectly line up but over time, hopefully, the average is added to something and ends up being a good investment.

[0:07:29.4] TU: There’s lots to dig into of course in that topic, in that umbrella, building a strong financial foundation, we’re not going to do that here today because that’s what we do every week on the show but I would point folks to episode 212 where I talk through some of the components of building a strong financial foundation, what does that exactly mean and why is that so important as you begin your real estate investing journey.

We know that real estate investing is such a broad umbrella and I think that’s one of the things that you guys have done such a nice job on the YFP Real Estate Investing Podcast is really introducing folks to the variety of different ways that they could invest in real estate but I think that because it’s so wide and because there’s so many options, that can be intimidating for a new investor. So David, tell the us more about how you and Nate break down real estate investing and what categories might be easier for first time investors as they get started?

[0:08:21.3] DB: Yeah, there are plenty of different avenues for real estate investing, kind of like the professional pharmacy, many different ways that you could practice pharmacy. As far as real estate investing goes, Nate and I like to break this down into buy and hold real estate investing where you just buy something, you rent it out long term, or flipping real estate where you buy it, you may fix it up and you may quickly then sell it.

You could apply those terms to single-family houses or multi-family apartment buildings or storage units or vacation properties or so many different categories. Just to make things pretty simple and to stay with areas of investing where people have some general familiarity often times just from buying their own primary residence, we talk a lot about the single-family, buy and hold, long-term rental where you’re simply buying a house, presumably a lot like what you live in and renting that out to someone else so that that simplicity and the clarity of buying a single-family house seems to be one way that people can make an easier jump into real estate investing.

It seems just a lot less intimidating to go buy a single-family, three bed, one and a half bath house than it is to buy an apartment building or buy a strip mall or buy a storage unit complex or something like that, there’s ways to dial back the intimidation factor that way.

[0:09:40.8] NH: Yeah, at the same time, we got a lot of people that come to us and say, “You know, Nate, I want to buy a vacation rental anyway, tell me about the short-term rental thing, you know? Can we do that?” And so there are other ways to get more adventurous with it if that’s what you want to go, where you can buy a property that you can use on the weekends here and there for the rest of vacation property and then rent it out the rest of the year.

We also see people and we’ve talked to individuals that are house flippers or even wholesalers where you’re taking basically, a great deal putting some capital into it or maybe very little capital into it and then flipping it to someone else. There are lots of options out there and just like David said, it’s just as diverse as pharmacy, you can – the term real estate investing is so broad, there’s so many different avenues you can walk down.

[0:10:18.0] TU: Yeah, for folks who haven’t yet listened to the many great stories on the real estate investing podcast, this is one of the areas that I love that you guys have done. I think really focused intently on the buy and hold strategy, David, for the reasons that you’d mentioned but you’ve also featured and then sprinkled some other areas to show the diversity that can be there, you know?

I’m thinking about the recent episode 46 where you had on Stuart and Elizabeth talking about motel hacking. I know you’ve had a couple of folks talking about short-term rentals so certainly, a lot of buy and hold, more of that traditional investing stories but other avenues that folks maybe thinking about as well. Now, I’ve heard you both talk a lot about the team aspect of real estate investing as a way to bring down the stress, reduce the barriers to entry.

Nate, do you mean investing in partnerships when you talk about the team, finding a mentor or something else altogether?

[0:11:06.8] NH: Yeah, it’s kind of a little bit of everything right? There’s nothing wrong with a partnership or a mentor but a lot of times, we focus on just building this team around yourself that can help and it can be something as simple as the YFP community, right? As part of your team, you’ve got people that are helping you out, supporting you in those decisions, helping make things just a little bit less stressful but really, truly, that team that surrounds you, starts with a good real estate agent.

Someone that has your fiduciary interest and making sure that you’re going to be successful and really, as that starts to expand, then your team can expand as well. You know, when we talk about building a team, it sounds really intimidating and so we really try to focus more on starting with really good core individuals around you and then expanding from there and then as you build your confidence and as you start to expand what your kind of projects you’re able to take on.

[0:11:50.3] DB: Yeah, that’s absolutely how we guys started to, we started with the realtor from our own investing and that realtor helped us, the first property that we bought, we needed someone that new plumbing because there’s a plumbing issue so I asked the realtor for a contact for a plumber, the realtor offered us a few different contacts, we were able to find a plumber. From there, we needed someone that could do dry wall, we reached out to the realtor.

And so, our team grew very organically just in terms of reaching out to that realtor, even when it came to an insurance agent or a property manager, those connections all happened just from that initial networking through that initial realtor and then contacts from contacts and going from there.

Even like Nate mentioned on the Facebook group, online connections, online networking, other local real estate meetups, we were able to over time add a book keeper and a tax accountant an attorney and lenders and other folks from there so you know, absolutely, that can sound intimidating on the front end of this enormous team that feels like is necessary when you listen to podcast and read books but for us, it just started out with a realtor and one foot in front of the other. Finding one contractor at a time as we needed people on our team growing that organically.

[0:13:01.6] TU: Love the simplicity of that, David. I’ve heard you and Nate mentioned that before as I think folks often hear stories of investors that have been at this for several years and they’ve got that team, right? They’ve got contractors, they’ve got insurance agents, they’ve got property managers, they’ve got, on the financial side where there’s bookkeeping, individual financial planning, tax side, they got attorneys, they’ve got a team that has really been built over time but they didn’t start there and so I think that step of my team and having that team in place can often paralyze folks if that’s something that they don’g think — maybe I can start with one individual, what if I start with a really good realtor that can help me take that step forward, that’s feasible, that’s manageable and then I can build my team out over time.

If I’m listening and I’ve narrowed down the type of real estate investing, let’s say I’ve determined what type is a good fit for me at least to get started, I thought a little bit about the team or finding that agent who is going to help me overtime, build out that team. The next question I think that comes to mind, especially in the current market is, where does one find a good investment property? Am I leaning on my team here, am I doing my own search on Zillow? Nate, what are your thoughts here?

[0:14:11.2] NH: Yeah, I think it’s a common question we get and I think the misconception that comes to us often is, the only way to find a good investment property deal is off-market because especially if you listen to some of the bigger players, people that are doing this for a long time, they find some of their best deals off-market but that’s not the only place to find them and so I think, again, that’s another intimidation factor that David and I really focused on dispelling is that there are absolutely deals that you can find on Zillow on the MLS or your real estate agent, you can go off-market and there’s advantages and disadvantages to doing that but you don’t have to.

Even something as simple as connecting with a good agent, getting an MLS, auto email setup and what I mean by that is, you put your criteria and your budget into the system and every morning, you’re going to get an email that says, “Here are the houses that meet your criteria,” and starting to understand your market, you’d be surprised at how quickly you’ll start to find a deal because now, you know everything in that market and so when a property pops up, now all of a sudden, you know, “Yeah, that one’s worth looking at” or “No, we can skip it, that’s not worth our time.” It just makes that deal-finding so much easier.

We were actually just talking about this last night on the none to one course about an individual that’s like, “I know there’s exactly 10 duplexes available in this particular area when the 11th one pops up, I know what to do in terms of whether or not it’s worth offering on” and that is how you really understand the market and when a good investment property comes along, you can really take action on it.

[0:15:29.4] DB: Yeah, I think that’s really important. One of the things that Nate, that you said there was the word criteria. I think that that makes it so helpful for a real estate agent that you’re working with when you define, we need to say, I’m looking for a great investment property, the realtor in the other side there is like, “What precisely do you mean? What am I looking out for you?”

That can be really puzzling but if you’re saying that, “I’m looking for a duplex between this street and this street, around this school” when you can be that clear. “At this price point, I want one half to be vacant, one half to be tenanted because I want to move in and house hack.”

Whatever those criteria are, the more precise and specific that you can get for that real estate agent, the easier it will be to find a search, even if there are only 10 on the market right now in that example, it’s so much easier to identify that when it pops up and to jump quickly, which is a big thing in this market is not falling into analysis paralysis once you see that opportunity but being ready to jump on that when it shows it face.

[0:16:29.3] TU: Yeah, speaking of analysis paralysis, you know, I think that pharmacists, it’s safe to say are very numbers-oriented and so when I hear you guys talk about like criteria and is it worth it, I am sure that many would be relieved if there is a sure-fire way to run numbers, identify if an investment is a good one or not and so you guys just released episode 50 where you talked about a spreadsheet analysis.

That brings comfort to me as a pharmacist, right? I can put numbers into the spreadsheet and that can at least help guide me. Tell me a little bit about how someone can use math to evaluate an investment and what that looks like?

[0:17:02.7] DB: Yeah, the math I think sounds intimidating right? When we talk about math pharmacist think like amino glycosides and it gets really complex in a hurry but when we talk about math in the real estate standpoint, it is relatively simple compared to what we do in the pharmacy world.

There is a common misconception that as long as the rent is higher than the mortgage payment, I will be making money and I feel like that is one of the key drivers behind the episode that we had to walk through the numbers and what are the other expenses that you may not be anticipating but they factor in.

So things like paying a property manager, if you choose to not self-manage the property or paying for those repairs and those larger expenses like we mentioned the roof and the furnace and things like that that if you own the property long enough, you will have to replace those things and setting aside money for that.

There are a lot of other smaller expenses that are easier to overlook and so again, that’s kind of the driver of setting up that spreadsheet and not just setting that up to make sure that those categories are captured but also setting that up with some notes in there to make sure that the information going in is good.

If you have your estimates wrong on each of those categories, it’s going to be a garbage in garbage out kind of analysis and it will be hard to trust those numbers, so we try to spend some time in that episode to talk through what are those categories, how might you estimate those, how would you get a little more precise in that math so that you have a better idea of how you might expect that property to perform from an investing standpoint.

[0:18:33.2] NH: Yeah, really good point David about the numbers and not getting too lost in the spreadsheet. It is important to use and it’s a great way to start using math to evaluate a property but you’d be surprised the amount of things that you can catch that don’t have to do with math, right? Maybe the property you’re looking at is on the same street as another one that you like or another one you are comparing it to but it just so happens to be right across the school district line.

So now, it’s not the same school district, which means it affects the property value or it affects the rent rate and so there is all these little nuances that can go along with it, and again, that’s where your team can kind of come in and help you out. Again, relying on that real estate agent, relying on maybe a property manager to help with rent rates and just taking a double look at things, once you’ve done the analysis to make sure that it actually marches out in real life.

If you are interested too, I don’t think we’ve dropped this here but I would mention in episode 50, we actually put together that spreadsheet that you can download yourself. If you head over to yourfinancialpharmacist.com/analysis, you can download that spreadsheet for free. A great way to again, run the numbers the same way that David and I do.

[0:19:25.8] TU: Awesome, thank you guys so much for putting that together. Again, yourfinancialpharmacist.com/analysis, we’ll link to that in the show notes. All right, so we’ve talked about several things so far. We have talked about the importance of having a strong personal financial foundation before we jump into real estate investment. We’ve talked about the different categories, the aspect of forming the team, and how you potentially find and evaluate an investment property.

Let’s transition to some common FAQs that you all hear from folks that are getting started in real estate investing. David, the first one here is, “Can I only invest close to where I live? Don’t I need to see the house before I buy and drive by the house regularly?” this concept of investing in my backyard or perhaps, is there an opportunity to invest at a distance?

[0:20:11.5] DB: Yeah, it’s a great question, one that we hear often and it has come up quite a few times in the none to one course particularly when we are talking with pharmacists that live in really pricey markets where it just feels intimidating to try to buy in that area compared to for instance the Midwest where Nate and I live and where properties are much more affordable than something on one of the coast.

I think the short answer is you don’t have to invest where you live. It may be less intimidating to invest or to go through your first investment process close to you and that is something that I did personally. We bought a house that was very close that I drove past on my way to work and so it was just very simple to keep an eye on that and to feel that kind of sense of security until I started doing that and realized like really not bringing a lot of value to this.

When I walk a property compared to when a contractor or realtor walks a property, they see a lot more than I see. When I drive by that house, I’m like, “Well, it is still there, it hasn’t burned down” I mean, there’s not really a lot of value that I brought to that so we started overtime in an area about a 45-minute drive from where I live, which I know to a lot of people that’s a daily commute, right?

That is not super far but it’s the point where we’ll buy a house, there have been houses that I have not been inside or driven by because we just value that team so much and the team perspective that if the contractor has walked it, if the realtors walked it, if the property manager is on board, there’s again, just not a lot of value that I bring to that equation. Again, even though it is not far away, we’re investing in houses that are far enough away that we’re not going there and we’re not in that day to day aspect of the investing, which is really helpful when you work a full-time pharmacist job and you don’t want to be distracted by your real estate investing.

[0:22:04.2] NH: As someone that does both in state and out of state myself, I totally attest to that like the ones that are out of state are so nice because I don’t have to worry about them, and then the ones that are in-state, you end up doing what I did, which is spend pretty much my entire Saturday painting and demoing a basement this weekend, so you can fall into that trap pretty easily.

[0:22:21.4] TU: You beat me to it Nate, before we hit record you are talking about your time spent this weekend and I was just thinking about that in terms of being in your backyard. David, one of the stories that I remember you telling early, I can’t remember if it was snow removal or mowing the lawn but you had mentioned that itch. That hey, I drive by this property, I see it all the time and I maybe have a tendency to think like, “Ah maybe I don’t have to depend on the team. I could save a little bit of money if I just shoveled the snow myself” right?

Obviously as you build out a portfolio, as you have, and of course you’ve built out a team that has helped you but that risk, I guess if you call it that can be real when you see the property so often.

[0:22:56.2] DB: Oh absolutely, yeah. I have vivid terrible memories of like six in the morning standing there with a snow shovel because the house was halfway between where I live and where I work and I am like, “Oh, I could just do this real fast” and then my feet are soaking wet and freezing and all that kind of stuff, it’s like why did I just pay someone the five or ten dollars or whatever it would be to shovel this?

Why did I feel like that was a good use of my time at six in the morning? So yeah, with some of this stuff there is some healthy separation when you’re investing just far enough out that you aren’t tempted to go run and do these things yourself.

[0:23:30.3] TU: Nate, the second question here and David hit on this briefly but I want to come back to it is this idea of is it a good investment if the rent is more than the mortgage and what’s the potential trap in that and what are some things that folks could be looking for to help avoid that?

[0:23:44.9] NH: Yeah, I think this actually goes back to that spreadsheet we talked about was it is not just simple numbers of, “Okay, the rent is 1,500 and the mortgage is 1,200 so cool, I am cash flowing 300 bucks a month” like that is not actually how the math works, right? We need to figure out a lot of the other factors that go into it because this is again, it is truly a business. It is an investment and so it has to run itself and by that, I mean that the repairs take care of themselves.

In terms of cost, the capital expenditures, big things like a roof or a furnace that breaks, again, the investment should be paying for all of those, so when we run the math on what a good investment property is, it needs to pay for itself every single year, year in and year out and put money back in your pocket to be considered again, “a good investment property.” I think running those numbers is really important and not just looking at the simple things but truly diving into the details and even though it sounds complicated, you can do this in three minutes, right?

Running the back of the napkin math and then getting into the nitty-gritty details if everything checks out.

[0:24:40.1] DB: Yeah and we try to sneak into that spreadsheet a couple of things too like other rules of thumb that you can look at. For instance, you may expect that the overall rent about half of that rent may go to general expenses like your taxes, your insurance, your repairs, property management, some of those things and so again, if that rent starts looking pretty suspiciously close to the mortgage payment, I get nervous that that property is not going to create positive cash flow every month.

[0:25:09.1] TU: Next question David is, do I have to do major renovations to a property? I think that is one of the fears I know I had, I suspect many have is how handy do I have to be and obviously some of the financial things that can come to this as well. So talk to us through this question.

[0:25:24.9] DB: Yeah, it’s a great question because people that watch HGTV think that yeah, all of these investors that jump in and buy these houses, they spend hundreds of thousands of dollars on these extensive rehabs that take months and multiple crews and it just feels super intimidating. We bought a house late last year that already had a tenant in it. It had just been fixed up, it was a great house and we liked it for the simplicity of not having to do any kind of renovations to that property, so that’s definitely an option.

We’ve also bought houses where all we had to do was go in and do paint and flooring and for a few thousand dollars it was done. So you can do no renovations, you can do minimal renovations or if you want to, if you want to do a pretty extensive rehab, there is potentially more money to be made and you could argue it is a potentially better investment but it may take more time. If time is scarce in your pharmacy world, don’t feel like you have to do major renovations to a property to have a solid real estate investment.

[0:26:27.6] TU: Speaking of time Nate, you know I think one of the common questions that comes up is, do I have to work with a property manager? Could I save a little bit of money here and do this myself? Although recognizing that some time might be involved and invested here. Talk to us about that question of, do I have to work with a property manager?

[0:26:43.8] NH: Yeah and again, I’ll bring in my own experience to kind of speak to this. I manage our local properties myself and then the out of state ones, I absolutely push off to a property manager. I have a foot in both worlds and there are advantages and disadvantages to both. I like doing some of the property management here locally one, because of the cost savings but two, it helps me be a better manager of my property manager.

I know how I want things to operate. I am a very detail-oriented nerdy pharmacist, right? I know how I want it to run. I know what my expectations are and so I can put the same expectations on the property manager that I am hiring so it helps to do both but it is not for everybody. I think David and I talk to people all the time about individuals who quickly identify, “This is not for me” or “I always want to be have a hand in this, I want to be involved. I like talking to my tenants.”

It is across the spectrum, there is no wrong answer to this. I think a lot of it pans down to what do you want to do and how do you want to operate.

[0:27:35.0] DB: Yeah, even when it comes to the property manager I think one thing to consider is, what is your pharmacy job like? There are certain pharmacy jobs where you can be interrupted and take phone calls and manage things two minutes here, three minutes there and there is others where you just absolutely can’t and so for me, I didn’t want to be in a position where I had to take phone calls during the day, I wanted a property manager to create that separation but again, that’s not for everybody.

If you do want to be a little more hands-on, you want to see those things, you want to be able to manage a little more closely, that is not necessarily something that you need to do and you could potentially save money if you are willing to take on those property management tasks yourself.

[0:28:09.7] TU: David, last question I have here relates to financing. Nate and I recently did a home buying webinar. We also did a LinkedIn live session and it seems like one of the topics that has a lot of interest that relates to the pharmacist’s home loan products where there is either a low down payment or in some of the physician loan products are out there, a zero down payment.

So often, I think folks might be wondering as we translate that from primary residence to real estate investment properties, are there zero down or close to zero down payment options for investment properties or what does that look like?

[0:28:41.9] DB: The short answer is not really but kind of. So when it comes to real estate investing, if you are just going to go out and like I mentioned before, finding a property that already has a tenant in it that’s already fixed up, the lending options are mostly putting a pretty decent down payment, 20, 25% something like that down on a property like that. That is the most common type.

If you are trying to get into real estate investing with less money down, there are options that just take a little bit more creativity or finding a loan product that aren’t quite as common. What we did in our first rental is we bought a property that we thought would be a good rental someday and we moved into it and we lived there for a period and then when we were done with that property and we were ready to move on to another personal residence, we kept that original property.

So that is where if you’re buying a property to live in with a zero down payment or very low down payment mortgage, you can often times keep those properties as rentals when you move somewhere else. If you do zero down to move into it personally, two, three years later, you do zero down and move into something else and you retain that property, that can particular in the price of your market save you from that 20, 25% down payment that can feel kind of overwhelming to save up for, for a real estate investment standpoint.

[0:29:59.2] TU: Great stuff guys. We’ve covered a lot of ground in a short period of time and I would highly encourage folks if they aren’t yet tuning in to the YFP Real Estate Investing Podcast, each and every Saturday morning a new episode goes live, please make sure to do so. We’ll link to that in the shownotes, you can find it on Apple podcast or wherever you listen to your podcast.

Also, if you are not yet a part of the YFP Real Estate Investing Facebook group, we’ll link to that in the shownotes as well. A great opportunity to come together with a community of other pharmacists that are everywhere in the real estate investing journey from, “Hey, I wanting to learn more, I am thinking about it” to “I am actually pulling the trigger on the first property” to “I am beginning to build my real estate portfolio.”

David and Nate, thank you so much for taking time to come on the show, I really appreciate it.

[0:30:37.0] NH: Yeah, happy to be here.

[0:30:38.6] DB: Thanks so much.

[END OF INTERVIEW]

[0:30:40.0] TU: Before we wrap up today’s show, let’s hear an important message from our sponsor, Insuring Income. If you are in the market to add own occupation disability insurance, term life insurance or both, Insuring Income would love to be your resource. Insuring Income has relationships with all of the high quality disability insurance and life insurance carrier you should be considering and can help you design coverage to best protect you and your family.

Head over to Insuringincome.com/yourfinancialpharmacist or click on their link in the shownotes to request quotes, ask a question or start down your own path of learning more about this necessary protection.

[DISCLAIMER]

As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information of the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analysis expressed herein are solely those of your financial pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 249: 3 Silent Killers to Your Investments

Posted on March 31, 2022November 2, 2022 by yfpadmin

3 Silent Killers to Your Investments

On this episode, sponsored by Insuring Income, YFP Co-Founder and Director of Financial Planning, Tim Baker CFP®, RLP®, talks about the three silent killers of your investment pie and how to keep your investment portfolio fit.

Episode Summary

In this episode, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, sits down with YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, to discuss the three silent killers of your investment pie: taxes, inflation, and fees. After a brief discussion about the most recent success of YFP Speaking Engagements, Tim Baker gets into the weeds on strategies to ensure financial security and freedom by protecting your investments. Tim and Tim discuss, in detail, how to keep your financial portfolio fit through evaluating your fees, investment choices, and the utilization of tax planning. Tim Baker explains some of the most common fees associated with investment plans and that often, investors do not know what exactly they are paying in fees. He shares the impacts of inflation on your portfolio over time and how to ensure financial security after retirement. You will also hear Tim Baker speak on his personal experiences as a CFP® and how tax planning permeates all parts of the financial plan, despite many planning firms not offering tax planning as a service. Tim Baker shares his answers to frequently asked questions like: why is inflation overlooked concerning the financial plan? What is the solution to inflation? How can market stability and fees negatively impact your retirement investments?

Key Points From This Episode

An introduction to today’s topic.
The importance of including tax in your financial plan.
How tax permeates all parts of your financial plan.
Tim Baker shares some of his experiences regarding tax, working as a financial planner.
Some examples of simple tax reduction strategies.
How to ensure the withdrawal of investments after retirement in terms of tax.
A discussion on inflation trends.
Why it is important to consider inflation in your financial plan and investments.
We learn how investments can help you get ahead of inflation.
A detailed discussion on the issues and impact of fees on your investment.

Highlights

“I think what you can’t do is just not participate. I don’t think you can stuff your mattress and hope one day you wake up, and you’re going to have enough to retire.” — Tim Baker, CFP®, RLP® [0:21:32]

“I think it’s really important that we understand those dynamics and know that we’re not always going to be in a low inflation environment.” — Tim Baker, CFP®, RLP® [0:24:30]

“It’s really important to understand how inflation can play a role in your ability to sustain yourself in the future.” — Tim Baker, CFP®, RLP® [0:24:34]

“I think a lot of people are unaware of what they’re actually paying, and the transparency is a real thing that needs to be overcome.” — Tim Baker, CFP®, RLP® [0:24:09]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody, Tim Ulbrich here. Thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I had a chance to sit down with YFP Co-Founder and Director of Financial Planning Tim Baker, to talk about the three silent killers of your investment by taxes, inflation and fees or easier way to remember as Tim, mentioned on the show, is how to keep your investment portfolio fit by evaluating your fees, investments and tax planning. A few of my favorite moments from the show include hearing Tim, talk about common tax mistakes he sees pharmacists making, and why he decided early on to bring a tax practice in house with the financial planning services. Why inflation is often overlooked? But an important part of the financial planning consider. What the antidote to inflation is? Why those nearing retirement should be looking closely at inflation and the volatility of the market? Finally, the common types of fees associated with the financial plan. Why these fees can have such a large impact on your investment portfolio?

Now before we hear from today’s sponsor, and then jump into the show. I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 240 households in 40 plus states. YFP Planning offers, fee-only high touch financial planning that is customized for the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner, may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning financial planning services are a good fit for you, we know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

Okay, let’s hear from today’s sponsor Insuring Income and then we’ll jump into my interview with Tim.

This week’s podcast episode is brought to you by Insuring Income. Insuring Income is your source for all things term life insurance and own occupation-disability insurance. Insuring Income has a relationship with America’s top-rated term life insurance and disability insurance companies so that pharmacists like you can easily find the best solutions for your personal situation. To better serve you, Insuring Income reviews all applicable carriers in the marketplace for your desired coverage, supports clients in all 50 states, and make sure all of your questions get answered along the way. To get quotes and apply for term life or disability insurance, see sample contracts from disability carriers or learn more about these topics, visit insuringincome.com/yourfinancialpharmacist. Again, that’s insuringincome.com/yourfinancialpharmacist.

[INTERVIEW]

[00:02:41] TU: Tim, excited to have you back on the show.

[00:02:43] TB: Yeah, Tim. Glad to be back. What’s going on?

[00:02:45] TU: It’s been an exciting start to the year.

[00:02:47] TB: Yes.

[00:02:47] TU: Lots of exciting things going on at YFP. We’re heating up the season of some of the speaking engagements that we’re doing for the year. Grateful for those opportunities, I think the team is humming and moving forward. It’s been a good, good first quarter of the year. You’ve got an exciting trip coming up tomorrow. I think you’re leaving, right, International.

[00:03:05] TB: Yeah, going international. My wife Shay, shout out to her. If she listens to the show, sometimes, sometimes not is running the Paris marathon. A couple of weeks ago she actually had fractured her foot in a misstep. She’s been doing a lot of cycling and pool work and things like that. She got the news a couple of weeks ago that she could run again. So she’s, yeah, she’s raring to go, heading out and excited to visit Paris again. It’ll be her first time and yeah, just enjoy some one-on-one time without the kids. It’ll be nice. I’m excited. I feel we’ve been so cooped up, because of the pandemic, haven’t really been traveling as much. Yeah, I’m pumped up.

To go back to that thing Tim, I was shocked. I think when we actually sat down, and you tallied up the reach that YFP has had or the last couple years with, I think it was 72 different schools and associations that we’ve been speaking with and doing presentations and things like that. I think that was a little bit shocking to me but awesome to see that number and see it continue to grow.

[00:04:12] TU: Yeah. We’re so grateful for that opportunity. We’ve partnered with just over 70 different organizations. It’s been Colleges of Pharmacy, State Associations, National Associations, Fellowship Programs, Residency Programs, some of the businesses that are out there and entrepreneurs, so super grateful for that opportunity. I think the reach to that has allowed us to have as we as we look to help more and more pharmacists on their mission towards achieving financial freedom. We’re looking to grow in that list here. If anyone is listening that, is looking to have a session on personal finance, financial education, we’d love to engage the YFP team, the YFP Planning team, so you can reach out to us at info at yourfinancialpharmacist.com.

Tim. Today we’re talking about silent killers to your investment pie. We’re talking about things like tax inflation fees. We’ve talked about these separately on the show, but I want to keep coming back to these, we’re going to bring these together. We talked so often about the hard work of building your investment pie, right? Ultimately, we’re going to be paying ourselves out of retirement paycheck, we’ve got to do the hard work to save early, save often, take advantage of that time value of money. We might be underestimating the impact the silent killers like tax, inflation, fees that may not be as obvious or as front and center, but certainly can have an impact on our financial plan.

We’re going to go through these one-by-one in three parts. We’ll start with the taxes, we’ll then talk about inflation, we’ll talk about fees, we’ll reference previous episodes, we talked about these for folks that want to dig deeper in any one of these topics. Again if you’re going to do the hard work, and you’re going to build that investment pie, we want to do as much as we can to maintain the integrity. Tim, let’s start with tax season. Could it be better timing, were about half a month now, away from the IRS tax deadline, the YFP tax team is knee-deep and making sure we get the tax filing and returns, and a shout out to that team if they’re listening to this episode. Here we are, it’s front and center for lots of folks, maybe they’re looking at the returns that they filed, and maybe they got it spot on, maybe they saw opportunities to improve, maybe they got a big refund, or were surprised by a bill that was due. So just talk to us about why this topic of tax is so important.

[00:06:25] TB: Yeah. I’m actually looking at the title of this, I see, Tax Inflation and Fees. I think if we were to go in reverse order FIT, this is I think, really about keeping your investment portfolio fit. We’ll go tax inflation fees as we talk here, but I think the reason we kick off with taxes because it just permeates everything, Tim. Every conversation that we have related to the financial plan, there’s a tax conversation close by, unfortunately. One of the numbers that always sticks with me is that we mentioned speaking over the course of a pharmacist career they’re going to make about $9 million. The actual dollars that flow into the bank account is closer to six. That’s alarming, because you’re like, all right, where’s 30 – where’s a good chunk of that go?

That 3 million, that delta, a lot of that is being soaked up by Uncle Sam, the taxman. What we see related to tax is that there’s typically a lot of dollars left on the table in terms of what you can do to mitigate the amount that the government is taken from you. Again, I think everyone wants to pay their fair share, but no one wants to overpay if they don’t need to. Yeah, and I think for us, as a group I harken back to the day when we were starting, I have launched Script Financial now, YFP Planning, and even before that in my first job and financial planning, financial services. A lot of traditional financial planning firms do not do taxes. I found that to be very problematic, Tim, because, again, I think they’re just so closely aligned with what you’re doing on the planning side, that there needs to be some coordination on the tax side.

Shortly after I launched Script Financial, we started to do taxes for our clients. It’s not a fun thing to do, the tax work, Tim, as we know, right now, it’s it can be hectic, you’re trying to cram so much work in a small window of time. It’s like trying to manage a lot of projects on a tight deadline that you have inputs and outputs from a variety of people. However, the reason that we do it is, because I think the value that it brings to the overall plan. I’ll give you some examples. When I would do planning for pharmacists, one of the biggest thing a lot of the pharmacists that we are working, with the tail that wag s the dog are the student loans, right?

The student loans one of the major strategies there is the forgiveness strategy, particularly PSLF, or even non-PSLF, because in that strategy, one of the main techniques you could do if you’re married is to file separately to disallow the income of the spouse that doesn’t have loans and really just work off of the AGI and the student loan payment is off of one the spouse versus two. The problem is this, Tim. I say this like I would build out these dope, that’s the official term, dope, financial planning strategy related to the student loans. Then the client would say, “Hey, Tim, do you guys do taxes?” We’re like, “Nah, we don’t, but go work with his accountant across the street. They’ll hook you up.” We like what they do. But the problem is that, because most financial planners don’t understand student loans, so I think the stat out there that I saw is that 33% of financial planners will work with clients on their student loans.

That doesn’t mean they necessarily understand them, but they’ll at least address them. That means the overwhelming majority don’t even really look at it. The problem is that because advisors don’t understand student loans, typically the accountant that they work with don’t understand it, and in 99 out of 100 times, for most people file in anything, but filing jointly for a married couple is wrong, but we just happen to work with a lot of pharmacists that it does make sense because of the huge benefit you get from maximize the forgiveness. I just got fatigued by building out this great debt plan, and then it being messed up by the lack of technical expertise on the tax side of things to see that through.

Then I think the other piece of this is we’re planners, right? I want a plan. I remember, again, back in the early days, I would hire a tax person to do my own personal taxes, and I’m a business owner. So when I got a good referral from someone, I met with them, they’re like, “Oh, yeah, we’ll be able help diagnose some things with your business and all this.” I’m like, “Great, that sounds awesome.” Then a couple months rolls around, I’m like man, it’s April 14th, where are my taxes? I sent out an email, and I get an email back, and it’s a PDF of the tax return some DocuSigns to sign, and then an invoice. I equate, it seems like a paper route, right? It’s like, here you go. Chuck the paper out the window, you figure it out. I just didn’t like that, because again, I was looking for things that and I’m a nerd like that.

Again, as a business owner, I want to make sure like, am I doing everything to mitigate my tax exposure. I just got zero guidance, zero planning based on – planning advice based on last year’s activities. I really wanted that. To me, I think there’s a lot of people that want that and are trying to figure out ways to get in front of the taxman. Then finally, I think just the reason that we did it is like I said before, is I think it’s just the coordination of your financial plan. It’s not just the debt piece. We would work with clients in my last firm where there probably needs to be a healthy conversation regarding the investment portfolio, just that this wasn’t had. I understand. I get it, during tax season it’s really hectic.

You’re just trying to move the return through, but at the end of the day, the reason that we make sure that everything goes through the lead plan of the CFP, it’s a check to say, “Okay, does this jive with everything else that we’re trying to do.” Not this debt, but the investments and whatever else is on the client’s plate just to make sure that there is a clear intention of, hey this reporting period and Q1 all the way up to April 15. This is really a reaction to what happened last year. But then what are the things that we can do or what are the things that we learned from this year that we can apply to the present year in this case, 2022?

I think if you stack just the financial plan, I think if you stack years of doing that, you really shrink that delta, that 9 million to six. I think you really start to shrink that in terms of what you’re keeping in your pocket. I think for most people out there that’s worth the conversation and with the planning.

[00:13:11] TU: Yeah. Tim, just to that point that the delta significant and of itself 9 million to 6 million, and you and I both agree, like taxes have value, right? They provide services we all appreciate. We want to pay our fair share. It’s not just the delta, but also how can that delta be put to use, and what is the effect to that?

[00:13:26] TB: Yeah, exactly. I think that there’s just a lot of – from things that we see with clients, there’s just a lot of meat on the bone. There’s a lot of opportunity to, hey, have you thought about this? Or as an example, HSAs those are our every week, we talk about them a lot, but a lot of people don’t necessarily fund them. Even things related to children FSAs, particularly for dependent care, making sure money goes through their, education planning. Sometimes there’s this singular focus on things like Roth IRA and conversions, and backdoor and all that kind of stuff. It’s like, we shouldn’t even be having this conversation yet. I think some of it is overconfidence for the taxpayer of what’s important and what’s not.

We see a lot of things with taxable accounts, Robin Hood, things like that, where there are, there’s a focus there that really shouldn’t be or disallow losses due to wash sale rolls or things like that. We’ve seen lack of record-keeping for side hustles as we’re talking about Schedule C, income expenses, lack of coordination for charitable giving with a larger deduction these days. There’s a bunch strategy where you should be bunching your charitable giving versus doing a consistent year over year. Cryptocurrency, we could have a whole thing on that, Tim. Cryptocurrency and then just the overlay of, hey, there’s a huge refund or a huge tax bill, that I think sometimes it’s due to either a lack of planning or a lack of follow-through on the planning or just an understanding of how withholding or the W4 works.

This is a sample of things of what we see and I think again if you can start to work through some those issues, Tim. I think you start to see. Again, it’s hard to quantify year over year, but these are just little tweaks here that I think we talked about the investment portfolio being a rocket ship, sometimes like fees and things like that is drag on that. I think the same thing could be the case with taxes and your net worth, your financial plan.

[00:15:20] TU: Yeah. It’s great stuff. The compound effect of those changes I think about someone who unlocks things like the HSA or is able to really look at some of the bunching strategies or other things that you mentioned dependent care FSA, etc. or priority of investment and making sure you got that, right. It’s not only getting that advice, recommendation strategy put in place today, but what does that mean going forward in the compound effect of that. We talked about lots of that. We had our director of tax, Paul Eikenberg, on Episode 233, we’ll link to that in the show notes. We talked about some of the common tax strategies, tax mistakes that pharmacists should be thinking about.

I’m glad you brought up the student loans to kick off that conversation. Just last week, we had three PSLF success stories, and through those stories, we heard about some of the optimization strategies and of course, one of that would be the filing status, which folks may mess up if they’re not getting good advice there. Tim, one of the things I’m really excited about and shout out again, to the tax team that’s been hustling this season, is you and I think are really behind this vision and approach of, yeah, “We got to file the IRS as we have to do it, or else they’re going to come knocking on our door, that’s great, we’re going to keep doing that, but we’re going to do that, really, if it’s a part of the planning and the strategy.”

So you gave that story of April 14th, here’s the DocuSign, sign it, here’s your bill, that’s great. I mean, that’s stuff that’s been done, it’s in our rearview mirror. Let’s talk about what we can do going forward to really optimize the plan and perhaps avoid some of the mistakes that were made throughout the year. So we’re excited about really shifting away from just that filing to more that year-round planning, that strategy, that mid-year projection, that pivot, how do we really optimize this with the financial plan? Well, this tax season, we’ve closed the doors in terms of new folks that we’re going to be doing tax returns. Again, we’ve only got about 15 days, couple of weeks left in the season. We are going to start to build out a list of folks that are interested in more that year-round planning optimization and you can go to yourfinancialpharmacist.com/tax and get more information there.

[00:17:19] TB: Yeah. I think the other thing that can take into consideration here is right now, we talk a lot about the accumulation of the portfolio and how tax is related to that. I think the other thing is really looking at the withdrawal. When you’re a pre-retiree, and again, simple if you have a million dollars in your traditional 401K, a million dollars, saying a Roth IRA, and a million dollars in a taxable account. Unfortunately, all of those dollars are not yours, particularly the traditional Uncle Sam so has to take the bite of the apple. But one of the main things that we look at when we’re trying to structure a paycheck that is going to be able to sustain that retiree for the course of their lives is the tax and minimizing the tax burden and how we draw on each type of account and the best strategy for it. A lot of that is a tax conversation.

To me, it’s something that, it’s again, permeates every part of the financial plan, but it’s also every stage of life. There’s even conversations of okay, how do we structure, how much in this bucket or this bucket, as we are accumulating to get in front of that when we are starting to say, “Okay, I’m 65, I’m retired. We’re going to use 30 years as I’m going to live to 95, just to model this out. How do I draw from each bucket? Overlay things like social security and everything else, to make sure that I – the biggest I think stressor for a retiree is, “Am I going to have enough money? Is the money going to run out? I don’t want to be destitute or have to rely on family.” It’s really trying to, and again, if we can hold on to more of those dollars, that still have to be tax or take those moneys when you’re in a lower tax bracket, or whatever that is. It’s really important to have that coordination. It’s a frequent conversation. It’s not just, hey April 15th, come and gone, and it’s something that we continually look at and make sure we’re on top of.

[00:19:15] TU: Well, thanks for being a wet blanket, Tim. If I’ve saved a million dollars, I might actually not have a million dollars.

[00:19:20] TB: Yeah, yeah. Sorry about that.

[00:19:20] TU: Good plan. That’s a good summary of taxes. We’re going to keep coming back to this topic. So important for all the reasons we mentioned. Moving on to the second one is you mentioned in this concept of making sure and investment portfolios fit. The IB inflation. I think, normally we talk about inflation, and it’s like, nah, yeah, whatever. Especially for folks that are in the first half of their career, we have not seen inflation at the rate that we are seeing it right now.

[00:19:46] TB: Yeah.

[00:19:46] TU: Certainly it has been higher than that historically, but it’s well above what we had expected be on an annual rate. So we’ve got as of January if you look at the yearly rate we’re hovering around 7%. We talked about this in episode 239: Two Financial I’s You Might be Overlooking: Inflation, I-Bounds, will link to that in the show notes. Since that episode, I would say this has been exacerbated by the unfortunate situation in Ukraine. We see oil prices going up. We see the market volatility that’s happening. Tim, we know inflation is real, we’re feeling it in the moment. Jess and I were just talking about this and in terms of month to month with this is playing out to be in terms of expenses, but still, hard, I think sometimes put our finger on it, and the impact it can have on the plan. Why is that? Why is it so important as we think about the integrity of our investment pie?

[00:20:34] TB: Yeah. I think inflation is really one of the main reasons why we need to invest. I say that if you’re looking at the markets, and right now, the markets are very volatile, up and down, negative in some cases. What you feel is that you want to take your investment ball and go home and be like, “I just can’t take the swings, Tim.” –

[00:20:54] TU: I’m feeling right now. I’m not going to lie, Tim.

[00:20:55] TB: Yeah. I don’t looking at my accounts and seeing X and then the next day and seeing X minus 10%, 20%, 30% if we have a major correction. I get it. I think, if you’re 20, 30 years from your retirement date, and that’s the purpose of your portfolio. I think you really have to train your heart and your mind to be like, “Okay, it’s going to come back. Let’s not worry about it now.” I mean, if you’re in retirement now, and you’re relying on that, and we don’t have a good bucketing strategy, or what have you to sustain those losses, then I think it’s more problematic. But yeah, you can’t – I think what you can’t do is, is just not participate. I don’t think you can stuff your mattress and hope one day you wake up, and you’re going to have enough to retire.

I think the inflation piece is one of the main reasons why we need to invest. One of the examples I gave is that $4 latte that you buy at your local coffee shop in 2020. If you use historical rates of inflation over the next 30 years 2050, that same latte will cost $10. But I don’t know, that’s a great, good enough example, Tim. Let’s put it another way. If you make $120,000 as a pharmacist today, and we fast forward 30 years and we’re using historical rates on inflation, which is typically most planners are using about 3%, which we know this year is high. It’s low because we’re seeing seven-plus.

$120,000 today as a pharmacist in 30 years, that would be equivalent to $291,000. Think about that, $120,000 today would be equivalent to $291,000 in 30 years. From a planning perspective, if we’re trying to build out a portfolio that can generate a paycheck that is some discount at that 291 because we know that social security is going to be there. It’s going to be limited than what it is today, so we can take a little bit off for that. Then you’re probably not saving some of that 291 would go to retirement savings, but if you’re going into retirement, you’re not going to be saving for retirement.

There’s some discount to that, but the idea is that, let’s say it’s $200,000, or let’s say it’s $180,000, whatever the case is. We have to be able to build a sustainable portfolio so then, Tim, if you’re my client at 65, 30 years from now, or whatever the number is. You’re going to say, “Hey, where’s my $200,000? At 66. “Hey, where’s my $200,000.” All the way up until 95 or whatever we’re planning as nobody knows when they’re going to pass away.

That is really important, because the investments particularly an equity portfolio, in your accumulation phase is going to be really important for you to stay in front of inflation, and the taxman, quite frankly. So yeah, and just a backup, we talked about this in the “Two I’s”, when we talk inflation, it’s really, inflation is the decline of purchasing power of a given currency over time. What it basically means is that a basket of selected goods and services in the economy will increase over a period of time. Sometimes that is due because the government is printing money, which is certainly true. In our case, we talked about quantitative easing and things that. It could also be supply and demand. So one of the things that you didn’t mention outside of the Ukraine crisis is all of the boats that are at the Port of LA or that are still need to be unloaded because of pandemic or whatever, that’s causing a lack of the supply demands, making prices go up.

I think it’s really important that we understand those dynamics and know that we’re not always going to be in a low inflation environment. It can’t go up it has this year because of X, Y, or Z. Even back, if you look back in the 80s, in the early 80s, inflation was 13 and a half percent, and mortgage rates, as a result, were close to 17%. If you think about we know rates are going up now, there’s been a steep decline, and I think the government is trying to do what they can, but the fact is, we have printed a lot of money in the past that could rear its ugly head. I think the way that we can mitigate the impact of inflation is really to invest in equity stocks, and hold it over a long period of time, Tim.

We know that we’re talking about 20 plus years, we know that the stock market is fairly predictable. Typically, over a 20 year period, the stock market will return about 10% on average, and if we have just that down for inflation that’s seven. So this year, that might not do a whole lot for you, because that’s the rate of inflation, so you’re breaking even at that point, but to me, it’s really important to understand that how inflation can play a role in your ability to sustain yourself in the future. Again, we’re feeling the pinch now, because inflation has gone up so high, and so much in a shorter period of time, where we’re starting to really notice.

Tim, I’m sure with four boys, you’re noticing it with your food bill, or even we’re seeing in at the pump. Those are things that you were seeing it with housing prices, right? Those are things that get our attention, but we’re probably not thinking about how this affects us in 10 years, 20 years, 30 years, depending on your timeline for retirement.

[00:26:15] TU: Yeah. As a shout-out to your 76 years, you got to trust the process.

[00:26:18] TB: Trust the process. Yeah.

[00:26:19] TU: When you say investing is the antidote to inflation, a lot of people hear that in the moment and they see the volatility, and they’re like, “Ah, it’s the opposite of what I’m thinking.”

[00:26:30] TB: Right.

[00:26:30] TU: We’ve got to zoom out. I think this is where the power of accountability and a coach and having that long view is so valuable. Tim, I’m also thinking about the folks that are listening that are, “Hey, I’m nearing retirement.” Or I thought I was going to make that decision here and the next year or so and here we are when I’m going to be going into retirement in a high inflation period. I’m going into retirement, while there’s also a lot of volatility in the market. Just talk to us for a moment and another episode for another day about the timing of that decision of retirement when we start to draw from our portfolios, and how in high inflation period, and a high volatility period could have an impact on that.

[00:27:07] TB: Yeah. It’s probably – so what we’re talking about here is sequence risk. Sequence risk is essentially where what you’ve accumulated over the course of your career takes a hit. We’re talking 20, 30% which could be very well beyond the horizon for us in terms of a correction of the market. So now you’re will use a million dollars, let’s say your portfolio was a million, and then it bottoms out to $700,000, but then you’re also taken $80,000 a year, or whatever the number is.

So in two years, and three years, you could see where your portfolio is almost half of what it was when you actually went to retire. You’re like, “Well, I had a million and now I have $560,000.” Or whatever the number is, that’s where you really see a higher rate of failure to the portfolio failure meaning that the money runs out, that balance goes to zero before you reach your end of plan year, which a lot of people use 30 years, so if you retire at 65, 95. It’s the combination of the portfolio being down, and then drawing down the portfolio at the same time, you almost can’t make it up.

I have a little bit experience, it’s just a proxy. I remember, my first job out of the military was with Sears Kmart. It actually took over – I was a trainee for my first year. Then I took over for a lady that retired. This was right around ‘08, ‘09, and that’s when the market just completely got, the market was completely down, because of that subprime mortgage crisis. I think she actually had to go back to work because her portfolio took a beating and then she was actually drawing on it. She quickly realized that she needed to not draw on that portfolio. So really, in these periods of time right leading up, you could probably say about five to 10 years before retirement, maybe in five to 10 years after retirement, that’s where you need to be the most conservative. It’s the eye of the storm.

In for some people, it makes a heck of a lot of sense not to retire than – and try to push it off, sometimes it’s unavoidable. Sometimes 40% of people retire sooner than they think either because of illness for themselves or for a family member or, or it could even be being pushed out of the workforce. Sometimes it’s out of your control, but when you overlay these decisions with things security, when to claim that and all that, it’s super important. You could do everything correct for 30 years leading up to retirement and then that those first couple of years in retirement be blow up your playing completely. That sequence for us at its finest.

[00:29:59] TU: We’re going to come back to some more episodes, we have planned out on building that retirement paycheck in consideration as you’re making that transition from all the hard work you’ve done, and now making sure we’re able to sustain that. We’ve talked about taxes, we’ve talked about inflation, certainly not least, but last on our list is fees. We know that fees can have a major impact on how much wealth one is able to build and something that many folks may not realize of how big that implication can be. We went into detail about fees on Episode 208, Why Minimizing Fees On Your Investments is so Important, we’ll link to that in the show notes.

Tim, summary here of fee something that we harp on over and over again, that folks may not be aware of those fees often are not as transparent as perhaps we’d like them to be. So as we continue this theme of some of the silent killers of the investment pie. Talk to us about fees.

[00:30:52] TB: Yeah. There’s no such thing as a free lunch, right, Tim? When you’re investing or if you’re working with an advisor, there’s typically a costs associated with that. I think the thing that I think bothers me as an advisor, but then also as a consumer is the lack of transparency, right? We know even in healthcare, there’s people get upset about what is the actual price or even we talk about PBMs, and things like that. I think a lot of it comes down to transparency, and what’s going on behind closed doors. To me, and we see this a lot and actually, we recently, we have clients that are prospective clients booked time with us to see if they would be a good fit.

We’ve added a button that they can upload a statement so we can talk at a high level, if they’re working with advisor what they’re actually paying, because most people either have the notion of, I’m not paying anything, which that’s actually a common belief or they know that they’re paying something, they just have no idea and often is the case that they’re paying a lot more than what they think. I always go back to this story. I remember, so my first job out of the military with Sears then I had another job with a construction company. I was like, “You know what, I want to do something completely different, go into a new industry.” I was like, “Hey, Mom, I think I’m going to become a financial planner.” I think verbatim, she said to me, “That’s the dumbest idea I’ve ever heard.” I’m like, “Why?” She’s like, “Well, we work with this as advisor and we don’t pay them anything.” I’m like, “That can’t actually be true.” Years later, when I understood the landscape a little bit, actually peeled back the onion, and they were paying over $8,000 in fees, unbeknownst to them so.

To me, I think, it’s fees are aren’t necessarily a bad thing. I think it’s the transparency around that I think needs a lot of work. Really, the fees that we’re talking about here, Tim, that are most common are things advisor compensation. These are things that you would, these are fees that you would pay or commissions that you would pay to an advisor to either provide financial planning or investment advice to you. One of the more common things that we see is an assets under management fee. This is like, “Hey, Tim you have $500,000, and I’ll manage for you, I’ll charge you 1% in the fees. 5000 I’ll bill that right out of your investment accounts.” That’s very common.

To be honest, that’s one of the reasons that pricing structure is one of the reasons why when we do find younger pharmacists that are working with advisors, so they’ll either be shut out, meaning the advisory would say, “Hey, young pharmacists, I’d love to be able to help you, but I can’t.” It’s not really because they can’t, because they don’t have those assets for you to manage that – in term of that that 1%. They’re either shut out of the market, or they’re sold, I would say less than suitable products, so they can make a commission and do some work with them. They kind of wait for the assets to build over time.

This is where, if you’re out there, and you’re in pharmacy school, or shortly thereafter, someone tried to sell you a life insurance policy, a disability policy, those are the next best thing for a lot of advisors that can earn a commission, “help the client” and then stay in touch with them until they have some assets for them to manage. It can be the same things like, “Oh, well invest your Roth IRA, and we’ll sell you in A-share mutual.” I was looking at a statement where there’s both an AUM fee but then A-share. Any share mutual fund is a front loaded commission. You pay five and a quarter percent on that and the advisor gets the commission and goes from there.

There’s lots of other fees there, Tim, related to advisors, hourly flat fee, there’s could be a hybrid unrelated to the investment portfolio, but still in mix, there are things like Life Insurance Commissions, Disability, Annuities, we recently saw a non-traded REIT, which is really sweet for the advisor, because that’s sometimes 6, 7, 8% terms of commission. So that’s a big piece. I think a lot of people are unaware of what they’re actually paying and the transparency is a real thing that needs to be overcome.

[00:35:08] TU: Great summary. We’ll get rolling back to Episode 208. Why Minimizing Fees in your Investments is so important. I think the transparency is one piece, Tim as you mentioned also just the tendency, we have to underestimate the impact of something like 0.1, 0.2, 0.3 right? As we look into individual investments.

[00:35:24]TB: Yeah, absolutely. I think if you’re not working with an advisor, there are other things that are present probably the biggest one is expense ratio, Tim. Justin probably – Justin was our director of business development, working with another advisor for years, before he came on to YFP. His portfolio, his all in expense ratio was about – it was almost 1%. 0.91 to be exact. What the expense ratio, it’s what the fund takes. If you have ABC mutual fund that’s managing billions of dollars, they might take 0.91% to pay for the mutual fund manager, the analyst, the fancy office on Wall Street, pay for information. They do that to keep the lights on. You basically buy that to get exposure to lots of different stocks and bonds, because that’s what a mutual fund is, or an ETF.

0.91% on a $100,000 portfolio is $910 per year, whereas if you do something YFP portfolios, .05, so why would I pay 1000 bucks if that guy pay 50 bucks and have similar results and things like that, but so that the expense ratio is a huge one. Platform fee, some, when I was in the broker deal where we would charge $50 or whatever, just to have an IRA open. There’s things like annual account fees, closing account fees, retirement, especially in a low interest rate environment like you’re just trying to eke out fees, because you can’t make money on the float, but things trading costs, all of these things add up.

Again, this can just be drag on a portfolio. Those are the four big ones I would say is advisor, compensation, trading costs, platform fees, and then internal to the funds that you’re in expense ratio. What we try to say to clients is like we try to minimize those as best we can, because at the end of the day, we want that portfolio to grow uninhibited as best we can. So there’s no such thing as a free lunch.

[00:37:25] TU: Yeah. That folks are going to pay for advising fee, and we’re not shy about the fees that we charge and the value they bring. The point being is you want the value to bring, right? So as you look at the coaching, the accountability, the holistic nature of comprehensive financial planning. There’s a fee there, and it’s transparent, you want to understand it, you want to feel good, that’s the return on the investment. We’re talking I think about in terms of minimizing other fees or fees that maybe don’t add value, or that are not transparent, so really evaluating closely the impact that those can have on your overall investment pie.

I’m going to link to a blog post from way back when, that I wrote, we looked at two different individuals that were saving about $1,000 per month between the ages of 30 and 65, because of some of the difference in fees and things expense ratios, or other hidden fees, they ended up with a nest egg that was about a million dollars difference. Again, the impact that we can see over the long run and what those fees can have.

For folks that want to learn more about the financial planning services that are offered by the team at YFP Planning, perhaps you’re working with a planner and interested in a second opinion. Want to have an analysis of that statement just to get some different thoughts as well or if you haven’t worked with the planner, we’d love to have a conversation as well. Folks can book a discovery call to learn and see if that’s a good fit with our Director of Business Development Justin Woods, also pharmacist and you can do that by visiting yfpplanning.com. Tim Baker as always great stuff and wishing you and Shay the best as you get ready for your trip to Paris.

[00:38:54] TB: Yeah. Thank you my friend. Good to be on the episode here. I think some good stuff to be – to chat about and probably even expand on in future episodes. So yeah, I appreciate you having me back on.

[OUTRO]

[00:39:05] TU: Before we wrap up today’s episode of the Your Financial Pharmacists Podcast, I would like to again thank this week’s sponsor, Insuring Income. If you are in the market to add own occupation, disability insurance, term life insurance or both, Insuring Income would love to be your resource. Insuring Income has relationships with all of the high-quality disability insurance and life insurance carriers that you should be considering and can help you design coverage to best protect you and your family. So head on over to insuranceincome.com/yourfinancialpharmacist or click on their logo or link in the show notes to request quotes, ask a question or start down your own path of learning more about this necessary protection.

As we conclude this week’s podcast and important reminder that the content on this show is provided to you for informational purposes only and is not intended provide and should not be relied on for investment or any other advice. Information to the podcasts and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacists.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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