If you have listened to this show for a while you know that I like to create a retirement withdrawal strategy based on the pie cake. However, we haven’t discussed what goes into the mix. 

Over the next several episodes, we’ll dive into the details of asset allocation. You’ll learn a bit about ETFs, mutual funds, separately managed accounts, and UITs. On this episode, in addition to answering listener questions with Andy Panko from Retirement Planning Demystified, you’ll learn about ETFs and their pros and cons. 

Building your pie cake

In retirement, your portfolios need to reflect when you plan on spending those funds. I separate these portfolios into what I call the pie cake. The basis of the pie cake, is of course, the plate. Your plate will contain your contingency fund and emergency fund. The first layer of your pie cake contains the money that you will use to fund your life over the next 4-5 years. The next layer will contain funds that have a different asset allocation. It may contain funds that are more of a mix of stocks and bonds. In your last layer, you have your long-term assets which will consist mainly of stocks. 

What are the ingredients of the pie?

Now that you have the cake set up you’ll need to consider what you’re going to put into each pie. Each layer of the pie cake is different and must be made separately. You’ll want to consider what ingredients you want to add.

How many ingredients do you want to have in your mix? I like to have as few ingredients as possible. Try adding complexity to your ingredients by diversification rather than simply adding more ingredients. What would you prefer in your pie--simple ingredients or complex ones with names you can’t pronounce?

What is an exchange-traded fund?

An exchange-traded fund (ETF) is an instant portfolio. It is different from traditional mutual funds in that an ETF trades like a stock--you can buy call options or put options. They can be highly managed or not depending on what you buy, so pay careful attention to the fees attached. 

One unique mechanism ETFs have is that the managers buy stocks that represent the portfolio you are trying to match. They track very closely to the net asset value. Learn more about ETFs by listening to this episode of Retirement Answer Man--make sure to stick around for the listener questions with Andy Panko.

What are some advantages and disadvantages to ETFs?

ETFs aren’t all good or all bad. They have their pros and cons. One advantage to an ETF is that you have an instant portfolio. Another advantage is the clarity. You know what is inside the fund at all times. They are also transferable between different brokerage houses and are quite tax efficient. 

On the flip side, if you buy an ETF that is focused on an index you may get less diversification than you think. So make sure to dig under the hood a bit to understand what it is that you are buying. ETFs can also be more expensive if it is more actively managed. Press play to hear the difference between an organic and manufactured ETF.

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN PRACTICAL PLANNING SEGMENT

• [1:50] How to build your pie cake
• [3:23] What ingredients do you need to create your pie?
• [7:48] What is an exchange-traded fund?
• [11:28] What are some advantages and disadvantages to ETFs?
• [15:31] There are organic and manufactured ETFs

Q&A SEGMENT WITH ANDY PANKO

• [19:23] Tax planning in retirement
• [23:40] Can you use one spouse's HSA to pay for the other spouse’s medical expenses?
• [26:55] How to balance retiring with college expenses ahead of you
• [31:30] Roth conversions and the pro-rata rule
• [38:32] Andy gives me some tax advice
• [42:28] Can I recommend a First Pen?

TODAY’S SMART SPRINT SEGMENT

• [43:45] Take a look at your portfolios and ask yourself if they are too complex

Resources Mentioned In This Episode

Taxes in Retirement Facebook group

Retirement Planning Demystified on YouTube

BOOK - Thinking in Bets by Annie Duke

Rock Retirement Club

Roger’s YouTube Channel - Roger That

BOOK - Rock Retirement  by Roger Whitney

Work with Roger

Roger’s Retirement Learning Center