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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
When you'd stop looking at all of your assets as one portfolio that's supposed to have some magical blend, and you start taking chunks of money and assigning them to very specific missions, now your investment suitability or objectives fundamentally change based on those mini portfolios. Welcome to the Retire On Time podcast. I'm Mike Decker with David Franson. This show is all about the nitty gritty. Text your questions, (913) 363-1234, and we'll dive into the details as we expand on the retirement questions that you provide to us.
Mike:Just remember this is a show, not financial advice. If you want financial advice, just go to retireontime.com and schedule the button that says discover what's possible. David, what have we got today?
David:Hey, Mike. If you have enough income coming in, what do you recommend that you do with the extra cash flow? K. So this is like you've got an abundance, you have more than you need?
Mike:Uh-huh. Alright. This happens. Yeah. So the conventional wisdom has your entire portfolio put on your suitability.
Mike:So if you're 60 years old, allegedly, you're supposed to have 60 of your assets in bond funds. If you're 70 years old, 70% of your assets are or should be in bond funds. If you're 80 years old, 80% of your assets should be in bond funds. The idea is that you're taking less risk because you can't afford to take risk. There's less time left in life, Not to be dreary about it or, you know, grim, but and so what if you needed the money?
Mike:It needs to make sure that it's there. So that's the principle being taught behind the rule of 100 or this idea that you take less risk. Well, what if what if you considered that your pension is kinda like your bond fund, your protection part of your portfolio? What if Social Security, a small pension takes care of all of your needs and spending more doesn't lead to more happiness? What if your real estate provides you the income and you're up to date on roof and and heating expenses, you know, like the HVAC, you know, the systems?
Mike:What if all that's kind of in a really good spot? How does that play into the portfolio calculations of how much risk or less risk or whatever it should be as your allocation? Do you see how it kind of breaks down into a cookie cutter approach of saying, you know, your age, here you go. Suitability, blah blah blah. And I don't wanna minimize the importance of suitability.
Mike:What I'm saying is it's ignoring other important aspects of your retirement.
David:Okay.
Mike:So let's break this down in the simplest form.
David:Okay?
Mike:How much money do you need to take income from when you retire until, let's say, age 100? And at age 100, your portfolio balance, assuming like a 6% return, is around, let's say, 600 to a million dollars. 600,000 to a million dollars. Why that? Health care costs.
Mike:You just wanna have a little bit left over. Okay? If that number that gets you through retirement is, let's say, half your portfolio, then you have to ask yourself, what's the purpose of the other half? I mean, really, what's the purpose of the other half of your portfolio? Let's say you've got $2,000,000, and a million dollars is able to take care of all of your own individual needs.
Mike:There's a self insurance part of it that you can pay out of pocket for medical expenses, long term care needs for you and your spouse, and so on. And you have this other million dollars that you don't really need.
David:Yeah. That's a good problem to have.
Mike:I see this all the time. Their I their plans built around their IRA assets, minimizing their IRAs, spending down their IRAs so RMDs are not an issue. It just it's all focused on the IRA, and it's like the Roth and the brokerage account are just for legacy purposes. Now ask yourself, okay. Well, where's the money going to?
Mike:Is it going to a charity? Is it going to a kid? Is it going to multiple kids? Mhmm. Is it going to a mix of the two?
Mike:If it's going to a charity, then okay. What would the appropriate suitability be? When I say suitability, the investment side of you put it all at risk, grow, grow, grow, grow. And if the markets are up, they get more. If the markets are down, they get less.
Mike:Do you wanna build a more strategic portfolio that kind of bridges the gap of volatility, so the the roller coaster versus, you know, in the downside protection, more predictable returns so you can have more predictable donations or contributions? Mhmm. Do you say, well, my kid's 20 years old today, which is great. They're gonna be a lower income earner potentially, so let's let's build up a nest egg for them so they can inherit it, and then you're gonna inherit tax free. Maybe your kid's 20 years old and wants to be a doctor in ten years.
Mike:Maybe you're using some of this portfolio that you really don't need to help pay for their medical expenses. When I say medical expenses, I mean their tuition medical expenses. Not, you know, they're in the hospital. Well, I guess they're in the hospital practicing on people, not the one being practiced on.
David:That's good.
Mike:Maybe you're paying for their colleges because it it there's it doesn't make sense for you to grow the money because you have excess and then give it to them later as opposed to then helping them not take on student debt.
David:That's a great gift.
Mike:It's a great gift. What if you're saying, well, you know, they need to earn their own way, but we'll give it to them or the grandkids, or we're gonna create a dynasty trust or a generational skipping trust. But do you see how when you'd stop looking at all of your assets as one portfolio that's supposed to have some magical blend and you start taking chunks of money and assigning them to very specific missions, now your investment suitability or objectives fundamentally change based on those mini portfolios. Many times, what I'll see is, oh, here, this million dollars is for the kids. Got it.
Mike:What's their age? What's their risk tolerance? What are their needs? We talk about that, and we invest that money with the intention of it going to them based on their risk tolerance.
David:Okay.
Mike:They don't know the money's going there. And then you have to make sure you got the legacy planning and all taken care of, that it passes through tax efficiently, that it's not going to be the lottery effect. This is important.
David:Okay.
Mike:If a kid's behavior is is very much spend everything they have, giving them a lump sum of money is going to probably hurt them. If their behavior is to save and invest and only spend what they need and they understand what happiness is to them, they understand what they need Mhmm. And then they are saving the rest, a lump sum of money would probably be well managed. Yeah. There are some people that their parents are very, very wealthy.
Mike:They haven't ever experienced managing millions of dollars, and they are anxious, not unlike the, you know, the way anxiety is perpetuated today. Anxious as in they're nervous because they want to do the right thing, but they've never experienced it. Anxious like it's your first time speaking to 100,000 people on stage anxious. Not like anxious in the kind of more mainstream, what you see on social media, of anxiety.
David:Right.
Mike:Very different. Okay? All of those things are structured. These are open conversations. But do you see how we're avoiding blanket statement conversations and building out more deliberate set of portfolios with deliberate allocations, with deliberate philosophies, with deliberate strategies?
David:Yeah. That's the word of this segment here, deliberate. Yeah. Seems like. Yeah.
David:So extra cash flow. So this seems like it's your overall plan and legacy extra cash flow. And the so there this person's not talking about, well, I've got, like, an extra $300 a month in my budget that I don't need. It can be. Okay.
David:What do they do if they have too much monthly?
Mike:Yeah. So some people will have a pension with their Social Security that's higher than the income that they actually spend.
David:Okay.
Mike:They just won't spend it all. I had a client up in in Washington State owned a gas station. The gas station was in a very nice part of the neighborhood. It was used often. The min mart just sold like crazy.
Mike:They made a killing on this gas station, and it gave them more money than they knew what to do with. So what did we do? We were we were very deliberate, keyword here, into where the funds were going in their brokerage account because they weren't able in their situation, it didn't make sense or they couldn't put money to a Roth or anything like that.
David:They hit their max limits contribution.
Mike:In their situation, was yeah. They're they're every all things considered it really wasn't possible.
David:Sure. Okay.
Mike:So they they were putting money into brokerage account funds Mhmm. Or investments where the dividends didn't exist. Think like a Berkshire Hathaway. Right? So it just growing, but it wasn't disrupting their taxes.
Mike:And it was for long term donations and or for the kids because when you pass, the kids receive a step up in basis. That's a fancy way of saying that your kids will get the stock and not pay the the taxes on the gains Alright. That you've held it
David:for Okay.
Mike:Based on current tax law. Yeah. So so it's it's cash flow is not income. This is a common misconception. Cash flow is the movement of money between your investments, accounts, and resources.
Mike:Income is what you spend.
David:Okay. Yes. So if your cash
Mike:flow is positive and more than the income you want, then you have an inflow of excess and you need to know where to put that. Whether that's gifting within the gift tax threshold, whether it's prepping for legacy, whether it's donating. I mean, there's a number of things you can do.
David:Okay.
Mike:But this does happen, and you wanna be very deliberate about not creating tax issues in the future. You don't want to create a bubble of let's say you put everything into a you're a dividend investor, and you keep putting more money into dividends, but you don't need more income. Yet the dividends are paying you a tax, an income tax. Right? So ordinary dividends are taxed as ordinary income.
Mike:So that just increases your tax brackets, your tax thresholds. You're paying more in taxes. It's an inefficiency. So you have to be very deliberate about pairing the investment objectives and the cash flow and understanding the resources you're working with with the the underlying lifestyle legacy goals and the tax consequences that are at play here. Now, any other questions?
Mike:No. I know this is wild, but it's it's these are things to think about.
David:Yes. There there's a lot to think about. There's a changing world out there. There's different dynamics. There's a market that just keeps going up and up and up, and when's it gonna stop going up.
David:So many things to think about. So we I like that we've landed on being deliberate in all of our
Mike:And that you're different.
David:Oh, yeah. Your situation
Mike:is different than someone else's, so don't take the the oversimplified advice or the general rule of thumb, everyone. Understand the principle being taught, and then understand when and how to apply it to your specific situation and your specific goals.
David:Because not everybody owns a gas station that's
Mike:No.
David:Well placed. No.
Mike:Yeah. Alright. Thanks for tuning the show. If you enjoyed it, make sure to like and subscribe. Also, make sure you tell your friends about the show.
Mike:That's the bigger the show gets, the more resources we can put out there on retireontime.com to help you prepare to retire on time. As always, text your questions, (913) 363-1234, and we'll feature them on the show. If you want individual help, you can always go to retireontime.com and click the button that says discover what's possible to chat with one of our advisors here at Kedric Wealth. We are a flat fee office, which means we don't charge you 1% on your assets. It's just you pay for the service that you get, whether it's a one time plan or an ongoing relationship.
Mike:You can find more about that by going to retireontime.com. From everyone here at the Kedrick Welles studios, I wanna thank you for spending your time, your most precious asset with us in the show today. We'll see you in the next episode.