Subscribe
Share
Share
Embed
Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, well, we can pretty much cover it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, request your wealth analysis by going to www.yourwealthanalysis.com. With me in the studio today, mister David Fransen. David, thanks for being here.
David:Yes. Glad to be here.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can text your questions in at any time this week to the number. Save this. Put it in your phone right now. 913-363-1234.
Mike:Again, that's 913-363-1234, or you can email them to hey mike at how to retire on time.com. Let's begin.
David:Hey, Mike. How do you know what to sell within your portfolio in order to generate income?
Mike:Okay. So this question is probably about generating income from growth. Now there's 10 ways you can take income in retirement. You know, you've got Social Security as an income stream. You've got rental income as an income stream.
Mike:Some people do dividends as an income stream. Some people buy an annuity and turn on the income for an income stream. So this is the idea that if stocks average, let's say, 8% year over year in growth, which is about right, I think. And if your bond funds average around, let's say, 4% year over year, you should be able to draw 4% from your portfolio and be fine. But there's some tricky nuance to that, Because if you if your retirement savings are mostly in, let's say, non qualified assets, so we're talking about your brokerage account.
Mike:So you've paid taxes on it. There's no tax benefits. It's just invested in the market. Okay? You can't easily just rebalance that portfolio because if you sell something, you're paying capital gains.
Mike:So one of the the hard parts of a nonqualified portfolio was those shackles that if you move, you get taxed. Not if it loses money, you tax loss harvest, but I digress. And then you've got your qualified accounts, your IRAs, your Roths. You can rebalance those. That's a little bit easier because you could just sell a little bit of everything, rebalance it, or sell one of something, rebalance it.
Mike:And that's easier to kind of manage. So let's see if we can answer the question on 3 different levels. Okay. So, again, the question, just real quick recap. How do you know what to sell within your portfolio to generate income?
Mike:Starting from a macro standpoint, a big picture, the first thing you would do is you would look at market conditions. So if the markets are up, what you would sell would probably be a different answer than what you would sell if markets were down. And this is why we are so adamant about the reservoir strategy, the idea that some of your assets are principal protected. Because if you sell your assets, your part of your portfolio when that portfolio is down, you're accentuating the loss. Here's some simple math.
Mike:If your portfolio is down 30%, it would take 43% of a return to break even. You with me so far?
David:K. Yep.
Mike:So 30% down, 43% up just to break even.
David:Breakeven.
Mike:Assuming you don't take income. Alright. Well, if it's down 30% and you take out 4%, you're now down 34%. That would require a 50%, 5 0% return to break even. So that's a problem.
Mike:Right? So if markets are down, your ability to take income or what you should sell is going to be different than if markets are up. Let's say markets are up 10% and you take out 4%. Great. You're still up 6%.
Mike:It's fine. So the first one is market conditions. The markets are gonna go up, but they're gonna go down. That's really the simplest way to look at this. So in my mind, how do you know what to sell?
Mike:If markets are up, sell a little bit of everything. You know, you've diversified portfolio for a reason. You don't wanna worry too much about rebalancing things like this. A little bit here. A little bit there.
Mike:A little bit here. A little bit there. K. If your portfolio overall is up and in your non qualified portfolio brokerage account, you've got a few stocks that have lost money. Maybe you just sell them.
Mike:Enjoy the tax loss harvesting because the overall portfolios move forward and you can have some tax benefits from that. Does that make sense, by the way? Yeah. Because you're not supposed to sell your losses and people will say, well, I don't wanna sell that till it recovers. But would you buy it now?
Mike:No. Well, then why are you holding on to it? Yeah. You know, let me say that again. Would you buy this stock at this price now?
Mike:If you say no, then why are you holding on to it? Because and this is the reality whether they can articulate it or not. Because I don't wanna sell it at a loss and feel bad about my decision.
David:Right.
Mike:We gotta get away from that. We gotta get away from our identity being tied to financial decisions. So if the if the markets are up, consider some tax loss harvesting opportunities, sell a little bit of everything. But if the markets are down, if you implement what we teach here on how to retire on time, what I talk about in my book, how to retire on time, it is that a part of your portfolio is principal protected. That is not your bond funds.
Mike:Bond funds can lose money. It is that you have some assets in either money market, CDs, treasuries, fixed or fixed indexed annuities, and or you funded years ago cash value life insurance that can't go backwards. That's indexed universal life, not universal life or variable universal life or all the other like, whole life isn't as effective for this and so on. So let me repeat that back. If markets are up, take a little bit from everywhere.
Mike:Look for some tax advantages. If markets are down, you draw income from your reservoir because you do not accentuate your losses, allowing your other accounts a better chance to recover. Now it's easy to say. It's very difficult to implement, which is why we run these analyses for free. We used to charge for them.
Mike:Admittedly, I'm considering charging for them again. We used to charge $500 for an analysis because it's a lot of time. Yeah. We don't currently charge for it. Again, we may bring that back because we do get a lot of people asking for these analyses to understand how to implement the reservoir strategy.
Mike:Many people don't wanna lock up their income in an annuity for the rest of their life. They don't want that guaranteed income stream that may not keep up with inflation. But they know they shouldn't have all their assets at risk. So the question I get over and over again is, how much should be in the reservoir? How much needs to be protected?
Mike:And I wish there was an easy answer, but there's just not. It depends on your plan. It depends on your social security optimization. It depends on if you have a pension and how much. It depends on your legacy intention.
Mike:There's a lot of factors in here that there is no generic advice. That's why we can't do basic planning here at Kedrick. We have to do comprehensive planning if we're going to do the work that we believe needs to get done. Yeah. But that's the first one.
Mike:Market conditions, are they up? Are they down? The second one, tax planning. So the nonqualified, you gotta consider what kind of capital gains are there. Are you selling positions you've held for over a year?
Mike:So is it long term capital gains? Is it short term capital gains? And so those are other factors in a growth portfolio to consider. Now, I don't think anyone should ever focus on this absolute. I do the same thing every single year.
Mike:So hear me out on this.
David:Okay.
Mike:Let's say you're 68 years old, so you don't need to do RMDs. K? No required minimum distributions. Maybe your qualified accounts are just killing it. You've done enough IRA to Roth conversions, so you've balanced the appropriate amount between the two accounts.
Mike:But you do have a lot of Nvidia, a lot of Microsoft, a lot of these stocks you've held for a while that have just done great. What if that year, you just do your income from your nonqualified sources and you're at a flat 15% tax rate because that's kind of where it would be. Mhmm. K. Do you see how it's nice to be able to pick and choose between your qualified accounts and generating some income from them?
Mike:Yeah. Some years it's from your nonqualified account, your brokerage account, utilizing the 15% tax rate. And some years, maybe you're balancing between the 2. Interesting. The coolest thing and this is why people do hire a professional, by the way, because it's nuanced.
Mike:You have to basically do a fake tax return every single year in anticipation for your actual tax returns so that you know the efficient way to draw income. Because you do one thing on your tax returns can affect 5 other parts of your return.
David:Alright.
Mike:That's an expression. It's not literally the same every single time. Some of these more, sometimes less. But you get the idea. So the second part is understanding what to sell based on the tax consequences.
Mike:I think I've kind of answered the question, but let's talk about the implementation of this because a lot of people just say, well, this is my portfolio. It's by my portfolio my whole life. So I'll just keep doing what I've been doing my whole life. That might not be the right way to go about it. Mhmm.
Mike:And the reason is your entire life, your portfolios had one purpose, growth. Become rich. Gain wealth. Yeah. Right?
Mike:It's not saving for your future. You're buying your future. When you take money out of your income, your cash flow, and you put it into your savings account, into your investments, you're not really saving. You're buying time for the future so that you can spend it how you want later.
David:Some people call it paying yourself.
Mike:Yeah. I love that. Yeah. Yeah. Yeah.
Mike:If you want a good book, you, richest man in Babylon. Love that book. One of the principles is to pay yourself by saving. So anyway but you you need to also understand that one portfolio can't solve all of your problems. So we we call it the rule of diversification.
Mike:People say broad diversification, buy a little bit of everything. That's investment ambiguity. I think that's that's more reactive than proactive. In my mind, let's say we have your $1,000,000 portfolio, whatever it is, 500,000, 20,000,000. It doesn't matter.
Mike:It's the same principle here. So we've got your portfolio and we take a part of it and we use that to implement the direction within your plan. Let me say that differently.
David:Okay.
Mike:You can't even put a portfolio together until you have a plan. Right. You need to know your income. You need to know that strategies you're implementing. So once you have a plan and you've explored your strategies to get more out of your money, then you can say, okay.
Mike:The for the first 5 years, what are my lifestyle needs? How much does it cost to be me? What do I need if the markets go up or if they go down? How am I gonna generate income in those sources? And you what you do is you take a part of your overall portfolio.
Mike:You take a little bit out and you make a mini portfolio specifically to fulfill the first five years of your retirement. A lot of people right now that I'm working with are taking a part of their portfolio and they're buying a SPIA. What's a SPIA? It's a single premium instant annuity. I I actually kind of hate income annuities.
Mike:I write about it in my book, the danger of it. But if you are guaranteed income for the next 5 years, it can't lose money. It can't go backwards. The rate is guaranteed. It's fixed.
Mike:It's stuck. K. And you know exactly where your income is gonna come from for the next 5 years so everything else can grow. That's a mini part of your portfolio. You've solved it.
Mike:And if you were to die, let's say, in the 2nd year, someone else is just gonna get the payout. And if the growth rate if you're getting more than what you would get back in CDs or treasuries, then why wouldn't you? So you take it out and you take that part of your portfolio and you solve the 1st 5 years, for example. Now you don't have to use a spia. You could buy a couple of CDs.
Mike:You could do a treasury. I don't want to assume that you're everyone's gonna do the same thing. Everyone's different. You have different objectives, and let's be mindful of that. But it's an idea.
Mike:There's a lot of tools in the toolbox. Then you've got, okay, year 5 to 10. How are you gonna solve that? Well, maybe you've got some growth in the market. And maybe in year 3 or 4, you take that part of the portfolio and you start taking a little bit less.
Mike:But do you see how you're getting more specific based on your time frames? Portfolios within a portfolio. Yeah. It's like we're we're breaking the 4th wall, but in finance, you're a movie guy. Yeah.
Mike:When you look into the camera, you break the 4th wall or something like that. Yeah.
David:Ferris Bueller did it a few times, I believe.
Mike:I mean, the idea here is let's get more technical. Yeah. More specific about your investments instead of saying, well, everything's supposed to grow and just solve all our problems. Well, what if it doesn't? What if the markets go flat and you're in an all equities portfolio?
Mike:Mhmm. How are you supposed to solve your income needs or your your lifestyle needs in year 5, 6, 7, or so? So we need to get more specific based on the objectives, the risk we're willing to take, and the timeline that's associated with that risk and those objectives. It's just easier to say, here's a good portfolio based on some assessment you took, and we'll just manage it for you. Yeah.
Mike:That's the easy way out. Yeah. I'm calling out some financial professionals in the industry. But again, this stuff matters. You don't wanna retire from retirement as in you don't wanna have to go back to work.
Mike:You gotta get this right. And the solution is not just buying annuity, turning on income, and hoping that inflation doesn't erode your quality of life.
David:Right.
Mike:So you get the idea there step by step by step. If markets are up or down, that's gonna affect what you sell and how you sell it. And then understanding the many portfolios and how they're growing will also affect what you sell and how you sell it. And one last thing too, by the way. The research we have and the research we found from other professionals suggest that the day you retire is the day you take the least amount of risk.
Mike:Mhmm. So the day you retire is the day your reservoir or your principal protected accounts should be the largest it will ever be.
David:Okay.
Mike:And then over the years, you're slowly draining it because you have less need of that protection. So think about it this way. If you're 60 years old and you expect to live to 90, you might experience 3 to 4 market crashes. If you're in your eighties, you might experience 1 or 2 market crashes just based on historical averages. So you don't need as much protection.
Mike:Does that make sense?
David:Yep.
Mike:Too many people have an incomplete plan that's based on a broad portfolio that's overly diversified with ambiguity and just oversimplified generalities. We believe in getting specific and detailed with a plan first, a series of strategies second, and then the portfolio or a bunch of mini portfolios to support the different seasons within your plan. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time.
Mike:Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.