Jacob: Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I am your host as always. Today on the show, we're going to be talking about how you should invest after you retire. So this is a question that comes up as as many people approach retirement.
Jacob, what should I do? Should I keep my investments the same? It's been working really, really well. Why would I make a change now if things have been going well? If so, what changes do I make?
And so I want to address that and talk through it. I want to give you some things to consider and just think about. So that's what we're going talk about today. But before we do jump in, I wanted to again remind you about the new segment or new episodes going to be coming out on Fridays called the Friday Q and A, where I answer your specific listener questions. So I need your help doing that, right?
So many of you have actually started sending in those requests and those questions to me using that form, and I really appreciate that. So if you're someone who's got a burning question on top of your mind retirement, investing, social security taxes, just kind of all the stuff that we talk about here. If you got questions about that, go ahead and there's a link down in the description below of this episode where you can send in your question. It's a quick little form, just your name, email, and then and then you can type out your entire question and then I will feature it here on one of the episodes coming up on Friday. So I need your help with that.
If you could do that, that'd be awesome. And I look forward to seeing what questions come through and seeing if I can answer those for you here on the show. All right, with that out of the way, let's go ahead and jump in to investing after you retire. So one of the big problems that I see are just things that I want you to maybe think about avoiding. And I wanna start here and then we'll jump into what I think you should actually be looking at is common issues gonna be around remaining either too aggressive in retirement.
So maybe you've been growing your portfolio really well over, I guess the last ten, fifteen, twenty, thirty years, and it's been working. And so your mindset is, why would I change it if it's been going really well? Been making a bunch of money in my portfolio, why would I actually change that now? It seems like I should keep doing what I'm doing. The other side of that is this mindset of, well, I've made a lot of money in my portfolio, or I have a good nest egg saved for retirement, I can't afford to lose it because I might then run out in retirement and have to go back to work or I might be in the poor house.
And so most people there end up going too conservative and so they don't leave enough risk on the table and that word risk there. It's kind of a loose word here, but it's just I'm just using that one so that everybody can understand maybe what I'm talking about. But if we get too conservative and don't have enough risk in the portfolio, we have other risks that pop up outside of volatility, which the main one there is going to be inflation risk. And as you've seen, perhaps over the last four to five years now, inflation can be a real problem if we don't grow our portfolio or our investments appropriately to outpace that. So that's a couple of things remaining too aggressive and then also getting too conservative.
Another big problem I see most retirees doing is following just general rules of thumb. Hey, I'm retired, so I'm going be sixtyforty, or I'm retired, so I need to be fiftyfifty, just buy 50% stock and 50% corporate bonds, and I'm going to be good, right? So I don't like that approach. I like to actually tailor investment portfolios to your specific needs, and I think that's a better approach because then you know why you're investing. In some sense, we want to attach a purpose to how your money is allocated.
You may have heard it said that every dollar has a name in terms of like spending and budgeting, or every dollar has a purpose to where it's gonna be going to be spent. Same thing can be said about investing. Every dollar needs to have a purpose. Why is it being invested that way? Why do you have cash in that amount?
Why do you have bonds in that amount? How much stock should you have? And what's the purpose of having that stock in your portfolio? So once we assign maybe a purpose to how we're investing in the dollars that you've worked really hard for, maybe it gives you a little more peace and understanding around the ups and downs that come with just investing in general, and then how you can weather the storms whenever they do arise. So those are a few different problems that I end up seeing as I evaluate portfolios and start working with new clients.
Now, what are some things we need to think about or consider here? So I put a list together, and one of the things that I think is important is is how long is your time frame? And I don't want you to think about like how long you're gonna live yet, we're gonna talk about that in just a moment, but I want you to think about when are you actually retiring? Because if you retire at age 50 versus at age 60 or 65, you've obviously got a longer amount of time that your portfolio will need to last in order to create income for yourself throughout the rest of your life. So an early retirement, that might mean that your money's gonna need to last longer.
So with that understanding, does that mean that you might need to be more aggressive in your overall investment approach? Perhaps, right? Because you've gotta continue growing your money because it's gonna be needed for perhaps forty years instead of only thirty or twenty five years. So you've gotta think about it that way, how long do you actually need your nest egg to last you and that's gonna help dictate how your money should be invested. Maybe if you retire later in life, 65 plus, maybe 70, you can afford to actually be a little bit more conservative because inflation over the next fifteen, twenty, twenty five years is not gonna be as detrimental as if you were on the other side of the early retirement where you might need to have money for forty years.
So inflation won't hit you as negatively in most cases, if you need your money for less amount of time. If you retire later, you can maybe afford to be a little more conservative in your overall allocation. So that's one side of it in terms of this timeframe, you know, how old are you when you start retirement? The other side of this is gonna be, what is your longevity or how long is your life expectancy? And you can look at this in a few different ways, you can look at your family history.
There is some data there to say that there is correlation between what your previous ancestors have lived and what your life expectancy might be. And then also too, what's your current health status? Are you extremely healthy? Are you fit? Are you active?
Are you working on your diet? Are you doing things well for your body to ensure longevity? Or are you not? And that might actually cause some longevity risks or issues there as well. So think about it this way.
When do you start retirement and how long do you expect to live? Obviously, if we had that, you know, crystal ball and we could actually say, hey, look, I know exactly when I'm going to die. That makes things a lot easier, especially around, you know, planning out your income and your timelines, and when you how long you need money and how much you need in total, also around social security decisions and things like that. If we knew exactly when we were gonna pass away, that make things really easy, but unfortunately, we do not know that. So we're kind of all making the best estimated guess that we can, and want to use some good data and good indicators to do that.
So your time horizon is going to be important when deciding how long you need to invest. Because one of the issues that I see again, is that whenever someone gets to retirement, they think they're done investing because that's the end of their time horizon. So I often hear, hey Jacob, I've only got five more years until retirement, so I need to be dialing back my portfolio because I don't want to risk losing all my money in year one of retirement. And I understand the, I guess the sentiment there, but if you retire at 60 and you're 55 right now, and you're thinking, hey, I need to get really conservative because I only have five more years to invest. Well, what does that mean for the next thirty years if you live that long?
Your time horizon is not when you're gonna be retiring, your time horizon is whenever you are going to be passing away. So you gotta think about how long you could need your money. Another thing to consider here is your relationship status. Are you single or are you married? You know, does your spouse, if you are married, do they have an appetite for risk the same as you do?
Maybe one person's like, hey, I wanna see what I can make here. And the other person's like, I couldn't imagine losing $20,000 in the market. And so there's a difference maybe in perspective between each spouse and you've got to consider that because at the end of the day, you've got to be able to manage your emotions of multiple people. You've to be able to manage the emotions of the household and say, oh my goodness, we had a million dollars, now we only have 800,000. Is one spouse okay with that and then the other's not?
That's something that you gotta address and kind of like the non financial side of things and really understand like how hard would that be for us to handle. In addition to that, you've gotta think about the life expectancy of both people in a marriage, where one person, you know, might pass away earlier than expected, the other person might live longer than expected. And so you've got to think about it that way and say, look, I might not live as long, but my spouse might, and I've got to take care of them in terms of how we invest this money so that they don't have any issues in the future whenever I'm not here. So your relationship status is important. Obviously, if you're single and you're only taking care of yourself and you're the only person who needs money, that might change your outlook as well.
So if you are married and you have a spouse and you're like, hey, this person that I'm married to might live ten, fifteen years longer than I, I might need to invest a little bit more aggressively so that they outpace inflation and then can live the lifestyle that they want to live once I am not here. Now, if you're single and you're like, hey, I've got things figured out pretty good, there's no one else that needs to be taken care of with this money in the future, I can do what I need to do with this, which means you might be able to take a little bit of risk off the table there. Another consideration is, do you have heirs or family that you wanna leave a legacy to? I don't know about you, but if you were going to receive money from a parent or a grandparent or something like that, would you want them to have that money sitting in CDs for twenty years? The answer is probably no, right?
Because if they didn't do that and they invested it aggressively and for the purpose of giving it to you, that money would probably be able to double or triple in value over that twenty year period, and you'd be a lot happier with more money. So maybe you want to leave a legacy for your family or you're able to leave a legacy financially for them. Think about it from that perspective and say, what would be best for them in terms of how I invest a certain amount of my money for them. So that might mean actually investing more aggressively on their behalf before you actually give them the money so that they can have more money. And they'll be extremely glad that you did so.
So you've kind of got to make a mental allocation here and say, look, I've got $2,000,000 and I only need a million and 0.5. So that means this other 500, that's gonna be what I try to leave for the kids or grandkids. Therefore, I'm gonna try to grow that as much as possible because now I'm actually investing beyond just my life expectancy or mine and my spouse's life expectancy. I'm investing for my kids and grandkids life expectancy, and what they could do with this money if it grows doubles, triples, quadruples over the next ten, fifteen, twenty, thirty years. That's important.
And that's how you can leave an extremely wonderful legacy from a financial standpoint to your heirs in the future. Don't lump all of your money into your investment allocation in that scenario. You got to kind of extract and say, I've got this portion that's actually set aside for them, I want to grow that as much as possible. And finally, you've got to think about what your other income sources might be that are quote guaranteed. Now, obviously there's no guarantees in anything, but it comes to Social Security, most of the time, I don't know, nowadays it's kind of changed a little bit in terms of the sentiment around it.
But Social Security is pretty much guaranteed is what we've come to understand it as in terms of income that's going to come in in retirement. Addition to that, you might have a pension, you might have some, maybe some VA disability or social security disability before you get to full retirement age, or other income sources that are fixed that might be there. So you've got to think about those potential sources and what you're gonna end up having, and think of those as a part of your bond or your conservative allocation within your portfolio. And here's why. Let's say you need $10,000 a month to live for you and your spouse, and then 8,000 of that 10,000 is actually going to be covered by Social Security, a pension, and then a small disability check that's tax free that you could have coming in.
If that's the case, that means you only need $2,000 a month out of your portfolio, which means you don't need a ton of money in that scenario, if you want to look at just a 4% or 5% distribution rate. That means you don't need a lot of money to live and actually stay retired. And when you think about your fixed income in this way, and actually say this is a part of my bond or my cash allocation within my overall portfolio, you can actually put way more of your investment dollars into more aggressive holdings such as equities, where you can grow your wealth more over time and perhaps leave that legacy to the kids or grandkids. And you can take a little bit more risk because most of your income needs are being met by these other fixed income sources. If all of your income needs are met by fixed income, that's even better, means you get to do what you wanna do with your investments and you can kind of invest it as aggressively as you would like because you don't need to pull money out of your portfolio.
So those are a few considerations, but what I wanna caution you with is this, is you've got to find the right balance. Between stock, bond, cash, kind of your risk profiles, you've got to find the right balance and there's risks on all sides of it. You can be too conservative or too aggressive. On the conservative side, you got inflation risk, as I mentioned before, on the aggressive side, you've market risk or sequence of return risk. And so your allocation needs to find this balance based on your income needs.
If you listen to any of my podcasts or any of my content before, know, I love to make sure we're investing our portfolio based on our income needs in retirement, not some rules of thumb. What I'd like to do here is I like to have a certain amount of money in cash or money market, I like to have a certain amount of money in bonds or fixed income and the rest is allowed to be in stocks. And that's using a three bucket kind of strategy there and it's all based on your income needs. So for example, if you need $50,000 a year out of your portfolio, I want to have at least a $100,000 in money market or in some sort of cash instrument. And that's bucket number one.
Bucket number two is fixed income, which could be treasuries or CDs or corporate bonds or something like that. But I want at least three years of living expenses in that bucket, which means again, if you need $50,000 a year to live on from your portfolio, should you have at least $150,000 in that particular bucket in that scenario. And what this does is, is this builds out a five years worth of income that you can pull from whenever markets are going down. So if the stock bucket, which is that third bucket, everything else is allowed to be there. If that's lost 30% of its value in a couple of years stretch, guess what?
You've got cash that you could be using or fixed income that you could be using to actually sell and create your income to continue your lifestyle during those tough periods. Obviously, you've got dividends or interest coming in all along the way, so you want to sell as much of your principal investment as you might think in that scenario. But I like to base my investments on my income needs, and maybe this is the opposite approach to most recommendations or things that you might read online. Again, most people start with the investments first and then see what kind of income I get out of that. I would say, what is my income need?
And let's invest for that purpose. Let's invest on purpose so that I can get a certain amount of income from my portfolio. And I can know that if the market's down for a year or two, I don't have to sell stock at a loss, which is the worst case scenario, that's that sequence of return risk, I can actually use my money market and my fixed income to create my income at that point, because that's not lost value in most scenarios. So that's the first thing you've got to remember here. You gotta find the right balance.
I like to use a bucketing strategy to do that. Hopefully that makes sense. Go back, I've got episodes there that you can learn more about how buckets actually work and the way I like to approach that. The second thing you've got to remember here is your emotions, right? Because the best plan is only the plan that you can execute.
Even if you've got the best investment plan ever, and you can't sleep at night, it's not a good plan because you're gonna end up giving up on it. You're gonna end up giving up on it. It's gonna be something you can't handle or execute any further. So what what I like to do with my clients is this, let's understand where we're at. Some people are way more aggressively minded than others.
And so I wanna identify which kind of camp you fall in. Are you wanting to be really conservative? Are you wanting to be really aggressive? And I've got to know which strings to pull and say, hey, look, here's why we can't be so aggressive because if we are, the market drops 40%, you don't have any income to live on, you're in the poor house and you're not able to spend any money, that's not fun. On the other side of that, if you're too conservative, none of your money is growing the way it should be over the next ten, fifteen, twenty years, and that's going to create some longevity risks, should you live longer than you expect, and inflation could be going up at a higher clip than your actual interest or earnings on your money.
So what I say is let's start where we are, and let's slowly shift the dials and ease into a different type of portfolio allocation over a period of time. I want people to experience the ups and downs of the market and then what happens is you get used to it. So if you've invested for twenty, thirty years in your four zero one ks, you've seen plenty of ups and downs throughout time, and what's happened every single time? It's gone down, but it's always come back up. Now, Jacob, what happens if that doesn't happen this time?
Well, I understand that's a reality and a possibility, but right now, all we have to go on is history and the data that comes with it. And if we kind of go big picture here, whenever we're talking about investments and long term outlooks, we're investing in companies that are designed and their sole purpose is to make money. They're built to make a profit and they're going to find a way to do that regardless of everything around us, whether it be higher taxes, more regulation, whatever it is, they're gonna find a way to make money and sell us products or goods and services. And we're betting on that. So what we're not doing is we're not betting on just a hypothetical stock market out in the clouds and say, oh, I hope it goes up and doesn't crash forever.
What we're doing is we're actually investing in underlying companies that are designed to make money and make profit. Okay, so keep that in mind. But bringing it back to how I want to approach this from an emotional standpoint is, let's start wherever we are aggressive or conservative. Let's start there and slowly work our ways back to where we need to be. Okay, so if we're really conservative, I want to get a little more aggressive, maybe in our portfolio allocation.
We've got to take some time to do that. And we're going to slowly piece it together and slowly dollar cost average from conservative into a little bit more aggressive so that we get to our target allocation over time. But I don't want to do it all at once. Because again, my job as an advisor is to to help manage my clients emotions and say, hey, look, I know this is gonna be hard. Here's how we're gonna approach this so that you can see, hey, we're gonna slowly ease into this, rather than just go all at once.
Because again, even if that's the right thing to do mathematically, guess what? It doesn't matter if the client can't stick with it. If you can't stick with it from an emotional standpoint, it's not helpful. And then finally, we have to have a written plan. And by writing it down, what you're doing is, is you're training your brain to say, look, I have something that's physical, okay, there's something about a tactile writing it down.
We have something on paper that said, hey, whenever things were good and we felt good about everything, this is what we said we would do when things didn't go well. So whenever things don't go well, we have to look back at that and say, look, we already decided what we're gonna do here. We can't let our emotions alter or fog our decisions at this point. And so what we do is we in that plan, we build in, hey, if this happens, then we do this. And here's the thing, most of the time inaction is the best action when it comes to investing.
I've got kind of an idea here, but the more you touch your investments, the smaller they get. Just think about it this way, if you trade all day, if you make decisions to go in or out of the market just because it's going up or going down or because someone is the president or is not the president, Those are really bad ways to make decisions around investing. And so the more you do that, the smaller your accounts gonna get, or if you're always taking money from your accounts, they're gonna get smaller over time as well. So the more you touch your accounts, the smaller they're gonna get. So when it comes to this, we have to have a written plan and in some sense, we're always trying to expect the unexpected, we always are hopeful, we always look forward and say, hey, look, I'm going to get my eight plus percent annualized returns over this period of time.
But the problem with that is those are annualized, those are averages. In order to get an 8% annualized return, you're gonna have a positive 30% year and you're gonna have a down 20% year. So it's not up into the right all the time. So we have to know that that's coming, and we have to have a plan to overcome that when those different periods of time arise. Everyone thinks they've got investing figured out these days, but if you make mistakes on your investments, it doesn't matter how good of a plan you have, because it's not gonna matter because you screwed up the investments.
You can have the best tax plan ever, but if don't any money, then it doesn't matter what taxes are doing. You can have the best plan for your income, but if you don't have any investments, you're not gonna have any income, right? So your investments are crucial to your overall retirement success. You have to do it right, and you've got to have a good plan for it, write it down, be able to manage your emotions as you go through different investing cycles and retirement's different because you're not earning an income. While you're earning an income, making a salary and putting money to your four zero one ks, it's actually fairly easy because you know, hey, I'm going make another paycheck next month.
I'm gonna have X amount of my paycheck go into my four zero one ks, it's gonna be buying in at a lower price even if the market goes down, that's actually a good thing for me. But when you get to retirement, your income source turns off, and now you have to start using your portfolio for your income. You're watching that market a lot more, I can promise you. It happens every single time, the nerves go up a little bit because there's no backstop of earning income from a job, you're relying on your savings. So you've got to a written plan, manage the emotions, find that right balance between, you know, aggressive and conservative, and then if you need to get help, get help because the mistakes here could be detrimental.
You can make the biggest mistakes in your investments. And even if your plan is wonderful, doesn't matter how good because execution is really what matters when it comes to retirement. So hopefully this gives you some some ideas around how to think about your investments after you retire. Again, base it on your income needs, follow that bucketing approach, and then think about these different considerations as you're building out your portfolio. Because again, your money might not only be for you, it might be for your spouse.
You got to think about them and in terms of their longevity. You gotta think about who's to come after you if you are able or want to leave a financial legacy for kids or grandkids or family in the future. All right, I think that about wraps it up. Remember to go submit your questions to me using that link down below, that way they can be featured here on a Friday Q and A coming up in the future. Other than that, I hope you have a wonderful rest of your week and we'll talk to you again next week.
Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.