Should you get more conservative or aggressive with your investments when you retire? In this episode, we talk about different strategies for how to fund your retirement.
Transcript for Episode 4 of the Retirement Readiness Podcast:
Tim (0:07)
Hi, and welcome to this episode of the Retirement Readiness podcast. I’m Tim Regan, your host. And joining me as usual is Katie Umland. Hi Katie!
Katie (0:15)
Hi, Tim. How are you?
Tim (0:17)
I’m good. Last time, we talked a little bit about how do you find significance in retirement? And we talked about what does it take to fill your box? And now that you’ve got all this extra time, what are the things that you should put in your box? Today, we’re going to shift topics a little bit, we’re gonna look at how do you fund it? It’s great to have a box. It’s great to fill it up with a lot of fun stuff. Today, we need to talk about how do I pay for all the stuff there? So let’s talk a little bit about what it looks like when people retire. Katie, have you ever heard anything about what you should do with your investments when you get close to retirement? When you get older, are you supposed to be more conservative or more aggressive?
Katie (0:58)
I would think you should get more conservative as you’re about to retire.
Tim (1:02)
Yeah, that’s what everybody thinks. And part of the reason that people think that is that a lot of times they start looking at retirement, almost like the finish line. They look at it as a time in life, kind of check the box, “I made it. I’m no longer working and no longer have financial security.” And because of that, they have the sense that they have a really short time. Well, what can happen is when they think about the stock market, or any investment market, really, what they get concerned about is this downturn. And so, when I think about retirement, and I think about it as an endpoint, I can get really nervous and think, “Man, I don’t have very much time that I can make that last. However, you could have a longtime retirement. Katie, you work. For you and Alex, what time do you guys think you want to retire?
Katie (1:53)
Realistically or our dream? Realistically, maybe 60?
Tim (1:59)
Yeah. So when when you think about age 60, how long did your grandma on your mom’s side live? Do you know how old she was?
Katie (2:04)
She was 95.
Tim (2:07)
So you could have 35 years left in retirement. So rather than thinking about this downturn here and being concerned about it, we encourage our clients to spread out their time horizon and really picture this entire time as the time that you have to invest, because you really could live for 25 or 30 years inside of retirement. And the reason we encourage people to do that, you know, if you think right now… Katie, what’s going on this year? What’s the deal with gas prices? Where’s the cost going?
Katie (2:42)
Crazy. Gas prices are crazy. Inflation is high. Everything feels like it takes more than it used to.
Tim (2:49)
Yeah, 100%. And, and that’s one of the reasons why, as we talk to clients, and really, when you think about what it’s going to take when you hit retirement, and how you pay for it, you’d have to think about how am I going to manage it. And so I’d like to walk through a little bit of what we consider around here, what we call “high blood pressure risk.” And you probably think that sounds silly for a financial topic, but I equate this to having high blood pressure. Let’s say that you had $1,000 that you’re going to invest. If you had that $1,000, and you could put it into a 10% investment, or into an investment paying 5%, what would that look like? Well, in the first example here, so if you’ve got $1,000 invested at 10%. Now, before we go there, and talk about how much you’ve made, Katie, if you make money on something, what do you have to do with it? Do you just get to keep it out for yourself?
Katie (3:42)
No, the government wants a piece of it.
Tim (3:46)
Yeah, you got to pay some tax. And so what we what we typically do is say, “How much money will I actually get to keep, rather than worrying about how much money did I make?” And so in this first example, if you are in a 28% tax bracket, what ends up happening is you’d have this 10%, you would make $100. In the 28% tax bracket, it would mean that you had to pay $28 in tax. Over here at 5%, you will make $50. That’s half of the $100. At 28%, you pay $14 in tax. Now we were just talking about inflation. That means that in order for you to go to the grocery store, buy the same amount of milk, bread, and eggs this year, as you did last year, you’ve got to bring in more money. Well, if inflation is 4%, that means that we had to make $40 just to be able to buy the same amount of milk, bread, and eggs. Well, what happens is I can make my $100, subtract my taxes and subtract inflation, I am $32 more wealthy at the end of the at the end of that year. Over here at 5%, I make $50, I subtract $14 for taxes, I subtract for inflation, and I am $4 less wealthy.
The reason I call that high blood pressure risk is if you do that year in and year out, in the beginning, it might not be noticeable. I’m 44 right now. If I have high blood pressure, and I don’t do anything about it, I don’t even know that it’s there, I don’t have a problem today. But in 25 years I will. It’s the same thing with your money. You won’t notice that you have the issue, because you’re making 50 bucks. It’s 50 bucks! It feels really good, because there’s not a lot of volatility to it. However, if I don’t have enough, and I don’t make enough to account for taxes and inflation, in 20 years, I’m going to have a problem. And so we have to balance that. Because what happens is, as people start thinking about this downturn, that down is not your risk. What your risk is, is that when you get down here at the bottom of that dip, that’s when you need your money. If you have to sell when it’s down, that’ll end up being a big deal.
What we have to do is we have to structure investments in your portfolio, so that we can ride through that downturn, and wait till we get back up here and take money out of there. So let’s talk a little bit about how we do that and how you structure your portfolio. So what I like to think about… Katie, have you ever been to a water park, like you know, the Wisconsin Dells or something like that?
Katie (6:26)
Yep!
Tim (6:28)
At those water parks, every one I’ve ever been to… So we’ve got four kids. Well, not anymore. My oldest daughter just got married. So we’ve got three kids that are still at home. And when we took them when they were little, all every waterpark I ever went to had this kids area where all the kids would play. And up above it, there’s usually this great big bucket that filled up with water. Katie, did you ever see those?
Katie (6:57)
Ding Ding Ding Ding!
Tim (6:59)
Exactly. The bell goes off, and all the kids come running. They all come running to it because it fills up with water and spills all over and all the water goes splashing and gets all the kids wet. In essence, what we do is we set up your investments the exact same way. So what’s going to happen is we’re going to picture this kind of like that waterpark. With the big bucket up at the top, we’re going to have a bucket that we’re going to call your growth bucket. Inside of this growth bucket, we’re going to focus on “It’s going to be all about how I tried to make 10%.” (10%, hypothetically)
What we want to do is we want to grow that part of the bucket or that part of your portfolio. It’s going to have the volatility that you’re afraid of. However, by having some money in that growth, it will allow us to try to outpace taxes and inflation. And what we’re going to do is we’re going to put a little trigger right there. As this grows, and it goes past that trigger, guess what happens? Ding ding ding ding! It spills over and it comes down and fills up this next bucket. This next bucket is an intermediate bucket. As an intermediate bucket, what that means is, it’s not super frothy, not super aggressive. But it’s also not extremely conservative. It’s somewhere in the middle.
So if we do have some volatility, it’s not going to move near as much as your growth bucket. But also, it’s going to be there if you need some extra stuff – you want to go on a vacation, redo the driveway, there’s some extra cash so that we can use to fund that. And we put a little trigger there, too. And then once this grows, ding, ding, ding! It spills down, and it fills up down here, in what we call your income bucket. And the income bucket is where we generate the money that you’re going to live on, day in and day out. Every month, your income comes out of there. And we have enough there so that when this downturn happens, you’re not selling at the bottom. We have time for it to grow back, and you sell at the top, because this growth bucket, at that point when it’s come back up, the trigger’s hit and it starts going down again.
And so as you think about, “How do I fund all the stuff that I put in my living retirement life of significance into that box?” That has to have a good balance of “I’ve got growth. I’ve got some intermediate… etc.” And that’s really how you put together that life-proof funding, at least that led with significance. Katie, when you think about you and Alex, you think about getting to age 60, and we talked last time a little bit about some of the significant things you’re going to be doing. When you think about how you fund that, do you think you want to have more money than you have right now? Or do you think you’re gonna want to scale back?
Katie (9:46)
I would think, doesn’t everybody always want more money?
Tim (9:49)
More money is never a bad thing. Right?
Katie (9:52)
More money, more problems?
Tim (9:55)
Yeah. How about it? You know, a lot of times, we look at that. People think in retirement that they’re not going to need as much income. Many times, our clients think that. In some ways, it’s true, because… I don’t know how you and Alex are, but I’m sure you probably have mortgage payments and all that kind of stuff and worry about paying for college education for Dylan and that kind of thing. And so, in some ways, you don’t need as much money. But in other ways, you almost need more to fund all that stuff that you put in the box. And if we’re not careful with it, you might start out at the beginning having plenty of money but by time you get towards the end of retirement, you could be wrong.
I hope that this was helpful for you today. We always enjoy talking to you and are happy when you dial in. Thanks for joining this episode of Retirement Readiness.
Katie (10:44)
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