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Traditional Retirement: Social Security, Market Conditions, & Managing Expectations with Kyle Mast

Traditional Retirement: Social Security, Market Conditions, & Managing Expectations with Kyle Mast

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The BiggerPockets Money Podcast

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Kyle Mast first visited us on episode 41 of the BiggerPockets Money Podcast, and he BLEW US AWAY with his suggestions, ideas, tips, and tricks for early retirement.

Kyle is back again today to talk more to traditional age retirees—those of us who are retiring at or near age 65.

Retiring now can seem scary. The market is near all-time highs and has been for a very long time. Markets are unpredictable yet cyclical, so many analysts believe we’re overdue for an economic downturn.

Kyle shares how to ride out the storm with strategies to manage both behavior and emotions. He’s a big fan of retirement fund dates—but not of putting all your retirement eggs into one fund-date basket. Kyle also looks at Social Security and covers several scenarios to help you decide when to start receiving your benefits.

Kyle is a fee-only certified financial planner, and this episode shows time and again just how valuable a consultation with a CFP can be. If you’re nearing traditional retirement age—and you’re not quite sure what’s next—THIS episode is especially for you.

Click here to listen on iTunes.

Listen to the Podcast Here

Read the Transcript Here

Scott: Welcome to the BiggerPockets Money Podcast show number 84, with a certified financial planner Kyle Mast.

Intro: It’s time for a new American dream, one that doesn’t involve working in a cubicle for 40 years, barely scraping by. Whether you’re looking to get your financial house in order, invest the money you already have or discover new paths for wealth creation. You’re in the right place. This show is for anyone who has money or want more. This is the BiggerPockets Money Podcast.

Scott: How’s it going everybody? I’m Scott Trench. Here with my cohost, Miss Mindy
Jensen. How are you doing today, Mindy?

Mindy: Scott, I am having a fantastic day. How are you today?

Scott: I am great. I really, really enjoyed our conversation with Kyle. He’s just got a huge amount of experience and a huge amount of intelligence that he applies to this stuff around financial planning. Today’s episode is going to cover some people of different, we typically talk about content and finance, and investing, and saving, and earning as it pertains to someone who is trying to retire early.

Scott: But we haven’t touched on what happens at retirement age and how someone planning to enter traditional retirement could be thinking about how to make things last. I hopefully that applies directly to some of the folks listening. If it doesn’t apply directly to some of the folks listening, maybe it applies directly to parents of some of the folks listening or those types of things and could be a resource in that area.

Mindy: I really enjoy having Kyle on the show, he was on episode 41. Gosh, that was like towards the end of last year, so it’s been a while since we’ve had him on. I love his enthusiasm for the topic, and his willingness to share so freely about information that he has and feels that other people really need.

Scott: We talk about money concepts, investing in those types of things. I think we do it from a very aggressive lens on this podcast generally speaking, the BiggerPockets Money Podcast. I think that’s appropriate, right? If you’re in your 20s, 30s or 40s, and you’re looking to aggressively move toward financial freedom, you need to be aggressive. You need to take “more risk”.

Scott: You need to think about, can I change my career? Can I drastically reduce my expenses? How do I get large returns and things like real estate or passive index fund investing which can be very volatile? If a market downturn comes, people will lose money pursuing those types of strategies, but there’s a lot of room to recover and there’s probably a better bet of building wealth over time, doing some of those things. You can’t really do that when you’re entering a traditional retirement age, because you can’t go back to work. Your favorite quote is from what episode?

Mindy: That’s from episode 11, from Joel, from FI-180. I was just thinking to myself, “Wow, my favorite quote, what’s the worst that can happen? I’ll just go back and get a job. My worst case scenario is everybody else’s everyday life.” That really doesn’t apply to people who are nearing traditional retirement age. What’s the worst that can happen? I’ll go back and get a job. Well, that might not be an option for you. While it is technically against the law to discriminate against people based on age.

Mindy: Let’s be realistic, this happens sometimes, you quit your job at age 63, because you’re going to retire and then the market takes a dip. Going back and finding a job at age 64 or 65, “Oh, why did you leave your last job?” “Well, I retired.” They’re going to be thinking that’s going to happen again, so you need to really hedge your bets in the beginning so that when you do retire, it’s permanent.

Scott: Yeah. There’s big decisions to be made, right? How do I allocate a portfolio, where am I going to get income from, when do I declare social security, do I buy long term care insurance? All these questions are things with no clear answer at all, and I think that’s where Kyle really brings a lot of his expertise to the table. The fact of the matter is that the emotional reaction to money is again, another concept we’re going to talk about.

Scott: It’s there for everybody, at every investing stage. No one likes to lose money, but there’s a real, I think even more powerful emotional component to this when it comes around traditional retirement age versus early retirement or investing in your 20s, 30s or 40s.

Mindy: Right. What I think that Kyle really excels at in this episode is showing you that there are so many different options. It gives you something to start thinking about, but he also recommends connecting with a Fee-Only Certified Financial Planner, who can help you with your specific situation. Because this is great to get the conversation started.

Mindy: This is great to get the ideas rolling in your head but for as more, he can’t give everybody, there’s no one-size-fits-all approach. I just love all the different options and the different ideas that he starts planting. Now I’m thinking to myself, “Okay, well now I need to contact a CFP.”

Scott: Like we mentioned, this is a great episode if you’re nearing retirement age or it could be a great episode to understand the things that your parents or other folks that might be listening, that you might care about, might be thinking about as they enter retirement age.

Mindy: Should we bring Kyle in?

Scott: Let’s do it.

Mindy: Kyle Mast, welcome back to the BiggerPockets Money Podcast. How’s it going?

Kyle: Good. Thanks for having me back. It’s good to be back.

Mindy: I am super excited to have you. We had a great time with you on episode 41. I actually heard from a lot of people, “Wow, that was so helpful, that Kyle gave me so much information that I could use just starting off. He gave me a great path, et cetera.” I’m super excited to have you back today.

Mindy: We have covered a lot of early retiree topics, we’ve covered a lot of how to start building your portfolio, but we’ve never really covered what happens after you’re done. You hit your financial independence number, you are a traditional retiree, age 65. What do you do with your portfolio then? Today we’re going to cover how to kind of figure out what comes next.

Kyle: Yeah. That sounds awesome. It’s a big question to cover, but I’m sure we’ll tackle it from different angles. Yeah. Where do you want to get started? Do you have kind of specific questions you’ve gotten from listeners that might be something that we should kick it off with?

Mindy: Well, let’s do this. I suppose that you’ve been contributing to a 401(k) for a long period of time, and you’ve done it right. You’ve kind of put that in and you’ve gotten it along the career, and you’re trying to think about, “Okay, the next couple of years, I’m going to think about retiring. How do I set up my portfolio, or what should I be expecting, how do I begin distributing funds from it, where will my sources of income be? Social security will come into play, how do I just kind of frame the transition out of a job around maybe traditional retirement age?”

Kyle: Okay. One thing maybe to set the stage a little bit and it’s probably something that you guys hear from your listeners and I definitely hear it from clients or people reaching out to me, is the current state of the market that we’re in right now. I know a lot of people, especially if you’re close to traditional retirement age, it’s a lot different than if you’re a 35 year old.

Kyle: Where you can retire and if the economy goes bad or your stock market portfolio really tanks, you have the real option of going back and getting a high paying job or a reasonably paying job. As opposed to maybe a 63 year old, who is later in the job scene and maybe able to get to some consulting work, but it’s a little bit different picture.

Kyle: A lot of people right now, because we’ve been in such a long bull market are thinking to pull everything out. I’ve accumulated my index funds and my 401(k), let’s just sell it and move it into cash. The first thing I would maybe say is that as we talk through this, we want to make sure that we’re talking about things that can hold up in any market stage, because you don’t want to be timing the market.

Kyle: We’ll talk about things that are going to be applicable no matter, if you think the market is going to tank tomorrow or if you think it’s going to go back to 25% in the next year. That being said, as you get closer to retirement, a lot of things stay the same and a few things change. Traditional retirement is longer and longer every year with life expectancies increasing, a lot of people don’t realize that.

Kyle: A lot of people put their money into one, maybe target date fund, at Vanguard and say their retirement date is 2025, so let’s take that five years from now. A target date fund, if you’re not with it, is basically managed by the Mutual Fund Company, an index target date fund at Vanguard, say.

Kyle: Over time as you get close to that target date, it reduces the risk as they define it in the portfolio down to carry a little bit more bonds, a little bit more high value stocks, not as many growth stocks, not as much international exposure, with the idea of reducing volatility when you’re going to need the money.

Kyle: The problem with that is if you live 30 years, 20 years is the average life expectancy for a 65 year old across males and females. Males a little less, females a little bit more. But if you’re a couple and between the two of you, likely one of you is going to be around 30 years. You really have to plan for some sort of investment strategy that actually helps keep up with inflation over that amount of time.

Kyle: You don’t want to move everything to really basic, barely keeping up with inflation in the short term and not plan for a potentially long lifespan. It also depends on the goals that you have. If you’re someone that says, “I’m going to spend everything I have, I’d have barely enough for me to live on.” That’s different than if you want to leave a big inheritance to somebody. But those are some things that you want to think about, rough of that.

Scott: I liked that because when we usually discuss this stuff, right? I can come in with my perspective, not even be in 30 yet and say, “Okay, great. This plan, long term, I can write a lot of things, I can build extra cushion, I can go back, I can do all these types of things.” The stakes for designing your portfolio correctly and the position we’re discussing right now, seem a lot higher and it’s a lot more important to get that portfolio allocation correct than it does for maybe me or Mindy right now.

Scott: Looking at it from the perspective of an early retiree. What does that specifically look like, or how would different people in different circumstances handle that restructuring of a portfolio, which seems kind of monumental? That’s the grand total of your life’s accumulation right there and now you’re going to redeploy it into a new asset class, how do you get comfortable with that?

Kyle: Yeah. Okay. Here’s where I throw in my disclosure. Well, this is not specific advice for anyone’s specific situation. Let’s just think in a broad sense, someone who’s saved well, they don’t have a ton of money to blow but they’ll have enough to, with the 4% rule say, have a reasonable living expense through retirement. The 4% rule is research that’s been done that you can withdraw 4% from a certain portfolio over time without it depleting over basically a 30 year time frame.

Kyle: There’s different studies that tweak that a little bit, but that’s the general idea. Someone who saved relatively well, usually what I do with clients and other financial planners will do things a little bit differently. I’m all about keeping it simple. I’m very much about managing behavior and emotion, because that’s the biggest thing that I’ve seen that just kills clients at this stage. Clients that went through the last recession, close to retirement and sold in March of 2009, just really got hurt.

Kyle: Usually it’s because the emotional thing got to them and they didn’t set up a portfolio ahead of time to manage the emotion. Not just the investments, the behavior and the emotion. I’m a big fan of what’s called a bucket strategy, and if you want to be real simple about it, you can basically split your retirement portfolio using target date funds.

Kyle: For example, at Vanguard, you could set, so let’s take the 2025 retiree. Put 25% of your portfolio in the 2025 fund, 25% in the 2030, 25%, in the 2035, and then maybe 25% in the 2045, for kind of a longer term help you fight inflation piece of the bucket. What that does and those allocations are different over time as they adjust, but what that does is it basically lets you know in your mind as a retiree, “I have 25% of my income that in the year 2025 is going to be very boring.”

Kyle: It’s not going to be earning much, you’re going to get two to 5% on that portfolio. It’s a retirement income portfolio. A lot of bonds which reduce volatility, they go down too but they won’t go down 40% in the recession, the portfolio went down probably 10%. You have that bucket for those first years of retirement to live off of and spend through. Then you have the next bucket that’s maybe a little bit more aggressive for the next section of retirement.

Kyle: Then you have the next bucket beyond that, and the next bucket beyond that. It’s a way to mentally prepare yourself to know that I have enough in the short term if the market really tanks, but I also have enough invested more aggressively in the long term to help fight inflations. If healthcare costs increase, if things in life change, it really helps play that out.

Kyle: A lot of your listeners are very smart in the financial independence community and they’ll immediately call me out and say, “Well, actually, you still have an overall allocation. You have these four different target date funds. What’s that overall allocation?” You actually have, maybe it’s 60% stocks, 40% bonds when you calculate it depending on the year.

Kyle: But in my mind and what I’ve seen with clients, that’s not the point. The point is separating out the behavior from the investment so that you can manage yourself. When that dip does come, it’s going to come in, might come next year, might come five years from now. I don’t know. I know I do this every day, so anything you can do to keep yourself on track for good investing habits is a really good thing.

Mindy: Wait, you don’t have a crystal ball, you can’t tell us when the market’s going fall?

Kyle: I wish. I would be on an island right now. I wouldn’t be chatting here, me and my son and my wife would be gone.

Mindy: Yeah. I think that’s one of the biggest problems right now is, the market has been on such a tear for so long. I keep thinking that it’s going to crash today, tomorrow. Obviously, I have a job still so it’s not such a big deal, but I’m assuming that the market is so.

Mindy: It’s so high right now and I like this idea of putting 25% in a bunch of different target dates out, 2040 is 21 years away. You’re still going to have some aggressive growth. If the market tanks, you’re going to have some tanking, but I’m assuming that there would be some bonds in the 20 years out fund?

Kyle: Yeah. There’d still be some in there. It depends on this can maybe get into a risk tolerance preference from the client’s standpoint. You could go a little bit more aggressive and it also would depend on what your long term goals are. If you have a little bit more money than you think you’re going to need and you want to leave some to your kids in a Roth IRA, for example, and a tremendous vehicle to leave to the next generation.

Kyle: Maybe that portfolio you invest in a 2060 target portfolio like a 20 year old who would not even though you’re 60, but you know that I may pull funds from that, probably not. The other 75% of my target date funds are pretty much going to cover me. I want to make sure that I’m being the best steward of this money and growing it in the long term, because I know that I could be 30 years alive and then my kid could have it for 30 or 40 years also.

Kyle: It ends up functioning almost like an endowment fund at that point, where you just start thinking completely long term. Really, it depends on the person’s specific situation. A couple of other strategies people can think of too and this comes back to, if you’ve heard of sequence of returns risk. The sequence of returns risk, that’s something that you just need to keep in mind as maybe making or breaking retirement depending on how you react to it.

Kyle: If you retire at 65, and the market tanks in the first three years, it’s really going impact the long term viability of your retirement portfolio. Another reason to have more saved than you think you’re going to need, that’s a good way to hedge against that. Another way to hedge against it, there’s a bunch of different ways that you can do it. But one of the easiest ways is to delay taking social security as much as possible. Social security is something that for the younger generation is going to look a lot different than it is today.

Kyle: There’s going to need to be reforms to the system to fund it. However, if you’re 55 and older, I don’t think any reforms that happen are not going to impact you too much because the planning for your retirement has already been based so much on social security, and in my opinion, the voting power [inaudible 00:17:37] impacted that much. If you delay social security as long as possible, you get an increase in monthly income every year.

Kyle: By doing that you now have a potentially extra piece of income that you can turn on at some point if the market tanks. Say you retire at 65, you have one good year in the market and then the market goes down 30% and even within all your buckets that you’re using to manage behavior, you feel like, “I don’t want to be drawing from them at this point. Let’s turn on social security now and draw from that and less from my portfolio and then maybe later on supplement it with your portfolio when the market comes back up.”

Kyle: But that’s assuming that you have built enough in your portfolio to also sustain you. A lot of this assumes that you’ve built a good chunk in there to be able to live off of and be a little bit flexible during those time frames. But the delay in social security is something that I see clients just, they just quit and they want that free income or that they’ve paid for over the years and they want it right away. It’s one of the worst decisions you can make, unless you think it’s true.

Kyle: Sometimes it makes sense to take it early, but there’s a lot of specific claiming strategies, especially between spouses that you can do and it can really impact the tax that you’re paying and the viability of your portfolio long term. Especially with long life expectancies, waiting till the max age of age 70 to take it. Especially for the highest earner between the two spouses is just a big deal. Yeah, so that’s a huge tip.

Scott: Let’s dive into that specifically for a minute or two here. What does that mean? I know nothing about this. I can admit complete ignorance around social security and that kind of stuff. How do I think about that, what’s an example without naming names or anything that we could walk through?

Kyle: I just met with someone last month and oftentimes between couples, between married people, there’s one that has had a higher income for most of their life. Their social security is going to be significantly higher. Maybe one is a stay at home parent, so theirs is definitely significantly lower. The lower of the two spouses has the option to take half of the higher spouse’s social security when they start claiming or take their own, whichever is higher.

Scott: Basic question here, what age do you claim that?

Kyle: Yes. Okay. Thank you. Stop me if I assume too much. Yeah, keep asking the question. The earliest you can claim is 62, and you get effectively penalized or a reduced amount at 62 to keep it simple. 66-ish is the normal retirement age for most people. They made some adjustments in the law, so it’s anywhere from there to 67, somewhere there between those ages. Then age 70 is the latest that you can claim.

Kyle: Every year that you wait from 62 to 70, you get a bump. From two to 66-ish, you get about a five to 6% increase in the monthly amount that you would get each year. From 66 to 70, you get about 8% increase in the amount that you get monthly each year. If you think about it every year that you wait, you’re losing a year of social security income that you could have had. It basically pushes out the break-even date that you would be able to say, “I need to live till 84 now to make it worth me waiting two more years to take social security.”

Kyle: Is kind of the way to think about it. There’s a few things you can, sometimes widows or widowers can take it as early as age 60. There’s some rules there that you can do it. This is the realm of man, it’s worth paying for an hour or two of a financial planners time to make sure you don’t make a big 10,000, $100,000 mistake over your retirement income time frame.

Kyle: These are getting to weeds a little bit, but yeah, 62 to 70 is basically the range that you can go. Age 70 is where with my clients, I usually try to get the higher income spouse to wait until then. The reason for that is that that higher income spouse, the higher of the two social securities, is the one that is retained when one spouse passes away. If you can at least delay somehow, even if it means taking a little bit more out of your portfolios in those early years to get that higher social security benefit for the higher income spouse to wait until 70.

Kyle: Once that starts at 70, you now have a higher base every year that government comes out with cost of living increases on your social security. If you can imagine if at 62, you’d receive a $750 benefit and at age 70 you’d receive a $2,700 benefit. A cost of living increase of 3% difference between those amounts compounded over 20 years of the rest of your life, is a big deal especially for the surviving spouse.

Kyle: This is usually, I use this to really focus on the emotion in a client meeting. Because a lot of times it’s hard to get people to not take it early, but when I frame it as this is how you can take care of the spouse that will be left, this is what you need to do. That really makes a big difference and it’s something that people should really think about.

Kyle: A lot of people think, “Well, I’m going to take it now. Social Security’s going to be dead. I’m not going to get any money, so I’m going to take it at 62.” Again, it could happen but the odds are not for that. Especially if you’re in the 10 or less years to retirement age, normal retirement age of 65.

Mindy: Okay. If I as the former stay at home mom, lower income spouse, started taking my social security, does that effect the amount that my spouse takes? If I started right at 62 and he doesn’t take it till 70, does me taking it early affect him and his payout? Payout’s not the right word. I don’t like that phrase, but whatever.

Kyle: Yeah. Social Security income. No, it doesn’t to answer your question. If you choose to take your social security early at age 62, if you’re a spouse and the other spouse is a higher income, they have a higher one. If you take it early, there’s no penalty if you take your own social security income early. I should specify that, there’s no penalty for your spouse regarding that.

Kyle: You actually can’t take the half of your spouse’s higher social security income at that point, they have to first claim their own social security before you can do that. There used to be other rules where you could do fancy stuff like they could file and then suspend or not really take it. Then you could take yours early and then theirs could grow to 70, it was like this awesome thing. There are very few people that are less able to do that.

Kyle: I have a few clients that we’ve done it with but it was cut off at a certain age a few years ago. It’s gotten a lot simpler. If you take it at 62, you get a reduced benefit at that age. You also have what’s called, income limitation. Where they’ll penalize you on the amount that you can receive if you make other income above a certain amount. It’s a really low amount, like $17,000 and adjust for inflation every year.

Kyle: You don’t lose that amount entirely when you hit full retirement age of 66, it gets recalculated into your social security income. But usually, I try to get people to at least wait till age 66, their full retirement age to take social security income. Mindy to your question, it’s not a terrible thing if there’s between the two of you, one person’s lifetime income is significantly higher so that their social security is quite a bit higher. The other one where say, stay at home is a really good example that it may be lower.

Kyle: It might make sense to just take it at 62, and have that reduced benefit and just for the extra cash flow. That means that you have to take a little bit less out of your investment accounts or your real estate portfolio. You can let that continue to grow over time and then let the higher earning spouse, let theirs grow till age 70 to make sure that you have that higher survivor benefit.

Mindy: Okay. You said that your benefit is lowered if you still have income. Is that job income or does that include a retirement portfolio that you’re starting to pull money out of?

Kyle: Yeah. It includes both. There’s kind of a calculation that goes into it. The other thing that I should say there too, and this is to keep in mind as you begin retirement. Social security; there’s two different things. If you take it early, you can get penalized but you’re also taxed on your social security too. Depending on your income, yeah, they’ll get you. Then depending on your income, they may tax it up to 50% of your social security may be taxable, or up to 85% of your social security income may be taxable.

Kyle: I’m talking about on the federal level, not State. Different States have different rules. Some States don’t tax social security at all, some tax it differently. Oregon where I’m, a lot of my clients are all over the country but a lot of them here, social security is not taxed at all on the State level. I oftentimes try to have that be the bulk of a client’s income and then orchestrate other income around that, because we can really do some really cost effective things there.

Kyle: Especially if you take into account maybe people moving in retirement, there’s things you can do there. But you just have to really be careful around this. I guess maybe the moral of the story as I’m talking through is, this is getting really into the weeds. I think that the best thing would be that you just really need to understand the social security stuff. You really need to, if you don’t understand it and you don’t dive into it on your own to a level of where I completely get this, it’s worth a meeting with a CPA, maybe even a tax professional.

Kyle: They might be able to at least give you the direct impact of what it would be for you. But a financial planner who can say, “This is going to be the best long term strategy to claim you and your spouse’s social security between 62 and 70.” We have financial planning software that runs it, but off the top of their head, after looking at your situation, a financial planner can usually say, “This is going to be the best fit.”

Kyle: I’m hesitant to give too much information to try to give people, I don’t want to give them the idea that it’s an easy thing to do and I want people to be really careful around it. It’s a benefit that is often the largest one for a lot of people, even though we always hear the social security system is broken or it’s underfunded. But for most people, that pension income, which is effectively what it is, is the most stable part of their retirement income.

Scott: Okay. A couple of questions to you. Just on a very high level, what is the difference? Let’s use two extremes, someone’s in the highest tax bracket. I know that social security, you stop paying tax after a certain tax efficient income level, right?

Kyle: Yup.

Scott: Someone in that bracket or above and someone who earned effectively no income over the duration of a career. What is the difference at 62 and 70 in terms of monthly pay for each of those people? Do you have like a very simple kind of range there?

Kyle: That’s a good question. A high social security income could be around 3,000 to 3,500, somewhere in there. I would say a normal one for like a medium income household would be 2,000 to 2,500 in there, and it really depends when you take it. But from a full retirement age, right in the middle at age 66 or 67, those are probably some good numbers to go off of.

Kyle: But depending on what your income was over your career, if it’s lower then you’re going to see $1,100 a month, that mean a full retirement age. If you didn’t work that much, it can be $200 at age 62, it can be really low. But the interesting thing about it is the way the system is kind of built, you get more benefit for what you paid in if you were on the lower end of the scale. You may be getting more but in relation to the amount that you worked over your career, you’re getting a higher benefit, if that makes sense.

Mindy: Yeah. I was a stay at home mom for eight years and I would get, every once in a while. It just seemed like it even comes out all that regularly, but every once in a while I’d get this letter in the mail from social security, “This is your benefit.” I’m looking and I’m like, “$300, what’s the point?” Why would I even bother taking that? I’ll take $300 any time somebody wants to give it to me, but it seems so low.

Mindy: This was because I had a lower income and then I had a period of time with no income, so I would definitely want to be taking my spouse’s. But I’m also not planning on social security because I don’t want to plan on it and then have it not be there. If I don’t plan on it and then it’s still there, “Well look, here’s the bonus of $300 a month or whatever tiny little pets I’m going to get.”

Mindy: This overall just in general sounds like really complicated and definitely specific to every individual person’s specific situation. When I’m calling up a financial planner, what do I say to make sure that they can help me? Because I’m assuming that not every financial planner is going to be a [wizard 00:31:38] social security. What are people looking for when they’re finding a financial planner?

Kyle: Yeah. When you call him up, make sure that they, let’s say specific questions to ask. Do you understand the tax implications of taking social security early? You could even preface it as saying, “I’m considering taking my social security early, do you think that’s a good idea?” They really should respond, I don’t have enough information to think that’s a good idea or not.

Kyle: But they should be able to explain some of the things and the variables that I was just talking about, the benefits of waiting, especially for the surviving spouse. Mindy, in your case, I’m going to use you as an example a little bit with the $200 a month. Say as at age 62, you’d get $200 a month. In your case, it may make sense to take it early because it’s such a small amount.

Kyle: It might not be a big deal and then let your husband’s grow till age 70, if you want just a little bit extra cash flow. However, depending on what your husband’s looks like, it really might make sense for you to wait until he starts taking his and then you take half of yours. What’s the age difference between you and your husband? You don’t have to tell me your ages. Is he older or younger and how many years?

Mindy: He’s a year younger.

Kyle: Okay. Okay. It wouldn’t work as well because sometimes they’d say you were four years younger, you could wait until he’s 70. Then he starts his, which is at the maximum benefit, there’s no reason for him to wait any longer and then you could take half of his at age 66. If you’re older, it makes less sense because you’ll be 71 when he’s 70. It may make sense for you to just take it early if it’s not going to be a huge benefit anyways.

Kyle: Again, this is not advice because there’s other variables here. It might make sense for you to both wait till 70 and 71 to take it, because then you have his full increased amount plus half of that amount. Okay, I’m going to get into the weeds a little bit more here. The spousal one is only half of the full retirement age amount and the full retirement age amount is the age 66-ish. Even if you wait till 74, your husband that you only get half of what he would’ve got at age 66. That’s another reason for you to not wait.

Kyle: It might make sense for your husband to wait until age 70 and you to take years at 62, just to have some extra cash flow. If yours was a larger amount and a bigger part of your portfolio, it might change things a little bit and again, meet with someone that has the view of everything to be able to figure that out. The difference you mentioned that you’re not counting on social security, you’re planning and investing, and saving well beyond social security, that’s like the cherry on the top.

Kyle: Because of that, that’s a different situation than what we’re talking about someone who’s five, 10 years away from his retirement age and maybe they don’t have the luxury of saving beyond it anymore. Now they’re at the point where this is going to be a part of their retirement regardless, and you need to think about where in retirement you started to maximize the income you have and reduce your risk.

Mindy: Yeah. No. I think that’s really helpful to, gives an example of something based on me and my situation. Because yeah, I didn’t know that I only get half of his age 66 benefits, but only a few waits until 70. But that’s very interesting, and his will be significantly more. He made significantly more money than I did.

Mindy: Then when I was making zero as a stay at home mom, he was still earning income. Yeah, now that’s really helpful and like you said, you’re getting into the weeds in this and everybody’s situation is different, but definitely call up a Fee-Only Financial Planner?

Kyle: Yes.

Mindy: Fee-Only, and if you don’t know of one … You recommend, I believe it was the XY Planning Network last time you were on, is that where you can still find a Fee-Only Financial Planner?

Kyle: Yeah. I recommended The XY Planning Network on the previous episode. Yeah. You guys asked really good questions on that last episode of vetting at CFP and finding someone I would. If anyone’s really, this is blowing their mind or they want to find someone, just listen to that episode. Mindy and Scott asked really good questions on what to be asking, what to look for.

Kyle: There’s some really good Fee-Only Financial Planners out there that aren’t going to sell you junk. They’re going to charge you because the advice is worth it, but that’s what you want. You want someone you’re going to pay them for their time and they’re going to show you the options and help you make the choice. They’re not going to make it for you, but help you make a good choice for your situation.

Mindy: Okay. That episode is episode 41, you can find that on wherever you find podcasts or at biggerpockets.com/moneyshow41.
Scott: Yeah. I think if I’m in this position, right, this is overwhelming. We just spent 20 minutes on social security, and I still couldn’t claim to be really comfortable at all with how I would think about and approach, if I were in the situation. It seemed to me that you need to meet with a financial planner, that amount and then you keep hammering away at this decision until you fully understand everything.

Scott: Don’t walk away and make a decision until you’re very clear on all of the alternatives. Because it seems like there are huge stakes for this, getting this right in terms of your retirement.

Kyle: Yes. Definitely. That’s probably the best takeaway. Yeah. If you don’t understand it, keep asking questions. If you meet with someone that is too confusing and I’m probably throwing myself under the bus here, because I think for the last 20 minutes I was probably too confusing. If you meet with someone and they won’t explain it, you need to look for somebody else because it is a big deal from taxes, to timing, to taking care of your spouse. It’s huge.

Mindy: Yeah. That’s really important. There’s a lot of people out there that can teach you what you need to know about this particular topic. But there’s equally a lot of people out there who will just confuse you completely. If you feel stupid when you’re talking to your CFP, that’s not the right CFP for you. You need to find somebody who will explain it to you and can continue to explain it to you, and not make you feel dumb.

Mindy: Because I will sit here and ask you 1,000 questions and I don’t care if people think I’m an idiot. I want to know the answer. But there’s a lot of people who feel like, “Oh, I should just really know this and I don’t, I’m not going to continue to ask.” Ask and ask, and ask until you understand.

Scott: Okay. So I think we’ve covered social security and the need for a financial planner. We’ve also talked about portfolio, we had a very high level brief discussion on how to think about a potential portfolio allocation on that. What about in terms of designing lifestyle and expectations around spending, because frankly, one easy way to make sure that this all goes better is to just need to realize less income. Right?

Scott: That’s how you make everything much easier on this. What are kind of spending patterns or behaviors that you’ve seen as people go through this transition, in terms of their household expenditures? What are things that people could be planning out better there without necessarily saying, “Hey, stop buying your morning latte or whatever at Starbucks?”

Kyle: Yeah. Oh, it’s a good question. I like this one. I really like working with clients that are in this time frame, they’re really excited about moving into the next stage. A lot of them haven’t traveled much during their lifetime, they’re excited. Their kids are out of the house, so they’re looking forward to a lot of things. One thing that I see oftentimes as people are getting close to retirement is, both spouses are working oftentimes or maybe just one is working.

Kyle: But the highest income that you have in your life, basically right at the end of your career. A lot of times people think, “I want to make sure I get things done before retirement.” Things like, “We’re going to get a different car, we’ll maybe move, we’ll make some big purchases, maybe do some sort of change around the house or remodel, something like that.” The idea is a good one from the standpoint that you’re going to get it done so that [inaudible 00:39:48].

Kyle: If you don’t enjoy doing these remodels, if you don’t enjoy moving to somewhere else and you want to say, “When I retire, I want all this done.” It feels really good. I think that’s definitely a route that people can go. One thing to keep in mind in doing something like that, that should play into your decision. You can decide whatever you want, when it comes to this. Anytime you get financial advice, you’re going to get the tradeoffs too, and it’s your decision to decide on what’s most important to you.

Kyle: But what I see a lot of times is that it would make sense for people to wait until they retire, and they stop having their high income jobs or highest income jobs. That may be 100,000 a year, 50,000 a year, 250,000 a year. It may make sense to put some of that money for those large life transitions into your retirement accounts, to try to reduce the tax that you’re paying on them. Then as soon as you retire, pull them out and use some of the time that you have to do some of these things that you have put off for so many years.

Kyle: Maybe it’s upgrading a car or doing something around the house, things like that. But oftentimes you’ll save some tax by doing that post-retirement rather than pre-retirement. Again, you don’t have to do it and if you run the numbers and you’d say, the simplicity of life in retirement, you want to be done with those repairs and have that all set up to do some major traveling or something, depending on your retirement goals. That’s fine. Just make sure you know about the tax.

Scott: Okay. Just to kind of put it into terms that I would think about it. If I need to spend 50 grand, right, then it’s better to do that after I stopped earning income because my taxable income is lower and therefore I’m going to just take less of a hit from having realized that income. I’ll be pulling money on my 401(k) at a lower tax bracket than I do in the years before I retire.

Scott: Does that logic still apply if you are already maxing out your 401(k) and all that kind of stuff, and this is all after tax liquidity anyways, does that advice change or is that the same?

Kyle: Yeah. Now that’s a good point. It would change a little bit because it’s not a significant of a tax penalty for doing it earlier. If you’re already maxing out a lot of those things, there’s not a whole lot that you can significantly do once you’ve maxed those out. Unless you’re self-employed and you have access to a solo 401(k) or something where you can do 50 plus grand a year, some major pretax stuff.

Kyle: But once you’ve done that, then yeah, I think what I see a lot of times is people that aren’t maxing those 401(k)s out, right up till retirement and using that money instead right at that point in time where it would make more sense. Just like you said, to move that into a year when you’re no longer working and your taxable income is lower. The concept still applies in the fact that sometimes you need something to do in retirement, and projects are a really good thing and can be a lot more enjoyable when you’re not working full time jobs.

Kyle: You can monitor the contractors better if it’s a remodel, you can spend more time looking for a vehicle. If you’ve never bought a new car in your life and you have a portfolio that now allows you to do that. Despite the depreciation hit, you don’t care and you’re able to spend on that. You want to spend three months looking for a car that’s going to last you for 20 years, for the rest of your life.

Kyle: You can do that instead of being rushed in those last years of retirement. But yeah, the tax penalty is not as big of a deal if you’re already maxing those things out, and you just want to kind of prepare retirement to be a lot more low-key and have these things completely done. It’s a good point

Scott: Now, so aside from just kind of monitoring the large expenses and kind of figuring out how to shift, make sure that you’re at least maximizing your 401(k). Then from there you can make all those different types of decisions about when to realize income and make large expenditures.

Scott: What about ongoing lifestyle expenses generally? Typically it sounds like those expenses drop considerably once people exit the workforce. How do you plan around that? Because that seems like a bold assumption to me. If, “Hey, I’m going to plan on spending less afterwards.” Is that a sacrifice, how do I wrap my head around that?

Kyle: Yeah. That is a bold assumption, you just have to be careful. The research does show that in retirement you actually end up spending less. However, it’s still very individually-based, just because there’s an average out there doesn’t mean that you’re average. You still need to watch your spending just like you would. I would say in the years leading up to retirement, those are just really prime times when you have the surplus in your budget or you have income to start training yourself to really track your monthly expenses and think about what you’re going to have in retirement.

Kyle: One thing to keep in mind is that oftentimes, the first 10-ish years of traditional retirement are really the best years for doing larger things like travel, large vacations, remodels, things that you’re still physically able and capable, and wanting to do. At age 75, you might still be physically able and capable to do that, but what we’re finding is that people at that point want to just move close to family. They want to have potlucks with family, the expenses go down significantly at that point.

Kyle: At that point people really realize the most important things in life are these relationships and being around the people that are important to them. We find that they just really settle into the habits and the things that they enjoy on a very simple basis. In planning for expenses in those first years, it might make sense to plan for slightly higher expenses in the first 10 years for travel and such, and count on reducing those a little bit later after that.

Kyle: You throw into the mix though higher health costs at some point later. That does go up but there’s other ways around that; Medicare covers some things there, insurance policies, long term care insurance is something we haven’t even touched on. We can jump into that in a little bit, it might be something to cover at least briefly. But yeah, I would say it doesn’t change when you retire, the responsibility that you have to track your expenses and manage your expenses. Money just doesn’t start growing on trees. You can really hurt your portfolio if you go off the wall. You still need to be a responsible person, I guess maybe the way to say it.

Scott: Well, let’s dive into that long term care and insurance, and those types of things that to be thinking about around this time as well.
Kyle: Long term care insurance is kind of a big question that a lot of retirees have, because more and more people are living longer and with the medical advances we have, we’re able to be kept living longer, I guess. In facilities or in good care places where people can really spend the last few years of their lives and really prolong it and live well, but it comes at a high cost oftentimes.

Kyle: What’s happened is probably 10, 15 years ago, long term care insurance policies, even a little bit longer than that now, maybe 15, 20 years ago, they were being sold at a ridiculously low price. They just didn’t have the numbers and the research to show what it would truly cost. I have clients that have these phenomenal policies that they bought 20 years ago, that will pay a ridiculous amount of money for their entire life and they’re done paying for them. They’ve paid premiums as like a 10 year pay-up policy, it’s done.

Kyle: Nowadays, the secret is out and the insurance companies have increased premiums substantially. Long term care insurance, I should explain what it is. It basically helps cover living expenses in a facility that is high care, like; a nursing facility, end of life type of things, continuing care facility. The insurance policy covers a certain amount per month basically. But now insurance companies have realized how costly it is and in order to make up for the really cheap policies they sold too long ago, they’ve increased the premiums substantially on new policies.

Kyle: For most people, it’s just a really high cost and it’s one of the toughest things for me to help clients decide on whether or not to go the route of a long term care insurance policy. Because it can cost 10 grand a year, it can cost 20 grand a year, depending on the price. You can get some for five grand a year, but they may not be what you’re looking for. That really hurts your cash flow and you might never use it. There’s some hybrid policies that are life insurance policies too, and they’ll pay out to your heirs.

Kyle: I won’t go down in the weeds on that. These are insurance products also that have commissions when they’re sold, so you need to keep that in mind when you’re looking into products like this. Whereas if you meet with a Fee-Only Financial Planner and you’re talking this through and you’re paying them hourly. If you decide that one of these policies is best for you, they’re going to refer you to someone else.

Kyle: You’re not going to get sold by that financial planners, it shouldn’t be because it’s just removing that conflict of interest. They’ll refer you out to someone that they trust to sell it to you. One thing that I try to get clients to do as early as possible when it comes to long term care, is to partition off a part of your portfolio that is specifically designed to hedge against those long term care expenses. If you’re, say age 50 and you’ve been saving well, and we’re talking about that bucket strategy at the beginning of the podcast.

Kyle: I would suggest slicing off a portion of your overall portfolio and doing a very long term target date fund of like target date 2050, or 2060. When you’re going to be age 85 or 90, just calculate it out and look at the target date fund for that. Do a quick calculation and see what you’d need to invest in it today with like a 7% growth rate for it to be 200,000 at that point in time.

Kyle: You still got at 40 years if you’re a 50 year old, so you could really slice off a portion of your portfolio and you just stick it in there and you say, “I’m not going to use this. This is not part of my retirement income. This is me self-Insuring for potential long term care.” Worst case scenario, you don’t use it, your heirs get it, your charities get it. That’s the best way to do it, is just as with any insurance, if you can self-insure, it’s cheaper.

Kyle: That’s what insurance is, if you’re able to do it yourself instead of offloading it. However later in life, if you haven’t saved for that, it might be a risk that due to the high premiums, you might not have enough in your portfolio to really portion off a piece of that. I would still encourage people to do even a small portion, even if you stick 20,000 into a really long term bucket of your portfolio that you know you’re not going to miss, and just invest it for that idea along down the road.

Kyle: But sometimes that might be a risk that you have to live with. If you take out a long term care insurance policy, the premiums might just be too high. It might break your retirement income portfolio and you might just need to live with that risk. Worst case scenario, there’s spend-down rules, you have to spend through your assets. When you go into a facility like that, your spouse can keep a certain amount of assets depending on the State you live in and the Medicaid rules in that State. I’ve done it with a couple of clients, but there’s some things around that.

Kyle: You still are taking care of the government steps in and takes over paying some of those things. But there’s rules on, they then have to claim your house eventually, they can’t kick your spouse out of the house. There’s different things like that you need to think about it, it’s not the end of the world. But long term care is just, it’s a really sticky issue that you need to at least think about and then just make a decision on whether you’re going to really try to insure it or just live with the risk. But make a decision, don’t just put it off.

Mindy: Okay. Let’s say that I need long term care insurance. I’m not going to feel comfortable without having some sort of policy in place. It sounds like this is a set amount of time that you pay and then the policy is good forever, and then so what time-

Kyle: Yeah.

Mindy: Oh, oh, okay. Let’s clear that up and then-

Kyle: Yes. Definitely. That’s a client that I have that has just a golden policy. They used to make these paid-up policies where you would pay for a certain number of years and then there was just this benefit that was done. They had a 10 year pay-up policy and now they have a long term care policy that is sitting there waiting for them, and it accrues compound interest every year. But the way they work now, those policies are pretty much, I don’t think there’s even one in existence anymore.

Kyle: The way they work now is you pay a premium for the rest of your life, kind of like a car insurance premium similar, because it can go up over time. They have to go through a process of submitting to the State, showing that their costs are high and that they need to increase the premiums to keep the program viable so there’s potential for that. A lot of times people can get it as early as age 50.

Kyle: A lot of people will get around 60. I think Dave Ramsey, if I can remember right, he always tells people to get it around age 60-ish and don’t quote me on that. But somewhere around there is probably the time to really be looking at it. The earlier, the better, the problem is earlier than you’re paying premiums for longer, the best route in my opinion in this day and age with long term care insurance is to self-insure if you can, somehow.

Kyle: To use a part of your portfolio, stick it in the index, target date fund and just put it for when you’re going to be age 85. Or you and your spouse somewhere, in there and have it in a retirement account. Don’t do that with qualified money, have it be a section of your IRA that you do that with

Kyle: Because that money you can take it out and you pay tax on it, but it’s going to be mostly for medical expenses, so you’ll get to deduct most of it on your taxes. You might as well have that hedge be inside of one of your retirement accounts. So it grows really as much as possible long term and then can be taken out effectively tax-free on some level.

Scott: Okay. I think there’s just a great discussion around long term care insurance. We’ve covered social security, we’ve covered some spending and those types of things. We touched on portfolio at the beginning of the episode and I want to touch on that real quick before we get to any kind of closing kind of concerns and thoughts. One of the things you’re posited was a potential target date.

Scott: Hey, but 25% in one target date, 25% in the next one is five years, five farther there and so on and so forth. One of the issues that comes to my mind, that we’ve been talking about a lot on this show is the fees associated with mutual funds, like a target date fund. What would this look like and if you wanted to do it yourself and reconstruct a similar portfolio using index funds with very low fees, what would that difference be and would there be advantages to kind of reconstruct again in that manner?

Kyle: Yes. Okay. I knew you were going to ask this question, Scott. I have the Vanguard target portfolio pulled up, so that we could dive into that. It’s a really good question. When it comes to the target date funds, at least at Vanguard, I use Vanguard. It’s not the only route you can go. There’s a lot of other good companies out there. For my clients, I know Vanguard very well. I know the company, I love John Bogle who founded the thing so that’s just a route I go.

Kyle: But you can do this with any other company; Fidelity, Schwab, there’s a lot of good companies out there. Their target date portfolio 2035 fund for example, has an expense ratio of 0.09, which is very, very minimal. If you go into their total stock market fund or some of these other funds, you’re looking at 0.03, 0.02. Internationally, you’re looking a little bit higher, you’re not paying that much more.

Kyle: They basically just build it up of, if you pull up online, their target date portfolio and you just scroll down and see what they put in it. You build it yourself to save five basis points, 0.05%. They have a total stock market index, total international, total bond and total international bond. Those are the four things that build up their target date portfolio. They basically tack on a little bit extra expense ratio to that.

Kyle: In my opinion, for the do-it-yourself-for-that really values their time, and you really need to think about the value of your time. If you love going in there and trading and re-balancing, then go ahead and build it yourself. But if you have four buckets with four things in each bucket, you’re going to need to re-balance each bucket with those four things on a regular basis, and not be emotional about it when the market changes.

Kyle: My opinion is that you set yourself up for potential error at some point, or not as well as you could if you just pay the extra 0.05%. Which really is not going to have a significant impact in your portfolio over the long run and just use a target date fund.

Kyle: But you do need to be careful because a lot of times, if you look at your 401(k) statements, a lot of times the target date funds there are very expensive. They’re not all created equally. Some of them are 0.6% higher, some of them are in 1% range. Vanguards are an index target date fund portfolio, that’s why they’re so low but you do need to be careful of that.

Scott: If I’m thinking about this and I want to do something along the lines of that 25% in each portfolio, suppose that I’ve worked a long career at a company that did not offer Vanguard with the 401(k). One of my first moves upon retirement would be to liquidate that 401(k) and move all of those assets into such target date fund within Vanguard system. Would that be kind of the way you’d be thinking about that? Maybe that’s too specific in terms of, what I’m recommending to do any of that, that would be one way to go about it if that was a goal.

Kyle: Right. If that’s your goal, that would be the way to implement it. You know that you have to decide whether that’s right for you or not and want to make sure we use the right terminology. You don’t want to necessarily, when Scott say liquidate it, we want to roll it over into the IRA non-taxable event. But yeah, that’s definitely a route you can go and I would highly recommend that.

Kyle: Getting your old employer plans into your own IRA, there’s a lot more flexibility around things that you can do with IRAs that you can’t do with 401(k)s. That being said, if you’re in a really good 401(k) plan, they might have some of these available institutional pricing that’s a little bit less, and you might be able to just build it right there inside that employer account. That would be totally fine but yeah, that’s a good route to go.

Scott: I think this goes yet again to say it’s so important, it seems like to just meet with a Fee-Only Financial Planner, CSP. That can help you time these decisions about, “Hey, how do I manage my 401(k) and get that into an optical state? When do I take social security? Should I be doing long term care insurance? Should I be doing all these things?

Scott: Like you mentioned, some of those products are commissioned-based to sales products, which is why it’s so important to get a Fee-Only Financial Advisor. It’s a couple a hundred dollars for X amount of hours that you want to go with that and it might save tens of thousands, hundreds of thousands or millions over the course of retirement.

Kyle: Yeah. That’s a really good summary. I definitely think so. Yeah, depending on the financial planner, like for me and this is definitely not a plug in the last one, I said the same thing. I’m at capacity but to give you an idea on pricing, I charge a minimum of $750 and that includes an hour of prep, an hour meeting and about a half hour to an hour of follow-up with any questions.

Kyle: If you want somebody to do a really good job, they’re probably going to be charging in the range of $300 an hour or so. Someone who’s been in the industry 10 years, who’s doing this day in and day out, they’re going to charge for their time. Well, you might be able to find someone that’s like $150 an hour or something like that and not that they’re not doing a good job, but they’re probably newer in the industry, don’t know how valuable their advice is yet.

Kyle: But a reasonable expectation would probably be around $500 to $750 for some sort of good broad consultation. If you’re a very good do it yourself, or you could do that once every three years. You don’t have to do it all that often. If you want it to do it really in depth one time and have someone spend more hours on it, they may say that’s going to take more hours to do that.

Kyle: Just make sure you understand the hours that it’s going to take. If your situation is complicated, you have a couple businesses, some real estate, that takes hours to do. If you want them to do a good job, you might have to pay for that. But again, you made a good point on the Fee-Only, they can recommend the commission products that you should buy from someone else.

Scott: There’s a lot of areas to be price-sensitive in life, right? And this is not one of them, right? It seems like we have a saying on BiggerPockets, “You think a $100 an hour electrician is expensive, try hiring a $10 an hour electrician. You’ll see how cheap that $100 electrician was.” It seems like that logic applies directly to this discussion based on what we’ve discussed here in today’s show.

Kyle: Yeah. Definitely. Think about your return on investment and anything you do, you’re always want to be thinking about your time and the investment you’re putting in to it and the potential impact that some of these decisions have on your life, your heir’s life, your spouse’s life. This is a big deal. You really want to make sure that you’re not skimping on it and that you’re finding the right professional, someone that’s on the up and up and not going to try to sell you something.

Kyle: I’m just going to say right now, someone who’s at traditional retirement is a very hot commodity for a commission-based salesperson. You have a lot of liquid cash. You now have access to retirement accounts, you now have kids out of the house, you have a lot of equity in your home if it’s not paid off.

Kyle: You’re someone that people want to get a hold of oftentimes. Just be aware of that when you’re making these decisions and talking with people, they may be seeking some value. Not that they always are and most people are very, very high integrity, but that’s something to be aware of.

Mindy: Well, and I think that it’s important to note, you just said you could do this once every three years, even if you’re doing this once a year, it’s not once a month. You’re not spending 750 to $1,000 a month. It’s a once a year, once every two years, once every three years, investment in the direction of your financial portfolio going forward.

Mindy: I think that it’s going to cost money, who’s going to do this for free? People who are getting paid by somebody else. I think it’s better for you to pay the money upfront and get unbiased advice, which is what you get from a Fee-Only Financial Planner and yeah, I love that, “You think it’s expensive hiring a professional, try hiring an amateur.” That’s just one of my favorite quotes.

Kyle: Really funny.

Scott: Well, great. Is there anything else that we should be asking or considering around this discussion? I know we’ve spent a lot of time but if there’s anything else, let’s dive into that as well before we close out here.

Kyle: I think maybe the only thing we haven’t touched on as much as we probably should have is identifying your own risk tolerance. This is something that comes out in our industry all the time. We throw this word around risk tolerance, we don’t even really explain what that means a lot of times, but it just basically is how you will react if something bad happens.

Kyle: What is your tolerance for the risk of something like a downturn in the market happening? This is something that you really need to be aware of in your own situation. This is a reason that I really like the bucket strategy for planning out retirement investing, is because really over all, you have a portfolio allocation. When you set up these buckets, you have one big allocation that you can look at if you add it all together.

Kyle: However, to separate in your mind these separate time frames really helps. But you need to understand that, Mindy mentioned this early on and I’m glad you pulled it out. Is that those later buckets, if we have a recession like we did in ’08, ’09, those buckets are down 35 to 45%, and you need to be able to stomach that. But the way you can stomach that is that you have these earlier buckets that are going to be down 9%, or something like that.

Kyle: That are going to be a lot less volatile, but you have to take some of that “risk” in the long run to your risk of running out of money or losing your money to inflation. That’s why the term risk in my mind is just really hard to define well, because there’s risk that people talk about as just the volatility in the market. But I often try to think, what’s your risk of not investing well for the long term? You’re going to lose to inflation.

Kyle: If inflation really takes off at some point, those long term buckets are going to hedge you against that. Other things won’t as much. You have more in cash, you’re going to get eaten alive by inflation. Things to think about, especially people that are 10 years or less from retirement at this point, you experienced the great recession in the middle of your working career or even later in your working career.

Kyle: How did you react? Don’t think that you’re going to react differently now. That’s a pretty good indicator. If you really panicked, you might panic again. How can you set yourself up for success if that happens again? Not saying that it will, I have no idea. But you need to make sure that you understand yourself well to see if you can put things in place. Vanguard did a study. This is one reason to work with a financial planner and it’s totally from a behavioral psychology standpoint.

Kyle: Alpha have an advisor study and what an advisor adds just from a behavioral coaching standpoint that keeps you in the game when you want to jump out when you shouldn’t. Not to say you can’t do that on your own, but you just need to be very self-aware in that case. Then jumping to the early retirees or people that are earlier in the game, a lot of you have only experienced it, the biggest bull market in the history of the US.

Kyle: You really don’t know what it feels like to see your $200,000 portfolio go to 100,000 and be thinking in your mind, “Man, It could go to 50, I need to get out.” Whereas that’s what the bottom of ’09 would have been in that 100,000 has now become 300,000. You need to be thinking through those things ahead of time and set systems in place, and strategies in place that are going to take your emotion out of it and help you stay the course.

Mindy: That’s really difficult. When the market drops so significantly, your first thought is, “I’ve already lost so much money, now I have to pull it out so I don’t lose any more.” You actually haven’t lost any money. You still have, let’s say you bought Facebook at $10, it was never $10. But you bought Facebook at 10, it went up to 100 and now it’s down to 90, you didn’t lose that $10.

Mindy: You gained the 10 to 90 that it grew, and I think that humans are just wired to view that as, “No, I lost $10.” No, no, you still gained, I guess it’s 80 not 90 I’m not even doing math right. But you gained the $80, and you only lose it when you sell. But that’s really easy for me to sit here with a job and-

Kyle: Yeah. There’s some studies that talk about loss is three times more painful than gain. If you could keep that in mind when things are going bad, you’re so much more likely to jump ship than when they’re going well. This is something that I’ve seen a lot of clients that I took on after the recession that really hurt themselves through the recession. What happens is it’s really hard to get back in then too, because you’ve psychologically hurt yourself when you say, “Okay, I pulled out the bottom, it’s going up but it should I get back in, is it going to crash again?”

Kyle: That’s why to have a strategy ahead of time and you just stick to it long term. The earlier you can start on this stuff, the greater margin you have, the longer term time frame you have. But even as you’re approaching retirement, you still have a decently long time frame. Just try to keep that in mind and use those buckets to your advantage.

Scott: Well let’s go to the famous four and we’ll mix it up a little bit today because we already did the famous four with you.

Kyle: Oh, boy. Oh, Great. I thought of things ahead of time because I had gotten other ones, but yeah, mix it up on me.

Mindy: Okay. These are the same four questions we ask everybody. Like Scott said, we already asked you about your favorite finance book back on episode 41. Do you have another finance book to recommend?

Kyle: I kind of went a different route here. I said the Rich Dad, Poor Dad and Set For Life on the last one. But every quarter I do a business retreat and Essentialism by Greg McKeown, and The One Thing by Gary Keller and Jay Papasan are just phenomenal books. They’re not strictly finance, they’re more business or even life in general, but they’re heavily focused on kind of the taking the 80/20 rule to the extreme and just really focusing on the most important things that you can do, both of them.

Kyle: The One Thing and Essentialism, they’re just, I probably read both of them 10 times. I cannot highly recommend them now. When you hear a conversation like we had today, a lot of information that you like, what is the one thing that you can do? In that book, he’s phrasing, “What’s the one thing you can do such that by doing it, everything else becomes easier or unnecessary.”

Kyle: That is just an awesome phrase. What’s the one thing from the podcast today that such that by doing it, everything else becomes easier? What’s the most important thing? I don’t know what that is for you, but I’m sure someone listening to this can think of something.

Mindy: Me with a CFP, a Fee-Only Financial Planner is my ne thing. I’m going to plug the one thing on top of you. Josh Darkin who founded BiggerPockets, read that book and loved it so much. He bought a copy for every single person in the office. And now whenever we get a new employee that is one of the things that they get in their new employee packet.

Mindy: They get this spiffy BiggerPockets t-shirt, they get a copy of The One Thing and that is a required reading. It’s such a good book. It’s such a good book. Yeah, definitely my one Thing is to get that CFP conversation happening.

Scott: What about a book or resource for self-education on retirement planning? Do you have one of those to recommend?

Kyle: There’s actually a book called Buckets of Money, that runs this concept pretty well. It’s an older book, but it’s a good classic book. A good blog to follow if people want to get into the weeds a little bit more, Michael Kitces, kitces.com, it’s K-I-T-C-E-S. I don’t know if you guys have heard of him or not, but he’s basically a superstar in the financial advising and financial planning realm.

Kyle: The guy is just genius on many levels and puts out some tremendous material. You can literally find everything from social security planning, all that stuff really boiled down well on his blog. I would highly recommend it if you’re into the self-education portion of it.

Scott: Perfect. We’ll link to that in the show notes. That’s a wonderful resource for people that are looking to think more about this.

Mindy: Yeah, he’s got a great blog and it’s not jargon-filled. It’s pretty easy to understand.

Kyle: It is. He dove into the new SCC ruling on fiduciary. He’ll get into some deep stuff and just skip to the stuff that you like. If it doesn’t apply to you, don’t read it. Just read the stuff that he puts out. But he did really good stuff on the new tax law that went in that summarizes things. Small businesses, there’s a qualified business deduction. He went into that really well, just go read his blog. He’s got good stuff on there.

Mindy: You probably will find it almost as enjoyable as Kyle finds it.

Kyle: Yes. Almost.

Mindy: What is the biggest money mistake that you fear retirees might be making going into retirement?

Kyle: Oh, my goodness, that’s a good one. I think it’s the emotional reactions to the market. I’m really afraid for people right now thinking that the market is really high and that it’s going to crash and that they want to do something about it right now to try to time that. You can do things like the bucket strategy or creating some other streams of income that can help hedge against that for sure.

Kyle: But anytime you think you’re smarter than the hedge fund managers that do this day in and day out with five screens and they get it wrong all the time, that that’s just a slippery slope. I just worry when I think about the 67 year old widow who does not know what to do with their portfolio other than what she’s hearing on the news, and calls a broker up and says, “I need to sell everything.” That just breaks my heart. Those would be things, emotional reactions to the market. If I could just wipe that out of people’s minds, that would be awesome.

Scott: Got It.

Mindy: Okay. What is your best advice for people who are nearing retirement?

Kyle: Oh, man, you guys are switching it up on me.

Scott: Yeah. We already know what your best advice is for people who are just starting out. You can find that at episode 41.

Kyle: Yeah. Nearing retirement, I’m trying to make this not a shameless plug for financial planners, but please meet with a financial planner. I just think you spend the money for one hour session and if you hate it, in the grand scheme of things at least you checked it out. I think it’s a very low barrier to entry and you could miss so much. You don’t have the long time frame to recover that a 21 year old does, and you just need to take that really seriously.

Kyle: I think that would be the number one thing, but make sure it is a Fee-Only Financial Planner that you know what they’re getting paid, they’re a CFP, they’ve gone through the courses pass the cumulative exam. Again, XY Planning Network is a great resource. You go on there, they have virtual planners. They have planners in your geographic area, you can find planners that will focus on your niche. If you’re a doctor or if you’re a self-employed, a contractor, whatever it is, there’s very specific niches.

Kyle: That’s one of the things that XY Planning Network does, is they have advisors that focus very specifically on certain professions or certain types of lifestyles, full time travelers, different things like that, so a very good resource. But I would definitely as you approach retirement, get some expert advice and pay for it, you do get what you pay for.

Scott: Yes. Your best piece of advice is to get advice? I love it.

Kyle: Yes.

Scott: I think it’s very appropriate given the conversation and there’s not a single, like that is the one thing if you haven’t done it already from this show. That you should be taking away, is you need to go and meet someone like Kyle that can help you figure this stuff out and make good decisions.

Kyle: [inaudible 01:16:16].

Scott: Alright. What is your favorite joke to tell at retirement parties?

Kyle: I don’t go to retirement parties and when my clients retire, I don’t see them anymore. May send me pictures of them pulling their RV to Florida. This is so funny, you guys asked me last time, I told you my only joke from my little sister last time, I literally don’t have any other jokes. I was thinking about with my wife, the reason is because we don’t go to parties. Parties are like after 7:30 PM and our kid goes about 7:30 PM, and we are in bed at 7:35 falling asleep at 8:30. That’s my excuse for not having any jokes at all.

Mindy: Don’t let Scott in on the fact that parenting is exhausting. How are we going to get him to have kids if we let him know that you’re exhausted for 18 years?

Kyle: It’s worth it. It’s not that bad. I get up early. I just make sure I get good sleep.

Mindy: Yeah. Did you hear about the kidnapping at school?

Kyle: No.

Mindy: It’s fine, he woke up.

Scott: Nice.

Mindy: Ha, ha, ha, ha. I know it’s terrible. Did I tell them what is red and bad for your teeth joke? Okay. What’s red and bad for your teeth? A brick.

Scott: I do remember that, you did tell me that when I was still a kid.

Mindy: My daughter goes through a fits and spurts, but she [blurred 01:17:43]. I know I laughed out loud at that one. I can just imagine somebody like whacking somebody in the face with a brick, which is bad for your teeth. But she’ll tell me all these jokes, I’m like, “Oh, I forgot to write them down.” Then you’re here at the office and, “Oh, I guess I didn’t remember any of them.” There you are, great jokes always never kill joy. Okay. Kyle, where can people find out more about you?

Kyle: You’re welcome to just jump on my website, just kylemast.com, my financial planning firm info is on there, but I have about an eight month waiting list until another CFP comes on. He’s studying through his coursework right now, but feel free to reach out to me on there. I also had a couple of blogs I read on there, True Hourly Wage where I’d talk about financial independence and just tracking your real hourly wage and what that means.

Kyle: Then letters to rand and I write some letters to my son on financial independence and just living intentionally in general or Twitter @financialkyle, if you want to see what I’m up to. But yeah, I appreciate you guys having me on, you guys just ask really good questions.

Scott: Yeah, we appreciate having you on. This was a fantastic discussion. You had a lot of concepts that I had never even touched upon or thought about how deep they go, like with the social security and retirement. I think I definitely underestimate from my perspective in life how emotionally powerful these market forces and things can be for someone that’s nearing retirement age.

Mindy: Yeah. Well, and even when you’re not nearing retirement age to watch the market go down at all, you’re like, “Oh, I just lost money.” Even though you didn’t really lose money, It feels like, “Yeah. I never want to lose money.”

Kyle: Definitely. For people that have more time, if you just think about, try to build as much margin as you can. It makes a lot of these decisions as you get to retirement a lot easier. If you’re not too tight on really having to make sure you maximize stuff, you can still maximize things. But the more margin that you can have in your saving, in your investing, it just makes a lot easier and a lot less stressful when you no longer have as much of an opportunity to continue working or getting income from some other source.

Mindy: Yep. Perfect.

Scott: Well, thank you again. This is wonderful and I’m sure we’ll have you back at some point in the future.

Kyle: Sounds good.

Mindy: I know we’ll have you back because you have such a lengthy waiting period. You’re not here trying to just plug stuff. Nobody wants to listen to one hour commercial.

Kyle: No. I’d be really bad at a one hour commercial too, it turn it off real quick.

Mindy: Okay. Great. Kyle, thank you so much for your time today. We really appreciate it as always and have a what looks like a beautiful day behind you. Have a lovely rest of your day.

Kyle: Awesome. Thanks guys. Good talking to you.

Mindy: Bye, bye.

Kyle: Bye.

Scott: All right. Big thanks to Kyle. Mindy, what’d you think?

Mindy: You know what Scott, I think this episode covered a lot of information that isn’t really covered frequently. I read a lot of personal finance blogs. I listen to a lot of personal finance podcasts and what I see overwhelmingly is, here’s what you should be doing to grow to retirement. But there is a real lack of information for what you do after retirement, after you’ve decided, “I have enough money and I’m not going to work anymore.”

Mindy: I think that Kyle gives a lot of really great advice about, not advice, he gives a lot of really great examples of things that could happen and then points you to a CFP to have a conversation based on your specific situation. I think that’s really, really going to be helpful for a lot of people.

Scott: Yeah. I thought it was a great episode. I thought there was again, outstanding perspective and information. I think there’s a lot of things I think it will leave you as a listener if you’re in this position with a lot of actions and a lot of, “Hey, this is the starting point.”

Scott: There’s a tremendous amount to understand and a lot of detail that you’d need to dive into in order to make the best decisions on many different fronts, and insulate yourself against some of the risks that he talked about. Yeah. Well, I hope that that was encouraging and enlightening. I hope that you go out and are able to connect with a professional who can help you, and enjoy a wonderful retirement, if that’s where you’re at.

Mindy: Yes. All of these links can be found at the show notes for this episode, which is found at biggerpockets.com/moneyshow84. From episode 84 of the BiggerPockets Money Podcast, I am Mindy Jensen and he’s Scott Trench and we are retiring. That makes it sound like we’re quitting, we’re not quitting. We’re retiring for the day.

Scott: We’re retiring for the day, yes. That’s right.

Mindy: Yes. We’ll be back next week with more information from another guest,[crosstalk 01:22:42]. I don’t even know who it is yet.

Scott: If I can retire back home with my scotch or something like that.

Mindy: Oh, do you drink scotch?

Scott: No. I’m trying to become financially free.

Mindy: Listen, you can have a little tipple. It’s delicious. I like Jura Best, if you’re going to be buying me scotch, it’s Jura. J-U-R-A.

Scott: Got it.

Mindy: I hate Laphroaig. Oh, my goodness. Do you know the math scientist? I was over visiting him. He’s like, “Oh, try this.” He doesn’t even tell me what it is. He pours me this like little tiny bit and I tasted Laphroaig and I’m like, “Oh, God, this is horrible.” Laphroaig is a very, very, you either love it or hate it. It’s very polarizing.

Scott: I know nothing about scotch, so I’m completely left in the dark of this conversation.

Mindy: Just say no to Laphroaig, unless you like drinking dirt. Okay. From episode 84 for real, we’re leaving. Goodbye.

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In This Episode We Cover:

  • How to set up a portfolio transitioning to traditional retirement age
  • On managing behavior and emotion
  • What a bucket strategy is
  • Sequence of returns risk
  • Delaying Social Security
  • On claiming social security
  • Income limitation for social security
  • The importance of understanding Social Security
  • What people look for when finding a financial planner
  • Designing lifestyle and expectations around spending
  • How to plan your expenses on retirement
  • What a long-term care insurance is
  • Having long-term care insurance with golden policy
  • On target date funds
  • Identifying your own risk tolerance
  • And SO much more!

Links from the Show

Books Mentioned in this Show

Tweetable Topics:

  • “Ask and ask and ask until you understand.” (Tweet This!)
  • “Money doesn’t start growing on trees.” (Tweet This!)
  • “Try to build as much margin as you can.” (Tweet This!)

Connect with Kyle