There is no cookie cutter retirement portfolio. Some people are looking to travel in retirement while others are looking to save and leave money behind. Listen here as Victor explains how to put your retirement portfolio together, whatever your risk tolerance might be.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA®) and Certified Financial Planner™ professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Palante Wealth Advisors.
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Announcer: Welcome to “Make it Last.” Helping you keep your legal ducks in a row and your nest egg secure, with your host, Victor Medina, an estate planning, and elder law attorney, and certified financial planner.
Victor Medina: Hi, everybody? Welcome back to Make it Last. I’m your host, Victor Medina. I’m so glad you can join us this Wednesday morning on the WCTC sound advice programming endeavor.
What is that? We try to bring to you local experts that can talk to you all about something important. I’m the person that talks to you all about your retirement, how to make sure that your legal and your financial ducks are in a row, and you’ve got everything set up. I’m excited to talk to you about today’s topic.
Basically, we’re going to talk about how to set up a retiree‑friendly portfolio. Before I jump into the show today, I do want to remind you that if you’re not listening, if you don’t have the opportunity, excuse me, to listen to us live on Wednesday morning, we do simulcast the show as a podcast.
If you are a retiree, a grandparent of sort, you can ask your grandchild how to set up a podcast. You know what? It’s really super simple. All you have to do is download your favorite podcast app. If you’ve got an iPhone, it’s simply called Podcasts. If you’ve got an Android phone, I don’t know what to tell you. There’s something out there, but I’m a Mac guy. [laughs] I haven’t figured that one out.
You download a podcast app and you search for Make it Last. You do that Make it Last with Victor Medina, you’ll see the logo for the show. You just hit the subscribe button. What that’ll do is that’ll give you the opportunity to download all the prior episodes.
If you can’t make it with us live on Wednesday morning, you’ll have the opportunity to go ahead and have that show automatically delivered to your phone and then you can listen to it whenever you want. That’s a little pitch for the podcast. I do encourage you to do that especially because it will give you a little bit of a library. You’ll be able to look back on all of the shows that we’ve done in the past.
Maybe there’s a topic that we haven’t hit yet if you’re a new listener, but you’ll definitely have the opportunity to look back onto that and see if there’s something there that you want to listen to. In fact, of course if you always have any questions or if there’s a subject that you want me to hit, all you have to do is just drop us an email. That’s pretty easy to do. You just email me.
My name is Victor, V‑I‑C‑T‑O‑R@Medina Law Group M‑E‑D‑I‑N‑A L‑A‑W G‑R‑O‑U‑P.com. Just send me an email. We’ll make sure that we’ll incorporate your questions, your topics into future shows.
You want to talk today about how to set up a retiree friendly portfolio. What we’re going to do is make sure your portfolio matches up with your lifestyle and your risks tolerance. Other reasons why this is important is essentially because a lot of people have got questions about, how can they retire? Do they have enough? Will their money last?
A lot of that success is really going to be driven by whether or not you have your retirement set up the right way. Everyone’s telling you what you’re supposed to be doing with your portfolio and everyone’s telling you whether the recent stock market. I’m telling you that that may not necessarily be the brightest idea for you because the term safety can be used for lots of different things in life.
Most of people, you being safe is a good thing. When we’re avoiding dangerous scenarios, we think about it. In the world that we live in, it seems obvious that we all want to be safe. How about with your money? How safe do you want to be with your retirement assets? Do you plan on keeping them in the bank as you’re working and hoping that your money will keep up with inflation?
In order to get your money to grow, you can’t put all your money in the bank. We have to define safety or somebody’s risk tolerance as a very individual thing and has a lot to do what your goals are in retirement. Whether or not you can meet them, acting one safe way versus another way.
Everyone’s got a different definition. Some people might look at safe is not losing one single penny. Other people are comfortable losing 5 or 10 percent if they know they have the potential make 15 or 20 percent. It really doesn’t matter which person you are because there’s no cookie cutter definition that applies to everybody. There’s not one definition that even applies to everyone in retirement.
People lead different lifestyles. Somebody is looking to take a trip and some people are looking to leave money behind when they die. People are starting with different numbers and then have different needs on that. People might have a different horizon for retirement.
Again, because everybody has got a different situation, they’re going to have a different risk tolerance that they’re going to arrive at. Naturally, I would say that people tend to be more risk averse as they get older and they get close to retirement. That makes sense because you know at that point in time, whatever you created as a nest egg, that’s what you’ve got. There’s no opportunity to add to that.
We do want to build a little castle around that. We do want to be a little more protective around that because we don’t have the luxury of just jumping back into the workforce and making what we made before, either to provide for our lifestyle, just make enough to live, or even to replenish whatever was lost by not wise thinking about the retirement portfolio.
Today we’re going to show you some strategies to set up your retiree friendly portfolio that matches your risk tolerance. Before we get into that, one of things I want to talk to you about is that our office helps people set up retiree friendly portfolios. This is what we do day in and day out.
If you are interested in learning a little bit more about what would be right for you, how to create a plan that will withstand your retirement needs, even to figure out how much risk tolerance are you taking right now, I encourage you to give our office a call and schedule a complimentary consultation with us. You can do that by calling us at 609‑818‑0068. The number again is 609‑818‑0068.
You set up an appointment and we’ll help you understand what your risk tolerance is and maybe what it needs to be as part of it. That’s absolutely at no cost or obligation to you. Anyway, back to the show. We’ve got a great show lined up. I’ll tell you the variety of people in different risk tolerance that I see coming into my office daily is amazing.
We serve people that are in their 50s. We serve people that are in their 80s. We serve people of high net worth, multi‑million dollars. We see if people of modest wealth, they just have a few hundred thousand dollars, and of course, that’s very important to them to make sure. I would say to you that nobody comes in asking to lose money.
Nobody comes in here looking for a plan that will guarantee that they’ll lose money. It’s quite the opposite, right? Most of the people that come in, they tend to be risk averse and they don’t like the thought of losing money. You just mention 2008 to them and watch the trembles start. That will disturb them thinking about the losses that occur.
While they come in risk averse, I’ll tell you what’s interesting is that when we meet with them, we’ll meet with them and show them or uncover that their portfolio is largely still or all in the stock market. The thing about it is that they might be OK taking on some risk because of the thought of the reward.
When you sit down you talk to them about it, or when we sit down and we talk to them about it, the idea that what would happen to their portfolio if another recession was to happen. It can be eye opening. Again, it’s not because, and I try to harp on this market theory is OK. I’m in my mid‑40s.
It’s OK for me to have recessions occur in the market because overall it will be OK because I’m not going to be living on this money. I’m not going to be retiring off of this money. When we think through like what will be the right strategy for somebody if you’re not going to be living off the money, the recession’s OK.
If this is all that you’ve got, it’s important to align risk tolerance both what they personally can withstand as well as their goals with their investments. I’ll tell you, one of the largest disconnects that we see is people who when we ask them about where they’re comfortable losing they say 5, 10 percent, showing them that they could potentially lose 30 percent or more.
While that’s a cognitive disconnect for them, it’s OK because it’s not their fault. The reason I say that is that for the last 30 or 40 years, most people have been working and trying to grow their money. That’s what we call the accumulation phase where the mindset is grow at all costs.
But even if it’s not growing at that moment, it’s not a big deal. It doesn’t violate what they’re supposed to be doing in that accumulation phase. Once you get closer to retirement, you enter the next phase. Whether you want to call that phase a preservation phase or a distribution phase. In this phase, you likely have to draw off of those investments to live.
Now the mindset shifts and it’s no longer grow at all costs. With a prominent we see, especially people who are about to enter retirement and sometimes well into their retirement. God bless them because of the last nine years they haven’t really seen the negative side of this. People still have all of their retirement assets allocated, at risk or mostly or all at risk like they were in the accumulation phase.
We’re there to open their eyes and have them understand that it’s different. My job is really to help inform the clients on their retirement portfolio. I don’t want to dictate to them, tell them where to invest in a certain place because of their age demographic. I help them understand their risk tolerance, how much they’re comfortable losing, and whether or not their portfolio matches that.
After that, after we’ve understood what their portfolio requires in order for them to become successful, then we can create a plan to align with that. It’s never too late to see where it stands. I mentioned earlier in the show that we have an opportunity for you to come in and learn about that.
If you are wondering how much risk you’re taking right now, again, you can call us and schedule a complimentary consultation. If you missed it before, the number 609‑818‑0068 and we’ll help you understand where your retirement assets are. Look, you’ve been working your entire life to build a nest egg so that you can one day retire and that’s great.
You needed to do that, but once you get close to retirement, you need a portfolio that’s more retiree friendly. Maybe a little more conservative, maybe fits your lifestyle, risk tolerance. Maybe it’s just a little bit smarter about how to use the money in different stages. Again, we’re going to dive into that and see what we can help learn today in today’s show. First of all, let’s set the stage.
First thing I want to do is talk to you about what a retiree‑friendly portfolio looks like. The reason why I want to do that is because it’s important, as I was saying, to make sure that you have comfort that your money is going to last. That you’ve got enough and that it will last. That’s really the reason why we’re talking about this.
Receiving a steady income retirement is one of the top priorities for retirees today. Some of that income is going to come from Social Security because you’ve been paying into it, for many people, over 30, 35 years. Again, if you’re not familiar with the way that that works, they take your 10 highest earning years, and that dictates how much you’ll be getting in Social Security depending on when you claim.
You’ll need a certain number of hours, quarter hours, that have been credited to you over a 30‑year working history. You’re going to get some numbers, social security, and you’re going to make some claiming strategy on that. You’ll claim it early, you’ll claim it in the middle, you’ll claim it late again. If you need help with that, that’s something that we can do.
If Social Security is not enough, maybe either retirement income that you need the remaining amount to fill that up is going to take a little bit more planning. Some people are fortunate enough to receive a pension from work. If you are one of those people, hey, congratulations.
Those are my parents, that’s going to end up being my wife. My wife is in the school system, so after she gets a certain number of years, she will get guaranteed income for the rest of her life, which means that I’ll get guaranteed income for the rest of my life if we set it up correctly.
My parents were the same way. They were both schoolteachers, or they’re both in the school system. When they retire, they had an opportunity to claim on their pension. For them, that fills essentially all of their needs right now. Their purchasing power is still very strong because they’re very close to retirement. They’re still in their late 60s even having worked 35 years.
Pensions are becoming less common today. What ended up happening is that the 401(k) system ended up replacing what we had as pensions for many people. That’s basically the form of retirement planning.
Because of this, solving for retirement income becomes really important when you decide to leave the workforce and enter these golden years in this third act of life, because you know when you have to take this body of dollars that you have accumulated and turn that into living money, there’s lots of strategies around that. You could just draw from it whenever you need money.
You can use a portion of it to create guaranteed income. You can position some assets to help you preserve the value of that. One of the reasons that this is important is because when individuals start to draw down on income from their life savings and then retire, one of the risks is that there’s a large downturn in the market that takes a big chunk out of the portfolio.
The reason why this is a major risk is, there’s this amount of momentum that you need in your portfolio in order to weather the roller coaster of the stock market. If you jump off that when the market is low, you don’t have enough momentum to get up to the top. The effects that having a downturn can have on your income planning for years could be very detrimental.
The question really is when you’re retired, are you comfortable waiting multiple years for the market to go back up to recoup the losses that you might have had. We just closed 2018, and in 2018, we lost 100 percent of the gains in the S&P that we had made over the course of the year. We closed essentially where we started.
If that had actually turned down, think about the whole loss of the year from that, what it takes to come back up again. You may not be in a position to wait for that to happen, to shut off the flow of money, so that you can continue to draw the same income. If you don’t do that, and if you just keep drawing out the same amount, you’re going to watch your portfolio decrease faster and faster.
I know that most people don’t want to think about that happening at all. The point I’m trying to get across is that when you get closer to retirement, it may be in your best interests to start adjusting your game plan to fit what I’m talking here about a more retirement‑friendly approach. That way if the market does have a big downturn, your retirement assets won’t take as big of a hit as it could have taken.
We took some of it off of the table or away and re‑targeted. I believe that retirement friendly portfolio ‑‑ the point of this is to give you the definition of that ‑‑ the concept of retirement portfolio is one that should take a more conservative approach as you get older and start drawing from your assets rather than adding to them.
What I’m going to do is I’m going to take a quick break here, and when we come back I’m going to talk about allocation rules of thumb. I’m going to cover for you three buckets of money, which I think is important for you to think about in terms of your way you set up your structure. I’m going to give you some tools on how to measure your risk tolerance.
It’s important because if even if you don’t come in to see me about what we’re doing with your portfolio or what you’re doing with your portfolio, you still want to be able to kind of figure that out. I think it’s important to do that. If you do want some expert level help with that, then what you can do is you can contact us. You can contact us at 609‑818‑0068.
We can help you learn a little bit more about your retirement portfolio. How it matches up to your risk tolerance, and whether or not all of that comes together. Before I take this quick break, I do want to make a reminder. You should do this at the beginning of the show, but we regularly host workshops in the area. We do have a series of workshops that are coming up.
This one is getting a little closer to full, but I do encourage you to think about attending. This one’s going to focus on a little bit more of legal planning, how to get your legal ducks in a row. It’s going to be held in our offices at our workshop in our educational center. If you’re interested in attending that, let me give you the dates real quick. We’re looking at February 7th.
That’s a Thursday at 1 o’clock, and then Tuesday, February 12th at 6:00 PM. If you’re still working, you want to come in afterwards. We’re going to serve light refreshments. Again, Thursday, February 7th at 1:00, or Tuesday, February 12th at 6:00 PM. Here in our offices and in Pennington, we’ve got a great workshop setup.
When we’ll come and host, all you have to do is contact us at 609‑818‑0068, ask to be put on to the invitation list. We’ll set you up with everything, so that you know exactly where to show up and what will be covered. I’ll give you the opportunity to do that.
When we come back from the break, all of those things that we talked about allocation rules of thumb, three bucket theory, as well as going over how to measure risk tolerance. Stick with us. We’ll be right back after this quick break.
Announcer: As you get older, there are so many decisions to make around your legal, financial, and tax planning needs, searching for the right people who you can trust and getting them all on the same page can be frustrating and exhausting.
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Victor: Hey, everybody. Welcome back to Make It Last. I’ve been talking today about how to set up a retirement‑friendly portfolio.
This is so important because as you’re leading up to retirement, as you’re looking and trying to figure out whether or not you can have enough to make it last, it’s important that you get this setup because the risk to what’s going on if you mess this up can significantly impact your retirement and your comfort in retirement.
We just want to make sure that we’re thinking about this a little bit smarter. Everyone will tell you that you don’t have to change your strategy. You may even be looking at it over the course of nine years and saying, “Hey, I didn’t need to change my strategy at all look, I’m exactly where I needed to be, where I expected to be going forward.”
We want to flip that around because what I’m telling you is that the risk to your retirement is significant in so much as if you end up essentially suffering one of these downturns. We saw a little bit of that towards the end of 2018. If you do that, you may not have enough to get back up again.
Let’s go into the allocation rules of thumb. I think this is important because most people don’t understand what conservative looks like. They want the safer money, but they don’t know how to do that.
If we walked through, first, this retirement friendly portfolio and you’ve agreed, “Look I need to make some more conservative,” you probably ask yourself, “Well how much of this should I make more conservative?” now that you’re in retirement. The thing is that Google will give you all kinds of answers to this question if you ask it.
If you go in there and it’s like, “What’s the rule of thumb for retirement equity exposure?” There’s a lot of them in there, but let’s share a couple. I want to bring one up that hopefully get the wheels spinning in your head. It’s no means cookie cutter, but it could be a good place to start. It’s commonly cited as what we call the rule of 100.
It states that an individual should hold a percentage of stocks or riskier investments, whether they’re mutual funds that are in stocks, equal to 100 minus their age. Then the remainder would be comprised of more financially conservative vehicles such as bonds, banking products, maybe even sometimes a fixed annuity. For example, let’s take a six‑year‑old because this is really easy math.
A six‑year‑old should have approximately 60 percent of their money safe. The other 40 percent can be allocated at risk under this rule. As this person gets older, they should be allocating more of their money towards safer vehicles. The thing is, that definition of what a safer vehicle is can be different. It can get confusing.
Here’s what I mean when I talk about safe vehicles. What we want is financial vehicles, products, investments that provide guarantees against loss due to market risk. We might look at CDs, savings accounts, and certain kinds of insurance products like fixed annuities.
While these financial vehicles will do very differently with regard to liquidity and how they’re taxed, they’ll all protect against loss due to market risk. You’ll know the term of the investment, the rate of the interest, as well as any charges for early withdrawals.
Now that phrase, liquidity, is like a term of art for us financial professionals. What it really means is, how much of your money can you get to at any point in time? I think this is an important point to deviate a little bit, because most people think about liquidity as your ability to access your money.
Certainly, if there were early withdrawal penalties, like with CDs, if you take out your money too early in a CD, they’re going to keep some of the interest. That’s basically a loss of liquidity insomuch as your account value says one thing but you really can’t withdraw that much money because you’ll lose the interest against it.
This concept of liquidity, for most people, simply just means how to access that part of your money. I also want to introduce a different definition of liquidity, because there’s the theoretical liquidity, and then there’s the practical liquidity. If you had your money in the stock market, and you were suffering a market downturn at that time, if you lost money at that moment, do you have liquidity?
Can you take your money out? Well theoretically, sure. You could go in there and ask them for your money, but you would be in essence selling at a loss. The question then becomes, would you do that? Most people would make a decision and say, “Well I’m not going to take the money out right now because I do know that it’s at a loss.”
They’ll adjust their lifestyle to match with their investment performances. That’s really risky because you don’t want your emotional state, your happiness in retirement, your flexibility, to be dependent on what the stock market is doing at any point in time. That’s really crappy way to live through retirement and you don’t want to do that.
For people that are going to be making that kind of decision, where they’re deciding not to take their money out because there’s a market downturn, they have a practical loss of liquidity. I just want to highlight that because I think that’s overlooked in many cases.
People make emotionally‑based decisions based on what their bank balance says and, you know, you’ve worked 35, 40 years for this. You can’t be making those kinds of decisions. You didn’t work this hard to let something as arbitrary as the stock market dictate your happiness at any point in time.
Even in financially safe vehicles that we’ve been talking about here today, there are different liquidity terms to that. You want to understand what those are because they’re going to be trade‑offs. Then, there’s also different taxation of the different investments.
Some of them can be deferred. Even though it’s gaining money, you’re not paying any taxes on that money until you take money out, and they’re gains. You can mix and match that. Going back to the rule of 100, this idea that you should take out or you should have in stock basically whatever your age is or…Excuse me. That should be safe, and then your stocks should be the difference between that and 100.
It’s been modified recently because life expectancies are growing. Compared to about 20 years ago, Americans are living about three years longer. Now, instead of taking 100 minus your age, it might make sense to modify this and start taking 110 minus your age. There are great TED talks. If you’ve never seen one, just do a search for a TED talk.
There are great TED Talks talking about how you engineer a longer life expectancy and greater health. Could it be the case that people today in their 60s are living to 110 or longer?
Yeah, absolutely. Thinking about it with 110 minus your age, understanding that the bigger number that that produces is really there to help you have enough growth in your portfolio to survive growing older to longevity so that the money sort of continues to grow. If you have a higher risk tolerance and you’re OK with taking on more risk, you might consider 120 minus your age.
Let’s take it again with a 60‑year‑old. If you’re on the 110 path, if you think, “Look at life expectancies are growing and it does make sense to make sure that we’ve planned for living longer and that way,” you might think about 110 minus 60 and then 50 percent of your money should be at risk and then 50 percent can be safe because a 110 minus 60 is 50.
If you are comfortable taking on more risk, then you can take 120 minus the age and put 60 percent at risk and 40 percent being safe. It’s important that this is just a starting point when making a decision about your retirement portfolio. There are many factors that can change your investment strategy.
I believe that the amount of risk you take in retirement is something that you can’t overlook. Working with a financial advisor that addresses this first and foremost to make sure portfolios aligned with your risk and tolerance and lifestyle is important.
It doesn’t talk about what that should be invested in and this isn’t a place where we make decisions for you. We don’t tell you, “OK. Invest.” This is not a stock picking event or show or anything like that. I’m not going to go ahead and tell you what you should be invested in, but I will tell you that what you are invested in is important.
Let’s let that sink in for a second. Whether it’s 40, 50, or 60 percent of your money that’s at risk, making decisions and smart decisions about what that is in is important. It’s not right to put it all in one place. You shouldn’t find a hot stock of the moment and put all 60 percent of your money in there. That’s not recommended at all.
Even in those areas, you want a well‑diversified portfolio. Well‑diversified across industry sectors, well‑diversified against different sizes of companies, large cap versus small cap, international versus domestic. There are different metrics of diversification. You want your money well‑diversified.
Too much to go into for what exactly should be in. If you agree that you should be putting 40, 50, 60 percent of your money at risk, whatever that number is, whatever that makes you comfortable with. By the way, you should have somebody help you express what the risk of loss is for that, so you can quantify it.
You don’t know necessarily what 40 percent at risk really means. You know it’s at a risk, but at a risk for what? What does a downturn in the economy mean for that, if you had a 2008 event? What would that do to that part of your portfolio? Would it go down 28 percent? 35 percent? 47 percent? What does it mean in real numbers?
You need that explained to you because you can’t just go in and say, “Well, 40, 50, 60,” without understanding the magnitude of that because you might actually have to live through a downturn event. We do want to make sure that you know what 40, 50, 60 means in real dollars. We have tools to help people understand that in our office. Then similarly, what you have that invested in is important.
Now that we understand how your investments should change as you get older, that is to say, they should get more conservative, I want to show you another approach and talk to you about one that might be beneficial to help address your retirement money, all this money that you’ve been spending time accumulating.
Rather than just dividing it up into safe money and risking money, you might want to think about creating three buckets. Just to further confuse you on this show [laughs] , just to make things more confusing, I’m going to give you two different variations of three buckets. One of them is going to be times segmented. The other one’s going to have to do with goal segmentation.
Let’s deal with the goal segmentation first. Think about three buckets. You can have a bucket that’s a security bucket, another bucket that is a risk/growth opportunity bucket and then here’s the dream bucket. That’s the third bucket. Then by doing these three different buckets, it can help you create a better balance in your investments, as well as giving you more confidence in retirement.
Think of these three buckets as forming a backbone of your overall financial plan. It doesn’t necessarily give you ideas about Social Security planning, whether or not you should have long‑term care insurance, or how your estate plan should be set up. It doesn’t give you a whole financial plan, but it will give you a simple structure for your investments, that’s easy to visualize and reference.
Let’s first start with the security bucket. I think that the security bucket should be set up first before the other two buckets, if you do this strategy, because this is the one that’s going to give you the greatest amount of confidence in retirement.
What you’re doing here is, you’re setting aside a portion of your retirement assets that you feel that you cannot afford to lose in the 100 minus your age rule of thumb. This is the amount that you should be allocating to the safe bucket, or that you couldn’t put at risk.
100 minus your age and you’re 60 years old. 40 percent of that is risky, which means 60 percent of the nest egg is in the security bucket. A portion of this bucket can also be used to provide income in retirement. Again, that’s part of that guarantee. In fact, if you’ve turned it into a guaranteed income, you can never lose it. It will pay out for life.
Some financial vehicles that you can find in the security bucket include things like cash and cash equivalents. We’re thinking about a checking account, a savings account. Technically, a money market account isn’t that. A money market account has risk associated with as a security, but that’s just a technical definition of it.
Most people will think about a money market account as being a cash or cash equivalent account. That’s good. The next thing you might think about putting in there would be government bonds. Government bonds are thought of as being super, super safe, almost guaranteed, because they are backed by the claims paying ability of the US government.
Most people believe that the US government is never going bankrupt. That, if they issue the securities where they promised to pay you money, whether whatever term you want, whether it’s 3 years, 10 years, 30 years, whatever you choose, most people believe that the government will be around to pay back that money and will not default.
I understand I’m recording this show or airing the show right now, at this time where there’s a government shutdown. You might be thinking that government is never going to reopen again. [laughs] Medina, what are you doing, talking about the safety of the federal government? Well, I have a lot of faith in the United States government.
Regardless of what’s going on in Washington DC, I believe that they will not default on things like their debt obligations, including their bonds, treasury notes, or anything like that. Definitely, definitely government bonds should be in the safe category as far as I’m concerned.
You can also look at government bonds in other countries. There, you have to be a little bit more careful. Not to say that other countries are necessarily going to be more or less risky. I don’t know that for the case. There are some people that believe that there are other countries right now that are, in fact, more secure in their claims paying ability than the United States government.
You’d want to understand that, but don’t think that just because it is a government bond, that it is absolutely secure. You’re going to know a little bit about specifically the country that you are investing in. By the way, when I say government bonds, we’re also talking about, essentially, municipal bonds, too.
That’s a form of the government, not just the federal government, the US, but you can go with state municipal bonds. Again, you’re going to want to learn a little bit more about this, because some states are safer than others. A lot are in the news, Detroit going bankrupt, what goes to what goes along with their previous bonds, so we had that whole issue going on. Again, just little smarter around that.
A couple other things that go into the security blanket, and then we’ll take a quick break. CDs. Those are certificates of deposit. Those are essentially insured by the bank that you’re in, up to $250,000 FDIC insurance. What you want to do is make sure that you don’t have more than $250,000, if you in fact want that, “guarantee,” but CDs are definitely in that safe bucket.
A pension goes into the safe bucket. Here, you can come at it a couple of different ways. It may be beneficial to think about a pension as being your life expectancy times the monthly payments. That’s a pretty good way of thinking about that because that’s the value of what’s in the bucket. The bucket is very large, when you think about it that way.
If you don’t have a work pension in the way that you have gone about your working life, you might be able to take a portion of your money and create a guaranteed annuity. A guaranteed annuity is, essentially, when you give some of your money to the insurance company, and they promise to pay you out a lifetime income.
We know that the total amount of there is guaranteed in the sense that the insurance company is guaranteeing that they will pay that out for the rest of your life. Then, it’s really about how long you’re going to live.
There’s different varieties here. There are some in which, if you die early, the insurance company keeps all of the money. There are some that if you die early, the remaining amount that you gave them that hasn’t been paid out, that gets paid to beneficiaries. You can mix and match that.
What’s important here, though, is that the guarantees on annuities are backed by the financial strength of the issuing insurance company. Not all insurance companies are created the same. Not all of them have the same claims’ paying ability. They’re going to be measured on different metrics by their financial strength, how much cash do they have on hand, how much are they leveraged, do they have the ability to pay claims.
Generally, insurance companies tend to be fairly safe places to put money, but we have to understand that this is not backed by any federal government. It’s not backed by FDIC insurance. It’s not backed by anything in there, except the claims paying ability of that issuing insurance company. You want to be smart about that. You want to look at the rankings that are on there.
Here, I want to take a pause because if you have never looked at the rankings in detail, prepare to get your eyes open. There’s different measurements. There’s Moody’s, A.M. Best, and standard reports. There’s different measurements of the financial strengths of insurance companies. What you’ll see is that almost every company that you look at will probably say, A, or some form of, A, A‑. If not A, then it’s definitely going to say like B+++.
What you need to understand is that there might be 22 rankings between A and B‑. Just looking at the letter isn’t important. When we talk to clients about the financial strength or the rankings of an insurance company, we find it important to show what the letter of the ranking is, and where it is ranked amongst the total of it.
Being number two of four is halfway to the bottom. Being 2 of 22 is much stronger. We want to show what the rank is, but we also want to show what the total number of ranks are so we understand what an A+ really is. Is it seventh from the top? Is it forth from the top?
Again, if you’re examining the financial strength of an insurance company, look at essentially not only what their rankings are, but where those rankings, how many of them are there, what’s the breath of them, where are they ranked in terms of the total amount that’s in there. That’s a security blanket.
Now, what I’m going to do is I’m going to do a quick break. When we come back, we’re going to talk about the risk and growth opportunity maker. We’re also going to do the same thing for the dream bucket. If we have time, I’ll talk to you about the other three buckets strategies. Let’s see how far I get. Just join us when we come back from this quick break on Make It Last.
Announcer: Just about every working American stays focused on the ultimate goal, retirement, but planning for it can come with a lot of uncertainty. Do I have adequate savings? Have I invested enough? Have I invested too much? What’s the right thing to do? If you’re one of the millions of Americans asking these questions, let financial expert, Victor Medina, help you make sense of it all.
Victor is a certified financial planner and retirement income specialist who can help you set the strategy with a unique planning process that centers on you by taking an in‑depth look at your retirement timeline, goals you want to achieve, and what you have saved. Victor and his staff can help you figure out how to get the most out of retirement.
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Victor: Everybody, welcome back to Make It Last. We’re talking today about how to create your retiree‑friendly portfolio. We just took a break, going through the first of three buckets in a bucketing strategy. We talked about a security bucket. Remember, that’s the one that’s the most important to fill first. We essentially want to make sure that that’s in place before we think about the other two buckets.
A good way of thinking about how much to put in that, is that rule of 100, rule of 110 rule of thumb. Again, take your age, and subtract it either from 100, if you want to plan for living a little bit longer 110. What you’re left with, that’s the amount that should be at risk. The balance of that is what we put in the safe bucket.
I know that sounded like a little turn around. You’re going on the rule of 100, and you’re 60 years old. 60 percent should be safe. If you’re 110, and you’re going and you’re 60 years old, then 50 percent of that should be safe.
Now that we understand what’s in a safe bucket, let’s talk a little bit about the risk or growth bucket. The next bucket you want to think about making sure is properly set up is the risk growth opportunity bucket. This bucket is a little bit more exciting, and has the potential to gain some higher returns, but it can also take a hit including the loss of principal because it’s not in that guaranteed stuff.
Now that you have your security bucket set up, you know that you can’t lose principal and from that bucket based on market fluctuations, and for as long as the product terms are followed with CDs or anything like an annuity. You are willing to take on some risk in this bucket.
You want to be proactive with this bucket and retirement to try and avoid any large losses that could happen anytime. Some common investments that you can find in the risk growth bucket include your stocks, your mutual funds, index funds, ETFs, high‑yield bonds ‑‑ those a little bit riskier than normal bonds ‑‑ government bonds, real estate, commodities, collectibles, things like that.
It is important that everyone’s going to have a different idea when it comes to this investing. It can be easy to get caught up in the idea of high returns. People forget, though, that when they get caught up in the potential for large gain, they’re likely forgetting how much they’re also risking in that process.
In this bucket, you want to make sure that you have the proper mix of security and risk opportunity bucket that makes for a well‑structured asset allocation in retirement. All you want to do here is you want to make sure that you’ve got that 50 set up, and that is essentially set up the right way.
The thing about this risk growth opportunity bucket is it’s not 100 percent safe. You want to think about that as you start to allocate money into that. The last bucket is this dream bucket. It’s really should come last after you’ve set up your security and your risk growth opportunity bucket.
This is the bucket to have fun with. This is the one where you set money aside for yourself, and the ones that you love so that you can going to all enjoy in life later down the road. This bucket should excite you and should motivate you to want to earn more and contribute even more into this bucket, especially if you’re not retired yet and you’re just trying to reposition some of your assets as you get closer to retirement.
You can be creative with this bucket and save for whatever you’ve always dreamed about. The key here is not to get overwhelmed with saving into this bucket before properly setting up the security and the risk growth bucket. At the same time, many people have a lot of their money set aside that they aren’t using simply because they have very little hobbies or interests in retirement.
Don’t be afraid to spend this money. That’s what it’s there for, to help supplement with that life is. That security bucket is there to make sure that you have the right minimum standard of living off of that. There’s three different ways in which you can add to this bucket. If you get a bonus of some kind and you don’t need to use it, then boom, you put it into your dream bucket.
That’s for way down the road, or for something really fun and exciting. If you make some great gains in in your risk growth bucket, maybe you want to set aside some of these gains and add to the dream bucket. By the way, the dream bucket probably has its own investment strategy. The dream bucket isn’t risky, or safe. In fact, you may want to make it safer depending what’s on there.
You might take a portion of that and maybe buy life insurance with it. If it’s money you’re never going to use, you may want to set it aside for something that you leave behind for someone else, that your dream to be to provide a great inheritance after you’re gone. One of the ways that you can do that is by using life insurance for that. You’re trading the time for this multiple that comes down later.
Obviously, you can just save and put inside there. The three buckets in this strategy are, essentially, the bucket that will help you for your security, your risk and growth bucket. Then, over on the other hand, you’re going to have this dream bucket. You can set your investments up that way.
Another way of approaching the three‑bucket strategy, and it’s basically my favorite one, is to think about it in time segment. Take away this idea of goals, about security and retirement, and thinking about them ‑‑ dreams, or anything like that ‑‑ and think about it a little bit more like time segmenting.
In this setup, essentially, what you’re doing is you’re dividing up the money that you’ve got into different time periods that you may spend it. You’ll think about it like a short, mid, and long‑term bucket. In the short, mid, and long‑term bucket, you’re changing your investment strategy to match the time horizon that you are dealing with.
Now, you think about it in terms of like your short‑term investments are in those liquid things, cash and cash equivalents. A little bit different than what we’re doing when we are using the security bucket, because the security bucket, we had different decisions about time horizons and liquidity.
You’ll remember we talked about that in the context of like some of these things might have a different liquidity option to it, like your time horizon off of it, you may not have it automatically available. In this way, you might have the short‑term bucket be almost exclusively, almost exclusively liquid assets, things that you have the immediate access to.
In the mid‑term bucket, you would look at investments that are well positioned for the next 3 to 10 years. Now, we can’t predict what the market’s going to do in 3 to 10 years. One of the things we want to do is make sure that this is protected as well, because this is the bucket that feeds in the short‑term bucket. This is the bucket that, as we consume the short‑term bucket, this is what feeds that short‑term bucket.
You would put those into kind of a 3 to 10‑year horizon. Then, you might look at the long‑term bucket as being the things that can be riskier. Since you’re not going to be drawing on these to live in those first 10 years or so, that’s taken care of by the short in the mid‑term bucket, because you’re not going to be living on those, then you can weather the roller coaster that will be associated with these investments.
Over time, you’ll be able to weather that essentially over a 10‑year plus, and then it’s OK to leave that alone. That’s another idea on a three‑bucket strategy. There are even more than that in terms of retirement strategies.
One of the things you can do here is you can start to align yourself with a retirement professional of financial services, a financial advisor that focuses on retirement, thinks about these strategies, and has a way of approaching it. I’ll tell you that in my experience, because remember, I came to the whole financial planning thing a late.
I am still a lawyer, but I spent majority of my practice before I ever got into retirement planning. I spent it just doing estate planning for people. I got to observe the world, that complete world of financial advisors and what they do. Some were great. Many of them were not. I will tell you that it’s one of the reasons why I started offering these services to my clients.
I figured we could do a much better job than what I was seeing out there. I will tell you that what I found was that there’s a big difference between people that focused on just accumulation strategies, versus the people that focus on retirement strategies. First of all, the number of people that focus on retirement strategies is very, very small in comparison to accumulation strategies.
Also, it has so much to do with their compensation schedule. What I mean by that is that many times the people who do financial services, they get compensated entirely on the fact that you have investments with them. You’re never going to hear from them strategies that are how to spend that money, because, of course, that lowers how much money that they get paid.
With somebody who’s a retirement professional, look, they’re already in that world. First of all, they know that there’s plenty of retirement of work to go around. They’re not bothered by helping people figure out how to spend their money.
I would say that the majority of people that are in retirement planning have spent extra time thinking about these strategies so that, in fact, it matches up with the theories that will help people have this money last as long as they need to.
Last thing that I promised to talk to you about is how to measure your own risk tolerance. I’ve brought a lot of ideas to the table and how to set up a retirement portfolio. Now that you have these ideas rolling around there in your head, last step is to measure your risk tolerance. How do you do this?
There are a lot of financial questionnaires and tools that are available that can assess risk tolerance, but which one is the right one? Well, I’m not here to tell you which of these tools are good or bad to avoid, but I will tell you that there are good ones out there. Certain tools today do a much more comprehensive job testing for an investor’s true tolerance for risk.
I will tell you a little bit about the one that we use. I’m not telling you it’s the best one. I’m not telling you the one that you have used, but obviously, it’s the one that we’ve selected to use in our office. The tool ends…This is something that’s almost exclusively for advisors. If I mention the name, it won’t be important.
I want to describe the tool because what the tool does in assessing your risk tolerance is start to deal with hard numbers. I mentioned before in one of the earlier segments that just simply knowing what 40 percent you’re at risk, that that’s your number, tends not to be enough for most people. We need to understand what the magnitude of that risk will really look like.
One of the benefits of the tool that we use is that we can quantify how much of your money is really at risk. If you are in a 40 percent bucket, it will mean that you will have the potential to lose X and gain Y. Of course, that’s important to know. That’s the one that we use.
It also does a great job of quickly and accurately assessing your portfolio. All you have to do is take a statement, and just enter in your stock holdings and what you hold, if it’s an annuity of its cash, if the bonds of stocks, if it’s mutual funds, and ETFs, variable annuity.
Whatever you have, you just throw it into the system, and it will calculate because all of this is publicly available information. It will run its metrics, and it will give you an answer about where are you, so you did your risk tolerance as where are you.
Again, somebody comes in who’s a prospective client. She wants to retire soon, but she’s nervous because she isn’t sure she has enough. We will look at her investments [inaudible 49:47] information, and then we determine whether or not what she has saved is enough to retire comfortably.
Then, we realize if we’ve done that, that the real reason why she’s anxious and probably doesn’t even realize it is that her current portfolio is exposed to too much volatility. These are the people that, when the market had that big downturn on Christmas Eve, weren’t thinking about being with their family. They were thinking about their retirement. They were thinking about what it meant for their retirement.
Using this tool is a way we could uncover the she’s exposed to a lot of risk. Then, we can take the test with her to figure out that her tolerance is much lower. Once she realizes the two don’t align, as she gets close to retirement, she may want to start to set up a retirement portfolio that will be better suited to her risk tolerance.
Again, these are the kind of issues we deal with all the time because we focus specifically in retirement planning for our clients. This is where our experience and expertise helps people address these financial concerns.
Using a knowledge, experience, credentials and the tools that we’ve got, I will tell you that in terms of kind of how to set things up, what I gave you as this woman who came in is completely hypothetical. It’s representative of what we do for people. Actual results are going to vary. There’s no way of giving a cookie cutter answer to this.
The question for you is, if you need help setting up a retiree‑friendly portfolio, what you need to do is work with somebody specifically. You can call us at 609‑818‑0068 to schedule a complimentary consultation. Again, the number is 609‑818‑0068. If you’d like to learn more about what we do, then what I can do is I can absolutely recommend that you come to one of the workshops that we have.
It’ll give you a great opportunity to learn more about us and our planning. The workshops that we have coming up in early February are going to be for estate planning. It’s really about how to get your ducks in a row and make sure that if you get sick in the future, you have a long‑term cure need, it won’t devastate your retirement. This is a crucial subject to be in.
You can come and learn about that and get to know us a little bit better we’ve got two of those set up in early February and we have one on Thursday, February 7th at 1:00 PM. We have one on Tuesday, February 12 at 6:00 PM, either in the middle that day or in the evening. You choose which of those, but you do have to preregister because it’s in our workshop here in Pennington, New Jersey.
If you’re interested in attending there is limited space. Again, you just call the office at 609‑818‑0068 and we’ll set you up for that. I hope you learned a lot today about how to set up a retiree‑friendly portfolio. We look forward to sharing more of this kind of information with you.
If you want to learn more about what we’ve done in prior shows, if you’re a new listener, or you just want to make sure that every episode is on your phone, you don’t have to worry about dialing into the radio right at 11:00 on Wednesdays. What you can do is go to Apple iTunes, set it up, search for Make It Last with Victor Medina and you can subscribe to this podcast.
Then we’ll send the show to you every Wednesday at noon was when the show drops for that. You’ll have that and you can listen to it in your car or wherever else you go.
Victor: That’s it for this week. Join us next week where we’re going to hit something just as exciting ‑‑ dealing with your legal and your financial planning. This has been Make It Last, where we help you keep your legal‑ducks in a row and your financial nest eggs secure. We’ll catch you next week. Bye‑bye.
Announcer: Investing involves risk, including the potential loss of principal. Any references to protection, safety, or lifetime income generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength in claims paying abilities of the issuing carrier.
This radio show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions nor should it be construed as advice designed to meet the particular needs of an individual situation.
The host of this show is not affiliated with or endorsed by the U.S. government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.