The Retirement Mirage: Why Your "Magic Number" Might Be a Lie
On this week’s Best of Simply Money podcast, Bob and Brian challenge the myth of the "magic number" in retirement planning. Just because you've hit $2 million or even $5 million doesn’t mean your future is locked in. Plus, hear stories of high-net-worth individuals navigating the pitfalls of poorly structured wealth. Later, they discuss new research showing that early retirement might actually shorten your life, how to use your empty nest phase for a financial makeover, and whether it’s possible to be too diversified. Finally, as always, Bob and Brian take on real listener questions—from restricted stock units to the right time to downsize.
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Bob: Tonight, the retirement mirage while your "number" might be a lie. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
You've worked hard, saved well, maybe even hit that magical, I don't know, $5 million number you've had circled for a decade, and now, you're there. But here's the potential curve ball. Now that you've "won the game", you're not sure the scoreboard actually matters. What are we talking about here, Brian?
Brian: Well, there's always the myth of the magic number out there. There's a lot of people who, and a lot of companies who promote the idea that everybody has a number out there. And that may be true, that may not be. But I think it's way too easy to simply say, "Here's the finish line that I got to get to, and then everything is smooth sailing from here," because God tend to think he's funny, and life will intervene. So, that magic number may move on you. So, $2 million, could be $5 million, but you have to account for lifestyle, tax obligations, for both of those things to change. The complexity of your holdings, the more complicated your portfolio is, the more out-of-left-field type of things you could have happen. For example, you give me two people with $5 million, they could have completely different outcomes depending on where that money is. Is it pre-tax, Bob? Is it, you know, like 401(k)? They've just worked a long time for another company, or is it after tax? Maybe they sold their own company, inherited something. A combination of everything, real estate, other business entities, that kind of thing. All of it changes the calculus on what that magic number might be and whether it stays, that magic number.
Bob: Well, and it all depends on how you choose to turn those assets into income, because let's face it, at the end of the day, no matter what your net worth is and how it's comprised, we all, Brian, need to take this pile of stuff, as you said, whether it's real estate, equity, business ownership, investment, we need to turn that into a paycheck to replace our day job if we really want to retire. And planning and doing the most tax-efficient strategy on converting all that pile of assets into income is really where the magic happen. And it requires some planning. It requires some proactive planning. All right. Another... No, go ahead, go ahead.
Brian: Yeah. So, let's talk about taxes here. Let's kind of break these down. What are the different things that could drive different outcomes? Well, if let's say, you're somebody who has worked for a big company for a long time. This is the Procter & Gamble company folks around town, or maybe Kroger, those kinds of things. You know, you might have $5 million in your 401(k). Well, if that's all pre-tax dollars, because for somebody who has worked in one place that long, that was the only choice. When you first started, pre-tax was the only option you had. There was no Roth. You know, there were no other options. So, if that's a pre-tax number, that might really only be $3.5 million after taxes, depending on the asset types that are in there.
So, what that means is you are set up for significant required minimum distributions at age 73 or 75, depending on when you were born. That's going to affect your Social Security tax ability. You're probably going to be facing something called IRMAA in those years because you will have a significant minimum amount of income. If you've got five million in a pre-tax account at age 73, you're looking at probably $240,000, $250,000 worth of distributions that you have to pay tax on. That's going to definitely put you into the second tier of IRMAA. And so, for example, that's something you might want to be thinking about. What can I do about that before I get to that age? And the answer is pretty much, let's look at Roth conversions.
Or in the case of some companies, Procter & Gamble being a big one, you can do something called a net unrealized appreciation transaction, which basically means you pull out some of that Procter & Gamble shares from your profit sharing side, from the PST side, and you will pay capital gains tax on them if it's done properly, not income tax, and you will have removed it from the 401(k). So, that's not limited to Procter & Gamble. That's just a very prominent example of a company that has that feature. If you've got company stock in your 401(k), you might look at something called net unrealized appreciation, whether or not you work at Procter & Gamble.
Bob: For sure. That can make a huge difference. All right. Another thing that tends to get overlooked is something we've talked about before on this show, something called sequence of return risk. And what we mean there is volatility in your portfolio, when that portfolio actually has to start creating monthly or annual income. Here's what we mean. You know, when you're accumulating money in your retirement plan, and you're just working and socking money away, you really don't care much about volatility. All you care about is the average, long-term return thing. Because let's face it, you're not spending any of that money. So, if the market goes down 8%, 12%, 15%, we know if we're still working and putting money away, it's always going to recover. It usually and always does. And you can kind of put that out of your mind and just keep piling away and working and socking money into your plan.
Well, when it comes time to turn this into a monthly income stream, volatility matters a lot. And it's just math. We've run studies, depending on what that volatility is, even if your average long-term return stays the same, if you don't manage volatility while you're pulling money out of a portfolio, that can really deplete your asset base, even though the long-term return didn't change at all. It's counterintuitive for a lot of people until you actually see these numbers in action. And that's why it's important when it comes time to retire to sit down with a good fiduciary advisor and walk through your income strategy and make sure that you've got some money out of harm's way that you're going to spend, the money you're going to spend in the next, say, one to three years, that gives you some protection against this, what we call sequence of return risk because it is a real risk out there. It's just plain old mathematics.
Brian: Yeah, and a good mechanical way to test this is by doing something we call a stress test. Put together your financial plan, figure out what your spending needs to be, fluff it if you want a little bit, just add a little bit more, and build inflation to it over the years, and I would also say, figure out which goals you have, which spending goals you have that won't exist forever. There's a mortgage in the mix, that's not going to be there. If you're going to retire at 60 and you have a mortgage for another few years, that's not going to be there when you're 90. Don't bake that into your living expenses. It's going to make things look unnecessarily negative. But then, so run your numbers with a standard rate of return, a nice, conservative, say 5%, 6%, you should be able to get more than that out of a decent investment program, but we're simply projecting conservative projections here.
So, then once you've done that, do it again, but take off, say, 20% of your financial net worth. Just make it go poof, lower the numbers by 20%. Don't change anything else, and run all the numbers again. That will tell you if you can handle what some people went through in 2021. Anybody retired in 2021, we immediately went over the cliff in '22, and most people, if they didn't panic, have recovered nicely and are okay. People who did panic and decide that, "I'm now retire. This is scary. I have to protect my assets." Well, then they probably changed permanently the trajectory of their retirement plan. So do that before, illustrate it before those kinds of things happen. Your number may come up, that could happen to you. There's only so much you can do in moving investments around to protect from it. We need to be able to withstand it and maneuver ourselves around the stress of that happening. So just run those numbers with that happening and make sure your plan still floats.
Bob: All right, another factor to consider, no matter how big your "pile of assets" is, is just longevity and potential family obligations. Here's what I mean. And I see this more and more happening, Brian. I don't know if you do, but I see this happening a lot. Many high net worth families are simply becoming multi-generational banks. And I'm sure when they sat down 15, 20, 25 years ago, they never expected to be in a situation where they're supporting their adult children, maybe more or beyond what they had planned. They never expected to have to support, financially, their own parents or other relatives. And once that bank is shown to become available and you start dispensing money, human nature being what it is, the assumptions can be, "Well, this support is always going to be permanent." And if that's really the case, you've got to factor that into your plan. If it's not the case, you've got to do some heavy-duty communicating. But you first got to look at the numbers and say, "What can we afford to continue to do if some of this support that we hadn't planned to be generating continues," and then, you know, make adjustments as needed. Do you see that happening more and more with your clients, Brian? Because I certainly do.
Brian: Absolutely. And I find myself thinking about, all right, I've got three kids that are just getting to their own level of independence, and I worry about that all the time. I think about it a lot more. I think than my parents had to because it was a little easier to get started in those days. But I think, Bob, it would be easiest we went through some examples. We've got some examples prepared here of actual client situations, real people, but fake names, and just kind of how they've navigated things, and how they get to where they've gotten to. So, first off...
Bob: Yeah, run us through one.
Brian: Yeah, so, let's take Steve. Steve is 67 years old. He's got a net worth of $6.2 million. Most of that having come from having sold a business about five years ago. And about $4 million of that net worth is now tied up in real estate. He's got a couple rental properties, a vacation home, and then about $1.2 million is in his pre-tax 401(k), $1 million in a taxable brokerage account there. He basically came in thinking that $6 million means set for life and didn't have to worry about it. And mathematically, yeah, that's usually in the ballpark, but the problem is that rental income is not consistent, and it's become a bit of a burden to maintain those properties, right? It's one thing to look at a piece of paper that says you own a couple of nice rental properties, and here's the rental that they average, but if it's inconsistent and you're dealing with tenants, that changes everything because you're the one that has to pick up the phone.
So, the point was, what brought him in was the idea that he wanted to change his $6 million worth of assets around to make it simpler. And so, the challenge was, how do we do this and generate the income that he needs without relying on so much of a business in the rental income. He had already ruled out the idea that, "Well, I could hire a property manager to do all this," but then that really kind of sucks all the return out of the owning real estate in the first place and makes it kind of just not that impactful in terms of generating income, net income. And so, basically, his problem was he had a lot of net worth but just about no flexibility.
So, that retirement number he had identified, his $6 million set-for-life figure, didn't really work for him anymore because of the asset location, because of what he did. So, we helped him, basically, get through the idea of, let's consider selling these properties, change your mindset from what you thought was going to be the best way to go. And let's just look at things a little bit differently to give you a less involved, "business of retirement". And he's been pretty much happy ever since. And all we did was shine a bright light on the situation you're in and the situation you could be in.
Bob: Good stuff. All right, we'll run through one more actual example. We'll call this couple Denise and Mark. They're 64 and 66. They have a net worth of about $5 million. They retired in late 2021 after strong markets boosted their portfolio. And their advisor said, "Yeah, you're totally fine withdrawing $200,000 a year. Your plan will 'work', assuming 6% average returns continue forever." The problem, as we all know, 2022 was a down year. The stock market was down, the bond market was down. That $5 million portfolio dropped to a little over $4 million, and they still pulled the $200,000 out. So, that's a real withdrawal of over 7% of their capital in a down market, and that just compounds the losses.
The answer to this is, proactively in advance have a bit of a bucket strategy where you've got some assets not subject to market volatility that can supply your income needs over that one, two, three year time frame where you're not subject to all that downside sequence of return risk. It makes a huge difference. And these folks finally got the message, and they're living happily ever after now because they've got some money set aside in different places for different reasons, and they're taking some of that short-term sequence of return risk off the table.
Here's the Allworth advice, your retirement success isn't about how much you've saved. It's about how that money is actually put to work to achieve your actual goals. A lot of people dream of early retirement, but what if stopping work too soon actually hurts your health and shortens your life? We've got new research to discuss on that topic next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" live every night, subscribe and get our daily podcast. Just search Simply Money on the iHeart app or wherever you find your podcast. Straight ahead, Eric's wrestling with a big tax hit on new stock appreciation unit. Karen's portfolio just got too complex to manage on her own. And Joe's wondering if downsizing makes sense right now. Real questions, we'll hopefully provide some smart answers straight ahead at 6:43. So many Americans, maybe even you, dream of retiring early. Get out of the rat race. No more meetings, no more commutes, just absolute freedom. But there's a new conversation taking place, Brian, and it's not about whether you can retire early based on whether you have enough money, it's about whether you should, because it might not be as good for you as you think.
Brian: Well, I don't think that's a new conversation. That's a conversation that I have every single day in my office, and I'm sure you do too through the planning process. But "USA Today" picked up on it, so therefore it's new to them. Anyway, so coming from "USA Today", 60% of Americans say that their dream is to retire early. But we get some figures from the National Bureau of Economic Research that did a study of people in China, a little bit of a different mindset over there. But when they take early retirement over there through this new pension program they have, they see about a 13% drop in cognitive performance. Memory, attention span, brain function, you know, the kind of stuff that actually can make retirement fun if it's in good order. And this is why we all say we want to retire earlier here in the United States. Well, over there, it's such a work-driven economy that as soon as the work is gone...
Bob: I was going to say, if I lived in China, Brian, I think I don't want to be retired too, but go ahead.
Brian: Yeah, but basically, the brain shut off. And I'm just going to go out on a limb here and say, there just might not be as much of a dream of retirement and freedom and all that kind of thing over there in China as there is here. So, how do we compare that to the United States? Well, similar results. So, there was a study published by the "Journal of Epidemiology and Community Health", found that people in the United States who retired at 55 were twice as likely to die early compared to those who retired at 65. Now, don't assume that this means that your job is the only thing standing between you and the great beyond. But what it does suggest, though, is that retirement, when it's early and unstructured, in other words, "I'm miserable. I hate this job. Got to get out of this, and I'll figure out what I'm going to do later," without a plan, that can lead to a lot of isolation, which leads to less daily movement, physical movement, and fewer reasons to stay mentally sharp, and all of a sudden, the downhill ride is kind of steepening on you a little bit.
Bob: Yeah, Brian, I think you raised a good point before. I mean, when we have people come in and talk about retirement now, very few people are saying, "Hey, I can't wait to just quit my job and do nothing, and sit in a rocking chair on the front porch, or just play golf 16 hours a day." You know, people are already more thoughtful about this. People are talking about, what am I going to do with my time and energy and my mind, you know, to your prior point, in advance? So, I think we've seen a healthy evolution in this whole retirement processing in advance, but for those that maybe are starting to think about this, here's three questions to ask yourself. Do you want to stop working or just stop doing your current job? And how will you stay mentally and socially active if you do retire early? Those are big questions to answer, and hopefully, answer in advance. In other words, is early retirement really your goal or is just flexibility, having more flexibility and freedom in your life your real priority? I think those are three wonderful questions to ask.
Brian: Yeah, and I think a lot of times, you know, it's exactly that. You know, a lot of people wind up frustrated in their careers, you know, that they've gone as far as they want to or maybe, as far as they can, or maybe the writing is just on the wall and the company is kind of moving on beyond their level of interest. But that doesn't mean they're ready to retire yet either. So, I think they're really, really, really important thing to be thinking about is we all tend to hide behind the dollars, and waiting until, "I think I have enough perceived money that I can actually get away with retirement." And we tend to focus on that to the detriment of the time because once we do get that... Oh, by the way, hey, people who focus on that number tend to work too long, and they wind up surpassing that number because they didn't have a plan to begin with. So, they might hit that number and plow right past it because now, they don't know exactly what they're going to do, and retirement just becomes terrifying.
So, start to think about what it is you might do. Are there smaller organizations where your skills would be valuable and you could potentially go work for them for some level of income? But remember, the whole point of this is you don't need the salary anymore and you probably don't need the benefits as much as you used to either. So, think big, think outside the box. Go on websites like Indeed and type in random words of stuff you're interested in, just a keyword search, see what kind of jobs are out there. You'd be shocked at the kind of things that people will pay you to do to take advantage of the skills that are in your brain that you developed over all those years. But don't focus only on the light at the end of the tunnel, "I got to get out of this job and I'll worry about the rest later." That hits like a freight train. You really have got to spend some time thinking about how you will fill the vacuum of time that you will have when you no longer have to work.
Bob: Yeah, the real sweet spot here to me, Brian, is being in a position where you can make decisions based on what you want to do and feel called to do, not what you feel like you have to do. That's really retirement freedom. And there's a lot of factors that go into that. Obviously, money is one, but you got to plan ahead and kind of look around here at how you're going to fill your time and energy, because at the end of the day, whether it's your work, volunteer work, relationships in the community, everyone wants to have some purpose and meaning in their life, and they want to have contact with other people. And if you don't have those things, some true community in your life, I don't care whether you're worth $5 or $50 million, your life is going to be empty.
Here's the Allworth advice. If you're dreaming of early retirement, that's great, but make sure you're planning for more than just financial freedom, plan for purpose, too. Coming up next, we've got the money makeover for all you empty nesters out there. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. There's this moment every parent eventually hits. It's usually after the last kid moves out, when you walk past that empty bedroom, and it just socks you right in the mouth, "Oh, wow, it's quiet in there." I've experienced that, Brian, my wife has as well. And right after that, you start thinking, "Okay, what do we do with all this space? And potentially, what do we do with all this money we've been spending on travel, baseball, and college tuition, and all that?" So, you know, the point we're trying to make tonight and kind of walk through is, when you hit that empty nester phase, it's not time to just, you know, go out and spend all that extra money you might have laying around or think you have laying around. It's time to take some inventory on where does life actually pan out right now, and maybe some tune-up work that needs to be done to your overall financial plan.
Brian: Yeah, so an empty nester money makeover, I think, is what you're referring to there. So, you already referred to the expenses that may be gone, all those things that the kids were into that aren't costing money anymore. So, let's talk about the house. So, the structure of the house, of course, is still the same, and congratulations because it's still standing, that's a good thing. But you don't need all that space. So, what about that old bedroom? Maybe it becomes a yoga room or a guest suite or the sports bar. But probably what it will become first is a glorified storage unit for 20 years of marching band trophies and old posters, LEGOS, and that kind of thing.
So, money works the same way. When the kids are gone, it's sort of like you just cleared giant room in your financial house. So, what do you want to do with those resources that you have next? Well, one of the first things to look at is that cash flow. So, as we mentioned, a lot of those regular expenses are going to disappear. Your grocery bill is going to drop. When they hit a certain age, eventually, your car insurance is going to drop. You'll hand off their cell phones, college payments go away. But without some kind of planning, the absence of those expenses is going to give you extra, spendable money. And it could result in, "We've got this stuff, so we might as well blow it on things." And you maybe wind up with a fancier car, more eating out, and then you may wind up regretting that you didn't really have a plan for it.
So, just think about it in advance. Think about it like this, if you take down a wall in your house, you could fill that new space with clutter, or you could open it up and make it more functional for something you actually want to do. But the point is, you will have thought in advance for what you want to do with those new, added resources that you have. So, maybe it's funding those catch up contributions in your 401(k), increase that amount, or IRA contribution, Roth IRA, backdoor contribution, if that's something that you're familiar with. If you're over 50, you can put in a little extra each year. And for those in their early 60s, there's even a new catch up. So, these dollars sometimes aren't present at the moment. But remember these opportunities when you do hit this empty nest stage of life.
Bob: Well, Brian, speaking of taking that wall down and having the option of just having a bunch of clutter, my wife and I are living this right now. So, I'm giving you a preview of what your life is likely going to become. All three of our kids are out of college. They're all living on their own now in their own separate homes and dwellings. But a lot of their crap is still in our house. You know, it's funny. My wife, she does a wonderful job of keeping our home clean and clutter free, but she'll periodically go through and find all...you know, you used the analogy of marching band trophies. I mean, whether it's that or athletic trophies or just clothes, you know, stuff laying around. And she'll go to the kids and say, "Hey, you moved out. Are you going to take this stuff with you?" "Nope, don't have room for that, can you keep it?"
Brian: No. The answer is no.
Bob: So, a lot of the stuff never goes away. It's a process. All right, speaking of the house, and this is a topic that comes up a lot, people talk about wanting to downsize or right size their home. This is a big, emotional, and financial topic. Some people dream about downsizing, while others love their current home and plan to stay put even if they have two or three bedrooms that are completely empty. The point I make here, Brian, is a lot of times people talk about downsizing. I don't know about you. I have yet to see the client. And I've been doing this for 35 years. I've yet to see somebody sell their primary residence and move somewhere that ends up costing less money. It might be smaller, but it ends up being newer, you know, with nice furnishings. It never costs less money. People want to rationalize this by, you know, calling it downsizing. It's really not when it comes to finances. So, just, you know, buyer beware out there when you start talking about the whole downsizing conversation. Does this ring true with you and your clients as well, Brina?
Brian: There's no such thing as a financial downsizing when it comes to your house. There's an effort and work downsizing. You can reduce the amount of work you got to put into it, but you're not going to save any money. Even if you buy a smaller house, it's most likely going to be in a in a nicer neighborhood or an area you always wanted to live in and that kind of thing. And you're probably not the only one who wanted to live there. Therefore, the expense of purchase goes up. So, don't think money when you think downsizing.
So, what do we do about this? Well, you can do what's called a retirement rehearsal. So, once that you've noticed the house is quiet and that budget is a little lighter, well, that's the time for a test drive. So, maybe live for six months on what you think your expected retirement income is going to be. And that might be Social Security, pension, investment withdrawals, or rental real estate income, that kind of thing. See how that feels. You're going to learn quickly if the plan works, because you'll know right away when you're dipping into more than what you thought you were going to. And then you're going to... Because this is you're not making a real sacrifice at this time, you're just kind of test driving. So, you'll know if you need a little tune up before that paycheck stops. So, it's kind of like taking the RV on a weekend trip, right, before you actually buy it for real, before you hit the road full time. You're going to want to test it before you're a 1,000 miles from home, and see if you run across any problems you didn't anticipate. One more thing...
Bob: I think that is a wonderful idea, and I wish more people did this. And I'm in the middle of trying to do this right now with my wife. Actually, constructing a budget and looking at what this is really going to look like if life's going to resemble what we think it might resemble. I think it's really good to test drive this in advance. But go on.
Brian: Yeah. And so, one more thing to do when you've got this free time, you're going to remember, the whole point of this is the kids are gone, they're out on their own, you're going to start paying attention to what it is they do and how they live their lives. That's going to be a bit of an estate planning tune-up for you. So, you're going to need help sooner or later. Someday, you're probably already in a situation where you yourself are helping your own parents. And so, this is the time to learn which kid might make the best executor, who is the one who can make decisions on your behalf.
Yes, this is years in into the future, but the sooner you put this stuff into place, the sooner you cannot think about it and enjoy retirement more. And then you'll be thinking about, which of my kids are good on their own and I can trust them inheriting money at my death. Which of them may have some more challenges and may require a little extra care for which I might need a trust and a trustee in place. So, estate planning isn't just about passing that money. It's about making life easier for the family later, especially for those of you who have been through a difficult estate settlement process for maybe your own parents. So, think of it like labeling those boxes in that modelled home. You're saving everyone from chaos down the road by planning ahead.
Bob: Here's the Allworth advice, an empty nest is your chance to reimagine, and possibly, refill your future. You know you should be diversified, but what does being "too diversified" look like? It's one of the questions we'll answer next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. You have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question and it will come straight to us. All right, Brian, Tim and Hydepark says, "Our advisor keeps saying we're on track, but it doesn't feel that way to us. What's the difference between being mathematically fine and being truly financially free?" This is a great question..
Brian: Yeah, I really think so. So, if it doesn't feel that way, first of all, that's not necessarily a negative thing. You know, that's that Jiminy Cricket on your shoulder telling you to be careful. That's the same voice that has been telling you all along to save, save, save. It can be hard to tamp that voice down and turn that freighter around psychologically, which is a very slow process, to spending your assets from putting nuts away for the winner. So, the difference between mathematically fine and being truly financially free, Tim, is confidence.
So, it sounds like you just need to go through your plan some more. And who knows? Maybe the advisor is missing something. We're all human. Sometimes things don't go well. So, if there's something you mathematically agree with, pinpoint that for the advisor and ask them to explain it again and again until you understand it. But again, that's the difference between mathematically fine and financially free, is confidence. Yes, I see this plan, and I understand that life doesn't always work out that way. But I have stress tested this plan several different times for many reasons. And now, I feel confident that anything crazy that comes out of left field we can handle. Confidence is the difference, Tim. David in Blue Ash. David has question for you, Bob. And he says, we always talk about being diversified, but is it possible to be too diversified? And if so, what does that look like, Bob.
Bob: Well, David, the most common situation we come across is, you know, people feel diversified, but they might have, you know, 13 to 17 different large cap mutual funds or ETFs either in the retirement plan or in their brokerage account. They've just been collecting these products over time. And people have the sense of, you know, the more funds or investment options I own, I'm automatically diversified. Well, true diversification is having some non-correlated asset classes to complement, you know, in my example, the large cap growth positions. So, a little bit of bonds, a little bit of small cap, a little bit of international, maybe some private equity, maybe some buffered ETFs.
The whole idea behind having a long-term, diversified portfolio is to have a portfolio that over time gives you the highest rate of return per unit of risk. That's what that modern portfolio theory that, you know, all financial advisors should be modeling portfolios after. That's how and why it works. So, we have to define what diversified means. And the only way to do that is kind of look under the hood and see what you actually own. But that's my answer. Oftentimes, people feel diversified by having a bunch of options in one particular asset class. And that's where you might feel like you're diversified, but you're really not. Hope that helps. All right. Eric in Fort Mitchell says, "My company just offered me restricted stock units, and I don't fully understand how they're taxed. How do I build a plan around something like that that fluctuates in value?" Brian?
Brian: So, first off, congratulations, because you obviously you work for a company that's been successful enough, it wants to reward its employees by giving them a little piece of the action. So, that's fantastic. So, those can be an excellent form of compensation, but they do have unique tax and planning challenges because their value depends on one company's stock price, and there's just no way to tell what direction one company is going to go or what the market's going to do to it. But here are the facts, when you're granted those restricted stocks units, you don't owe any taxes yet because you technically don't own anything. They're restricted until they're not. So, they're just a promise. So, that transaction at the very beginning is not a taxable one.
They all have a vesting date, though, and once they vest, they hit that date, now they're yours. Now, the value of them is treated as ordinary income, just as if they had increased your salary a little bit. So, the value of those shares are going to be added to your W-2 income. Federal, state, and payroll taxes are going to apply and they will be withheld. Oftentimes, you'll have a choice, though, through what they call share withholding, or they're going to sell some shares to cover. And then after those vests, so you've paid income taxes for what you're sitting on, now you just own stock. Now, you just own shares as if you had bought them on your own. And if you sell them within a year of having been granted them, then if there's any gains above what you paid for when they came unvested, then you're going to pay income taxes on that as a short-term gain. If you sit on them for more than a year, now, you get the lower capital gains right now.
It's always a crapshoot as to whether you should hold or sit on them. Only you know your company better than anybody else. Treat it like an investment. If you had bought it on your own or inherited or whatever, then think about it, that's something you want to keep for the long term. But hopefully, that helps with some of the questions you might have had out there. And again, congratulations for the for the future windfall.
So, moving on to Karen and Loveland, Karen says, they've been careful with money, but now, they're in that sandwich generation where they're spending more helping their own aging parents, not to mention, keeping their own situation afloat. So, how do you spread it all out, Bob? How do you support those aging parents without sacrificing their own security?
Bob: Great question, Karen. Here's my answer, don't just leave it to chance. And here's what I mean, first, build a financial plan and update it if you already have one, and run some different scenarios. What do our aging parents...? What we think we're going to need, and for how long? And put those expenses into your plan, and then factor in your own Social Security. As you pointed out in your question, have a plan, run different scenarios, and stress test that plan and see how it's going to work.
And usually, one of three things, you know, might need to happen. You know, if you and/or your spouse might need to work maybe one or two or three extra years in order to pull all this off, you might have to spend a little bit less money in order to help your aging parents. There's a lot of different variables there. And the important thing is get out in front of it now. Run those scenarios so you have more control over those levers that you pull. And then I'd say, the last thing is communication. You know, if you get to the point where you can't just bankroll everything for your aging parents, the sooner you can sit down and have those tough conversations right now, the better everything's going to be down the road.
I don't know if you have siblings that are in the mix. You know, it might involve some communication with them, but that's my answer. Run a good financial plan and then communicate, communicate, communicate. Don't just hope all this works out at the end. You know, make some adjustments now when you have the ability to do so. Next, I've got my two cents on picking a financial advisor. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, Brian, we talk all the time about having a properly diversified investment portfolio. But, you know, from time to time, we run into folks that think it's a good idea to be diversified in terms of the number of "financial advisors" they have. And I want to touch on that a little bit. I rarely, if ever, find this to be a good idea, where people are getting ideas from four to five different "advisors", when really all they are is just people that they've bought product from over the years. And, you know, at the end of the day, a lot of these clients aren't really looking for an advisor, they're looking for a bunch of different ideas, and they want to be their own advisors.
So, the analogy I want to use is, you know, because of a heart valve, you know, thing that I was born with, I've seen a cardiologist for, shoot, 30 years now. And when it comes time to having somebody keep me alive, I'm not Googling it. I'm not talking to six different cardiologists. I asked around, I found a good one, and then I let him manage my care over the long term. And I don't need to get in all the details, but he's done a wonderful job of keeping my heart healthy. It's because I found a good cardiologist. I trusted him. I trusted his process. I trusted the fact that he has always coordinated my care with my primary physician, and it's been a good outcome.
The same thing should apply to your financial advisor. A big thing that we run into, Brian, is there's no coordination from a tax standpoint, you know, with a client's CPA or even proactive tax strategy. And I'll say, even if you've got five different "advisors" out there, and no one's doing any proactive tax planning in coordinating with your CPA, you do not have a good financial plan. You got a couple of good ideas. You got a bunch of people trying to retain wallet share in terms of your assets under management, but you really don't have a good financial plan. Same thing apply. Yeah, go, jump in.
Brian: I want to lean on your cardiologist example there, because I have a similar situation, where I've got a minor thing going on that there's nothing to worry about, but I got to pay attention to it. And when it first surfaced about 15 years ago, I went to the closest place because I really wasn't... I didn't know how to think about this stuff. And it took probably about six months before I realized that that was not their specialty. And they were kind of flailing a little bit, trying to figure out... This wasn't a traditional cardiologist. It was somebody recommended to me by the hospital in the ER that I went to. And I realized that, you know what? I really need somebody who does this all day long. And that's all that they do. And I figured out that that was a very different experience. And they got me squared away. And I go every few years, and they say, "Go away, you're in pretty good health, but let us know if anything else happens," which is a good thing.
Same thing with financial advisors. Figure out what your challenges are. If your financial advisor isn't teaching you things that you didn't already know, then they're not doing you any good. They're probably just selling you product. A financial advisors should never tell you exactly, precisely, here's what you need to do in black and white terms. If you have built a solid financial situation for yourself, that should mean you have options. And options come with pros and cons. And it's not for an advisor to tell you which to do. It's for the advisor to help you clearly understand the pros and cons because they're all good ideas. One of them will be better than the others. That is your call. But you need an advisor there to tell you which to do. It's never black and white when you've reached a level of financial success.
Bob: Yeah. And to use your example, and it's one that I lived through with that cardiologist as well, I mean, you get to the certain point where I had a high degree of respect for someone that says, "Hey, I've reached the limits of what I'm able to do personally. I'm going to refer you to this specialist over here." That's good advice. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You've worked hard, saved well, maybe even hit that magical, I don't know, $5 million number you've had circled for a decade, and now, you're there. But here's the potential curve ball. Now that you've "won the game", you're not sure the scoreboard actually matters. What are we talking about here, Brian?
Brian: Well, there's always the myth of the magic number out there. There's a lot of people who, and a lot of companies who promote the idea that everybody has a number out there. And that may be true, that may not be. But I think it's way too easy to simply say, "Here's the finish line that I got to get to, and then everything is smooth sailing from here," because God tend to think he's funny, and life will intervene. So, that magic number may move on you. So, $2 million, could be $5 million, but you have to account for lifestyle, tax obligations, for both of those things to change. The complexity of your holdings, the more complicated your portfolio is, the more out-of-left-field type of things you could have happen. For example, you give me two people with $5 million, they could have completely different outcomes depending on where that money is. Is it pre-tax, Bob? Is it, you know, like 401(k)? They've just worked a long time for another company, or is it after tax? Maybe they sold their own company, inherited something. A combination of everything, real estate, other business entities, that kind of thing. All of it changes the calculus on what that magic number might be and whether it stays, that magic number.
Bob: Well, and it all depends on how you choose to turn those assets into income, because let's face it, at the end of the day, no matter what your net worth is and how it's comprised, we all, Brian, need to take this pile of stuff, as you said, whether it's real estate, equity, business ownership, investment, we need to turn that into a paycheck to replace our day job if we really want to retire. And planning and doing the most tax-efficient strategy on converting all that pile of assets into income is really where the magic happen. And it requires some planning. It requires some proactive planning. All right. Another... No, go ahead, go ahead.
Brian: Yeah. So, let's talk about taxes here. Let's kind of break these down. What are the different things that could drive different outcomes? Well, if let's say, you're somebody who has worked for a big company for a long time. This is the Procter & Gamble company folks around town, or maybe Kroger, those kinds of things. You know, you might have $5 million in your 401(k). Well, if that's all pre-tax dollars, because for somebody who has worked in one place that long, that was the only choice. When you first started, pre-tax was the only option you had. There was no Roth. You know, there were no other options. So, if that's a pre-tax number, that might really only be $3.5 million after taxes, depending on the asset types that are in there.
So, what that means is you are set up for significant required minimum distributions at age 73 or 75, depending on when you were born. That's going to affect your Social Security tax ability. You're probably going to be facing something called IRMAA in those years because you will have a significant minimum amount of income. If you've got five million in a pre-tax account at age 73, you're looking at probably $240,000, $250,000 worth of distributions that you have to pay tax on. That's going to definitely put you into the second tier of IRMAA. And so, for example, that's something you might want to be thinking about. What can I do about that before I get to that age? And the answer is pretty much, let's look at Roth conversions.
Or in the case of some companies, Procter & Gamble being a big one, you can do something called a net unrealized appreciation transaction, which basically means you pull out some of that Procter & Gamble shares from your profit sharing side, from the PST side, and you will pay capital gains tax on them if it's done properly, not income tax, and you will have removed it from the 401(k). So, that's not limited to Procter & Gamble. That's just a very prominent example of a company that has that feature. If you've got company stock in your 401(k), you might look at something called net unrealized appreciation, whether or not you work at Procter & Gamble.
Bob: For sure. That can make a huge difference. All right. Another thing that tends to get overlooked is something we've talked about before on this show, something called sequence of return risk. And what we mean there is volatility in your portfolio, when that portfolio actually has to start creating monthly or annual income. Here's what we mean. You know, when you're accumulating money in your retirement plan, and you're just working and socking money away, you really don't care much about volatility. All you care about is the average, long-term return thing. Because let's face it, you're not spending any of that money. So, if the market goes down 8%, 12%, 15%, we know if we're still working and putting money away, it's always going to recover. It usually and always does. And you can kind of put that out of your mind and just keep piling away and working and socking money into your plan.
Well, when it comes time to turn this into a monthly income stream, volatility matters a lot. And it's just math. We've run studies, depending on what that volatility is, even if your average long-term return stays the same, if you don't manage volatility while you're pulling money out of a portfolio, that can really deplete your asset base, even though the long-term return didn't change at all. It's counterintuitive for a lot of people until you actually see these numbers in action. And that's why it's important when it comes time to retire to sit down with a good fiduciary advisor and walk through your income strategy and make sure that you've got some money out of harm's way that you're going to spend, the money you're going to spend in the next, say, one to three years, that gives you some protection against this, what we call sequence of return risk because it is a real risk out there. It's just plain old mathematics.
Brian: Yeah, and a good mechanical way to test this is by doing something we call a stress test. Put together your financial plan, figure out what your spending needs to be, fluff it if you want a little bit, just add a little bit more, and build inflation to it over the years, and I would also say, figure out which goals you have, which spending goals you have that won't exist forever. There's a mortgage in the mix, that's not going to be there. If you're going to retire at 60 and you have a mortgage for another few years, that's not going to be there when you're 90. Don't bake that into your living expenses. It's going to make things look unnecessarily negative. But then, so run your numbers with a standard rate of return, a nice, conservative, say 5%, 6%, you should be able to get more than that out of a decent investment program, but we're simply projecting conservative projections here.
So, then once you've done that, do it again, but take off, say, 20% of your financial net worth. Just make it go poof, lower the numbers by 20%. Don't change anything else, and run all the numbers again. That will tell you if you can handle what some people went through in 2021. Anybody retired in 2021, we immediately went over the cliff in '22, and most people, if they didn't panic, have recovered nicely and are okay. People who did panic and decide that, "I'm now retire. This is scary. I have to protect my assets." Well, then they probably changed permanently the trajectory of their retirement plan. So do that before, illustrate it before those kinds of things happen. Your number may come up, that could happen to you. There's only so much you can do in moving investments around to protect from it. We need to be able to withstand it and maneuver ourselves around the stress of that happening. So just run those numbers with that happening and make sure your plan still floats.
Bob: All right, another factor to consider, no matter how big your "pile of assets" is, is just longevity and potential family obligations. Here's what I mean. And I see this more and more happening, Brian. I don't know if you do, but I see this happening a lot. Many high net worth families are simply becoming multi-generational banks. And I'm sure when they sat down 15, 20, 25 years ago, they never expected to be in a situation where they're supporting their adult children, maybe more or beyond what they had planned. They never expected to have to support, financially, their own parents or other relatives. And once that bank is shown to become available and you start dispensing money, human nature being what it is, the assumptions can be, "Well, this support is always going to be permanent." And if that's really the case, you've got to factor that into your plan. If it's not the case, you've got to do some heavy-duty communicating. But you first got to look at the numbers and say, "What can we afford to continue to do if some of this support that we hadn't planned to be generating continues," and then, you know, make adjustments as needed. Do you see that happening more and more with your clients, Brian? Because I certainly do.
Brian: Absolutely. And I find myself thinking about, all right, I've got three kids that are just getting to their own level of independence, and I worry about that all the time. I think about it a lot more. I think than my parents had to because it was a little easier to get started in those days. But I think, Bob, it would be easiest we went through some examples. We've got some examples prepared here of actual client situations, real people, but fake names, and just kind of how they've navigated things, and how they get to where they've gotten to. So, first off...
Bob: Yeah, run us through one.
Brian: Yeah, so, let's take Steve. Steve is 67 years old. He's got a net worth of $6.2 million. Most of that having come from having sold a business about five years ago. And about $4 million of that net worth is now tied up in real estate. He's got a couple rental properties, a vacation home, and then about $1.2 million is in his pre-tax 401(k), $1 million in a taxable brokerage account there. He basically came in thinking that $6 million means set for life and didn't have to worry about it. And mathematically, yeah, that's usually in the ballpark, but the problem is that rental income is not consistent, and it's become a bit of a burden to maintain those properties, right? It's one thing to look at a piece of paper that says you own a couple of nice rental properties, and here's the rental that they average, but if it's inconsistent and you're dealing with tenants, that changes everything because you're the one that has to pick up the phone.
So, the point was, what brought him in was the idea that he wanted to change his $6 million worth of assets around to make it simpler. And so, the challenge was, how do we do this and generate the income that he needs without relying on so much of a business in the rental income. He had already ruled out the idea that, "Well, I could hire a property manager to do all this," but then that really kind of sucks all the return out of the owning real estate in the first place and makes it kind of just not that impactful in terms of generating income, net income. And so, basically, his problem was he had a lot of net worth but just about no flexibility.
So, that retirement number he had identified, his $6 million set-for-life figure, didn't really work for him anymore because of the asset location, because of what he did. So, we helped him, basically, get through the idea of, let's consider selling these properties, change your mindset from what you thought was going to be the best way to go. And let's just look at things a little bit differently to give you a less involved, "business of retirement". And he's been pretty much happy ever since. And all we did was shine a bright light on the situation you're in and the situation you could be in.
Bob: Good stuff. All right, we'll run through one more actual example. We'll call this couple Denise and Mark. They're 64 and 66. They have a net worth of about $5 million. They retired in late 2021 after strong markets boosted their portfolio. And their advisor said, "Yeah, you're totally fine withdrawing $200,000 a year. Your plan will 'work', assuming 6% average returns continue forever." The problem, as we all know, 2022 was a down year. The stock market was down, the bond market was down. That $5 million portfolio dropped to a little over $4 million, and they still pulled the $200,000 out. So, that's a real withdrawal of over 7% of their capital in a down market, and that just compounds the losses.
The answer to this is, proactively in advance have a bit of a bucket strategy where you've got some assets not subject to market volatility that can supply your income needs over that one, two, three year time frame where you're not subject to all that downside sequence of return risk. It makes a huge difference. And these folks finally got the message, and they're living happily ever after now because they've got some money set aside in different places for different reasons, and they're taking some of that short-term sequence of return risk off the table.
Here's the Allworth advice, your retirement success isn't about how much you've saved. It's about how that money is actually put to work to achieve your actual goals. A lot of people dream of early retirement, but what if stopping work too soon actually hurts your health and shortens your life? We've got new research to discuss on that topic next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" live every night, subscribe and get our daily podcast. Just search Simply Money on the iHeart app or wherever you find your podcast. Straight ahead, Eric's wrestling with a big tax hit on new stock appreciation unit. Karen's portfolio just got too complex to manage on her own. And Joe's wondering if downsizing makes sense right now. Real questions, we'll hopefully provide some smart answers straight ahead at 6:43. So many Americans, maybe even you, dream of retiring early. Get out of the rat race. No more meetings, no more commutes, just absolute freedom. But there's a new conversation taking place, Brian, and it's not about whether you can retire early based on whether you have enough money, it's about whether you should, because it might not be as good for you as you think.
Brian: Well, I don't think that's a new conversation. That's a conversation that I have every single day in my office, and I'm sure you do too through the planning process. But "USA Today" picked up on it, so therefore it's new to them. Anyway, so coming from "USA Today", 60% of Americans say that their dream is to retire early. But we get some figures from the National Bureau of Economic Research that did a study of people in China, a little bit of a different mindset over there. But when they take early retirement over there through this new pension program they have, they see about a 13% drop in cognitive performance. Memory, attention span, brain function, you know, the kind of stuff that actually can make retirement fun if it's in good order. And this is why we all say we want to retire earlier here in the United States. Well, over there, it's such a work-driven economy that as soon as the work is gone...
Bob: I was going to say, if I lived in China, Brian, I think I don't want to be retired too, but go ahead.
Brian: Yeah, but basically, the brain shut off. And I'm just going to go out on a limb here and say, there just might not be as much of a dream of retirement and freedom and all that kind of thing over there in China as there is here. So, how do we compare that to the United States? Well, similar results. So, there was a study published by the "Journal of Epidemiology and Community Health", found that people in the United States who retired at 55 were twice as likely to die early compared to those who retired at 65. Now, don't assume that this means that your job is the only thing standing between you and the great beyond. But what it does suggest, though, is that retirement, when it's early and unstructured, in other words, "I'm miserable. I hate this job. Got to get out of this, and I'll figure out what I'm going to do later," without a plan, that can lead to a lot of isolation, which leads to less daily movement, physical movement, and fewer reasons to stay mentally sharp, and all of a sudden, the downhill ride is kind of steepening on you a little bit.
Bob: Yeah, Brian, I think you raised a good point before. I mean, when we have people come in and talk about retirement now, very few people are saying, "Hey, I can't wait to just quit my job and do nothing, and sit in a rocking chair on the front porch, or just play golf 16 hours a day." You know, people are already more thoughtful about this. People are talking about, what am I going to do with my time and energy and my mind, you know, to your prior point, in advance? So, I think we've seen a healthy evolution in this whole retirement processing in advance, but for those that maybe are starting to think about this, here's three questions to ask yourself. Do you want to stop working or just stop doing your current job? And how will you stay mentally and socially active if you do retire early? Those are big questions to answer, and hopefully, answer in advance. In other words, is early retirement really your goal or is just flexibility, having more flexibility and freedom in your life your real priority? I think those are three wonderful questions to ask.
Brian: Yeah, and I think a lot of times, you know, it's exactly that. You know, a lot of people wind up frustrated in their careers, you know, that they've gone as far as they want to or maybe, as far as they can, or maybe the writing is just on the wall and the company is kind of moving on beyond their level of interest. But that doesn't mean they're ready to retire yet either. So, I think they're really, really, really important thing to be thinking about is we all tend to hide behind the dollars, and waiting until, "I think I have enough perceived money that I can actually get away with retirement." And we tend to focus on that to the detriment of the time because once we do get that... Oh, by the way, hey, people who focus on that number tend to work too long, and they wind up surpassing that number because they didn't have a plan to begin with. So, they might hit that number and plow right past it because now, they don't know exactly what they're going to do, and retirement just becomes terrifying.
So, start to think about what it is you might do. Are there smaller organizations where your skills would be valuable and you could potentially go work for them for some level of income? But remember, the whole point of this is you don't need the salary anymore and you probably don't need the benefits as much as you used to either. So, think big, think outside the box. Go on websites like Indeed and type in random words of stuff you're interested in, just a keyword search, see what kind of jobs are out there. You'd be shocked at the kind of things that people will pay you to do to take advantage of the skills that are in your brain that you developed over all those years. But don't focus only on the light at the end of the tunnel, "I got to get out of this job and I'll worry about the rest later." That hits like a freight train. You really have got to spend some time thinking about how you will fill the vacuum of time that you will have when you no longer have to work.
Bob: Yeah, the real sweet spot here to me, Brian, is being in a position where you can make decisions based on what you want to do and feel called to do, not what you feel like you have to do. That's really retirement freedom. And there's a lot of factors that go into that. Obviously, money is one, but you got to plan ahead and kind of look around here at how you're going to fill your time and energy, because at the end of the day, whether it's your work, volunteer work, relationships in the community, everyone wants to have some purpose and meaning in their life, and they want to have contact with other people. And if you don't have those things, some true community in your life, I don't care whether you're worth $5 or $50 million, your life is going to be empty.
Here's the Allworth advice. If you're dreaming of early retirement, that's great, but make sure you're planning for more than just financial freedom, plan for purpose, too. Coming up next, we've got the money makeover for all you empty nesters out there. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. There's this moment every parent eventually hits. It's usually after the last kid moves out, when you walk past that empty bedroom, and it just socks you right in the mouth, "Oh, wow, it's quiet in there." I've experienced that, Brian, my wife has as well. And right after that, you start thinking, "Okay, what do we do with all this space? And potentially, what do we do with all this money we've been spending on travel, baseball, and college tuition, and all that?" So, you know, the point we're trying to make tonight and kind of walk through is, when you hit that empty nester phase, it's not time to just, you know, go out and spend all that extra money you might have laying around or think you have laying around. It's time to take some inventory on where does life actually pan out right now, and maybe some tune-up work that needs to be done to your overall financial plan.
Brian: Yeah, so an empty nester money makeover, I think, is what you're referring to there. So, you already referred to the expenses that may be gone, all those things that the kids were into that aren't costing money anymore. So, let's talk about the house. So, the structure of the house, of course, is still the same, and congratulations because it's still standing, that's a good thing. But you don't need all that space. So, what about that old bedroom? Maybe it becomes a yoga room or a guest suite or the sports bar. But probably what it will become first is a glorified storage unit for 20 years of marching band trophies and old posters, LEGOS, and that kind of thing.
So, money works the same way. When the kids are gone, it's sort of like you just cleared giant room in your financial house. So, what do you want to do with those resources that you have next? Well, one of the first things to look at is that cash flow. So, as we mentioned, a lot of those regular expenses are going to disappear. Your grocery bill is going to drop. When they hit a certain age, eventually, your car insurance is going to drop. You'll hand off their cell phones, college payments go away. But without some kind of planning, the absence of those expenses is going to give you extra, spendable money. And it could result in, "We've got this stuff, so we might as well blow it on things." And you maybe wind up with a fancier car, more eating out, and then you may wind up regretting that you didn't really have a plan for it.
So, just think about it in advance. Think about it like this, if you take down a wall in your house, you could fill that new space with clutter, or you could open it up and make it more functional for something you actually want to do. But the point is, you will have thought in advance for what you want to do with those new, added resources that you have. So, maybe it's funding those catch up contributions in your 401(k), increase that amount, or IRA contribution, Roth IRA, backdoor contribution, if that's something that you're familiar with. If you're over 50, you can put in a little extra each year. And for those in their early 60s, there's even a new catch up. So, these dollars sometimes aren't present at the moment. But remember these opportunities when you do hit this empty nest stage of life.
Bob: Well, Brian, speaking of taking that wall down and having the option of just having a bunch of clutter, my wife and I are living this right now. So, I'm giving you a preview of what your life is likely going to become. All three of our kids are out of college. They're all living on their own now in their own separate homes and dwellings. But a lot of their crap is still in our house. You know, it's funny. My wife, she does a wonderful job of keeping our home clean and clutter free, but she'll periodically go through and find all...you know, you used the analogy of marching band trophies. I mean, whether it's that or athletic trophies or just clothes, you know, stuff laying around. And she'll go to the kids and say, "Hey, you moved out. Are you going to take this stuff with you?" "Nope, don't have room for that, can you keep it?"
Brian: No. The answer is no.
Bob: So, a lot of the stuff never goes away. It's a process. All right, speaking of the house, and this is a topic that comes up a lot, people talk about wanting to downsize or right size their home. This is a big, emotional, and financial topic. Some people dream about downsizing, while others love their current home and plan to stay put even if they have two or three bedrooms that are completely empty. The point I make here, Brian, is a lot of times people talk about downsizing. I don't know about you. I have yet to see the client. And I've been doing this for 35 years. I've yet to see somebody sell their primary residence and move somewhere that ends up costing less money. It might be smaller, but it ends up being newer, you know, with nice furnishings. It never costs less money. People want to rationalize this by, you know, calling it downsizing. It's really not when it comes to finances. So, just, you know, buyer beware out there when you start talking about the whole downsizing conversation. Does this ring true with you and your clients as well, Brina?
Brian: There's no such thing as a financial downsizing when it comes to your house. There's an effort and work downsizing. You can reduce the amount of work you got to put into it, but you're not going to save any money. Even if you buy a smaller house, it's most likely going to be in a in a nicer neighborhood or an area you always wanted to live in and that kind of thing. And you're probably not the only one who wanted to live there. Therefore, the expense of purchase goes up. So, don't think money when you think downsizing.
So, what do we do about this? Well, you can do what's called a retirement rehearsal. So, once that you've noticed the house is quiet and that budget is a little lighter, well, that's the time for a test drive. So, maybe live for six months on what you think your expected retirement income is going to be. And that might be Social Security, pension, investment withdrawals, or rental real estate income, that kind of thing. See how that feels. You're going to learn quickly if the plan works, because you'll know right away when you're dipping into more than what you thought you were going to. And then you're going to... Because this is you're not making a real sacrifice at this time, you're just kind of test driving. So, you'll know if you need a little tune up before that paycheck stops. So, it's kind of like taking the RV on a weekend trip, right, before you actually buy it for real, before you hit the road full time. You're going to want to test it before you're a 1,000 miles from home, and see if you run across any problems you didn't anticipate. One more thing...
Bob: I think that is a wonderful idea, and I wish more people did this. And I'm in the middle of trying to do this right now with my wife. Actually, constructing a budget and looking at what this is really going to look like if life's going to resemble what we think it might resemble. I think it's really good to test drive this in advance. But go on.
Brian: Yeah. And so, one more thing to do when you've got this free time, you're going to remember, the whole point of this is the kids are gone, they're out on their own, you're going to start paying attention to what it is they do and how they live their lives. That's going to be a bit of an estate planning tune-up for you. So, you're going to need help sooner or later. Someday, you're probably already in a situation where you yourself are helping your own parents. And so, this is the time to learn which kid might make the best executor, who is the one who can make decisions on your behalf.
Yes, this is years in into the future, but the sooner you put this stuff into place, the sooner you cannot think about it and enjoy retirement more. And then you'll be thinking about, which of my kids are good on their own and I can trust them inheriting money at my death. Which of them may have some more challenges and may require a little extra care for which I might need a trust and a trustee in place. So, estate planning isn't just about passing that money. It's about making life easier for the family later, especially for those of you who have been through a difficult estate settlement process for maybe your own parents. So, think of it like labeling those boxes in that modelled home. You're saving everyone from chaos down the road by planning ahead.
Bob: Here's the Allworth advice, an empty nest is your chance to reimagine, and possibly, refill your future. You know you should be diversified, but what does being "too diversified" look like? It's one of the questions we'll answer next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. You have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question and it will come straight to us. All right, Brian, Tim and Hydepark says, "Our advisor keeps saying we're on track, but it doesn't feel that way to us. What's the difference between being mathematically fine and being truly financially free?" This is a great question..
Brian: Yeah, I really think so. So, if it doesn't feel that way, first of all, that's not necessarily a negative thing. You know, that's that Jiminy Cricket on your shoulder telling you to be careful. That's the same voice that has been telling you all along to save, save, save. It can be hard to tamp that voice down and turn that freighter around psychologically, which is a very slow process, to spending your assets from putting nuts away for the winner. So, the difference between mathematically fine and being truly financially free, Tim, is confidence.
So, it sounds like you just need to go through your plan some more. And who knows? Maybe the advisor is missing something. We're all human. Sometimes things don't go well. So, if there's something you mathematically agree with, pinpoint that for the advisor and ask them to explain it again and again until you understand it. But again, that's the difference between mathematically fine and financially free, is confidence. Yes, I see this plan, and I understand that life doesn't always work out that way. But I have stress tested this plan several different times for many reasons. And now, I feel confident that anything crazy that comes out of left field we can handle. Confidence is the difference, Tim. David in Blue Ash. David has question for you, Bob. And he says, we always talk about being diversified, but is it possible to be too diversified? And if so, what does that look like, Bob.
Bob: Well, David, the most common situation we come across is, you know, people feel diversified, but they might have, you know, 13 to 17 different large cap mutual funds or ETFs either in the retirement plan or in their brokerage account. They've just been collecting these products over time. And people have the sense of, you know, the more funds or investment options I own, I'm automatically diversified. Well, true diversification is having some non-correlated asset classes to complement, you know, in my example, the large cap growth positions. So, a little bit of bonds, a little bit of small cap, a little bit of international, maybe some private equity, maybe some buffered ETFs.
The whole idea behind having a long-term, diversified portfolio is to have a portfolio that over time gives you the highest rate of return per unit of risk. That's what that modern portfolio theory that, you know, all financial advisors should be modeling portfolios after. That's how and why it works. So, we have to define what diversified means. And the only way to do that is kind of look under the hood and see what you actually own. But that's my answer. Oftentimes, people feel diversified by having a bunch of options in one particular asset class. And that's where you might feel like you're diversified, but you're really not. Hope that helps. All right. Eric in Fort Mitchell says, "My company just offered me restricted stock units, and I don't fully understand how they're taxed. How do I build a plan around something like that that fluctuates in value?" Brian?
Brian: So, first off, congratulations, because you obviously you work for a company that's been successful enough, it wants to reward its employees by giving them a little piece of the action. So, that's fantastic. So, those can be an excellent form of compensation, but they do have unique tax and planning challenges because their value depends on one company's stock price, and there's just no way to tell what direction one company is going to go or what the market's going to do to it. But here are the facts, when you're granted those restricted stocks units, you don't owe any taxes yet because you technically don't own anything. They're restricted until they're not. So, they're just a promise. So, that transaction at the very beginning is not a taxable one.
They all have a vesting date, though, and once they vest, they hit that date, now they're yours. Now, the value of them is treated as ordinary income, just as if they had increased your salary a little bit. So, the value of those shares are going to be added to your W-2 income. Federal, state, and payroll taxes are going to apply and they will be withheld. Oftentimes, you'll have a choice, though, through what they call share withholding, or they're going to sell some shares to cover. And then after those vests, so you've paid income taxes for what you're sitting on, now you just own stock. Now, you just own shares as if you had bought them on your own. And if you sell them within a year of having been granted them, then if there's any gains above what you paid for when they came unvested, then you're going to pay income taxes on that as a short-term gain. If you sit on them for more than a year, now, you get the lower capital gains right now.
It's always a crapshoot as to whether you should hold or sit on them. Only you know your company better than anybody else. Treat it like an investment. If you had bought it on your own or inherited or whatever, then think about it, that's something you want to keep for the long term. But hopefully, that helps with some of the questions you might have had out there. And again, congratulations for the for the future windfall.
So, moving on to Karen and Loveland, Karen says, they've been careful with money, but now, they're in that sandwich generation where they're spending more helping their own aging parents, not to mention, keeping their own situation afloat. So, how do you spread it all out, Bob? How do you support those aging parents without sacrificing their own security?
Bob: Great question, Karen. Here's my answer, don't just leave it to chance. And here's what I mean, first, build a financial plan and update it if you already have one, and run some different scenarios. What do our aging parents...? What we think we're going to need, and for how long? And put those expenses into your plan, and then factor in your own Social Security. As you pointed out in your question, have a plan, run different scenarios, and stress test that plan and see how it's going to work.
And usually, one of three things, you know, might need to happen. You know, if you and/or your spouse might need to work maybe one or two or three extra years in order to pull all this off, you might have to spend a little bit less money in order to help your aging parents. There's a lot of different variables there. And the important thing is get out in front of it now. Run those scenarios so you have more control over those levers that you pull. And then I'd say, the last thing is communication. You know, if you get to the point where you can't just bankroll everything for your aging parents, the sooner you can sit down and have those tough conversations right now, the better everything's going to be down the road.
I don't know if you have siblings that are in the mix. You know, it might involve some communication with them, but that's my answer. Run a good financial plan and then communicate, communicate, communicate. Don't just hope all this works out at the end. You know, make some adjustments now when you have the ability to do so. Next, I've got my two cents on picking a financial advisor. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, Brian, we talk all the time about having a properly diversified investment portfolio. But, you know, from time to time, we run into folks that think it's a good idea to be diversified in terms of the number of "financial advisors" they have. And I want to touch on that a little bit. I rarely, if ever, find this to be a good idea, where people are getting ideas from four to five different "advisors", when really all they are is just people that they've bought product from over the years. And, you know, at the end of the day, a lot of these clients aren't really looking for an advisor, they're looking for a bunch of different ideas, and they want to be their own advisors.
So, the analogy I want to use is, you know, because of a heart valve, you know, thing that I was born with, I've seen a cardiologist for, shoot, 30 years now. And when it comes time to having somebody keep me alive, I'm not Googling it. I'm not talking to six different cardiologists. I asked around, I found a good one, and then I let him manage my care over the long term. And I don't need to get in all the details, but he's done a wonderful job of keeping my heart healthy. It's because I found a good cardiologist. I trusted him. I trusted his process. I trusted the fact that he has always coordinated my care with my primary physician, and it's been a good outcome.
The same thing should apply to your financial advisor. A big thing that we run into, Brian, is there's no coordination from a tax standpoint, you know, with a client's CPA or even proactive tax strategy. And I'll say, even if you've got five different "advisors" out there, and no one's doing any proactive tax planning in coordinating with your CPA, you do not have a good financial plan. You got a couple of good ideas. You got a bunch of people trying to retain wallet share in terms of your assets under management, but you really don't have a good financial plan. Same thing apply. Yeah, go, jump in.
Brian: I want to lean on your cardiologist example there, because I have a similar situation, where I've got a minor thing going on that there's nothing to worry about, but I got to pay attention to it. And when it first surfaced about 15 years ago, I went to the closest place because I really wasn't... I didn't know how to think about this stuff. And it took probably about six months before I realized that that was not their specialty. And they were kind of flailing a little bit, trying to figure out... This wasn't a traditional cardiologist. It was somebody recommended to me by the hospital in the ER that I went to. And I realized that, you know what? I really need somebody who does this all day long. And that's all that they do. And I figured out that that was a very different experience. And they got me squared away. And I go every few years, and they say, "Go away, you're in pretty good health, but let us know if anything else happens," which is a good thing.
Same thing with financial advisors. Figure out what your challenges are. If your financial advisor isn't teaching you things that you didn't already know, then they're not doing you any good. They're probably just selling you product. A financial advisors should never tell you exactly, precisely, here's what you need to do in black and white terms. If you have built a solid financial situation for yourself, that should mean you have options. And options come with pros and cons. And it's not for an advisor to tell you which to do. It's for the advisor to help you clearly understand the pros and cons because they're all good ideas. One of them will be better than the others. That is your call. But you need an advisor there to tell you which to do. It's never black and white when you've reached a level of financial success.
Bob: Yeah. And to use your example, and it's one that I lived through with that cardiologist as well, I mean, you get to the certain point where I had a high degree of respect for someone that says, "Hey, I've reached the limits of what I'm able to do personally. I'm going to refer you to this specialist over here." That's good advice. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.