Constructing a Portfolio in Retirement

Constructing a Portfolio in Retirement

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The Smart Take:

Pick your favorite financial publication. One minute, they tout a financial collapse and pending recession, and then seemingly on a dime, headlines change to – “cash yields are attractive” and “the stock market finishes at its highest level in twelve months.” Making portfolio decisions through all the noise can be a challenge. What is the right investment strategy? How much should you put in stocks? Do you need bonds? CDs? What type of stocks or bonds? What about other or “alternative” investments? All are good questions and just touch the tip of the iceberg.

On this episode, hear Tyler Emrick, CFA®, CFP®, dive into these questions and, more broadly, how you should think about asset allocation — aka your “investment recipe”. Pay special attention to how aligning your financial life planning and your goals to your investment decisions is a critical step many misunderstand or overlook.

Here’s some of what we discuss in this episode:

  • Determining how much you can afford to withdraw in retirement each month.
  • Should you be favoring cash and bonds over stocks and what are the benefits of each?
  • How to design the proper portfolio that aligns with your goals.
  • Having a more dynamic retirement plan and a more dynamic investment plan.

Additional resources for this episode: 

How Much Is the Right Amount Of Cash?

Dynamic Strategy: Retirement Income Planning Series – Part 4

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick  00:00

With attractive cash yields and a rising stock market, what is the right investment mix for you? Do you need bonds? Should you invest in a 5% CD? Like most important questions the answer is, well, it depends. Let’s dive into how you should be thinking about your asset allocation. Today on retire smarter.

Walter Storholt  00:24

It’s another edition of Retire Smarter. Welcome back. Walter Storholt here alongside Tyler Emmerich certified financial planner, as well as a Chartered Financial Analyst at True Wealth Design, with offices in Northeast Ohio, Southwest Florida and the Greater Pittsburgh area, but serving clients all across the country. Great to be with you this week. Tyler, how is life treating you as we close out our second to last episode of 2023

Tyler Emrick  00:48

That’s right. The year is rapidly coming to an end right? Just busy. You’re in planning and urine items with the holidays. We had family in town this past weekend, which was great. So it’s like the start of the December festivities. A lot of food. A lot of family and events right. already

Walter Storholt  01:07

burned. And we’re not even at the juncture yet.

Tyler Emrick  01:11

That’s right. That’s right. I still might have some of that old Thanksgiving leftovers in a week later. Not exaggeration, but they did last me a couple at least a few days.

Walter Storholt  01:20

Oh yeah. What how are the decorations in the neighborhood looking anything interesting yet pop up?

Tyler Emrick  01:26

No decorations. The decorations are good. I’d say my house is probably the one lacking the most I definitely need to up my game on that for sure. Maybe this year after after the holiday season. I can pick up some good deals and be more prepared for the next year. But no, I’d say yeah, neighborhoods looking good. We don’t have any like Clark Griswall hanging down from the gutter or anything like that. But the lights are definitely pretty

Walter Storholt  01:50

nice. Our neighborhood went in an interesting direction we were apparently out of the loop on what what had been planned. So we’re, we’re one of the like, two or three oddballs in our entire like little part of the neighborhood like our little three Street Collection here. And we came home from being out of town for a week and turned the corner and there is a 15 or 20-foot Santa in every single yard all the way down the block around everyone and yes, there are literally like 30 20-foot Santos that I pass in a span of just you know 15 houses or whatever you know that like just a 10 second span you can see them all lined up you know like an army of senses. So I think everybody in the neighborhood except for apparently us and our neighbors

Tyler Emrick  02:40

We can say you missed the memo

Walter Storholt  02:42

We have frosty we it’s hilarious we have the exact same frosty and it was in Canada was like they have the same frosty as we do. And then we come back a week later and everybody has the exact same saying all down the neighborhood. So it’s like okay, don’t look so bad.

Tyler Emrick  02:56

It must have been a good Black Friday deal right?

Walter Storholt  03:00

Some text exchange we weren’t on that said everyone by a snowman by saying

Tyler Emrick  03:05

no our neighborhoods lacking in that area. But we definitely are in the spirit got we got the lights up and neighborhoods looking good. So you know already for that first big snow and go from there. Love

Walter Storholt  03:16

Love it. Yeah, definitely. Let’s let’s dive into our episode Tyler and get things shaken today as we have a great topic on the way a little bit of an extension from our past episode, which generated a lot of commentary and a lot of really good feedback from listeners, the 8%, safe withdrawal rate in retirement claim from Dave Ramsey, that we kind of broke down on the last episode. And you did such a great job kind of just dissecting the good and the bad and the ugly of you know, that kind of advice or talk or generalizations. And it kind of inspired you to just continue off in that direction a little bit today.

Tyler Emrick  03:51

Yeah, I think so it’s, I think, what’s something that goes hand in hand with thinking about? Well, where are we going to get money from in retirement? And how much can we withdraw from our assets? Your natural next progression is, is well, what type of portfolio should we be investing in? And that’s a big piece of that puzzle that I think trickles down into, you know, what, actually you have available there to withdraw from or at access as you kind of think about retirement. And you know, we’re really big on on research and trying to stay ahead of the game on, you know, what everybody’s doing, and what are some of the new ideas that are out there. And, you know, Morningstar is a place where we get a lot of that content from Christine Benz had an article that was titled, came out at the beginning of last month, you know, should you invest in stocks, bonds, or a 5% CD and it kind of caught my attention? I thought it was just really a natural progression saying, Well, hey, what, what should you invest in? Or how do you make that decision? And how do you do it with all these other things that you have to accomplish in your mind, as you’re thinking about, we’re heading into retirement, cash and bond yields with their highest levels and I I don’t know, almost 15 years was her comment. And so many investors are wondering, you know, should they be favoring them? Or how should they be using them inside of their portfolio? Or should they be changing their portfolio at all? So we kind of picked up on it too, I think earlier in the year, we did a podcast talking about like, hey, what’s the right amount of cash? So in that podcast, we dive into that decision a little bit more in-depth, I think we’re going to take a slightly different approach, as we kind of think about it today. And really take a look at that portfolio allocation or portfolio mix, and how you should be thinking about it from a portfolio withdrawal standpoint or a planning standpoint. You know, the article that kind of prompted all this that I mentioned earlier for Morningstar, their article was was broken down from a high-level standpoint, kind of diving into and saying, Well, hey, you know, if we look at cash, bonds, and stocks, what are the advantages of each of those buckets? And I thought, there were a couple of good tidbits in there that we’ll share before we kind of get down into the meat and potatoes of what we want to touch on today. And the first way that they looked at it, what was kind of looking at and saying, Well, why should investors avoid an over allocation to cash, especially as interest rates are as high as they are right now. And a couple of the points that they referenced in there, I thought were pretty good. The first of which, they said, Well, hey, they might be high today. But that doesn’t mean they’re necessarily going to stay here for an extended time into the future. I mean, we go back just a few years, what were interest rates all like down into almost 00. So it’s almost like they came out of nowhere over the last 1218

Walter Storholt  06:39

months. I mean, it’s really funny that you’re breaking down an article that’s like, is, should you invest in a 5%? CD, it’s like just a couple of years ago, that would have been an unfathomable article, like

Tyler Emrick  06:50

No chance or writer think. Yes, well, and even as you think about these higher interest rates, you know, they actually weren’t their points about why you should avoid an over allocation to cash was actually the inflation risk. So as you look at cash yields over a long period of time, you know, sometimes they beat inflation. But that’s not always the case. And more often than not, not actually the case. So even though you are getting that pretty nice yield at this particular point, that doesn’t necessarily mean that you’re going to be able to keep pace with inflation over an extended period period of time. So those were their two big caveats they wanted to look at as they’re thinking about, well, how much is in cash, then they moved over and said, Well, okay, well, what’s the advantages of bonds over cash. And one of their points was, while you can lock in a higher yield for a longer period of time, so you have longer dated bonds, anywhere from what 10 5 15 year bonds, pick your like, from a term. And then you also have the ability to have some appreciation potential. When you look at those fixed income instruments as well, which you don’t have in cash, you think about a money market, or a high-yield savings accounts, as those interest rates change on month-in and month-out basis. If they start to decline, you’re not necessarily profiting off of that interest rate decline. Whereas if you have your money in a bond, there’s two ways that you make money, you make money off of the interest rate that you’re getting. But you also have that principal appreciation where if interest rates decline, the price of that bond will actually increase that old teeter totter, ladder wall. Have you ever heard that before inverse relationship,

Walter Storholt  08:32

That’s why it goes up, the other goes down,

Tyler Emrick  08:34

You got it. That’s why he tweets way too, was so bad from a bond market standpoint, we had a rising interest rate environment, a very historical rapid Lee increasing interest rate environment. So those bond prices or that second return opportunity on bonds actually worked in the opposite direction, and were negative for some of those investments, you go back to the early 80s, all the way up until 2019 2020, we were in a declining interest rate environment. So those bonds over all those years, really profited not only from the interest, but also the declining interest rate environment where the price of the bonds actually increased. Interesting

Walter Storholt  09:15

To see how that has swiftly changed, like we’ve had that and that more steady change may be in some of these other arenas, but that swift change really jumps out to me and something that I don’t know, just kind of interesting as you break this down Tyler to see the different economic factors that lead to our decisions as individuals, how sometimes we have to base our decisions off of things that are slow, and it’s sort of like macro view. And then these things that happened just really fast and get to try and get to keep up with the ball and build a plan to work with all those different factors that are moving at different speeds.

Tyler Emrick  09:45

Oh, they do. I don’t know how many families we’ve met with over the course of 2023 where we talk about cash and the cash levels and really taking a look and saying well what what’s your banking relationship like? Where are you holding your cash is more so in a check Can account, are you using a high yield savings? Because your 12-18 months ago, really, there was no difference between a checking account and a savings account. Whereas now I think the average interest rate on a high-yield savings account somewhere in the mid 4% range 5% range. So the more money that your family keeps in cash, the more impactful that interest rate increase can be. So if it’s not something that you’re really paying attention to all the time, which generally I wouldn’t say it is, for a lot of families, that interest rate increasing so rapidly, it’s taken a look at and saying, Wow, this is a big difference. Am I using the right bank? And do I have my cash positions, you know, in a, in a favorable spot,

Walter Storholt  10:39

Great points all across the board. Tyler, right. So what else jumps out to you here.

Tyler Emrick  10:43

And then the third thing that they dove into was just the advantages of stocks over cash. And there are points where, hey, if you’re long term stock investor, you have upside potential, of course, but you have at the expense of principle-related volatility. So again, you breaking that down in normal terms, is basically saying, Hey, you have risk in stocks. But historically speaking, you’re going to have and get paid for that risk increase, but it’s going to be a bumpy ride to get there. And that stocks historically have been the best long-range opportunity to outrun inflation as well. So that was the key started up that article, right. But and I think all the points are very fair. That’s why I brought them up on the podcast. I mean, frankly, I would add one other thing as you’re kind of thinking about your portfolio in cash, bonds and stocks, and that’s, you know, a concept called Cash drag. And in relation to trying to maybe time the market, you know, we had a lot of families at the end of 2022, there were a lot of articles about, hey, this recession is coming, you know, the stock market is going to continue to be very, very poor for an extended period of time, look at these high-interest rates, let’s jump in and try to time it and you’ll put a bunch of money in cash. And you look back over say the last 12 months, the families that tried to time that and pulled maybe money out of stock market and put it into a high yield CD, you might have been getting at 5%. But over the last 12 months, the MSCI All Country World Index was up over 12%. So it’s like, Hey, you, you’re in something that’s up five, that’s great. But if you pulled it from something that over the last 12 months would have been up by 12%, there’s a lot of opportunity lost there. And that comes out in the form of what this concept called Cash drag, where traditionally, cash investments are not going to give you a higher expected return than bonds and stocks over a long period of time. And if you time it incorrectly, you know, it could really hurt, which I think there’s been a number of articles and a number of families, that if they tried to time that are probably in a worse off situation now than what they would have been just staying and keeping that money invested. But overall, I find it very hard to take each of these little points and concepts. And how do you how do you really apply them? And how do you think about and use them to create a portfolio? that’s right for you and your family? It’s very hard and my opinion? Well, I think my own personal situation, I spent a number of years studying for field investment exams for my CFA. And when I graduated with that, that exam was really about investment selection, business valuation and portfolio construction. And it was great, I learned a lot doing it. But it was very different actually applying all those granular points and concepts in a holistic approach to really come out and say, Well, how should you develop a portfolio? How should you be thinking about it? It’s almost like that academic and reward application world and if I’m explaining this the right way, but it’s like, how do you take all these points and really use them to formulate a strategy and a plan that’s really good for you that you can say, hey, this is how I’m going to make my investment decisions, or how I’m going to create my portfolio? Does that make sense? Or am I just kind of rattling off there?

Walter Storholt  13:57

No, totally makes sense. I mean, it’s like you can you can study how to hit a baseball, but eventually, you gotta go out there and actually swing the bat and make contact him and the two things are very different, right? So theory versus practice, you know, in real-life situations, I got it 100%.

Tyler Emrick  14:12

And so this concept of kind of driving and say, Well, how should you divide your assets? How should you come up with the right stock bond encashment mix in your portfolio, I think is where I wanted to really spend a lot of time as we kind of think about today and the podcast. And I’ll frame that there was a wonderful line that I’m going to read actually verbatim from the article here that I think kind of segues and sets us up pretty nicely. As we kind of dive into that. And the article reference, it said, Hey, higher yields are available in cash and fixed income investments today. We’ve already kind of talked about that Monte Carlo simulations that they ran heavily favored the portfolio with a fairly significant stake in fixed income. So the highest safe withdrawal rate corresponds with a portfolio between 20 Am 40% equities? Who a lot to unpack there, right? Yeah, that was

Walter Storholt  15:05

I won’t learn it. But it was, it’s just like, it wasn’t a single word there that really earned the egghead alert. But just as a sentence, maybe it should have triggered a lot, a lot.

Tyler Emrick  15:14

So what did they say in there? Well, I mean, the first concept that they bring up, that’s important to understand is Monte Carlo simulations. And when I think of Monte Carlo simulations, I think it’s like a fancy term for a financial plan. Because as I think about financial planning and creating that first plan, what you’re trying to do in my mind is you’re trying to take an inventory, your assets, you’re trying to take a look at your spending. And you’re projecting that each year, say, over the course of the next 30 years over a long, healthy retirement, and you’re trying to say, hey, if I use my assets to cover this spending, am I going to have enough? And one of the big unknowns, as we look at a scenario like that is what rate of return are you going to get on your money each year. So what Monte Carlo allows us to do is it allows us to go year by year and assume that your portfolio gets a different rate of return and run that 30-year projection saying that you have this much in assets, you need to cover this much in spending, let’s change that return each year, and see if we can run out of money, right? So they do we do that each year, we change the return assumption, and we look 30 years down the road and we say, Hey, do you have money left? And if you do, if you have $1 left in your accounts, that’s a successful trial. Okay. And then we’ll go back and then we’ll do it again. And we’ll say, well, let’s change the return again, maybe let’s assume you retire into a very, very bad market. And let’s see if we can run out of money for that trial. And then we’ll do another trial. And we do this 1000s of different times. And what that allows us to do is to say, Well, how many times when we test this plan, do you have money left at the end of your plan. And if 99% of those trials have $1 left inside your account, we call that a successful Monte Carlo simulation or trial 99% of those trials, there’s money left, okay, and maybe 80% Of those, you have money left, or 60, or whatever the case may be. And of course, the higher that success rate is, the better. I want to say the better your plan is, but the more confident we are that you have enough assets to cover your spending. So it makes sense.

Walter Storholt  17:26

Well, that’s a great measuring stick of not trying to predict the future, but run it through so many different situations to just see how, how confident can we be? Right?

Tyler Emrick  17:35

So Monte Carlo did that. Right? They basically ran a financial plan for a general family. Okay. And what they said was, well, what is the highest safe withdrawal rate that we can get to have 99% of those trials be successful? And what portfolio in turn, gives us that? So, hey, let’s run those tests and those trials each year, let’s change the withdrawal that you need each year to cover your expending. And let’s see what portfolio gives us the highest safe withdrawal rate on an annual basis at a 99% confidence level. And they came out and said, well, a pretty conservative portfolio, only 20 to 40% in stocks actually provided that. Okay. So what I think probably the biggest takeaway from this sentence, and us kind of breaking down what a Monte Carlo Monte Carlo simulation is. And this highest safety withdrawal rate is, I think, the concept of having a plan, ie doing some type of Monte Carlo simulation to come up and say, Well, what portfolio is going to put me in the best situation going forward is very impactful. And very, it can be very helpful as you start to think about how much money should be in stocks, or bonds, or cash. And we can use that as a very, very good starting point. So what I mean by that is, maybe if I break that down a little bit further, what are we actually trying to test for when we run that financial plan? And the first thing that we’re really looking at from a financial advisor standpoint is I’m trying to figure out and say, Well, what rate of return? Do you need to get on your money to accomplish your goals? And bring that success rate and have as many successful trials as we can? Right? Do you need to get 4% return on your money to make that work? Do you need to get 2%? How do we think about over a long 30-year retirement, the rate of return that you need to get to accomplish all those spending goals? So we call that required rate of return? And that’s the first number if you’re kind of looks listening, thinking and saying well, you know, hey, I’m heading into retirement, but I don’t know what rate of return I need to get all my money to make my retirement goals work. Well, that’s kind of like an alert here to say hey, that’s, that’s an important number to know. Because then you can start to look and say, well, While if I needed to get this rate of return to make my plan work, what type of portfolios or stock levels or bond levels have historically given us that type of return, or what stock and bond portfolio mix would give us that expected return looking at expected and forward-looking return numbers for each of those markets. So we use that plan to get a required return number, we also can use that plan or Monte Carlo Monte Carlo simulations to actually test what we call a bear market test. And what that is, is we take a look and say, Well, what if you retire into a very, very poor market, and the market experience is something like a 2008, where I think the stock market dropped around 40 Some percent during that year, that would be a pretty rough go from an asset level standpoint, and a pretty large decline. If you were to retire into something like that. Well, let’s test it. Let’s say, Hey, if you retired into that, and you lost that amount of money, does your plan still work? What are those success rates look like? And what are those trials, how many of those trials actually have $1 left over the next 30 years. And what that allows us to do is it allows us to measure how much risk you can take in your portfolio. Because as you think about that stock level, the higher amount of stocks that you have in a portfolio, traditionally, you’re going to think, Well, I’m gonna have a lot more volatility. And I have a lot more risk if we were to come up on a bear market, or experience a 2008. So if you were to run your plan, and say, hey, my success rates only come out ahead half the time, if I were to lose 40% of my portfolio, well, then what that tells me is, is that you probably shouldn’t have all your money in stocks. Because if we were to experience that, that puts your plan at jeopardy. Whereas if you’re under a scenario where hey, we run that bear market test, and your plan results are still very, very good. And all those trials, 99% of them, or 90% of them end with $1 left inside of the account. Well, then what that tells me is that you could absorb and potentially take on more risk and have when almost 100% of your money in stocks. So those two numbers to back up a little bit, we look at required rate of return, how much money do you need to get on your assets to make your plan work? And then we run that bear market test to say, Hey, could you afford to take on a lot of risk or not. And then the final number that we look at from a portfolio standpoint that matches with your plan, is really your willingness for volatility or your willingness for fluctuation, I kind of think of it as like the emotional side of it. And that’s really looking at dollars and cents and saying, Hey, if we have a portfolio that has X amount in stock, and we backtest it against a 2008 market, you know, how much in dollars would your account go down? Would you lose? 200 grand? Would you lose? 300 grand? Would you lose 400? And then in turn, how would you feel about that? Now, of course, while no one’s going to feel good about losing that amount of money, right? You’re,

Walter Storholt  23:05

I know what that percentage is going to be?

Tyler Emrick  23:09

Goose egg right now. But it’s but really, what is your comfortability around that? And would you write out a market downturn like that? What would be your conversations be like between you and your spouse, or you and your financial advisor, or you or whoever your trusted advisor is? If your investments were to drop by that dollar amount, what is the game plan, and if that game plan involves, hey, I would sell out or I would want to go on the sidelines, well, then you know that that mix, or that portfolio that would fall by that probably has too much risk, and you need to pare it back. But having an understanding of all three, I think really helps you zero in on what that right mix would be because you can take your required rate of return, you can take that bear market test and say, Hey, am I going to be alright if my portfolio loses this much since I took on this much risk? And then what is your willingness or emotional comfortability, about volatility, and use those to look at historical portfolio performance and future return expectations and each of these asset classes to kind of zero in on a mix that is going to meet your needs and all three areas? I

Walter Storholt  24:21

think it’s a great strategy and way to look at things Tyler I’m just trying to think of it from my own personal standpoint, I’m a very positive person, I’m someone that always kind of, you know, is on the lookout for the best case scenario and it’s all going to always gonna work out, you know, that kind of thing. And I need systems and processes that help kind of keep me realistic. keep me in check a little bit, because if I were doing my own plan, you know, I’d be very tempted to just put in all the best-case scenarios, right. And there’s probably a lot of people that fall into that category. Yet I can also see someone with a different personality ends up putting all the worst-case scenarios and it comes to the conclusion they’re never going to be able to retire or have success in their financial life. And it sounds to me like what you guys really tried to drill down to by using Monte Carlo simulations and looking at required returns and running the bear market tests and all these kinds of things and, and talking to people about their own personal situation is, let’s look at what is realistic, and then let that dictate how we feel about it, and how we’ve structured the planet. I mean, it’s only a small piece of the puzzle. But it really seems like you’re just trying to help paint that realistic picture for people so they can make less emotional decisions about their financial futures. And that seems to be what’s so key about the level of detail you guys go into in the planning process 100%.

Tyler Emrick  25:37

And I would even just build on that a little bit, well, and take it one step further and say, Hey, giving you the, I guess, the information needed to make the best decisions for you. I mean, we just go back to this article that we’ve been referencing a few times from Morningstar, okay, a lot of good things in there. And that comment that I read off, where it said, Hey, your highest safe withdrawal rate corresponds with a portfolio between 20 and 40%. In equities, so some people might read that and go, Okay, well, if I want to get the most money I can and a safe way, I should probably have a portfolio in retirement that targets somewhere between 20 and 40%, in equities. And when you look at information like that, I think the articles are really meant to be very general. And sometimes we can get into trouble when you start applying that general guidance to your own personal situation. So if you look at the financial plan, and I’ll kind of maybe use an example to help illustrate what I what I mean here, because the article is going and saying, Hey, this is your highest safe withdrawal rate. So a 99% success rate. Okay. Well, another way that we can look at a Monte Carlo simulation, or again, a financial plan is, yes, your success rates, but also taking a look at saying, Hey, we ran all those trials, we tested different returns each year, 99% of them were successful, you had money left after 30 years, that’s great. But another number that you need to a lot of families want to pay attention to is well, how much is left at the end of the plan. When you do that, on average, how much money do you have left inside of your assets, we refer to that number as a safety margin. So you could have a 99% success rate. And let’s say you ran your plan, and your safety margins were a million dollars on, you know, the average on all those trials that were run, and you’re like, Well, if I do a 35% stock portfolio, I want my success rate has to be 99%. They I feel good about that. But if you dissect the decision a little bit, and you maybe change some of the assumptions and let’s say we run that Monte Carlo simulation, and let’s do it under a portfolio that maybe takes on a little bit more in risk. Maybe instead of 20 to 40% in equities, you ratchet up and you do a portfolio that’s 50 to 60% in equities. So what that’s going to do, that’s going to add a little bit more unknowns, and a little bit more volatility to the plan overall. So those success rates might drop, let’s say they drop into the mid-90s. So they’re not perfect, not every single one, a trial that you run has at least $1 left in your mid 90s. But let’s say 95% of those trials have $1 left at the end of them. So 5%, you actually 5% of the time you actually run out of money. And the reason why their success rates drop potentially in this scenario because we increase that risk of the portfolio. So you’re increasing the volatility. So you’re increasing the chance that maybe early in retirement, you have a few very bad years of performance. And that really weighs heavily on on the plan. But when we look at that other number, that I had brought up that safety margin numbers, a lot of times what we’ll find is those safety margins will actually ratchet up. So instead of a million dollars in a safety margin, the safety margin might ratchet up and say, Hey, on average, at the end of your plan, you’ve got like 1.4 $1.5 million left inside of the plan. So you know, a few $100,000 More than the million that you ran. And the reason for that is it’s saying, Well, if you’re taking on more risk, traditionally, you can expect a higher rate of return. We call that the equity risk premium. So you’re actually building and creating more wealth, potentially under this scenario by taking on a little bit more risk and stocks. So I think that’s a little bit of a conundrum there. Right? It’s like well, hey, are you a family where you can give up a little bit of that success rate? Hey, I’m comfortable with a 95% of my tests and trials, being successful with the opera To add to potentially have more wealth creation, over the course of a long retirement, what that would potentially allow you to do to maybe increase spending that’s more of an inheritance for your family. How important are those things to you? And what is that right mix of having a high enough success rate, but not giving up building wealth over the long term. And that portfolio decision about around how much is in stocks, bonds, and cash really is where we see those outcomes-driven and those safety margin numbers where they can be increased or decreased substantially based off the amount of stock exposure that you’re planning to take over a long, healthy retirement. You look back over the s&p 500, I think it’s averaged. I mean, there’s a lot of numbers you can look at. But general consensus is over most time period, long term, you’re looking at about an average 10% return per year, whereas like an ag bond index is in the low single digits. So that kind of shows over a long period of time, well, hey, you’re you have a higher expected return. But you’re going to take on more risk and experience more volatility to get there, can your plan withstand that risk? And do you and your family want to take on that risk for the bigger cared or the potentially more inheritance or more wealth creation over the course of a long retirement.

Walter Storholt  31:20

A lot of different moving parts, we’ve got to figure out and have in front of us here, Tyler, but love that you guys help people figure out all of these moving pieces and how to bring them together. I feel like sometimes it’s trying to, you know, we had a baseball analogy earlier. So I’ll continue on here. But it feels like sometimes you’re trying, you’ve been pitched a fastball and a curveball at the same time. And you got to try and hit them in the same swing is what sometimes feels like it can be Well,

Tyler Emrick  31:45

I think the big thing is, is just taking the time to do some of these tests, run this plant, run a Monte Carlo simulation, have some type of financial plan. So that way, you can look at these numbers, test these numbers under different portfolios, different scenarios, and say, Hey, what scenario and my most comfortable with, and then have a trusted professional there to bring up ways that you should be looking at it and showing you hey, if you took on more risk, here’s what might happen. Here’s what that outcome looks like. Here’s, you know, how it affects potential spending and some of the things that you need to look out for. And then you as a family can kind of use that information to settle in on what type of portfolio is really going to achieve the goals that you’re looking for from a retirement standpoint. And, you know, I think this approach generally lends itself to I guess the other the final point that I want to really kind of touch on as we wrap up the podcast is really this idea that having a Do Not a dynamic retirement plan, a dynamic investment plan, I think is another value add, and something that’s extremely helpful as you start to think about the portfolio construction in relation to your overall financial plan. And just by definition, right dynamic, just hey, constant change activity or progress. And what that what I’m getting at there is that when you make your first decision on a portfolio allocation, or some type of financial plan, that doesn’t mean it’s going to stay the same and be exactly Hey, the same allocation and the same spending strategy five years down the road, or 10 years down the road, and certainly not 15 or 20 years down the road. So these ideas and these concepts and your approach to your portfolio should be reviewed and looked at on a year-by-year basis. You know, as I think about finding that right portfolio mix and investment allocation. You know, one of the big things is well, hey, return expectations change the you pull up capital market expectations from any of the big institutional firms, you and BlackRock, JP Morgan, I think a lot of families might be surprised on Well, what are the return expectations in the different parts of the stock market over the next five years over the next 10 years? What are the return expectations in cash? What are the return expectations and bonds, they might not be completely in line with what has been the recent history over the last 10 years. So these expectations change. So your portfolio construction and targeting and stocks, bonds and cash might have to change. And another aspect that I think of when we think of hey, this dynamic strategy, or looking at your investment portfolio and your retirement plan in a dynamic light is not only from a portfolio construction standpoint, but a spending standpoint, as well. And we spend a lot of time on the podcast kind of diving into, you know, spending and how retirees are utilizing their money and where they’re getting the best use out of out of that spending. Well, if you think about your portfolio construction, it could be very valuable to understand And Well, when I run a financial plan, and we’ve come up with that spending assumption number, well what part of that number is needs where I can’t change it, it’s not going away. And what part of that number is spending that, hey, if I run into a rough market, I could kick the can down the road on a car purchase, or I can, you know, push travel a little bit or decrease my travel spending, right? So identifying how your spending is made up, and what part of that spending is, Hey, I can’t change it. And what part of that spending? Well, hey, I have a little bit of flexibility here, I might not want to change it. But if I absolutely had to, I could, or, Hey, if I experience a good market over a two, three year period, what what spending what I want to increase to get more out of my retirement? And where would those extra dollars that I had I had gotten from the portfolio? Where am I going to use them? And what’s their best use case to live a happy and fulfilled retirement? So you’re thinking about that dynamically? I think Kevin did a podcast on the retirement income planning. It was very early on, on our episodes about I don’t know exactly which one it was. But you know, he dove in and peel back the onion a little bit more on how we kind of think about, hey, how do you look at your portfolio? And how do you look at your retirement plan? And what does it truly mean to set it up in a very dynamic way, providing you a lot of flexibility, as you kind of think about and head into retirement to make changes, as you see fit? And I think that is an extreme benefit? I don’t know. Was it episode, you know, episode it was? Well, you’re normally pretty good about picking up.

Walter Storholt  36:37

Through my searching, I see that it was part four of a four-part series. No, it was a five-part series actually on. Okay. Yeah. retirement income planning Series, Episode 19. This was back in May of 2019. And it was your retirement income planning part for dynamic strategy.

Tyler Emrick  36:56

Okay, great. And I know we’re another one of the points that I’ll just bring up as you kind of think about it this way is like having a game plan for when things don’t go as expected, when you have under expected spending, maybe when your portfolio decreases to a point to where you, hopefully it doesn’t decrease to a point where it was unexpected, but maybe you run across a rough patch. from a performance standpoint, you know, what is the game plan? What assets are you going to be pulling from that you need in retirement? Do you have a runway? And how long is that runway? What I mean by runway is like, Hey, what’s your spending over the next, you know, five to 10 years? And what types of assets could you use, if you were to have an extended period of bad market performance to pull from your to cover that spending so that way, you don’t have to necessarily, hey, sell out when the markets down or whatever the case may be, and you have some of that flexibility built into plan? I think it can be extremely valuable. But it all, you know, kind of wrap up your wallet. I mean, I think really the big key takeaways from today is, you know, there are very granular points. And hey, pros and cons to cash stocks and bonds, understanding them are important. But I think what’s more important is understanding how the mix for your family fits into your overall financial plan. And the right strategy is to take a top down approach and to say, hey, let’s start with a financial plan. Let’s figure out some of these numbers. What’s our required rate of return? You know, how would our portfolio perform in a bear market? What are we comfortable with from a volatility standpoint, and then use those numbers to kind of back into and say, well, to accomplish those goals, I need to have a portfolio that has X amount of stock or X amount of bonds, or I can keep this amount in cash to cover my spending needs or whatever it might be. And then you can kind of back into that right solution for you. And then start looking at forward return expectations and historical performance to kind of settle in and make some nuanced changes to the overall portfolio mix. And then finally, Hey, be dynamic, understand that things change and have that flexibility built into your plan and be looking at this on a normal basis that’s comfortable for you. So that way you’re staying abreast on Hey changes and return expectations and what’s going on in the economy in the overall market. So that way, you can at least feel comfortable. And if you need to make any changes you can

Walter Storholt  39:25

Great perspective all across the board, Tyler and I will certainly link to these previous episodes that I think people might find interesting in the shownotes the description of today’s show, so go check it out there. We’ll link to that episode 19 That dynamic strategy episode that Tyler mentioned a few moments ago. And earlier in the episode we were talking about how much is the right amount of cash to have an episode that we did back earlier this year in February one eight team and we’ll put that link in the description of today’s show as well. So go check those out. If you want a little bit more feedback and information about some of the topics that we dove into on today. Show. Tyler, thank you so much for taking us in this direction, once again talking about this withdrawal rates and putting together the proper strategy. And also really enjoyed kind of learning how you utilize something like a Monte Carlo simulation and what its benefits are, what its limitations are and how it incorporates into the planning process. So this was a lot of fun, greatly appreciate it. Always a pleasure. Right? If you’ve got questions for Tyler, you want to talk to the team. At true wealth design, it’s very easy to do that you can go to true wealth and click Are we right for you schedule a 15-minute call with an experienced advisor on the team. Again, that’s true wealth You can also call 855 T W D plan 855. TW D plan, and we’ll put that contact info in the description of today’s show as well. All right, Tyler, I guess I’m gonna go need to get a Santa to join the rest of my neighborhood crew at this point to get to get that erected and then shape so it sounds like you got to step up your light game to a little bit here. So you got a few weeks to work on that my friend. Good luck. Oh, yeah,

Tyler Emrick  41:01

We’ll get started as a pleasure. And we’ll catch up. Uh, yeah. One more episode at the end of the year.

Walter Storholt  41:06

Sounds good. That’s Tyler Emrick, Walter Storholt. Thanks for joining us and we’ll see you next time on Retire Smarter.

Disclaimer  41:17

information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable but their accurateness and completeness cannot be guaranteed all performance referenced is historical and not an indication of future results benchmark indices are hypothetical and do not include any investment fees.