In today’s episode, you’ll learn more about:
- How to understand your true household allocation and risk exposure
- Why many retirees naturally drift into an “all cash, all stocks” portfolio
- Asset location and using different accounts efficiently
- Required portfolio return and bear market testing
- Dynamic spending throughout retirement
- How strong markets can impact spending and gifting decisions
- Roth conversions, IRA distributions, capital gains, and tax planning
- Why retirement income planning is much bigger than simply withdrawing money from accounts
Listen Now:
The Smart Take:
Most financial plans get built once, put in a drawer, and rarely used again.
But real financial planning should actively help guide decisions throughout retirement.
In this episode, Tyler Emrick, CFA, CFP® walks through three practical ways your financial plan should actually be helping you right now: investment decisions, spending decisions, and income & distribution planning.
As retirement gets closer, every financial decision starts affecting the next one. The goal of a financial plan should not simply be to exist — it should help families make better decisions over time.
Go Inside the Episode:
0:00 – Intro
2:14 – Investment decisions
7:42 – Spending decisions
10:43 – Income & distribution planning
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
Most people build a financial plan, put it in a drawer, and maybe look at it every few years, but a real financial plan should actually help you make decisions. Investment decisions, spending decisions, income and tax decisions, and the closer you get to retirement, the more all these things affect each other. So, in today’s episode, let’s walk through three practical ways your financial plan should be helping you right now.
Walter Storholt:
Hey, and welcome to another edition of Retire Smarter, Walter Storholt, alongside CERTIFIED FINANCIAL PLANNER, chartered financial analyst, and a wealth advisor at True Wealth Design, Tyler Emrick. And Tyler, we’ve got a great show on the way today… Yeah, we’re not just printing out the financial plan, sticking it in the drawer, and moving on, this is an active document, a living, breathing document, so to speak.
Tyler Emrick:
We do. We do. Yeah. The big 90, 120 page documents with all the pretty charts and colors and everything, yeah, we want to talk about that today and how it can actually be something that you use to help you make decisions, and what are a few things that you should be using it for in the here and now to help you right off the rip. So, I don’t know about you, but I remember the first time I’ve got in the industry and I seen one of those big, beautiful binders, I was like, do I really know everything that’s in here? Do I know every chart? Have I even read through this all? But it was very pretty, and it was nice, and it was huge. So, I don’t know if you’ve seen any of those, Walt, or come across them, but they get pretty long and big.
Walter Storholt:
Yeah. Yeah, for sure. Well, sometimes that heft and that weight can be impressive, but then if you don’t read it, if you’re not actually using it for information or to help you make these decisions that you’re going to walk us through today, then it’s not really worth that much. So, it’s kind of one of those things that, I don’t know, it works.
Tyler Emrick:
Correct. Hey, it’s in there, right? It’s in there somewhere.
Walter Storholt:
It works if you work it, is that what we’re going for here?
Tyler Emrick:
Yeah, no, absolutely. But those documents can just be a lot, so I think the big question is like, well, how are we using it? Are we ever going back and updating it, using it in a way, or using it as a tool that can help us make decisions in the here and now? And yeah, we’re going to cover a few, the one I want to start with is investment decisions, which I think is probably one of the biggest areas that we can use that financial plan to help us. And the first one, Walt, is just having an account of where all your assets are, and what they’re actually investing in. We all have busy lives, busy careers over time, I’m sure there’s some listeners out there that are like, “Yeah, I’ve got a few old 401ks out there, old employers, maybe I got an IRA at this place, a brokerage account at the other,” and Walt, it can be just a lot to say, well, heck, where is everything and how is it actually invested? Right?
Walter Storholt:
Yeah. We’ve run into that before where especially, maybe this happens when you’re younger more than maybe later in your working life because maybe you wisen up by then, but you try things when you’re younger. So, I remember we had, just trying different things, we had an Acorns account, and a way to save thing that was every dollar you spend was going in.
Tyler Emrick:
[inaudible 00:03:12].
Walter Storholt:
So, we had multiple of those types of accounts, and you maybe had a checking account over here and another one over here, and we’re not even getting into then a brokerage account open over here, and there’s this new app that you can invest with fractional and microshares, or… All of a sudden you just got 35 accounts, maybe not that many, but you’re like-
Tyler Emrick:
They can get up there.
Walter Storholt:
[inaudible 00:03:29].
Tyler Emrick:
They can get up there. Yeah, no, absolutely. Well, it’s hard to understand, well, how risky am I? How are all these things working together? I don’t know how many times-
Walter Storholt:
I got $175 in 32 different accounts.
Tyler Emrick:
Maybe not that bad, not that bad.
Walter Storholt:
[inaudible 00:03:48].
Tyler Emrick:
But I don’t know how many times, Walt, I’ve come in and families, we go through that exercise of just, “All right, hey, where is everything, where it’s at?” And what they’ll find is like, yeah, hey, I got a bunch in cash, and I got a bunch in US large cap stocks. Almost like the barbell approach of like, well, is there any other investments that could be used to diversify or make the portfolio a little bit more efficient? So, when you can take an inventory of where everything’s at, then you can get down into the weeds a little bit more, and just try to understand, well, what’s under the hood of all these accounts? Because what you’ll find I think is over time all these accounts do things differently, and some might be better than others.
So, we call that like asset location, we talk about it a ton on the podcast, but that’s really trying to say, well, hey, I have this account, how should I be invested in it in the grand scheme of everything else? So, for example, your 401k, maybe it does large cap US indexing very well, but it does not have bonds, it does not have very many options for emerging markets or international investments. So, maybe you would look at that and go, well, hey, I want to not go against the current and fight the wave here, let’s use my large cap US exposure in my 401k and then I’ll go in my other accounts and diversify around that. So, that way you’re kind of really using what that account does well. Another big one would be just the type of accounts, and what assets that you’re using underneath them.
We talk about Roths all the time, and generally speaking, well, we want to have our highest expected return investments in there, typically, there are a little more aggressive, a little more risky, but our highest expected return assets. So, these would be things like stocks and so on and so forth. So, the question becomes, can you look at all these different accounts and point and say, well, I want to make some tweaks there, ooh, I got a bond fund in my Roth, I’m going to sell that, put it in stock and go buy bonds somewhere else? And this asset location over time is almost like the blocking and tackling of investments, right? It’s like, they all add up and over time can reap some really large benefits. So, that asset location is a big one we can use the plan for. Another one would be just inherently, well, how much risk do I want to take on? And I think that comes down to a few things.
One would be, well, what rate of return do we need to get on our investments to make that plan work? So, what are the return assumptions in that financial plan? Do I have a portfolio that’s going to meet those return assumptions and expectations? And on the flip side of it, well, what is almost my worst case scenario? If I look at all these accounts and where they’re at, how much would I expect to lose if we experience another 2008 great financial crisis? And not necessarily how much would I expect to lose in percentage terms, but in true dollars and cents. So, you can wrap your arms around and you’re never going to get comfortable losing money. Well, but you’re going to hopefully be able to position ahead of time to, hey, if you see some of that volatility, see accounts down, well, hey, it’s built in the plan.
My plan can afford it, it doesn’t need to change any of the goals that I’ve set for myself. And having that in your back pocket I think is immensely valuable. So, those investment decisions, use that plan to help you make them, be efficient with them, and size them the right way, for sure, bar none I think is right off the rip, one thing that we can take a look at.
Walter Storholt:
Yeah. In five minutes, you probably ask 20 questions there, rhetorical in this context, right? But that’s what you’re saying the plan is going to help you do, an active plan is going to answer all of those questions or provide you at least options to those answers.
Tyler Emrick:
Oh, absolutely. And if you go through all the work to get that plan put in place and, hey, what did the next 20, 30 years look like? How do my assets change? We want to use that. Use that to help make better decisions in the here and now. And I think investments are a wonderful way to do that. I think the other one that I want to touch on is your spending decisions. Well, we’re coming off markets that have been wonderful, really since 2022, we’ve had a couple blips on the radar, they always seem to come around April timeframe, this past April, certainly last year with some of the tariff talks in April, we’re always going to have those blips, but all in all, the stock market has performed very, very well really since 2022. So, what we’re finding is some of these financial plans are getting better, right?
Your results are getting better. There’s more safety margin at the end of that plan, there’s less required rate of return on your assets to make families’ plans work. So, the question becomes is if we’re using that financial plan, how are we using it to make better decisions on how you want to use that wealth that you’ve accumulated? Has your spending changed in the last couple years? If it hasn’t, but your wealth is accumulated, well, then that can drive a very good conversation around, well, hey, how are you using your wealth? And do you want to start thinking about using it in different ways, whether that’s gifting a little bit more to church, charity, family, whatever the case is. Maybe you decrease the risk inside of your portfolio because you don’t need as much of a required rate or return. Maybe you spend a little bit more, you go on an extra vacation while you can.
This is where the magic of that financial plans can have very real outcomes because, hey, if you’re wealth’s accumulating but you’re not feeling it, gratification in any way, shape or form, what is it doing for you? So, that whole dynamic of, hey, if the market’s done well, plans have gotten better, let’s use that and how do you want to use it? And if you don’t, hey, that’s perfectly fine, but help it make better decisions on how you’re using those wealth. We see it on the flip side too if we have a down market. When we had a 2022 or we had a COVID year or a great financial crisis and we see markets drop quite substantially, it could work on the flip side as well, right? Well, hey, where’s my assets going to come from that I’m going to live off of?
Do I have enough runway to get through this without having to sell out of my stocks? These are those types of questions that when you’re dusting off that financial plan and you’ve run some of those tests, this is how you can use them each year to help you have real outcomes on how you’re using your wealth, how you’re spending it, whether it’s good or bad. Obviously it’s been pretty good here in the market as of late, and we’ll take it as we can, but it can work on both sides.
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Walter Storholt:
It’s always a good reminder that there’s two sides, there’s that investing side, then there’s the spending side, and we’ve got to make sure that we figure all of those out. And I guess it’s a three-sided coin… I guess there isn’t really such a thing. But there is a decision point number three that a great plan to help you navigate through as well.
Tyler Emrick:
There is.
Walter Storholt:
Not only the investing and the spending, but the income and this big distribution conversation that we focus so much on on this show.
Tyler Emrick:
Absolutely. Well, and some listeners might be like, well, isn’t that the same as spending, distributions from my retirement accounts? And I would argue that it’s actually very different because there’s a lot of families that we work with, Walt, where, hey, they’re pulling out more money than what they need to live off of. Maybe they’re doing those Roth conversions, or they’re realizing gains in their taxable accounts, or whatever the account may be. So, when we think about distribution and income planning, I think it’s absolutely, it builds off spending, and how much you want to have there, but it is something that’s completely different. And you think about-
Walter Storholt:
I think you’re always going to want the distribution to be higher than the spending and not the other way around, right?
Tyler Emrick:
Yes, that would be a goal, for sure, absolutely. But you go through a year like last year, we have major tax law changes, that can absolutely change our income planning for families. So, you think about a financial plan, you’ve got it put in place, one of the wonderful insights that it’s going to be able to give you is how does your tax situation change over time? Does your taxes go up once you hit your mid 70s, and you have to start pulling money out of your retirement accounts? Do you have a year where you maybe are planning to buy a car or do a remodel and so you’re spending quite a bit so that affects your distributions and taxes and all that stuff? Your plan is going to give you insight into those things so that way you can make those adjustments as you see fit.
I mentioned one, the big ones would be is, well, how high do we want to take your income each year? With the tax law changes, we would expect some families tax bracket marginal federal would be in the 25% range. Well, now it’s maybe in 22. So, now the question becomes is, do we want to do Roth conversions at 22%? Whereas before we were getting a little bit of a deal, now we might not be getting such a deal from a tax standpoint. But there are some other reasons why you still might want to do those conversions, and you can drive and have those conversations, but your plan is going to lead with that.
I think another one that we’d take a look at at the end of each year would be gifting. A lot of our plans, maybe there’s some gifting that’s out there to church or charity built in each year. Well, hey, if we’re going to be doing that and it’s in the plan, should we be looking at some of those bunching strategies and maybe gifting to a donor advised fund this year, right? Prefunding that gifting, and then using that account essentially to continue your gifting over the next handful of years. But from a tax standpoint, is that going to save us a bunch? Are we going to be able to capitalize off of that? So, these things all work off one another, but when we think about our plan, it all starts from that, right?
We need to have that plan in place so that way we can start to frame these conversations and these distributions and how we want to do it. And that’s everything from, again, Roth conversions, to gifting strategies, to, hey, where are we going to live off of? What are we going to live off of this year? And we talk about ACA tax credits and healthcare, whatever life transition that you have come up, I think we can glean some benefits from that financial plan and make those decisions in the here and now. So, income and distribution planning, different than spending, where do we want our income to be? How are we going to do those distributions, and where are we going to pull from? And so, I think that’s what we’re getting at here, Walt.
Walter Storholt:
Yeah. You touched a little bit on the tax piece of that equation, we’re not giving that its own decision point because it’s wrapped into all of these other things.
Tyler Emrick:
Sure.
Walter Storholt:
But great example of the ripple effects of any of these decisions or any of these areas, that’s why it all needs to also work in concert all of these decision points, and it all points back to the plan, right?
Tyler Emrick:
Yeah, the plan. Yeah. And it should be in there, right? Those assumptions that are being made when we do those projections, what rate of return are we going to get? What’s the tax brackets going to look like? All that stuff becomes much, much more important. When are we going to start social security? Is that going to be a year where that’s going to add some taxable income and maybe not allow us to do as big a Roth conversions in a particular year? So, all these things work in conjunction together, that financial plan gives us that roadmap to help make better decisions in the here and now. And I think the investments, spending, and how we’re using our wealth, and then this income and distribution planning are probably the three that I see us really leaning on that financial plan with year after year, and having and driving those conversations with families.
Walter Storholt:
I don’t want to be alarmist, but you can see that one good decision from the financial plan leads to another one. We talk about the ripple effects and you could also look at it as like a snowball, right? It just can accumulate better and better decisions, the more that plan works and the better you experience success along the way. But there is a flip side to that, right? You can have a one-off bad decision, but often those snowball as well, if you’re not letting a plan guide you, and you make that one decision, maybe you’re chasing, you’re trying to fix the problem you created with the bad decision, that can lead to multiple in a row as well, plan helps you avoid that too. So, works in a couple directions.
Tyler Emrick:
Yeah, absolutely. I think it takes some of the emotion out of the decision a little bit, and helps you stay grounded and looking at the facts. Not that emotions aren’t important and they’re going to go into every decision that you make financially for sure, it’s your wealth, it’s the money that you’ve accumulated and built, right? But just understanding those decisions and when emotion might be creeping into some of those, I think just help create better outcomes for our families in the long run.
Walter Storholt:
All good points. Well, hey, if you enjoy today’s episode, and you’re looking to work with an advisor who can help put together these kinds of plans for you, and walk you through all of these important decisions that you’ve got to make, and get a plan in place, it helps you make all of those decisions and execute everything and develop a long-term relationship to talk about getting you to retirement, through retirement, all the other auxiliary things that surround that retirement conversation, don’t hesitate to reach out to the True Wealth team. You can talk to Tyler or one of the great wealth advisors on the team by going to truewealthdesign.com and clicking the Let’s Talk button. We’ve also got a link in the description of today’s show that takes you directly there to where you can schedule a 20-minute discovery call with an experienced advisor on the team, see if you’re a good fit to work with one another, and then take it from there.
So, it’s very easy to schedule that time to talk and explore those options. No cost to do that, it’s just a conversation to see if you’re a good fit to work with one another. So, again, truewealthdesign.com or click the link in the description of today’s show. Tyler, thanks for all the help today.
Tyler Emrick:
Absolutely. We’ll catch you on the next one for sure.
Walter Storholt:
Yeah, good episode. And thanks everybody for joining us, we’ll talk to you again next time right back here on Retire Smarter.
Disclosure:
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 reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.