transcript

Speech-to-text transcription can look a little quirky. Please excuse any grammar or spelling errors.

Episode #605 - Direct Indexing vs. Mutual Fund or ETFs

It's important in life and in retirement planning to name things.

Roger: Welcome to the show dedicated to helping you not just survive retirement, but to have the confidence to lean in and rock it.

I'm sort of laughing at myself. I have so much fun hanging out here with you. My name is Roger Whitney. If you are new to the show, I'm a practicing retirement planner with over, wow, 30 plus years of experience, founder of Agile Retirement Management, and we hang out here every week and we talk about how not just to talk about retirement planning, but to be about it so you can go create a great life with confidence, which is the whole point of the exercise. We forget that so often. today on the show, we are going to do a quick primer on direct indexing, which came from a client question. We're going to answer a number of other questions from people like you.

In addition to that, we got a few tidbits from those out in the wild rocking retirement. I love those.

Before we do that, though, I want to talk about acknowledging and naming things in life and in retirement planning. This came up in two ways. Number one was Nichole Mills and I were messaging, I forget what it was about, and I sent her a message of wow. I really want to acknowledge this beautiful season of life. Professionally. I get to work with amazing people like Nichole and Tracy and Kim and Aaron and Troy and now Natalia and Lordlee and Tanya. Tanya, my partner, and so many others. I want to acknowledge that not everybody gets to work with a team that they get to bring into their life. We work with clients that we really love, walking life with them. We feel like we are leaning into them from a process standpoint and making a difference in some way. That's wonderful. I want to make sure I acknowledge that now while we're in the midst of it, rather than when I'm 80 and reflecting on this. I just want to take a moment, take a breath, and acknowledge that. So that's initially where it came up.

Then we have been in the middle of Q3 meetings, which is really the biggest meeting of the year for us when we're working with clients, because we're accomplishing two things.

Number one is we're closing out the current year, in this case, 2025, looking at 2026 and beyond. We're reminding ourselves with the clients that this is what we say we want life to look like, or what you say you want life to look like. Is this still relevant? Let's remind ourselves, because you shouldn't be thinking about this while you're living your life. Let's remind ourselves what the plan is and where you want to go. Then let's revise it or tweak it if that's changing in some ways, because we want the plan to be relevant. So that's the number one thing we're doing. And then number two is we're setting ourselves up for the end of year. What risk or opportunities are there for the end of year, usually related to taxes? So those are the two things that we're doing. When Troy does all of the prep with Erin on this, he'll send me a loom video, which is like a screen share where he just commentates all the work that he and Erin have done to prep for this meeting so we can have discussion about it and revise it if need be. He used a phrase, it's like here so and so, and it's calm waters right now. Then he was going on with his commentary, and that made me think. I wrote down calm waters. He labeled them as calm waters right now. We actually use that phrase in the meeting with them. I think it's important to acknowledge the situation when it comes to your retirement plan, so I took that and we created basically four levels that we want to make sure we acknowledge with clients verbally so we can name it because it helps to name things. Then it's not free floating. It puts some substance to something so we can do something with it. Sort of like free floating anxiety versus naming it for what it is.

So, calm waters. I have four levels that I want you to ponder about where you're at right now. Calm waters are when you have a plan of record dialed in and you're focused on your life. I mean, you're too busy to think about planning and Roth conversions because you've done that work. Now you're living the dividends off of that work, all that work. So you're focused on your life. So you have a plan dialed in, you're focused on your life, and you revisit the plan at least twice a year to orient and make sure it's still relevant. Then you're off living life again. Those are calm waters.

We've had a lot of clients in Calm Waters right now, and it's really nice to label it that way with them so they can acknowledge, yeah, we don't have to create work here. We're living off of all the past decisions. We've done a lot of the work. So let's enjoy this season because we all know that seasons change, right? You know, we'll never get exonerated from uncertainty.

The next level is choppy waters. Now choppy waters are when someone has a plan dialed in, they're still focused on their life, they're focused on being about it, but they still have some mid-level stuff they have to deal with. They have RMDs, maybe they have some Roth conversions or ACA considerations that you got to deal with and pay attention too, but they're not too disruptive. So that's choppy waters. Choppy waters are fine, right? If you've ever been on a lake or an ocean, most often you're going to have some chop. It doesn't mean you have white caps, but you're going to have some chop.

The third level is rough waters. This is when you have a plan of record in place. But there's some personal or external disruptions to navigate that you're going to, you have to pay attention. You have got to have your hand on the wheel and you have got a little bit of work and things to navigate. So in the personal realm that could be life shocks, an illness in the immediate family or with yourself or the spouse that you have to navigate. That puts some things on hold. Spending shocks personally or professionally or with family. Externally it could be the bear market, it could be a bad investment, High inflation that's hitting you particularly hard. Economic stress. These are things that have to be navigated. You can't just sort of lie out on the front of the boat and you know, sun, you have got to have your hands on the wheel. There's some stuff going on and you have to navigate that. So that's the third. It's important to acknowledge that rather than just get into the issues, hey, we are in choppy water right now. Let's focus our attention on the most important things that we have to deal with. Because we need the energy right now. We can’t focus on things that aren't that important to the plan. That's why it's important to name it so we can focus our attention when we're in calm waters. Focus your attention on life. Don't create work when you're in choppy waters. Have those tasks scheduled and planned so you can continue to focus on your life when you're in rough waters. Focus on the things that are coming at you so you can navigate those and make sure that unimportant things don't take away from your focus and your energy.

Then the last one is change. Of course you have a plan of record, but you're seriously considering or have decided to change your goals what you want your life to look like. This could be you want to speed up your pathway to retirement. If you haven't retired yet, you want to go back to work, you're maybe going to relocate, you're going to have significant goal changes. You've decided to start a big gifting program. You're updating your estate plan. You decided to spend money on other things. I don't know. Whatever it is, it's important to say, hey, we have been on this course, but we're really considering changing directions so we can refresh the plan of record. I think those are good four to start with.

Naming them helps us feel calmer and in control, even if it's rough waters. With that said, let's move on to rocking retirement in the wild.

ROCKIN RETIREMENT IN THE WILD

Two quick ones here. Brian says he likes to rock retirement with spending time with my family, in particular my grandkids. That's all you have to say. It gives you space and energy to focus on the relationships that are important in your life. Brian. Bravo, buddy.

DON SAYS ELECTRIC BIKES ARE GAME CHANGERS

Our next one is from Don and we're going to explore this one a little bit more.

Don sent in how he's rocking retirement in the wild based on something we talked about before and I agree. E bikes, electric bikes, are game changers. My wife and I say that all the time and we were never ones to go for a bike ride. But now with the E bikes we go all the time and it's fun to discover local trails and stop for lunch and just a beer. And we have taken a lot of friends and they like it too. It's a fun way to travel your state with short drives to new trails. I think it's a good suggestion. Love that Don. E Bikes are bringing more people to exploring their surroundings outside of a car at a different pace. There are wonderful things to do and the cool thing is almost any city you go to now you can rent E bikes and then just go explore. We're going to talk more about that, but bravo to Don leaning into not just talking about it, but being about there, getting out and creating great experiences.

PRACTICAL PLANNING SEGMENT

Now let's get to our title question. This comes from John, relative to direct indexing.

John says,

“We recently came into an inheritance which includes $500,000 in cash, and this is something that would be invested in an after tax brokerage account. But we have concerns about mutual funds that pay out capital gains and dividends at the end of the year. Our advisor suggested investing in direct indexing vehicles. I'm trying to wrap my head around what that is, how it differs from mutual funds or ETFs and the pros and cons. Any insights you could shed on this would be helpful.”

All right, John, so let's start from the beginning.

Now, I'm assuming that you've already have had a plan of record that you have confidence in that is focused on your life and that is resilient. So, let's assume that you have that. Now we have this inflow of a half a million dollars.

Step one would be to start at the beginning again, John. Wow. We have this blessing of a half a million dollars that came into our life. Let's revisit our values. Let's look at the base great life and the wants and the wishes that we have and see if there's an opportunity to expand them in a way that honors the person that gave us this money via inheritance. I would start their first because now this money has come in. How can you use this to expand your life, the life of people around you and the values that you have? Focus there first.

Assuming that you've done that and you're coming back down, now we have this inflow you've looked at. I don't want to give it away, I don't want to spend it, I don't want to pay down debt, I don't want to save it as cash. I want to invest it. So you've gone through that protocol and determine this is a long-term investment. So I'm assuming that you went through that protocol first because that's the proper order. You want to invest it. Now you're like, hey, this is after tax money. Open end mutual funds have a major disadvantage in that they distribute the capital gains that they've realized and the dividends they realized every year to the shareholders of the portfolio. Those decisions on realizing those capital gains are focused on their cash flow management, not necessarily the market. That's a big disadvantage of open end mutual funds, you get hit with unexpected tax consequences depending on markets you want to try to avoid or at least manage that. Exchange traded funds solve for a lot of that, John, and we'll come back to that.

Another thing that is sort of the new toy right now that is being talked about. And that doesn't mean it's a bad one. It's just newer and so it's cool, is direct indexing. Let's do a quick primer of what that is.

Direct indexing means instead of purchasing shares of an open end mutual fund or an exchange traded fund that's tracking an index. In our example, let's just use the S&P 500. What a direct indexing does, basically, it is a separately managed account. These have been around for decades. The old benefit or perceived benefit of a separately managed account is hey, we can hire these institutional money managers that you don't get access to and you can own the individual stocks. This is essential that you will own an account and you will have the half a million dollars in there and then you will contract a manager or program to implement and manage the portfolio in your account. Construction wise, what happens is rather than own the S&P 500 ETF or open end mutual fund, you're actually going to have direct ownership of all the stocks in the portfolio. So it's totally unwrapped. That could be hundreds of stocks, it could be thousands of stocks depending on the index. The intent of direct indexing is to mirror the index that it's targeting.

How does this actually work? So in the key mechanics of it, in portfolio construction, the program that you use for direct indexing is going to say, what stocks do we need to own in order to mirror the index that we're modeling? So in the S&P 500 there's going to be a software program that's going to say, well, we don't have to own all 500 stocks if we just purchase these stocks in these amounts. That should closely track the index's performance, which is what it's attempting to do, but because of practical constraints, it's not going to own every single stock in the index because its goal is to try to track the index performance as efficiently as possible. The advantage of this is you have tax loss harvesting opportunities. Since you own all the individual positions, you can direct the program to say, well hey, let's realize losses of this amount whenever we have them so I can offset gains. You have much more customization there, we can exclude stocks, we can say, hey, let's not realize gains this year. I have environmental preferences, so let's not buy certain companies. Or maybe you have a stock concentration in a company that you worked for. If I worked for a tech stock and I have a lot of concentration there, let's not buy so many tech stocks. You can customize all of this stuff. So that's essentially what it is. You're just going to own a stock portfolio that's trying to track the performance of an index and it's going to try not going to buy all the individual pieces. So what's the cost of doing this? Well, that is, that can range anywhere from a low of 15 basis points up to 1% a year. A traditional wealth manager is going to be about 4/10 of 1% to a 1% a year in order to implement this.

So let's get to your question, John. Should you do this if you're concerned about taxes? Well, I want to go over some potential benefits and drawbacks and then I'm going to make a suggestion for you.

Number one is the potential benefits obviously are the customization. The tax management would be. Number two, which you talked about. You have the opportunity for harvesting losses or not realizing gains in any particular year because you own all the individual stocks, et cetera. But what are some potential drawbacks of this? One is more complex tax reporting. Because you own hundreds of stocks in your portfolio, anytime there is a trade or all the dividends, there's going to be reporting on an individual security level that will come down to your 1099 that you'll have to account for. So you're going to have qualified dividends, you're going to have restated 1099s. You're going to have all sorts of stuff going on. That's one potential drawback. It's going to be more of a headache for your CPA and your tax accounting.

Number two is tracking error. You're not going to own all the stocks in the index. It's going to be based off of the software. So you may not track the index or the asset class that you intend to track as well, because the software is going to miss things and it's not going to do it well.

Next drawback is account portability. If you decide to leave this wealth manager or stop direct indexing, you are now going to have a portfolio of hundreds of stocks that you will take on the management for yourself. That is a huge burden. If you do that, then it's likely that this will start to track the index that you meant to track less and less overtime, because it's a lot of work to track an index because they keep reconstituting.

Another potential drawback is the tax loss harvesting that likely will diminish over time because if we just follow history, you're going to slowly build up gains. And while you're harvesting your losses, you're going to keep your gains. So there's going to be less and less opportunity to harvest losses. Now also there's some rebalancing disadvantages here that aren’t obvious initially. When you have an index, let's say the S&P 500, it rebalances on a systematic basis, making the stocks have different percentages and indexes reconstitute at different intervals. So reconstitution means that The S&P 500 company will say, we're moving this stock into the index, we're moving this stock out of the index and based on market cap, we'll have to rebalance so we can match what we're trying to match. Well, you, your direct indexing algorithm is going to move companies in and move companies out and rebalance, which is going to create tax friction anyway while they do that because you own the individual stocks. That's actually a disadvantage. If you direct the index program to say, hey, I don't want to realize gains, so don't do that rebalancing or don't reconstitute this year, now you start to track your intended index less and less. So is this worth pursuing, John? This is a decision I would slow down on and be thoughtful about because while implementing this it gets harder and harder to ever extract yourself from it. There are these unintended consequences. Now you own a hundred or thousands of stocks in whatever index you're trying to track and you have the things that I mentioned.

I think a much more elegant solution that would get you 80% of the way or 90% of the way there is exchange traded funds. They have some advantages over direct indexing in terms of the reconstitution and the rebalancing happens because they have constant cash flow that they use for all of those things. I would slow down on this decision, John, to see how much meat there is there relative to the things that I outlined.

LISTENER QUESTIONS

Now it's time to answer some of your questions. If you have a question for the show, go to askroger.me and you can leave an audio question or write your question. You can even tell us how you're rocking retirement and we'll try to share it to inspire others.

SCOTT HAS A FOLLOW UP QUESTION ABOUT GETTING A MORTGAGE IN RETIREMENT

Our first question comes from Scott.

Scott says,

“Hey Roger, love your podcast. I've been following it for many years. Follow up question from about a year ago.”

Wow, okay!

“I had asked about getting a mortgage in retirement and indeed we have and are about 50% complete. My wife and I are 60 to 61 and both retired. Net worth is $2,600,000. About 2.1% of it is in traditional IRA, the rest is in Roth IRA. We have an interest only loan for our home build that will convert to a fixed 30 year mortgage upon completion that's six and three quarters, ouch, with a principal balance of about $250,000 with a real aversion to paying interest. We are debating some options.

Number one, we're considering paying off the balance with Roth IRA money to keep our modified adjusted gross income low for ACA subsidies.

Two, paying the mortgage with interest over the next five years until we get to Medicare and then taking IRA withdrawals to pay off the mortgage.

Three, maybe doing a little bit of a mix of both, of taking some Roth money, taking some IRA money and taking the bite on one year of ACA in order to get it paid off.”

So, Scott, you're on the right track. You're building options and trying to look at them and compare them and contrast them. I'm going to assume that you have a plan of record, Scott, that you know what you want, you know that it's feasible and you've already done the work to know how you're going to pay for life at least for the next five years. So you've got that in place. If you don't have that in place, it's hard to really make sense of different options because you don't have the scaffolding to attach one pathway to another pathway.

You articulated two things. One is you're trying to solve for ACA options, and two, you're adverse to paying interest. There are some quantitative things there, but there's some qualitative things there. One of the most important things you can do at the beginning, Scott, is determine what you are trying to solve for here. What's most important to me is it being debt free? Is it maximizing ACA? Is it minimizing lifetime tax potential? The more clear you can get on that intent, the easier this is going to be.

Now, I've walked this kind of journey, Scott, with a number of clients over the years, and they've all had different intents. We've had some clients where ACA was so important to them qualitatively that that's what we solved for. They were willing to take the bite in other ways because they just were annoyed with ACA and they just didn't want to pay those premiums. They wanted the bird in the hand right now and it didn't matter what long term numbers said might be the better solution. That's what was important to them.

Similarly, we have had situations similar to yours, Scott, where we are debt free people. We don't want debt, we don’t like that hanging around. That was so important to them that long term considerations weren't. We've had other clients that were willing to batch and take one year of paying. In this case that would be the IRA distribution and paying off the mortgage with the IRA and taking the hit on ACA, getting the hit on state and federal taxes and be done with it. Your intent here is what is important.

Another scenario there is, is a mortgage that bad? Thank you. Dave Ramsey. Debt is bad. Debt can be bad when it's used in excess for sure. But in retirement debt can be helpful in controlling tax consequences. Yes, you may pay more interest, but it's going to provide you flexibility to manage taxes around ACA as well as IRMAA and you can build a plan to pay off taxes. I sort of like that option. Personally, the Roth option wouldn't be first on my list. I would do the mortgage and then map out how you're going to accelerate paying this off. That may take five years, that may take 10 years. That's going to be a year by year decision because I don't know all of your situation.

If you look at your IRA right now, Scott, assuming you're not touching that to live life, we didn't really share that information. Assuming you don't touch your IRA, well, your first year RMD, if we assume 6% growth is going to be about 171,000 a year and then that will ratchet up a little bit percentage wise every year for the rest of your life on that 2.1 million. I don't know what you guys spend for a living or for life, but in the future you're going to start having these amounts come out and you're going to have no choice in the matter of taking those required minimum distributions. That might be an opportunity to do some qualified withdrawals earlier. Maybe waiting until you get to Medicare and start to incorporate those qualified withdrawals into your overall retirement plan, and again, I don't know if you have pensions and what the Social Security situation looks like, but I would think doing the mortgage, letting it convert and then just making the payments and mapping out what is most important to you. When you're thinking about ACA or taxes, think about those RMDs that are going to start happening later in life and the tax impact those could have.

One thing we don't think about often here Scott, is at some point one of you is going to be in single tax brackets later in life when these RMDs are going to be happening. So we really want to have a multiyear perspective here.

Last thing I'll say is Scott. well, two last things. I always have more. Right, two last things.

Number one is think about setting yourself up for later in life. Definitely, I think getting this mortgage paid off in a reasonable amount of time makes sense because it will make life easier for you to when you're older, so I definitely like that.

Two, you're going to get to a point where you can't get any more precise and you can't get 100% clarity of slam dunk. This is obviously the right decision from a mathematical perspective. You really won't know because there's so many variables in here. That's why it's important to have the plan of record and it's important to understand what's most important to us. Forget the math, what makes us feel comfortable, what feels right to us. Don't discount that because that will help lead you to a decision that you can really feel at peace at.

It sounds like you're already doing the scenarios to help you along the way. So hopefully that helps you again this year.

ANONYMOUS SAYS IT IS TOO LATE FOR LONG-TERM CARE AND WANTS A RECOMMENDATION FOR A LOW RISK INVESTMENT

Our next question comes from Anonymous.

Anonymous says,

“I am 63, I have adequate income for a successful retirement. I think it's too late for long term care and want to keep a separate account to use to fund my long term care or if not needed would go to my sons when I pass away. Do you have a recommendation for which type of low risk investment I could keep it in?

I don't want it in cash. Maybe money market or tips? What's your opinion?”

Well, money market is essentially cash. Anonymous is 63, totally has a feasible resilient plan but they want to take care of long term care. We do have a long term care decision pod in the Rock Retirement Club so I'm going to follow a little bit of that protocol.

Number one is I would still go explore whether you can qualify for either traditional long term care or a hybrid which is a life insurance based long term care. Don't assume that you can't go through the process. I would suggest a broker that works with all of them, they can do a prescreening questionnaire to see if you do qualify. I think that's important because you may not know whether you can or not.

Also, if you have any life insurance in place, work with that broker to see if you can convert whatever type of life insurance you have to one that has some long term care benefit. These hybrid policies are an opportunity to make unneeded life insurance more productive. So don't just assume that you can't qualify.

Now you're 63, make an assessment for your health. I mean this is definitely a potential risk for all of us. Some types of long term care need in the future at some level. Definitely a risk but make an assessment. Is this something that you think is realistically possible in the next 10, 15 years? Are you really worried about later in life or do you have health issues right now or do you perceive that you're going to have health issues in the next five or ten years where this really is going to be a need that's important to know. Yes, I understand life can always happen, but we can't predict that. But if you already have diabetes and other health issues, then it's a little bit more prominent than if you're healthy and active right now.

How do you actually invest this money? Well, you want to have it. What was the phrase that you used? Low risk. Let's define what we mean by risk. Risk on the short term, which is the risk that we think about most often is losing money. Right. I put it into something, it goes down and I've lost a good portion of that money. That's generally how we think about risk. That is definitely a risk in the near future.

In the long term, you're 63, let's say for your 83 year old self that isn't a very big risk statistically. Investing in diversified assets doesn’t lose money over a 20 year period. What's the bigger risk for your 83 year old self? It's going to be inflation. Right now long term care costs run at a higher level inflation than normal inflation, maybe two, three times what normal inflation is right now. So long term for your 83 year old self, inflation is the biggest risk.

What would you actually do with this money? If you want to have this bucket for long term care with the secondary purpose of being a legacy for your children, if you don't need it. Well, let's treat it that way. Let's put it into a separate account, label it, this is my long term care reserve and then make an assessment. What money do I think I might need over the next five years for long term care? Obviously life always happens, but based on your health and as best as you can handicap it, how much do you need for over the next five years or potentially or what amount makes you feel comfortable? Put that in a money market, in treasury bills, in something that guarantees the return of your money, even CDs or multiyear guaranteed annuities. The key aspect of that bucket of this $500,000 is going to be I want to earn some interest, I want to have it relatively liquid and I want return of my money.

Okay, next bucket. How much of this half a million dollars do you think you're going to need over the next five or ten years for long term care? Put a number to it. There's no science to this. You're just going to have to make a swag at it based on your health and the other income flows that you have in your assets. That money could be invested in more of a balanced portfolio, meaning a mix of stocks and of bonds, probably 60/40. We'll just start there. You can take some risk, but you don't want significant risk of losing money. You want it to. It's going to go up and down but it's starting to have more time to actually work for you. Time is the biggest issue here.

Now here's going to be the hard one. How much money do you realistically think you're not going to need for at least 10 years? You're 63, maybe you're super healthy, you don't foresee much happening and it sounds like you have your life set in other ways. That money could be very equity centric statistically. You don't really lose money on equities or you haven't in the past. If you have a 10 year time horizon you're setting yourself up for success. Even if there are bear markets. You m already have these other buckets of liquidity in the 0 to 5 bucket and the 5 to 10 bucket now that money can actually start battling inflation risk. The plus side here ah as well in this structure is that each year you can rebalance this based on your current health situation, your current financial situation and preferences. This money is also working in the event you don't need it for your children. I think that it is a reasonable protocol on how you allocate this money that you have for your long term care, take into account all this other guaranteed income and stuff and how you live your life, because that makes a big difference in what this money's actually for.

JOHN HAS A QUESTION ABOUT BEING AN EXECUTOR FOR AN ESTATE

Our next question comes from John related to being an executor for an estate.

“Hey, Roger, longtime listener, first time question submitter.

My mother in law recently passed and my wife has been discovering the joys of executorship. This has us rethinking our choice of executor in our own will. We have no children and are planning to leave the bulk of our assets to charity. Would it be unusual to specify in the will that it is up to the charities to assign an executor as a primary beneficiary? This would ensure that they would manage the executor to assure us that everything's organized and they're not racking up outsized fees, etc.

I'm sure I'm missing something here. What is my blind spot?”

That's an interesting question. I have not heard of that structure where the charity, because you're leaving it all to a charity, would be the assigner of the executor.

Obviously, I think you and your wife can do this for each other because likely one of you will pass first. But what happens when the second one passes? Who will be the executor? There are some very basic things you can do to set up the executor to have a relatively easy job.

Now, obviously this will vary from state to state, but before you think going down this route, John, I would suggest that you consider having all your pretax accounts assigned beneficiaries and contingent beneficiaries. Obviously the charities would be the contingents while the two of you are alive. I would assume that happens outside of the estate. So an executor wouldn't deal with that. So you could pass all of those assets directly without having an executor involved. Now what about post tax accounts like bank accounts or joint investment accounts, et cetera? Here you can do roughly the same thing you do with a pretax account, but you would have what's called a transfer on, death account where you can assign beneficiaries.

If you have an account, you can assign your wife as a beneficiary, and then you could assign a charity as the contingent beneficiary. Then if one of you passes, you can relocate that to have the charity be the beneficiary of after tax accounts. Now These rules vary state by state, but again, this is the asset structure that bypasses the executor and the normal closing out of an estate.

Now, what about other assets like a home or other property? Here you could explore having a living trust, which would dictate when one or both parties pass how the assets are transferred. Again, this would be mostly outside of the executor standpoint. So you can, with a little bit of proper planning, really minimize what the executor has to do.

Now, there's some state by state considerations, but I would focus on those first before going through the process of figuring out a third party to assign an executor. I've not heard that happen. Perhaps there are some larger charities that will do that, which is something that you could explore because I'm assuming you would pick these charities early and see if they have that type of program. These are some basic things you can do prior to going to that level.

DAN HAS A QUESTION ABOUT REBALANCING

Our next question comes from Dan related to rebalancing.

“Hey Roger,

I listened to your podcast on rebalancing. I believe you said that you should have the first five years of expected spending prefunded in cash or cash like investments and then have your upside portfolio of stocks and bonds beyond that. Then you said you should rebalance annually.

So, my question is, if the cash bucket is replenished every year, doesn't that defeat the purpose of having those five years of spending prefunded? If the market is down, wouldn't you live on the cash bucket until the market recovers?

Thanks for all you do.”

Well, I think you caught part of the point there, Dan, is the purpose of having that five years of your funding from your money prefunded is to have clarity of how your life is going to work in the near future. That's critical for a number of reasons.

Number one is having the clarity to know specifically how you're going to pay for your life and knowing that that money is not at risk brings confidence to actually go do it regardless of what's going on in the world. If you have that big trip planned in the second year and you have that money set aside, whether that's in a CD or treasury bill, what have you, if the markets are down, you can have confidence that you don't have to change your life based on what's happening in the world, clarity brings confidence and that's part of that purpose of having that money set aside.

The second reason is that your life is constantly changing. So by having a five year payroll reserve for your expected spending. It gives you a lot of liquid assets to make adjustments when you change your mind about what's important to you and the goals that are related to that. So it gives you money that you can move around when you change course on what your plan is. Third, it also gives you a lot of liquidity. If you're experiencing higher than expected inflation, you have liquid money to help fill the gap, so you can rebalance and rebuild that reserve in a strategic way.

Then lastly, maybe not lastly, but the last one I'm thinking of right now is exactly what you're talking about. If the world brings you choppy waters or rough waters, you can choose tactically not to continue to refill that bucket for five years. You may wait a little bit, or you may moderate your spending and wait a little bit in order to ride out those rough waters. The key thing that it brings you here is the clarity on your life, and it gives you a lot of optionality. Both of these things set yourself up for better decision making. If you had to name one thing that helps you make higher quality decisions, it is time. Your back is never up against the wall when it comes to decision making.

To continue with these boat analogies, I was kayaking the Colorado with my friend Other Roger the other day and there was a gentleman in front of me that was part of our group, and I'm following behind him in these rapids and he got stuck on a rock. He got stuck sideways on the rock and I was too close behind him. I had no room to maneuver., so I ended up getting stuck on the rock behind him, and because he was already on the rock, I was just next to the rock, my boat tipped, I filled with water and I went floating downstream and had to regroup. Other Roger later made the, Hey, Roger, this could be a good analogy for your podcast. I didn't have a lot of optionality because I didn't have time because I was too close. That's what these five years of cash reserve do. It gives you time to react to markets or your life or anything else unfolding. Hopefully that helps clarify that for you.

Now, with that, let's get onto a smart sprint.

TODAY’S SMART SPRINT SEGMENT

On your marks, get set, and we're off to set a little baby sprint we can take in the next seven days to not just rock retirement, but rock life!

In the next seven days, I want you to reflect on what season you are in right now. It could be professional, it could be personal. you decide that and name it.

Are you in calm waters? Have you done a lot of work and you can actually just lean and enjoy life and not create work for yourself? Are you in rough waters or choppy waters? Or are you changing direction? Name it, acknowledge what it is and that can help you focus your efforts of where you want to lean into life at the moment.

UP NEXT

So next week on the show, we're going to have Tanya Nichols on to help answer some of your questions. I'm m excited to hang out with her more on the show. I'm going to let my voice recover here. I feel like I'm really losing my voice.

It's been a very busy season. I am in a busy season professionally at the moment, between all the stuff with the club and the merger with Tanya, etc. I'm acknowledging that and I'm trying to eat a little bit better, sleep a little bit better, have a little less wine, make sure I'm exercising knowing that I'm in this season. It is an honor to hang out with you every week and I hope your season is calm.

The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All, performance reference is historical and does not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax or financial advisor before making any decisions.