Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

How To Create An Anti-Cookie Cutter Investment Portfolio

June 03, 2024 • Ari Taublieb, CFP®, MBA • Episode 183

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Ari Taublieb, CFP ®, MBA  is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Ever wondered why your neighbor's retirement plan looks so different from yours, despite having a similar income? It's because there's no universal strategy for asset allocation in retirement, and we're here to unravel the mysteries behind personalizing your financial future. This episode is filled with insights and anecdotes, including the tale of an 83-year-old who teaches us that pensions, social security, and other income sources can significantly influence how we manage our investments. From the debate over the traditional 60/40 equity-to-bond split to the savvy placement of assets for tax efficiency, we're guiding you through a financial landscape where "one size fits all" simply doesn't cut it.

Strap in as we navigate the twisting roads of retirement accounts, tackling the myths surrounding Required Minimum Distributions and uncovering why embracing growth—in spite of higher taxes—can be a boon for your golden years. The conversation gets personal as we discuss the varying levels of comfort with investment risk and how it shapes our approach to work, life, and happiness post-retirement. I'm thrilled to share stories from our clients that bring to light the bespoke nature of financial planning. Join us for an episode that's as much about heart as it is about numbers, where we share the commitment of our firm to provide individualized advice, free from the constraints of one-size-fits-all financial institutions.

Create Your Custom Early Retirement Strategy Here

Get access to the same software I use for my clients and join the Early Retirement Academy here

Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

Today's episode is all about asset allocation and asset location. It might not sound as fun as the Netflix show you're watching, but I hope today is equally, if not more, fun. And I'm going to start with an example for you guys to understand why. So client came to me. They were 83. And they came and they said, ari, how much should I have in equities? What should be my asset allocation? And I said you should have a hundred percent. And they're like what are you nuts? I said you should have 100%. They're like what are you nuts? I'm 83.

Speaker 1:

I'm like it's a horrible recommendation. Like then, why do you say it? It's horrible for your neighbor that doesn't have two pensions, social security, rental income and inheritance that's coming in. So for you, you have enough that you're going to be okay, meaning if you have $3 million in your portfolio, if it went to zero, I know you wouldn't be happy with me. I understand that, but you would be okay, meaning you would be able to pay the bills. You're still going to travel, you're going to be okay. Your neighbor that does not have pensions and social security and rental income, they could not have this asset allocation, meaning it would be way too risky because now they run a big risk, which is markets go down. They need to sell things at a loss which is going to impact their income for the rest of their retirement. So the point of the little silly story there is even though it's true is I want to make sure you know, don't have a cookie cutter approach to retirement planning, specifically asset allocation. So asset allocation is a fancy way of saying how much should be in equities and fixed income and cash, and most advisors stop right there and go, hey, you should have 60, 40 or 70, 30 or 80, 20. I don't subscribe to any of that. I don't do this cookie cutter approach. I think you need to go a whole lot deeper, not because if you don't, you won't be okay. You would be okay. You'd just be leaving a lot of money on the table. So we're gonna be exploring today what is the right way to think about this. How much should I have before I retire? Do I need to change anything right now? All that good stuff. So I'm going to walk you guys through how to do that now.

Speaker 1:

We're always, as I mentioned, going to start with fun reviews of the week and keep this engaging as much as I possibly can because, look, I get it. Now a lot of you are awesome. You're like listen, ari. I wake up and I'm like, oh my God, it's Monday, I've got an episode of early retirement and I'm excited. Now a lot of you do send me messages going hey, it's really helpful, I enjoy it. But you know, I do want to watch my Netflix show and I'm not going to sit here and go, hey, my content's more entertaining than that. I hope it's educational, but I also don. I'm only going to get educated and I'm not going to kind of be entertained along the way. So I do my best to keep a balance of both of those. So what I want to do today I've got a few fun things to share Now.

Speaker 1:

I just gave you that kind of little story there, but I'm going to go a little deeper while I pull something up, because here's what I want you guys to know Asset allocation is level one. Asset location is level two. Let me explain what this is so you guys fully understand. And if this is your first time to the show, welcome. For most of you, you guys are longtime listeners, but if you're new, my name is Ari Talblee. I'm a certified financial planner. I am the host of this podcast, early Retirement, and I'm the vice president at Root, and I want to make sure you are optimizing what you've worked so hard for. So thank you for being here. I know there's a lot of different podcasts out there and you guys have chose to be with mine, so thank you very much. Now I'm pulling something up, but while I pull this up, I want to show you guys a few different things. So here's what I'm excited to talk about today. Sometimes, while I'm speaking, you know, I do my outlines for the episodes and then sometimes I'm like, yep, screw that, there's something else I want to show you guys.

Speaker 1:

So, in terms of asset location, so asset allocation, some of you are like, hey, did you just say the same thing, no different things. Asset allocation how much should be in equities, fixed income, cash and here's what most people do, and it's a mistake. Not a mistake in terms of they're not going to be okay, a mistake in terms of not optimizing. So here's the common mistake. Well, maybe I should have 60% equities and 40% fixed income, or 40% bonds and, you know, maybe 5% in cash. And some of you are like all right, that's 105%. I'm like, I know, I'm just trying to keep you guys on your toes, all right. So, 60% equities, 35% fixed income, 5% cash.

Speaker 1:

Some of you are like, no, no, no, I'm 80-20. Some of you are like, no, I'm 50-50. Some of you are like I'm 100-0. You're all wrong. And here's why You're all not actually wrong, but here's what I mean by that. You don't want to say, okay, great, I'm 80-20.

Speaker 1:

Let's keep it really simple. Let's assume 80% equities, 20% bonds. Just, I know it goes deep, ari, some of you are going to send me an email. What about inflation protected securities? What about treasury bonds? What about international? It's all included, all right, so relax.

Speaker 1:

Here's my point. Here I want to make sure you guys are optimizing to the umpteenth degree, and I'm going to show you how to do that right now. So most of you go, yep, I'm 80-20. Let's assume you have a million dollars. Okay, so you have $800,000 growing for you in equities and 200,000 fixed income.

Speaker 1:

Most of you also don't just have one account. You have an IRA and a Roth IRA and a 401k and a brokerage account and inheritance which might be an inherited IRA. Maybe there's a certain timeframe you gotta withdraw from it. You might have a lot of different accounts. You might also have pension and rental income and social security. So some of you right now are like, oh my God, there's a lot. It is a lot. We're going to break it down for you.

Speaker 1:

So most people go got it, I'm 80-20. Okay, 80-20. Got it, 80-20. And they go do that in their IRA, in their Roth IRA, in their brokerage account, in their 401k. They put 80-20.

Speaker 1:

That's not the right way to do it and here's why they are not being tax efficient by doing that. For example, your Roth IRA or Roth 401k is the best account you have for tax-free growth. You're going to touch that last. I want it to compound tax-free forever. I don't want a single bond in your Roth IRA.

Speaker 1:

If you have an advisor right now and you're looking at your Roth IRA and you're like, hey, why do I have anything that's not growing like crazy in here, please ask them for me and you can tell them I sent you for that. That is to me the low hanging fruit, easiest thing you want to tackle, like yesterday, that Roth IRA should be growing like crazy. So if some of you are like, hey, my Roth hasn't grown much, that's a big problem, even if some of you might be going. Hey, it's fluctuating like crazy when I look at it. Good, it's supposed to be. I need that growing like crazy. That should be 100% equities, okay.

Speaker 1:

So let's keep this million dollar example. Let's assume someone's got 80, 20 in there. So let's assume the Roth IRA has 100,000. They might have 80,000 equities, 20,000 fixed income. Move the 20,000 fixed income, okay, all into equities. 100% of the Roth IRA should be growing. For you, okay, that's number one. Now let's assume that this person has 100,000 Roth and 500,000 in their brokerage and 400,000 in a pre-tax IRA. Just to keep it simple, okay, 500,000 in a brokerage account.

Speaker 1:

Some of you are like, hey, ari, maybe I should make it more conservative. But like I bought Apple stock for 10,000. Now it's worth 500,000. So like I don't want to just go sell it, just to have a balanced portfolio. And I'm like, good, don't, you need to be a whole lot more careful when you have a brokerage account. Don't just go sell something just to get to the ideal quote, unquote balanced approach of 50, 50 or 60, 40. Don't do that. It's got to be dependent.

Speaker 1:

But for a lot of my clients, what I'll do. I have one client that has 3 million of Microsoft. I'm like I need you to sell at a minimum $400,000 because I need this amount to help us bridge the gap from now before you retire, because if Microsoft goes down, I don't want us doing poor planning impacting you, which might mean you have to go back to work. If we don't do this, like Ari, but I'm gonna have to pay taxes I go, you're right. That's why we're not doing it on the whole thing. You're doing it on this small portion, for this particular amount of time. They're like okay, got it Now when we sold that 400,000, that's all going in super safe assets because that's going to help us bridge the gap the next few years.

Speaker 1:

I don't want it fluctuating. Think about it like buying a home. I don't want you to have all these investment proceeds and you put them into the market and you get unlucky and the market's down and now you can't buy your dream home. Like don't even subject yourself to that risk. What I want you to do is go okay, got it.

Speaker 1:

Following so far, this pre-tax account, this pre-tax IRA or 401k, that's almost in the middle there. So think about it like your brokerage account on paper should be the least risky because that's going to help you bridge the gap until you tap into retirement accounts. So the bridge account, that 401k excuse me, the bridge account, the brokerage I call it the superhero, and some one of you sent me a cape. I got to put it on one of these episodes called the superhero, which is like the coolest gift ever. So you guys need to have the brokerage account be the least risky. But don't just get there by simply selling tax. You know, selling a stock that creates a huge tax bill. So don't do that. But brokerage account on paper should be the least risky.

Speaker 1:

Then your pre-tax account. So your IRA or 401k. That should next, once again, required distributions are going to hit that account. So as it keeps growing in the future, you're going to pay a lot of taxes on it. I still want it growing for you. One of the funniest comments I've ever heard Someone was like, hey, ari, I heard you say on the podcast RMDs, those required distributions in the future, they're going to crush me.

Speaker 1:

I'm like they will. They're like okay. So I thought about it. I think I should put it in all cash. I'm like, yeah, it's going to crush you, but you're going to benefit more from it still growing. And they're like yeah, but I beat the system. Like the distributions aren't going to be that big. I'm like that's the equivalent of saying no to a bonus because you're going to be paying more in taxes. They're like, oh, I'm like, okay, so pre-tax account that should be growing for you, but not as much as your Roth IRA. So you might have an overall 80% equities, 20% fixed income, but your Roth IRA is a hundred percent in equities. Your pre-tax accounts might actually look like a 70-30. Your brokerage account might look like a 50-50, and it might all come out to 80-20. So most people simply go 80-20, 80-20, 80-20 in every single account. Don't do that. If your advisor is currently executing this or if you're your own advisor, it's hard to know what this is. So one of the benefits of what we're doing, of course I have my new Early Retirement Academy. You're able to see all of that in live time and as markets change, you can update that. That, to me, is true.

Speaker 1:

Rebalancing Most people rebalance every quarter or every twice a year or whatever it is, but they're only rebalancing because they think they should. They don't actually know the degree they should rebalance, which is beyond. Simply okay, let's assume. Keep it easy for you guys, because it's hard to follow. Trust me, I get this stuff, especially if you're listening to it. If you're watching it maybe a little easier, but if you're listening, kudos to you.

Speaker 1:

I try to keep it as engaging as I can. So let's assume you have 50-50, 50% equities, 50% fixed income and let's assume markets go up by I don't know 10%. Okay, great, but only on the equity side. Well, if markets go up by 10%, you now have 60% equities and 40% fixed income. So most of you are like, okay, great, I need to go sell to get back to the 50-50 so that you're in alignment with your asset allocation, which is great and that would be correct. But some of you, you rebalance every quarter or you rebalance, but you're not rebalancing the correct way. You're not rebalancing across various accounts. Let me give you a better example. Let's assume you have a Roth IRA that has international companies and domestic Just keep it easy and it's 50-50.

Speaker 1:

What if you look at your account and it says 100% equities? You might look and go I don't got to rebalance, why would I rebalance it? 100% equities. You might look and go I don't got to rebalance, why would I rebalance? It says 100% equities. I'm going to teach you a little thing about investing, ari, you know. And then you're going to see six months later it still says 100% equities. You're like why would I rebalance anything? It's still 100%. Well, the reason you'd rebalance is international may have gone on a tear and now international that used to be worth 50% is now worth 80% and domestic is worth 20%. And you might look and go I don't need to rebalance, I've got 100% equities. You do, but you don't have 100% equities. Evenly. You've got now what used to be 50% in international, now 80%. And what if markets don't perform well? And now international takes a big hit because you didn't rebalance properly. So rebalancing occurs even with you have 100% equity.

Speaker 1:

So the point here asset allocation is saying great, how much should be in equities and fixed income and bonds across different kind of accounts? What should be the overall allocation? Asset location says let's go deeper, let's understand how much should be in Roth equities. Is it 100%, is it 95%? How much of my pre-tax accounts? Should it be 70%, be 60? How soon am I going to retire? How much income do I need this? Guys? This is the next level of planning. Most people are like I've got 50, 50 or 60, 40 and they stop there. It doesn't go deep enough.

Speaker 1:

So the comments that I wanted to bring up for you guys at the beginning, um is there's a few um no-transcript you might be, you know, spending more on a home remodel, and if you're doing all that at the same time, markets are going down. What I don't want you to do is get unlucky because markets perform poorly and it's the same time you know you've got your energy and your health and you want to do a lot of the fun stuff I talk about. Great, I want you to do it also. But if you have too much in equities and now all of a sudden markets take a downturn and you've got all these expenses, well, now you're subjecting yourself to a big risk. So I'm bringing up health care, because most people overlook this aspect of an additional expense in retirement. And so when does it make sense to kind of start tweaking the portfolio Generally if you have an asset allocation of 100% equities?

Speaker 1:

I have a lot of clients with 100% equities all the way up until five years out from retirement, because the average market downturn is two to two and a half years, but sometimes it can take five plus years. So they're like hey, even if markets take a downturn, I've got the ability to be okay, I can weather these downturns and I'm still going to add new money when markets are going down. Once you're five years out from retirement, that's when you want to be really intentional. Up until then, I have a lot of clients I'd say a large majority with 100% equities growing for them. Now you might be going hey, I'm just not comfortable with markets going down 40% and seeing that happen to my million dollars. Great, then don't do it.

Speaker 1:

It's about understanding how much would you be comfortable with and how much income do you want to create in retirement? I have one client that's the sweetest lady ever. She was a teacher for 35 years. She's like Ari. I get the logic. I understand where you're coming from. I know what I should be doing, but I am just going to. It's going to irk me every time I look at my account and markets are down 20%. So I know I'm leaving money on the table and I'm okay with it. And it's the same reason that I'm going to work three more years, even though I know I'm in a good spot, because I want that extra buffer. That's how she likes to approach it. Other people like to approach it differently and they like to go whoa, whoa, whoa. For me, I don't want to work longer than I need to. I'm okay with the volatility if you tell me I'm in a good spot. So to me this is important.

Speaker 1:

Now, one of the comments and this is the one kind of not really a hate comment, but this from Chris Bird one, I'm going to put it on my screen here If you're just listening. That's okay too. He says I'm so glad I don't need a hundred thousand a year to enjoy my amazing life. Chris, good for you. Like awesome, you don't need a hundred thousand a year. Money doesn't buy happiness. Now, it can create a lot of peace of mind and some people might go you know, 100,000 is great, but like I can't do everything I wanna do, just because they wanna spend 100,000 and you don't doesn't mean you're wrong. So like, good for you, like you don't need 100,000. You have an amazing life, you don't need that. Like to me, you did awesome.

Speaker 1:

Other people don't feel bad if you wanna excuse me. Don't feel bad if you wanna spend. Have clients that want to spend a crazy amount of money and they're like listen, I'm happy to work longer if it means I can spend what I want to spend and they love the luxury lifestyle, like great, good for them. Some of you are like Chris Bird here, who's like, listen, I don't need a hundred thousand a year. You give me 60,000 a year, I can do everything I want to do and travel and I'm going to be happy. I'm like great, then you can retire earlier. So the point here is it's not really a hate comment, but you've got options. Don't forget about health care and then, finally, what you want to spend is very different from your neighbor, your co-worker.

Speaker 1:

So this is how to think through asset allocation, asset location, if you guys want a holistic strategy and help on asset allocation and tax and withdrawal and estate and inheritance and connecting all the dots. That's why I exist. I don't simply go, hey, pick this stock. For those that do reach out and go, hey, I just want investment guidance. I'm like great, there are 10 firms down the street that can help with that. I'll help you pick one of them. It's not us, they're like, but then you can't work with me. I go, that's correct. They're like but I want your help. I, it's inheritance and you don't even want to work with me. Some of you think you do. You're like, hey, ari, could you be my advisor? I'm like you don't want me to be. They're like, why not? I'm like I've got all the designations and CFP and MBA and I'm young, and they're like mean, hire them, I don't have the experience. I have a lot of advisors that are way smarter than me and I want you working with them on an ongoing basis, who have been through the downturns, that understand what it looks like.

Speaker 1:

But the cool thing about Root to me in my opinion, the coolest thing I'll brag about this briefly is the people that are reaching out are like listen, I have an advisor today. About 80% of people do. I have an advisor today. About 80% of people do. I have an advisor today, but I'm just not getting the holistic guidance. I'm paying 1% a year or so and I'm just not getting guidance.

Speaker 1:

I'm like, okay, so here's someone listening to our content, going, hey, I want better planning. Then here's an advisor that's currently working at Fidelity or Vanguard or Schwab or Merrill going hey, I currently work here. They give me a quota of. They're telling me that you know, for example, I have to take on X number of people every month and I have to have X amount of meetings every day. And you know there's a. You know they don't specifically let me do what I want to do, which is tax planning or early retirement specific planning or whatever it is. They just tell me to work with everyone and if I work with everyone, I can't really specialize.

Speaker 1:

So here's an advisor that's watching our content, listening, begging to give this type of guidance to someone who wants it. So you guys almost have like a secret language where you're begging for this guidance. They're begging to give it to you. You guys both just want a home. You want good, holistic planning. They want to give it to you and that's their only job. Their job is to advise. They're not also making videos and podcasts and content, compliance and running the business. That's what I'm doing. I make all this stuff.

Speaker 1:

So you guys reach out and go, wow, that's exactly my situation. I want that guidance. And then I want you working with our amazing advisors. That's only job is to watch your money all day, every day. I don't want them also doing other stuff. It's what makes us different.

Speaker 1:

So some people are like, hey, can I like meet one of your advisors? I'm like you can meet them online, but you can't meet with them right now because they're busy watching people's money. All want them doing. I don't want your advisor also potentially bringing on new clients. And the reason I tell it to everyone in this way is my parents were number 187. And you're like what do you mean? So my parents were burned by a few advisors and there was 250 clients with that one advisor. They were number 187. I don't know 187 people by name, so I don't know how you could possibly give guidance to 187 people. So we have a limit of 75 to 100 clients that work with any one advisor, because we ask a lot more of our advisors. So if you're looking for this type of guidance, you're in the right spot. We do have a wait list, not because we're mean, but we limit the number of people that come on in any given month so that you're getting the exact experience you're looking for. So hopefully, if this type of content resonates with you holistic early retirement planning I encourage you to reach out and I'll see you guys next week.

Speaker 1:

Thank you for listening to another episode of the early retirement show. If you have a question that you want answered in a future episode, you can always go to my website, early retirement podcastcom. That's early retirement podcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.