Listener Questions: Investment Edition, Ep #120

In this episode of the Retirement Made Easy podcast, I focus on some listener questions that I’ve received that have to do with investing. I’ll share what the questions are and address why I don’t give out advice on specific investments. However, I will share some best practices and talk about why retirement planners get into the nitty-gritty details. Don’t miss it!

You will want to hear this episode if you are interested in…

• [3:13] Question #1: What do you invest in your buckets?
• [8:50] Question #2: Does our retirement plan work?
• [14:42] Question #3: Why do retirement planners make retirement complicated?

Question #1: What do you invest in your buckets?

One of my listeners, Ann, asked how to invest the three buckets and what accounts should go in each (if you’re not familiar with my bucket strategy, listen to the episode here). Here is a breakdown of the buckets and what types of investments might make sense in each:

• Bucket #1: In the emergency fund bucket you can include money markets, checking, savings, or high-yield bank or credit union accounts. This bucket needs to be liquid.
• Bucket #2: The income bucket needs to, well, provide income. This income needs to be reliable. It could be dividends, interest, annuities, etc. But this isn’t the only way you can invest.
• Bucket #3: The growth bucket is meant to protect you from the rising cost of living. Every year, everything you buy will cost more. This bucket needs to be invested to help you get ahead—and stay ahead—of inflation.

Why won’t I give specific investment advice? The investments in each bucket won’t be the same for everyone. For example, if a couple both have pensions and social security, then they don’t need to draw much out of bucket #2 for income. Let’s say their gap is only $1,000 a month. In that scenario, we know the majority of their retirement portfolio is going to be in the growth bucket (because cost of living increasing is their biggest danger in retirement).

Secondly, I need to know much more about someone to give specific investment advice. The financial industry is heavily regulated. What I say on the podcast is regulated. Everyone has different goals and retirement income needs. It’s counter-productive to give specific advice to a blanket of the population—it may be more hurtful than helpful.

Question #2: Does our retirement plan work?

Rob and his wife are both 62. They intend to claim social security at age 70. They have about $1 million saved in their 401ks. They want to live on $80,000 per year and it’s estimated that their social security will be $78,000 yearly. Based on Rob’s calculations, they’ll have $360,000 left in our 401k upon age 70. Rob wants to know if his plan will work.

Rob, here are some things you should consider:

• Will you still be living on $80,000 at age 70? I believe that the cost of living between 62 and 69 (the next 7 years) will increase.
• Are you maximizing your social security benefits? Do you need to claim both at 70? Can you claim one and let the other defer? I would analyze that.
• What state do you live in? What would your state income taxes be on the $80,000 you’re withdrawing every year?
• Have you factored in Medicare and paying for Medicare Part B?

These are just a few of the things you need to factor in when determining the success of your retirement plan.

Question #3: Why do retirement planners make retirement complicated?

“S. Smith” asked, “Why do retirement planners make retirement complicated? If the S&P 500 averages 9% per year and I only withdraw 5%, it seems like my money will last forever. Why does this have to be so hard?”

Most people don’t have the risk appetite to invest the vast majority of their retirement savings in an S&P 500 index. It’s a highly risky investment. Why? In 2008, the S&P 500 was down 37%. If you were taking a 5% withdrawal, you’d be down 42%. Your $1 million fell to $580,000 in one year.

Listen to the episode to learn more about the sequence of return risk and why investing in an S&P 500 index isn’t the easy solution you think it is!

Resources & People Mentioned

• 3 Steps to Retirement Planning
• FREE 30-minute coaching call
• Episode #24: The Retirement Bucket Strategy
• Sequence of return risk