Transcript Disclaimer - May contain the occasional confusing, inaccurate, or unintentionally funny transcription moment. It’s all part of the show.

Lena: Paychecks are great right up until they stop. Today on Midlife Circus, Brent and Rob tackle one of the biggest midlife questions of all. How do you actually pay yourself in retirement? From savings and Social Security to bucket strategies, taxes, and peace of mind, this conversation is practical, honest, and incredibly relevant. Before we begin, remember to follow Midlife Circus on Apple podcasts or wherever you listen, and join us in the Midlife Circus community on Substack.

Let's dive into no more paycheck, how to pay yourself in retirement.

Brent: Rob, a few years ago, you made the move into semi retirement. And with that came something a lot of people find hard to imagine, your regular paycheck stopped. And for you, it was more than twenty five years of earning one. What did that feel like emotionally for you and Tara?

Rob: It was weird. It was both exciting and scary, Brent. Just the unknown. What's it going to feel like to not have that every other week, the deposit going into the account? And the only thing that was happening was money was going to be coming out of my accounts.

And it just the unknown of, you know, we think we have enough. You're making your best estimate. Do you have enough? Given all the math, all the equations, all the things we're going to talk about today, and you don't really know. You're making your best guess into what you're predicting the future and future state and future finances.

So it was a little bit of a of scary in this transition, but I also say it was exciting because we'll figure it out. I can always go back to work. I can always get that paycheck again if I needed to. And so I a little scary, but a little bit exciting at the same time.

Brent: So remind our listeners, how old were you guys when that took place?

Rob: When I stepped away? I was going to be turning 49 about a month after I stepped away.

Brent: Okay. So then when you think about turning 49, what was the timeline then you were thinking of planning for? This is more of a humor question.

Rob: You mean how many years would I be planning for?

Brent: And then for Tara.

Rob: Another forty years.

Brent: I remember talking to Carolyn about this. She's like, well, I'm going to live a lot longer than you. And I'm like, oh, yeah. No.

Rob: Plan forty years for one of us to live that long. It's probably not going to be me.

Brent: Yeah. That's how I did it too. And I was just like, well, there's probabilities here. She's a much healthier human being in general, all around three sixty. We're going to give her the longer life expectancy.

Rob: Absolutely. Yeah.

Brent: So that brings us into our conversation today. And this is one of those topics that a lot of our listeners keep asking us about because of previous episodes. We've talked about the two numbers that you need to know to go into retirement. We've talked about earning an income once you decide to leave your big paycheck. But today is a little bit different.

We're going to talk about what happens when the paycheck stops and you need to begin funding your life from your savings, your retirement accounts, social security, and other income sources. The benefit we have today is Rob came from that space having a long career in financial services, specifically working as an advisor and working with advisors so he can bring in his experience and then I'll kind of feather in some of my own personal experiences throughout the conversation. So the way that it's described in the financial services space, it's called distribution planning. We're So going to talk about the planning process, how it's really not a one size fits all approach. It's really unique to each individual and their circumstances.

And then we're going to talk about beyond just the math side of it, what is the emotional aspect of what this journey has in store for you? The benefit that Rob and I both have is we both made the decision a handful of years ago to move into this semi retired lifestyle. So we can talk about our personal experiences, but then Rob can take us a little bit broader. But before we jump in, Rob, can you just share with us the disclaimer? Because this is one of those episodes that we got to be very careful because, we're going to talk about a lot of things that we learned, and we want to make sure that, people understand where it's coming from.

Rob: Absolutely. And as you mentioned, I spent twenty six years in financial services as an adviser and then leading advisers around the country. This in no means, this podcast is representative of actual recommendations or advice. So we are not going to be giving any specific recommendations or advice today. Distribution planning and planning your paycheck during retirement is incredibly complex.

So that's likely what you're going to hear a lot of today, just how complex this decision is. And so I always recommend as we get into distribution discussions that you do want to have a conversation with a professional that is actively doing this with clients today. I'm not doing it today with clients. I haven't done it with clients for a number of years, and so you absolutely want to seek out the help of a professional before you make any decisions.

Brent: And it's a really important step. I mean, I've used financial advisors throughout my entire professional career. I use them still today. And it's a lot of things that I just don't know about. There's complexities, taxes, different types of accounts, when to do them, timing, age, big expenses.

I know we've talked about kids going to college, those kind of factor in big purchases, big vacations, things like that. So we're going to talk about a lot of that throughout today's conversation, but where I want to start the conversation, Rob, is something that I probably struggled with a lot in the early stages of this is when someone moves from saving money to living on that money, what changes in the way they need to think about their financial life? So it's that, you know, when the paycheck stops, what do people usually underestimate the most, the math or the emotions around the math?

Rob: I think it's most of the emotions around the math, Brent, and I'm guessing that's what you experienced as well. I've retired young, I know that, and so I can run the math equations. I've done it myself. I've had my advisor run the math myself. That's, I think, the easy part of the discussion today.

Even though it's complex, the math portion and that discussion and the conversation is somewhat easy about the numbers. The emotional piece of it was weird for me to get my hands dry. As I mentioned earlier in the conversation and your first question, having spent, you know, twenty five, thirty years, and I think for our audience having done this, only making contributions to accounts, not typically taking any money out of an account, for those contributions to stop, for that regular paycheck to stop, and now you're starting to take money out of these accounts, that is a just a weird feeling. I don't know how better to describe that. The reason why is because the consequences of our choices, we're not going to figure out that we may have made a mistake for ten or fifteen or twenty years.

If we pull too much out today, I'm still okay financially if I pull too much money out today. I'm not going to notice it today that I pulled too much money out of an account. It's going to show its head twenty years from now when I might be a little bit lean or not have enough in that account in the future to actually cover some of my expenses. So that's some of the angst and worry that I brought to the table was we're making decisions now. We're trying to predict the future, but the future is completely unknown.

What's going to happen with taxes? What's going to happen with the market? What's going to happen with interest rates? We're making our best estimate, hoping that these things come true, and we'll find that out in another twenty years from now whether or not our estimates were accurate. What was your experience in going through this?

Because I know you retired young as well. You're doing some of the same math that I am. Where was it more of the math that was the discussion or the emotion for you and Carolyn as you were making that step?

Brent: Well, one thing that I experienced, Rob, which is challenging even to this day is I always knew if we were going to make a big purchase, let's say we needed to get a new car, I always knew it could cover that expense through the income over maybe the next year or two years through bonuses or something related to my work. So now when I'm experiencing or considering making a larger purchase, it's just coming out of account. There's not a replenishment strategy associated with it unless I go pick up some sort of part time work or things like that. So that's really different for me. That was the first moment that I had was making the big expense, big purchases.

And I don't make a lot of big purchases, but they do happen in life. The other one that has been really challenging is navigating father time. When you sit down with a financial advisor, they're doing their best to actually predict the future alongside of you. And they start asking questions of saying, Well, what do you think? Do you have some big trips in the next five to ten years?

I'm like, I have no idea. I know in the next year or two years, I've got a few things that are on the horizon, but there's so many moving parts. And I think what happens, Rob, is there's that human element that comes in of the unknown. And you can start to get wrapped up in, is there a potential health issue that we have to fund? What about a relative that might need some support?

Things that you don't have on the radar today that fall in your lap in the future, maybe suddenly or unexpectedly. So that's really hard to navigate, but that's why working with a really experienced professional can help you because they see all these scenarios and a lot of their modeling is going to take into consideration a lot of that. And that's something that I've learned, you got to trust a little bit of this. But it's been challenging for me because I always knew that I could replace the expense, the pulling the money out with income that I was earning over a period of time. Now that's a little bit different.

I all free to admit it's a rollercoaster ride emotionally, but it's not a bad thing. I think I'm more at peace with it now because I'm a few years removed from my last paycheck. So that's a healthy part of the process, like time starts to do, know, kind of help you through the journey. But in the first stages, it's very strange. I mean, it's something that I never experienced in my entire career because there was always money coming in.

Rob: And we're one of the first generations, Brent, that is going into retirement without the fixed income coming in from a pension plan. Now we might get Social Security down the road, but we, you know, our parents and our earlier generations had big defined benefit plans that actually kept that paycheck coming in on a biweekly or monthly basis, and we have to actually for our generation we have to actually make withdrawals from investment accounts that we've been saving money into our entire life. So we're really the first generation that's going to be experiencing this type of emotion.

Brent: Yeah. And there's only a select few people that I know that have a pension, whether they were a teacher, they worked in the public sector, And we have a few friends that they've got really good retirement pension plans because they spent twenty to thirty years in that space and they deserve it. But a lot of us, myself included, don't have that. So it's one of those things that we were reliant on saving money throughout our career, and it is awfully hard. We can all attest to this when you're in your twenties to try to save pennies from pennies coming in.

You just weren't making a lot and you're spending a lot on just your life and your rent and you're getting you're trying to get your first car and all those things. So it's really interesting to see when you reflect back on time, there's a lot of woulda, coulda, shoulda in this process as well to say, jeez, if I just saved a little bit more, I probably wouldn't have this emotional baggage that I'm carrying with me into the future. We're going to jump into a few of the different ways that people can think about withdrawing from whether it's their savings or 401ks.

Rob: A lot

Brent: of this is time dependent. But our conversation today isn't about earned income in semi retirement or full retirement. I know in previous episodes, talked about like one in particular was like five ways to earn in retirement. That is supplemental income as we call it. What we're talking about today is what is the income that you're going to take from your savings or your different investments that you may have?

So that's just to ground everybody in the conversation because it's two completely different things. And a lot of times what people have to do with earned income is to say, yes, I can go into semi retirement similar to you and I, Rob, but I still want to earn a little bit of money doing something maybe not as rigorous or intense as my prior job to help supplement my overall spending. One of the things that comes up quite a bit, and I've fallen into this when I learned about this principle several years ago, and I'll give an example in a little bit, but a lot of people still think that they can live off the interest and never touch the principle of their investments. And that's where this whole concept of the 4% rule somewhat comes into play. So why in your mind, in your experience is that's often unrealistic, the 4% rule or living off just interest of your investments?

Rob: Yeah. There's two questions in there, Brent, that you said. I'm going to talk about the first one, which is I call it the principal principle. It's I'll have enough money set aside that I can just live off of the interest. So enough principal in my accounts that I can just live off of the interest.

And where that becomes flawed is that interest rates fluctuate and investment markets fluctuate. So as an example, we're going to use round numbers for all of these examples today. Okay? So if you have a million dollars in an account and you decide I'm going to live off of the interest and this year it provides 10% interest or growth on that account, you have a $100,000 that you can actually take out of that account. That's the interest coming off of those investments or those that account.

What happens when the market goes down though? And we all experience a downward trend in a market. Technically, if you follow the principal principle, you should put money back in the account because that million dollars isn't a million dollars anymore. It's now worth less. And so you can't take money from a million dollars because you didn't earn any interest.

You should actually make deposits to that account. And so that's where it starts to become flawed a little bit. I know people say, well, I'll just have enough money. I'll put it in a money market account or a savings account. And we've even seen savings and money market account interest rates go really low.

And so to have enough principal to live just off of the interest, you have to have a lot of money in principle. So there are individuals that have more than enough money that could just leave the money in account and just truly live off of the interest from a very safe of it safe investment. You and I are not those people, I don't think. I think most of our audiences are those people. We're talking millions and millions and hundreds of millions of dollars in accounts to be able to do that.

And so because people can't live off of just the interest, the 4% rule came into play. And what the 4% rule talks about is if you have a certain dollar amount when you start retirement, you should be able to pull out 4% of that dollar amount in perpetuity. So going back to my original example, if you have a million dollars set aside, you should be able to pull out 4% of that or $40,000 a year from that portfolio, and that takes into account those that fluctuating market. So if the market goes up by 20%, you still pull out only 4% of that investment, and that difference, the 16% difference, stays in the account for future drops in the portfolio that allow you to keep pulling out that $40,000 every single year. And so that's where the kind of the rule around the 4% came up was to take into account a fluctuating market or fluctuating portfolio.

Brent: For a point of clarification, is the 4% rule based on the amount in your account at the time of retirement? So let's use that million dollars as an example. It would be a million dollars this year that you'd take the 4% and million dollars next year, even if your account went up or down, you would still do it off that basis of the million dollars, like the starting point? Or is it intended to say you take it out based on the value of the account at that point in time that you're withdrawing in the account? So if it's a million dollars today, you take out $40,000 but next year, let's say it's $900,000 would you be taking 4% of $900,000 or 4% of the million?

Rob: Most advisors that I worked with, Brent, they would say that you reassess that distribution every handful of years. You're not actually making that adjustment every single year. And so, you know, every five or ten years, and that's really dependent upon the market and what types of returns and what types of growth have you seen during that period of time. And what advisors will talk about is sequence of returns. And if you have a bunch of down years early on in your retirement, that does have a dramatic impact on your ability to keep taking such those types of withdrawals.

If you have a bunch of growth years during the market, that does have an impact on the types of withdrawals. So I would say most advisers won't say every single year you can only pull out 4% of the portfolio. Every handful of years, every four, five, seven years, they might actually make an adjustment based on what's happened during that previous period of time.

Brent: It's really tricky with this Rob is if you go back to like 2009 as an example where the markets, let's say you were heavily invested in the markets, well, the markets lost between 4060% depending on where you were invested. So you might lose half your portfolio in a very short amount of time. And that could be a million dollars down to $500,000 But if you're still pulling out, that $40,000 you're now pulling out closer to 9%, or if it was just say half, you're pulling out 10% instead of 4%, it's really hard to recover. So there's so much strategy that goes into this. So one of the questions that I have Rob is, and I've got caught in the trap is around money markets.

And I learned this several years ago. I thought that money markets were going to be to be the king for me to apply these principles because at the time, and this goes back several years, they were at close to 4.5%, 5%. I was like, Oh, this is great. If I've got X dollars in an account, let's say just use million dollars in account, I could pull out 40 to $50,000 a year on that account. Great.

Well, the challenge that I had quickly learned too is that's considered ordinary income. So it's taxed at a higher bracket, but then also fluctuations. So what is your experience with money markets and how do you navigate those? Because some people think that that's like a sure thing, but throughout your career of twenty five plus years, it certainly hasn't been a sure thing.

Rob: You hit two of the topics on money market accounts, Brent, is one is interest rates fluctuate. And money market accounts or savings accounts, they fluctuate. Right now, they're actually up a little bit compared to what they were at just a few years ago when you're getting very little growth on those money market accounts. The reason why the growth rate on money markets and why it typically that strategy doesn't work is because of inflation and taxes, something that you mentioned. So right now, we're experiencing a pretty decent amount of inflation over the last handful of years, And if you're getting a very limited return, three or 4%, you're barely keeping up with inflation today, and you need your portfolio to keep up with inflation not today, but for future years.

Not to mention that those money market accounts are taxable. So I'm not saying money market accounts shouldn't be part of the equation, but they're not the equation. That's what you're going to hear me say a lot today is there's not a one size fits all to this approach where everybody should use money markets, everybody should use CDs or just port you know, investment stock portfolios. A good adviser is going to cater the advice to you, your risk tolerance, and your emotion around how you're thinking about retirement. But I want to take a step back and even talk about the 4% piece just before we move on from that, Brent.

I think that strategy is even flawed a little bit as well. And this is where working with a really good professional will help you. While you're young and you're going into retirement, you may spend more money in the early years of your retirement doing all the fun things that you're physically able to still do, planning on spending less later in life. And so you might actually do a five or a 6% withdrawal rate for your first five years of retirement, go down to a 4%, and then eventually move down to a two or 3% of that original portfolio, all adjusted for inflation still. And so working with that professional and really fine tuning your plan so it's not a set it and forget it.

Oh, it's 4%. Here's what the rule is. Now I can't make adjustments. It's really think through what lifestyle do you want to have. Is 4% going to be enough to cover the expenses early on?

Or are going to have to reduce your lifestyle in future years?

Brent: And one of the things that also I wanted to add to that, Rob, is if we could go back a little bit and just talk about money market accounts and ways that I've used money market accounts as a simple example is let's say, you know, upcoming tax bill, your April taxes, you've got a little bit of money that you're going to have to pay to the government. That's a good place to hold it because it's not going to fluctuate a ton over a couple month period of time. So you are earning a little bit of interest. That's a good thing. One of the challenges that I put out to listeners as well is some people are still stuck on the concept of the savings, traditional bank savings account.

Usually those rates are so low, like so, so low. And if you go over to the money market with some of the banks where they've got a money market account, and usually you want to look into what's FDIC insured because that just shows kind of the exposure that you would have if you have a large amount in there. If something happens to that bank, you may not be protected. So there's a lot of things to look into, but there's ways that you can leverage a money market account that can be very useful. Or if you know that you're going to withdraw on a quarterly basis, well, you probably want to put your money in like a money market account so it is getting a little bit of interest before you spend it.

So there's simplicity there. But the other thing before we go into the next part of the conversation, Rob, can you just give a just quick high level viewpoint on you'd brought up interest rates and inflation and how do those impact the thinking? Because if you're just using simple math of, let's say you have a million dollars in your savings account, let's say the interest rates right now, or you're getting, let's just say 5% interest total combined in your portfolio, but then you're navigating inflation. What does that actually mean for somebody? Because I think that's an important thing just to give a super high level of the impact of inflation on just the overall way we should look at spending.

Rob: I'll go back and use the price of eggs from the last couple of years to help answer that question, Brent. And if you think about inflation, you'd have both inflationary periods of time and deflationary periods of time where, you know, expenses are going to go up, and then they're going to come back down. They typically don't go back down to what they were at before. You So think about eggs, and we had a period of time where eggs were a normal price for eggs, and then they almost tripled, I think, for us. Right?

As we were just a couple years ago, the price of eggs tripled. They didn't go back down to what they were prior. They're still more expensive now than they were five years ago. They're not as expensive as they were two years ago, but they're more expensive than five years ago. When we have a world where things are going to fluctuate up and down and we're going to deal with inflation, you're always going to need to stay ahead of it.

So the price of something today is obviously going to cost you typically more in the future. Your investments need to keep up with either a change in lifestyle that you may want to have or keep up with those expenses down the road.

Brent: Yeah, and that's a great way to look at it. So that's what a good financial planner is going to do for you is give you that perspective to say, Hey, the cost of goods today, most likely in the future, it's going to be higher. So we need to factor that in. Cause if you're only basing your math on the return of your investment and what the interest rate is that you're getting, you're missing kind of a key point because ten years from now, inflation, the impact on the cost of goods or the things that you like to do is most likely going to be higher. As you said, rarely do prices go down.

In some industries they do, like the technology industry often sees prices go down because it's economies of scales. But when we think of the cost of the goods associated with eating as an example and food, it's rare that those go down in cost. So we just need to make sure we're taking that into consideration. So we've talked about this strategy around understanding the 4% rule and living off the interests. And we're trying to give people a perspective.

That's one strategy some people use. I think we expose some of the flaws associated with it. We're not saying it's a bad thing. It's often used just as a simple measuring stick, but you need to go much deeper. There's another strategy that people use, and I think it's worth sharing is it's called the bucket strategy.

And maybe you could talk a little bit about what is the bucket strategy and why does it appeal to so many people who want more confidence and stability in retirement?

Rob: Yeah. And I've heard this called a number of things, Brent. I've called it bucket strategy. I've heard it, cash flow strategy. I've heard it carve out strategy.

It has a lot of different names depending upon the adviser that you're working with. But in its simple approach, it is a I'm going to use buckets as the as the way in which you describe it. As you have distinct different buckets of money that you intend to use at different periods of time in your life. Okay. So I'll use myself as an example.

And so when I think about my retirement, and you mentioned you talked about money market accounts, Brent, and savings accounts, they actually should be part of the overall portfolio for my expenses that are coming up in the shorter term. And so from a bucketing strategy, you might have two, three years of your expenses or estimated expenses in a very safe and liquid investment position. That could be savings accounts, money market accounts, CDs. These are all safe. You're not going to see fluctuation.

You're not going to see a lot of growth in this portfolio, but you're also not going to see any loss in this type of an account either in this bucket. It's going to be safe and accessible when you need it. And the reason why you have a couple years in this bucket is to take into account market fluctuations that might occur with the rest of your portfolio. So that way, you're never taking out or you shouldn't be taking out of your investment portfolio when it's down. And you've high you hinted at that a little bit earlier today is if you have a I'm going to keep going back to this.

You have a million dollars in your account and the market goes down by 20 or 30%, that account now is worth $700,000. Well, now taking money out of that $700,000 dramatically impacts the growth you need to get in the future to keep up with inflation. And so the strategy here is just to have enough money in safe accounts that allow you a place to make withdrawals without having market volatility become an issue. And most advisers will say two, three years in a very safe position. The next bucket is for years three through seven, eight, nine, depending upon you and your risk tolerance.

And here, this is going to get some growth, but also be a little bit safer still. You're not looking at large investment portfolios that have high risk associated with them. You're going to have things that have dividend producing investments, interest producing investments, and some people will actually have those dividends and interest keep pushing over and refilling that bucket that you're draining for your expenses. Right? So you think one bucket goes to fill the next bucket.

Think of, like, a cup of water. You're usually pouring a little bit into that cup that you keep drinking out of. The last bucket, the last piece of the portfolio is long term growth. These are assets that you're not going to touch for ten, fifteen years. And I'm using round numbers here.

Everyone's situation's going to be different. But I have money in my portfolio, Brent, that I'm not going to touch for twenty years. If I just think about over a twenty year period of time, how do you think that money should be invested? Should be invested for growth?

Brent: Yeah, absolutely. You know, when you think about, you know, we've had other episodes where we talk about in my case, like my kids, their investment strategy is way different than my investment strategy when they start and they get into their career and so forth. Because their time horizon is so different than mine. And then your time horizon looks a little bit different than your parents' time horizon or a lot different actually. So it's really important, but it's interesting when you say that third tier, Rob, is that literally could be twenty years from now that you would touch that.

And what it allows for you, from my understanding, is it allows for kind of the volatility within that tier or that bucket, because it might be a little bit more aggressive. It might be more in stocks or things like that, where you're going to account for fluctuation, but they have a higher growth profile over a longer period of time.

Rob: Absolutely. And if we have great growth in the investment world in the short term, we may actually take a little bit of that growth to replenish the cash bucket too. We may actually harvest some of those gains because we have great growth in that portfolio, can actually use those assets in the short term to replenish our cash.

Brent: Absolutely. So if I play this back to you, so you gave us three tiers really, the short term, mid term and long term. So the short term is likely over a period of maybe three to five years. And it depends on how conservative you want to be. And often within that bucket, you've got very tax efficient allocations as well.

Because if you're pulling out of highly appreciated stocks, you're just going to get hit pretty hard on the tax, on the gain. So those are the things that the financial advisor can work with you in the strategy. And then your midterm has stable investments, but they're also potentially producing incomes. We're starting to expose the complexity of these strategies, but this is a common strategy. Then the third tier is much more looking at these long term investments.

For me, Robin, I'm curious how you think about this for you guys in your household. I like this strategy, but it's really hard for me to get my arms wrapped around it because of the time horizons. I totally get the short term. What do you think your expenses are going to be over the next handful of years? And we want to be as tax efficient as we possibly can.

And we want to avoid withdrawing or selling off investments if it's a down market. I get that. Where I struggle the most is this really long term thinking because it's hard. That third tier is just mentally hard for me. I don't know if you experienced the same thing.

Rob: I treat the third tier as if I'm still working, is how I mentally think about it, Brent, because it's twenty years from now before I'll likely need those assets. And so with that third tier, it's more long term investment strategy with that portion of the portfolio that I'm not going to need to pull from these accounts for a really long period of time. So it allows me to get my head around that component of it. It's not a set it and forget it. It is a I want these to grow.

I'm going to treat these not as a safe investment. I'm going to treat these as a growth oriented piece of my portfolio.

Brent: That's helpful to understand where you think about it. Like you're still employed, you're still earning an income and it's just a different time horizons, but different expectations as well. Where I've learned in this tier though, is really understanding taxes the best because let's say you buy Apple stock ten years ago and whatever Apple stock was ten years ago and where it is today, it's drastically different would be my guess. And if you started withdrawing from that right now, your tax bill would be very high. Because anytime you sell an asset, that's when Uncle Sam wants to collect rent.

So that's the things that we have to think about. The simplest way when I think about advisors is two things you want to be really good at. There's actually multiple things, but you want your fees to be low. That's something that you negotiate at the beginning, but also wherever they're investing, you want to make sure the fees are low because over the long term, if you're paying high fees, it's going to impact the performance of your portfolio and their tax strategy. Like how are they navigating the taxes?

Because that can be significantly for those that don't pay close attention. There's a big difference between being taxed at ordinary income and capital gains. That's a huge difference. So time horizons, all this factors in. And if you don't have somebody looking out for your best interests on that, you're probably leaving money on the table.

You got to protect your pennies here and your dollars. And then, and I'm not saying go outside of the boundaries of, you know, tax law and things like that. Not at all. It's just being smart about it.

Rob: Absolutely. And the complexity around taxes, it's short term gains, long term gains. And then what types of accounts are taxed as ordinary income, what types of accounts are tax free, all of the tax situation. Again, you're making predictions on future state, what taxes will be down the road. I want to come back to fees, and how I think about fees should be commensurate with the services that your advisor provides.

And so if you have an advisor that's really providing a great level of service, both from a financial standpoint and a numeric standpoint helping you make the financial decisions going forward, and helping you on the emotional side of these decisions, the fee should be commensurate with that. So I know people say low fees, and our generation, I think a lot of the fee conversation came out of our generation because we had access to accounts that people my parents didn't have access to. I could go online as an early investor and invest online by myself, so I could be very fee conscious where my parents didn't have that option, they had to work with an advisor. And so we were able to do things ourselves in a very fee conscious way. Now I'm at the point, and having been in the industry, I'm at the point where things are so complex, I want to hire a professional.

I'm going to pay a professional. I'm going to pay a commensurate fee to professional to help me make really good financial decisions going forward. And so you could find a free option. A lot of what we're talking about today, you can go out and do the math online for a lot of the things we're talking about today. There's software available, and a lot of financial institutions have free financial software available.

That software is not going to help you make an informed decision for you. It's going to answer the number part of the equation, but there are so many other variables around it that a great advisor is going to help you with.

Brent: And I personally think through my own experience, I've left a lot of money on the table because I went through what I call my stubborn years, where I wanted to do everything on my own, because I was looking at the fees and I'm just like, well, I can do a lot of that. I'm clearly not experienced and I don't have enough knowledge. I have the right level of knowledge to know that I need to have somebody to help me. And I encourage people, if they're really curious, we did an episode in the past about selecting a financial advisor. Go back to that episode because Rob brings in a lot of his experience.

And then I brought in some of my own personal experiences of why having a financial advisor at this stage in life can be very beneficial to you. So, we've talked about two things now. We've talked about like this 4% rule, living off the interests. That's kind of like one strategy that people follow. Another strategy is the bucket strategy.

There's a third strategy that comes into play that I think was a little bit more popular maybe for our parents' generation. And then some people really look down to it and it's called guaranteed income or annuities. Can you talk a little bit about what is an annuity? How does one go seek out an annuity? So where do you get annuities from?

And then talk about your experiences of, are they good? Are they bad? Things like that.

Rob: What is your experience with annuities, Brent? When you use the phrase, have you heard of annuities? Are you familiar with them at all? What do you know about them?

Brent: Well, I'm definitely familiar with them. And I know that a lot of it to me was attached to insurance companies. And so I would learn more about it through like my insurance agent. And what I found is where I shied away from it was there was this big fee structure to get into it. And then there's this guarantee over time.

And so I didn't felt like it was a right fit for me, but Rob, to be completely transparent, I didn't do enough homework. So I wouldn't say I have any bad feeling. I just looked at the fee structure. I'm like, this is crazy. This is really expensive.

But I I don't want to say that it's a bad thing. It just wasn't for me. So maybe you can give clarity there.

Rob: Yeah. So the market of annuities, and I'll come back and talk about what an annuity is. And I come from the place, Brent, that there are no bad products. There are bad applied products when something doesn't work for you and what you're trying to accomplish. And I I get when I coming from the industry, I get really frustrated with people that are that follow an absolute model.

No one should ever do this or everybody should do that. Either side of the equation isn't true because your financial situation is different than my financial situation, different than my neighbor's financial situation, and our emotion around money is entirely different as well. And so when there's an absolute that's applied, you should never do something or everybody should do something, that's where my tension gets higher because I know that's absolutely not the case. What an annuity is, it's a contract with an insurance company. And what that contract says is I'm going to deposit a certain dollar amount into an annuity, and in doing so, that insurance company is going to pay me a fixed income out of that dollar amount for the rest of my life.

So I'm going to go back to our million dollar example. I'm not saying please don't take this as everyone should go deposit a million dollars into an annuity. That's not what I'm saying. But I'm going to go back to that example is I make a deposit of a million dollars into an annuity. That insurance company may guarantee me $80,000 a year for the rest of my life.

So if I live thirteen years, I've actually pulled out more money that I've deposited into the account. I think that math works. I'm trying to do it in my head real quick as we're talking. And then every year after that that I live, I actually am ahead. So what you're betting is, unlike life insurance, when you're making a bet with an insurance company, you're when you buy life insurance, the insurance company's betting that you're going to die later, not die sooner.

They're hoping you're not going to have to pay it out. An annuity, they're hoping you die soon, and they actually don't have to pay for a long period of time. And so you might get a little bit higher income in the earlier years from that distribution assuming that you're going to die sooner. That's what the annuity company is really looking at. That income is guaranteed as well.

All these insurance companies will guarantee that income. They can have a guaranteed inflation rate on that income, all of those things. And so what you're paying for, and you brought up fees with the annuity, yes, there is a fee associated with the annuity. That fee pays for that guarantee. Does that make sense?

Brent: Yeah. Absolutely.

Rob: Okay. And so where people get stuck is just what the fee is. Now in working with clients and having conversations with clients, if you knew that this check was going to come in every single year no matter what happened to the investment world, Brent, would you pay a fee for that?

Brent: I think the older I get, the certainty is certainly help helpful for my psyche. Yeah. So I think there's a value add. I think when I originally looked at this, I was probably in my mid thirties. Right.

And I just didn't really see like, why am I going to pay for a bunch of stuff? And it was over this long period of time and those unknowns. But I think the key here is the certainty you can establish with it and kind of removing yourself from the upfront cost and the fees and all the things, but it's more or less, do you want that guaranteed? Like creating a paycheck for yourself that's not going to disappear. It's actuarial science behind it.

So the actuaries are just saying, how long is Rob going to live? Absolutely. Do we see based on his lifestyle and the things he likes to do and where he lives and so forth? Then they're planning for that. And then if you outlive the policy, then you're kind of on the winning side.

If you don't outlive the policy, they're on the winning side. But from my understanding, and if you could just validate this with an annuity is if you pass away early, you don't get the money back. It's theirs, right?

Rob: That used to be the case. There's a lot of variability now in annuities and what you can have. I could set up an annuity that it pays for my life and my spouse's wife

Brent: Okay.

Rob: For the rest of both of our lives. You can have it set up where it pays out for a guaranteed of at least ten years. You can have it set up where it pays out at least a guarantee of the principal that you put into the account and maybe not get any growth. There's a lot of variations in annuities, but that definitely used to be the case when they first came out is that when you died, it ended. And they realized that they weren't really marketable that way in in the marketplace, so they actually made a lot of changes and evolution within that product class to help people realize that they could be a good fit.

And again, it comes back to, yes, there's a fee associated with that annuity. That fee is associated with the guarantee. A way to think about it is I I'm paying a fee for security, and that's what an annuity can provide. That if you have regular occurring expenses in your home, let's say, are $500 a month, you can have a very small annuity that just covers those expenses every single month for the rest of your life, and you don't have to worry about them anymore. A lot of these strategies are not a again, it's not a one and only.

You may use the bucket strategy and an annuity at the same time. You don't have to pick one or the other. You could actually use both because they both might be appropriate for you, and that's what working with a really good adviser is going to discuss is what are you trying to accomplish, how do you feel about risk, you know, what's your emotional state around money, and annuity might be a really good fit for part of what you're trying to accomplish in retirement.

Brent: One of the things that we talked about in the previous episode about picking an advisor is there's so many options for advisors. Get to know your financial advisor, get to really thinking about your own psyche and so forth. This is a process. Usually this is not decided in one conversation. It could happen over several months, multiple conversations about just where you're at in life.

And also you need to revisit it periodically as well because life does change. So I think that's an important part of this process. You also cleared up my knowledge of annuities is pretty old. I mean, it's going back fifteen, twenty years, and I haven't paid any attention to it now. So I certainly learned some things from you today.

So I appreciate that. One thing I want to highlight before we move on to the next part of the conversation is you'd said there really isn't bad investments. I'm going to give you an example of a really bad investment that

Rob: I did. I said that, and as I said it, Brent, I knew you're going to come back and catch me with those words. There are some bad investments, yeah.

Brent: So I was coming out of college and I started my career and I had some friends of mine from college that this was probably a couple years into my career. So I didn't really have any money and they were in a venture capital firm and they reached out to a handful of us and said, We've got the sure thing investment. It's going to pay off like a huge return. And I think it was like a 10X return in just a couple of years. It was the next greatest technology.

So here's the bad investment behind it. I said, you bet. And I thought it would solve all my problems. I had some student loan debt. I was thinking about getting a different car.

Maybe I could do a down payment for a house. I was thinking really big here. Now, what I did to fund this investment is something I never recommend to anybody. And I hope my children would listen to this someday, is I borrowed money from my credit card to fund this. What I did is I just did that credit card roulette where once the you know, I do the no zero interest for six months.

I just go to a new credit card. I kept moving it till I got my big payday. We're all excited. This would be the next big thing. So six months in, we're still getting the information.

About nine months, everything starts to slow down. We're getting less communication. Twelve months, pretty much crickets. We'd have to reach out like, hey, guys, what's going on? Oh, you know, they're just trying to figure out a few things, but it's still looking pretty good.

By about eighteen months, dead. The whole thing died. So I learned a lesson on a bad investment really early on. And why was it a bad investment? I am actually an active investor in private companies.

It was a bad investment because I did zero due diligence on I management did zero due diligence on the product. I knew nothing about the product. And I didn't have the money to actually invest into it. I figured out a way. So give me a pat on the back for like creatively saying, borrow money from a credit card because I thought it was going to solve all my problems.

So too good to be true. So I'm just going to call you out there. There are bad investments. There are bad investments or bad investor. Maybe I should just take I'll take the hit on this one.

It was me.

Rob: Going to challenge you back. That may or may not you probably wouldn't have made that investment choice today.

Brent: No. No.

Rob: You would have done a lot more research. Yeah. But I yes, Brent, you caught me, and I'll probably get a phone call and a couple of messages from some of my friends that are advisers in the marketplace today. He's like, Rob, you're wrong. I can't believe you misspoke.

Yes. There are bad investments. So Yep. Yes. There are bad investments.

Brent: There are some cautionary flags. All right, so the last topic today that I want to talk about is timing of withdrawals. And this is a really important part because many people have retirement accounts. They may have access to social security at one point in time. They're going to be in different tax brackets.

So how do you approach the timing aspect of taking money out of accounts? And what's your big viewpoint there and the circumstances that we may have that could affect the decisions on timing.

Rob: Yeah. So we've talked about a number of things today that likely will cause our audience to even get more confused. You know, the how much can I pull out on a on an annual basis from my portfolio? What types of strategies should I use? The last category is the types of accounts you start withdrawing money from, which actually adds another layer of complexity to this.

So there are accounts that we all saved in into that you can't access until you're 59 years old. Unless you follow certain rules, you can though. And but there's this misnomer that you can't access it to 59. You can actually access them a little bit earlier, but it's not necessarily a recommended strategy for everybody. And so withdrawals from your accounts, you have taxable accounts that create taxable income today, you have tax deferred accounts that cause taxes for you when you make the withdrawal, and then you have tax free accounts like Roth IRAs where the withdrawals during retirement are tax free for you.

The strategy around how to make those withdrawals depends upon how much money you have in each one of those categories. So one of the things our government figured out and is that the more time that money sits in a portfolio tax deferred, the longer it sits there, the higher that portfolio is going to be in value when you start to take withdrawals, and it could be taxed at a potentially higher rate. And so for some people, I've heard people say, well, I'm just going to take out of my retirement accounts until they force me to do it. At 70, 72 years old, that might actually push you into a higher tax bracket, and that's when you're required to take those dollars out of the account. And so how you start taking withdrawals from different types of accounts is really goes into a tax equation, and are you're making estimates as to how much is my portfolio going to grow over a period of time.

Is it going to be a future higher tax bracket if I make withdrawals at that rate later in life, or should I start taking money out of those accounts a little bit earlier? When it comes to Social Security benefits, another choice you get to make, does it make sense to take Social Security for both spouses at the same time when they hit 62, 65, or 67 years old? Does it make sense to take out of one spouse's Social Security and let the other one sit and continue to grow in its value? All of those decisions are completely unique to the individual and their financial situation. Probably one of the more complex components of this is it's not the portfolio design.

It's not whether you can take out of a different bucket. It's what is the tax situation and how do you withdraw from all of these different types of accounts over the rest of your life.

Brent: And that goes back to what you talked about earlier, Rob, is when you've got your different tiers of investments, like back in that bucket strategy is there's different strategies. And one thing that we know is most likely taxes aren't going to go down. If you look historically, taxes usually go up. So we have to be very aware of that. And there's tax efficient ways to navigate the age element and the timing element, but you've got to work with a professional.

Rob: Absolutely. And I have a number of years before I hit 59, I might start doing some conversions. So transferring some of my pre tax or four zero one k or IRA type assets into a Roth IRA. That has tax decisions today, but it actually helps me down the road. All of these things are variables that you should absolutely be discussing with somebody.

Brent: Yeah. I mean, that's part of this conversation today. As we bring closure to the discussion today is if anything in today's conversation resonated with you, or if you know somebody that could gain value from this, share this episode with a friend. And that's an important part of what we're trying to do at Midlife Circus is, you know, expand our audience and our reach. But we know that some of these topics, you may have a brother or sister that's a little bit older than you or a close friend that says, They probably could gain from this because they're getting close to that age.

And it might be helpful for them just to hear out some of the things to think about. And it might help people prepare for the conversation with their financial advisor where you could walk in and say, Hey, let's talk about this bucket strategy that I heard about from Robin Brent. Or, Tell me a little bit about your viewpoint on annuities or the 4% rule, things like that, or the timing. These are all topics that are really important. And what I also recommend is don't try to be the expert in all of this.

You've got people that you can lean on, but it's also good to have a little bit of knowledge around each one of these as you start to pull from accounts, because hopefully got a long road ahead of you and we want to make sure that you don't outlive your money. That's one of the important outcomes of today's conversation. So Rob, as we bring closure today's discussion, we talked about first the emotional aspect of when you start to no longer be saving your spending. So you're drawing down from your accounts, you're not adding to your accounts. That was the first place that we started.

Then we went into just talking a little about living off interest in that whole concept and maybe some of the flaws with it or things to take into consideration. Then we moved into the bucket strategy, which we identified. There's typically three tiers that we think about short, middle, and long term, and there's strategies associated to that. You did a good job of educating me for sure on annuities and the current state of annuities. And then we rounded out around timing of withdrawals and their strategies associated with that.

So that was our conversation today, but what would be to close it out? Like what would be some closing thoughts that you have as somebody leaves this episode? And maybe the easiest way for me to frame it for you is what if somebody has a lot of anxiety around, wow, that's a lot for me to take in. How would you coach or advise them to digest this information today?

Rob: Yeah. And I tried to simplify things as much as I possibly could today in our conversation, Brent, but this topic, distribution planning is incredibly complex. There are a lot of variations, a lot of options that you could actually follow as a client or as a as an individual to accomplish your retirement goals. Lot of options and they all could actually work and they all could actually not work. That's the kind of the uncertainty which causes some emotion here.

And so I said this in an earlier episode, and I said it a bunch of times here today. It's working with a very good professional to help you make an informed decision around what you're going to do as you get into this stage of life. Because none of us want to be forced to have to go back to work at 70 or 75 years old because we run out of We may choose to do that because we want to do some work, and you and I are choosing to do some work, but none of us want to be forced to do anything. We spent our entire working lives adding to our portfolios and investing in accounts, and we gave ourselves time to actually see those accounts fluctuate and likely grow over a big period of time. As we start taking money out of those accounts, the consequences go up, and so it's very complex as I shared today.

Work with a really good professional. It's going to not only talk about the math behind the equation, but the emotion behind the decision. That's probably the biggest thing is you have an adviser that's going to really go deep with how you feel about money, how you feel about different scenarios, what if scenarios. That advisor is going to be able to ask questions to help you make the most informed decision with your money possible.

Brent: Thank you. That's so important. So closing out each conversation, we like to do a gratitude share. And today, gratitude, we're doing a shout out to one of our virtual friends on Substack. His name is Kevin.

He's active on Substack, and I'll tell you a little bit about Kevin here in a minute. But he responded to one of our recent episodes that was around micro adventures matter. And he said, I couldn't agree with you more. These many adventures are key, all uppercase, to a fulfilling and happy life. And he put that comment in Substack for that episode.

I recommend going to Substack. And if you get a chance to follow Kevin, he does some really cool things. And just quick background on Kevin. His Substack publication or page is called Unmapped, and he decided to leave Apple after thirteen years to backpack 1,000 miles. And his kind of tagline here is what happens when you stop optimizing and let the trail shape what's next.

So that is something that we talk about your next great act. So I think we've got some alignment, Kevin. Thanks for the always supporting us. We're definitely supporting you. Thank you everybody for listening to us today.

And remember, you are the director of your next great act.

Lena: That's it for this episode of Midlife Circus. Visit midlifecircus.fm for show notes, transcripts, and all the latest happenings. And be sure to join us in the Midlife Circus community on Substack. Follow Midlife Circus on Apple Podcasts, YouTube, and wherever you get your podcasts so you never miss your next great act. Quick reminder, the opinions and stories shared here are personal reflections, not professional advice.

This show is for entertainment and inspiration only. Thanks for listening, and we'll see you under the big top next time. Midlife Circus is a Burning Matches Media production.