Episode Transcript
[00:00:02] Speaker A: Yeah. And the beauty of financial planning is it's not just like one occasion where we get together and we have this conversation and then you go live the rest of your life and we never talk about it again. This is something that we are going to revisit as regularly as it's needed. If adjustments need to be made, we're staying on top of that. You're not going 10 years between financial planning conversations and realizing, oh, my gosh, something has dramatically changed, and now I'm going to have to downsize my house or whatever the case may be. Right. So we're doing this regularly. We're making updates in light of how your life has evolved.
Hi, and welcome to the newest episode of Integrated Wealth Perspectives, presented by Saltmarsh Financial Advisors. My name is Sarah Horn, and I am joined by Mark Hemby today just to introduce myself a little bit. I am a certified financial planner and an associate financial planner with the firm. I'm going to turn it over to Mark and let him introduce himself now.
[00:01:03] Speaker B: Yeah. My name is Mark Kimby. I am a senior financial advisor at Saltmarsh Financial Advisors.
I have the CFP designation as well as a CFA charter holder. And today we're excited to talk about income planning and retirement.
Yeah, so.
[00:01:20] Speaker A: So income planning is a really important topic. I think, you know, most clients that we work with have worked really hard over their working years to accumulate assets and save into those retirement accounts and have maybe been able to participate in pension programs. And so the rubber really meets the road when it's time to start withdrawing from those accounts and supporting their lives after they've stopped working and they're not receiving regular paychecks anymore.
[00:01:50] Speaker B: Yeah. And I guess maybe we should start with kind of what is financial planning and income planning specifically in retirement?
You know, obviously, it. It's about spending, but also it's, where do you take the money from?
How do you plan around taxes? How do you integrate insurance into that equation? And so we see a lot of that in our practice. We do financial advisor, we do asset management, and we do financial planning. Those are kind of the two things we do, but they're. They work in conjunction with one another.
So one thing that I see a lot in my practice with retirees is the psychology of going into retirement.
Because, frankly, if you've developed a nest egg and you can retire at that point, you got that way through discipline. Right. You got that way because you were disciplined, you saved, you invested over your career, and now you have to totally flip the script, and it's a Lot of times difficult for retire that I see now, some it isn't, but, but a lot like you go from like, constantly controlling your spending, putting money away, to now, all of a sudden you've got to do the opposite. And it's funny, not, not in every case, but in a lot of cases, I feel like clients call me and say, hey, can I have a little extra money for this or a little extra money for that? As almost if they're asking me permission to spend their money. And it's always like, well, hey, you know, does this fit into your plan? Have we planned for this? But, you know, typically it's. Yeah, absolutely. It's, it's your money. So that's one a lot. Just the psychology of it. The, the, the, the mental flip, if you will, to, to try to go ahead and, and enjoy your retirement. Something you've, you've planned and invested for.
[00:03:38] Speaker A: Yeah, I, I definitely agree. I think it is a, a psychological shift because over your working years, you're contributing to these accounts and you're, you know, watching those balances tick up and up and up. And it can be a little bit unnerving to imagine that balance kind of coming down, down, down as you withdraw. And so something that we are careful about when we work with with all clients is making sure that assets are invested appropriately for the client.
So thinking about how much risk can this person emotionally handle?
One of our advisors on the team says, does your investment allocation pass the pillow test? Meaning can you sleep at night? Is this going to be something where you're losing sleep or you're, you know, developing ulcers because you're watching this portfolio bounce around as the market fluctuates, or is it something that you're comfortable with? So we have to make sure that we're managing risk tolerance emotionally, but also we need to make sure that the assets are invested in such a way that they're outpacing inflation, because in that way that inflation is one of the biggest risks that retirees face because, you know, goods and services are going to continue to get more expensive. And you need your assets in retirement to continue to outplace or outpace those increases in costs. And so we have to take some amount of risk to keep the assets growing. And so we have some really intentional conversations with clients, not just when we start working together, but over the life of their relationship to make sure that the assets are invested appropriately for the client's emotional comfort as well as the plan success.
[00:05:27] Speaker B: Yeah, one thing I heard you say there was talking about more specifically the asset allocation.
What percentage are we investing in stocks or equities versus fixed income bonds?
You always hear about the classic 6040, but in my practice, I have just two examples in their extremes.
Well, you know, into their retirement years. And I have an asset allocation that's 25% stocks and 75% bonds. And I have another individual who's 80% stocks and 20% bonds. And so it's really dependent on each individual with risk tolerance and what their current situation is, how much, how many assets do they have.
So we kind of help coach our clients to kind of get, get something that they're comfortable with that also works. You've got to have enough risk but not too much risk. And so that's, that's something we go through in the, in the process.
Another thing and, and that I talk to a lot of clients about, especially when they're new to retirees, is their spending. Right. Because, you know, most people have a rough idea of what they spend, but I would say more times than not, people spend more than they think they do. And we have some pretty, we have some good tools to kind of help you budget, kind of flesh out all the things you spend money on. And a lot of times it's surprising because there's little, there's little spent expenditures that you, you know, in your household that you just don't think about. Like, hey, you have a exterminator that comes once a quarter, you know, you pay $150 to or whatever, you have a pool and it has required service or the lawn, you know, the lawn service, all that stuff kind of adds up. But generally speaking, in financial planning, there's something known as the spending smile where when you're first in your retirement, in your mid early 60s, let's say you spend much more money.
That's kind of the most you spend in retirement. And then as you get older and you get into your late 70s and into your 80s, you tend to spend a little bit less. And then it spikes up again. So it's kind of a smile. It spikes up again in your latter years as you need more healthcare and stuff. So that's something that we take into account when we're trying to, you know, understand what the plan should be going forward.
Well, you know, another thing, Sarah, is the rise and fall of the pension plan.
Have you seen, do you have many clients that have old school pension plans?
[00:08:01] Speaker A: Yeah, I have a few and most of them are former military, retired military, so. But you're right, it's been Pretty interesting. Just over the last couple of generations, you know, like when my grandparents were working, they had access to a pension plan. They didn't really have to save or invest. And they did do some of that just being wise and having excess funds. You know, they wanted to invest, but they didn't really need to for their retirement. And then within the last generation or so, we have seen, seen pension plans kind of fall by the wayside. But we do have a few clients who have, you know, a pretty significant pension through the military. And then I have a couple of clients who have smaller pensions through companies that tend to, you know, have continued offering them. And so what's really nice about having a pension is it's a guaranteed income stream. And so those pensions can really strengthen a financial plan because it allows the assets in the retirement portfolio to continue to grow because there's less demand, there's less income.
Yeah, because you've got this pension, this, this guaranteed income source. But unfortunately they became less manageable by these companies. It was as life expectancy got longer and people started to live longer, these pension plans started to not be able to meet their guarantees of paying a lifetime income stream. So that's why we've seen this shift from pensions to 401ks, 403 profit sharing plans and those kinds of things. It shifts their responsibility from the company to provide for their retired employee to the employee to provide for themselves.
So that, that is something that I've, I've observed and I think as, as, as years go on, we're going to see less and less pensions come through.
[00:09:56] Speaker B: Yeah, it seems like my age, I'm in my mid and one of the first jobs I had was at a big bank and they had a pension plan. And then we had this decision that they made, hey, we're going to do away with the pension. And it was kind of like you have to make a decision, you're going to stay in the pension. Are you going to go to the 401k? And I was, you know, you did the math on it and I was, I was that age to where it made more sense for me to, to switch to the, to the 401k.
Another thing about, you know, kind of reliable, you know, kind of stand, you know, you know, regular income that's coming in like a pension. You know, historically, a lot of times people thought, well, I've got this investment portfolio and it's going to, you know, spit off interest in dividends. Well, I looked back and did some research and 30 years ago the S&P 500 had a dividend yield of 2%.
Today it's roughly 1%. So it's like half. Now there's a lot of reasons for that. One is that companies tend to reinvest into their own business. Now they also tend to do stock buybacks with cash instead of returning that money to investors.
And along with the fact that, you know, there's, you know, 30 years ago there were 8,000 publicly traded stocks. Today there's around 4,000 publicly traded stocks. So there's fewer to choose from as well.
Now you still see, you know, dividend yields for banks and utility companies and stuff like that that tend to be a little higher. But you can't sit back and just say, hey, this portfolio is going to push off a bunch of income and it's going to be able to support me through the rest of my life. Now, if the number's big enough, yeah, that could work, but typically it's not. So what are some of the other strategies that we use, like the 4% rule, for instance, that we plan for? And maybe you can get into that, Sarah, talk about where you take the money from and how you plan around that.
[00:11:47] Speaker A: Yeah, yeah, that's a great question. And so one thing you mentioned just now is the 4% rule, which is just a rule of thumb that is pretty standard in the financial planning industry. The idea that if you're withdrawing about 4% of your total portfolio value or less than 4% on a, you know, in a year, if you continue that for, you know, maybe 25, 30 years of your retired life, you shouldn't outspend the portfolio. But there are some caveats there because not, you know, it's not always the case that 4% will support your lifestyle and it doesn't always account for market fluctuations. It doesn't account for asset allocation. And so rather than relying on that just general 4% rule of thumb, we do, like you've talked about in depth financial planning to account for irregular expenses and those higher spend years at the beginning and end of retirement, like Mark, Mark talked about with the smile. So rather than just say, okay, you're spending less than 4% of your portfolio this year, you're good. That's not our approach. We're going to want to spend some more time really delving into the variables and making sure that your, your income is going to be sustainable for you.
And related to that, you know, we talked earlier in our conversation about asset allocation, which is the mix of stocks, bonds and cash in a portfolio, and then the risk of related to that mix.
A similar phrase that we use around the office and in the financial planning industry is asset location, which is different. And this has to do with placing certain asset types in certain types of accounts based on taxation of those accounts. So for example, you might have a traditional 401k or IRA which is going to be taxed when you take the money out, not when you put the money in. You might have a Roth which is taxed when you put the money in, but not when you take it out. And you might have a taxable brokerage account which you pay tax on interest and dividends that are produced in that account. But then you pay capital gains tax on any gain that you might have in assets that you sell. And so there are different strategies to optimize your tax situation by withdrawing from these accounts in strategic ways and then by placing certain assets in those accounts. So for example, for less tax efficient assets, things like bonds and real estate, for example, those tend to throw off a lot of income. So you might place those in a tax advantaged account like a pre tax account or a Roth account where you're not realizing that income every year because it's, it's happening in this tax deferred or tax advantaged account. And so that's another layer of expertise that we bring is just making sure that those less efficient tax wise investments are placed in accounts that are not giving you those that taxable income in that year.
So that's another thing that we pay attention to. And so Mark, I'll, I'll kick it back to you. Did you have any other.
[00:15:02] Speaker B: Yeah, I mean, and one thing I would, you know, the typical like sort of standard would be oh, you take money out of your taxable until you get to required minimum distribution age and then you take it out of your traditional IRAs and then ultimately if you have to, you take it out of your Roth long term so you can allow those tax deferred or tax efficient accounts to grow. But that's not always the case.
You know, sometimes, you know, if you don't have a huge taxable account and you're 62 years old, you decided to retire, Something's come up. There comes some time, you know, where it does make sense to take it out a little bit earlier than RMD age. But it's not, you know, it's not a hard and fast rule. And so that's, that's kind of why we like to do the whole process.
And we can go over that in a little bit.
[00:15:49] Speaker A: But can I jump in here, Mark, and ask you. So you mentioned RMD age. And of course, for people with traditional retirement accounts, that's an age it's, I think it's about 73 right now. It'll likely increase to 75 as I approach retirement age and younger folks.
But that's an age where the IRS requires account holders to withdraw an amount from that, from that account to pay taxes on it. And so sometimes if you have a large traditional IRA balance, you are looking at some pretty big RMDs in the future. So there are strategies that we can use in your lower income years to what we would call accelerate that income so that you're paying it at a lower bracket now rather than paying it at a higher bracket later. And so things like Roth conversions can be good if you have a low income situation, a low taxable income situation, which we often will see early in retirement.
You can also just start to withdraw income, you know, for your spending needs from that account. So that way you're reducing the balance so that it's not growing as, as extreme towards your, your required minimum distribution years. So, Mark, I just wanted to jump in and say that.
[00:17:08] Speaker B: Yeah, so Roth conversions are, yeah, Roth conversions are a great tool if the situation is like you said, kind of. We do an analysis on this in terms of where you are in the tax bracket. Do you have some cash to pay the taxes? Because what you're doing is you're pulling that tax, pulling that money out, you're paying the ordinary income tax on it today and then you're converting it to Roth so you never have to pay taxes again and it grows tax free.
So it's an important decision to make. One, do you have the cash and is your income low enough to do that? Another common thing that, that we see a lot and with traditional IRAs is, you know, a lot of our clients are terribly inclined, whether they get to their church or they give to charities regularly on an ongoing basis.
You know, the new rules are if you are 70 and a half, meaning before the 75 year R and D age, you can start pulling money out of your IRA tax free to give to charities. It's called a qualified charitable donation.
And it's a way to, it's money you were going to spend anyway or give away anyway. It makes more sense to pull it out and not have to out of the IRA and not ever have to pay taxes on that if it was money you were going to go ahead and donate anyway. So that's another one of those little, just kind of Strategies that we incorporate into plans if it suits the needs of our clients.
Another common thing I get.
Let's just say you are recently retired. You're 65, you bought your house 20 years ago. You've got 10 years left on your mortgage. You refinanced it when rates were 3%.
Then the question is, I've got this monthly mortgage payment that I've got to make. I've been making it for my whole working year. Now I've got, you know, a little bit, you know, I don't have income anymore, so I kind of feel weird about paying. Should I just sell my assets to pay off a mortgage? And there's not really a right or wrong answer. You know, some of it's psychological. You know, if, if the idea of having no debt in your life makes you sleep better at night, then it's absolutely a possibility. But depending on the interest rate, sometimes just from a strict math standpoint, it might make sense to just not pay it off. Because if, you know, if you're paying 3% on your mortgage and your portfolio is making 8%, you know, you're better off leaving that money in your portfolio.
And those are the kind of, you know, a lot of the little nuanced questions we get from clients when they're sitting down and they're first, now, do I really want to make this, this mortgage payment $1500 a month or whatever it might be for the next 10 years. And a lot of times the answer is, yeah, you might as well. But if it makes you sleep better, pay it off.
[00:19:46] Speaker A: Yeah, I'm glad you brought that up. That's a really common thing is retirees know, okay, well, I don't have this income from a job anymore, so I don't like, I want to manage my expenses. And they do look to debt payoff as one way to manage their expenses. But it's important to kind of take both the, the cost benefit analysis into account, but also the client's psychology want to make sure that they're actually comfortable with the different decision that's being made. So, yeah, I'm glad you brought that up.
[00:20:15] Speaker B: And along in sort of a similar type thing is a what if or when should I is when to take Social Security.
Right. Because you can start taking it at 62 and all the way up to 70. Right. And you know, the longer you wait, the more you get.
So it becomes a decision, you know, does it make sense to go ahead and start taking it? Should I defer it, et cetera.
My general rule of thumb is if you're really pinching pennies or you really feel like you're constrained financially, go ahead and take it, right? Because you just never know. Like you can get by a boss and you never get it right. And so there's a break even point if the longer you wait, the longer, the more you have to live, longer you have to live before you break even on had you already taken it. So my general rule of thumb is if you're unsure, go ahead and take it.
Do you see similar conversations in your practice, Sarah?
[00:21:09] Speaker A: Yeah, yeah. I had a conversation with a client really recently about when to take Social Security. And it's not always as simple as it seems because you often will have clients who have, you know, maybe benefits from an ex spouse or maybe they've lost a spouse and they have their survivor benefit. And so navigating that requires some analysis.
And so, yeah, it just, it's dependent on the client's situation and their needs.
But that is always something that we can help with the decision on.
So, yeah, that's, that's an important piece. And another one is for those that do have pensions like we talked about, sometimes those pensions have survivorship options and, you know, you might be able to get, get it set up to where you receive a benefit for your life and then maybe your surviving spouse or child beneficiary receives a portion of that for a period of their lives. And so, you know, all of those options can be a lot to sift through. So let us run the numbers and help you decide what makes the most sense, both in the math of it as well as the emotion of it. That's, that's really where, where we sit is the intersection of calculations and the emotions.
[00:22:21] Speaker B: And maybe, you know, maybe that's something we could talk about. It's like when we take on a new client, like kind of what are the steps? Like, what do we do first?
So I'll just kind of lead us off. Like, I guess, you know, the first thing we do, we're, we kind of have a, taking a full picture, right? We want to make a, we want to do a lab test on you, if you will. Like, we want to take the blood work, see where everything is, whether it's insurance, retirement accounts, investment accounts, what your mortgage is, what your house is, what your spending is. Just Kind of assess the situation and take in as much information as we, as you're willing to share with us, the more the better. And then from that point we do. What do we do, Sarah? Like, what's your next sort of idea of what the next.
[00:23:08] Speaker A: So it's really, it's gathering information, like the numeric, the numbers information about your life, like what's your income, what's your spending, what's your portfolio like, how do you have it invested? All of those good technical things. But then it's getting to know you as a human being and your personality and your hopes and wishes and aspirations and fears and, and helping those kind of come together into a cohesive picture of you and your life and then developing a plan for. Well, how can we invest these assets to manage risk, but also, you know, seek, seek a reasonable return for you. And how can we, like we've been talking about today, how can we withdraw from those accounts and use other income sources to leave you with a larger amount of money at the end of your life, if we can?
Because a lot of people do have legacy, neat interests and they want to leave money to charities and the next generation or whatever they feel strongly about. And so it's really about understanding both the finances of everything, but understanding the person in front of us more importantly so that we can.
[00:24:18] Speaker B: I think what you're saying is like, what are the goals? Right? Like, yeah, some people, yeah, it's like, you know, what are your goals? Are you going to travel? Are you going to buy a boat?
Do you want to live, leave, leave a huge amount to your kids, your grandkids?
[00:24:31] Speaker A: So kind of concerns that we need to be thinking through how you're going to pay for those. And maybe you don't want to burden your children with your care at the end of your life. How do we want to manage that?
[00:24:44] Speaker B: And then again, sort of we try to understand, like, what's the family dynamic? You talked about that. And we get to know a lot of personal information about clients. And I could say there's a.
Everybody's got weird situations. I'll just put that in as nice a way as I can with whether it's kids, grandkids, spouses, ex spouses, et cetera. You know, there's always some messiness to it. And helping having people explain those to us to the extent they will, kind of helps us understand, you know, because let's, you know, some say this kid needs more money when, when I'm gone than this kid. And that's totally, you know, normal.
And we see it all across the board. And no situation is exactly similar other than there's always some weird scenario with that. So by establishing those goals, assessing situation, establishing the goals, and then we get into, well, what's the plan can we afford what your goals are like? Is your portfolio structured in such a way that we're going to meet those goals?
And so once that happens, then we implement the plan. Right. We put in an investment strategy, we put in a withdrawal strategy, and we do this with some pretty sophisticated software. Most financial planners have this type of software and it kind of gives us, spits us out a result, you know, with the quantitative analysis and it gives us a probability of success. Right. And so, you know, people get caught up on that. Right. And general rule of thumb is if it's got an 80% probability of success, it's considered a sound financial plan.
But that's, there's no, first of all, there's no guarantee in that, obviously. But secondly, that's not, doesn't mean there's a 20% chance that you're going to run out of money and you're going to be, you know, on, you know, you're going to be out of your house, et cetera. The way I like to phrase it to clients is, you know, if you have a 85% chance probability of success on your plan, you have a 15% probability that you're going to have to make some changes. Right. That doesn't mean things are going to completely change. You're going to be, you know, have no money at all. It just means that there might a very low probability chance that you might have to make some changes, whether it's, you know, spend less money, leave less money to your, to your legacy, or, you know, change your portfolio mixture so that we can maybe get closer to your goals.
[00:27:02] Speaker A: Yeah, and the beauty of financial planning is it's not just like one occasion where we get together and we have this conversation and then you go live the rest of your life and we never talk about it again. This is something that we are going to revisit as regularly as it's needed to make sure that if adjustments need to be made, we're staying on top of that. So you're not going 10 years between financial planning conversations and realizing, oh my gosh, you know, something has dramatically changed and now I'm going to have to downsize my house or whatever the case may be. Right. So we're doing this regularly. We're making updates in light of how your life has evolved to make sure that you have the opportunity to make changes when they need to name.
[00:27:45] Speaker B: And that's, and that's, you know, that's, you know, we do have occasionally have a one off, you know, someone will come in and says, Do a financial plan for me. But 99% of our clients are asset management clients. And so we're developing the plan, we're helping them invest the assets.
And the financial planning part is just kind of comes with, you know, it's included in the price, if you will.
[00:28:10] Speaker A: Sure. And even for those one time investment, or, excuse me, financial planning clients, they always have the opportunity to come back and engage us again when circumstances have changed. So we're not going to cut anyone off and say, no, we're not, you know, we're not willing to talk again.
[00:28:27] Speaker B: Well, most of our clients, you know, we, we, we, we're talking to them at least quarterly. We're meeting face to face at least once to even sometimes four times a year or more. And so one thing we like to emphasize is, hey, we're always here, the door is open.
Anything that comes up, that is a financial decision in your life, are you going to buy a new vacation home?
You're getting ready to buy a car? Should I lease it? Should I buy it? All those kind of things we have conversations with our clients about in terms of trying to help guide them. Sarah, let's talk about sequence of returns and what that risk is in an income planning, retirement planning situation.
[00:29:02] Speaker A: So talking about assets being invested in the market, you're going to have up years and down years. Right. And just because you have an up year or a down year doesn't mean your expenses are changing with the fluctuations of the market. So when you withdraw from the portfolio and the market has come down, that means there's less of the portfolio to rebound when the market kind of returns to its previous level and recovers. And so we want to be mindful to not try to avoid withdrawing or rebalancing during a down market cycle and try to plan in advance for those income needs. So something that we're really careful about is making sure that we're talking regularly with clients to understand what income needs they have in the next maybe 6, 12, 18 months. So that when the market is up, we're going ahead and proactively rebalancing to get cash available for those anticipated needs.
And there are other ways that we can manage the portfolio because there are going to be times when you need money from the portfolio and the market is down. And so we try to invest assets in such a way that there's going to be a portion of the portfolio that is, you know, relatively stable even when the market comes down. So sequence of returns risk is really the risk that you're withdrawing from the portfolio, when the market has pulled back and the portfolio is worthless, it's like
[00:30:28] Speaker B: the retirees worst nightmare where you retire today and all of a sudden the stock market crashes. You're like, what am I going to do? So, you know, one of the things that I do with when we, you know, how much are you going to need over the next 12 months? Right, let's have at least that amount set aside in money market. For instance, right now, money market is getting 3 and a half to 4% yield, which is actually pretty good, especially compared to some other fixed income securities. So it's actually a pretty decent return just for keeping the money on the sidelines. Sometimes we go out as far as two years because that really gives you a lot more flexibility if we were to have a down year. Um, so it just depends on the individual situation.
[00:31:08] Speaker A: Um, yeah, I was going to mention that, Mark. It kind of, sometimes it depends on the client. If a client is relatively risk averse, they might want to have a few years of cash on the sidelines and some clients aren't as worried about it. So it's, this is a, as with anything you say, it's all depends on the, on the client in front of us.
[00:31:25] Speaker B: All right, well, as, as we wrap this up, I guess the message I would like to just send out would be that, you know, if you're unsure if you do not have a financial plan or if you're unsure about the plan you have, there's no obligation at all. We'd be happy to speak with anyone about that, about what they're currently doing with their current advisor. If they don't have an advisor, you know, what can we do to help? Our door is always open. We love to talk to clients and so sometimes it's a great fit, sometimes it's not.
But you know, we're here, here, contact us and we'd be happy to sit down with you.
[00:31:59] Speaker A: Sounds great, Mark. Well, thank you so much for the conversation and we hope this has been really helpful and if we can ever be of assistance to you, we would love to hear from you. So thanks again for joining us for this episode of Integrated Wealth Perspectives from Saltmarsh Financial Advisors and signing off. Thank you all for joining us.
[00:32:17] Speaker B: Thanks, Sarah. Bye.
[00:32:19] Speaker A: Thanks, Mark.
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