AMA | Withdrawal Strategies with Allan Roth

Welcome everyone. We're really excited that so many people could join us. Very exciting that so many of our users get just as excited about talking about taxes as we do. We're going to start with some quick introductions, talk about what's new at New Retirement. Then we'll cover some withdrawal Strategy basics guest hosted with Alan Roth and then we will do a quick demo of the tool to show you how you can leverage those strategies in your plan. And then we'll open it up for Ask Me Anything questions. A lot of you have submitted questions already, so we'll start with those that came from the Facebook group and through email and if there's time at the end of the hour, then we'll take live questions. With that said, I'm going to turn things over to Steve Chen, who's the founder of New Retirement.

So yeah, welcome everybody. Michelle, thanks for hosting this. And just for intro. So Steve Chen, I'm the founder, appreciate everyone's time today. We're looking forward to kind of sharing what we're up to. So we've got Michelle hosting us who runs Customer Experience, does all the support for our team building, help building tutorials and videos and learning with our audience, Bill Smith, who's the lead CFP for us. And if you sign up for Advisor and you're going to work with us to get the only advice he's helping to deliver that. And then Alan Roth, who is the founder of Wealth Logic, he is a fee only financial advisor and planner, former McKinsey, he'll give a little bit of a bigger intro downstream but we'll be answering some of the questions we got submitted earlier. So you know, just real quick on background in case you don't know much about us. So we are essentially building the Turbo tax for financial planning that's this year and then where we're going next year is we want, you know, one way of describing is like the Tesla of planning. We basically want to learn all of our users and then build a virtual financial advisor based on the data that we're learning we're seeing and the behaviors we're seeing from our users. So use that to kind of identify best practices, what's working for our various plan participants and then use that to help other people do better and also live in events like this with the community. So that's kind of directionally where we're going and you're going to see some pretty material improvements in our UX user experience. We got finally hired a lead designer. So she started a week and a half ago so you've already seen some of her early designs. You'll start to see some of that stuff in the next four to six weeks and then you know, the virtual financial advisor score and things like that are coming. So just real quick about some of the recent updates. So Michelle has rolled out our initial hub help desk. So we're building articles and videos and you can find this stuff inside of Intercom on our site. Soon we'll have a dedicated link so you can kind of easily find these things on a contextual per page basis. But we're adding more and more materials. It's something we've heard a lot from a lot of our users. They want additional help on how to use the site. We added HSA and 529 accounts recently. So these accounts have special tax treatments and that has been applied. So you can, if you went in and you had some qualified savings that you were just kind of labeled as this, you can now select these account types and get the appropriate tax modeling for these different accounts. Can you forgive this? Okay, cool. So just a couple other things that we're doing. We have coaching, which is actually essentially super product help that's delivered by Michelle. So if you sign up for coaching, Michelle will be jumping on a zoom with you like this one on one walking through your plan, helping you see how to use the product. It's not advice, it's like super product help. So you have to figure out the answer yourself using the product. But you have someone who is a personal finance expert sitting next to you, but it's not advice. And then we also have advice delivered by Bill who is a cfp and that's actually done under the umbrella of our ria. So there's no retirement, the software company and there's no retirement advisors via the RIA that can deliver advice. And so if you work with us around advice or advisor, you're going to be working with Bill and he'll go through your plan with you again on Zoom. You know, we it's all hourly, it's all flat fee. Okay, so we'll turn over to Alan to kind of give a quick background on himself and then dive deeper into the product and how withdrawals work.

Thanks very much. First of all, I'm just thrilled to be here. I've been an hourly financial planner for almost 20 years now. The goal is to do a one time plan. Get fired. I just want to say a couple of things. Number one, I've kicked the tool around and I think the description TurboTax for financial planning is brilliant. It is a brilliant model. I am really impressed with it. And two, I'm thrilled to be talking to all of you, the attendees of this conference, because you guys understand what money is and have put money away for retirement to have choices later in life to pursue whatever gives your life happiness and meaning. So I'm thrilled to be here. Thanks.

We're thrilled to have you here as well. So what we want to do before we jump into all the questions, we want everyone to have a good baseline and background of what we're talking about. We're not going to get into any concepts in a very deep way, but we do want to lay out the land here. There's a lot of different ways that you can think about withdrawal strategies and a lot of ways that they can be talked about and applied for the purpose of today and the purpose of new retirement plans. The way that we think about withdrawal strategies is the framework that you're making to inform the decision on how you're taking out money to fund expenses. So whether that's coming from taxable accounts or tax advantaged accounts, it's really the rules that you're thinking about in order to implement those decisions. So Bill and Alan are going to talk a little bit more about some of the things that you should be thinking about as you make those decisions.

Okay, so withdrawal strategies. So why should you care about withdrawal strategies? Well, choosing the right withdrawal strategy during the decumulation phase of retirement is basically going to help you get to your goals, right? So it's going to help you define your goals. It's going to help you achieve your goals. And like everything else in personal financial planning, it's personal. So some of the common goals that we see in working with our users, the number one goal is to avoid running out of money, right? Everybody wants to have enough money in retirement. And the fear is, if I retire, am I going to have enough money? Right? Everybody wants to make it to the end of their plan. Another goal is to maximize spending. So some people are fortunate enough that running out of money is not the issue. It's basically, how do I maximize my plan so that I can enjoy my retirement to the fullest extent. Another goal is to preserve wealth for children, grandchildren, for charitable endeavors, church, whatever that might be. So you're trying to set aside a plan that's also going to preserve a pot of money at the end of the rainbow. And then the other would be to make more money after paying taxes. So choosing the right withdrawal plan can help you pay less taxes over the life of your plan, thereby maximizing your plan and offering you more money, more spending, etc.

And when you go to make that decision, there's a lot of different things that you should be thinking about. A lot of these things we allow you to model in the tool. So you're thinking about your goals, you're thinking about longevity, your risk tolerance, your asset allocation. All of the factors that we talk about in your plan and that you enter into your plan come together and impact your withdrawal strategy. Now, these are levers we can dial things up and down. And there's a lot of others that I'm not mentioning. And so Alan is going to talk a little bit about some common mistakes people make when thinking about the withdrawal strategy in context of some of these categories.

Thanks. Yeah, this was a cover story article in AARP magazine last year. And kind of the key to it was really, before I get into the mistakes, thinking differently about money. I define net worth not in terms of dollars, but in terms of years and time. So somebody that's worth $10 million, that needs $5 million a year to live on, only has two years worth of financial freedom. On the other hand, somebody that has a half a million dollars, that needs $20,000 above Social Security, they're pretty wealthy. They have 25 years worth of financial freedom. So mistakes that I see people make all the time, is, number one, going for income. And it's natural because you've worked hard your entire life to build up that portfolio. And the thought of spending it down is incredibly scary. So we buy things like master limited partnerships that are supposedly safe alternative to bond funds until they lose 50, 60% of their value, et cetera. So it's the total return that matters. Number two, taking too much risk on fixed income. One of the few names that I like, what Wall street calls are bonds that are below BBB because they're known as junk bonds. And I think that's a very good name. And people say right now rates are at all time low. And being the most argumentative person on the planet, I disagree. I go back to 1980 and clients say, gosh, it was so wonderful to earn 12% on a CD or a bond fund. And I say, well, you got 8% after taxes and inflation was at 15%, so you lost 7% of your spending power. Rates are much better today. I'm generally not a fan of annuities, but the best annuity on the planet planet is delaying Social Security. And the only reason to take it earlier would be that you are single and in bad health or both you and your spouse are in bad health, it's just a wonderful thing. And then number four, you know, relying on rules of thumb, you know, what's a safe spin rate, 3 and a half percent, et cetera. It depends on lots of different things. And I'm a believer, by the way, in retirement, I like to call it financial freedom instead of retirement. To the extent that you can develop a budget that's somewhat flexible, that says, oh my gosh, if the market plunges like it did in March and stays low like it did not this year, we're going to cut out certain things like vacations and the like. So those were kind of the key parts of that article.

Great. So that's a, that's a perfect segue into kind of getting the lay of the land and how we should think about it. All those things, the different fixed income rate or different withdrawal rates for fixed percentage and Social Security, those are all things that you can model within the new retirement plan. And what I'd like to do is talk about how you can also think about your withdrawal strategy and do a bit of analysis on a couple different ways of thinking. So for starters, it's really important to understand the order of operations in the way that we fund expenses. And this is a very common way to think about it in terms of a rule of thumb. So when we fund expenses, we always fund expenses with work and other income first, so whatever income is coming in. And then next we start funding expenses with taxable accounts, then tax advantaged accounts and then Roth accounts. And so when we think about the withdrawal strategies, that's the order that we're taking money out in order to fund our expenses. In the tool under Insights and Withdrawals, we have a couple different charts here that really give you a good view of how you can apply different strategies. So right here I'm looking at two different charts that are actually showing whatever your plan is. So all the inputs that you put in your plan are being outputted here. And this top chart is showing the withdrawal amount, so how much money is coming out of your accounts each year. And the bottom chart is showing your savings balance. So how are your liquid assets changing over time throughout your plan? So we have three different strategies that are available to you to model in your plan and on other pages you can toggle between them so that you can see how your score is affected, how your taxes are affected, how all different aspects of your plan are affected. So the first one I want to talk about is your spending based on needs. So in your plan, you've modeled expenses, you know, you've modeled RMDs, you've modeled taxes. Those are all things that you have to think about on an annual basis. And when your strategy is to spend only your expenses, you might have a goal in mind to maximize your estate at the end. So you can see that the pink line, which is spend based on spending, it actually gives you the highest estate value because on a year to year basis, you're spending the least as total opposite a maximum spending plan that thinks about your estate and says, how can I deplete my money based on my goal age? So over the course of my retirement, I want to end up with no money because I want to be able to spend as much as possible every year. And maybe that's to go on vacation or treat your family or donate to charity, whatever the reason might be. And so as exact opposite of based on spending needs, the maximum spending plan provides you the most income on an annual basis. Still thinking about having enough to get through your entire life. And then the final strategy is a fixed percentage withdrawals. And that's when you choose the age and the amount that you want to deplete from your portfolio. And you use the same amount on an annual basis. And the goal of this strategy is to preserve your principal. So the idea is that you're not going to run out of your nest egg that you save and you're going to live mostly on the growth of your portfolio. So in this scenario, you see that you have preserved the principal and it's even grown a little bit. And when you think about the spending, it kind of falls somewhere between your minimum and your maximum spending. And so it really makes sense for you to play around in the tool. There's a link right here from this page to go back to your withdrawals plan page and adjust the parameters for each of these different withdrawal strategies. Before we get started on questions, I want to open it up. If anyone has questions about how you would model this in the tool or any of the things that Alan and Bill spoke about.

Can you see Michelle, there's some people, a couple people ask questions in the Q and A part of it. And then we're also getting some questions in chat.

Okay, so I can see the chat questions I see. Do I insert 529amounts under myself or, or my spouse? Doesn't matter. You can select an account for either one. Does it take inflation into the account? Yes, you can set inflation. We have separate inflation for Social Security expenses and medical. So you can adjust those accordingly based on how you think they will be modeled.

And we're going to be adding kind of an overall real versus nominal switch to the whole tool, but right now it's kind of all in nominal dollars versus real dollars. And there was another question up top about recognizing capital gains or converting. Can you see that on top from John?

Yeah, I think that. Yeah. So the question is, what's a good way to decide whether to recognize capital gains or convert traditional IRA to Roth IRA in early retirement? I'm 65 and I have a mix of investments. We have several questions like that coming up in the ama.

Okay, okay. Why don't we get into kind of the preset questions and we'll circle back to some of these so people can keep feeding in questions. We'll try to take as many as we can, but some of these may be answered in some of the ones that we had already kind of decked up.

Yep.

Steve, I see a question on TIPS for me.

Can I answer that?

The question was what percentage of one's bond fund do I recommend for treasury inflation protected securities? These are Treasuries that move up or down with inflation. And my answer is it depends. I generally use a CD strategy to get some protection from inflation, like an Ally Bank CD that has a really easy small five month early withdrawal penalty that now amounts to 0.42%. So that if we have inflation, something like the Vanguard or Barclays total bond Fund will lose money. So I would then use that CD that has the easy withdrawal penalty as a put, sell it back to the bank and reinvest it at the higher rate. So it depends if they use the CD strategy a lot, very little in tips. If they don't use that CD strategy, then roughly 20%.

Awesome. Thanks, Ellen. And also just I want to make a quick disclosure disclaimer here. All of this falls under kind of general education product support. This is not meant as advice, personal advice. You know, obviously it's all free, we're not getting paid. But just want to make sure everyone, you know understands that if you do want advice, you can talk to us about it.

But anyway, cool. So a couple questions that came in were pretty lengthy. We tried to distill them down for the purposes of this. This is a couple who is very well off and doesn't necessarily need to withdraw funds from the portfolio. And they're wondering in this situation, would they actually increase their allocation of equity and be a little bit more aggressive?

Okay, so I'll take a shot at that one so it sounds like these users are in a good position, a fortunate position. And I would say that in addition to covering your expenses, you should build an emergency fund with cash so that you can cover any unforeseen expenses. So that if you need to write a check tomorrow for a new car, dental procedure, et cetera, new roof, that you have the ability to do that. And then I'd say following that, yes, it makes sense to let your portfolio grow in equity index funds, which will provide inflation protection and build a legacy. And additionally, you might find that your portfolio grows to an extent that frees you to pursue an expenditure that might otherwise feel like an extravagance, something that you hadn't thought that you that you could purchase, or an experience that you couldn't have. But letting your portfolio grow might allow.

You to do that.

It might make you feel comfortable doing that.

And I agree with you, Bill. You know, I have lots of clients that are investing for future generations and that's important. On the other hand, you want to look at the world is very risky. I never would have predicted the world where it is today with COVID and the like. So there's always a chance that Social Security becomes means tested, et cetera. So I'd leave a little money in reserve. And finally, I'm a believer by the way, and more Balanced portraits portfolio because I think a lot of the return comes from going against the herd. Daniel's book Predictably Irrational describes how we investors behave. We think we can take a ton of risk on February 19, suddenly become risk averse on March 23, barely a month later. So being able to stick to an asset allocation and rebalance I think adds a lot of return.

This next question, Alan, is for you and it says that in the past that you recommended, people who are financially independent should keep 70% of the bond portion of their asset allocation in insured CDs, either brokered CDs or bank CDs. Given that interest rates are low, do you still recommend this allocation or is this a recommendation that you've provided?

I might have been on drugs when I said that. Or at least I don't remember saying that. I can't promise I didn't. But you know, the answer is it really depends. Again, rates are not at an all time low when you get real as an inflation adjusted number two, it depends upon where the CD rates are and the early withdrawal penalties versus a high quality bond fund like Bloomberg Barclays Aggregate Bond Fund. So you know, right now, heck, if there was a CD out there paying 5%. I'd violate that rule immediately. I happen to be roughly 50% CDs, 50% bond funds.

Okay. And so the next question is, can you address withdrawal sources? Traditionally they say withdrawals should become, should come from tax deferred, taxable, then tax free. Are you going, if you're going to be in a higher tax bracket and capital gains are going to be lower, does this traditional rule still apply?

So overall, the goal is to minimize your overall taxes by minimizing your average effective tax rate. So achieving that is going to require different withdrawal account makes for different people. So this is one of these things where there's a rule of thumb out there. But the reality is the most efficient tax strategy will likely have you taking money from different accounts at different times. Some of the variables are going to be things, what is the basis in your taxable account? If you've got a lot of basis, then you can pull that money out essentially tax free. Are you facing significant RMDs that will push you into higher marginal income tax tax brackets later in your retirement? Will you have low income years prior to RMDs and Social Security and Medicare, excuse me, and Social Security that allow you to realize income at lower marginal tax rates. Right. So taking advantage of the fact that we are in what historically, you know, our low tax years, by the way.

I feel like this is a trick question because the actual best practices taxable tax deferred like 401ks and IRAs and then tax free like Roths. So, and that's the, that's the default that we use for our withdrawal strategy. But in the withdrawal and plus you can actually go in and specify per account, like if you want to take out money at certain points in time. So if you are trying to, you can model Roth conversions is one thing. But if you also want to do targeted withdrawals from very, you know, from taxable, from any one of these buckets, you can, you can model that up as many as you want. And I don't know, Michelle, if you're going to show some of that or.

Not, but do you mind if I add two cents?

Please, please do.

I've always said that investing is simple. I never said tax is born. So Steve, I agree completely with your rules of thumb, but as we know, rules of thumb don't always work. So, you know, especially if one is retired early, they've done the right thing by delaying Social Security. They're not in the RMDs, then their tax bracket is very, very low and that gives them the Ability to perhaps pay taxes sooner at a lower rate than later at a higher rate when their income is going to be higher. So that could argue taking some money out of the tax deferred. And Bill, as you mentioned, that also depends on how much capital gains you have in the taxable. So there are all these things to take into account. And then if you take money out of your tax deferred, that's going to eliminate the opportunity to take a long term capital gain at a 0% tax rate. And either of these can increase your income so that your Medicare premiums end up going up even if you miss by $1, it could cost you 1,000 or more.

Yep, great point. Yeah. I mean, it is complicated and right now, unfortunately, I mean, you know, if you're very financially literate and you kind of understand investing the different buckets and tax law, you can use our platform to kind of do a best fit, if you will. And hey, I go to retire, but it's before my RMDs kick in and I want to delay Social Security till 70, so maybe between 65 and 70. I have really low income and therefore low and no taxes. And then the whole Roth conversion strategy is pull forward revenue. I mean, pull forward the recognition of gains into those years. Maximize and optimize for your marginal tax rates to the degree you want to and get money into the Roth vehicle for the future. Right. So things like that. So today users can do that and we also apply IRMA testing and so forth. Where this is going in the future though is we'll actually run thousands of simulations behind the scenes for you. You tell us a strategy you want to do and a lot of users are asking us for this. It's like solve for my Roth conversion strategy. So that's what this thing is going to do in 2021 or hopefully early 2021. So that's where we're going with it. But in the time being, you still have to kind of, you know, we give you the tools, you can do it yourself. You can also talk to Michelle or Bill about it and make sure you did it right. But you know, you can, you can solve it for yourself and hopefully save yourself tens or in some cases hundreds of thousands of dollars in taxes.

Great. So this next question was pretty long. So I'm going to do my best to just summarize it. The question is, how do I replenish my cash cushion so about two years and keep my asset allocation according to my strategy and does the location of the account matter for how I Do my rebalancing.

Okay. So I'm going to take this in a couple of different, you know, take a couple different bites at this. Okay. So I would say that replenishing your cash is going to come from first from interest and dividends.

Right.

And then by rebalancing your portfolio to mean the desired asset allocation, which effectively means that you are going to be selling more of your relative outperformers and rebalancing into underperforming assets. And then I would say as far as timing, once a year is probably a good makes sense. You might want to do it quarterly, but I'd say at least once a year with the caveat that significant market fluctuations might create opportunities to rebalance within the year for tax purposes. So March of this year was a great time to book capital losses potentially. Right. And for tax purposes. And then in retirement, it makes sense to generate income in your tax deferred accounts as you're likely going to have to withdraw the money in the form of taxable RMDs. So if you've got interest in dividends being generated in that tax deferred account, that's a great source of cash for you. And then for the purposes of tax efficiency, taxable accounts are well suited for capital appreciation. And Ellen, I know that you've got something to add to that.

Yeah, I'm a strong believer that asset allocation always comes first and then the asset location is incredibly important. So if you're spending down your cash, and even if bonds and cash or bonds and stocks return about the same, you're going to have to sell some stocks. You're better off selling the stocks if you have it in your tax deferred or tax free accounts. But always stick to that asset allocation. I personally, I can tell you exactly how to rebalance after the fact. We don't know exactly what's going to happen with the market, but I'm a believer in sticking to a tolerance. So for instance, if one were going to be, let's say 60% in stocks, maybe set a tolerance of 6 percentage points around that. And I tell my clients they're in breach of contract, if they violate that, their money can't sue them, but I can guilt them to death. And in terms of that rebalancing, one of the sad truths are, is that if it feels really good, you're doing the wrong thing. And if it feels really bad, like buying more stocks because I was out of tolerance in March, that hurt like heck. And I've been studying behavioral economics for 20 years and teaching it. And I have some clients that are world experts in this area and understanding the theory and actually pressing the buy button in mid late March is a really hard thing to do. You're going to whatever has caused you the most amount of pain.

The next question is, with very low bond yields, what is your opinion on the common 60:40 asset allocation regarding retirement income?

Yeah, you know, I'm not a believer in the 60 40. I think it depends on two things, your willingness to take risk and your need to take risk. So when you've won the game, as William Bernstein puts it, quit playing. It doesn't mean you get out of stocks completely. And then as I mentioned, in real, after inflation and after taxes, rates aren't at an all time low. So I mean the best thing that I would say is take a look at what you did between February 19th and March 23rd. And that's going to be, in my opinion, even though there's no research to show this, the best indicator of how you're going to behave in the next plunge. And every plunge is different. Well, I happen to be, by the way, 45% stocks, 55% fixed income, and by the way, so far this century, since 1231, 99 global stocks and bonds have returned about the same. And that rebalancing has just worked for brilliantly.

What are some questions I should ask if I want to change from my self directed portfolio to using a financial advisor?

Well, you're asking a financial advisor what to ask a financial advisor, so I think there's a tad bit of conflict there. But I would ask various questions like what are the total fees that I'll be paying? Not the advisors fees, but the funds, everything within that. I would ask the advisor what some of their biggest investment mistakes were and if they can give you none, they're lying. I would, you know, ask how they're making money, what incentives they have, et cetera. You know, I'm obviously a believer in ultra low cost index funds, fees, et cetera. Are they active, passive, etc. Are they smarter than the market? That's a warning sign. I'm smart enough to know that I'm not smarter than the market. Those are just some things that an advisor advises you to ask advisors.

So I would also throw in this is a question to ask of yourself. Right. So would you enjoy retirement more by turning over your portfolio to a financial advisor rather than having it be self directed? I mean there's a lot of structures involved in managing your own portfolio. If you're comfortable Handing over to an advisor, you may make your life easier, and you might make yourself, you know, you might relieve yourself of that burden.

Yeah.

And I will add, Bill does not actually manage assets. He just provides advice. So, yeah.

Hey, I want to.

Personal opinion, Michelle.

I want to make a quick comment here, too. So, you know, we just interviewed one of our community members, Glenn Nakamoto, about what he did. And he took a different approach, which was he wanted to create a retirement paycheck so that he could kind of guarantee a certain minimum level of income to fulfill all of his mandatory needs. And, you know, that also reduced kind of the stress he felt about managing his money. So what he did was he delayed Social Security till 70, so boosted his income that way. He bought a series of spias, so single premium, immediate annuities. And we're not here to push annuities, but just that's what he did to kind of like level up his income. And then he took. And that was about a third of his money. He took about 11% and he stuck it into a CD ladder essentially to create income to satisfy his RMDs. And he was using the RMDs to fund his discretionary spending. So travel, kind of fun stuff. And then he took the remaining chunk of his assets, which is about 55%, 54%, and he put it in 80, 20 portfolio, which he keeps rebalanced. And then by doing this, he kind of could set it and forget it to some degree. He knows he has enough income, it's diversified, and it's kind of lower risk. Probably his long term maximum estate value might be decreased because he took essentially some risk off the table and put it, you know, with insurance companies. But, you know, there are definitely very different ways to frame this up. I think, you know, one of the things that we see here is that, you know, you. You spend your whole life piling up this money. So you have one or two million bucks. Good job. Right? That's better than 95% of the world, 99% of the world out there. But then you have to spend every day, if you're managing all this money yourself, like investing, rebalancing, and if the market tanks 30% like it did.

Back.

In March, then you're kind of like freaking out every day about that. And so I think you have to ask yourself, what kind of risk are you comfortable with? What would you do? Like, for Alan's question, if there was a huge drawdown, and thankfully we've seen a quick rebound, but I think it is an opportunity to say, okay, I just lived through this, you know, am I, is my allocation right for where I'm at today?

So the other thing that I would like to add is when I'm speaking with folks, you know, a retirement plan is not necessarily a math problem. Part of it is a math problem, but it's not necessarily about maximizing the amount of money that you can spend or maximize the amount of money that you have at the end of plan. It's creating a plan that gets you to your goals that you can live with, you can sleep at night, you can keep to that plan and you're comfortable with. I mean that's, that's because you need to be comfortable in retirement. It's not just about maximizing the amount of money. It's creating a plan that you're comfortable with.

Actually, we have a question, a related question to the around annuities. Why does Alan, why doesn't Alan like annuities? Is that true for Dias bias for longevity, risk and lifetime income or the hybrid products only?

Well, I think I'm on good. I think Spias single premium immediate annuities aren't horrible things. You would always delay Social Security. Almost every pension plan I look at has a higher payout rate and partially backed by the Pension Benefit Guarantee Corp. But what you're doing is you're buying an investment product through two intermediaries, the insurance company and the agent and both are getting commissions on that and even Aspia, which is the best of the insurance annuities. And I'm just doing some research to write about this for financial planning. What you're doing, it's not income by the way, if they're telling you you're getting five and a half, six percent, you're not. Because when you die, there's nothing left. Most of it is return of principal. So you're getting closer to based on average life expectancy or a healthy person's life expectancy, something like one and a half, 2% return. Now if you live to 100, it will have ended up being a very good thing. But you're going against the odds. And then number two, with all this money we're printing, and I'm not predicting inflation because the top economists have gotten inflation right, right the direction about 30% of the time, less than a coin flip. But if we have high inflation, work out the math that the SPIA is going to be paying you in 25, 30 years, 40 to 50% of the spending power that it's going to pay you the first year. And guess what? You can no longer buy an inflation protected spia. And the reason is because the actuaries at the insurance companies, I've been an officer of two insurance companies are really smart. They don't want to take the risk of that high inflation that they can't hedge against.

The next one is about pension. So they have a cash value pension. So similar to one of the earlier questions, they have cash. And from an asset allocation standpoint, what is the best way to think about a cash pension? Right now they're considering it to be similar to a bond. But Alan, maybe how would you think about that in context of the other assets.

You'Re making me ask? Answer all the questions, the hard ones.

Your answers are better informed.

The first thing that I would look at is how is that cash pension plan paying 4.5%? I mean, is it an insurance contract and out dated insurance contract that they're stuck with paying? So I would kind of look at and be very careful. And if it truly is a secure 4.5%, I'd stash as much as I could in there. Whether or not you consider, technically I would consider that high yielding cash because unlike a bond fund, if it's truly a guaranteed 4.5% return, it's not going to move up or down with inflation. So really all I care about is risky assets and risky assets. I consider US stocks, international stocks and real estate alternatives and low risk assets, cash and bond. And if you think about it, earlier on this year cash was yielding almost as much as bond. Today cash is yielding. The Fed lowered the fed funds rate, which is the overnight rate, from a little over 2% to a little over 0%. So now cash is generally very costly. If you can earn 4.5% on your cash, go for it and just consider it part of the low risk asset. And I don't really care whether it's.

Cash or bond And Bill, do you have anything to add?

Nothing on this slide.

Thank you.

Okay. Okay, I'm going to stop sharing the slides and I think we'll just switch to some of the questions from the folks on the phone or on the webinar. Alan, another one for you. What do you think of using a 401k stable value funds for the bond portion of a portfolio? I don't think you can give specific advice, but maybe you want to generalize that.

Good point. And that was a good disclaimer. None of this is specific advice because I'd have to know far more about everyone, blah blah, blah, blah, blah. So the answer Is it depends. Sometimes I see stable value funds that are derivative bond funds and that scares the heck out of me. Other times I see stable value that are guaranteed insurance contracts. And while they're not backed by the US government, insurance companies can and do go under. And in a systemic sort of environment, all insurance companies could go under. But if it's truly backed by a highly rated insurance company and there aren't any penalties to get out of it, I'm all for that. And sometimes, by the way, I'll see people that have just a horrible 401k plan, but they have this legacy insurance contract that gives them a great stable value.

Well, this one is for new retirement. It says all you folks look young. Do you have anyone on your staff that's in retirement? For some of us we need to take RMDs. And do you include that in your calculation? Do you want to take that Steve, or do you want me to?

I'll take it. Sure. I would say we have a mix of people. I mean, you know, Bill and I are in our 50s, so we're getting there. We have the pre retiree real issues of like needing to make sure we accumulate enough money during our working years. You know, we have advisors and our user base that is all over the map. I mean most of our users are 50 to 65 years old so and most of them have, the average is a million dollars. But that's barbell because there's wealth concentration and the median is $600,000. That's who's using our platform, which is kind of a mass affluent type of user base. But we spend, you know, we have thousands of users a month on the platform, you know, that are asking us questions like this every day.

And so, and I spend all day talking to users. Most, most people who are, I'm talking to are in retirement. And the answer to the second part of the question about RMD is absolutely we are modeling RMDs automatically at age 72. We're calculating what those should be for you and how they impact your expenses and your overall strategy. So you can see that in a lot of the different charts in a very granular way. And then if you want to change it or extend it, there are definitely ways to do that too. And you can just get reach me through the chat and I'd be happy to help with some of the one off scenarios for RMDs.

Yeah, just to elaborate on that, I mean there's another question from Paul about retiring at 59 and claiming Social Security at 70, you know, with the base tool, you'll see an income forecast, you know, and what's driving it. So work Social Security, RMDs, drawdowns, passive income. You know, it's all layered in there and you can see it with plus, you can see which accounts it's hitting, the tax effect of each of, you know, every drawdown that's happening. So you can really get in and look at how the money's flowing through your, through your whole plan. And also from a tax perspective, we start, we show the marginal tax rate. So are you pushing out of the various brackets into the next bracket? And, you know, does it make sense to move, try to, you know, move your income around from, from year to year? And also behind the scenes, we are testing for the IRMAA Medicare penalties. We're going to make that more visible people, so they can see, hey, I pushed my income over that level and I'm going to be subject to that Medicare penalty.

That's really impressive, by the way. Just a comment.

Thanks.

Okay, the next question is from John. Should one assign some sort of present value for future Social Security benefits and account for that amount in their bond portfolio or bond allocation? So how do you account for Social Security as part of your guaranteed income?

Well, you know, a couple of different things. I happen to take Social Security. Well, you know, I do look at the net present value of the Social Security in coming up with safe spin rates, et cetera. And the greater your guaranteed income relative to your total income, the higher your spin rate can be. But generally, for a client, I typically look at how much they need to live on beyond Social Security and then develop the portfolio around it. Although there's just as equal of an argument to include the Social Security as part of that bond. A close call.

We have two financial planners here, so we'll go to Teresa's question next. And that's how much do you need to have in assets for a financial planner to want to work with you, realistically?

Well, I'll take a step. So we work with folks who want to do plan reviews. So it's really, it's not a function of how much money you have.

Right?

It's a function. Have you built a plan? Would you like a second opinion on that plan? You think you could benefit from that? And I'm happy to work with those folks. So it really has. It's not dependent upon your assets.

And I'm strictly hourly, but at $450 an hour and 10 hours being the basic plan, you know, somebody came to me with $100,000 and I accepted them as a client. I'd be doing worse than what I been writing about for 16 years on paying too much in the way of fees. And don't forget, lots of financial planners spent the whole week that it took to get an insurance license so that they can capture your $30,000 and sell you an annuity or something like that.

Yeah, a quick comment on this. I think you got to be really careful that you're working with a fiduciary. The word financial advisor is pretty loosely, you know, it's not regulated. Almost anybody can say they're a financial advisor. So you know, are they a fiduciary, which means they put your financial interest out of their own. And then more importantly like how are they paid? You know, the reason we started this company is that like my brother and I helped my mother do this and she had a quarter million bucks and she was like, I need financial help and like, is there an advisor that will help her? And the answer was not. Too many people were interested in helping her because she didn't have a lot of assets. And most people are focused on accumulation because Most advisors are paid percent of AUM. I mean the most common model is 1%. So if you have a million bucks they're charging 1% is 10,000 bucks a year. So if you're making 7 to 8% nominal and you're not paying attention, you're like whatever. Doesn't seem like it's that high a fee. The reality is you're losing out on all the compound growth going forward. Could end up costing you 30 to 40% of your total return on your investment over a long period, you know, 30 year time frame. So it's a huge amount of money. It's a huge cost. It's just.

You're not going to speak to me again because I'm going to argue with you.

Okay.

You know, the word fiduciary is really easy to say and I've seen more so called fiduciaries do horrible things to their. You know, as a cfp, I've been incredibly critical of the CFP board on not enforcing the fiduciary standard. And I mean this is another question I should have added when you asked about, when the question came about, what should you ask your financial advisor? How can a fiduciary including by the way Vanguard, tell you it's okay to buy a bond fund paying 1.15% and you're paying taxes on it meanwhile, so you're lending money to the government and corporations. Meanwhile, you have a mortgage at 3% and you're not getting any or much of a tax deduction from it. You know, the only reason I would argue to keep that mortgage is that you, you need that liquidity to feel comfortable to sleep well at night. So I would tell people to, you know, yes, it's important, you know, not to hire some commission based person but on other hand, be your own fiduciary. And I tell people not only do you need to understand your strategy, but make sure you can find any 8 year old and explain the strategy to them. And if they can't understand it, it's too complex and you're going to be taken advantage of. Sorry Steve.

That's why we do this, so we can have multiple perspectives.

So then Alan, in that question the implication is that you are a proponent of paying off the mortgage.

Absolutely. And by the way, I've had a mortgage twice because the same credit union had a zero cost mortgage mortgage.

At.

The same time they had a CD paying higher. So not once but twice I did that. Which comes as close to arbitrage as one could possibly get. But by the way, after the second time I did it, the tax law changed. I could no longer, longer deduct it, so I had to pay it off. But yes, in general, if you think of how a bank makes money, guess what? Except for that one credit union, they pay depositors a lower rate than they lend the money out for. So to the extent that you can disintermediate, get rid of the bank, yes you should. The same sort of thing. See, I'm not young like these guys. I remember when we used to book travel with travel agents and you know, lo and behold came the Internet and we all had access to that information and the travel agents got disintermediated. So you know, disintermediate the bank insurance company whenever you can buy insurance from an insurance company, but generally don't invest.

Through an insurance company.

I'm not opinionated, am I?

You're unbiased.

No, that's perfect. That's probably a good way to end the hour. It's hard to believe that that flew by. We weren't able to get to everybody's question. There are several questions about how do I model this, how do I model that? If you still have that question, please definitely go through the chat in the bottom right hand part of the screen. I'll be happy to respond to you in the next couple days with how you can model that in the tool Most of the questions that have been asked, there are ways to model them. And then if you do have any follow up questions for Bill and Steve and Alan, you know, we'll take these questions, we'll try to answer them on our blog or, you know, kind of address them in some way. And I guess we just are really happy that everybody was able to join us and we want to thank Alan for joining us and answering questions with us and we look forward to doing more AMAs. Probably another one in a month or so. And I don't know. Steve, do you want to add anything?

Yeah, no, I really appreciate everyone's attention and Alan, thanks for joining and just so everyone knows, Alan's like booked up. He's not here to solicit business. He has more than he needs and. But so we appreciate his time. He is really coming at this from a completely unbiased perspective. On our side, we would love to sell more plus subscriptions. So if you're thinking about it and you want to support our business, I mean, our business model is designed to be completely aligned with our users. So it's subscriptions six bucks a month or 72 bucks a year and then coaching delivered by Michelle and that's 125 a year which includes plus or advice through bill and that starts at 500 bucks and also includes plus for the year. And then we got these sweet T shirts that Michelle ordered which I'm going to throw up here. If you order today, we will send you a T shirt and we're going to start thinking about how to give T shirts to people in our community who are more active. You know, I want to give a shout out to Klein and people like that that are asking good questions, contributing content. This is a community based effort that's part of the way we keep the cost low. So we are trying to learn, you know, with everybody else and deliver a very new way of delivering advice and planning to basically anyone around the world. So that's what we're trying to get to anyway with that, you know, appreciate everyone's time. Can I add 20 seconds?

Absolutely.

Thank you for having me. And you guys are the real good guys in financial planning. I mean, absolutely wonderful. What you've accomplished and are doing is beautiful. I'm gonna, I think I'm gonna cry.

Wow, that's such an endorsement. Thank you so much.

Thanks Alan. I appreciate it. Yeah, so, you know, we're working hard at it, but it's, you know, Alan given us a ton of good input and feedback over the years and so appreciate your time. We're going to try and do more of these with Jonathan Clements introduced us and try and get folks like that on these AMAs answering questions and doing this as a community.

Awesome. Well, thanks, everyone. Have a good evening.

Okay. Thanks, Michelle. Thanks, Bill.