How To Select Your Asset Allocation For An Early Retirement!

today's episode is all about asset allocation and asset location it might not sound as fun as the Netflix show you're watching but I hope today is equally if not more fun and I'm going to start with an example for you guys to understand why so client came to me they were 83 and they came and they said Ari how much should I have in equities what should be my asset allocation and I said you should have 100% and they're like what are you nuts I'm 83 I'm like it's a horrible recommendation like then why' you say it it's horrible for your neighbor that doesn't have two pensions so security rental income and inheritance that's coming in so for you you have enough that you're going to be okay meaning if you have $3 million in your portfolio if it went to zero I know you wouldn't be happy with me I understand that but you would be okay meaning you would be able to pay the bills you're still going to travel you're going to be okay your neighbor that does not have pensions and Social Security and Rental income they could not have this asset allocation meaning it would be way too risky because now they run a big risk which is markets go down they need to sell things at a lot which is going to impact their income for the rest of their retirement so the point of the little silly story there is even though it's true is I want to make sure you know don't have a cookie cutter approach to retirement planning specifically asset allocation so asset allocation is a fancy way of saying how much should be in equities and fixed income and cash and most advisers stop right there and go hey you should have 60 40 or 703 or 80 20 I don't subscribe to any of that I don't do this cookie cutter approach I think you need to go a whole lot deeper not because if you don't you won't be okay you would be okay you just be leaving a lot of money on the table so we're going to be exploring today what is the right way to think about this how much should I have and when is too much enough and all that important stuff that most people go hey I know I've been meaning to update my allocation and I just don't know how soon should I update it before I retire do I need to change anything right now all that good stuff so I'm going to walk you guys through how to do that now we're always as I mention going to start with fun reviews of the week and keep this engaging as much as I possibly can because look I get it now a lot of you are awesome you're like listen AR I wake up and I'm like oh my God it's Monday I've got an episode of early retirement and I'm excited now a lot of you do send me messages going hey it's really helpful I enjoy it but you know I do want to watch my Netflix show and I'm not going to sit here and go hey my enter my content's more entertaining than that I hope it's educational but I also don't want you going oh well it's kind of just I'm only going to get educated and I'm not going to kind of be entertained along the way so I do my best to keep a balance of both of those so what I want to do today I've got a few fun things to share now I just gave you that kind of little s story there um but I'm going to go a little deeper while I pull something up because here's what I want you guys to know asset allocation is level one asset location is Level Two let me explain what this is so you guys fully understand and if this is your first time to the show welcome for most of you you guys are longtime listeners but if you're new my name is Ari TBL I'm a certified financial planner I am the host of this podcast early retirement and I'm the vice president at root and I want to make sure you are optimizing what you've worked so hard for so thank you for being here I know there's a lot of different podcasts out there and you guys have chose to be with mine so thank you very much now I'm pulling something up but while I pull this up I want to show you guys a few different things so here's what I'm excited to talk about today um sometimes while I'm speaking you know I do my outlines for the episodes and then sometimes I'm like yep screw that there's something else I want to show you guys and I think it's going to resonate more um which is why hopefully you're tuning in so I'm going to explain asset location and then I'm going to go over a few fun things I just thought of I want to show you guys so in terms of asset location so asset allocation some of you are like hey did you just say the same thing no different things asset allocation how much should be an equities fixed income cash and here's what most people do and it's a mistake not a mistake in terms of they're not going to be okay a mistake in terms of not optimizing so here's the common mistake well maybe I should have 60% equities and 40% fixed income or 40% bonds and you know maybe 5% in cash and some of you are like all right that's 105% I'm like I know I'm just trying to keep you guys in your toes all right so 60% equities 35% fixed income 5% cash some of you are like no no no I'm 8020 some of you are like no I'm 50/50 some of you are like I'm a 100 zero um you're all wrong and here's why not be you're all not actually wrong but here's what I mean by that you don't want to say okay great I'm 8020 let's keep it just keep it really simple let's assume you're 8020 80% equities 20% bonds just I know it goes deep already some of you are going to send me an email what about inflation protected securities what about treasury bonds what about International it's all included all right so relax um here's my point here I want to make sure you guys are optimizing to the umth degree and I'm going to show you how to do that right now so most of you go yep I'm 8020 let's asse you have a million dollar okay so you have $800,000 growing for you INE equities and 200,000 fixed income most of you also don't just have one account you have an IRA and a Roth IRA and a 401k and a brokerage account and inheritance which might be an inherited IRA maybe there's a certain time frame you got to withdraw from it you might have a lot of different accounts you might also have pension and Rental income and Social Security so some of you right now are like oh my God this is a lot it is a lot we're going to break it down for you so most people go got it I'm 8020 okay 8020 got it 8020 and they go do that in their Ira in their Roth IRA in their brokerage account and their 41k they put 8020 in every single one so that they have 8020 that's not the right way to do it and here's why they are not being tax efficient by doing that for example your Roth IRA or Roth 401k is the best account you have for taxfree growth you're going to touch that last I want it to compound taxfree forever I don't want a single bond in your Roth IR aray if you have an adviser right now with a and you're looking at your Roth IRA and you're like hey why do I have anything that's not growing like crazy in here please ask them for me and you can tell them I sent you for that um that is to me the the loow hanging fruit easiest thing you want to tackle like yesterday that Roth should be growing like crazy so if some of you are like hey my Roth hasn't grown much that's a big problem even if some some of you might be going hey it's fluctuating like crazy when I look at it good it's supposed to be I need that growing like crazy that should be 100% equities okay so let's keep this million dollar example let's assume someone's got 8020 in there so let's assume the Roth IRA has 100,000 they might have 880,000 equities 20,000 fixed income move the 20,000 fixed income all into equities 100% of the Roth area should be growing for you okay that's number one now let's assume that this person has 100,000 Roth and 500,000 in their brokery and 400,000 in a pre-tax Ira just to keep it simple okay 500,000 in a brokerage account some of you are like hey Ari maybe I should make it more conservative but like I bought Apple stock for 10,000 now it's worth 500,000 so like I don't want to just go sell it just to have a balanced portfolio and I'm like good don't you need to be a whole lot more careful when you have a brokerage account don't just go sell something just to get to the ideal quote unquote balanced approach of 5050 or 6040 don't do that it's got to be dependent but for a lot of my clients what I'll do I have one client that has 3 million of Microsoft I'm like I need you to sell at a minimum $400,000 because I need this amount to help us bridge the gap from now before you retire because if Microsoft goes down I don't want us doing Port planning impacting you which might mean you have to go back to work if we don't do this like Ari but I'm going to have to pay taxes I go you're right that's why we're not doing it on the whole thing you're doing it on this small portion for this particular amount of time they're like okay got it now when we we sold that 400,000 that's all going in super safe assets because that's going to help us bridge the gap the next few years I don't want it fluctuating think about it like buying a home I don't want you to have all these investment proceeds and you put them into the market and you get unlucky and the Market's down and now you can't buy your dream home like don't even subject yourself to that risk what I want you to do is go okay got it following so far this pre-tax account this pre-tax Ira or 401K um that's almost in the middle there so think about like your brokerage account on paper should be the least risky because that's going to help you bridge the gap until you tap into retirement accounts so the bridge account that 401k excuse me the bridge account The Brokerage I call it the superhero and some one of you sent me a cape I got to put it on one of these episodes called the superhero which is like the coolest gift ever so you guys need to have the brokerage account be the least risky but don't just get there by simply selling tax you know selling a stock that creates a huge tax spill so don't do that but brokerage account on paper should be the least risky then your pre-tax account so your Ira or 41k should that should next once again required distributions are going to hit that account so as it keeps growing in the future you're going to pay a lot of taxes on it I still want it growing for you one of the funniest comments I ever heard someone was like Hey all right I heard um you say on the podcast rmds those require distributions in the future they're going to crush me I'm like they will they're like okay so I thought about it um I think I should put it in all cash I'm like yeah it's going to crush you but you're going to benefit more from it still growing and they're like yeah but I I I beat the system like the distributions aren't going to be that big I'm like that's the equivalent of saying no to a bonus because you're going to be paying more in taxes they're like oh I'm like okay so pre-tax account that should be growing for you but not as much as your Roth IRA so you might have an overall 80% equities 20% fixed income but your Roth IRA is 100% in equities your pre-tax accounts might actually look like a 7030 your brokerage account might look like a 50/50 and it might all come out to 8020 so most people simply go 8020 8020 8020 in every single account don't do that um if your adviser is currently executing this or if you're your own adviser um it's hard to know what this is so one of the benefits of what we're doing of course I have my new early retirement Academy you're able to see all of that in live time and as markets change you can update that that to me is true rebalancing most people rebalance every quarter or every you know twice a year or whatever it is but they're only rebalancing because they think they should they don't actually know the degree they should rebalance which is beyond simply okay let's assume keep it easier for you guys um because it's hard to follow trust me I get this stuff especially if you're listening to it if you're watching it maybe a little easier but if you're listening kudos to you um I try to keep it as engaging as I can so let's assume you have 50/50 50% equities 50% fixed income and let's assume markets go up by I don't know 10% okay great but only on the equity side well if markets go up by 10% you now have 60% equities and 40% fixed income so most of you are like okay great I need to go sell to get back to the 50/50 so that you're in alignment with your asset allocation which is great and that would be correct but some of you you you rebalance every quarter or you rebalance but you're not rebalancing the correct way you're not rebalancing across various accounts let me give you a better example let's assume you have a Roth IRA that has International companies and domestic just keep it easy and it's 50/50 what if you look at your account and it says 100% equities you might look and go I don't got to rebalance why would I rebalance it says 100% equities um I'm going to teach you a little thing about investing Ari you know and then you're going to see 6 months later it still says 100% equities you're like why would I rebalance anything it's still 100% well the reason you'd rebalance is international may have gone on a tear and now International that used to be worth 50% is now worth 80% and domestic is worth 20% and you might look and go I don't need to rebalance I've got 100% equities you do but you don't have 100% equities evenly you've got now what used to be 50% in international now 80% and what if markets don't perform well and now International takes a big hit um because you didn't rebalance properly so rebalancing occurs even with you have 100% Equity so the point here asset allocation is saying great how much should be in equities in fixed income in bonds across different kind of accounts what should be the overall allocation asset location says let's go deeper let's understand how much should be in Roth equities is it 100% is it 95% how much of my pre-tax accounts should it be 70% should it be 60% how soon am I going to retire how much income do I need this guys this is the next level of planning most people are like I've got 5050 or 6040 and they stop there it doesn't go deep enough so the comments that I wanted to bring up for you guys at the beginning um is there's a few but I've got them pulled up I'm going to show them so if you're on YouTube you're going to be able to see this on your screen right now um which is I had two two specific comments I want to bring up um the first one here um is regarding healthcare you're like what does Healthcare have to do with any of this let's assume um you're retiring early and I'm just going to use an example let's assume you're 53 and you're like hey I need to bridge the gap from 55 because I'm going to be on COBRA or I'm going to do something like that with my employer but from 55 until 65 like I don't know how I'm going to pay for this so you might have additional expenses you might have Healthcare you might have travel you might be you know spending more on a home Remodel and if you're doing all that at the same time markets are going down what I don't want you to do is get unlucky because markets perform poorly and it's the same time you know you've got your energy and your health and you want to do a lot of the fun stuff I talk about great I want you to do it also but if you have too much in equities and now all of a sudden markets take a downturn and you've got all these expenses well now you're subjecting yourself to a big risk so I'm bringing up healthcare because most people overlook this aspect of an additional expense in retirement and so when does it make sense to kind of start tweaking the portfolio generally if you have an asset allocation um of 100% equities I have a lot of clients with 100% equities all the way up until 5 years out from retirement because the average Market downturn is two and two and a half years but sometimes it can take five plus years so they're like hey even if markets take a downturn I've got the ability to to be okay I can weather these downturns and I'm still going to add new money when markets are going down once you're 5 years out from retirement that's when you want to be really intentional up until then I have a lot of clients I'd say a large majority with 100% equities growing for them now you might be going hey I'm just not comfortable with markets going down 40% and seeing that happen to my million dollars great then don't do it it's about understanding how much would you be comfortable with and how much income do you want to create in retirement I have one client that's the sweetest lady ever she was a teacher for 35 years she's like all right I get the logic I understand where you're coming from I know what I should be doing but I am just going to it's going to irk me every time I look at my account and markets are down 20% so I know I'm leaving money on the table and I'm okay with it and it's the same reason that I'm going to work three more years even though I know I'm in a good spot because I want that extra buffer that's how she likes to approach it other people like to approach it differently and they like to go whoa whoa whoa for me I don't want to work longer than I need to I'm okay with the volatility if you tell me I'm in a good spot so to me this is important now one of the comments and this is the one kind of not really a hate comment but this from Chris bird one I'm going to put it on my screen here if you're just listening that's okay too he says I'm so glad I don't need 100,000 a year to enjoy my amazing life Chris good for you like awesome you don't need 100,000 a year money doesn't buy happiness now it can create a lot of peace of mind and some people might go you know 100,000 is great but like I can't do everything I want to do just because they want to spend 100,000 and you don't doesn't mean you're wrong so like good for you like you don't need 100,000 you have an amazing life you don't need that like to me you did awesome other people don't feel bad if you want to excuse me don't feel bad if you want to spend $400,000 a year I have clients that want to spend a crazy amount of money and they're like listen I'm happy to work longer if it means I I can spend what I want to spend and they love luxury lifestyle like great good for them some of you are like Chris bird here who's like listen I I don't need 100,000 a year you give me 60,000 a year I can do everything I want to do and travel and I'm going to be happy I'm like great then you can retire earlier um so the point here is it's not really a hate comment but you've got options don't forget about Healthcare and then finally what you want to spend is very different from your neighbor your cooworker so this is how to Think Through asset allocation asset location um if you guys want a holistic strategy and help on asset allocation and tax and withdraw and estate and inheritance and connecting all the dots that's why I exist I don't simply go hey pick this stock for those that do reach out and go hey I just want investment guidance I'm like great there are 10 firms down the street that can help with that I'll help you pick one of them it's not us they're like but then you can't work with me I go that's correct like but but I want your help I go too bad like but I I go not because I'm mean but because we only do holistic planning it's everything it's tax it's withdrawal it's estate it's inheritance and you don't even want to work with me some of you think you do you're like hey Ari could you be my advisor I'm like you don't want me to be they're like why not I'm like I've got all the designations and cfp and NBA and I'm young and they're like you're smart I go how many doctors have you met that are MDS that you wouldn't let touch your body and they're like what I go just because someone's got designations doesn't mean hire them I don't have the experience I have a lot of advisers um that are way smarter than me and I want you working with them on an ongoing basis who have been through the downturns that understand what it looks like but the cool thing about root to me my opinion the coolest thing I'll brag about us briefly is the people that are reaching out are like listen I have an adviser today about 80% of people do I have an adviser today but I'm just not getting the holistic guidance I'm paying 1% a year or so and I'm just not getting guidance I'm like okay so here's someone listening to our content going hey I I want better planning then here's an adviser that's currently working at Fidelity or Vanguard or Schwab or Merill going hey I currently work here they give me a quota of how many people I have to work with they're telling me that you know for example I have to take on X number of people every month and I have to have X amount of meetings every day and you know there's a you know they don't specifically let me do what I want to do which is tax planning or early retirement specific planning or whatever it is they just tell me to work with everyone and if I work with everyone I can't really specialize so here's an adviser that's watching our content listening begging to give this type of guidance to someone who wants it so you guys almost have like a secret language where you're begging for this guidance they're begging to give it to you you guys both just want a home you want good holistic planning they want to give it to you and that's their only job their job is to advise they're not also making videos and podcast and content compliance running the business that's what I'm doing I make all this stuff so you guys reach out and go wow that's exactly my situation I want that guidance and then I want you working with our amazing advisers that's only job is to watch your money all day every day I don't want them also doing other stuff it's what makes us different so some people like hey could I like meet one of your advisers I'm like you can meet them online but you can't meet with them right now because they're busy watching people's money all day and that's what I want them doing I don't want your advisor also potentially bringing on new clients and the reason I tell it to everyone in this way is my parents were number 187 and you're like what do you mean so my parents were burned by a few advisers and there was 250 clients with that one advisor they were number 187 I don't know 187 people by name so I don't know how you could possibly give guidance to 187 people so we have a limit of 75 to 100 clients that work with any one adviser because we ask a lot more of our advisor so if you're looking for this type of guidance you're in the right spot we do have a wait list not because we're mean but we limit the number of people that come on in any given month so that you're getting the exact experience you're looking for so hopefully if this type of content resonates with you holistic early retirement planning I encourage you to reach out and I'll see you guys next week

Channel: Ari Taublieb, CFP®

Views: 8,025

Keywords: early retirement, financial planning, ari taublieb, ari taublieb retire early, early retire, retire early, medicare, root financial, james conole retirement, retirement specialist, retirement planning, asset location, asset allocation, managing withdrawals, assets allocation for early retirement, how to do assets allocation to retire early, asset allocation in retirement, asset allocation for retirees, proper asset allocation, asset allocation strategy for early retirement

Id: zCVxJWF6E4w

Length: 19min 25sec (1165 seconds)

Published: Wed Jun 05 2024