The Rules Change in Retirement. Here's What That Actually Means.

We heard from a listener who has managed their own money for years and done well. So why would they need an advisor now that retirement is around the corner?

WAYS TO CONNECT:

Website: https://www.johnchoi.net/

Phone: 847-247-0850

Blog: https://bit.ly/3CNltG2

Transcript

SPEAKER_00 0:01

This week on Middle Class Millionaire, we heard from a listener who's managed their own money for years and done well, so why would they need an advisor? So we're going to dive into that conversation with John Choi here on Middle Class Millionaire.

SPEAKER_01 0:18

Becoming a millionaire isn't just about growing your money, it's also about protecting and preserving your wealth by using the right financial strategies for your situation. Welcome. This is Middle Class Millionaire with John Choi. John has his Master's of Science and Financial Services and is a certified financial planner and the president of Epiphany Capital.

SPEAKER_00 0:42

Everybody, welcome to the podcast. Thanks for hanging out with John and I as we talk investing finance and retirement. And a couple of weeks ago, John, we had an email question that had come in about, you know, should I fire my advisor? Because my performance wasn't kind of where I wanted it to be. We talked a little bit about that. This go around, it's, you know, kind of similar, right? Um, you know, they've done well for themselves from a DIY standpoint. So why need an advisor? And I think this is, and I kind of teed up before that at the end of the last session that this is maybe a surprising piece that people don't think about or talk about. There's so much tech and things available now, John, that it is easier to kind of build your wealth on your own. Do the DIY thing, right? But the preservation stage, aka retirement, is different. And there's a lot of different moving parts in there that can certainly trip you up. So we're going to talk about that this week. How you doing, my friend? You doing all right?

SPEAKER_02 1:33

I'm doing great. This is uh gonna be a topic I am gonna be passionate about, and I'm gonna bring it.

SPEAKER_00 1:38

Okay. Well, let me give you the email question and then I'll let you rip on it. So here's the question that came in. I've managed my money myself over the years, and I gotta say, I've done pretty well. Everybody tells me I should have a financial advisor at this stage of the game because I'm getting close to retirement, but I have trouble with the concept of turning it all over to somebody else since I've proven I can handle it. What's your argument, John, for why I should let someone else do it? Because going up the mountain and coming down the mountain are two separate skills. Big time.

SPEAKER_02 2:06

All right. So when you're accumulating assets, it's I don't want to say it's easy, it's simple. How's that? You put your you you you take a portion of your paycheck every month, you invest it in the market, whatever your risk tolerance is, you take a nap for 30 years, and voila, you've got a lot of money in your 401k. I don't know how many people that say I've only made$80,000 average over my career, and I've got like a million too in my 401k. I don't know how I accumulated this money. And I said, because you were consistent with it. Yeah, you uh did it every month, you didn't look back, you didn't stop these contributions, and you know it it grew over time, and compounding interest took the rest, uh took over uh on the rest. So that's how you did it on the accumulation phase. That's wonderful. Now, now what? Is it the same skill coming down the mountain? Uh there is uh two risks coming down the mountain that will decimate or that can decimate your portfolio. One is taxes and one is the sequence of returns risk. And uh have we covered sequence of returns risk, Mark?

SPEAKER_00 3:12

I think we've touched on it, but why don't you give us an overview again for folks that may not know?

SPEAKER_02 3:17

Okay. So if you take a look at uh sequence of returns, and that is when good returns come and when bad returns come. Because we know that market doesn't give us eight percent every year consistently, like eight, eight, eight. It doesn't do that. Right. It gives us negative 12, positive 25, minus three, positive 30, and so on and so forth. A good sequence of return is when you get good returns early and then bad returns late. And a bad sequence of return is flipped when you get bad returns early in your retirement and good returns later in your retirement.

SPEAKER_00 3:52

Yeah, and it wreaks real havoc if you if you retire in a bad market, right? Like think about the lost decade, for example, right?

SPEAKER_02 3:57

Yeah, yeah, yeah.

SPEAKER_00 3:58

If you retired in 2000, that was horrible. Um you get 10 years of basically, you know, just loss. Well, not only that, but the first three years were negative. Yeah, right?

SPEAKER_02 4:10

Yeah. So that that was uh that was not a good time to you had bad sequence of return risk. And I guess I'll tell you how to handle that.

SPEAKER_00 4:18

I can say, John, I guess to make that simple for people, let's just say you were doing the four percent rule. You had a million dollars and into your to that timeline to retire, you're pulling out 40 grand a year, but the market's down, you know, year over year. So it's compounding that you know, you're losing you're losing maybe you're saying maybe it's a seven or eight or nine or ten percent, you know, you know, pull out at that point.

SPEAKER_02 4:37

Yeah, it's a double whammy. So I I tell people you do not want to take money out of your market-based accounts after a down year. And then they say, well, okay, great genius. Um, where do we take the money from? Right, right. And I and I'll get to that in a little bit. Okay, right. Right. But the whole message is this it's a totally different skill set. The people that know what they're doing, they are working on the other side, the deacumulation or going down the mountainside. And I'll tell you a quick story. I do a four-hour class to teach financial advisors exactly how to decumulate someone's assets. And I said, look, you gotta provide a plan that shows the retiree how much are we pulling from what account in what year. Otherwise, it's just it's willy-nilly, it's by feel, and we can't do it by feel. So we get up there and we it's it's time for lunch. We have a speaker that uh from I forget what mutual fund, but we we have a speaker uh talking over lunch, and he's a young kid, he's like 25, 26. And he goes, you know, it's interesting you say that because he goes, let me tell you a story. And I go, okay. He goes, my dad recently retired, and he called up his broker or his advisor, and he said, Hey, now that I'm retiring, we need to do a uh have a separate conversation because my focus is now on income, not assets. And he goes, I was shocked at what the guy said to my dad. He goes, Yeah, we don't do that here. So uh that's not within my skill set. I don't know how to do it, and you're gonna have to find a different advisor. Now I was shocked because number one, he admitted it. Number two, he said you should find somebody else because it was out of his wheelhouse. And I respect the man for saying that, right? But you don't get you don't hear that very often. And it just goes to show that it is a different skill set. And thank goodness he recognized that and said, Yeah, that's a little bit beyond my expertise. You're gonna have to find a specialist to do that. So two different skill sets. I applaud the guy that said, not my, I'm staying in my lane, and that's not my lane, so go find somebody else.

SPEAKER_00 6:48

Well, let's talk about some of those skill sets because it's the complexity, John, of retirement, that changes, right? Again, if you're you know going up the hill, you're you know, even if you're going traditional and you're working a job 40 years and you're pumping away into the retirement account, you're growing the wealth pretty decently. Maybe you're doing a few extra things, maybe you're getting a little more complicated, whatever, that's fine. But retirement introduces that complexity, like Social Security timing or Medicare, or RMDs, or Irma surcharges, right? And how they all interact with each other. You already talked about sequence of return, but like there's a ton of other stuff.

SPEAKER_02 7:19

Okay, so this is what software doesn't do.

SPEAKER_00 7:22

Okay.

SPEAKER_02 7:22

There's um financial planning software, there's the big three, and they all do it the same way, retirement distribution. But what they recommend in the traditional way is, and this is the default. I don't know if you can change it. I don't know if you can override it in some of them, but here's how it goes. You have your taxable accounts, which is your you know, your non-qualified brokerage accounts, you have your tax-deferred bucket, which is your IRAs and your 401ks for lack of a better word, and then you have your tax-free bucket. These this is your Roth IRAs, this is your cash value life insurance, and maybe some muni bonds. Uh, that's kind of an asterisk behind there, but whatever. If I look at my book, and if um financial advisors are honest and they look at their book, this is how it breaks down. The average is about 10 to 15 percent in non-qualified brokerage accounts, about 80% is going to be in their tax-deferred accounts, which is their IRAs in 401ks, and then about 0 to 5% is gonna be in their Roth IRAs or cash value life insurance. Now, what software says is that when you retire and you need income, you're gonna withdraw from your taxable buckets first, and then you can uh you withdraw the from that every year until that gets depleted. Then you start hitting your tax deferred buckets, and then you go through and you deplete that, and then when that's gone, you go to your tax-free buckets and you withdraw from there. And then when that's gone, you have two choices you can either die or you can move in with your children. And most people would rather what, Mark?

SPEAKER_00 8:56

Uh actually, I probably die, actually. No, that's just a joke. I know I'm kidding, yeah.

SPEAKER_02 9:02

But if we're gonna manage for taxes, as you said, if we're gonna do Social Security timing, Medicare, and Irma penalties, how the heck are you going to manage your tax bracket in the middle where most of your money is when you're pulling out from your tax deferred accounts? Because every dollar that comes out of there is a dollar that adds to your gross income. This is the dumbest thing I've ever seen in software where you're doing it like that. I think the better way is, and I'm spilling on my secrets here. Okay, spill it. I think the better way is you pull the right amount from the right bucket so that you can control your AGI. Because everything, well, except for two things, but almost everything is AGI based. Your ability to deduct, your tax credits, your ARMA penalties, it's all some flavor, it's either AGI or some flavor of AGI, like modified adjusted gross income. So in the middle, if you're doing it the traditional way, there's no way you're gonna manage tax brackets. Because the holy grail of retirement planning, and I've said this before, is to get the highest paycheck at the lowest taxable income and control your tax brackets. There's no way you can do that if you do it the traditional software way.

SPEAKER_00 10:27

Yeah. And those aren't investment questions, John, right? No, those are playing.

SPEAKER_02 10:31

A totally different skill set. Yeah. And then here's my next question, and I am going to keep this a secret. Okay. Is okay, we're going to do it your way. We're going to pull the right amount from the right bucket. But what happens when we have a down year? What bucket do we pull from? Where do we pull it? Because you said that the last thing you should do is pull money after pull money out from a market-based investment after a down year. And I said, that's exactly what I said. So where do we get the money from, genius? Because we got to eat this year. Right. All right. And again, that answer is going to be gate cap. But talk to your advisor. How's that?

SPEAKER_00 11:10

Okay. Well, let's let's address the big piece of this email here that I think people struggle with, John. And this is the fear of turning it over to somebody, right? So I get it. It's your nest egg. You've worked your whole life, you've built it up, you've done a good job building it up, right? So you feel like, hey, I've got some, you know, I've got good control here. Um, and it's that fear of having somebody else do it that certainly a lot of people struggle with. And I get it. Nobody wants to be made-offed, right? Nobody wants to be taken in for a or taken for a ride. But I think, you know, you got to frame the question, I think, in in the right way. There's just so much you don't know. And this is why you can vet out the advisors and find the right one for you, find the right relationship, right? But there's so much you don't know that you really could screw yourself up. All that hard work that you did for 30 or 40 or 45 years, you may jack it up if you're not careful by trying to do the retirement part by yourself.

SPEAKER_02 12:00

Yeah, you don't know what you don't know.

SPEAKER_00 12:02

Yeah.

SPEAKER_02 12:03

You know, uh everyone talks about AI these days. And they what they say about AI is you gotta have the right prompts to get the great answer. Oh, it'll give you wrong answers all the time.

SPEAKER_00 12:13

Yeah.

SPEAKER_02 12:14

Right. But you got to have the right prompts. You know what they're saying is you gotta ask the right questions. Gee, that sounds like that's what prompts are.

SPEAKER_00 12:20

Yeah, that sounds like anything else in life, right?

SPEAKER_02 12:23

So and it and it and it extends to, as you said, everything else in life, especially retirement planning. You gotta ask the right questions. People don't even know the right questions to ask, they don't know what they don't know. Well, it's their first retirement, right? Well, yeah, it's your first retirement. Exactly. It's your first time. Um, and here's the thing. And my question back to the person that's asking me, Hey, uh, I don't want to turn it over. What should I do? And I and I will ask him this what's the alternative? Do it yourself, right? You're doing it all on your own. Okay, and how's that working out for you?

SPEAKER_00 12:56

So far, it's been pretty good, right? But again, I haven't got to the retirement phase.

SPEAKER_02 13:00

And I think that's what I'm saying is if you don't even know if you've considered this, it's like you're you're gonna get you're gonna get beat up if you don't work with somebody that's gonna be able to control it.

SPEAKER_00 13:11

And you don't want John, you don't want clients anyway, that are coming in and going, here's my box of crap, handle it, right? It's a collaborative effort. At least it should be right.

SPEAKER_02 13:20

You don't want it uh you don't want it too hands-off, but you don't want it two hands-on. It's as you say, it's a collaboration. Yeah, it's a partnership, and we're gonna get through this together because yeah, we have both you know, two extremes, right?

SPEAKER_00 13:33

So your advisor should not care more about your strategy than you do. It's your money, right? You've got to care the most, of course. But you want to work with someone who also uh shares your passion, cares, and wants to help you get it done and get it done right. Uh, but again, it's a collaborative thing. So I think a lot of times people struggle with that fear of handing it off to somebody, and it's like, well, you're not really complete, you're not you're not going hands off here. You know, you're just getting help with the heavy lifting.

SPEAKER_02 13:58

But if you have a good custodian, a solid custodian, a Schwab, a Fidelity, uh, you know, an altruist, uh, whoever, all the major broker dealers, that they're though those are fine. The people that got into trouble with Bernie Madoff is because he actually had had custody of the assets. Oh, yeah. He never wanted to give custody of the assets to anybody.

SPEAKER_00 14:20

Right. Yeah, those I think there's a lot of things in place to prevent that, but I think that's the mindset people jump to, right? I don't want to get taken advantage of, you know, and that's just a you know kind of the cliche term to use there.

SPEAKER_02 14:30

I mean, uh again, uh what I would do is uh at a minimum level, I would look at someone who is a certified financial planner, and then I would look at someone, you know, I I prefer someone local, to be honest with you. Yeah, um, you know, it's just my bias. And then after that, I would be like, okay, there's three CFP candidates that I'm looking at word of mouth, uh, meet with them, interview them, sure, yep, and see who you vibe with. That's really, really important.

SPEAKER_00 14:59

Yes. Yeah, and that's why advisors and so many industries and things offer consultations, complimentary reviews. It's to see, you know, it's a if it's a good fit both ways. It's not just one way either. You're not trying to nail down every person that comes in the door and have them be a client. It's got to be a good fit because you've got to be able to again collaborate and build this plan together and know that they're gonna help you know work the plan as well. You know, we can put all this effort in. Let's make sure we're, you know, using it.

SPEAKER_02 15:23

So and not with Zoom, it doesn't have to be local, right? I mean, I prefer local, but uh, I mean, I've got people, I do business with people that heck, I do business with you. Yeah, right. Right.

SPEAKER_00 15:35

And we're not and we're in two different states, but everything is with Zoom and it's great. Yeah, so yeah, I mean, and I think you know, everybody's got their their proclivities there, right? Whatever it is that you like. Uh, you know, sometimes people want to have you know, look somebody in the eye and shake their hand, and sometimes they're fine. Or maybe you start that local relationship and then you do, you know, part of the plan in retirement is to move someplace else, especially if you're in Chicago, right? You want to get out and get someplace warmer, uh, which certainly happens, right? Yeah. So, yeah, so lots of things there. But I think at the end of the day, you know, you know, this past month we've had some conversations here about, you know, needing an advisor. I think this is still one of those industries where there's a lot of value add with the right person, John, to help you, you know, take that level where you need it to be. Plus, do you want to manage all this stuff in retirement or actually enjoy being retired? That's another big piece. Yeah.

SPEAKER_02 16:21

Yeah. Go golf, go camping, go.

SPEAKER_00 16:24

The wife wants to hang out or the husband wants to hang out or whatever, right? So go do some things. Yeah. All right. Well, great stuff. So thanks for hanging out with us here on Middle Class Millionaire. If you need some help from John, again, reach out to him at johnchoy.net. Whether that's help with the uh CFP program, he is an instructor, or you know, just needs some help and advice about your own strategies. Reach out to him, johnchoy.net. That's johnchoi.net, and this is Middle Class Millionaire. Subscribe to us on Apple, Spotify, and so on and so forth. And we will catch you next time here on the podcast.

SPEAKER_02 16:52

It was a really fun conversation today.

SPEAKER_00 16:56

Absolutely, my friend. We'll see you next time. Take care. We'll catch you later on Middle Class Millionaire.

SPEAKER_02 17:00

Bye-bye, folks.

SPEAKER_01 17:06

Epiphany Capital is a registered investment advisor, RIA, located in the state of Illinois. Epiphany Capital provides investment advisory and related services for clients nationally. Epiphany Capital will maintain all applicable registration and licenses as required by various states in which Epiphany Capital conducts business. Epiphany Capital renders individualized responses to persons in a particular state only after complying with all regulatory requirements or pursuant to an applicable state exemption or exclusion.