The Real Reason Your Investing Strategy Should Change Before You Retire with Mike Guthrie, CIMA® – Ep 114

The investment strategy that helped you build your retirement savings may not be the same strategy you need once you retire. When you’re working and consistently contributing to your portfolio, growth is typically the primary goal. But once those contributions stop and withdrawals begin, market volatility can have a very different impact on your financial future.

In this episode, SHP Financial co-founder Matthew Peck is joined by Mike Guthrie, to discuss the shift from accumulating wealth to distributing it in retirement. They explain why investors should start preparing for this transition several years before leaving the workforce, how sequence-of-returns risk can affect a retirement portfolio, and why an investment strategy that once made sense may need to evolve as retirement approaches.

Matt and Mike also break down the roles of safety, income, and growth within a retirement portfolio and how each can help give retirees more options when markets fluctuate. Ultimately, the right mix will look different for everyone, which is why your investments should be built around your spending needs, income, risk tolerance, longevity, and broader retirement plan.

In this podcast interview, you’ll learn:

• Why investing for retirement is different from investing during retirement.
• When you should start repositioning your portfolio before retirement.
• How sequence-of-returns risk can impact your retirement savings.
• Why your current 401(k) may carry more risk than you realize.
• How safety, income, and growth can serve different roles in retirement.
• Why your investment strategy should be built around your broader financial plan.

Resources

• Medicare
• Social Security
• Monte Carlo simulation
• Bill Chisholm
• Brad Stevens

Inspiring Quotes

• “While you’re saving and accumulating, volatility is your friend.” – Mike Guthrie

• “You’ve got to get the plan in place, otherwise, you’re chasing your tail if you haven’t thought about it and you’re just, ‘Hey, I’m done. I’ve got enough money. We’ll be great,’ which is not a bad place to be, but it’s probably not reality.” – Mike Guthrie

• “When you start to think about this planning, it’s really getting yourself in a position where you’re not pigeonholed into one particular thing. You’ve got options.” – Mike Guthrie

• “Before you make that leap of faith, you have a plan that’s based on these buckets. You have time to construct it,  then you can stress test it and say, “Yes, I feel good because I’m in that 95, 98, 99% chance world, and I feel good to making that leap.” – Matthew Peck

[INTERVIEW]

Matthew Peck: Welcome, everyone, to another edition of SHP Financial’s Retirement Roadmap podcast. I’m your host today, Matt Peck. We often talk a lot about the transition from retirement, from working to retirement, and all of the mental gymnastics that you have to do. You suddenly go from working 9:00 to 5:00 to not having a routine right off the bat. Your colleagues, who you’re working with, you don’t see that who you’ve been spending a lot of time with suddenly you don’t see as much, or if at all. But there’s also a dramatic change in how you invest, and what you have done to get you to that point is almost the complete opposite of what you need to do as you transition from the accumulation phase to the distribution phase.

Here on the podcast to discuss this today and to kind of go into greater detail is a repeat guest, a fan favorite, some may say.

Mike Guthrie: If you will.

Matthew Peck: If you will, absolutely. That is our good friend, Mike Guthrie. So, welcome back to the show, Mike.

Mike Guthrie: Thanks, Matt. Appreciate it.

Matthew Peck: Anytime, my friend. So, okay. So, talk to me, just start off with you meet a client, and they’re just about to… They’re thinking about retirement, right? And forget about Medicare, Social Security, or whatever that is. Obviously, there’s a lot of nitty-gritty paid time off and when you’re about to retire. But what’s the first thing you tell them about that transition, about how you change your mindset?

Mike Guthrie: Matt, I think it goes from you’re working, you’re saving money, you’re just putting things away, and your main goal of your money at that point, from an investment standpoint, is to grow it, right? And so, a lot of the questions we get from clients more or, and prospective clients as well, when we’re talking to them is should I invest the same way that I have been when I’m in retirement, right? And we’ve worked with thousands of clients, I imagine, if we added them all up across the firm. I wouldn’t say it’s an unequivocal no, but it’s pretty close. No, you probably shouldn’t be investing your money the same way that you have been while you’re working, because there’s a shift, right?

Your money had a job while you were saving, and that was to grow it. When you shift into retirement, your money probably has at least two to three jobs. You should have something that’s safe, something that generates some income, and growth as well. But it’s really a shift in mindset because, again, that volatility of the market, we can get into some different numbers as well, is no longer your friend. But it’s also not a bug of the system, right? It’s reality. The markets are going to go up and down, and how you start to position your assets as it relates to an overall financial plan, how do I take that piece of the plan that is focused on investments and make sure that, one, I’ve got it positioned in the right way that I don’t leave money on the table if I’m looking to spend and enjoy retirement, and also not to run out of money. So, how do we start to position away from maybe traditional stocks, bonds, and cash, and use different buckets to help your money kind of grow?

Matthew Peck: Absolutely. And let me kind of pick that up because you mentioned about positioning different assets. And we’ll get into how you do that or what to do or some thoughts to consider. But what about when? Like, if someone, is it six months away from retirement? Is it six years away from retirement? Is there a certain time that you think that people really need to take a hard look at? Or is it two years out? Like, what would you say?

Mike Guthrie: I mean, I think the answer with a lot of stuff that we do is it depends, but I would say if you’re thinking of retiring in the next five years or so, you really should start to get a handle on this. Okay, where is everything positioned, and how do I start to build for when I do finally pull the rip cord and leave work, that I’m not then starting to plan, right? I get to that point, I’ve got all my assets where they are. Now, let’s start to diversify. No, it should be set up for the time when you’re looking to officially retire. And I would say, again, I think within five years you got to start thinking about it. But potentially when you’re actually doing the planning, at least a couple, right? I don’t know how you feel about that.

But if you’re 60 and you’re thinking of retiring at 65, I think it’s a really smart time to start thinking about all those different things because you don’t want to have it hit you, retire, and then meet with somebody to say, “Hey, help me figure this out,” then the markets are going crazy, and you haven’t been positioned in a way to do it.

Matthew Peck: Okay. Yeah. So, that’s a good idea. So, anywhere from three to five years, let’s say, prior to. And it certainly, as you said, it depends because there are so much other factors at work that are there. So, here we have a client, and again, anywhere from six months to six years from retirement and beginning to look at it, right? And you said earlier about how money’s going to have suddenly, from a job of accumulating. Now, it’s going to have more jobs. So, explain that a little bit further.

Mike Guthrie: Yeah, maybe even just take a step back and think about when you’re working and you’re saving, and what the job of your kind of savings is at that point, which is primarily to grow And if you think of where money grows and what the best rate of return potentially is, it’s stocks, right? Not an endorsement to own just stocks, but nonetheless, that’s where your money probably has the best chance to grow. And even if you think about it in the context of, like, the S&P 500. And let’s go back to 1976. I was not in the business in 1976.

Matthew Peck: Well, wait. What? 1976? Yeah.

Mike Guthrie: I was not in the business.

Matthew Peck: No, to be clear?

Mike Guthrie: Yeah, to be clear.

Matthew Peck: Are you sure?

Mike Guthrie: I had not started yet.

Matthew Peck: Are you sure?

Mike Guthrie: Close. Within a couple of months.

Matthew Peck: Okay. Yeah. But okay, let’s go back to ’76. Yeah, all joking aside.

Mike Guthrie: All joking aside. So, from ’76 to June of this year, the S&P 500 has averaged about 12.1%, right?

Matthew Peck: Which is okay. That sounds good.

Mike Guthrie: Sounds good, right? 12.1% is fantastic, right? The interesting thing, though, is that it’s never actually returned 12.1% in any given year. But if you’re growing your money over time, and in 50 years or 30 years of working, and you’re averaging about 12.1%, that’s pretty good. In fact, if you just think of that timeframe, if you started investing $1,000 a year for 50 years and just put it in the S&P 500, you’d have about 2.5 million-ish saved up just by putting $1,000. You put in 50,000 and let it grow and didn’t do anything with it. Now you have 2.5 million, which is pretty powerful, right?

Matthew Peck: Absolutely.

Mike Guthrie: But again, because of the fact that the market hasn’t actually returned 12% a year, you have some pretty strong outliers there, right? The best year the S&P ever had was up about 60%.

Matthew Peck: Wow.

Mike Guthrie: It was in ’82 to ’83. Also was not yet in the business, but getting closer, right?

Matthew Peck: You’re setting yourself up.

Mike Guthrie: I’m setting myself, yeah, yeah.

Matthew Peck: Not to fail, but for me to make a bad…

Mike Guthrie: To make fun of me.

Matthew Peck: Yes, absolutely. Okay. But keep on going. But that was a good year. 60%, that was a good year.

Mike Guthrie: The tide’s going out up there, Matt. Eventually you’ll be…

Matthew Peck: Yeah, yeah, don’t worry. Yeah. The tide’s receding, as we say.

Mike Guthrie: Yeah. The worst year, the S&P was down almost 43%.

Matthew Peck: Jeez.

Mike Guthrie: And that was in ’08 timeframe, you know, the financial crisis. So, if you’re thinking about that and that type of volatility and if you’re retiring in October of 2007 and you haven’t done any of this planning, and then suddenly your portfolio’s down 43%, that’s impactful.

Matthew Peck: Yeah. And so, I was going to chime in on about the averages, right? People hear about averages and about how S&P returned X, and S&P returned Y, but it’s really a great point about an average, right, about how it could be up 60, down 40. Up 20, down 20. I mean, that 12%, you eventually get to that 12%. And as you said, I mean, I’ve seen a study where about three-quarters of the time, about 75% of the time, the market is up. Okay? So, any given year, you have roughly about a 75% chance that in that year the market’s going to be positive. But there’s also a quarter of the time that it’s not going to be, right? And how bad is that quarter going to be? What impact does that have on your average? What average gain, of course? And then what impact does that have obviously on your retirement?

Because you’re pumping money in during all of those years, during all of those sort of average years. And now suddenly, okay, we have a 25% chance that you’re pulling money out in a down year. And how bad is that down year, which could be as bad to potentially as 43%.

Mike Guthrie: Because the flip side of that coin is, like, if you think about, okay, that’s an aggressive growth vehicle, the S&P 500. Although it’s diversified, but you would categorize it as aggressive if all your money was in the S&P. The flip side of the coin, one of the safer areas to look about investing is, like, one-month T-bills, Treasury securities. Same timeframe, ‘76 to June. That’s returned about 4.25%. So, a T-bill over that 50-year time period has returned 4.25%, which isn’t a great number. If you think of that same scenario, that $50,000 that you invest over that timeframe is now about 162,000 as opposed to 2.5 million. So, while you’re saving, that’s probably not a great place to be.

But the upshot of that is the best return of that T-bill over time, one year, is about 15%, which again, which is pretty good, which is good, but not great, 4.25%. Excuse me, 15%. The worst timeframe was positive, 0.01%. So, over that 50-year time period, it never had a negative return. Now, when you’re accumulating, that 4.25% is not great because you’re not left with enough. But now that you’ve stopped working, maybe it’s time to start thinking about putting some money into an asset that is protected, that over a period of time you’re giving up the growth, but you’re also protecting to the downside, so you’re not having that wide swing of volatility. While you’re saving and accumulating, volatility is your friend, right? Because you’re putting money in each month, your 401(k) deposits, however you’re doing it, your dollar-cost averaging, and you’re getting that 12.5% average rate of return.

Now that you’re retired and you’ve stopped working and you’ve stopped contributing those swings, you just can’t maintain it. So, how much do you think of your million-dollar, two-million-dollar portfolio makes sense to put in some type of safe bucket? And that varies to everybody, right? And you’ve met with enough folks, and you could pull down the textbook and probably find a definition. But just for example’s sake, let’s say you said, “I’ve got a million dollars,” just the math is easier, “And I want to take a percentage, and have about a year’s worth of expenses saved up.”

So, what is that number? Is it 70,000? Is it 100,000? Is it 150,000? So, that each client’s a little different. And maybe taking that portion of the overall portfolio and saying, “Okay, let’s protect a year’s worth of expenses in something that’s not going to be volatile,” right? That’s just steady as she goes. It doesn’t have to be T-bills, but something that’s safe. Because again, you don’t want to be forced to sell something that’s down to fund your lifestyle while you’re in retirement. Does that make sense?

Matthew Peck: Well, I was going to say, even before we got there I wanted to interject about how what… I think one of the biggest risks that people have, or that they don’t know that they have is that they may have old 401(k)s or even existing 401(k)s, 403(b)s, that they’re contributing to, right? So, here they are three years out, five years out, six months out, whatever that may be, and they’ve never updated the risk profile in their 401(k). So, here they might be 60 years old, but they have the risk profile in their 401(k) of a 25-year-old, right?

Mike Guthrie: Yeah, we hear that all the time, like when you sit down with folks, like, “Talk to me about your investments.” When you’re like, “Oh, we’re conservative,” and then you look at the investments of something they haven’t looked at in a while, and in fact, they’re like aggressive, not just aggressive, but very aggressive. And it’s eye-opening, like when you put that in there and say, “Look, this has done great up to this point, but you’re not conservative at all based on your investments. So, let’s figure this out.” Because if you think you’re one way and you’re another, that could have huge impacts if you’re not paying attention to it.

Matthew Peck: And that’s what’s so, yeah, sort of like kind of frustrating about it in a certain way, and just in the sense that, okay, volatility’s my friend, as you were saying, during your accumulation phase. So, volatility is your friend. You want dips to happen because you’re putting money in, and you’re reinvesting on a monthly basis, if not getting a match from your employer. So, that positioning is really, really good, so you should be in that position, right? And then suddenly, okay, not suddenly. Time flies. But time goes by really, really fast. Again, no pun intended there either. And now suddenly, okay, now you’re that three years away from retirement, and the position that was exactly where you should have been now is almost the exact opposite, or you have to take a really, really hard look at it very fast, or certainly you don’t want to get caught flat-footed if the markets are down at that point.

And so, you need to take that sort of S&P 500 fund or that more equity-based, more stock-based portfolio, and you need to diversify it even further, right? And so, you talked a little bit about the different buckets and whatnot. So, now let’s take that 401(k) that people have not addressed for too long. And so, how do you kind of say, okay, where should it go?

Mike Guthrie: Yeah, sure. And even just to, for just a quick example to kind of put a point on that diversification, let’s just say, for example, it’s early or late 2007, and you’re thinking about retiring, and you officially retire in 2008, and you have a million-dollar portfolio. And you need $70,000 off of that to do what you want to do. So, 7%. That might be a little bit high, but regardless, the math is easier if it’s 7%, right? So, you’re taking $70,000 off of that portfolio, and you’re very aggressively positioned. In ’08, if you remember, the market’s down 43%. So, if the market’s down 43% and then you’re taking out an additional 70, you’re really down 50%. So, now you have a half-a-million-dollar portfolio that was a million a year ago, and guess what you need?

Matthew Peck: $70,000.

Mike Guthrie: $70,000.

Matthew Peck: Right. Absolutely, yeah. The bills don’t stop.

Mike Guthrie: So, instead of taking… Right.

Matthew Peck: Whether it’s volatile or not or…

Mike Guthrie: Yeah, your bills don’t go down 43%, right?

Matthew Peck: Yeah, whether it’s a bull market or a bear market, your bills are still coming in monthly.

Mike Guthrie: So, instead of taking 7%, now you need 14. So, 7% in a market that’s averaged 12.5%, it’s probably going to work. But 7% in a market that’s down 43% and just the bad timing of the year you decided to retire, because it’s going to happen. Although we’ve been saying that for a while and it hasn’t, but it will happen at some point. The market will go down. and if it just happens to be the year that you did it, like, there’s no… You can’t get a do-over to say, “Hey, well, no, no, let’s go back. Give me that money back, and we’ll just start over.” No, you have to be positioned to begin with. So, when you’re thinking about that, to your question, like, how do you start to bucket out what goes where, it’s really an understanding of what your expenses are, what’s your guaranteed money coming in, if you’ve got Social Security or a pension and things along those lines, and then figure out what that gap is between income and expenses.

And then say, okay, now you’ve got this great… You’ve done an excellent job saving. Congrats. You’ve got a million, $2 million portfolio. How much do we want to make sure that is there that you’re not forced to do anything you wouldn’t otherwise do to get some money? Like, is it in cash? Is it in T-bills? Is it safe? You might have come up with an idea that, “Hey, I’m making Social Security, but I was making pretty good income, and now I’m just making Social Security. It’s great, but it’s definitely dropped, and I need to fill that bucket. But I would feel a hell of a lot better if I had an extra couple thousand dollars a month or $1,000 a month of guaranteed income for now or beyond the rest of my life.”

Are there things that you could build to do that? Sure. There’s a whole sorts of solutions that can help to do that. So, how much of the 2 million goes there? And then the rest typically stays in growth, right? Because hopefully, if you’re in your early 60s, you’re retiring, you’re looking at a 30-year retirement. Particularly if you’re married, somebody’s living probably 30 years, the likelihood, so that money does need to continue to grow and at least keep pace with inflation. So, that growth bucket then is diversified as well. So, you’re giving yourself options as to where to pull money from when you need it.

Matthew Peck: Well, and I think, too, we’ll go back to those buckets, almost like the investments themselves, right? Like, what are safe “investments” to have in your safety bucket for emergencies? And then just stylus, or not style, like what type of tools are in that toolkit?

Mike Guthrie: Sure.

Matthew Peck: Same idea, income, what type of tools or products are in that toolkit? And then growth, what type of strategies are in that toolkit? I do want to go back to you mentioned about having a million dollars and withdrawing $70,000. That nice little fancy term for all of our listeners is what’s called sequence of return risks, right? What is the sequence of return? And what is the impact on that million dollars that you entered retirement with? Where if you have a million dollars and you earn 7% and you take out 7%, okay, great. You have a million dollars in your flat for the year, which is okay because you lived off of it.

But if the return is now suddenly negative 30%, well, the portfolio obviously gets impacted, and now suddenly your withdrawal percentage, what you were trying to withdraw, like you said, jumps from 7% per year. Now, it’s maybe 10% per year, and your portfolio could potentially not recover at all. And I mean, I’m not sure if… I mean, I certainly have one story that was always in my mind. I mean, thankfully it wasn’t an SHP client, but it was sort of a friend of a friend that was just saying about how he bumped into a buddy that retired kind of like in 2006. And about 10 years later, that guy walked right through the door, right back through the door of where they were working.

And they were like, “You know, Steve, what are you doing here? Blah, blah, blah.” And he’s just like, “Yeah, ’08 happened, and ’09 happened.”

Mike Guthrie: Yeah. Hopefully, he didn’t have a broom in his hand. Hopefully.

Matthew Peck: But it just gave the idea that this guy in his mid-70s had to come out of retirement.

Mike Guthrie: Right. And part of the issue too that you run into, and I’m sure you do and I do as well, is that because the markets have done so well, right, and you might come in with a portfolio that has a concentration of five stocks that have just done exceptionally well the last five years, 10 years even, and recency bias is, well, they’re just going to keep going up. They’ve done so well, so why would I get out of these? Like, it doesn’t make any sense. Of course, a concentrated portfolio like that is going to go down more than the S&P, right? So, you can imagine people, particularly like in ’08 when the market was down so much, that you came in with five, six stocks that had just done so well, and they’re like, “I’m not going to sell them. These things have been killing it for me for the last five years.” And then it happened overnight. It wasn’t a slow decline. You were there.

Matthew Peck: Yeah, absolutely.

Mike Guthrie: Yes. It pretty much was like within a few weeks, the market was down 43%. And if you hadn’t positioned yourself to absorb that by having those buckets, you’re back to work.

Matthew Peck: Well, and that’s certainly like when I heard that story about it actually happening, I was like, “This wasn’t just hypothetical anymore.” This wasn’t just, “Okay, hypothetically, the sequence of return risks can cause you to literally have to come out of retirement and get a second job or a new job.” To actually have seen it or heard of it actually happening is where… And it fueled me, right? It inspired me to say, okay, this is exactly why I do want to talk to people that are three years away from retirement or at any point in time, really. Again, as you said, it kind of depends, but the sooner the better only to start to build that runway. Like, when do I go from an all-equity portfolio or an all-stock portfolio to a blend, you know? Let’s say it’s 100% stock. When should I go 80/20?

When should I go 70/30? Should I ever go 50/50? Or at what point, as I get closer to retirement and closer to taking withdrawals out, or closer to that time where it flips from accumulation to distribution? Right? That should not be something that gets planned out two weeks prior to retirement. Because of things that can happen, history can happen, and markets can go down like you’re saying. So, it’s just, again, after hearing that story, it just inspired me to really obviously continue to do what I do, or we do every day. And I think that the topic of this podcast really kind of hits that home about the importance of it because people just, you get busy, and you have this old 401(k) that you never took a look at, that you forgot about almost, and then suddenly you walk in with nice, handsome advisors like us that just say, “Do you know that you’re 100% in stock?”

Right? And do you know that you’re about to withdraw $70,000 per year? And what can happen in a bear market or an extended bear market?

Mike Guthrie: Yeah. It’s really that shift, I think, the mind shift of the job of what your investments are for. When you’re working, like we said, in maybe not within a couple of years of retirement, but as you’re working, that job or that money is to grow. You’re putting it away. And the levels of aggressiveness comes down to each individual. But primarily, that job is to grow the money up to retirement. The shift, and a lot of people have a difficulty making that shift, and I think that’s a lot of the work that we do, and why we do it is the shift is now your money has to have several jobs. One of it’s to grow, but it’s also to provide income, and also to provide some level of safety that you’re not going to “run out of money.”

If it’s all in stock, it could be. Could not be too, but I’m not willing to take that risk with a portfolio, so let’s start to diversify it. So, for example, you need $70,000 a year of expenses, so maybe somewhere around that is what you should have in some safe vehicle. So, if the market is down and you’ve got a diversified portfolio, hopefully we bill them that they’re not down 43% when the market’s down, but maybe it’s down 20, 25, you’re not required to sell that investment to generate $70,000 of income, because you have it in that safe bucket.

Matthew Peck: Well, even just pause there because I do want to talk about the safety, income, growth model. And the different jobs, right? Because here we have I’m going to do this in a little analogy. Check this out. We’re going to have different jobs, right? We have like, okay, a safety job, an income job, and a growth job, and then we have a bunch of different subcontractors underneath there that we can hire out to do those particular things. But, actually, let’s get into that now because I did have a thought and it went right out my brain. It might come back.

Mike Guthrie: It happens.

Matthew Peck: Yeah, absolutely. At some point. I am getting old, Mike. It’s official. But okay, so we have safety, income, growth, and there’s different sort of vehicles that we can use. So, how do you define safety? Not in regards to risk or anything like that. But what’s the goal? I mean, obviously, safety kind of speaks for itself, but let’s be a little bit more…

Mike Guthrie: Yeah, I think the best way to describe it is principal protection.

Matthew Peck: Okay.

Mike Guthrie: So, you have $70,000, and I just keep going back to that number because it’s in my head now. But you need that to be safe. So, maybe it’s in cash or like a money market or CDs or something that it’s never going to go below 70,000 unless you spend it, right? It’s not subject to market volatility. If the market’s down…

Matthew Peck: And is there a certain ratio that… Because sometimes people will say like, “Oh, I should have six months’ worth of expenses,” right? And that logic was originally based on losing your job. But if you’re retired, well, you voluntarily lost your job. So, is there any rule of thumb that you like to go by? Is it the six months? How do you generally answer that?

Mike Guthrie: I mean, again, it’s one of those things like it depends but I would be comfortable recommending. If you think about how long it takes for a market typically to recover after a down year, it’s usually, like, two and a half years. Sometimes it’s longer. Sometimes it’s shorter, but the average, as we’re talking averages, a return from a bear market is about two and a half years before you’re back. So, maybe that’s a number to start thinking about, in terms of expenses. So, if I’ve got $70,000 a year of expenses, and I’ve got a $2 million portfolio, maybe it’s $140,000 that you put in some sort of protected vehicle, whether that’s one year, it’s just the cash. But maybe year two it’s in something that’s generating a little bit more yield or better income but still has that principal protection.

So, when the market is down, and you need money, not just to fund your lifestyle, but you want to do something fun, or you’ve got to buy a new car, that you don’t have to call and say, “Hey, I need X amount of dollars, and I need to sell investments that are down to fund it.” No, you have that bucket over here, so that money can recover if the market is down, stays invested, does not come out, and you’re not kind of left with that playing that game of, “Okay, well, maybe I just sell this amount or that. What’s up? What’s down?” But no, you’ve got a bucket that you could pull from that isn’t forced to sell. And the same like the flip side of that coin though is if the markets are doing really well and you’re in rebalancing, things like that, maybe you go to the growth bucket, if you’re up 12%. So, you’ve got that safe money, but let’s pull off the 7%, half of 12, right? And go from there.

Matthew Peck: All right. So, just to kind of spell it out to the clients, or I’m sorry, to all the listeners. We have our safety bucket and figure CDs, money market, cash, checking, whatever that may be. Anywhere from six months to two years, let’s say, again, on average. We’re just doing generalizations here. And I’d add in if you have any trips coming up, renovations, new cars, things like that, you kind of have it in that bucket. Fully liquid and fully principal protected, obviously with FDIC and different things like that. Okay. So, then we have the income bucket. Now, either how much goes in percentage-wise or what style of investments fall under the income jar. Who we hiring to do our income?

Mike Guthrie: Right. I think it depends, Matt.

Matthew Peck: I see. If I’m going to get one more ‘it depends’ out of you, I’m going to get you a couple more. And I’m going to let that one settle for a little. Think about that one a little bit. It depends.

Mike Guthrie: Settle a bit, right. Depends. Okay. You’re making all, yeah. I get it. I’m there. I’m with you. Not funny. So, let’s get back to something serious now, right? How much goes into the income bucket? And I think for me anyway, and I think some colleagues as well, it’s more of like reverse-engineered. So, we know what’s coming in the door. If it’s Social Security, for example, and you’re making, I don’t know, $40,000 of Social Security, but you would feel much better sleeping at night if you could get $50,000 a year or $60,000 a year. So, that reverse engineering is, okay, how much of your overall portfolio. We’ve got the money in the safe bucket, and we’ve got what’s left. How much of that do we need to dedicate towards an income-producing vehicle?

And then we can set it up that way so that money goes there. Now, in that bucket, it’s dividend-paying stocks, maybe it’s bonds, maybe it’s some sort of an income annuity, something along those lines. There’s a lot of choices in that bucket, and it’s maybe not be for everybody, but for a lot of folks, that kind of comfort of knowing that, hey, no matter what the market’s doing or no matter what’s going on with me, I know in the mailbox each month I’m going to have a certain amount of money for now and then into reti- you know, for the rest of my life potentially.

Matthew Peck: Yeah. And just to kind of expand on that, I mean, there’s real estate investment trusts, private credit, private real estate, infrastructure funds. I mean, there’s a whole universe of income-focused investments. right? And then back to the annuity conversation because annuities are in that bucket, right? And I sometimes will tell people that, in my opinion, some people are annuity guys and some people aren’t. Some people love the mailbox money because it allows them to sleep at night, and that’s priceless. Allowing you the confidence, allowing you a stress-free retirement is wonderful. And having guaranteed income streams during times of volatility is extreme comfort.

Mike Guthrie: Comforting. Yeah, for sure.

Matthew Peck: And then you have other people that don’t really like them because they’re like, they’re maybe a little bit boring, they’re illiquid at times, and different things like that. But my main point is that working with an advisor that has access to everything in that toolkit, I think is the most important. And I like building because, back to the idea of so unique situation about how, yes, the tools are the same every single client, but what’s built or how we build there is so unique to them because it’s based on spending. Because even how much goes into the safety bucket is going to be very client-specific, obviously, right?

Mike Guthrie: For sure.

Matthew Peck: And so, I just love it because some people, again, in the income space, they want this less stress. Others want higher yields. Everyone’s a little bit different.

Mike Guthrie: It all depends, Matt.

Matthew Peck: Yeah, it does.

Mike Guthrie: And not to cut you off, I think ultimately what you’re trying to do for our client is to give them options, where you’re not just kind of pigeonholed into one thing to generate income for your retirement.

Matthew Peck: And even to build on that, what I love about when clients do come into the office, seeing it in front of them. Like, with the roadmap that we do and the software that we use and whatnot, seeing that, okay, here’s how much I have in safety, here’s how much in income, and I have this much in income because I need this much of an income gap. Seeing it all in front of them, I think, is just so powerful as well because, okay, here is why we’re building it how we’re building it with this target in mind.

Mike Guthrie: Yeah, and just even the explanation of what is this pool of assets for. Like, what’s the job of this money? It’s to grow. So, we’re going to pay attention to it, but that’s not where we’re going to go first, to potentially grab some money that you might need. We’ve got these other buckets that will give you the options. Sometimes that is the place to go, but you want to have the ability to say, “Well, I’m going to let that continue to stay where it is, so let’s pull out of here, and then do we replenish that? Or do I have that income coming in that I know is just going to come in the door, so do I supplement on top of that?” It’s all different options. And again, there’s no right or wrong answer for every single person.

The solutions I wouldn’t say are irrelevant. They’re relevant in that they’re trying to generate something for you. But the fact that you’ve got such a wide menu of things to build that portfolio that, particularly with the things that we’re dealing with here at SHP, that it’s not all like everybody gets the same thing. It’s what makes the most sense for you, as long as we’re meeting your needs, and what are the best solutions to fill that.

Matthew Peck: No, and I’ll kind of go back to that, too, and there was a couple points that you made I wanted to go back to because to kind of round out this particular theory, like, the theory of the safety income growth theory. Because there are other bucket theories, and there’s a number of different ways of doing it, kind of to your point. But the final bucket is the growth bucket. You know, that’s where you allow your stocks, and the equities and the S&P 500 to live, and whether it’s growth mutual funds or ETFs or individual equities or whatever it might be. That’s in that final bucket. But you made a great point earlier, which is, hey, yeah, we have our safety bucket. We have our income bucket, and yeah, we have our growth bucket.

But if the markets are doing really, really well, you could pull some of your money from growth to feed income that given year. I mean, these aren’t these hard-and-fast siloed accounts that there isn’t some flexibility there. It’s just more of a foundational piece, and then you can kind of roll with the punches depending on how market conditions are.

Mike Guthrie: And even to the point that you made around the safety and the income bucket having, like, different solutions, in the growth bucket it’s not just taking what’s left and sticking it all in the S&P 500. There are buckets within that bucket. So, some’s aggressive, some’s conservative. And it’s built out to a risk. So, what’s the right amount of risk for you to be taking on that portion of your portfolio? And even then, you may call it, I need some income, and it’s I need some money for something. Okay, let’s go to the conservative bucket of your growth to pull that from, or let’s go to the aggressive bucket from the growth because it’s done so well. Let’s take some profits. So, even in that scenario, you’re building out options, right?

It’s just, again, for me, when I talk to clients and try to build that out and explain it, the primary goal here is we’re giving you options that you’re not stuck in one thing. That if it does well, great. If it doesn’t do well, you’re walking back in the door, to your point before, not just to go to lunch with your old colleagues. You’re like pulling up in a desk.

Matthew Peck: Right. Because to your point about giving options, right? And because I finally remembered it, Dawn.

Mike Guthrie: Light dawns on Marblehead?

Matthew Peck: Yeah, exactly, on Marblehead. But the beautiful part is here is this theory, right? Here is the safety, income, growth that we use with, again, buckets upon buckets, subaccounts upon subaccounts. And again obviously, we’re trying to make it, we’re simplifying it a little bit, but it’s going to be extremely complex depending on how you actually get structured. Main point, though, Mike, is that it goes towards a plan, right? It goes towards a financial plan that you see based on your spending, based on everything. And so, now, here we are all the way back full circle.

Now, you’re two years out from retirement. This is what allows you the time to plan everything and to begin to de-risk and to figure out, okay, how much do I need in the safety bucket? How much do I need in the income bucket? How much do I want in the growth bucket? And because there are a lot of choices and options along the way, that’s why we want to build in that amount of time before you actually walk into your boss’s desk to give your notice. And that time also allows us to again, that two-year out, three-year out as we sort of, as we’re paving the runway, because the markets are going to shift in that time, right? And we want to make sure that we’re getting ahead of it and not being flat-footed.

Because then once you have a plan built out, and then once you have a sort of all the data entered, then you can start to do some scenario planning. And this is the point that finally came back to my head is just running a Monte Carlo simulation, right? Where it’s like, okay, based on average markets and different things like that, what’s my chances of success? Now, I know it’s just one of the kind of standard financial planning stress tests that are out there, but it’s extremely important. Because you can get a number, like a number of confidence. Is it a 99% chance of success? Is it an 85% chance of success? What is that number? Because sometimes, and this is a little bit dramatic here, but it’s like, look, if you’re about to hop on a plane, and I’m like, “Oh, you only have an 84% chance that that plane’s going to land,” you might not jump on that plane.

Or you might not retire, right? So, it’s like, okay, what can we do to get you to that 99, to get to that 100% chance so that it’s not hopping on a plane when you walk into your boss’s office to give your notice, right? But it’s a similar idea that before you make that leap of faith, you have a plan that’s based on these buckets. You have time to construct it. And now, then you can stress test it and say, “Yes, I feel good because I’m in that 95%, 98%, 99% chance world, and I feel good to making that leap.”

Mike Guthrie: Yeah. And now even just to add a level of complexity here, but the conversation we’ve just had, it’s about a sliver of your overall plan, right? It’s like 20% the investment side of things. But the investment bucket is informed by all the other things. What’s my income need? What’s my healthcare situation? What’s my tax situation? All stuff that are for other podcasts, but building out that plan is not just a static, “This is just our investment. Our investment plan is our retirement plan.” It’s a portion of your retirement plan that’s informed by the rest.

Matthew Peck: And I’d say back to, like the tailored nature of it, too. Because some people are saying like, “Oh, hey, maybe I should plan to live until… ” Or how old do you want to plan to live, right? Is it 90? Is it 95? Is it 100? I mean, some people are saying you need to plan to live to 100, 105 years old. So, now you actually have more in your growth bucket. Not because we want that risk, right? Not because we’re chasing returns because like, hey, you might want to…

Mike Guthrie: It’s 40 years.

Matthew Peck: Yeah. Right. You might retire at 60 or 65, and suddenly you have, yeah, again, 30 years of retirement. I mean, it’s crazy how longevity and the impact of medical technology is going to have on retirement planning itself.

Mike Guthrie: I always get a little of a chuckle when you run those scenarios sort of 90, 95, 100, and the client says, “There’s no way I’m living that long.” Well, how do you know? You don’t know. I hope you do, you know. Or if you say, “I don’t want to live to 95,” well, yeah, but you might. So, let’s plan, let’s make the plan last to that and not say, “Let’s make the plan last at 78 because that’s when your dad passed away,” right? Like, it’s a different animal altogether and making sure that it’s built not just for 5, 10, 15 years, but 15, 20, 30 years and, in some cases, longer.

Matthew Peck: Yeah. And just even putting aside all the potential for the AI and GLPs and peptides and all that stuff. I mean, like, longevity is something that you need to absolutely factor into this conversation. And that’s what maybe we launch into it is the fact of this is just part of the plan. Right? And so, knowing longevity, knowing your healthcare situation, knowing how much you’re going to, I mean, it’s just, like, it keeps us on our toes.

Mike Guthrie: I’ll tell you that much. It’s not as, yeah, just not as simple as saying, “Hey, I’m done on October 1st with work.” I mean, “I’ll see you out for drinks one night,” you know? No. It’s significantly more than that. And the people, it’s that old saying, “Fail to plan, plan to fail,” all that sort of stuff, right? Like, you got to get the plan in place, otherwise, you’re chasing your tail if you haven’t thought about it and you’re just, “Hey, I’m done. I’ve got enough money. We’ll be great,” which is not a bad place to be, but it’s probably not reality.

Matthew Peck: Yeah, no, exactly. And that’s just, again, all of these, the application of how safety, income, growth in these buckets and the application in real life is basically what we do, right? So, the podcast about these ideas, what we do every day is bring it to life with each individual situation and their plan, which is obviously very specific to you. And as I said, it’s just fun because it’s always new, and it’s always unique, based on your needs, right? So, okay, all right. So, we had a nice little thing. I don’t know if you have any final words for our audience. I have a final joke. I have a final bad joke. That’s about it.

Mike Guthrie: It depends. No. Yeah. Go ahead. Why don’t you tell your joke, and we’ll…

Matthew Peck: No, I was just going to say, when we were off camera, we were joking around about we might have a two dads on finance podcast, just kind of putting it out there. I’m going to see what happens on the web if suddenly that goes viral. And like, oh, totally. Let’s totally have two dads talking finance. That may or may not happen. Probably not.

Mike Guthrie: Probably won’t.

Matthew Peck: But you never know. We can hope. Let’s, yeah. We’ll put it out there and see how that works. But no, that’s about it. That’s all I really have. But yeah, any final words before we wrap up?

Mike Guthrie: Again, like I said, I think, when you start to think about this planning, it’s really getting yourself in a position where you’re not pigeonholed into one particular thing. You’ve got options. I always love to close meetings with clients who are successful, and we run the plan. Everything was great. Like, “Hey, you’ve got choices, Mr. or Mrs. Client, and they’re all good ones. You’re not going to be forced to do anything. So, congrats. And now we just have to make sure that those choices that you want to make can sustain a retirement. So, let’s make sure the plan is in place and then adjust it as it goes along.” So, it’s really about options for sure.

Matthew Peck: That’s great, optionality. And I know the Celtics love optionality right now going to Chisholm and Brad Stevens. Okay. We’ll leave the sports podcast to another one. Thank you all for listening to the SHP Retirement Roadmap podcast. I’m your host, Matt Peck. I’d like to thank Mike Guthrie for coming out and talking safety, income, growth. And stay tuned and be well.

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