Q&A: "I'm Scared of Running Out of Money in Retirement!"

29:29Mutual funds, because they're older, also have this wonderful on-ramp where you can just say, I want to put$100 in it a month. And the mutual fund company can hook that up and you just buy whatever percentage that happens to be on the day. It's easy to dollar cost average in. Most ETFs still don't have, this is like 90, 99 % of ETFs, still don't have that mechanism. So every stinking month, you're going to have to go buy that$100 worth of ETF on your own. You can automatically have it added to your Schwab account, your Fidelity, your Vanguard, whatever your account is, but you're going to have to go in and buy it every month.

30:06Behaviorally, we just don't do that. Yeah, we just don't do that behaviorally. So behavior always wins the day. Always wins the day. Buy the mutual fund if you're buying in. If you're not buying in, if you're just lump summing a bunch of money in or you have a bunch of money sitting there and you want it, almost always choose the exchange traded fund. because if you're going to have to make the move once manually, then the ETF is going to be the way to go. By the way, I do think, and I believe you're on board with this, Paula, I do think that's going to change. They talk about breaking news. I think it's coming.

30:41I seriously think in the next five years, because of how sexy exchange-traded funds have become and how much these companies know that the word is out about exchange-traded funds. So I'm thinking in the next five years, we are going to see that change where ETFs will be as easy to buy as mutual funds. Right, right. And by the way, I should make a note here, and we probably should have said this up front, that index funds are a type of mutual fund. So an index fund is an index mutual fund. So for anybody who's wondering, hey, wait a second, this question was about index funds. Why are we talking about mutual funds?

31:24Index funds are a subset of mutual funds. Yeah, they are passively managed funds, meaning they are just going to try to do, their attempt is to do exactly what an index is. And Lauren is in one that mimics the S &P 500. So different companies have products that do this. iShares has one. There's another one called the Spider that does it. There's several different iterations of this. But an index fund is generally a mutual fund that mimics the index. And the only difference between it and the index really is the fee they take out, which is minuscule. It is a tiny fee they take out. So you will always just barely underperform whatever index you're trying to mimic.

32:09one we like for new investors to make it just to press the easy button and get rid of the freak out factor everybody gets what should i invest in forget about that just go buy the total stock market index right which for a beginning investor i think paul i can even speak for you here i i like better because you're buying a little bit of everything you get some small companies some medium-sized companies some international uh exposure you large companies and they're all in proportion. It is truly pressing the easy button for a new investor. Right, right. And as I said on a recent podcast episode, as I said on the May 2024 First Friday episode, another reason that I love the total stock market index fund, particularly right now, is because I'm extremely bullish on AI.

32:55And I think the best way to invest in AI is through a total stock market index fund, because the future of AI and the future of the U.S. total stock market are moving in lockstep. Yeah, it is an interesting time to be an investor. I love, by the way, what Professor Scott Galloway said recently about this, because you know how, Paula, everybody is worried about AI, but you talk to smart people and they're not worried about it. And so many investors are like, how can you not freak out about AI? They're coming for all of our jobs. They're coming for all our jobs. You've heard this. You know what Scott Galloway said?

33:32And I love this quote. I wish I would have thought of this myself because I 100 % agree. AI is not coming for your job. People who understand AI are coming for your job. Beautiful. Beautiful. Isn't it? Yeah. And it's 100 % true. Get on board or get left behind. Yeah. Period. It's exactly what you certainly need to know what AI can do for you in all aspects of your life because it is very exciting. Right. Absolutely. Absolutely. And I said this also on the first Friday episode, we are living in 1999 and learning about the information superhighway. It's the brand new information superhighway. Exactly.

34:12And the people who embraced the internet in the year 2000 were the first to have flourishing careers that were online based by 2004, 2005, 2006. The ones who were slow to adapt to the internet suffered some career hits. You certainly saw that in the world of journalism, and I know that you saw that in many other fields. So be bullish, be optimistic, get ahead of it. Don't swim against the tide. And as an investor, the U.S. and specifically the U.S. Total Stock Market Index Fund is an amazing way to get exposure to the growth that is coming. But back to the original question, the distinction between an index fund and an ETF, while interesting, is in practice not something that the average investor needs to worry about.

35:12Because we're talking about squeezing a couple of basis points, too few basis points to really worry about. We're talking about picking up pennies, and it is, in a life that has limited time and limited cognitive bandwidth, simply not a good use of time or energy to worry about a minor expense ratio differential between an ETF versus an index fund. save your brain power for the big things. The only time that this may be big is if you're considering buying a mutual fund with a lot of money outside of an IRA before the capital gains tax. Right. In, in early November. Yes. Yeah. Under that is, under that incredibly specific circumstance.

36:06Yeah. Then it is truly material and can change your trajectory because you could end up paying a big tax, which is not yours. Right. But if you simply wait until December to do the same thing, which December is right, right around the Santa Claus rally anyway, which is the historically the stock market typically has a December rally known as the Santa Claus rally. Great time to invest. Yeah, exactly. Just wait two weeks. Yeah, exactly. You avoid the capital gains problem and you may pick up a few points, you know, which you never count on. But hey, if you do, you do. Yeah. Yeah. There's certainly a lot of enthusiasm for investing in early December in anticipation of the Santa Claus rally.

36:51You know what the theory is around that? It's because so many companies are given year end bonuses. There's a lot of money that's that is just automatically put into the sideline as bonuses get paid out. So the rally historically, if you look at charts in years where the economy does really, really well, that rally is bigger. Years when the economy doesn't do as well, less companies paying the big bonus. So that's one reason a lot of people making moves the last week of the year for tax rate, for all kinds of reasons. There's so much movement that last week of the year to try to get things in under the wire that that's why that rally occurs.

37:25It's almost like that rally is collateral damage or collateral wonderfulness that happens as people do things for things that have nothing to do with the market. It's like collateral benefit. Collateral benefit. Yeah. I don't think I've ever used that term before, but that is correct. Right. As people make moves for tax-related purposes or for shifting money from one account to another account, from one hand to another. Yeah. Selling out of certain positions and into others. Well, thank you, Sarah, for asking that question. and remember you can't go wrong with either one index funds and etfs are both great tools all right joe do you remember at the start of the show when i asked you about slow madding like no madding but slow would it be wild if i said no no i don't remember that i have no recollection i can either confirm nor deny joe joe it was recorded oh damn Damn.

38:28Caught on the record again. Yes, I remember. I can't wait. Well, excellent. Well, we are going to take one final break to appreciate the sponsors who allow us to bring you financial literacy at no cost to you. And after that, we will have a discussion about slow matting. And for this particular caller, slow matting in the context of a disability.

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42:12Our final question today comes from an anonymous caller. Joe, we give every anonymous caller a nickname. What would you like to name this one? Man, I was just looking at new movies coming out. There's so many. Finally, you get the feeling that the strike really made going to the movie theater horrible. But coming out, Pixar's got a new one, Inside Out 2. And one of the main characters is Joy. And this person's looking for more joy in their life. So how about we call them? In honor of the emotion. Let's call them Joy. Well, then our final question today comes from Joy. Hi, Paula. This is Anonymous, and I'm calling because I am on disability, but I still am able to do a lot of things, including travel.

42:57And I'm about to sell my home at about half a million dollars, and I would love to know what I should do. I'm not going to buy another home for a while. I'm going to be nomading or slow matting like I used to do very carefully as to cater to my needs and take care of myself so not to have a flare up with my disability, which I've already done a test drive last year and the year before, and it's a go. So just as long as I can have some really good, safe investment styles and diversification strategies for this half a million dollar windfall, that would be wonderful, Paula. Thank you. Thank you so much for calling in.

43:39I absolutely love the plan that you've made. You know what I love is the fact that you have done a test drive. I was going to comment on that too. That was like the first thing. Exactly. Exactly. Exactly. Because, and, and I actually, I love the fact that you've done two. You did a test drive last year and the year before, right? So you've tested this out. You've run a sample. You know that it works. Can, can we talk for a moment about why that's so important? And this is a message really for the broader audience, because Joy, you have set such a great example. Joe, you know, we hear over and over and over from people in, in both of our communities who say, I really want to do X, but they've never actually done a test drive of X.

44:25So people say, I'd like to retire and go sailing. I'd like to retire and go RVing. I would like to move from Florida to Oregon or Oregon to Florida or wherever. As you know, Paul, I was one of those people. Right. Exactly. Exactly. You yourself sold your home in Texarkana and decided you were going to go live somewhere else. No, this was my house in Michigan. My house in Michigan. We were going, we sold all of our stuff, Which is amazing because you were just at my house. Look at how much crap you can reaccumulate. It is amazing our ability to make this house seem like we never sold all our stuff.

45:01But we sold the vast majority. We didn't sell everything. We sold the vast majority of our things. We sold our house. We were going to live this nomadic lifestyle where we would live in different places for a few months at a time. I can work from anywhere. Cheryl was going to do these based on her career. She was going to be able to do these six-month stints. And between those, we were just going to go live in Portugal for a month, live in Brazil for a month, live in wherever. And I realized after doing that for six months, I freaking hated it. It wasn't for me. But it was that test drive, Paula.

45:34If I hadn't test-driven that, this was the big thing in my head that I thought for sure was my, quote, retirement vision. We were going to have no possessions. We were going to travel. It was going to be awesome. I love traveling still, as you know. But I also love having a home base far more than I thought that I would have had I not test drove it. So that is wonderful. Yeah, exactly. Exactly. Wait, and didn't you have you had a house in Texarkana and you sold it and you thought you were going to live elsewhere. And then you came back to Texarkana. We moved to Michigan and then we thought we were going to be nomads.

46:05And so we sold our house and we tried out the nomadic living. We lived in Palm Springs for a while. We lived in Vermont for a while. We lived about a month at a time for that six months in different places. and then decided that you have two families. You have the family that you're born into and you have the family of friends who truly are that network that you create during your life and it was back here in beautiful TXK. Wow. Well, your story and Joy's story, I think both highlight the importance of test driving whatever it is that you think that you're going to do, right? So Joy, thank you for sharing that because it's such a good example that you're setting for the community and such a good lesson for all of us to take, which is whatever it is that you think that you want to do during retirement, test drive the idea, make sure that it works.

46:56I love what you've done, which is you did two separate test drives in two different years. You know that it works so you could have total confidence in the plan that's ahead. So first I want to commend you for that. And now to answer your question, which is how do you handle this$500 ,000? The first question that I have back to you is how much of that$500 ,000 are you going to invest and how much of it are you going to spend? I'm going to take this on the assumption, and I don't know if this is the case or not, but I'm going to take this on the assumption that you'll be investing the entire$500 ,000 lump sum and living on a 4 % withdrawal.

47:38Now, I don't know if that's actually your plan or not, but if the goal is to preserve the principle and to live off of the gains, then I'll address the question as though that is the plan. But of course, no pun intended, your mileage may vary. Oh, wait. Why? Thank you, Joe. I'm here all week, folks. Yes. So if I guess as we were just discussing with Sarah, if you are going to invest this as a lump sum, don't do it in early November. In a mutual fund. Yeah, in a mutual fund in a taxable brokerage account. I'm glad we just had that conversation. generally speaking lump sum investing is better than metering this out because if you do invest it in a lump sum statistically speaking you are better off deploying that money into the markets immediately than you would be if you were to hold it in cash and slowly start metering it into the markets so when you sell your home putting that entire lump sum into the markets right away in a manner that is asset allocated based on your timeline, that lump sum investment is better than keeping a portion of it in cash.

49:02And for a detailed explanation as to why, I'll refer you to episode 507, affordanything.com slash episode 507. I think there's a discussion, Paula, we need to have around the word safety, because when When people think safety, the default feeling people have is that means freedom from fluctuation. The thing that I will encourage you to do is to think about safety in a different way. Safety is making sure this money lasts for a long, long time. And unfortunately, if you're going to try to beat inflation, then fluctuation comes with the territory. And it's much more about being getting more comfortable as the passenger on that moving portfolio that's going to be on a bumpy road than it is about safety.

49:56Because if you go for things that are FDIC insured, this money is going to not last very long at all. Right, right. Yeah. You need an equity bond split. Yes. Safety is for me as much of this inequities as possible. So order of operations, pay down high interest debt because that's a guaranteed rate of return. Next is make sure that you've got your emergency fund money that you can get to if the markets go haywire that you don't have to worry about. That's your FDIC money, high yield savings account for that. And then the rest of it as aggressive as you can stomach. Now, when I say aggressive, I don't mean going and picking individual stocks like you're some stock jock that's betting.

50:36We don't want to bet. But certainly buying some responsible large company mutual funds or exchange traded funds, I think that asset allocation, though, should have a bias toward equities. The cool thing is that you can buy different types of equities that will give you some cool diversification. This piece blew my mind, which is that you can buy a large company ETF like the S &P 500, and you can add to it three other exchange traded funds that generally are more aggressive. Let's say small company, midsize company, international. Your overall volatility for that portfolio will go down even though you added three more volatile ETFs to that, which blows my mind.

51:26How do you add more aggressive stuff to it and it's less volatile? The reason is you're on four different up and down roller coasters versus one. And so I think diversification is your friend, not FDIC insurance. Right, exactly. And Morningstar is a fantastic resource, particularly the efficient frontier. Yeah, portfolio visualizer as well. We'll link to all of that in the show notes. Now, Joy, you'll notice that we did not recommend a specific asset allocation. There are some people out there who do that. There are some people out there who will use these very broad rules of thumb that says, oh, you know, your age minus 10 is the percentage that you should put in bonds with the remainder in equities, right?

52:08There are these broad rules of thumb. But the thing, the problem with those rules is that they are so generalized, so blunt. And when I say that, I don't mean blunt as in direct. I mean blunt as in dulled, unsharpened, right? Unhoned, uncut, right? These broad, generalized, dulled types of broad rules of thumb are useful teaching tools for the sake of getting a big picture framework of directionally where are we going? but they should never be applied to a given individual. So what you should do, what you specifically should do if you want to find great asset allocation for yourself, go to Morningstar and we're going to put this link in the show notes.

53:05And again, you can subscribe to the show notes for free, affordanything.com slash show notes. You can also go and see the show notes of any given episode by just searching affordanything.com slash and then write the words episode and then the episode number. So for today's episode, it's affordanything.com slash episode 511, episode 511. At any rate, go to Morningstar and they have a particular page where you can see these model asset allocation portfolios. So what you'll do is you'll go to asset allocation portfolios, right? The main page, which we're going to link to in the show notes, click on the button that says view portfolios, and then you'll be taken to a page where you can choose among a variety of portfolios.

53:49There's ESG, there's active mutual funds, there's fixed income allocation. What you will want to do, assuming that you want a passively managed, low cost tax efficient strategy, which is what we promote here on the Afford Anything podcast, is click on the choice that says ETF. ETF. It's right at the top of the page. So you click on ETF and then you can use the slider to choose your time horizon. So maybe you want to choose a time horizon of let's say five to seven years or a time horizon of three to five years or a time horizon of 15 years, right? So you choose the time horizon for a batch of investments that you want.

54:30And then you can click the button that says full portfolio overview and you can see some model portfolios. So this is a really good resource for not just you, but for anybody who's listening who wants to get a sense of what their asset allocation ought to be. And remember, with this$500 ,000 that you have, this big lump sum has different timelines and different goals within it. So there's going to be some portion of this $500 ,000 that has a 15-year time horizon. There's also going to be some portion of this$500 ,000 that has a five to seven year time horizon. There's going to be some portion of it that has a three year time horizon, right?

55:12So you'll want to divide the money that you have into different buckets based on the time horizon of each bucket. And then you'll want to asset allocate for that particular time horizon. So let's just say for the sake of keeping it simple, let's say that you break this$500 ,000 up into five different buckets. And each of those buckets has a different time horizon. You've got one bucket that is that 15 plus year time horizon. You have a second bucket that has a time horizon of 10 to 15 years. You have a third bucket that has a time horizon of five to seven years. You have a fourth bucket that has a time horizon of three to five years.

55:55and then you have a fifth bucket that has a time horizon of one to three years, right? You'll want to asset allocate each bucket differently based on its time horizon. Using a tool like Morningstar's Asset Allocation Builder will help you see what some model portfolios might look like. We're going to link to that in the show notes. Subscribe at affordanything.com slash show notes at no cost. You can also view it on the website, affordanything.com slash episode 511. Thank you, Joy, for the question and enjoy your nomadding and your slow madding. That concludes today's episode. Thank you so much for being part of this community.

56:39If you enjoyed today's episode, please do three things. Number one, most importantly, share this with a friend, a family member, a colleague, a neighbor. Share it with the people that you know, because that's how we spread financial literacy. Number two, please follow us on three platforms, Apple Podcasts, Spotify, and YouTube. Please give us a follow on all of the above if you got value from this show. And please, while you're there on Apple Podcasts and on Spotify, leave us up to a five-star review. The third thing is please join our community. It is no cost and a great way to connect with other like-minded people who have similar goals.

57:23You can find our community at affordanything.com slash community. We're also on Facebook and Twitter as Afford Anything and on Instagram as Paula Pant. Thank you again for tuning in. I'm Paula Pant. I'm Joe Salci. Hi. This is the Afford Anything podcast, and I'll meet you in the next episode. food