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Welcome to personal finance for long-term investors, where we believe Benjamin Franklin's advice that an
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investment in knowledge pays the best interest both in finances [music] and in your life. Every episode teaches you
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personal finance and long-term investing in simple terms. Now, here's your host,
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Jesse Kramer. Welcome to Personal Finance for Long-Term Investors, episode 126. My name is Jesse Kramer. By day, I
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work at a fiduciary wealth management firm helping clients nationwide. You can learn more at bestinterest.blog/ blog
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back/work and the link is in the show notes and by night I write the best interest blog. I host this podcast. I
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also put out a weekly email newsletter and all of those projects help busy professionals and retirees avoid
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mistakes and grow their wealth by simplifying their investing taxes and retirement planning. Welcome to a 2026.
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And to celebrate today is our 12th AMA episode, ask me anything episode. And I'm going to focus today's episode on
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some, you know, New Year's resolution-y type questions, such as, how can I determine if this year is my year to
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retire? How can I get my kids or grandkids started in the long-term investing activity? How do I change my
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investment allocation as I age? We'll all get one year older this year, so I'm
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told if my math is correct. And then similarly, a guide to all of the or at least many of the important ages in your
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financial plan. meaning, you know, at what ages do certain doors in your financial plan open and at what age do
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those doors close. So, let's dive into that. But first, we have a review of the
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week from Lane's Dad. And Lane's dad wrote, "A refreshing change from all the
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others. Each week, I listen to at least a dozen podcasts in the realm of personal finance and retirement
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planning. Over the past two to three years, Jesse's podcast has become number
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one in my book for accurate, simple, relevant, easy to listen to education and information. Whether it's one of his
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topic based episodes or simply an ask me anything episode, his way of explaining
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is simple and comforting to the average Joe like me. The icing on the cake is he
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has one of those smooth, enjoyable radio voices. Unlike so many of the other podcast hosts, bottom line, an
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exceptional podcast. Well, Lane's dad, thank you for the kind words. If you or
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heck, if Lane wants a super soft podcast t-shirt, please drop me an email to jessebinest.blog so I can get that sent
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out to you. And now we commence with the New Year's AMA. The first question is
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from Jim in Minnesota who uh live from a hockey rink is asking us, "Is this the
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year to pull the retirement triggers? My numbers say I can, but what about valuations? I'm specifically concerned
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with sequence of returns risk. What are some of the other biggest pitfalls I might be missing?" So, Jim, the numbers
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tell you a lot. When I hear you say that, here's what I think, or at least here's what I think you mean. It means
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you know what your annual cash flow will look like at least for the first few years of retirement. You know how much
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you'll need to pull on your portfolio during the different phases of retirement. And those different
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portfolio withdrawals align somewhat well with safe withdrawal rates. You've
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probably built some flexibility into your life should you need it. Meaning if markets took a tumble, you know how you
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might be able to dial down some of your portfolio withdrawals by 5 or 10 or 20%.
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This, I'll add, is an important way to combat the sequence of returns risk, which you asked about, but we'll dive
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more into sequence risk in a little bit. Last, on the numbers front, I'd go so
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far as to say that you maybe even have uh stress tested your retirement plan via something like a Monte Carlo
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analysis. At some point, I will say listeners, I ought to do a deep dive on Monte Carlo analysis for retirement
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planning. Let me know if that would be interesting for you. Feel free to send me an email. uh this won't be the
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episode for it, but long story short, Monte Carlo analysis is both a terrific tool, but also a kind of a dangerously
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powerful tool. And it's also a tool that I feel like is frequently used incorrectly or used with a poor
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understanding of what the outcomes actually mean. So, it's kind of that that double-edged sword of Monteol
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analysis. So, anyway, I could always do a deep dive there, but let's get back to
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Jim's question. Some of Jim's current concerns. The first one is valuations.
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And to address this, I'm going to read from a November 17th article I I recently wrote called, "Should retirees
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sell stocks and move to cash?" And we will link that article in the show notes. But as the article title might
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imply, it was inspired by a question about market valuations and and whether we a retiree specifically ought to look
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at current market valuations and sell some of their stocks and move to cash. So, let's dive in. And this again was me
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writing in November of this past year, 2025, where I wrote to Phil, who asked me the question. And I said, I've been
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thinking about this myself, Phil. Yes, valuations are undoubtedly high. As with Deodoran might ask, Professor Deodorin
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is at NYU, one of the most highly respectful uh respected finance professors in the country. There is a
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difference between overvalued and overpriced. And just because we know something is overvalued or we think it's
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overvalued, that doesn't always necessarily mean that it's overpriced. But most to the point of Phil's original
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question and Jim's from Minnesota's question here on this episode, the the
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real point is should long-term investors and retirees do anything about overvalued markets if we think we're
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there. And I'll say that the the bogelhead and the Burton Moil in me know that market timing is absolutely a
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fool's errand. As John Bogle told us, don't do something, just stand there.
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But at the same time, you know, returns have been so so good. the S&P 500 as of
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uh November 17th. Again, for the previous 35 months, the S&P 500 has returned 22.5% per year. Those kind of
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recur returns do not and cannot continue forever. And then zooming out, since the
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original question asker, Phil, since he retired in 2017, which he he told me, the S&P has returned about 15% per year
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for him. That's simply outstanding for eight-year period. And valuations do look pretty high, especially amongst the
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biggest stocks in the market. you know, the Nvidas and the Apples and some of those. So, if there was ever an excuse
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to time the market, surely this is what it would look like. Or at least I'm sure
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that's the argument that many of us might be telling ourselves. So, in fairness to the idea, I will share both
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the smart and the dumb reasons to shift money from stocks into cash or to really
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do something about overvalued markets, and we'll see where your thoughts end
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up. So, I think there are some logical reasons to consider selling some of your stocks and moving to cash right now. The
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first one is risk reduction and rebalancing discipline. you know, selling some stocks will lock in your
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gains, protect you if the market does correct sharply. That is purely a risk reduction measure. If your 6040 starting
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portfolio is now closer to a 7030 portfolio because of stocks going up, well, I'm all in favor of selling
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selling some stocks and and going back to 6040 or in, you know, in this case was 6030 plus 10% in cash. That makes
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sense. Now, the my second reason is asset liability matching. Some of you might have heard me talk about this many
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many times before. If your financial plan is based on or includes asset liability matching or goals-based
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investing framework, then recent stock market performance might have blessed you with excess capital and the asset
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liability framework suggests that using low-risk assets like cash and bonds to cover all your near-term spending. Then
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you use higher risk assets like stocks to cover your long-term spending needs. But then you might have all of your
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future liabilities covered and you still have money left over to be deployed. That is excess capital. It's money you
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don't need. And your financial plan will be successful with or without that excess capital. And at the end of the
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day, especially when we look at it from a uh a needs, willingness, and ability framework, which I'm going to do later
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in this episode, you can essentially do anything you want with that money. You can find a great charity. You can take a
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flyer on your nephew's pizza business. Or if you are particularly market wary
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right now, you can just keep it in cash. Moving on to the next point, cash isn't
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actually that bad right now. As of right now, cash accounts are yielding something like 3 and a.5%. Not terrible.
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It's actually a reasonable interest rate for a safe asset, for a safety net right
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now at the moment. You know, a riskless asset. So, okay, that's not a bad reason
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to go to cash. There's the psychological safety factor. Cash provides peace of
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mind during periods of high volatility, high uncertainty. That's the flight to
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quality that you might have heard of before in the investing world. And for long-term investors like us, I think
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that the the number one threat to our portfolios is personal behavior, right? Great investors little secret is not
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outsized intelligence. It's having a wonderful temperament. So, our personal
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behavior gets in the way of our long-term success. I think that's our number one threat. And one of the worst
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things that can happen is getting burned by a market downturn and then swearing off investing forever, convinced that
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investing is simply flawed. We want to avoid that kind of fight orflight lizard brain reaction where we feel that primal
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urge to sell our stocks simply to survive. So if you need to derisk yourself to avoid that potential fate,
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I'm totally on board. Those are some of the smart or at least reasonable reasons
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to to move to cash right now to sell some stocks simply because of high valuations. But there are also many bad
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or dumb reasons to do so. So the first one, market timing is notoriously hard. Predicting the top and then the bottom
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of the stock market is very hard to do. Even though some smart people describe the current market as overvalued, the
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really smart people, at least in my opinion, are also saying things like company's earnings might actually catch
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up to some of these valuations. There won't necessarily be a pop to this bubble. It'll just slowly deflate over a
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few neutral or mediocre uh years in the market. Or some other smart people are saying, well, yeah, it'll pop. We just
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don't know when. Is it going to be next month? Is it going to be in between the
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time Jesse's recording this episode and when it publishes in January? Is it going to be summer of 2026 sometime out
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in 2027 or beyond? We simply don't know how far these things can go in advance.
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So, in other words, they're saying we don't know if it'll pop and we certainly
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don't know when it'll pop. And that's why you need to ask yourself some really
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hard questions. Questions like, what if you sell your stocks today and then the market grows for another 24 months? Will
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you be okay with that? Are you going to keep that cash on hand forever? Or are you planning on buying back into the
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market eventually? Like, what exactly does that strategy look like? What if you buy back into the market too soon?
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Meaning, what if you reby your stocks 6 months from now only to then watch the real crash happen before your eyes? Or
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what if you buy back in too late? What if you're so convinced that the crash is
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coming that you sit on the sidelines for years to come as the market simply grows
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and grows away from you? Essentially, what I'm asking there is, are you setting yourself up for harder choices
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and for more regret in the future? Another reason I think historical data, opportunity cost, and inflation erosion
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will prove that moving to cash probably isn't a smart thing. You know, right now
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in the moment, I'm not sure if moving to cash is right or wrong. Only time will
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tell, but what I do know is that over the long run, cash historically underperforms stocks, especially after
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inflation. And if we're all thinking like long-term investors, which I think
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we should be, we shouldn't forget that fact. Even if current cash interest rates, again 3.5% are higher than
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traditional inflation rates, that's definitely true. The simple truth is that cash does not outpace inflation
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over the long run. So by fleeing to cash right now, you are accepting a lot of inflation risk. My next reason, you
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chose this portfolio for a reason. Back in April 2025, during the tariff tantrum, during the stock market's
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subsequent volatility, I reminded my readers and listeners of that line from Russell Crowe in Gladiator where he
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says, "Are you not entertained? Is this not why you are here? And similar logic
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applies right here, right now. We've all shared in amazing returns. And now,
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yeah, the market might be a little overvalued, overpriced, but is that not why you are here? Part of being a
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long-term investor is this very trade-off, right? We receive periods of outstanding returns in exchange for the
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threat or in sometimes in exchange for the reality of negative performance. That is the bargain we signed up for in
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the first place. But yes, I do understand the temptation to sell. I know we're all loss averse, right? Loss
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aversion is that behavioral economics term. We're all loss averse. If we can
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avoid the negative period, why not do so? Why not eat our cake and have it too? That's the human temptation. But
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it's also changing the terms of our investment pursuit and our investment plan midway through the game. I don't
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think we should do that. I think we should stay the course. My next reason, I think we should ask oursel what's the
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magnitude and what's the benefit. So, if you're committing to this idea of
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selling some stocks and moving to cash, how are you planning to rightsize your bet? So, let's do some simple math. We
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all know that a 20 or 30 or 40% drop in the stock market wouldn't be fun. But
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the question is, are you going to sell all of your stocks to avoid that potential drop or would you just sell
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off a small portion? If you're just planning to sell off a smaller portion, what's the real benefit? For example, if
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you're going to sell 10% of your stock portfolio and then perfectly time a 40%
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drop in the market, you just saved your portfolio a whopping 4%. That doesn't
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seem like a lot, but then again, if you're planning to sell 50% of your stocks, well, are you sure you want to
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do that? Because not only are you now violating a key tenant of long-term investing by timing the market, but
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you're also doing so with a huge fraction of your net worth. So, on the small side, I would argue that this
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choice doesn't really move the needle. On the big side, this choice might ruin
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your financial future. And the question becomes, where is your Goldilocks zone? My next question, why now? You need an
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objective reason why now is the right time to make this move. Why not 3 months ago? Why not back in 2021? And I'm
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worried the reason might be because every media outlet seems to be calling this an AI bubble. And surely where
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there's smoke, there's some fire, right? So, it's true if we look at the past 5
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years of Google trend data for the term AI bubble, it's spiking right now here
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at the end of 2025. But in response to this idea, I want to invoke some wisdom from Howard Marx and his latest
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newsletter where he wrote, "One of the most prominent characteristics of the
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financial markets that I've detected over the years is their tendency to obsess over a single topic at a given
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point in time. The topic eventually changes to another. But before it does, it's often the thing people want to
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discuss to the near exclusion of everything else." Remember, for example, Silicon Valley Bank, remember GameStop,
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remember the yield curve inversion or NFTTS? Those are topics just from the last four years. And I know concerns
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about an AI bubble are everywhere we look. But are we all in a bit of a financial media echo chamber? I'd argue
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we are. I mean, let's be honest, you're here listening to what might be a top
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50ish retirement and financial planning podcast on the internet. You, like me, might be pretty deep in the weeds here,
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and we might be in a financial echo chamber. So, what should we actually do? Should we rebalance out of stocks into
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cash? Should we sell? Should we not sell? The way I see it, both choices have some rational and numerical, but
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also some subjective and emotional components. On the numerical side, it's an argument between yes, this bubble, if
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we want to call it that, probably can't keep growing forever versus if you time
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the market and move to cash, the historical odds are not in your favor. Now, on the emotional side, it's all
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about minimizing regret and loss aversion and avoiding that fightor-flight scenario that I talked
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about before. So, if you're in 2026, you are on the fence about doing something
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drastic in your portfolio. Here are seven tips I have for you. The first one, tie this choice to a timeline. A
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retiree might say, "You know what? I'm going to move one year's worth of
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expenses out of stocks and into cash." You're now measuring this decision in
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time, not in percentages, not necessarily in dollars, but in time. So, really, what you're doing is you're
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moving some of your long-term runway in your retirement, and you're shifting it
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from the long term to the immediate near-term. I'm okay with that. Number two, keep this decision small. You know,
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you don't need to eat the whole tub of ice cream. Maybe just one bite of ice
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cream will will satisfy you. Similarly, could you possibly scratch your current itch in a small yet satisfying way by
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only selling a very small fraction of your stocks just to make yourself feel better? My third tip, I would make this
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a one-way decision. You're selling stocks to go to cash. Fair enough. But do not assume that you'll also find a
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perfect time to move this cash back into stocks sometime in the future. That's a
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very slippery slope. So again, if you need to scratch this itch, don't let it
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turn you into a chronic market timer. Tip number four is zoom out. If this particular seed has been ruminating in
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your head for years, fair enough. But I would not let a couple months of headlines derail your financial plan.
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And I would wager that a lot of people who are thinking about doing something right now, they are letting a couple
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months of headlines derail their financial plan. Tip number five, be clear with yourself. Are you solving a
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portfolio problem or a feelings problem? Either one can be reasonable. Neither one is really wrong. But just be clear
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about what you're doing. And then tip number six, write it down. Why are you
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making this decision? Then set a reminder to review this decision in 3 6 12 24 months. And finally, tip number
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seven, don't act under urgency. If you think the markets are a ticking time bomb that could explode any day, I would
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strongly urge you to pause. you're probably letting fear create a certain set of urgency. And I doubt we can make
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sound investing decisions in that kind of mindset. So, back to Jim's question.
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I mean, who knows what the market will do between now when I'm recording this
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on December 9th and when this publishes in early January, let alone over the first few years of Jim's retirement. But
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I think the principles that I just read out in the article ring true. But now, let's talk through the sequence of
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returns risk. I'm going to call it sequence risk. We did a deep dive on sequence risk back on episode 87, and
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I'll link another article in the show notes about the interaction between sequence risk and required minimum
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distributions. An interaction that keeps some retirees up at night, even though I
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I don't think it should. Now, for those unfamiliar, the one-s sentence definition of sequence risk is bad
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market performance hurts you disproportionately more in your early years of retirement than in your later
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years, such that we all carry a risk that our retirement will suffer an unlucky streak of bad returns early on,
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potentially derailing our long-term retirement dreams. Yes, that was one run-on sentence, but let's talk about
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how much it matters early, how a sequence risk declines in time, and what you can do to protect those early years.
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In Wade Foul's book, Retirement Planning Guide book, he attempts to quantify the
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magnitude of sequence risk yearbyear leading into retirement and then once retirement starts. So, I will throw a
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link to that chart in the show notes. It's a really cool chart. I will say I I
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haven't really d dove dived doven into the data itself, but I trust Wade and
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I'm sure the data in the chart reconciles pretty well with my understanding of the math. My takeaway
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from the study is this. The first six years of retirement carry more sequence risk than any pre-retirement year
00:18:03
because after all uh the returns we receive before retirement certainly play a role in our retirement success. We are
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subject to sequence risk even before our retirement starts in that way. However,
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those first six years of retirement carry more sequence risk than any pre-retirement year. and FA study for
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what it's worth that looked at a 60-year period 30 years before retirement, 30
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years after retirement to evaluate each year's relative impact on final portfolio value. So again, first six
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years carry the most sequence risk. The first year carries the most risk by far with each subsequent year falling off
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pretty significantly. By the time you're at year 10 of retirement, your sequence
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risk is actually far far lower than it was for the entire decade before you retired. Or put another way, if you're
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listening to this and you've already been retired for more than six years, I'd feel pretty good about that. And if
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you've been retired more than 10 years, you should feel great about that. So
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now, going back to Jim, who wants to retire this year and therefore is facing the greatest amount of sequence risk
00:19:02
he'll ever face. What do we do about that fact? In my mind, it's actually
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pretty simple because, as I've mentioned before, sequence risk is not just a
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function of market returns. It's also a function of how much money you withdraw
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when your assets are depressed. selling stocks when they're down 40% off all-time highs. That will cause you a
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major sequence pain. That's why we want to build a safer or non-correlated assets into our retirement portfolio. In
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an ideal scenario, an ideal scenario that might look like 6 to 12 months of cash, then 2 to 3 years of short
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duration bonds, maybe another 2 to 3 years of slightly longer duration bonds. So, when we zoom out, we would see 5 to
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seven years of relatively low risk spending right there. And that should get us through most of the riskiest
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sequence window. There are other ways to construct a portfolio. I know more and more I'm seeing online risk parody style
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portfolios that hold a lot of different non-correlated assets and and have high safe withdrawal rates that way. That's
00:19:55
fine. That's fine. Going back to my cash and bond example though, most retirement
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portfolios already have this built in, right? If you're entering retirement with say 30% or more of your money in
00:20:05
cash and bonds, a 7030 style portfolio, you almost surely have six years of money allocated to relatively safe
00:20:13
assets. Now, if you're entering retirement with 20% or 10% or barely anything in cash and bonds, well, then
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you might have to make a hard decision. Do you intentionally accept the lower expected returns of cash and bonds in
00:20:25
order to dissipate your exposure to sequence risk? Now, financial planning is chalk full of those types of
00:20:31
trade-offs. And financial planning is all about understanding or at least somewhat understanding and decreasing
00:20:36
your potential uh your range of potential outcomes. I'll say it again. Financial planning is all about
00:20:42
understanding your range of outcomes and somewhat decreasing your range of potential outcomes. So, Jim, you also
00:20:48
asked for the biggest pitfalls I see. And you might laugh, but I'm telling you, financially speaking, spending is
00:20:54
almost always the biggest pitfall for people in their early retirement years. And really, what I mean is accurate
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spending. It's not necessarily o overspending. It's more accurate spending. So, first spending, I'll keep
00:21:04
it really simple. In order to do any of the proper retirement analysis that you ought to do, you need to have an
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accurate idea of what you spend. Doesn't necessarily have to be down to the penny, but something within like 5%
00:21:14
accuracy on a monthly or annual basis. So, if you tell me you spend 100 grand a year, then we should know with absolute
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certainty you're somewhere in that 95 grand to 105 grand range, right? But I've had conversations with people who
00:21:26
make 25% or greater mistakes in their retirement spending in both directions, right? They'll tell me they spend
00:21:31
$100,000 a year when the real number is actually less than 75 grand a year or more than $125,000 a year. And in
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general, the most the more frequent mistake is underestimation, right? spending assumptions are a lot like uh
00:21:45
calorie caloric intake assumptions. The average person vastly underestimates what they spend. They also underestimate
00:21:50
what they eat. So the message here, Jim, is pretty simple. You need good spending
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data. You need to look at your spending accounts, your credit cards, your bank accounts, your cash transactions,
00:21:58
whatever you use to pay the bills, to buy stuff. You need to have ideally dozens of months or multiple years of
00:22:04
data in order to truly understand your retirement plan, your spending plan, and and therefore your retirement plan's
00:22:10
overall health. And going back to sequence risk from earlier, so you also know where your spending flexibility
00:22:15
lies in case you need to dial some of your spending back. I also think Jim, you will face equal, if not greater
00:22:22
risks in your retirement years, your early retirement years especially with the lifestyle shift. I've spoken about
00:22:26
this plenty before. I would direct you to episode 106 of this podcast for a deep dive on on some of those retirement
00:22:32
risks. To make a long story short, think about your social relationships. Think about replacing the purpose that you
00:22:37
felt from work, the productivity that you felt from work. 40 or 50 hours a week that you now need to replace.
00:22:42
That's a lot of time. So, think really hard about building yourself a schedule
00:22:46
to maintain some structure to ensure you don't slip down a slope of just what do
00:22:50
I do with my time in retirement. Jim, thank you for that terrific question. Here's a quick ad and then we'll get
00:22:56
back to the show. Every January, we make the same promises. Eat better, work out,
00:23:00
read more books, and of course, something about money. You know, this year is the year I finally get my
00:23:05
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00:23:11
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00:23:26
better finances the resolution that actually sticks this year. Next, Matt D asked about his 11-year-old daughter
00:23:32
who's earning some babysitting money, and he's curious if it's worth opening a
00:23:36
Roth IRA in her name to invest the earnings via the mommy and daddy match. Loving the idea of five decades of
00:23:42
compounding. Excellent. So, Matt, I'm going to use this as a platform for a big get your kids involved in investing
00:23:48
conversation. First, teaching your kids about money is awesome. I think it's
00:23:51
great to teach your kids about the value of a hard-earned dollar. It's great to
00:23:54
teach them about earning money, the joy of spending money, at least on certain things in life. uh the lessons we can
00:23:59
learn from bad spending choices or bad money choices in general and of course the wonderful lessons of long-term
00:24:05
investing especially that that power of compound interest and yeah sure down to the intricacies of risk and reward. Now
00:24:11
on that front I really do think the two most powerful lessons from my personal past are the value of a hard-earned
00:24:17
dollar and the power of compounding. Those two lessons certainly play off one another. As I mentioned just recently on
00:24:22
episode 125, I remember how many toilets I had to clean in order to earn a dollar
00:24:27
back in 2006 at my summer job. And through the magic of compounding though, and through some fairly conservative
00:24:33
assumptions at that, I can easily 10x that dollar, right? I can have that $1 I earned by grow scrubbing toilets. I can
00:24:41
10x that dollar between the time I earned it at age 16 and by the time I retire. Or for a young adult, if you
00:24:48
save 15% of your income at age 22, it could easily turn into 150% of your income, aka well over one year of
00:24:56
earning, probably well over two years of of spending needs by the time you're 62.
00:25:01
So, can we just think about that? How one month of income could eventually turn into one year of financial needs in
00:25:07
the future, all through the power of compounding. That's an amazing lesson. Second, I think we can talk through some
00:25:13
of the mechanics of getting your kids involved in investing, which accounts they can qualify for and when and which
00:25:18
ones are kind of best or at least best in certain circumstances. So, if it's
00:25:22
purely your money as their parent or as a grandparent, then you have three common options. A 529 account, a
00:25:28
custodial UTMA or UGMA account, and a taxable brokerage. The 529 is meant for educational purposes only, and all else
00:25:35
being equal is somewhat boring. To be totally honest, I'm not planning on using the 529 account to like teach my
00:25:41
daughter about money and investing. Maybe by the time she's a late teenager,
00:25:44
but as a 5-year-old, when I go to her and say like, "Hey, I'm putting $260 a
00:25:49
month into your 529 so that you can go to college in 13 years," she's not going
00:25:53
to care. So instead, I think that the the UTMA or the UGGMA or a taxable account are the much better option. The
00:25:59
UGGMA is basically a trust that you, the parent, manage for your child until they
00:26:03
turn 18 or 19 or 21, depending on your state. You can make just about any sort of investment choice inside that
00:26:09
account. The tax scenario in those UGGMA accounts is actually pretty nice due to
00:26:13
something called the kitty tax. So, for a long story short, it means that the first few thousand in dividends or
00:26:19
interest each year are taxed at very, very low rates. Not quite taxfree, but can be somewhat close to that. Now, the
00:26:25
main drawback though of the UGGMA account is that you as the parent, you lose 100% control when your child
00:26:31
reaches the age of majority. So, the question ends up being, what would your 20-year-old child do with a sudden
00:26:36
injection of money at 20? You know, many thousands, maybe even many tens of thousands of dollars, you lose control,
00:26:41
and that can be a little scary. I know there are parents out there who are like, "No, no, my my kid is great. I've
00:26:46
got this seven-year-old. They're a wonderful child." And there's a difference between a seven-year-old and
00:26:50
a 20-year-old. I just think it's worth understanding that. So that's why the
00:26:54
other common option here is a simple taxable brokerage account that you, the parent, own. You've simply earmarked it
00:26:59
in your head for your child. You can save and invest the same way as you would in an UGGMA. The tax situation for
00:27:05
you would be slightly worse. And then when you ultimately gift those taxable account assets to your kids in the
00:27:10
future, the gifting rules might throw a small wrinkle in your plans. Personally,
00:27:15
I wouldn't let that gifting wrinkle really throw you off too much. It's going to be about filing a a gift tax
00:27:20
return. Not that the gift will be taxable unless you happen to be extremely wealthy and above the federal
00:27:26
state tax limit. It's just that you're going to have to file a gift tax return
00:27:29
most likely. Now, so that's that's what I would do if you're a parent and if
00:27:32
it's the parents money who's involved, but it's different if it's your kids'
00:27:35
money that's involved. Like Matt mentioned, his daughter is babysitting. So that's where a custodial Roth IRA
00:27:41
might come into play because the IRS sees that your child has earned income. They can use that earned income to save
00:27:47
in a Roth IRA. An important note for Matt in this case who asked the question, I would bet that the IRS
00:27:52
probably doesn't know about your daughter's babysitting income unless you
00:27:56
are, you know, voluntarily reporting it to them, which legally, yes, you're supposed to do. I think if it's over
00:28:00
$400, you're supposed to report it. But depending on the total amount of income,
00:28:04
I will say that might very well all fall within your within your daughter's her
00:28:09
uh standard deduction on your tax return. Uh meaning it would get taxed at 0%. It depends on how much she's
00:28:15
earning. So, I would look into that for your family. But let's assume you did
00:28:18
report the income. Great. So now you can fund a Roth IRA for your daughter up to
00:28:22
either the amount she earned maxing out at now7500 here in 2026. The limits just
00:28:27
went up from 7,000 to 7500. So the one and only downside here is that these Roth dollars are certainly most
00:28:33
effective if they're not touched until your daughter's 59 years old. So it's
00:28:36
hard to tell an 11year-old, you know, here honey, I know you earned $700 this summer, but why don't you just wait 49
00:28:43
years for it to turn into $10,000 and then you can do something with it. So, I think at least when I'm going to be at
00:28:48
this point with with my children, I'm going to encourage them to make a balance between something like Roth
00:28:53
contributions and taxable contributions. Some for sooner, some for later, some to
00:28:57
have and as a investing sandbox, and some to totally set and forget. So, speaking of that sandbox, third, let's
00:29:03
talk about making this fun. So, here's what I've seen work. First, I would
00:29:06
recommend some sort of parental matching. I think Matt called it the the mommy and daddy matching. So, you want
00:29:11
to incentivize your children to save some of their money by offering a generous parental match. Most kids are
00:29:16
going to want to spend some of that hard-earned money. I think that's totally fine. But if you offer them
00:29:20
maybe like a one for one match, it would allow them to save 50% and spend 50%. But then you match their 50%
00:29:28
contributions. So the next thing you know, they end up with 100% of the amount they earned invested. They also
00:29:35
got to spend half of what they earned. And so that's not a bad trade-off. So
00:29:39
depending on your personal preference and parenting style, you could certainly offer different incentives for different
00:29:44
accounts, too. But then we should talk about the actual investments. And this is still on the topic of keeping it fun.
00:29:49
I think index funds are wonderful obviously, but they aren't necessarily fun. But still, we want to instill some
00:29:55
sort of good long-term investing practices here. And it does feel a little irresponsible, at least to me,
00:30:00
to, you know, if my kid is going to invest five grand, half of which was mine that I gifted to them, and then
00:30:06
they're going to go buy some triple levered Nvidia ETF, that doesn't quite
00:30:09
feel right. So, I'd recommend some agreement where the majority of their long-term savings are invested in kind
00:30:15
of a lowcost diversified passively managed vehicle. For example, total stock market index fund might make
00:30:21
sense. But then, yes, a minority of the money can be some sort of sandbox for your children to experiment with. If you
00:30:27
still want to put some parameters on that experiment, by all means, have at it. Both the index funds and the sandbox
00:30:33
both create these great opportunities for teaching. So, Matt, thanks for the question and good luck. The next
00:30:39
question is from Say or Sied who asks, "One topic I would love to hear about
00:30:42
would be how our investments should evolve over time as our investment assets increase. I'm especially
00:30:48
interested in your investment recommendations for when one reaches FI or financial independence." So yes, say
00:30:54
here we are one year older, one year wiser, let's hope, one year closer to retirement or further into retirement.
00:31:00
And yes, one year closer to our expiration date to death. Although it's worth noting uh an intriguing idea that
00:31:06
we might be able to buy ourselves more time through many other people's biggest
00:31:10
New Year's resolution, health. You know, you don't have to die at 78. You could
00:31:14
get healthier and live till 88. So anyway, we're one year older. We know that for sure. So there are two
00:31:19
questions in one here built into say's question. The first one has to do with
00:31:23
how our timelines evolve. But then the second one has to do with how our ability to take risk and our need to
00:31:29
take risk shift as our investment assets increase. So let's start with the timelines. Now for most of us, our
00:31:35
portfolio represents 20 or 30 or 40 years or more years of future spending. So for that reason, getting one year
00:31:42
older shouldn't represent that big of a shift, right? It's just one year older
00:31:46
out of a 30 or 40-year timeline. So if you're ever tempted to make large wholesale changes just because you're a
00:31:52
year older, I would recommend you pause that action to double check if you really sure you know why. So how do your
00:31:58
timelines change yearbyear? The answer does slightly change depending on if you're in retirement or before
00:32:03
retirement. So, let's go chronologically. We'll start with some of the younger listeners, folks like me
00:32:08
in their 30s or or maybe even younger, maybe some folks in their early 40s. Basically, I'm I want to think here
00:32:13
people who look at their financial plan and they think, you know what, retirement is simply 15 plus years away.
00:32:19
If you think retirement is 15 plus years away, I'm not sure there's a strong
00:32:23
reason to fundamentally shift your asset allocation from year to year. I would say just keep doing what you're
00:32:28
comfortable doing. That 15-year number I mentioned, I'll admit it's a little
00:32:33
arbitrary and subjective because essentially the question to ask is how far before retirement or whatever the
00:32:39
other really big goal is that's 15 years away. I'm using retirement. How far
00:32:43
before retirement do I need to seriously begin downshifting to a more conservative allocation? Now, if you
00:32:49
look at target date funds, for example, you'll see that most well-known mutual
00:32:53
fund companies, they begin their target date glide path 25 years before the actual date. The industry average target
00:33:01
date fund carries between 85 and 90% stocks until 25 years before the retirement date, and then it glides down
00:33:08
that allocation to 40 to 50% stocks by the time retirement begins. Or put another way, if you've got the 2055
00:33:16
retirement date fund right now, you are still 90% stocks, but then starting in about five years, they're going to make
00:33:23
roughly a 1.5 to 2% allocation change per year that starts 25 years before retirement. It's a 40 to 50% change in
00:33:33
stock allocation done over 25 years. Now, that 25-year downshift, that's a little bit more conservative than my
00:33:40
personal taste. I don't think I need to start downshifting 25 years in advance.
00:33:44
In fact, I would wager that most bogleheads, DIYers, fire folks probably think that even my 15-year transition is
00:33:51
a little too conservative. But the way I think about it is this. Whether it's 15
00:33:54
years, 12 years, 10 years before retirement, maybe you've even got their sequence risk on your mind from what we
00:34:00
talked about earlier. Maybe you're only going to downshift 6 years before retirement like I mentioned. I do think
00:34:04
at some point you need to look at your financial plan and admit to yourself in X years it'll be my first year
00:34:10
retirement and I need to earmark some money for that year and I also need to feel really confident that my earmarked
00:34:16
money will fully be there when I need it and then you've got to make some allocation decisions appropriately based
00:34:21
on that statement. Now if you think that inflation risk is greater than equity risk over 10 or 12 or 15 years I'm
00:34:29
totally willing to admit that you might be right there. it's hard to know in
00:34:32
advance. And and the reason why I point those two things out specifically is that bonds and cash, right, they are
00:34:37
subject almost totally to inflation risk, whereas stocks are subject to equity risk. And the question becomes,
00:34:44
if I've got 15 years to my retirement, which risk is greater, 15 years of future inflation risk or 15 years of
00:34:50
future equity risk? So, I understand both sides of that argument, don't get me wrong. I will say though, at some
00:34:55
point in that time range, 8, 10, 12, 15 years, I do think you need to start building up the safer side of your
00:35:01
portfolio. And here's another thought for the most risk-on investors who want
00:35:05
to wait until just before retirement to start building up the safe side of their
00:35:08
portfolio. I'm talking about someone who's, you know, 100% stocks right now,
00:35:11
their plan to to retire at maybe 85% stocks. The question I would ask them, it's a financial planning question, and
00:35:18
basically it's, would you rather give yourself one day to make that portfolio
00:35:21
change or one decade? And I'm cherry-picking here, but my point is that the one-day option gives you zero
00:35:27
flexibility to actually plan the allocation shift over time. The one decade option, it gives you 10 different
00:35:34
tax years. It gives you 10 different years of portfolio performance, 10 different years of earned income or
00:35:39
maybe not earned income. It gives you 10 different opportunities to make smart portfolio allocation decisions that also
00:35:46
might be ideal for your overall financial plan. So again, that's why I wouldn't necessarily wait till the last
00:35:52
minute. I would plan it over time. Back to the original question from say I'm
00:35:56
still talking to people who are pre-retirement here. And basically my message is this. At some point
00:36:00
pre-retirement, you will want to begin gliding your portfolio from a higher growth allocation to your this is me
00:36:07
ready to pull the retirement trigger allocation. The pros, the professionals who tend to lean conservative, they
00:36:12
certainly do so they don't get fired, they glide over 25 years. I'm more
00:36:16
tempted to glide over 10 to 15 years. I would simply recommend that you choose a
00:36:20
long enough period so as to give yourself flexibility to glide over market cycles, over tax regime changes
00:36:26
or changes to your personal circumstances. I mean, listen, there's a reason why when you're flying into
00:36:31
Rochester International Airport, yes, it's an international airport. We have
00:36:34
flights to Toronto. There's a reason why they start descending like 40 miles out,
00:36:38
right? They don't just descend when you're a mile away. I do think you need
00:36:42
a little bit of a glide path. But now, let's pivot. What about when you're in
00:36:45
retirement? How do these year-over-year changes? How how does that work when you're in retirement? Now, to me, the
00:36:50
answer might change somewhat here. You've heard me discuss asset liability matching, goals-based investing. So,
00:36:56
you'll be familiar with what I'm about to say if you've heard me talk about it
00:36:58
before, and I will throw a relevant article link in the show notes here about asset liability matching. So,
00:37:03
let's imagine our retiree, they're beginning a new year in retirement right
00:37:07
now. Presumably, last year, they spent some money from their portfolio to support their lifestyle. Awesome. And
00:37:12
most likely they funded most of that lifestyle money using some cash that acrewed in their portfolio. They
00:37:18
probably sold off some fixed income. Maybe they've realized some capital gains from stocks at at a at a low rate
00:37:23
or something like that. But I would argue that most for most of these people, their cash and their fixed
00:37:29
income is lower now than it was 12 months ago, depending on how often they've been rebalancing. But then what
00:37:35
else happened last year? Well, markets happened, right? Markets happened. Markets did their thing and asset prices
00:37:40
have changed from 12 months ago. So based on at least where we are now in early December, diversified high-grade
00:37:46
bonds are up about 5% on the year. Diversified US international stock portfolio is probably up about 20% on
00:37:52
the year. And based on those numbers, if we rebalanced back to our beginning of year allocation from 12 months ago,
00:37:59
well, we might have the same percentage of bonds that we had 12 months ago. The math is also clear that we're going to
00:38:05
have way more dollars in bonds now than 12 months ago. And from a goals-based or
00:38:10
asset liability framework, that doesn't really make sense. With one more year of
00:38:15
liabilities now checked off because we've had one more year of retirement that we've lived, we don't need any more
00:38:20
money in our safe assets. If anything, we need less money in safe assets. So that's why I I wrote an article back in
00:38:26
2024. Yes, the link will be in the show notes. And the article is called when not to rebalance. And it's all about
00:38:32
this concept. Basically idea is that there are sometimes in your retirement there are sometimes if you're following
00:38:37
an asset liability framework where I don't really think you need to rebalance. If you started the year with
00:38:42
10 years of bonds and 15 years of stocks and now you have 10 years of bonds and 20 years of stocks why exactly do you
00:38:48
need to rebalance to even more bonds instead I think the better question to ask is what do you want to do with your
00:38:54
excess capital? The same question I or the same term rather excess capital that I mentioned before. Many retirees end up
00:38:59
in a point where due to asset growth over time, they have more than enough assets to cover the rest of their
00:39:05
lifestyle expenses for their entire lifetime. So the question for them is how to invest the remainder. And it
00:39:10
mostly comes down to personal risk tolerance and personal preference. That's the willingness to take risk. If
00:39:15
someone wants to play it safe and keep their excess capital and cash and bonds, I totally get it. But if someone wants
00:39:20
to take a flyer on venture capital or their their nephew's Etsy business, more
00:39:24
power to them. And the reason why I bring up that excess capital is because going back to the original question,
00:39:29
when one looks at their portfolio year-over-year, they might eventually realize that they have more excess
00:39:34
capital than anticipated or that their excess capital has actually expanded year-over-year. So for them, their
00:39:40
reallocation or rebalancing decision is actually more about what to do with that
00:39:43
excess capital than it's about anything else. And there's not a one-sizefits-all
00:39:47
answer there. And actually, one more stop as I answer that question. I mentioned earlier our ability to take
00:39:52
risk and our need to take risk. They shift as our investment assets increase. And I use those words intentionally.
00:39:58
Ability and need. Your ability and need are two objective mathematical ways to assess how much risk ends up in your
00:40:05
portfolio. Ability is all about recovering from losses either through time or through adding new assets when
00:40:11
when investment prices are down. And then your need is all about the returns you require to meet your goals. So
00:40:17
whether you're a pre-retire or a post-retiree, you're likely going to see
00:40:20
your ability and your need to shift over time. And part of this is already built
00:40:24
into the topics we already discussed today. This is actually one of the reason why glides paths exist. This is
00:40:30
also one of the reasons why you can do whatever you want with your excess capital because technically when you
00:40:34
have excess capital, that money has an infinite ability to take risk but also has zero need to take risk. So what do
00:40:41
you do when you have infinite ability to do something but you have zero need to do something? Well, you can kind of do
00:40:45
whatever you want. But then of course there's also your willingness to take risk. Willingness is the subjective side
00:40:50
of taking risk. It's that sleep at night factor. It's the how often do you check
00:40:54
your portfolio factor. And the interesting part about willingness is that quite often we learn more about our
00:40:59
willingness to take risk as we progress through both the upy years and the down years. Specifically here at the end of
00:41:05
2025, something like the April tariff tantrum might have helped some investors realize that their assumed willingness
00:41:10
to take risk was actually too high. that they cannot handle the feeling of being
00:41:14
down 15 or 20% while also hearing the the negative headlines from all around. For those people, I think it's
00:41:20
reasonable to to make relatively large allocation changes actually over a short period of time, right? Because they've
00:41:26
realized that their willingness to take risk is not what they thought. They're
00:41:29
in the wrong portfolio. And I think it makes sense for them to make a pretty big change over a short period of time.
00:41:35
Now, what we want to avoid doing is this, where during a bull market, you convince yourself you need to allocate
00:41:41
10% or 20% more to stocks, and then during a bare market or during a correction, you convince yourself to
00:41:46
allocate 20% back to bonds. We don't want to do that. A great quote that I heard, and I think it's originally from
00:41:51
Ben Carlson, is that you need an allocation that simultaneously does two things. It participates in the upside
00:41:57
enough so that you're content during the bull markets, but it also has enough
00:42:01
downside protection so that you're at peace during the bare markets. And that
00:42:05
will look a little bit different for everybody. My point is though is that some of us might have realized back in
00:42:09
April tariff tantrum that we're not at our sweet spot. So the question then becomes how quickly do you pivot down to
00:42:15
your sweet spot allocation? And yes, we want to take taxability into account here in case we're dealing with a
00:42:21
taxable account. But all else equal, we want to make that change quickly. There's no major reason to drag your
00:42:26
feet other than to prevent future regret about bad market timing when we make the
00:42:31
change. Therefore, for those type of allocation changes, again, keeping some of that behavioral economics, behavioral
00:42:37
finance in mind, I typically recommend people make half the change, 50% of their proposed change immediately and
00:42:43
then they spread the remaining 50% out over 3 months or 6 months or 12 months. Now, cuz the longer you wait to make the
00:42:50
change, the longer you are exposing yourself to the risk of your incorrect allocation. So, say great question. So,
00:42:56
you know, as far as someone who might be having those kind of thoughts here in the new year as they assess their
00:43:01
financial plan, that is how I would approach some sort of uh significant allocation change. Here's a quick ad and
00:43:08
then we'll get back to the show. Serious question. Why do podcasters constantly
00:43:12
ask for ratings and reviews? Yes, they do help highlight our shows to new listeners. They help strangers find us
00:43:19
on Apple Podcast and Spotify. It's totally true and a good reason to ask for ratings and reviews. But I have
00:43:25
something more important, at least more important to me. I want to know if you like this stuff. I want to know if you
00:43:31
like my podcast episodes, my monologues, my guests, the information I share with
00:43:35
you and the stories I tell. I want to improve and make your listening more enjoyable in the process. So yeah, I
00:43:41
would love to read your reviews. And sure, if you throw a rating in there, too, that's great. If you like what I'm
00:43:47
doing, please share it with me. It's such a great feeling to read your feedback. I'd love to read your review
00:43:53
or see a rating on Apple Podcasts or Spotify. Thank you. Our last question, and this is a pretty quick one. Christa
00:43:59
from Dallas asked, "Every year we get one year older. What are the specific
00:44:03
ages we need to be most worried about in retirement, and what events occur at those ages? How should my retirement
00:44:09
thinking and retirement plan change accordingly?" So, a very interesting question. I'm actually going to go back
00:44:14
before retirement, and I'm going to cover some of the younger listeners, too. So basically again chronologically
00:44:20
here I'm going to read off some important ages and I'm going to tell you
00:44:22
what happens at those ages. And even when I'm done I'll talk about some important events in retirement and
00:44:27
beyond that aren't necessarily tied to an age but they certainly feel chronological in some way. So I'll talk
00:44:34
about those ones too. So first the ages. So ages 0 to 17 those are the years where kitty tax occurs and and child tax
00:44:42
credits and those kind of things. I guess child tax credits extend beyond 17 too. So just worth knowing that even
00:44:47
when you are a kid or when you have kids, there are some important ages there. Ages 18 to 21, depending on your
00:44:52
state, you reach the age of majority, which might mean getting full ownership of an UGGMA or an UTMA or again as a
00:44:58
parent losing control of that account to your kids. When you're younger than 24,
00:45:02
which almost all college kids are, your parents income still counts on your FAFSA form. Uh now, that certainly is
00:45:08
not a reason to delay college until you're 24. Just pointing that out in case it matters. age 26, you can remain
00:45:14
on your parents' health insurance until December 31st of the year you turn 26.
00:45:19
My next age I have as N plus five. You can withdraw from Roth IAS penalty-free 5 years after establishing one. And so
00:45:28
again, or there's also an N plus5. There there's two 5-year rules with Roth IAS,
00:45:33
right? One of them has to do with when you can make withdrawals after first initially establishing your first ever
00:45:39
Roth IRA and the second one has to do with when you can start to withdraw dollars that you've converted from an
00:45:46
IRA to a Roth. Both of them have an N plus5 5-year rule. The next age here is 50. At age 50, you can start making
00:45:53
catch-up contributions in retirement accounts. At 50 as well, certain public service employees can start using the
00:45:59
rule of 50. Now, the rule of 50 is very, very similar to the rule of 55. It's
00:46:03
just five years different. And what's the rule of 55? So, at 55, you can start
00:46:07
using the rule of 55, which allows you to make penalty-free 401k or 403b withdrawals in certain circumstances if
00:46:14
you're retired early. So, I would highly recommend you read up on the rule of 55
00:46:19
and therefore also the rule of 50 if you think it applies to you. Also, at age 55, you can start making catch-up
00:46:26
contributions to your HSA accounts. at age 59 and a half. I still don't know
00:46:31
why it's 59 and a half. I would love if someone out there knows why that half
00:46:34
year is there, man. Just make it 60 or make it 59. Let's Come on. Let's go.
00:46:39
What are we doing here? IRS. Anyway, at age 59 and a half, you can start making penalty-free withdrawals from your
00:46:44
retirement accounts, IRA, 401ks, 403bs, that kind of thing. At age 60, survivor benefits become available. Social
00:46:52
Security survivor benefits become available for widows or widowers. At age 62, the big one, you can file for your
00:46:59
uh social security benefits, albeit at lower benefits, lower rates. At age 63 and a half, some people call this the
00:47:06
bridge to Medicare age because if you wanted to, you could retire. You could claim COBRA health insurance benefits,
00:47:13
which lasts for 18 months or can cover 18 months and can cover you from age 63 and a half till 65, which is when
00:47:20
Medicare kicks in. And that brings us to our next age, 65. you're eligible to
00:47:25
sign up for Medicare 3 months before turning 65. Also, at 65, you can start withdrawing HSA funds, not only
00:47:33
penalty-free, but you can also start withdrawing them for non-medical reasons when you turn 65. It essentially lets
00:47:40
you treat your HSA like a traditional IRA where you still have to pay income tax on the withdrawals, but you don't
00:47:46
have to use it for medical reasons, which is kind of interesting. depending on when you were born. Age 66 or 67 is
00:47:51
full retirement age, which has a very technical term, technical definition I should say, in the social security
00:47:56
world. And then age 70 is when you have not full retirement age, but basically you have maximized your social security
00:48:02
benefits by age 70 and you have to claim. Age 70 and a half, you can begin making qualified charitable deductions,
00:48:09
QCDs from retirement accounts. And then depending on what year you were born, for most of you listening, age 72 or 73
00:48:16
or maybe even 75 is when your required minimum distributions will begin. So that's my list. That's all I had. Now,
00:48:23
other events, like I alluded to before, certainly matter and they're somewhat
00:48:26
tied to age. They're just not necessarily tied to a universal age. Death being a big one. Death might be
00:48:32
one of the biggest events out here. It's certainly chronological for many people.
00:48:35
Your term life insurance will likely well, it will eventually expire. It's term unless you pass away. and and then
00:48:41
you get the benefit from the insurance. But anyway, your term life insurance will expire. It's worth knowing when
00:48:45
that happens. Employer pension eligibility and then benefits or benefits reductions are often age-
00:48:51
based. Various insurance premiums can be age- based. Uh you know, lots of insurance types might batch you into
00:48:57
5-year clumps. So when you move from, say, the 40 to 44 year old group into the 45 to 49year-old group, you will
00:49:04
probably see your premiums change. So sometimes, again, it's usually in 5-year
00:49:09
clumps. So, every five years, you might see an insurance premium change because you've changed age groups. Long-term
00:49:15
care insurance, those insurers generally will not issue policies past a certain age. Granted, I'm not exactly a an LTC
00:49:22
insurance fan anyway. Some RSUs or stock options can have age-based gates. Certain states have specific age-based
00:49:29
triggers, especially for senior benefits. I'm sure I'm missing a bunch, so if if anything is really sticking out
00:49:35
as an obvious one that I missed, by all means, let me know. But that's about all
00:49:38
I could think of. So, thank you for the great question, Christa. And listeners, best of luck in your finances here in
00:49:44
2026. If you have a question to submit for a future AMA or for a potential blog post or simply to get my 5-minute
00:49:49
opinion, by all means, feel free to please send me an email to [email protected].
00:49:54
I very much look forward to hearing from you. And again, have a wonderful and healthy and hopefully wealthy 22 2026.
00:50:01
Thanks for tuning in to this episode of Personal Finance for Long-Term Investors. If you have a question for
00:50:07
Jesse to answer on a future episode, send him an email over [music] at his blog, The Bestin Interest. His email
00:50:13
address is [email protected]. Again, that's jessevestinterest.blog.
00:50:20
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