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