Risk Management and Retirement Planning Webinar

Pure’s Senior Financial Advisor, David Cook, CFP®, AIF®, provides insight into key risks of retirement and how to manage them.

Outline

• 00:00 Intro
• 1:26 Why is Risk Management so Important?
• 3:35 Types of Risk Management
• 20:20 Risk Management Strategies
• 24:25 Asset Allocation
• 26:44 Diversification
• 28:09 Tax Diversification
• 35:37 Risk Management Process
• 36:07 Retirement Risk Zone: What is it?
• 38:22 Bonds and stocks
• 44:04 Health insurance
• 44:41 Parts of Medicare
• 47:42 Medicaid
• 49:44 Life Insurance
• 51:01 Staying Healthy
• 52:36 Q&A
  • Given all the fires we’ve seen in CA, how do we manage natural disaster risks for my home?
  • Does Roth Conversion need to be done when you’re working or retired?
  • For sequence of returns risk, do you recommend a bond tent leading into retirement?
  • Difference between bonds in relation to ETFs and fixed index annuities

Transcript:

Kathryn: Welcome to this Risk Management and Retirement Planning Webinar. We have David Cook, our Senior Financial Advisor here at Pure Financial Advisors. Welcome. How are you doing today?

David: I’m doing good. How are you doing, Kathryn? Happy to be here.

Kathryn: I’m doing good. I know we have a lot to talk about, so I’ll let you just get started.

David: Hopefully, you know, we’ll be going over a lot of ideas to help you understand and navigate the different risk factors that we all face. And it’s not about risk avoidance, it’s about risk management. And my goal is to hopefully go through these factors simply and equip you with some practical insights and how to best manage some of these risk factors that we’ll all be facing.  So with that, let’s jump right in. So let’s go to basically understanding really what risk management factors we’re going to be discussing. So we’re going to be talking about, of course, longevity risk, and I’ll be going into specifics a little bit more in each of these. We’ll be talking about inflation risk, the sequence of return risk. Of course, there’s interest rate risk. Liquidity risk, we’ve got market risk, we’ve got tax, we’ve got opportunity risk, and those are the main areas that we’ll be discussing. And how to understand these risks in our own world and, simply how to understand what’s the best way to address them and control these risks as best as we can. Again, this is about management, this isn’t about risk avoidance.

Why Is Risk Management Important?

So kind of moving forward again, why risk management is so important. Well, again, you think about, and we manage risk every single day, whether we’re driving in our cars, we’re jumping on a bike, riding down the boardwalk, dealing with, you know, the traffic. There’s a lot of different risks that we’re managing. And it’s really about understanding the manage, how to manage a risk that we can’t control. So, it’s really getting prepared for the unexpected, because we know it’s going to happen.  And secondly, it’s making sure that you protect not yourself, but you’re also your family and also your own personal picture. How to make sure that you can manage these things without having perfect visibility and everything that’s going to happen. And again, in this day and world, there’s so much noise out there, and so it’s really trying to break it down. What can you control? Because there’s a lot of things that are out of our control. You know, with the news cycle happening so fast, we’re getting our news in this kind of headline, kind of, you know, feed, and we get so caught up on these things and it’s kind of like, I’ll use some analogies. I love aviation. So I tend to use a lot of aviation analogies, a pilot is flying at 30,000 feet. He’s not worried about what the weather is at 5000 feet, right? So it’s just understanding the types of things that we can control and making sure that you maximize the control of those. And then everything that’s out of your control, well, that’s just going to be something that again is not in our control.

Types of Risk Management

So, moving forward, I’m going to start going into some of the factors that we’re going to be facing.  So kind of starting off with longevity risk. Right, as we’re, when we’re younger, you know, we hope to live a long, healthy life. And that’s our goal as we age and go through our accumulation years. Now, as we get older, there’s a risk of what if I live a long, healthy life? And then that becomes a really tough complication in managing retirement assets and making sure do you have enough, and making sure you don’t outlive your money. So longevity risk is something that we have to kind of understand. And a lot of times when we do planning, we push it out as far as we can. Age 95, even though maybe the average life expectancy might be 76, 77, we tried to, I, want to make sure that, if you do live a long, healthy life beyond your personal life expectancy, that is not, you’re going to have coverage there. And there was an interesting paper that I read that did a study on the psychological impact of longevity. And it basically said those that said, I’m not going to live past 75. You know, you know, you have maybe your own personal genetics, maybe your parents didn’t live very long. And the more that you verbalize that, the more you’re going to actually speak it into existence. So my, my, I would say my recommendation there is don’t play yourself short. Expect to live a long, healthy life, but also prepare for it.

The next we’re going to talk about is inflation.  Now inflation has really kind of taken a front-row seat in the last several years.  And really inflation is something that you need to evaluate in your own personal financial situation. When you’re doing a cash flow projection, you got to put a really reasonable amount of inflation so you know that you’re keeping up with inflation. Because it’s not just when you look at your stock portfolio, okay, you might have a 6% or 7% rate of return. That’s your nominal return.  What if inflation was 5% or 6%t that year? Your real return is maybe 1%. So it’s about purchasing power. It’s about understanding that inflation is an absolute part of the risk factors that we have to address and evaluate in your financial picture and your financial plan. You got to look at it over the next 5 years. Also the next 10. Go out to 20 years and you see that rate of inflation can take a pretty big bite. So you got to make sure that when you’re looking at your investments that you’re not too fearful, you know, going, out of equities because you’re worried about a market. And then all of a sudden inflation hits and your cash might not lose anything. But if inflation is 6% or 7% or 8%, well, you’ve lost 7% or 8% of your purchasing power. So it’s really making sure that you don’t get, you don’t get too panicked. Now we just went through the largest amount of inflation we’d seen in 40 or 50 years. So of course it’s something that we have to address every day.  And it’s, and we’ve seen this ramp up of inflation and it’s not going to be easy to bring back down. But it’s something that we need to understand. Now, inflation’s gonna impact people in different ways. If I’m a young family, like I have a niece that just, she’s in her mid 20s, just had her first baby, got married. She had to move out of California to go live in Tennessee because inflation was going to be really tough on them, on young families. So young families that are just having, getting started, maybe you don’t have a house. Maybe you have an old car that you’re eventually going to have to replace in the next couple of years. Inflation is going to likely hurt those young families more than if you’re retired. If it’s just, you know, you have two individuals going into retirement. Maybe your house is paid down. You bought it when prices were much lower.  And so inflation is going to impact you a little less. And especially when you get into Medicare, inflation is going to keep somewhat under, under control because you’re not going to see these big expenses. Now, if you’re out doing a lot of traveling in retirement, and you plan to spend a lot of money going on doing some more discretionary expenses, inflation is going to impact you more than if somebody said, hey, you know, I did all my traveling in my earlier years, and I’m just going to kind of relax  and kind of just hang out with the grandkids and you know, so, so each person is going to have a very different understanding and impact of inflation, but it’s something that you need to know and how it’s going to impact your personal cash flow. So it’s very important to know what your cash flow is and what your expenses are.

Now we’re going to move on to sequence of return risk.  A sequence of return risk is essentially the danger of the timing of the withdrawals that you take in the early part of your retirement. The gist there is that if you run into a really bad market, like a market downturn in your early first two, 3 years of you taking withdrawals in retirement, that has a danger of really reducing longevity of your assets. You can run out of money a lot faster. You lose 10% one year. If you just do 10% the next year, you’re not going to be even, especially if you’re taking a 4% or 5% distribution rate. So the sequence of return risk is something that you got to be mindful of. Now to give you a perfect example of something that we just recently faced within the last few years, it’s COVID. 2020 I had many clients, several clients that retired in January and February of 2020. If you remember March of 2020, the stock market went down anywhere between 25% and 50%, depending on which asset class, small caps, mid caps, all went down. Everything went down, and it did it very fast, within 3 weeks. I had clients that were very nervous, especially if they pulled the trigger on retirement in February, to only see the market just, the bottom just fall out, right?  So, the idea of sequence of return risk says, let’s say the next 5 years, you had a genie that said, the next 5 years, I know what the returns are going to be, 10%, 3%, 5%, negative 20%, and 2%. But I don’t know which years those happen. So if you have a portfolio A) that has all the same returns every single year that we’ve talked about, and you have portfolio B) and they just mix up those returns so the bad year happens earlier. Those two returns are gonna have the same average rate of return. But the portfolio that took the hit in the early part of the first year is gonna have a shortened lifespan, shorter than the portfolio that maybe that bad year happens 3, 4, 5 years into retirement. So there’s ways to, to address that. Again, you don’t want to be caught going into retirement and have 90% stocks, say for instance, right? Let’s say you go into retirement and you have 90% or 95% stock portfolio, and you’re just about to start your distribution. Let’s say you’re going to take a 4% distribution rate. And you’ve got $1,000,000 and you’re going to take $40,000. And all of a sudden COVID happens.  Well, you’re stuck pulling money out of a, of an asset that’s down 30%. And you’re taking volatility and creating a real loss. That’s going to be very hard to dig back out. So, so that’s why asset allocation is so vital. So you have safe money, you got a cash reserve, you got some bonds, and maybe if you look at what happened in COVID, bonds actually started performing well after about one or two weeks into the drop. So then you don’t take any money from your stocks, you let your stocks kind of heal, and you take your distributions from your safe money. That’s why it’s important to have 20%, 30%, 40%, 50%  in bonds, even though it’s going to add maybe a little bit of drag to the portfolio. It’s very important to make sure you have a pool of money that you can use, not touch any stocks when they’re down. That’s one way to mitigate sequence of return risk. Now, each person is a bit different. Each portfolio is a bit different. You know, if you, so each one you’re going to have to evaluate, but that’s something that you have to keep in mind.

Now, interest rate risk. Of course, interest rate risk is another risk that we’ve kind of seen recently. Again, a lot of these risks, we’ve, you know, we may have talked about them theoretically 10 years ago. Inflation, interest rate risk, but those are pretty mild. Inflation had been pretty mild. Interest rates have been pretty, you know, pretty low and hadn’t really spiked or come crashing down. So we didn’t, we knew them that things like this happened, but now we’ve got real world experience. Interest rates had stayed low for many, many years. You know, we, if you remember back to the recession in 2008, 2009, they dropped interest rates down to zero, Federal Reserve did, and they were only supposed to keep them there for maybe one or two years. Well, 2010 they kept interest rates at zero. 2011, interest rates at zero. 2012, interest rates at zero. So they, for the last 12, I’d say 15 years, they, the Federal Reserve kept interest rates very, very low. And what that kind of did is it ended up placing a lot more risk on those that wanted to have a safe portfolio, having bonds, because you didn’t get paid much in your bond portfolio. Interest rates were low, and it also incentivized extra borrowing.  And it also, it kind of sparked more speculation on the equity side. So what we started to see is, you know, some of the some retirees adding risk to the portfolio when they, it wasn’t necessary or at a time that they couldn’t afford more risk. And so then we had interest rates really low, then they started raising them in 2017, 2018, and then they kind of stopped, right? So you have to understand your own portfolio, how it’s going to interact with interest rates. If you got a heavy bond portfolio and interest rates are low and they start going up, well, if we’ll talk about this later in this webinar, interest rates going up is going to push the current value of bonds down. And so you have to know what your asset allocation mix is, how it’s going to interact with interest rates, kind of have a good situational awareness.  Again, a lot of this risk management is I’ll talk about another aviation analogy, if you’re a pilot, you got to really have good situational awareness. When you get into retirement It’s really important to have good situational awareness. What’s the kind of the rate of inflation currently? You know, and you know, you don’t have to be an economist, but you got to have a kind of idea of what the current interest rate market is.  Are you getting a favorable rate return on cash? How much exposure do you have if interest rates spike, they come down? Again, only controlling what we can because we can’t control the direction of interest rates. We can control how that impacts our portfolio.  So it’s an important thing because we’ve seen it. We saw interest rates spike and now they’re kind of starting to fall. But they’re you know, the federal reserve had just kind of halted their short-term rates in January. They’ll probably do a couple great drops this year. But that doesn’t necessarily impact mortgage rates or the long-term borrowing rates for the government or treasury. So there’s a lot of intricacies that it’s important to kind of understand again in your situation finding out what we could control.

Now we’re going to kind of move into another set of factors here.  So liquidity risk.  If we look at liquidity risk, that’s kind of like where if you have assets that you are forced to sell and maybe there’s additional costs to sell or there you’re selling at a downside and maybe it’s hard to sell. So you don’t, you want to make sure you have enough liquidity to get you when you’re in retirement, if you’re taking a distribution, you’re taking cash flow. You want to be as liquid as possible, but sometimes liquidity comes with a cost too. If you’re too liquid, well, sometimes, you’re not going to get the types of returns you did if you had some things that are you know, like let’s say real estate. Real estate for instance is generally not a very liquid investment. If you take all of your bonds, you’re like, you know, I don’t like the way my bond portfolio is acting. I’m getting 1% or 2% on bonds. I’m just going to sell all my bonds and buy a commercial property. You buy a commercial property you’re getting a some income from it, but if something happens as an emergency and you need to get access to that liquidity and you’re only getting the cash flow, well then now you’ve got liquidity risk. Because those bonds not only give you income, but they allow you to sell them in a time where there’s distress in the equity markets and you use it for cash flow. If you have it tied up in real estate or even say gold or some of these more illiquid assets, you can be stuck. You can kind of be caught in a liquidity trap. It’s a right mix. Again, some things aren’t liquid and they’re actually going to perform good, but some things you want to make sure you’ve got a good balance. Again, a lot of this is just a good balance.

Market risk is obviously something that’s most investors talk about, think about as, you know, as a CFP® and as a financial advisor is something that we look at a lot. But again, there’s ways to manage the market risk. And, again, that’s through some of the things we’ll talk about asset allocation.  And just making sure that, again, that you’re not too fearful. You take some of the noise out.  Sometimes the markets are going to give us real time information. Like right now is kind of a perfect example of a lot, we’re getting a lot of news, a lot of things happening, a lot of noise. But what’s the signal?  Is there any real signal? Coming into our, you know, into, our information that we’re actually able to make good decisions. So sometimes watching the market will give us a little bit of a better indication of how the market is reacting to current events.  Now the market’s never going to be perfect. You know when you think about the market there’s millions of participants that are evaluating real time data. What’s the interest rates? What’s inflation? What’s unemployment? What’s going on in Europe? What’s going on with tariffs conversations, right? So instead of getting all worked up and fearful in this new cycle, sometimes they just look at what the market’s telling us. Because it’s not going to be perfect. But sometimes it’s going to give us the best indication, is the market really panicking? Is it kind of confident? Is it apprehensive? So sometimes watching your portfolio and understanding markets is going to kind of give you a little bit of insight. Same thing with the markets could be the bond market too. You have capital markets, could be equities. Also a big part of the capital markets is the bond market. A bond market is going to act differently. Watching where yields are going. Are they rising right now? Are they falling? That will give us a little bit of an indication. Is there stress in the overall debt markets?  Is inflation a cause for concern from the bond market? You will see that in the daily fluctuations of, let’s say, the treasury yields. So you want to make sure you understand how to address your portfolio, what’s going on, but also not oversteering. You really don’t want to oversteer when it comes to market risk. Because like anybody, if you’re driving down the road on a freeway, somebody starts inching into your lane a little bit the last thing you want to do is swerve because you can make a situation that was just, okay, maybe I just slow down a little bit or speed up versus you could turn that into a really catastrophic event. So you don’t want to panic. You want to stay away from fear, but you also want to stay away from the greed, especially as you’re going into retirement. So market risk is something we’ll get into specifically with asset allocation, how to manage market risk, but it’s also understanding where it’s at and what it’s telling you.

Opportunity risk is again, kind of overlaps a little bit as well.  You know, let’s say you were really concerned about the, you know, some, event that’s happening in the world or the markets and you go to cash and you’re like, this is really scary. I’m just going to get out of the market right now. Well, if you’re sitting in cash and all of a sudden, those events have been overplayed and the market says, Oh, this isn’t a big deal. I think we’re going to, I’m going to be fine. Perfect example is COVID. If you got out in bottom of March and you took a loss of 30% to 40%,  there’s no way that you would have been able to foreseen that the US stock market would have fully recovered by August. Because by August, things were, we were still in the dark. We had still no idea what was going on in the markets. But now, unfortunately, what you did is you had an opportunity cost risk of sitting in the sidelines. You took the loss, the markets recovered, and now you’re at a loss trying to catch up. And it’s never going to feel comfortable to get back in. So opportunity risk is something that you’ve got to make sure that you’ve got liquid cash available. Let’s say you’re in a portfolio that’s, say, 50/50 and the stock market drops. Well, maybe you’ve got an opportunity to take some excess bonds and buy when the market’s cheap. Again. it’s just making sure that you’re not panicking and causing a bigger problem.

Tax risk. We’ll get into tax diversification. Taxes are a big piece of life. There’s you know, it’s one of those things they say that you know death and taxes are the certainties in life. Volatility is probably another one. But you want to make sure that you understand, have good situational awareness, again, of your tax situation. What’s your marginal bracket? What is your taxes going to look like when you get to required minimum distribution age? Is that going to push you into a higher bracket? Understanding what your AGI is.  So, again, understanding that is different from your taxable income, because some things are determined by AGI, let’s say, your Medicare premiums. Some things are determined by taxable income, what bracket that you’re in, how, what are your capital gains rates going to be, that’s going to be dependent on what your tax bracket is. So, again, understanding that taxes you know, 20% to 30% to 40% every year are going to take more from us than likely the market will. So, you really can’t have a good understanding of market risk without understanding how the impact of taxes are going to be in your situation. We’ll kind of get into that here in a little bit later.

Risk Management Strategies

Now, risk management strategies. We’re going to talk a little bit about asset allocation. Asset allocation has a, there’s a separate slide here we’ll go into specifics. There’s dollar cost averaging. Dollar cost averaging is when you’re building up an accumulated portfolio while you’re working, you can reduce the timing risk by simply having a systematic contribution. And again, it’s not just contribution in a 401(k). Maybe it’s a systematic contribution into an individual or trust brokerage account that you don’t get the current tax break today, but it accumulates in another pool of money. We’ll talk about tax diversification, and why it’s good to have many different types of pools of money.  But if, say the market drops and you’re putting in your 5%, 10%, 15% in the 401(k), that dollar cost averaging, you’re buying more shares when the markets are cheap. If the market’s really expensive, you’re putting your 5%, 10%, 15%, you’re seeing a static contribution. You’re buying less shares when the market’s expensive. So dollar cost averaging is a very, it’s a simple thing that you can do to kind of remove some of the timing risk. Rebalancing is also really important.  You want to make sure that you’re rebalancing and you’re looking at your portfolio on a regular basis. You know, that you don’t, if the markets are doing really bad, a lot of times our instinct is to not look at it. Just put it away. I’m not going to look at it right now because it’s going to hurt. Sometimes that’s the time you want to look at it. Now, you don’t want to, again, go in and overreact to it. But maybe there’s an opportunity, just like COVID, as I mentioned in March, things were very cheap. You could have bought just about every asset class on a fire sale between 20% and 50%.  And you could have had assets that were selling at a premium. You could be taking, selling high, buying low. Now, you want to let the market tell you when to rebalance. There’s a lot of big mutual funds or say the target date funds that were rebalanced based on a calendar system, like maybe once a year, maybe at the end of the year, they redo a big rebalance, or maybe it’s one, if you’re lucky, it’ll do it once a quarter, but that’s generally going to be more costly. So, so those are calendar date rebalancing. Don’t necessarily recommend that because you might run into, let’s say you rebalance once a year on July 31st. Well let’s say at that point of time, it’s, just before a market shoots up or drops and you rebalanced and you’re, not going to look at it again for another 6 months or another year. Well the opportunity that you’re losing by not rebalancing could, you could shrink the time it takes to recover if you do some smart rebalancing when the market’s telling you hey, we’ve got some things moving, time to rebalance now. That will actually shrink the amount of time that it takes for your portfolio to fully recover. So rebalancing is important thing to do. There’s some science involved in there. So there’s some things that you got to make sure- now diversification kind of lines up with asset allocation. Diversification, they say is he really the only free lunch we have in investing and the idea and the art of diversification, the science of diversification just means you have different asset classes that don’t move up with each other. They call correlation is low. So let’s say bonds and stocks have a low correlation. So when you put those together what happens is you drop the overall risk of the portfolio.  And the more asset classes that you can bring into your portfolio in an asset allocation model that don’t correlate with each other, the more you get on diversification. Again is the only free lunch that we have.  And sometimes that’s the only thing we got in terms of protecting us from market risk is diversification. Hedging, you know, adding investments that kind of give you a little bit of a boundary, a cushion for let’s say inflation hedge, you know, it’s important to kind of add some in some inflationary hedge positions in your portfolio. Sometimes there’s currency hedging that you can do. That’s a little bit more sophisticated.  You know, there’s not a lot of, you know, hedging that probably retail investors do. Sometimes the portfolio itself by good allocation, diversification, you’re building your own hedging within that. The tax diversification, we’ll get into that specifically on its own slide. So kind of asset allocation.

Asset Allocation

So again, asset allocation is kind of the science of building a portfolio strategically dividing your portfolio into different asset classes. Now the asset classes, you start off with a big broad understanding. Let’s say again, if I look at just the most simplest allocation is stocks and bonds, right? You got fixed income and you got equities. Equities could be real estate, equities could be gold, stocks. And then you got your fixed income like cash and bonds, right? Every investor, whether you’re Warren Buffett, whether you’re managing CalPERS pension, or you’re managing your own IRA, that’s usually the first question that every investor has to address is, what is my asset allocation? If you put together a good asset allocation, really what you’re going to do is you’re gonna address a lot of the risks that we’ve talked about.  A good asset allocation model will address market risk, it will address inflation risk, it will address longevity risk, it will address interest rate risk, and a good asset allocation should address even the sequence of return risk. So understanding how much you should have in bonds, how much you guys should have in stocks will all come back to what is your personal cash flow need in retirement.  If you know you need to take say $20,000, $30,000, $40,000 out of your portfolio, you want to back that into 4 to 5 to 6 years of income, in case something really happens I can pull money out of bonds, sidestep sequence return risk, let my stocks come down and recover. Because stocks have always recovered as long as you invested into a diversified portfolio of stocks. Individual stocks can go down and stay down forever. You diversify, let’s say through exchange-traded funds, mutual funds. We’ve never had it had those asset classes drop and not recover. 100% of the time, they’ve come back. So understanding your personal asset allocation is going to be important. Again, each person should have a different understanding of your cash flow need in retirement. But also your asset allocation is going to change over time. If you’re young and you’re accumulating portfolios like 401(k)s and you’re adding then you don’t necessarily need to have a lot of safe money because you’re not going to be taking any money out. So you’re going to be probably able to absorb a little bit more volatility, a little more market risk. But asset allocation is really important to understand because this is going to again as I mentioned address a lot of risks that you have in your portfolio.

Diversification

Diversification is really just a subset of that. Diversification is the byproduct of a good asset allocation model. Asset allocation model isn’t like saying, Okay, I’m going to have 4 different types of S&P 500 funds. That doesn’t give you any diversification. Or say, okay, I’m going to spread it out between Vanguard, Fidelity, TD Ameritrade, Schwab. That’s really not diversification either. Again, diversification, you have to really understand what the asset class is and how they’re moving in lockstep with each other because that’s really going to give you the better understanding of truly how much risk aversion you have in the portfolio. And how you’re going to address the different, you know, the different types of market risks that you have. And it talks about stocks, bonds, cash. there is also what is called liquid alternatives or alternative investments. Those can kind of be like private equity, you know private credit, maybe it may be some venture capital types of things. There is reinsurance. There’s Bitcoin, there’s gold. So you want to make sure that you kind of, you’re looking at all asset classes and that you’re not married to one or the other. You know, I see some right now, some really wide extremes. Like I say, I’m just going to only, you know, going all the gold or all the Bitcoin and, really not understanding where you’re really undermining your market risk and you’re adding no diversification. So having a little bit of everything, the right mix, is really going to manage a lot of the risks that you’ll be facing when you go into retirement.

Tax Diversification

Now, tax diversification. This is something that I think gets missed a lot. Tax diversification is something that we feel is vital, because you can’t have a good retirement plan that doesn’t have a good tax strategy that’s integrated. As I mentioned, taxes can take anywhere between 20% and 30%, sometimes more, out of your portfolio every year. And it’s something that you need to be able to understand.  Now when you look at tax diversification, and under this guideline, there’s about 3, there’s 3 different pools that you can save into for retirement.  You got your tax-free pool, you got your tax-deferred, and you got your taxable. Tax-free pool would be like Roth IRAs, Roth 401(k)s, there’s Roth 403(b) options. And consider those to be kind of like your, the money goes in, you’ve already paid the tax.  When the money comes out, you’re paying no tax when it comes out as long as you’re, taking those distributions as a qualified distribution, not an early distribution. The second pool, we have tax-deferred accounts, those are the types of accounts in your 401(k) where you get a tax deduction for putting the money in, you get a deduction today. But again, that’s just a deferral,  the money grows deferred, and you take the money out and you got to pay the tax on all the money that comes out at your highest level tax return, tax rate, which is ordinary income. Taxable would be anything that’s outside of a labeled retirement account, let’s say, you’re lucky enough to inherit $100,000 from a grandparent. $100,000 is likely going to line up here on an inheritance. Now you can invest in all 3 pools, you can invest in the same investments. You can invest in Apple stock here, Apple stock there.  Apple stock there. Cash, cash, cash, So it’s not, it’s, these accounts aren’t, you’re not talking about investment type. You’re more about account type. So. When you’re looking at all of these, of course, the best tax rate that we have comes from the tax-free pool. That’s zero. No federal, no state tax. Right?  Everything here is what we mostly accumulate assets in. That’s your 401(k)s, and that’s where a lot of times we’ll see a lot of our clients that come in as pre-retirees, they may have the majority of their money here. And when they have all the money there, you’ve got to remember that at certain ages, you have required minimum distributions that you have to take out. And the government’s going to say, that’s great, you’ve accumulated a good amount of money. Now it’s time to start pulling the money out and you get taxed at whatever the future tax brackets are going to be. And so then the taxable account here, you’re going to be paying likely what is called capital gains rates. Now, capital gains rates are generally going to be lower than they are for your IRA distributions.  Generally right now, about 15%. If you’re in the 12% tax bracket, capital gains and qualified dividends are actually taxed at zero. Another very important aspect of knowing situation awareness. So what you want to do is kind of have an idea of, you want to have money in all 3 pools. So as you’re saving, you want to be mindful, do you have access to these 3 pools of money?  And so when you pull money out, it’s a way to control your taxes in retirement. If you want to create a tax-efficient income stream, like a personal pension, of assets that you spent 20, 30, 40 years accumulating, if you’ve got these 3 pools of money working, you can blend the income. Let’s say you need $40,000, just to say you have a little bit of Social Security, and, you need about $40,000 out of your portfolio,  you might take $20,000 out of here, let’s say $10,000 here, and $10,000 there. So you’re only going to be paying ordinary income tax on the $20,000 here, the $10,000 that you bring out of the Roth, you’re paying no tax. And maybe you’re paying a portion of that $10,000, maybe only $2000 to $3000 in capital gains, but that rate’s going to be lower. So it’s a, it’s making sure that you manage your tax distributions and you can kind of control your taxes. A lot of people think when they get into retirement that there’s no way that they can control their taxes.  It’s just kind of a foregone thing that I’m in retirement, I’m just at where I’m at.  That’s not true either. There are ways to get money out of the tax-deferred pool into the Roth pool through, you know, through what is called Roth conversions. So let’s say here you, you haven’t accumulated any, anything in the Roth and your past working age, so you can no longer do Roth IRA contributions. Well, let’s say you’ve got a, you’ve, retired and you’ve fallen into a lower tax bracket, it might make sense to start converting, paying the tax and putting money into your tax-free pool and letting that money grow tax-free for the next 5 to 10 years. Because there’s no way out of this tax.  You’ve deferred it, it’s like paying, so if you think about the money that you put in, you’re deferring money on the seeds. So if you’re a farmer, let’s say you’re, let’s say this account is $500,000, and your own contributions over the years was $150,000, right? So you got $150,000 that you’ve deferred on income, but your account is worth, say, $300,000, $400,000. Well, you deferred tax on $150,000, which is the seed. Now you’ve got to pay tax on the full harvest, whatever the full value is, whether that’s $400,000 to $500,000. So what you’ve done is you’ve paid tax. I mean, you’ve deferred tax on the seed and now you’ve got to pay tax on the harvest. The opposite is for the Roth. You pay tax on the seed, as it grows there is no tax on the harvest.  So now, as you’re in a high tax bracket, you want to manage that. Again, it’s not an all-or-nothing type of scenario. You want to make sure that if you have the ability as you’re younger, you’re in a lower tax bracket. You want to maximize your Roth IRAs and even your Roth 401(k)s. As you kind of get into your peak earning years, maybe you want to blend it or maybe you want to get a tax break today. And then you’re planning once you first retire start doing a 4 to 5 to 6 year conversion strategy getting money out of there, paying the tax at a known rate, a comfortable rate that makes sense for your long-term tax projection and saying Okay, I’m just gonna rip the band-aid off. I’m gonna pay my taxes. Again, then there’s no way around it. The thing is you’re controlling the taxes that you’re paying on the conversion. Right, as long as you understand your tax situation.  And so that’s going to allow you to have more tax diversification so when it comes to let’s say you’re in retirement and you want to buy a car and you really don’t want to have a payment in retirement, right? Let’s say you’ve got some cash set aside for down payment, say $10,000 to $20,000. If all your money is in an IRA and you have a $60,000 car. If you take that all out of your IRA, that $60,000 car is going to cost you about $85,000. Because you’re going to have to take $15,000, $20,000 to pay taxes on that distribution. If you have money here, you take $60,000 out to buy that car. No taxes. Right? Because you paid your tax over time and the growth is now caught up and you got that tax-free growth. Same thing here. So again, it’s about having that diversification that’s really important. That you don’t just sock everything here. That you want to make sure that you’ve got a blend. And this is a way to make sure that you manage in retirement your tax bracket.  As we’re facing,  you know, really large amounts of debt  in our society, you know, we’ve seen all kinds of case studies saying there really is, in the future we’re going to have to see taxes go up. And so the likelihood is we want to be able to control the taxes at the rates that we have today because we’re at the lowest tax rates we’ve seen in our lifetime.  And so, so again, that’s tax diversification, something that’s really important.

Risk Management Process

Now I’m going to kind of move into, okay, the risk management process, as we’re kind of saying, you know, is again, it’s really understanding, identifying the cause and the nature of the risk, really determining, you know, what are, you willing to retain in yourself as risk? Are you able to self-insure? Do you want to supplement that with an insurance company? Or you want to say, I don’t want any of this risk. I’m going to pass this on to somebody else. Basically understanding how much you’re able to retain and then determine how to handle the risk that you have retained.

Retirement Risk Zone: What is it?

Now, we get into the retirement risk zone. This is essentially, you know, your, these risks that we talk about, you’re really going to face them almost your entire life. Whether it’s inflation risk, market risk, but when you’re talking specifically about retirement, the 5 years before are really critical. Again, as you’re accumulating, as we talked about, where are your tax diversification, understanding what inflation is likely going to be for you in retirement. What are your expenses? What are you spending today? Most people want to go into retirement  with the same amount of living expenses, same lifestyle. So understanding what that is before you get to retirement is really important.  So you might want to understand, do a test drive on what you expect to spend in retirement. Do that for 3 to 6 months. So you have an understanding, is that going to be enough when I get to retirement? Do I have enough? You might need to really load up your retirement dollars and non-retirement dollars in those years and try to get as much as you can in so you can retire comfortably and not worry about longevity risk, right? So then of course the 5 years after is really important because that’s where the sequence of return risk comes in. If you retire in February of 2020, And you’re two, two months before a 30% to 40% market drop, What are you going to do? What’s your plan?  Does inflation happen? Do we go to 10% or 15% inflation two years into your retirement? You know, all those sorts of things are really critical. Do we get a big tax increase right before retirement? Are you in a low tax bracket that you could have been doing conversions because you fall for a low tax bracket before Social Security hits, before RMDs hit and you could have been converting those dollars at a low tax bracket? You know, that’s something that you want to make sure in those 5 years after that you’re very hyper-focused on your tax diversification. So that’s kind of the risk zone. Of course the idea is you’re accumulating assets and you spend them down over retirement and making sure that this isn’t 75 or 80. That if you’re expecting yourself to live to 85, 95 here, you don’t run out of money. Right? So it’s understanding all those sorts of things. Now it’s kind of starts getting into investment vehicle risk like bonds. You know, I’m just going to talk just briefly on this.

Bonds and Stocks

Bonds, again, there’s a lot of different flavors of bonds. You’ve got corporate bonds, you’ve got government bonds, you’ve got mortgage-backed securities. Short term would be like a one year bond and you’ve got intermediate 5 to 6 years and you’ve got long term, let’s say 15 to 30 years, right? So you’ve got short-term, long-term. Traditionally, you’ve got more risk as you go long, less risk as you go short, but the longer you go, you should get a higher interest rate. And I say should, because that can change. We just went through a period of almost two years where we had what’s called an inverted yield curve, where short-term rates were actually paying you higher than long term rates. That’s a sign of distress. Again, as we’re looking at markets, what are the markets telling us? When the yield curve is inverted, it’s telling you it’s stressed. That there is some recessionary pressures.  So it’s understanding what is the current market doing, but understanding where your risk is. So you don’t want to generally take a lot of risk in bonds, because you don’t get benefit, you don’t, there’s not a big benefit by taking a lot of risk in bonds. When the, interest rates were low, and there was a risk of them going high, you wanted to kind of kind of line up and stay in short-term bonds. Now, as interest rates are kind of high, kind of starting to fall, you might want to start extending the length of your bond portfolio to have more locked-in rates that are at a higher point. Let’s say you’re getting a 5%, 5.5% interest on your bond portfolio. If you lock that out from one to maybe 5 years now you’re get if their interest rates fall, you’re getting that interest rate for the entire time. You’re not risking seeing your interest rates fall as interest rates fall. And of course there is a credit rating. You know, sometimes I’ll see this, Oh, this is paying a 9% or 10% or 11% interest on this bond. If it’s paying 11%  in a 4% world, that tells me that company has a very low rate rating. They used to call those junk bonds. They call them junk bonds. And now they call them junk bonds today. Nobody would buy them. So they call them high yield now. It sounds better. But you got to understand that there’s a much higher probability that those companies won’t exist if their credit rating is too low. So you don’t want to extend and grab too much risk in the bond market by going junk.

Now, high-yield bonds are a good asset class to probably bring in. Again, it’s like a spice. You want to add it where it makes sense. You don’t want to overload and have all your bonds in the junk bonds or high-yield status. Maybe it’s having some government bonds, short-term bonds, intermediate, corporate, and then adding in a few percentage points of high-yield bonds. Because again, non-correlating assets are really important.  And we just saw the interest rate risk really pronounced with bonds in 2022, was one of the worst performance we’ve ever seen for government bonds. If you remember in 2022, in March, the Federal Reserve was ratcheting, starting to ratchet up interest rates. And they had for the all 2022 for about 16 months straight, they were pushing interest rates up to kind of try to combat inflation. So in 2021, when inflation was really high, interest rates were really low. You have a big institutions like banks, insurance companies and pensions were loading up on government treasuries. And, you know, those might’ve been paying 1.5%.  All of a sudden they raised rates very aggressively. And those safe bonds dropped anywhere between 20% and 30%. The worst performance we’ve really seen since the Revolutionary War in terms of government treasuries. So the answer to do to mitigate that was to go short-term bonds. Now if you remember what happened in March of 2023, we had those banks fail, like Silicon Valley Banks and these other banks failed, because in 2021, 2022, early on they were loading up on long-term government bonds. And because there was a lot of liquidity that was created during COVID and a lot of deposits coming in, when those deposits stopped, they needed to sell bonds to basically to get their cash reserves up. And that meant they were taking massive losses on the sale of those bonds at the worst possible time. That’s liquidity risk that they managed, that they didn’t manage very well. They didn’t manage liquidity risk, they didn’t manage interest rate risk. They didn’t manage inflation risk. So there’s a lot of things that they did wrong. And again, in your own personal situation, you got to, again, having good situational awareness of where those are, because every portfolio should have a certain amount of bonds in them because they provide safety. It’s like having an airbag in your car. If the markets are going down, you can pull money from bonds and not have to worry about- Now, not every time, you know, bonds and stocks move in different directions. Sometimes they move in the same way like they did in 2022. It’s rare, but it can happen. Generally, they don’t have a high correlation. That is not always the case though. Again, understanding your portfolio is really important. Stocks. We all know stocks. Equities, you know, they tend to be a good inflation hedge. There’s a lot of different styles of stocks. There’s small companies, there’s mid-sized companies, large, there’s growth, there’s value, there’s international, there’s emerging markets, there’s domestic. So it’s really understanding where those assets fit into your asset allocation. Making sure that you don’t ignore certain asset classes because they’re all going to move at different speeds. So again, stocks are a good way to kind of make sure that you keep up with inflation.  And they also are, you know, going to give you your best chance of seeing some decent growth. But again, you got to be diversified, you got to understand the risk that you’re taking.  Now, kind of getting into risk obstacles, we talk about identifying risk, do you have the right insurance? Do you have enough insurance? Planning for the future, future risks, and caring for dependents, there’s all the different obstacles that we have. Again, we’re really not trying to avoid, we’re trying to reduce, except, you know, here we have health insurance.

Health Insurance

You know, obviously, you know, we’ve got your, you got your private insurance, you got Medicare, and then of course there’s Medicaid, which is more of a federal funded, we’ll get into specifics here, and you got life insurance. We’ll talk about that here in a second. I’m just going to kind of move into those slides, get into specifics.  Health insurance, of course, individual or group. If you retire before Medicare age, you got to make sure that you understand the types of medication that you need. You go, you make sure that what that cost is going to be and you include that into your financial plan. Because you might be going from $300 to $400 a month on insurance through a group plan. And all of a sudden you’re paying $1000 before Medicare kicks in. Now Medicare kicks in and it’s going to reduce that cost.  Now, group plan, of course, is understanding what your medical situation is. Do you want to, do you want to have a set, a certain group of doctors that you can always receive? And so, you kind of get into different types. Now, this is getting into Medicare.

Medicare

It’s 4 parts of Medicare. You got Part A, which is your- that’s your hospital insurance. That’s taxes that get taken out of your income. And it’s about 1.45% that comes out of your paycheck each time you earn $1. Your employer’s paying 1.45%, you’re paying 1.45%. That’s basically going to cover Part A.  Now if you’re self-employed, you get to pay both of those. Now, Part B is going to be more of the medical insurance that is through Medicare. That’s what you’re paying currently, the Medicare premium at the base rate is about $184 right now. And you got Part D is prescription drugs.  And that’s going to be a separate add-on that’s going to help, you know, there’s different plans for that I’m not going to get too specific into Medicare. That’s a whole ‘nother webinar. Now Part C is going to be your Medicare Advantage Plan. So it kind of wraps all of those together and it’s going to be mostly like a closed loop. And it’s going to be you know kind of be something that you’re not going to have as much flexibility, but it’s likely to be a lot lower cost. Now we kind of get into Medicare options. We kind of talk about- You got your provided, your original Medicare Part A, Part B, and then you got your Medicare Advantage plans, which, you know, you, it’s kind of like an all-inclusive. It feels more like a group plan from your work.  It’s not a PPO style, it’s more HMO.  And then you usually, sometimes a Part D is included. But a lot of times your base premium $184 might cover your Medicare Advantage plan, but again, you’re somewhat limited.  It’s important to go in and make sure that you understand this before you turn 65, because that’s when you start to, it’s only for those of 65 and over unless you’re under disability. You got to have at least 10 years of paying into the system. You got 3 months, plus your birth month and then 3 months after to apply. If you miss the application, you’re not getting covered. There’s about a 10% penalty that stays with you forever. Now it’s also you want to make sure that you know what your AGI is going back to taxes because your AGI is going to determine what rate that you’re paying in terms of premiums. There’s a thing called IRMAA that’s going to determine where are you paying- just the base rate? The next rate is a 40% increase.  And it can go higher from there. It can go up to 3.320% of the base rate if you’re AGI. So if you sell a house, have a large capital gain, you might have a really big, huge increase on your Medicare for that- and falling, it’s usually two years later from the taxes. So, again, understanding and just knowing kind of where that’s going to cost.  Medicare doesn’t, not do a very good job at long-term care. It does cover you for really the first- It’s 100% covered, first 20 days, 20 to 100 days, you get some, about 2 to 4 days. After 100 days, it ends. So, it’s not there for long-term care insurance. It’s mostly there to give you short-term,  I, like, if you need, if you have a stroke and you need to go into physical therapy and you’re into a situation that’s going to be 30 to 60, 90 days, well, Medicare will likely cover that. But beyond that, it won’t.

Medicaid

We’ll talk about Medicaid. Again, this is mostly for situations where it’s, more of like a welfare program. There is some criteria you have to look at, and that’s your income assets and look back period. Currently, there’s about a 5-year look back period for federal, I think California’s two and a half years. So what they do, they look back, all your expenses are transfers. If you’re transferring money, gifting to kids, to kind of make sure that you get qualified for Medicare. They may go back and do a look back period and say, Well, those assets are going to be included when we actually look at how much age you’re going to get. So you have to be mindful of what those income requirements are. Now, there’s a lot of changes that’s happened in the last year. There’s going to be likely like more changes. So again, that’s a whole ‘nother webinar.  Again, we talked about Medicare versus Medicaid. Those are two different things. Medicare is mostly federal health insurance Medicaid is more of an assistance program for low-income individuals.  Now, long-term care insurance, this is a really tricky scenario. Back in 2002 was the peak of selling traditional long-term care insurance. I think about 750,000 policies were written. As of a couple years ago, only about 45,000 or 49,000 policies. So there’s been about a 93% drop in the type and the number of long-term care insurance being underwritten. You’re seeing a lot more of this kind of hybrid policies where you get a life insurance that it kind of can change into long-term care if you need, and they call these kind of a hybrid.

Life Insurance

So if you have a whole life insurance, old policy, you might be able to take cash value and exchange it into a new kind of hybrid policy that has a long-term care rider on it.  Again, it’s something that’s, it’s a really tough, it’s like a hundred-sided Rubik’s cube to try to figure out the situation because expenses are getting higher,  and people are living longer. And again, this is a whole ‘nother topic. But it’s not easy to manage this risk, but it’s something to, again, understand. If you have your house paid off, you might be forced into a reverse mortgage, that sort of thing, to help you with those, you know, the end-of-life expenses.  So kind of going into life insurance, I’m just gonna spend just a really short period of time here. You got term insurance, which provides protection over a certain period of time. You got permanent insurance is more like whole life, universal life. I tend to be more of a fan of the term insurance because life insurance is really there for income replacement. So if you’re 10 years from retirement, you generally don’t need to have life insurance that goes beyond that. So you might get a 10 year period of term insurance at that point to make sure that you’re covering the income that could be lost if in case you pass away and you leave your family without that 10 years of income. So you generally want to match the terms to when you think you’re going to retire. So if it’s 20 years, 30 years, 10 years, life, term insurance is going to be the cheapest, most purest form of insurance. Permanent insurance is really there if you get a pension and you don’t choose a survivor benefit for your spouse. You might replace it with some, whole life insurance, universal life insurance in case something happens, that pension falls, but then your spouse will get some insurance. That’s one way to manage that.  Again, this is going to be part of the slides. You can go back and read it. I’m not going to get too into the weeds because I think we have some questions we want to go through.  Staying healthy, of course, nutrition. You want to be able to, when you get into retirement, if you want to have an active lifestyle, health is very important.

Staying Healthy

And it’s one of those things that, you want to stay active and you want to have a long, healthy, you know, retirement life that is going to keep you, moving and keep your mind active. It’s not just your body. It could also be your mind. Again, making sure you don’t get too overwhelmed with the news cycle, because I know some people can get to get going to get fearful what’s going on. You want to make sure you control what you can, stay healthy mentally and physically as important. And as you get older, you want to make sure that your house is safe for you. You know, if you’re getting a situation where you’re not as mobile, you want to make sure there’s people that can come in and kind of do an evaluation of your home to make sure it’s not a risk for you falling different things that happen as you get older. So these, again, the risk management strategies kind of going to know your situation. Again, situation awareness is critical.  Carrying the right insurance, making sure you have cash reserves and emergency funds. You don’t go into debt for things.  Your investments are diversified. You know, as I mentioned, you limit your debt, you stay healthy and again, do your due diligence. Kind of keep up with what’s going on, just in your situation, again, all those things that you can control.  Now, we’re going to kind of go into questions.

Q&A

Kathryn: If you have a Pure Advisor, I recommend that you reach out to them and ask the questions if we can’t get to them because that is your greatest resource. If you do not, then I, you know, offer you that free one-on-one consultation that you can then speak to someone personally about your own situation and not just this high level information that kind of pertains to everyone. But I’ll just give you a couple of questions in this last few minutes.

David: Sure.

Kathryn: First of all, given with all the fires that we’ve seen recently in California, how do we manage that risk, like for the home, just real quick?

David: Great question. Yeah, I don’t think we even addressed that. So, obviously we saw the devastation that happened in Los Angeles and, and in other places around the country. So, I think it’s a very important, it’s a good opportunity right now to really do an evaluation of your insurance, homeowner’s insurance, earthquake insurance. Get your declaration pages out of your insurance, know what your coverage is. The first thing I generally do is, what is your replacement cost on your homeowner’s insurance? Pick up the phone, schedule a time to talk to your insurance company or your broker. And find out, are you way underinsured? You don’t want to be caught underinsured, especially with the fire risk that we have here in Southern California.  So again, this is a good opportunity to make sure that you have the right level of insurance and you don’t want to be cheap with homeowners insurance. With inflation, it’s almost double the cost of building in the last 5 or 6 years. And if you’re unlucky enough to be in Los Angeles, where you’ve got 5000, 6000, 7000, 10,000 people trying to rebuild. You can imagine the demand is going to be high, supply is going to be low. What does that happen with the market? That means prices are going to be even higher to rebuild. So it’s a really good opportunity to find out the health of your company that’s insuring you.  Making sure that you have a very healthy replacement cost and it’s not too low, but review that with your insurance broker. Great question, Kathryn.

Kathryn: Okay. There’s a few questions that were, very detailed, but one that you might be able to quickly answer. Does Roth conversion need to be done during your working years or can it be done when you’re retired?

David: So yeah, you technically can do a Roth conversion while you’re working. Some 401(k)s will allow what they call an in-plan conversion. Let’s say you’re unlucky enough to be laid off and you move a 401(k) into your IRA.  You’re still in your working years, but let’s say that year you have a dip in your tax bracket. That’s a good opportunity to maybe pay to do the conversion then. So you can do it in your working years, but it’s also important to know that you have opportunities to convert while you’re also retired. The majority of the conversions we do are going to be just in that 5 year zone before, and 5 years after. But you need to really understand your tax situation to understand when’s the right time to do it, what tax rates you’re going to pay. So each person could be different.

Kathryn: Okay. for sequence of return risk, back to the beginning, do you recommend a bond tent leading into retirement, ramping up your percentage of bonds through retirement, then after X number of years, your ramp percentage of bonds back down?

David: I don’t think you necessarily have to do a big tent. I think again you have to understand what is your distribution going to be when you get into retirement? So knowing mapping out your expenses, knowing what income you’re going to have and knowing what need is going to be. Like I said, if you need $40,000 a year, you want to make sure you’ve got 3 to 4 to 5 as maybe as long as 7 years of bonds to cover that. Now, I don’t, I’m not, we generally don’t expect the market to take 7 years to recover, but that means that you’re not trying to add a bunch of bonds right before retirement and then dropping them. You can just go in with a nice 5 to 6 years of bonds. Let’s say again, if it’s $40,000 you need, let’s say that’s $200,000. You know, if you’ve got a $600,000, $700,000 portfolio, you put $200,000, $300,000 in bonds, and there’s your beginning of your asset allocation. I don’t think you necessarily need to build it up too much. Just know what your distribution shortfall is going to be when you go into retirement so that will give you a much more customized level of how much bond you actually need going into retirement.

Kathryn: Okay. And this is also a bond question. Might be a little detailed, but maybe you can pick a couple of things. So bonds are paying 4% to 6%. Not good. FIA ties up your money for years, pays the same 4% to 6%, even though they tell you different. But buffer ETFs will pay to a cap of 12% to 15% but for losses or 15% or more, depending on what you pick. Sounds great. If you’re loss averse, like most of us in 60s and 70s. I know that’s a long question, but what can you kind of talk about bonds versus, you know, when he’s talking about the FIAs and ETFs?

David: Yeah. So there’s, there is some of those index annuities that they will tend to give you a one to two-year kind of special cap that you can make more. What I my experience is that’s an introductory cap and once you go in for two years, they slam them down. If you actually read a contract a lot of these fixed index annuities, they’ll tell you in the small detail. Usually the salesperson selling you that annuity is not going to tell you, detail says they have they reserve the right to always change those caps and I’ve seen it over and over again. It looks good and we get in but then those caps slam down now you’re due a 2% to 3% cap. So again, it’s understanding what your target return should be. What’s the interest rate market? What are you trying to get with your bonds? If you’re trying to get a return, you’re trying to get above interest rate return, that’s what your stocks are for.  That’s where you’re gonna take a little risk and that’s what your stocks are supposed to give you that, that return above bonds and above inflation. A fixed index annuity, sometimes when interest rates were low, like we just went through this long period of low interest rates. That was probably a better time to consider fixed index annuities where you might be able to get a 3% or 4% rate of return when bonds are giving you zero to 1%. Now as we’re moving in a higher interest rate environment, you have the opportunity to lock in a 4% to 5% rate of return without having to get into a contract. Remember a fixed index annuity is a contract with an insurance company. Two things I tend to try to avoid as many as much as possible are contracts and dealing directly with a contract with an insurance company, because they’re not benevolent actors, but there is this sometimes they are important tool. You can place them into a fixed-income portfolio to try to give you a little bit more of an upside there. But again, there’s a lot of different things. Each person is different. It depends on what your cash flow needs is going to be, risk tolerances as well.

Kathryn: Well, gosh, that we’ve got right exactly one o’clock. So David, thank you so much. We were not able to get to all the questions. And as I said, please, if you’re a Pure client, please reach out to your advisor and they will be happy to answer all of your questions. And if you’re not, then we welcome you to come and join us and have a private conversation with a professional here at Pure Financial, just get your questions answered. So we hope you’re having a great day. We thank you so much for an hour of your time and we hope to see you next month as well. David, thank you for all your time.

David: Thank you, Kathryn. Good to be here.

Kathryn: Take care.

 

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• Neither Pure Financial Advisors nor the presenter is affiliated or endorsed by the Internal Revenue Service (IRS) or affiliated with the United States government or any other governmental agency.

• This material is for information purposes only and is not intended as tax, legal, or investment recommendations.

• Consult your tax advisor for guidance. Tax laws and regulations are complex and subject to change.

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC an SEC Registered Investment Advisor.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

CFP® – The CERTIFIED FINANCIAL PLANNER® certification is by the CFP Board of Standards, Inc. To attain the right to use the CFP® mark, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. 30 hours of continuing education is required every 2 years to maintain the certification.

AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.