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A Bigger Portfolio or a More Reliable Paycheck? · Bitesize Retirement

• 0:00
  SPEAKER_00: A bigger portfolio or a more reliable paycheck?
• 0:03
  SPEAKER_00: You're 65 years old.
• 0:04
  SPEAKER_00: You have $2 million saved for retirement.
• 0:07
  SPEAKER_00: And someone asks you a very simple question.
• 0:10
  SPEAKER_00: Would you rather have $2.2 million or $2 million?
• 0:12
  SPEAKER_00: Obviously.
• 0:15
  SPEAKER_00: So for most of our working lives, the financial goal seems obvious.
• 0:17
  SPEAKER_00: Make the portfolio bigger.
• 0:17
  SPEAKER_00: But now let me change the question.
• 0:19
  SPEAKER_00: You're retired.
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  SPEAKER_00: Your monthly spending is $8,000.
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  SPEAKER_00: Social Security covers $4,000.
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  SPEAKER_00: That leaves a $4,000 gap.
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  SPEAKER_00: Now you have a choice.
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  SPEAKER_00: Would you rather have a larger portfolio or know exactly where that $4,000 is coming
• 0:47
  SPEAKER_00: from every month?
• 0:49
  SPEAKER_00: That question is harder,
• 0:51
  SPEAKER_00: and it gets to one of the biggest changes that happens when you move from working
• 0:55
  SPEAKER_00: to retirement.
• 0:56
  SPEAKER_00: While you're working, your portfolio is mostly a number.
• 1:00
  SPEAKER_00: In retirement, it has to become something else.
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  SPEAKER_00: It has to help pay for your life and a large portfolio is not the same thing as
• 1:08
  SPEAKER_00: a reliable paycheck.
• 1:10
  SPEAKER_00: Let me show you what I mean.
• 1:11
  SPEAKER_00: Imagine two retirees.
• 1:13
  SPEAKER_00: We'll call them Robert and Michael.
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  SPEAKER_00: They're both 65.
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  SPEAKER_00: They both spend about $96,000 a year, $8,000 a month.
• 1:21
  SPEAKER_00: They both receive around $48,000 a year from Social Security.
• 1:26
  SPEAKER_00: So both households have roughly the same problem.
• 1:29
  SPEAKER_00: They need another $48,000 a year, $4,000 a month.
• 1:34
  SPEAKER_00: Robert has $2.2 million invested.
• 1:37
  SPEAKER_00: Michael has $2 million.
• 1:38
  SPEAKER_00: So if you only looked at net worth, Robert appears to be in the stronger position.
• 1:43
  SPEAKER_00: And financially, he may be.
• 1:45
  SPEAKER_00: But let's look at how they experience retirement.
• 1:47
  SPEAKER_00: Robert keeps almost everything invested.
• 1:50
  SPEAKER_00: Every month, when he needs money beyond Social Security, he takes it from the portfolio.
• 1:55
  SPEAKER_00: When the market is doing well, this feels easy.
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  SPEAKER_00: The account is growing.
• 1:59
  SPEAKER_00: He takes $4,000.
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  SPEAKER_00: Maybe more for a vacation.
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  SPEAKER_00: No problem.
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  SPEAKER_00: Then the market has a bad year.
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  SPEAKER_00: His account falls by several hundred thousand dollars.
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  SPEAKER_00: Nothing about his lifestyle has changed.
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  SPEAKER_00: The electricity bill is the same.
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  SPEAKER_00: The property tax is the same.
• 2:15
  SPEAKER_00: Groceries still cost money.
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  SPEAKER_00: His wife still wants to take the trip they've been planning.
• 2:20
  SPEAKER_00: But something inside Robert changes.
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  SPEAKER_00: Now every withdrawal feels different.
• 2:25
  SPEAKER_00: $4,000 used to feel like income.
• 2:27
  SPEAKER_00: Now it feels like a loss.
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  SPEAKER_00: So he starts watching the market every morning.
• 2:32
  SPEAKER_00: He checks the account more often.
• 2:33
  SPEAKER_00: He starts asking, should we skip the trip this year?
• 2:37
  SPEAKER_00: Should we spend less?
• 2:38
  SPEAKER_00: Should I wait for the market to come back before taking money out?
• 2:41
  SPEAKER_00: Robert has more money than Michael,
• 2:43
  SPEAKER_00: but the market has become part of his monthly household budget.
• 2:47
  SPEAKER_00: Now look at Michael.
• 2:48
  SPEAKER_00: Michael started with $200,000 less,
• 2:51
  SPEAKER_00: but he made a different decision about how retirement would be funded.
• 2:55
  SPEAKER_00: Maybe Social Security covers part of his essential spending.
• 2:58
  SPEAKER_00: Maybe another predictable income source covers part of the remaining gap.
• 3:02
  SPEAKER_00: Maybe he keeps near-term spending money separate from the assets intended for long-term growth.
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  SPEAKER_00: The exact structure isn't the point.
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  SPEAKER_00: The point is that Michael knows where next month's spending money is coming from.
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  SPEAKER_00: So when the market falls, his investment account falls too.
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  SPEAKER_00: He's not immune.
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  SPEAKER_00: But the experience is different.
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  SPEAKER_00: He doesn't immediately have to ask, what do I sell to pay for next month?
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  SPEAKER_00: And suddenly we have an interesting situation.
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  SPEAKER_00: Robert has the bigger portfolio.
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  SPEAKER_00: Michael may have the more predictable retirement paycheck.
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  SPEAKER_00: Who's better off?
• 3:35
  SPEAKER_00: There isn't enough information to answer that.
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  SPEAKER_00: And that's exactly the point.
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  SPEAKER_00: And more income certainty are not the same objective.
• 3:44
  SPEAKER_00: During your working years, this distinction doesn't matter nearly as much.
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  SPEAKER_00: Your employer provides the paycheck.
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  SPEAKER_00: Your investments can stay focused on the future.
• 3:53
  SPEAKER_00: You don't expect your 401k to pay the electric bill next month.
• 3:57
  SPEAKER_00: But when you retire, those two worlds collide.
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  SPEAKER_00: The assets you've spent decades accumulating now have to support spending.
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  SPEAKER_00: And this is where I think many people continue using accumulation logic
• 4:09
  SPEAKER_00: after they've entered a completely different financial phase.
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  SPEAKER_00: They keep asking, how do I maximize my return?
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  SPEAKER_00: How do I keep all my money growing?
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  SPEAKER_00: How do I end up with the biggest account?
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  SPEAKER_00: Those are reasonable questions.
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  SPEAKER_00: But retirement introduces another question.
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  SPEAKER_00: How much of my lifestyle do I want depending on market performance?
• 4:29
  SPEAKER_00: That's a very different question.
• 4:30
  SPEAKER_00: And there's no universally correct answer.
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  SPEAKER_00: Some people are perfectly comfortable funding retirement almost entirely from
• 4:37
  SPEAKER_00: an investment portfolio.
• 4:38
  SPEAKER_00: They understand volatility.
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  SPEAKER_00: They have plenty of assets relative to their spending.
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  SPEAKER_00: They're willing to adjust withdrawals when markets are weak.
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  SPEAKER_00: They don't panic.
• 4:47
  SPEAKER_00: For that person,
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  SPEAKER_00: maintaining flexibility and growth potential may be more important
• 4:52
  SPEAKER_00: than creating additional guaranteed income.
• 4:55
  SPEAKER_00: Someone else may look almost identical on paper,
• 4:57
  SPEAKER_00: but hate the idea of selling investments every month to pay bills.
• 5:01
  SPEAKER_00: That person may value predictability more.
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  SPEAKER_00: Neither person is wrong.
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  SPEAKER_00: Let's take Robert's situation a little further.
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  SPEAKER_00: Remember, he has $2.2 million.
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  SPEAKER_00: Suppose he needs $48,000 a year from the portfolio.
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  SPEAKER_00: At first glance, that doesn't look particularly aggressive relative to the size of his assets.
• 5:23
  SPEAKER_00: But Robert is He's worried about the average year.
• 5:26
  SPEAKER_00: He's worried about the year when the market is down 30%.
• 5:29
  SPEAKER_00: He's worried about being 87.
• 5:31
  SPEAKER_00: He's worried about his wife having to manage the portfolio if he dies first.
• 5:35
  SPEAKER_00: He's worried about whether he'll still feel comfortable spending when
• 5:38
  SPEAKER_00: the account balance is falling.
• 5:40
  SPEAKER_00: Those aren't purely investment questions.
• 5:43
  SPEAKER_00: They're retirement design questions.
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  SPEAKER_00: Now imagine someone tells Robert,
• 5:47
  SPEAKER_00: you can potentially create more predictable income,
• 5:50
  SPEAKER_00: but to do it, you'll have to give up something.
• 5:53
  SPEAKER_00: Transcription by Casting
• 6:16
  SPEAKER_00: Bonds may provide income and stability,
• 6:19
  SPEAKER_00: but they still carry risks and may not offer the growth potential of stocks.
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  SPEAKER_00: Insurance-based guaranteed income can transfer certain longevity and income risks to
• 6:28
  SPEAKER_00: an insurance company,
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  SPEAKER_00: but in exchange,
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  SPEAKER_00: there can be liquidity restrictions,
• 6:33
  SPEAKER_00: contract terms, and less access to certain dollars.
• 6:36
  SPEAKER_00: Everything costs something.
• 6:38
  SPEAKER_00: The question isn't How do I get all the benefits without any trade-offs?
• 6:42
  SPEAKER_00: You can't.
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  SPEAKER_00: The better question is, which risks do I want to keep and which risks do I want to transfer?
• 6:49
  SPEAKER_00: That question changes retirement planning completely.
• 6:53
  SPEAKER_00: Think about longevity risk.
• 6:54
  SPEAKER_00: If you keep all your money invested, you keep that risk.
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  SPEAKER_00: If you live to 98, your portfolio needs to support you to 98.
• 7:01
  SPEAKER_00: That may be perfectly fine.
• 7:03
  SPEAKER_00: You may have enough assets to do it, but the responsibility stays with you.
• 7:07
  SPEAKER_00: Now suppose part of your income is guaranteed for life.
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  SPEAKER_00: You've transferred some of that longevity risk somewhere else.
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  SPEAKER_00: But you've probably given up something in exchange.
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  SPEAKER_00: Maybe liquidity.
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  SPEAKER_00: Maybe upside.
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  SPEAKER_00: Maybe control over a portion of the assets.
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  SPEAKER_00: That's the trade.
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  SPEAKER_00: And the same logic applies to market risk.
• 7:24
  SPEAKER_00: You can keep more assets exposed to market growth.
• 7:27
  SPEAKER_00: That gives you more upside potential.
• 7:29
  SPEAKER_00: It also means you keep more market risk.
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  SPEAKER_00: Or you can move some money toward greater predictability.
• 7:35
  SPEAKER_00: Now, you may give up some growth potential.
• 7:37
  SPEAKER_00: Again, trade-offs.
• 7:39
  SPEAKER_00: This is why I don't think retirement planning should begin with the question,
• 7:43
  SPEAKER_00: should I buy an annuity?
• 7:45
  SPEAKER_00: Or what should my stock allocation be?
• 7:47
  SPEAKER_00: Those questions come too early.
• 7:49
  SPEAKER_00: First ask, what does my retirement need to do?
• 7:53
  SPEAKER_00: Let's go back to that $8,000 monthly lifestyle.
• 7:56
  SPEAKER_00: Suppose Social Security provides $4,000.
• 7:59
  SPEAKER_00: Now we have a $4,000 gap.
• 8:02
  SPEAKER_00: Before choosing any product, I'd want to know how much of that $4,000 is essential.
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  SPEAKER_00: Maybe $2,500 covers housing,
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  SPEAKER_00: food, utilities, insurance, and other expenses that aren't very flexible.
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  SPEAKER_00: The remaining $1,500 may be travel, dining, hobbies, and discretionary spending.
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  SPEAKER_00: Now the decision looks different.
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  SPEAKER_00: Maybe you don't need every dollar of retirement spending guaranteed.
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  SPEAKER_00: Maybe what really matters is knowing that essential expenses are covered.
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  SPEAKER_00: Then the discretionary spending can remain connected to the portfolio.
• 8:37
  SPEAKER_00: Good market?
• 8:38
  SPEAKER_00: Take the bigger trip.
• 8:39
  SPEAKER_00: Weak market?
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  SPEAKER_00: Maybe travel closer to home that year.
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  SPEAKER_00: For some retirees, that kind of flexibility works beautifully.
• 8:46
  SPEAKER_00: For others, it doesn't.
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  SPEAKER_00: Maybe the first 10 years of retirement are exactly when they want to travel.
• 8:52
  SPEAKER_00: They don't want the market deciding whether they go to Europe,
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  SPEAKER_00: so they may want more predictable income during those years.
• 8:58
  SPEAKER_00: Again, the solution follows the life, not the other way around.
• 9:02
  SPEAKER_00: And this brings us to a distinction that I think is incredibly important.
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  SPEAKER_00: There is a difference between being wealthy and feeling financially free.
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  SPEAKER_00: Someone can have $3 million and still worry every time the market falls.
• 9:17
  SPEAKER_00: Someone else can have less money but know that housing,
• 9:20
  SPEAKER_00: food, healthcare, and the basic lifestyle are covered every month.
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  SPEAKER_00: Which person feels richer?
• 9:26
  SPEAKER_00: That's not something a net worth statement can answer.
• 9:29
  SPEAKER_00: Because financial freedom isn't just the size of the asset.
• 9:32
  SPEAKER_00: It's also the relationship between your assets and the obligations those assets need to support.
• 9:38
  SPEAKER_00: Now, here's where the conversation takes another turn.
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  SPEAKER_00: Suppose Michael creates more predictable income,
• 9:43
  SPEAKER_00: and 10 years later, Robert's portfolio has significantly outperformed Michael's.
• 9:49
  SPEAKER_00: Robert now has much more money.
• 9:51
  SPEAKER_00: Did Michael make a mistake?
• 9:52
  SPEAKER_00: Not necessarily,
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  SPEAKER_00: because we can't judge a retirement decision only by looking backward at
• 9:57
  SPEAKER_00: which strategy produced the highest ending balance.
• 10:00
  SPEAKER_00: We have to remember what problem Michael was solving.
• 10:04
  SPEAKER_00: Maybe he wanted to know that his basic lifestyle would continue regardless of what
• 10:07
  SPEAKER_00: the market did maybe that certainty allowed him
• 10:10
  SPEAKER_00: to spend more comfortably maybe he traveled without checking
• 10:13
  SPEAKER_00: the market first maybe his wife never had to learn how to manage
• 10:17
  SPEAKER_00: a complicated withdrawal strategy if that was the goal Then the value of
• 10:22
  SPEAKER_00: the decision isn't fully captured by the ending account balance.
• 10:46
  SPEAKER_00: That's a problem too.
• 10:48
  SPEAKER_00: Predictability can be overbought.
• 10:50
  SPEAKER_00: Just like growth can be overemphasized,
• 10:52
  SPEAKER_00: that's why I don't think the answer is portfolio or paycheck.
• 10:57
  SPEAKER_00: The better answer may be how much of each?
• 11:00
  SPEAKER_00: How much income do you want to know is coming?
• 11:02
  SPEAKER_00: How much money do you want available and flexible?
• 11:05
  SPEAKER_00: How much do you want positioned for long-term growth?
• 11:08
  SPEAKER_00: How much needs to be there for unexpected expenses?
• 11:11
  SPEAKER_00: And how much do you want to leave behind?
• 11:13
  SPEAKER_00: Those are different So let's go back to the beginning.
• 11:18
  SPEAKER_00: You're 65.
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  SPEAKER_00: You have $2 million.
• 11:21
  SPEAKER_00: Someone offers you $2.2 million.
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  SPEAKER_00: Of course, you'd rather have more money.
• 11:25
  SPEAKER_00: But retirement isn't only a competition to see who dies with the largest portfolio.
• 11:30
  SPEAKER_00: The portfolio has a job.
• 11:31
  SPEAKER_00: It's there to support a life.
• 11:33
  SPEAKER_00: And once the paycheck stops,
• 11:35
  SPEAKER_00: one of the most important questions becomes,
• 11:38
  SPEAKER_00: how much of that life do you want to depend on selling investments?
• 11:41
  SPEAKER_00: There is no right percentage,
• 11:43
  SPEAKER_00: there is no magic product, and there is no structure that eliminates every risk.
• 11:48
  SPEAKER_00: But there is a decision.
• 11:49
  SPEAKER_00: You can keep certain risks.
• 11:51
  SPEAKER_00: You can transfer certain risks.
• 11:53
  SPEAKER_00: You can accept less predictability in exchange for more flexibility and growth potential.
• 11:59
  SPEAKER_00: Or you can give up some flexibility and upside in exchange for more certainty.
• 12:04
  SPEAKER_00: That's retirement.
• 12:05
  SPEAKER_00: Not finding the perfect investment.
• 12:07
  SPEAKER_00: Deciding which trade-offs allow you to live the way you actually want to live.
• 12:12
  SPEAKER_00: Because a bigger portfolio can make you wealthier.
• 12:14
  SPEAKER_00: But a reliable paycheck can make it easier to use the wealth you already have.
• 12:19
  SPEAKER_00: And for many retirees, the best retirement isn't choosing one or the other.
• 12:24
  SPEAKER_00: It's knowing exactly how much you need from each.
• 12:27
  SPEAKER_00: I'm Jean with Bitesize Retirement.
• 12:29
  SPEAKER_00: If you're approaching retirement and trying to sort through decisions like these,
• 12:32
  SPEAKER_00: I've put together a free guide called 15 Retirement Decisions.
• 12:36
  SPEAKER_00: You can find it at bitesizeretirement.com.