The Retirement Planning Roadmap: 401(k)s, Real Estate, Bonds & More

Scott:
Welcome to the BiggerPockets Money Podcast where we interview Robert Brokamp from The Motley Fool and talk about planning for retirement. Hello, hello, hello, my name is Scott Trench and with me as always is my electric co-host, Ms. Mindy Jensen. How you doing today Mindy?

Mindy:
Scott, I did a thing.

Scott:
Yeah, I heard we have some charged news.

Mindy:
Yes. Yes, I am super excited to announce that I am finally the owner of a Tesla Model Y. We went and picked it up this morning, so finally I can stop harassing Carl about buying a Model Y and now he can harass me about getting to drive it because I am taking over and I am commandeering his vehicle. So sorry sweetheart. You’re going to have to buy another one if you want to be able to drive your electric vehicle.

Scott:
Fantastic, Mindy. We will continue with the automatic driving and all, keep us going here, with Mindy and I are here to make financial independence less scary, just for somebody else, to introduce you to every money story and every possible plan to early retirement or traditional retirement because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Mindy:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or Tesla or start your own business, we’ll help you reach your financial goals and get money out of the way so you can launch yourself toward your dreams. Now is the time for the segment of our show called The Money Moment, where we share a money hack, tip or trick to help you on your journey to financial independence. Today’s Money Moment is do you have a wedding or a holiday party coming up? Rather than having an open bar, serve a signature drink. This will cut down on costs at home or at the event venue. Everyone will still have a great time and you get the bonus fun of naming the drink. Do you have a money tip for us? Email money moment at biggerpockets.com.
Robert Brokamp is a former financial planner who still has his certification, but while he’s a financial planner, he’s not your financial planner. And he’s also a former English teacher, so expects some great grammar during today’s episode. He is now at The Motley Fool where he is the lead advisor for the Motley Fool’s Rule Your Retirement Service and contributor to The Motley Fool Money Podcast. Robert, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Robert:
Thanks, Mindy. So great to be here.

Mindy:
Robert, let’s jump right into your background. Can you tell us a little bit about yourself and what you do at The Motley Fool?

Robert:
Yeah, so I graduated from college in the early 90s. As you mentioned, I was an English teacher, so I started doing that because I couldn’t afford a car because I didn’t have enough money and that’s when I decided I probably should learn more about money. So I started reading books, listening to radio shows, looking at a relatively new thing at the time called the internet, and that’s how I first found The Motley Fool because it was one of the earlier sort of mainstream financial websites. And my first reaction was why weren’t we taught this stuff in school? Why am I as someone in my 20s just learning about saving for retirement? What an IRA is? How to invest?

Mindy:
Okay, you just mentioned a trigger for me. You said, “Why weren’t we taught this in school?” And as you were telling your story, I’m like, yeah, 23 years later, no, 33 years later, we are still just now getting this into high school curriculums. Class of 2024, 2025 is the first year in Colorado that you have to take a personal financial literacy class and it’s a half a credit.

Scott:
Today we’re going to talk about retirement planning and what folks need to do to achieve basically a traditional retirement or perhaps a slightly early retirement. It starts with saving 15%, rule of thumb there. It starts I imagine as early as you can possibly start with that. What are some things, how do we guide more people to begin that journey?

Robert:
Well, hopefully it’s teaching them that the sooner they start the better. And you probably have seen illustrations that show if someone who starts saving at 25 and stops at 35, is going to have more money for retirement in their 60s than someone who waits till they’re 35 and then saves for those 30 years till they’re 65, just getting that early start is better. If you’ve never seen this illustration, go check out J.P. Morgan’s Guide to Retirement. It’s this annual publication that they do that’s free, it has all kinds of awesome charts about retirement. So that’s one way to see this illustration.

Scott:
We want to start saving early. We know the compounding nature of the returns that you can get over decades and the power of that. I want to get in a little bit more tactical for a second here and drill in around a good 401(k) plan versus a bad 401(k) plan and what we should be investing in, in your opinion, in order to get to that long-term retirement state?

Robert:
So it does start with if you’ve got a match that’s great, that makes for a good 401(k) plan. The average match is between 4 and 5% these days, so you would own a good match. Costs are a consideration. It costs money to run a 401(k) and hopefully your employer is covering those costs and not making you shoulder them or embedding them in the mutual fund expense ratios. So it’s important to know who’s paying the costs of the 401(k). And then what to invest in really depends on your interest in learning about investing. These days, almost all 401(k) plans have target date funds, which is a mutual fund of mutual funds that has a reasonable asset allocation based on your age and it gets gradually more conservative as you approach retirement. I think that’s a great one-stop shop for people. You could probably do better if you learn on your own. I’m a big fan of index funds. We at The Motley Fool talk a lot about investing in individual stocks. I do that too, but the foundation of my retirement portfolios is in index funds.

Scott:
Awesome. And by the way, I’ll just call it. Mine too. We talk about real estate all day long. Foundation of my retirement portfolio is in boring, old-fashioned index funds. Same deal with that. And yeah, I completely agree. That’s something that a lot of people don’t realize is that employer sponsored 401(k) plans because we had I think a similar dynamic years back before we transitioned to a new plan here at BiggerPockets. They can have absurd expense ratios like 1% just for managing the fund, the plan, and then on top of that, there can be fees inside of the individual assets that are within the plan. Let’s say I work at a company for 5 or 10 years and I’ve been in that plan, maybe it’s to my advantage to be in the plan because I’m getting a match and I’m getting the tax things there. Any advice for what to do once that employment ends with funds inside of these “bad plans”?

Robert:
Generally speaking, it’s best to move the plan, so roll it over to an IRA or roll it over to the 401(k) if your next employer. I prefer an IRA because an IRA just has more choices. The typical 401(k) plan has 20 to 30 mutual funds, 20% of plans do have a side brokerage account like we do here at The Motley Fool, which basically means you can buy anything but most don’t. So I prefer rolling it over to an IRA, gives you a lot more choices, control of costs, and you do want to do, if you can a trustee to trustee transfer, it’s going from one institution to the other. You generally want to avoid receiving a check from your old plan, but if you do, get it into the new account quickly, otherwise it could be considered a distribution and you’ll be taxed and penalized.

Mindy:
You mentioned that you’re a big fan of index funds. You have some individual stocks. Looking at your personal portfolio, what would you say the percentage is of individual stocks versus index funds?

Robert:
So it’s about 30% individual stocks, 70% index funds, and that used to be lower. It got bigger because I lucked out with the stocks I bought. I think we’re all Tesla investors here. Am I right about that?

Mindy:
Two thirds of us are.

Robert:
Two thirds of us are. Okay. I knew somebody was, and I mean that’s just luck. I’ve got some great winners, I have some losers, and then there’s the index funds and we all like to say I like index funds, but you do have to choose which index funds, which asset classes you’re going to invest in. If you invested like in a S&P 500 index fund, you’re looking great. If you have bond index funds, international index funds, small cap index funds, which I have and I believe in, those have been sort of lagging. So my individual stock portfolio has been outperforming my index fund portfolio. I don’t know if that will always be the case, but I think it’s important to have a little bit of both.

Mindy:
Okay. And let’s say somebody’s listening who is just getting started on their individual investment journey, how would you recommend they allocate their investments? You said that your stocks used to be less than 30%, but you’ve had some luck and I like that you used the L word and didn’t say, “Oh, I’m just a really great stock picker.” No, you’re not. You got lucky just like we did.

Robert:
Exactly. So I mean you can start with an index fund, S&P 500 fund. I like a total stock market index fund because that is a little bit more of the mid caps and small caps. You could just start there, it’d be fine. The good thing about investing these days is most discount brokerages don’t charge commissions and many of them allow you to buy fractional shares, which means you don’t need to save up $1,000 to buy 1 share of a stock that’s trading for $1,000. You can buy a fraction. So I think it’s fine to invest small amounts of money in individual stocks as the spirit moves you. We like at The Motley Fool for you, if you’re going to go to the individual stock route to have at least 25 stocks, ideally more, no more than 10% of your portfolio in a single stock and no more than 30% in a single sector. So you can actually build up a pretty diversified portfolio of individual stocks with small amounts of monies these days because of fractional shares and no trading commissions.
And then frankly, as you’re starting out, you’ll just decide what you like. You may think, you know what? I bought these stocks and then I never pay attention to anymore. I have no interest in listening to their earnings reports. I have no interest in following the CEO. And then it just sort of goes to the wayside and you stick with index funds. Or you may find you just love investing in individual stocks. There are people at The Motley Fool who pay attention to stocks the same way people pay attention to their favorite sports team, and that’s great too. So you try out that and you’ll figure out which one you want to go. But like I said, even if you become a dedicated stock picker, I still think it makes sense to have a foundation of index funds.

Scott:
I want to transition us now to thinking about what the ideal retirement portfolio looks like for an investor. And because we just talked about, hey, no more than 10% in any individual stock, all that kind of stuff, I have met a large number of investors on BiggerPockets who have kind of wacky portfolios for good reasons. “Hey, I bought Tesla stock 10 years ago and now it’s 40% of my portfolio because it boomed. It was one of the best performing stocks of all time.” What do you do in a situation like that that’s not intent? I might have started with my ideal allocation and then got warped way out of whack because something performed way beyond expectations, for example, over the last 20 years. How do I transition away from my Tesla stock in this example tax efficiently in a way that’s going to actually improve my position and how I feel about my portfolio?

Robert:
So first of all, you can do it with cashflow. So if you’re still saving for retirement, you just make sure that your future contributions go into something else and ideally something very different, a different type of stock or a different kind of sector. Number one. And if you’re retired, your best performer is where you start to look for what to sell to raise cash, to bring that allocation down a little bit.
Another thing you can do if you have a stock that pays a dividend is to just make sure you don’t reinvest the dividends. You take the dividends of cash and you invest those somewhere else.
And then another way, and Tesla’s a great example because it’s been up and down, you do some tax loss harvesting. You reduce the allocation. At some point, Tesla is down what? 50%. And so you do some tax loss harvesting, you get the tax benefit, plus you somewhat reduce your allocation. But those are some ideas. There are people though who believe so much in a single company that they’re comfortable with that. And I’m not going to tell them they’re wrong. Warren Buffett is one of the richest people in the world because he has his net worth tied up in one stock. Now, Berkshire Hathaway, of course, is very diversified, and I should add, I own Berkshire Hathaway as well. But there are plenty of people who will say, “I’m fine with having 30, 40% in this one stock because I know it so well and I believe it so well.” If that’s what you want to do and you’re experienced at it and you’ve demonstrated ability to be right about such things, fine. But for the average person, I think you should keep it to 5 to 10%.

Mindy:
Warren Buffet runs that company.

Robert:
That’s true. He does.

Mindy:
That all of his money is tied up in, so I think you can’t compare, not you, Robert, but if that’s somebody else’s argument, well, you can’t use that as an argument because Warren gets to make these decisions. Also, he’s smart.

Robert:
He is very smart.

Scott:
So two part question here. Can you explain tax loss harvesting for those who are new to the term? And then for those who are advanced and understand what tax loss harvesting means, can you address the argument, the potential counter argument, hey, well, if I was tax lost harvesting Tesla stock and it peaked at 400 and at, what is that? 2021, and it bottomed out at 123 in December of 2022, and now it’s back up to 264, didn’t I lose a lot of much more money by selling at the bottom than I gained by tax loss harvesting?

Robert:
So tax loss harvesting only works in a taxable brokerage account. Won’t work in an IRA or a 401(k). Basically, if the stock fall, or any investment, could be bond, could be options, could be mutual funds. If it falls below the price you paid for it, you can sell it at a loss. At first, that loss offsets any gains you have and then up to $3,000 of individual income. If you have losses beyond that, you can carry it forward to future years. So it’s a tax deduction.
Now, to take that tax deduction though, you have to make sure you do not violate the wash-sale rule, and that is when you sell that, well, we’ll keep talking about Tesla. So if you sell Tesla, you cannot buy it back for 30 days. But then on the 31st day, actually think of it the 32nd day because the 30-day clock starts the day after you sold it, then you can buy it back. And yes, if it took off in that 30-day period, you’re like, “Ah, darn it. I wish I didn’t do that.” But the stock market generally is kind of like a coin flip on a monthly basis. So it’s just as likely that the stock will go up as come down. So you’re probably going to be okay. And again, I put that also in the context of you wanted to reduce your exposure to the stock anyhow, so it’s just sort of like an added bonus to that.

Scott:
Okay, so walk us … Look, I assume the allocation is very different for someone in the accumulation phase. At the retirement phase, are you seeing an optimal portfolio or one that you would sketch out for someone that is really transitioning and saying, “No, I’m going to actually stop working and earning active income and I’m going to live off this investment portfolio?” What does that look like to you?

Robert:
So I’ll just start with the foundation of any portfolio, whether you’re retired or not, and that is any money you need in the next three to five years should not be in the stock market. The stock market, if you look at it as a whole, is profitable about a little bit more than 80% of the time over a 3 to 5 year period. So it’s just better to keep that out of the stock market, keep it in cash or something like that. So that’s the start.
Now when you’re talking about in retirement, for me the best place to start is to look at the research on safe withdrawal rates. We all love the 4% rule and you two did a great interview with Bill Bengen back in 2020. And the research on safe withdrawal rates, it’s pretty clear that retirees should have at least 30% in the stock market and no more than 70 or 75%. So the sweet spot really is that 60% stocks, 40% cash bonds that we’ve all heard about the balanced portfolio. That’s a great starting point for a retirement portfolio, and then you adjust accordingly to various circumstances like your risk tolerance, whether you have a pension, your age, things like that.

Scott:
Okay, and what’s your take on how a BiggerPockets member who’s maybe got 50% of the portfolio in real estate, how does one think about that as an alternative asset class as a huge part of your portfolio if that’s how you’ve built it up?

Robert:
I’m not an expert in that, but here’s what I would say. When I think of a portfolio, you think of risks and rewards. Potential good things and potential bad things. So with the real estate portfolio, and I would say the same thing, if you have businesses, any other sort of thing beyond the traditional stocks and bond portfolio, you have to think in terms of, okay, what bad could happen to that part of my portfolio and I should set up my investment portfolio so it diversifies away from it.
So just easy example. If you invest directly into a lot of commercial real estate, maybe you shouldn’t buy real estate investment trusts. If you have a lot of rental real estate, for example, a big issue there as you know is you have to have some level of liquidity because you might have to make repairs or you have bad tenants, which is something that happened to my parents when they tried to invest in real estate when I was a kid. So you might have to be a little bit more liquid in your investment portfolio than maybe someone who didn’t have that real estate. So again, think in terms of what could go wrong and what should I do with the rest of my portfolio, so that will hold up if my real estate or my business suffers.

Mindy:
I was going to ask about inflation. Because we are in a crazy inflationary period right now and the market is up and down and up and down and it’s going to crash any minute. Just read the newspaper, read the online news, I guess. I might be the only person still getting newspaper, but read the news and it’ll tell you that there’s a crash coming. So how do you account for this outside of this? I love this. “Anything three to five years shouldn’t be in the stock market.” Oh, I love that quote. But how do you account for these inflationary periods that are going to come up and these down markets that are going to come up and these unexpected life events that are going to happen during your retirement planning?

Robert:
So the crash is coming, by the way. We just don’t know when, but it’ll happen. I even tell you, if you’re going to invest in the stock market, you are going to see your portfolio drop 50% or more, at least once or twice, maybe more over the course of your life. That’s going to happen.

Scott:
And in real estate too.

Robert:
In real estate too. Anything, really. Anything. Even the bond market. Last year the bond market was down 13%. Worst year ever for bonds, which just goes to show that sometimes the future does look different than the past. But anyway, so these things happen. So you have the money out of the stock market. By the way, in retirement, we call that your income cushion. Like five years of any money you need from your portfolio, it’s safe, cash, treasuries, CDs, things like that. In your stock portfolio you have different offsetting types of stocks. So last year the NASDAQ was down 33%. Value stocks, boring blue chip dividend pairs only down 5%. In my individual stock portfolio, my two biggest holdings are Tesla and Berkshire Hathaway, and they kind of take turns offsetting each other because they’re different type of stocks. So you own enough stocks so that something ideally will be up or at least not down quite so much in case you need your money.
The other thing to think about though in terms of retirement planning is there are different stages. I think of three stages. You’re young, you’re working, you’re transitioning to retirement, maybe that last decade, and then in retirement. When you are working, your biggest asset is your human capital. That determines how much you can earn, how much you can spend in your [inaudible 00:20:41], how you can cover your bills, and how much you can save. A market downturn then is actually good because all future contributions to your 401(k) go and buy stocks at lower prices. So when you’re younger, focus on your human capital. Life is basically all about transitioning your human capital to investment capital. So to the point where you retire, you are now living completely off your investment capital and that’s where you have to play things a little differently because if the market goes down, it’s not like, well, I’ll just buy more stocks because you don’t have the money. That’s why you have to have some money to live off of, safe money to live off while you wait for your stocks to recover.

Scott:
You mentioned bonds being down 13% and one thing that I think really … I’ve talked to a lot of financially independent folks and what I’ve yet to find are the folks that are truly living off of a 4% rule portfolio, selling off chunks of their equity in early retirement. Perhaps it’s different for traditional retirement age there. And the real ace in the whole is income. Are there any tools that you can use and go after that will produce that reliable income, that just kind of set it and forget it to help you with that transition phase, to accelerate the transition phase?

Robert:
Now you’re talking about for people who are early retirees or more normal age retirees?

Scott:
Let’s do both. Are there different options available to each?

Robert:
I would say that I am not quite the expert for early retirees in terms of what you’re talking about, other than things that you’re better experts at in terms of real estate and things like that, that ideally provide some passive income and things like that. For folks who are in retirement, you do have something that provides that regular source of income and that is social security. And I’m a big believer in people delaying social security for as long as possible. So every year you delay, it increases around 8%. Social security is safe. I know the program has challenges, but I think they’ll be solved. It adjusts for inflation. So Mindy, you were talking about protecting against inflation, it protects against inflation and social security is partially tax-free, and if you’re under a certain level of income, it’s completely tax-free. So maximizing that is a great retirement strategy.
And if you want even more guaranteed income beyond social security, I actually like plain vanilla annuities and I know annuities are a bad word for good reason. Many of them are expensive and lousy and pushed by horrible people, but the traditional single premium immediate annuity, you hand over a lump sum to an insurance company and get a check in the mail every month for the rest of your life. It is a great source of income for many folks, particularly people who are really worried about outliving their money, maybe they have a family history of longevity, and you would take a portion that you would otherwise devote to bonds in your retirement portfolio and put a little bit in this type of annuity so you know you have that income coming in every month.

Scott:
Okay, I’ve got a lot of questions. First, you said delay social security for as long as you can. Let’s say that I can delay social security indefinitely. At what age does it no longer make sense to delay social security?

Robert:
So you get social security benefit based on your work record and that, you delay to age 70. Once you’ve reached age 70, you might as well take social security. Even if you’re still working, go ahead and take it because there’s no benefits delaying. Now, you might also, if you’re married, you’ll get social security either based on your work record or half of your spouse’s benefit, whichever is higher, and there’s no reason to delay that beyond your full retirement age, which is 66 to 67 depending on the year you were born.
But in study after study, I’m not making this up, many studies have looked at this. Really, the optimal strategy for people is to delay to at least full retirement age, if not age 70. Really the only exception is if you have reason to believe you have a below average life expectancy. But I am a big fan of people using tools to solve this. There are some tools that you can pay for, but there’s a free one, opensocialsecurity.com. It’s operated by Mike Piper who is a CFA and an author, and that’s a great way to look at it. That way it looks at your actual numbers, especially if you’re married, there might be some different strategies to use and it gives you sort of a mathematical answer to the best claiming strategy for you.

Scott:
I have just one more question on social security. So I’m 33, how skeptical should I be of the income from Social Security being in its full current state by the time that I reach for traditional retirement age?

Robert:
You should be 25% skeptical because in 2033, the trust funds will work run out, and at that point, social security will only have enough money to cover about 77% of the benefits. It is important to know that social security is a pay as you go program. The three of us are working, we pay social security taxes, the vast majority that goes to pay for the checks of current retirees, and when we’re retired, the people who are working then will pay us. So it’s mostly funded but not fully funded. So I definitely think that for people who are younger, in their 50s and younger, should assume that they will only get 75% of what they’re promised. That’s bad news, but it’s better than nothing.

Scott:
I love that answer and that’s how I’ve long thought about it. A lot of people are like, “Oh, social security is bankrupt.” Well, it is not sustainable in its present form, but it doesn’t mean it’s going to go to zero in terms of you’re not going to get the … You’re going to get 77% of the benefits that hopefully that past generations have gotten. Not zero.

Robert:
Yes, and survey after survey shows that. All kinds of Millennials in particular or Gen Y thinking, Gen Z thinking that they’re not going to get anything, but you will get something, but it’s safe to assume you won’t get as much as you’re currently promised.

Scott:
Awesome. Now, let’s go to annuities. We had a great discussion about annuities a while back, and I think Mindy and I have moved on from them being a dirty word to being something, hey, there’s a lot of freedom and power in a very predictable, very safe stream of income. Walk us through why you like this SPIA, the single premium immediate annuity, and I have a couple of other questions. Is it indexed to inflation? Who’s actually guaranteeing it? How sure should I be that they’ll be able to guarantee it for the rest of my life? Those types of high level questions.

Robert:
Yeah, those are great questions. And so we’ve talked about the 4% rule, but if you were to go to an annuity provider, an insurance company, if you’re a 65-year-old female for example, and handed over $100,000, you would actually get a withdrawal rate that’s basically 7.3% because, and here’s the downside, when you buy one of these annuities, if you die a year later, you don’t get any money back. So it’s the people who die soon who subsidize the income from the people who have above average life expectancies. So that’s one of the risks.
The other risk is most of these do not adjust for inflation. There used to be inflation adjusted annuities and not anymore. However, there is a good bit of debate about how much inflation protection retirees actually need. They’re already getting it from their stock portfolio over the long term, they’re getting it from social security, they may not need any more beyond that. And it is an insurance company, so you should pick a highly rated insurance company, ideally A or higher. If you’re going to put a lot of money in one of these, you might want to split it up to put it a few insurance companies and every state has a guarantee fund. You could think of it sort of like FDIC insurance for insurance companies, and it’s not quite like that, but conceptually the same. It varies by state, anywhere from 100,000 to $500,000, but most states do have some backing in case an insurance company goes under.

Scott:
So look, that’s an unbelievable return, 7.3% on your money, that’s not indexed to inflation, but still that’s great. Guaranteed for the rest of your life. I think a lot of people would take that deal. I imagine this is not available to me as a 33-year-old, reasonably healthy guy. This is available after you reach a certain age limit or have you have to qualify through some means for this?

Robert:
Well, I would just say that the market is geared towards people in their 60s, 70s, and 80s. Is there an insurance company that would give you Scott an annuity? Possibly. I mean, why not reach out and find out? I mean, a great place to see quotes for immediate annuities is immediateannuities.com. You put in your age and your state and it gives quotes from different insurance companies. So I don’t know. Go ahead, put your birth date in there, Scott, and we’ll see if they give you a quote or not.

Scott:
I’ll certainly do that. I do not think I’m going to get 7.3% though.

Robert:
Well, you’re not. And this is the key point that I was going to say. Annuity payments are based on two criteria. One is life expectancy, so the longer you delay, the better the payout. So most people should wait at least till their 70s really to start thinking about this. Maybe 60s, but mostly 70s.

Scott:
Immediateannuities.com unfortunately says that your age today must be 40 or higher, so I’ll have to wait seven more years. I’ll get back to you on my rate.

Robert:
Close. You’re close. That’s right. And then the other thing is interest rates. I talked about how you would take this money to buy an immediate annuity out of the bond side of your portfolio because when the insurance company takes that money, they’re just going to invest it in a portfolio or bonds. When interest rates are higher, they have higher payouts. Interest rates now are the highest they’ve been in more than 15 years. So annuity payouts today are much better than they were five or seven years ago.
And I’ll just add one other thing. These aren’t for everybody. I’ll give an example of how I think I’ll probably end up buying an annuity. I might buy it when I’m in my 70s anyhow, but I’m the guy who manages the money in our household. My wife is wonderful and smart, but she’s a mental health therapist and a counseling professor. Money’s not her thing. And many people are like this, right? If there’s one money manager in the household, you first of all have to have a plan what happens to that money manager? And if that were to happen today, we have a financial advisor already picked out who my wife will contact.
But let’s say we’re in our 70s and I pass away then, my wife would be a great candidate for annuity because first of all, she doesn’t want to manage money. She just wants a check coming in, plus longevity runs in her family. Many of people in her family have lived to their 90s or even over 100. So she’s a great candidate because she doesn’t want a hands-on approach to investing, and she has above average life expectancy. That’s how we’ll probably use it in our household.

Scott:
Look, I think that you’re trading the potential for greater returns. If you know what you’re doing as an investor, you’re going to get better returns. Most likely on average by a good amount, than you will get with an annuity. But there’s also something just freeing about saying, “No, I’m going to buy this income and I don’t have to worry about it anymore. I can focus on other things and I know I’m not going to run out for the foreseeable future.” And so that’s I think a legitimate value. And as long as you understand that, know that you are giving arbitrage likely to an insurance company who will make better returns on the money than what they’re going to pay out, that’s fine. That can be just a wonderful way to live your life and enjoy retirement.

Robert:
I totally agree.

Mindy:
Okay. Is there a net worth minimum that makes annuities no longer makes sense? We are more focused on the early retiree than the traditional retiree and the 4% rule, and I would assume that after … Well, I know that after a certain amount of net worth life insurance no longer makes sense. You simply self-insure. And does the same apply to an annuity?

Robert:
Yes, I think so. I would look at it more in terms of withdrawal rates. If you only need 2% of your portfolio a year in retirement to be happy, there’s a very, very, very slim chance you’re going to run out of money. You can just take the interest and dividends from your investments and that’ll cover your living expenses. I’ll use an extreme of example as we brought up Warren Buffet. In one of his annual letters, he wrote that when he passes away, he’s directed the administrator of his estate to invest his wife’s portfolio, 90% in an S&P 500 index fund and 10% in treasury bills. His wife is now almost 80, I think. That’s an aggressive portfolio for someone who’s almost 80, but she’s also going to have tens of millions of dollars. So it’s perfectly fine for her to have an aggressive portfolio and she would certainly not need an annuity.

Scott:
So one of the things that we don’t do a lot here on BiggerPockets Money is talk to folks going through the traditional retirement process. So I just would love to ask you a couple of questions as we wrap up here about folks in that situation because we’re so focused on early retirement and what folks can do now. I wonder, not knowing what I don’t know here, if a lot of these traditional retirees either dramatically overshoot their retirement spending or are way under, coming in way under. Are you seeing a lot of folks kind of finesse it right through in that catch up phase in the last 10 years? Am I wrong on that or how does that break out? Do we have these buckets here where you’re really going way too far and you’re building up way more cash and too conservative and other folks who are totally unprepared?

Robert:
So there’s such wide variation. I mean, you will find examples of just about everything you said. What I will say is that the average person is probably not saving enough for retirement and that they could use that last 10 years, especially once the kids are out of the house and college is paid off to sort of play catch up. Unfortunately, most of them don’t, but they could.
That said, the typical consumer of financial media, whether it’s podcasts or reading articles, is probably on track if not doing better. And so people listening to this podcast, especially if they’ve been doing this for a while, they might be in the category of people who probably either A, could retire sooner. B, could enjoy themselves a little bit more along the way. Or when they retire, C, spend more than they do because there’s plenty of evidence that have found that there are people of middle to upper wealth in terms of retirement wealth, just underspending. And part of it, it could be because they’re used to being savers. It’s tough to make that transition from a saver to a spender. It could be they’re worried about outliving their money, long-term care, medical expenses, things like that. But the vast majority of those folks, and I think that probably applies to a lot of people listening to this podcast, probably could just relax a little bit in terms of their saving and spending.

Scott:
Makes sense. That has been a big theme in the last couple of months, is folks who have way overshot even early financial independence and can’t seem to spend all of their money. I’m not sure if anyone here can relate to that. So I think that’s just the other side of the coin here. We talked all about how do you optimize these tools to make it in that journey and get to those levels and the catchall or one of the big lever of social security in the journey. But a lot of BP Money listeners, people listening to this podcast may be at risk of the other problem of accumulating way too much or way more than they needed to achieve that goal, which is a good problem, but something that you should also factor in your decision making and plan around to a certain degree.

Robert:
Yeah, I would say if there’s one thing that’s changed with me since I really started getting into this 30 years ago now. When I was a kid was, then I was like, “Oh, I’ve got to save as much as I can. I need to invest as much as I can” because I did have the investing bug and it was delay, delay, delay, defer, defer, defer. But now that I am 54, I’ve seen many people, friends, relatives, celebrities who had certain plans for their retirement and they never happened either because A, they died prematurely or something happened to their health or something happened to their spouse, and you had a guest recently on, right, Mark Trautman, Mark’s Money Mind, I think is what … He’s 57, he’s retired and he talked about how his wife died two years ago with cancer. Now they lived a good life. They took lots of nice trips, and that’s the smart thing to do if you’re on track and a lot of people aren’t and they’re just going to have to suck it up and save more.
But many people, I’m sure listening to this podcast probably should relax and enjoy some of their money, really think about what they want to do in retirement and can they move it up before retirement because life and health are uncertain and you don’t know if you’re going to make it to your 60s and 70s or what kind of shape you’re going to be in when you get there.

Mindy:
Robert, thank you so much for your time today. This was a lot of fun. I really appreciate you and we will talk to you again very soon.

Scott:
And Robert, before we go, can you just tell everyone where they can find out more about you?

Robert:
To learn more about The Motley Fool and me, go to fool.com and then I am on the Motley Fool Money Podcast, which you will find on Apple Podcasts, Spotify, and wherever a great podcasts are given away for free.

Mindy:
All right, Scott, that was Robert Brokamp. I want to already have him back on again because he was just fantastic. What did you think? I don’t even have to ask you what you thought because I know you had a great time on the show because he was so wonderful. But really, what did you think?

Scott:
I thought he was fantastic. I think he’s a wealth of knowledge and a true expert in a lot of these areas, specifically around stocks. And because he’s so knowledgeable about stocks coming from The Motley Fool and the various strategies there, I thought it was really interesting that that contributed to … Well, first I thought it was interesting that he’s a big index fund guy and most of his wealth is in index funds, which I thought was awesome. Really agree with that, even though we’re [inaudible 00:38:53] talking to someone from The Motley Fool.
But second, I thought that that contributed to an even more advanced understanding than perhaps most of the folks in the personal finance space around retirement accounts, planning around these income strategies that you can use with social security, treasury inflation, protected securities, I bonds, annuities, and more. So really enjoyed it. What a wealth of knowledge and what fantastic tools that he was able to reference right there for folks to go and use, all free.

Mindy:
What I loved most Scott, was his comment about how even though he’s incredibly knowledgeable, he still has 70% of his portfolio in index funds. And 30%, and it’s only 30% because he got lucky, not skilled, lucky with some of the individual stocks that he chose. Only 30% is in individual stocks. So I think that is very important for people who, frankly, most people are less knowledgeable than he is because he is just so intelligent, for people who may be less knowledgeable about the stock market in general to take note. He’s in this every single day and he’s still mostly in index funds. All right, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this fantabulous episode of the BiggerPockets Money Podcast. He is Scott Trench. I am Mindy Jensen saying, shake a tail, feather Heather.

Scott:
If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets money was created by Mindy Jensen and Scott Trench, produced by [inaudible 00:40:46] Bennett. Editing by Exodus Media. Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.