Central to creating a retirement plan for retirees should be a tax-efficient, draw-down strategy against their portfolio of assets. To create that plan, you need an accurate view of their asset mix so they’re comfortable as they pull from each one—and for many retirees your advice on how to handle their property is pivotal.
Unfortunately, too many advisors fail to focus on how retirees should be liquidating their assets and are satisfied to just make a few projections. On this episode of the Elementality podcast, Reese Harper and Chad Jardine discuss how the Elements® Financial Planning System helps you clearly measure a client’s asset mix allowing you to create a tax-efficient, withdrawal strategy. A strategy that can be critical to creating a stress-free, comfortable retirement for your clients.
Podcast Transcript
Reese Harper:
Of course, you can also just run one money car loan simulation at the first meeting with a client when they’re 65 and hope that it works out over 20 years and check in [chuckle] every five years. And a lot of people will do that. It would be like, wake up. Six years in they’d be like, “What happened? Our net worth’s half what it was.” [chuckle] Well, you’d never actually monitored the pace at which they were moving and they’ve made some adjustments. You didn’t track ’em, you didn’t notice ’em.
Abby Morton:
Welcome to Elementality. I’m Abby Morton, CFP and producer of our podcast here at Elements. I love being a financial planner but I know it’s a challenging profession as well. That’s why the number one goal of our show is to help you prosper as an advisor as you better connect with your clients. We know your time is very valuable. Plan on a good return when you spend it here with us.
Reese Harper:
Welcome to Elementality everybody. I’m your host Reese Harper, here with Chad in the studio, excited for another big episode and Chad how about you kick us off with the question of the week?
Chad Jardine:
Yes, I am the co-host, Chad Jardine, who is weekly attempting to keep pace with Reese Harper.
Reese Harper:
Each week, by weekly you mean each week.
Chad Jardine:
So, I have a question this week. So, we talk a lot about how Elements helps people who are… They’re in the middle of their financial lives. They’re striving to accomplish financial goals or to reach places in their financial lives where they are… They have peace of mind about key financial questions and how that helps them feel about money. We don’t spend a ton of time talking about people that are at the end of their financial lives, that are in retirement.
Chad Jardine:
And so I was just curious, if we were to look at the same type of financial monitoring and understanding of the financial health of somebody who is a full-blown raging accumulator, whatever you call somebody who’s written in effect of that. How would those principles apply to both clients who are in retirement and advisors who have a significant segment of their book that is retirees?
Reese Harper:
I think a lot of my work with retirees that I’ve really… Where I feel like we’ve innovated a little bit, maybe done something a little different, is I think that… The origin, actually, of Elements didn’t start with exclusively an accumulator market. It’s just that we knew that mobile technology would play a big role in trying to get the system off the ground. And so that’s why I think a lot of people associate us with younger clients or younger audiences, because mobile tends to be where they’re at.
Chad Jardine:
It is this new thing called technology.
Reese Harper:
Truth is though mobile is also something that is… The senior market spends a significant amount of time on Facebook. They have a lot of exposure to mobile technology, it’s not really…
Chad Jardine:
We’ve seen a lot more uptick in things like Zoom too, with COVID.
Reese Harper:
Yes. Yeah, I don’t… I think that one of the main things that I wanted to get out of Elements was helping me look at someone’s asset class mix during retirement and kind of making tough decisions about how we’re going to distribute and liquidate assets. ‘Cause a lot of people, when they look at Elements they tell me, they’ll see, they’ll look at TT, they’ll look at LT through RT, and they’ll ask the question, “Well, why are you including real estate inside of someone’s retirement calculation? They don’t even wanna use that. They just wanna live in their house and they’re not gonna use that for income.” And I think that’s kind of the…
Reese Harper:
Income is the place where most advisors focus, cash flow, it’s a pure cash flow thing and just trying to get the right cash flow lined up. The truth is most people are going to have to make some really hard decisions about the fact that for them to stay in their home, for them to minimize their taxes during retirement, they’re going to have to make some hard decisions regarding their real estate and their retirement plans and their liquidity and the mix that they have.
Reese Harper:
And sometimes that involves someone taking money out of their house before we pull money from the 401 [K] in a rapid way, because if I take some money out of my home, I know that’s scary for some people, but if I look at someone’s total term score and they’ve got a 20 and they’re 65, and we’re having a retirement conversation, there’s really no… And let’s say seven of their 20 score is inside of real estate, there’s no way they’re gonna make it without tapping into that real estate asset. And so if I know there’s no way they’re going to make it all the way through retirement without using that, and I know at some point down the road, we’re gonna have this…
Reese Harper:
Even if we don’t touch the real estate and we just go after the liquid assets of the qualified plans, and at some point in their late 70s, early 80s, we’re gonna have this really hard conversation where they’re mentally not quite ready. They’re not in a mental state to make a decision that traumatic. We’re gonna have a decision about relocating them out of their home or financing or…
Chad Jardine:
Downsizing and…
Reese Harper:
Downsizing or… And they don’t have the same comfort level with having that kind of conversation as they’re aging at that stage in their life.
Reese Harper:
So as I look at everything in my… When I look at our retiree situation, I look at someone at 65 or 60, I’m constantly, every three months, I’m looking at how fast is net worth declining, how fast is net worth increasing, what’s the mix between real estate, liquid assets and qualified plans? And I’m not making the same decision each quarter on where to pull assets from because sometimes, regardless of what projection you ran, someone will have cash flow needs that change.
Reese Harper:
They might say, I need another, $40,000, or we decided to do this for our daughter, or we decided to pay off our condo ’cause we just don’t wanna have any debt. They’ll do things that affect their asset mix, a lot, which will affect the plan that you need to have on how you’re going to liquidate assets. So asset, liquidation and distribution, the mix of assets you carry and the way that you spend money from them has a huge effect on someone’s wellness, someone’s peace of mind in retirement, and so tracking that over time and monitoring it really closely, especially including their primary residents and or investment property, if they have any in that overall picture, just allows you to be a lot more proactive and pull from the right places that have the least amount of tax consequence.
Reese Harper:
So somebody has a… If they’re really wealthy and they’re never gonna need to pull from real estate at all, then maybe I’m less concerned, but if I can tell it’s gonna be tight, then I might say, “You know what? We’re paying a lot of money right now to pull money out of your brokerage account with all the capital gains tax we’re paying or your 401 [K], we’re gonna have to make a decision on this house so that we can preserve these other liquid assets and not pay taxes, ’cause this house you’ve already… There’s no tax on it at all. You’ve already paid taxes on the money that’s paid off this home.” And that kind of thing is really critical in my view, and most financial advisors are… They’re aware of this, obviously, and they do… Many of them are much more qualified than I am to even address this topic, but a lot of times they’re not actually monitoring it that closely, and they’re not thinking about it in a way that allows them to be proactive and make hard decisions.
Chad Jardine:
They might not have access to tools that make that easy to do.
Reese Harper:
Yeah, exactly. Anyway, that’s kind of, I think, working with retirees is about getting an accurate net worth picture, looking at it every three months, measuring the draw down on their portfolio, checking their withdrawal rate, making sure that you’re comfortable with the amount of time that you have to pull from each asset before you’re gonna have to be making hard decisions around the real estate that they live in, and understanding what they wanna do with property throughout that time. So that it’s just the most comfortable, enjoyable retirement someone could possibly have and that they don’t worry about the fact that there may or may not be some debt on their property that… It’s a really important conversation.
Abby Morton:
Do you ever wonder if you do enough for your clients to be worth what they’re paying you for? Do you feel like you’re delivering enough value? Many advisors wrestle with questions like these. I’ve used the Elements Financial Planning System for a couple of years now. With it I can deliver periodic insight about a client’s financial health and progress by utilizing standardized measurements. They know I’m watching their progress and can actually see how my advice is improving their life. With the Elements Financial Planning System, you can also give your clients consistent planning guidance and the valuable advice they expect. Check it out at, getelements.com/meet.
Chad Jardine:
And so that makes sense in terms of monitoring and tracking their assets and how their net worth is changing. Talk to me about how does that work when you’re looking specifically at the withdrawals. Like the cash flow side of things.
Reese Harper:
I think in Elements, one of the things that we’re really kind of particular about is measuring net worth change over time and grouping the net worth change by category, so cash change, after tax investments change, qualified plans change. And what you’re trying to look at on a regular basis… Most advisors, what they’ll do is they will periodically, they’ll look at their client’s situation in retirement and determine if they felt like their projections were accurate. So they’ll set up an income plan, but they won’t actually… They’ll set up an income plan, they’ll start setting clients up on auto drafts, but then they’re less likely to go and look at whether the overall withdrawal rate that the client is experiencing on their portfolio is healthy. So as the market moves and shifts, how much clients are withdrawing changes. Even if their withdrawals are the same, if the market’s declining, that increases the clients withdrawal rate. If the market’s increasing, it decreases the withdrawal rate.
Chad Jardine:
Is that the percentage of their holdings?
Reese Harper:
Yeah. And you wanna be really careful that if someone’s overall net worth is declining… And this is why I think it’s so important to get clients to verify their data on a quarterly basis, just so that you can see is there a new account, is there a property value going up, have they paid off more debt than I thought…
Chad Jardine:
Yeah, and with Elements there is… In fact I think it’s just this month, our automated quarterly reports, progress reports got released and you would see that. That would automatically generate a quarterly picture on clients, whether they were younger or in retirement.
Reese Harper:
Exactly, like if I saw… The first thing I’m looking at is just total net worth decline. If I’m in a bear market, and I know that I’ve got a client that’s probably not in a 100% stock, but they’re probably in a 50-50 portfolio or 60-40 portfolio on retirement, if I see net worth going down, by like 4% in a quarter or 5% in a quarter. That’s a 20% net worth decline over a year, I’m freaking out. I know that something’s going on, either their cash has been spent too fast or they called in and took a withdrawal from their portfolio and never really ran it by me, they… ‘Cause they felt embarrassed. [chuckle]
Chad Jardine:
Would that happen? So you’re saying the client would do something and not tell you about it?
Reese Harper:
And then the… And I’m just trying to be vulnerable, folks, that this has happened to me before. [chuckle] Okay. And it usually has to do with when they want to buy something really expensive for their grandkids or something. [chuckle] It’s like, “We bought a condo for Johnny at college.” I’m like, “Oh, that’s a big thing to buy for the grandkids.” Anyway, so I think that monitoring the pace of decline of net worth overall, like if you want a 4% withdrawal rate from your assets or a 3%, withdrawal rate from your assets, when the market’s going up, you’d expect there to be no net worth decline for the most part. So if there is a net worth decline while the market’s going up, that’s gonna raise a red flag. If there’s a market increase, but a net worth decline, we’ve got a challenge. If the market’s down, but you’re up that is also surprising.
Reese Harper:
If the market’s down 8% and your portfolio’s 60-40 and your client’s down 2%, maybe I’m feeling fine. And so I’m really trying to understand where I’m at in the year-to-date market move, where my client’s at based on their recent approvals to their net worth that they’ve verified with me, and then I can sleep well at night knowing okay, we’re on pace. Of course, you can also just run one Monte Carlo simulation at the first meeting with a client when they’re 65 and hope that it works out over 20 years [chuckle] and check in every five years.
Reese Harper:
And a lot of people will do that. They’ll be like, “Wake up.” Six years in they’ll be like, “What happened? Our net worth’s half what it was.” [chuckle] Well, you never actually monitored the pace at which they were moving and they’ve made some adjustments. You didn’t track ’em. You didn’t notice ’em. And next thing you know, you’re the advisor, you’re trying to recoup your credibility with the client ’cause they’re just like, “Man, I’m kind of in a pinch and what happened?”
Chad Jardine:
Well talk to me about the transition too. It seems like if you’re, I don’t have experience about this, I’m just guessing based on your comments, but it seems like if you have a pattern of monitoring with clients along the way that as they transition to retirement, I don’t know about you, but the people that I know who make it, it’s not always like today’s the day we’re retiring. Some people dribble into retirement and some people, I was out to lunch with a friend the other day, and he’s like, “You know, I was out playing golf and somebody asked me, it’s like, so are you retired?” And he’s like, “Oh, you know, I guess I am.” [chuckle] And he probably been that way for two or three years.
Chad Jardine:
But I’m interested in your take about that. If you have a pattern of monitoring when they’re not retired, it feels like that that would be easier to maintain once somebody transitions into retirement.
Reese Harper:
Yeah, your pattern of monitoring, that should be what you’re doing throughout your life as a financial advisor. I mean, the biggest thing you can do as a financial advisor is get a full picture of your client’s situation as often as possible so that you can sniff out the things that look unusual. Full picture of cash flow, full picture of net worth, and more importantly than just a one-time view, it’s a trend. Like if you can see patterns over time, that speaks so much louder than a single instance. And I think that’s what we’re trying to do at Elements is create this monitoring platform that allows us to really be able to understand trends and get used to looking at your clients in this fashion. Most advisors won’t be able to really accurately tell you what their average net worth growth is of their clientele or what their average savings rate should be, or what the change in net worth is they might expect for someone who’s making X dollars per year.
Reese Harper:
I think that’s the biggest difference between a successful guide, a successful coach, a successful team member executive to the degree that you’ve had a lot of at-bats, you’re able to just more successfully pattern match and say, “This smells like I need to make an adjustment.” But it’s hard to do with clients when there isn’t data history to look at and say regardless of what they’re saying right now, ’cause people don’t always know why things are doing well or not. They’re their own, it’s difficult to be objective about your own situation, and so if you have a lot of data, you can look at someone’s history over time and be like, “You know what? This is what I’m seeing regardless of what you’re saying. I feel like this is the right direction.”
Reese Harper:
Next time on Elementality.
Bob Veres:
So the question becomes what is my value proposition and what is my revenue model for the future? Value proposition is not I’m gonna make you wealthy when you retire because I don’t have that power and I don’t have that forecasting ability. It is I’m going to help you in your day-to-day ability to navigate the financial world in a way that it makes you more efficient, more effective, where you make good decisions for now and for the future. That’s the value proposition. That’s not an AEM model, and that’s not a projecting out into the future model. That is a here and now model.
Abby Morton:
You can learn more about the Elements Financial Planning System at getelements.com/meet, and schedule a time to meet with me or one of our friendly financial planning experts. Elementality’s executive creators are Reese Harper and Chad Jardine. Elementality is produced by Abby Morton and directed by Jordan Haynes.