THE FISCAL BLUE PRINT
WITH COACH JEFF MONTGOMERY
Episode 43: The Top 3 Characteristics of Money When It Comes To Your Retirement Plan
What is the definition of a characteristic? “a feature or quality belonging to a person, place, or thing,”
On today’s show, we cover the TOP 3 CHARACTERISTICS OF MONEY and how we can capture all 3 in a comprehensive plan. When you think of retirement and how we can prepare for it, we like to prioritize these 3 things: Safety, Growth, and Liquidity.
Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you are a client, I can’t give you advice because I don’t know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser… right? That’s just common sense.
(1:00) Practical planning segment: In my mind, there are 3 main characteristics of money: Safety, Growth, and Liquidity. We have weaved them into other podcasts covering different subjects so we figured we would dedicate a podcast to this subject entirely. In any investment product out there, you will only get 2 out of 3 of these characteristics, at most. In our opinion, it is impossible to get all three characteristics in one product or investment. If someone is promising safety, growth, and full liquidity with your money, then it’s probably too good to be true.
(2:15) Safety- When you think about safety, you typically might think they want some type of guarantee, or is my money safe from market declines? Typically, people are looking at market risk when they think of safety. Remember, Risk and return are related. So, when we want to achieve safety, we typically must sacrifice something to guarantee that safety. Typically, growth potential would be sacrificed.
An example: Bank Savings account (safety, liquidity, but no growth)
There is no one size fits all solution or perfect investment product out there. I recommend that folks seek Fiduciary advice where the pros and cons or various solutions are thoroughly explained. Also, consider building a plan to capture all 3 characteristics appropriately and monitor and make changes accordingly.
Let’s go through a mental exercise to explain this. Imagine that you’re walking along a mountain path and all of sudden you come across this huge GAP in the trail, a large crevice. A RISK TAKER would probably jump across, someone who is more risk averse would probably turn around and find another way. Now, a risk manager would find a solution. I.e. a way to build a bridge, or a safety net.
Is there a cost of safety? Is there any risk to safety??? Yes, opportunity cost and inflation risk.
Additionally, I recommend 3 to 6 months saved (in a savings account, immediately accessible) as an emergency fund for any unforeseen events that may lead you to needing money as quickly as possible. Also, everyone is different when it comes to how much is in their emergency fund. It depends on a myriad of different things like job security, health, personal comfort level, etc.
(10:20) Liquidity consists of having immediate and quick access with no penalties.
To explain this, here are a few examples of Illiquidity: Fixed Annuity or Long-Term Jumbo CD’s; (some growth, safety, but limited liquidity)
Questions to ask yourself: How much access (Amount) do you need quickly? Is a 3-month emergency fund enough for you?
(12:30) Growth would consist of positive returns that at least keep up with and ideally, exceed inflation. Like I mentioned before, growth is associated with some level of risk. An example: Stock/bond portfolio (growth, liquidity, no safety)
There is no guarantee (or safety) with a stock/bond portfolio. Even bonds! Some folks think they are completely safe, but they can default too.
So, when we are looking at building a plan we ask, ‘how much risk is acceptable to take with a portion of my overall retirement plan?’ The answer varies from person to person, from family to family, etc. It really depends; everyone has a different risk tolerance.
The benefit of using a portion of one’s overall plan allocated towards a portfolio of stocks and bonds is that you increase your expected rate of return overall. For the folks that lean more toward risk, they may allocate more to this area.
(14:20) To recap, there is no one size fits all solution or perfect investment product out there where you can capture all 3 characteristics, but you can usually capture 2 out of 3. Let’s go back through the examples.
- In a bank account, we can get safety and liquidity, but we don’t get growth.
- In a CD, or a Fixed Annuity, we can get safety and some growth, but sacrifice liquidity.
- In a market portfolio we can get growth, generally liquidity, but sacrifice safety based on various levels of risk tolerance.
(15:15) Where does Real Estate fit in? It’s an interesting asset class.
There is a good argument that it’s a growth asset, over time. When it comes to safety, some folks might argue that it is a safe asset, but I do not think that is the case and the 2008 market can probably prove that. Real Estate is local, and it has fully rebounded
As far as liquidity goes, it’s definitely not liquid. You can’t just pick up the phone and cash out quickly. Even in a hot market like we’re in now, locally at least, it still takes time to go to settlement.
So, I would argue that you only get 1 out of 3: growth. The growth is slightly risky, and it’s not liquid, which could add to the risk because let’s say you did need money tied up in an investment property. You would have to price it aggressively for it to sell quickly, thus cutting into the growth component.
(17:00) Conclusion: There is no one size fits all solution or perfect investment product out there I recommend that folks seek Fiduciary advice where the pros and cons or various solutions are thoroughly explained. Also, consider building a plan to capture all 3 characteristics appropriately and monitor and make changes accordingly.
“We appreciate you joining us today for this episode of The Fiscal Blueprint.
Remember it’s not about the money but about your life!
Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!
“Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment.”