Motley Fool Hidden Gems Investing - Retirement Tools and Affording Impulse Purchases

Starting point is 00:00:00 How to analyze your retirement plan with online tools and how the Fed will affect your finances. You're listening to the Saturday Personal Finance edition of Motley Fool Money. I'm Robert Brokamp and this week I speak with financial planner Sean Gates about how to choose a high quality retirement calculator and a few to consider. But first up, let's talk about what happened last week in money. And we start, of course, with the widely anticipated interest rate cut from the Federal Reserve. The Fed shaved 0.25% off the target for the Fed funds rate and suggested that two more cuts could be coming this year with maybe another in 2026. Now, the Fed's in a tough spot, right? Trying to prop up the job market while not stoking

Starting point is 00:00:47 inflation, which has been ticking up lately. In the press conference after the meeting, Chair Jerome Powell said, quote, we have two-sided risks, which means there is no risk-free path, end of quote. Still, I think it's likely that more cuts are coming. So what does that mean for your finances? Well, one interest rate that reacts almost immediately is the prime rate, which is generally three percentage points above the Fed funds rate. The prime rate is the rate that banks charge their most credit-worthy customers for things like home equity loans, auto loans, credit card balances. The prime rate could also affect other rates, such as those on 401k loans, which are kind of unique because you're actually borrowing money from yourself.

Starting point is 00:01:25 Other rates that may or may not come down, or at least come down as much and as soon, are the rates on things like intermediate to long-term bonds, which are determined largely by the buyers and sellers of bonds from all over the world. Bond rates, in turn, have a big influence on the 30-year mortgage rate, which has already come down quite a bit over the past year, currently sitting at 6.22%, so perhaps any influence the Fed may have had may already be factored in. Other rates that are likely to drop soon, and in fact already have been on the decline is what we get on our cash and money markets. So given that more cuts are likely, it might make sense to lock in current rates with maybe some individual CDs or short-term treasuries

Starting point is 00:02:05 with some of your cash that you don't need in the near term. Moving on to our next item, happy 65th birthday to Real Estate Investment Trust, aka REITs. They were created on September 14th, 1960, when President Eisenhower signed the Cigar Excise Tax Extension of 1960, which contained a provision that gave investors a way to buy shares of companies that own diversified portfolios of income-producing real estate. One thing that investors like about REITs is that they tend to have higher yields than the average stock because they generally pay out at least 90% of their income as dividends to maintain some tax advantages. So the yield on the Vanguard real estate ETF, ticker VNQ, is currently 3.8% compared to 1.2% for the S&P 500. And REITs

Starting point is 00:02:49 invest in all kinds of real estate. We're talking like offices, hospitals, apartments, malls, storage facilities, even data centers and cell towers. The National Association of Real Estate Investment Trust maintains a data library on its site that goes back as far as 1972. And since then, equity REITs have returned an average 11% per year, which is pretty much exactly the same return as the S&P 500. But they don't behave the same way as the S&P 500 from one years next, which means they can add some diversification to your portfolio. Unfortunately, diversification is a double-edged sword, right? Investors loved REITs when they made money while the S&P 500 plummeted during the dot-com crash, but not so much over the past several years when

Starting point is 00:03:30 U.S. large-cap stocks have pretty much been the best game in town. REITs have underperformed not only because they tend to fall more into the small and mid-cap category, but they can also be sensitive to changes in interest rates. So they've struggled since rates began to rise in 2022. But now rates are likely heading the other way, which could be a tailwind for future REIT returns. And now for the number of the week, which is 0.01%. That's a rule of thumb created by author Nick Maggiuli of Ritholtz Wealth Management and discussed in his latest book, The Wealth Ladder, and also covered in a recent Wall Street Journal article. Here's how it works. So let's say you're debating about whether to make a purchase, such as going out to eat or

Starting point is 00:04:08 buying a shirt you see in the store. Majuli says that if the purchase is less than 0.01% of your net worth, don't sweat it. So for someone worth $100,000, that no sweat limit would be 10 bucks, whereas someone worth $500,000 could spend $50 guilt free. The math behind the rule is that 0.01% a day is around 3.7% a year. And hopefully your portfolio is earning more than that. Plus, you may also be adding to it with regular contributions. So you're likely not jeopardizing your future finances with purchases that are 0.01% of your net worth. That said, even small amounts can add up, which is why, as Majuli says in the journal article, it's something to use maybe a few times a week. Now, obviously, most of us spend way more than 0.01% a day on things like

Starting point is 00:04:53 housing, food, transportation, raising kids, and so on. So for me, the rule of thumb is most useful when you're in a situation where you're just debating about whether to make an impulse purchase. For some people, the rule will say, no, you should instead keep your money. Whereas for others, especially those who've been frugal for years and maybe have built up a good amount of savings, it'll give them permission to relax and, you know, maybe live a little. Up next, crunching your retirement numbers when Motley Fool Money continues. New from Nespresso. Blend wellness into your coffee routine with the Coffee Plus range, infused with functional benefits. Choose the coffee you love with added B vitamins,

Starting point is 00:05:30 like Coffee Plus B12 to help support immune function and Coffee Plus B6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on nespresso.com retirement is largely a math game and calculators could help you crunch the numbers fortunately the internet is full of retirement tools but some are much better than others here to join us to discuss what to look for in a high quality retirement calculator is sean gates a financial planner with Motley Fool Wealth Management. Sean, welcome to the show.

Starting point is 00:06:09 Good to see you again, my old friend. So Sean is, I should add that Sean not only is a financial planner with Motley Fool Wealth Management, but he's the first person I ever hired as a manager at the Motley Fool. So I'm so proud of him. All right, let's get into the show here. Let's start with your take on why people should spend time with retirement calculators. Yeah, I think everyone has questions about whether they will be successful in retirement, but they may not want to engage a paid professional to answer that question. And so a lot of people will look for calculators to try and give them a half measure answer. But I use all of these calculators. I've used probably

Starting point is 00:06:47 15 different calculators, some professionals, some DIY. And so I'm excited to talk about the topic. And you kind of have to use something, right? Retirement's pretty complicated with all these moving parts, all these variables, you know, what your portfolio is going to earn, when you're going to claim social security, the taxation of different accounts. You can't do it in your head. You need some sort of tool to do it for you. Not only do you need a tool to help you do the math and the projections, I would argue being able to visualize and see the details of each year that you're projecting is super critical. And I also think the feedback mechanism of seeing how it is actually updated year by year matches those projections. I wish a lot of people don't always do.

Starting point is 00:07:29 All right. So those are the reasons to do it. And there are plenty of tools out there to do it with, but they're not all created equal. In fact, in 2018, a study looked at 41 retirement calculators and found that, quote, the majority of tools are inaccurate, making it dangerous for the public to trust tool outcomes, end of quote. So what do you think people should look for in a good retirement calculator. Yeah. I mean, I think that study is well-intentioned, but I would make one call out at the top of our conversation, which is I think retirement projections are purposefully overly scary, meaning most of the calculators make many conservative assumptions to protect both the calculator creators or the person using that calculator. And then if you actually ran out

Starting point is 00:08:15 the projections into the future most people die with well more money than they need and so i i think it's doing a disservice to people who might want to live fully with a smaller set of resources perhaps but with that out of the way i think the biggest thing that you need to use inside the calculator is one that allows you to see the cash flows on a year-by-year basis because these are just big calculators and the inputs dramatically affect the outputs and so if you can't see what's happening from your inputs as a resolution on the outputs how do you address like how do you know to course correct even if you're a diy like or i should say even if you have a professional if they can't see it they're probably guessing to some extent and trusting a lot in the math

Starting point is 00:09:04 going on in the background right there's no really way yes check whether everything is going according to what you expect. Totally. Yeah. Which some of them will do cashflow year by year inflows and outflows. So this would be like traditional accounting, right? A cashflow statement where you see the income coming in for the year, the expenses, taxes going out for the year, and then the amount that might be left saved or spent. But being able to see that and say, hey, yeah, that looks very close to like my budget and my income as projected into each of these views in the future is really, really critical. I'll mention a few yellow or red flags that come to mind for me.

Starting point is 00:09:44 When I look at a calculator, you let me know what you think and if there are other ones that you think are important too. So for example, if I pull up a calculator, if I see that it does not ask for the type of account I have, it's not asking whether it's Roth or traditional or taxable, that makes me a little suspicious. If it doesn't allow me to customize social security, whether I receive it or not, and whether I'm putting in the figure, if it has default investment returns that I can't customize, or if it doesn't assume a long enough life expectancy. And some of them, you don't even

Starting point is 00:10:12 know what the life expectancy is, or I've seen them where your life expectancy is going to be average, which is about whatever, 85 or so. But of course, that means half people are going to live longer. I think those are all great flags. I would agree with most of those. I would say that there are a number of tools that have gotten much more sophisticated over the last three to four years. So I would almost bucket out the calculators where there's like the one page input section that then you get a PDF for. And then there's another bucket that is much more interactive where you can add accounts that live in the tool and you can apply specific investment returns and inflation returns to each component part and kind of play with the whole scenario generation. So I would

Starting point is 00:11:00 say that's one good way to be evaluating the calculators is just which bucket does this fall into and then as you start to look at those inputs as you mentioned a lot of the default ones like default assumptions are probably incorrect so one of the most common things that i see is the tool will auto apply a home expense like repairs of five percent of the value of the home each year because that's an easy rule of thumb. And the tool is trying to help guide the user to get the inputs in there. But that's just wrong for the vast majority of people

Starting point is 00:11:33 to your point with life expectancy, right? 85 is a good rule of thumb, but there's going to be a lot of people that that doesn't apply to. Like you, I hope you live to 150 so I can hang out. All right, he's going to talk about a tool that we like. I'm going to kick it off. And this is what I've mentioned on the show before.

Starting point is 00:11:50 It's from CalcXML. They have a lot of retirement tools. so you got to make sure you get the right one. You want to do an online search for the CalcXML Comprehensive Retirement Planning module. You'll know you found the right one. It's got a long URL, but it's got 606 at the end. So if you get that one, you've got the one I'm talking about. And so here's why I like it. So first of all, it's free. I love that part of it. It also allows you to break up retirement spending into three segments, right? Which is often called like the go-go years, the slow-go years, and the no-go years. But evidence is clear that for most retirees,

Starting point is 00:12:22 their spending declines as they age. But there might also be an issue where you're entering retirement with your mortgage, but it's paid off in 10 years. So you want to be able to factor that into your spending. I like that it does allow you to distinguish between Roth traditional and taxable brokerage accounts, allows a lot of customization in terms of what you want to assume about inflation or the raises you're going to get. So a lot of that type of stuff.

Starting point is 00:12:44 And it does have that year by year cash flow. So you can sort of see the math as it goes throughout and gives you an eye to your point earlier of you could, based on its assumptions, die with millions of dollars because it shows what you're going to have at the end of life. So you can say, oh boy, maybe I'm playing it too safe.

Starting point is 00:13:04 All right, so those are the good things. Here are the drawbacks and then we'll move on to the one you like. First of all, there's not much explanation about how it works, right? It's just a free calculator. There's no customer service. There's not really much explanation.

Starting point is 00:13:15 So for example, you should enter your retirement expenses after taxes, not pre-taxes. But you wouldn't know that unless you, like me, actually reached out to the company and asked that question. And probably the biggest drawback is it just assumes your portfolio is going to earn the same thing each and every year, right? So you're going to assume it's going to return 6%. Well, it's going to turn 6% each and every year. And of course, nobody's portfolio does that. So I think it's very good as free tools go, but much more limited in terms of what you can get from some more sophisticated tools So for example, why don't you tell us about one tool that you like?

Starting point is 00:13:52 Yeah. So I have really grown to love Projection Lab. I would say a very close competitor that you and I both know about is also Bolden, which used to be New Retirement. And actually, I think if you follow Ron Berger, he has done a comparison between these two tools because I think they're rising to the top of DIY planning tools. But so Projection Lab is what I've gravitated to for a few reasons. so number one it's very cheap there's a free version with limited feature sets but even a

Starting point is 00:14:23 larger or more robust version is only like 100 to 150 bucks a year and the prices change right now again but the customization is extremely robust so to your point a lot of default calculators will take an investment rate of return and just apply that into the future and the default rate of return on a projection plan is often set to that, what they call a fixed rate return visualization of the plan. But you can then override that vis-a-vis a Monte Carlo simulation, where then we'll default to showing the historical rates of return and volatility applied to your individual circumstances. Can you explain what Monte Carlo is real quick for the folks who don't know Monte Carlo analysis? What does that mean real quick? Yeah. I mean, just a very simple explanation is

Starting point is 00:15:10 it's a mathematical probability engine. So it'll take the historical rates of return and standard deviations, apply them to your asset base, and add that variability in a year by year fashion to your scenario and give you a chance of success, an average chance of success that each of those individualized trials run out at. And so you can use that as a rough rule of thumb, you know, chance of success of 80 let's say is your output easy to digest but so that monte carlo simulation is able to be applied to the scenario with the historical rates of return and because we only have a certain amount of history you actually have to set a loopback year because some of these plans might last for 50 60 80 years and then so there's not enough historical data to push it through

Starting point is 00:15:58 right so that's kind of a cool feature too and then the visualizations are very nice it has an excellent ui it has a what's called a sang key chart for the cash flow chart which is sort of like i like to think of it like pac-man where your inflows are the big mouth and then it kind of closes on the expenses and then what squirts out on the other end is your savings but it's just it's a very easy clean way and you can kind of scroll through each of the pac-man visualizations to see to gut check it you gut check the math on a year by year basis and so yeah and then you can set individualized like expenses with certain start and stop dates you can set the life expectancy everything is really customizable that's probably leads into the biggest con which is it can be

Starting point is 00:16:45 overwhelming so i mentioned a lot of these tools will develop sort of guided paths to help people get started and because there's so many variables affecting this over a really long period of time it can just cause analysis paralysis and i was that fine to be true for the most part for projection lab is you just get overwhelmed. Not to mention if you start creating scenarios, right? So all of these plans can be thought of as having like a base plan where there's these foundational inputs, but then you might want to say, okay, what if I only make $50,000 in retirement instead of $100,000? And these more sophisticated tools will let you say, okay, we'll compare that to the base case. And so that can then, right? So you have all the foundational inputs that you

Starting point is 00:17:27 have to make sure are right. And then you have to make sure that you're tracking the changes that you're making and what we like to call the what-if scenarios. And so it can just be very overwhelming, but that's a plus and a minus to Projection Lab with the ability to do that, but also cause confusion. Yeah, you highlight a couple of interesting things, right? First of all, you want a tool that you're comfortable with and you want to interact with, right? So the design is important. I feel the same way about any budgeting tool or anything like that too. I think that is good, right? They are fully aware that if they ask for everyone to input everything, there's some people who will never do it so they try to simplify it but then maybe they might be

Starting point is 00:18:03 simplifying it at the cost of accuracy yeah totally and one thing i would be remiss to say as a positive of projection lab is and this is a unique feature set that not a lot of softwares that i've used or seen is the ability to easily export the file so all of those inputs that we've been talking about all the data sets you can actually just download it into a very simple computer program. And then you can re-import that into a version that someone else might have. And so that's super beneficial because a lot of softwares don't allow for that. It's just a black box that you get a PDF report that's a static point in time. And so that's not super helpful to make changes to the assumption set. And I would argue the ability to do that arms a DIY

Starting point is 00:18:49 investor really well if they're shopping for help from financial advisors or wealth managers, because they could just give that to someone and say, hey, here's all my inputs. And now that's good for the advisor and the consumer because you don't have to go through that work of recreating the data set that takes someone several weeks. Hey, do you have your tax return? Hey, where's pay stuff and all that good stuff. Yeah. All right. So those are two to try, CalcXML Retirement Planning Module and Projection Lab. I want to name a couple others. You named one already. It's Bolden, formerly New Retirement, created by Steve Chen, an impressive fellow who's been on the show before. It has a free version as well as a premium version, $144 a year.

Starting point is 00:19:33 And a disclaimer, Motley Fool Ventures is an investor in Bolden. And then another tool is Maxify, M-A-X-I-F-I, created by economist Larry Kotlikoff, also a bright fellow who's been on this show. And that costs $109 to $149 a year, depending on the version you sign up for. Like the more advanced one will let you do Roth conversion analyses, for example. Do you have another to suggest, Sean? I do. Yeah. So this is maybe a disclosure is this person also used to work for Motley Fool or Motley Fool Wealth Management, but Seafire Sim, long before they came aboard at the Motley Fool, they no longer work for the Motley Fool, but they are improving that tool and have built that tool from the ground up. It's a fire namesake. And so that's

Starting point is 00:20:18 C-Fire Sim from Lauren Bolden. So those are a few to try. And I do think it makes sense to do more than one, right? None is perfect. And using a few of them is a good way to get a second or third opinion about your retirement. Yes, I mean, if you're using a few of these, it's going to cost you some money. But I think retirement is such an important decision, such an important goal, like it's worth the money to put in that extra investment. Yeah. And any dollars spent on something like this in an absolute value compared to having a money manager is going to be quite small in the grand scheme of things. Not saying it replaces that, but just trying to contextualize the cost of doing something like this for yourself and

Starting point is 00:20:58 getting educated about what retirement could look like. Any final words for us, Sean, on using retirement calculators? I think we can't make a rosy picture. So one of the things that I've done is I've helped in a pro bono fashion, people who have projection lab plans, and there's always errors. I've seen some very well done DIY plans, which are probably 80% good, but the mistakes are such that you're compounding this over a 30, 40 year timeline. Those small miss inputs can make huge outcome differences in something like the the tool so you do use these they're cheap they help you get informed but then enlist a community or a professional to help gut check your assumptions because there's going to be one that you missed well that's been great

Starting point is 00:21:52 sean thank you for being on the show my pleasure new from nespresso blend wellness into your coffee routine with the coffee plus range infused with functional benefits choose the coffee you love with added b vitamins like coffee plus b12 to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover our coffee plus on Nespresso.com. It's time to get it done, fools. And this week, I encourage you to look for ways to enhance your job skills. And as highlighted by the Fed's rate cut, the job market is slowing down. According to Charlie Bilello of Creative Planning, the number of jobs

Starting point is 00:22:39 in the U.S. has increased by less than 1% over the past year. That's the slowest growth rate since 2021. In the past 50 years, this type of weakness in the jobs market has preceded a recession and a spike in the unemployment rate 100% of the time, according to Bolero. So here's something I try to do. I aim to be able to update my resume every year with a new skill, a new designation, maybe a new degree, or just some sort of accomplishment of some kind. And you know what that would be for you and your profession is unique to you. And I'll tell you what I did this year. I recently passed the third exam I needed to be able to apply to be an enrolled agent. What's an enrolled agent? Well, it's a tax professional who has earned the highest credential offered by the IRS. Now,

Starting point is 00:23:21 I don't plan on becoming a professional tax preparer, but I sure learned a lot, which ideally will make me a better personal finance podcaster. And it's a nice thing to add to my resume. And it will help me with some volunteer work that I do. Each tax season, I participate in the IRS's Volunteer Income Tax Assistance Program, VITA, which offers free tax prep to lower income citizens. And you know, volunteer work is another way to boost your resume. And if you're financially inclined and looking for a way to help some people out, see if there's one of these programs in your area by visiting the IRS website and searching for VITA. No experience is necessary. They provide the training and the software, and they're going

Starting point is 00:23:58 to start looking for volunteers in the next few months. And that's the show. As always, people on the program may have interest in the investments they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell investments based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Fool on, everybody.

Motley Fool Hidden Gems Investing - Retirement Tools and Affording Impulse Purchases

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