18 min
The Top 3 Characteristics of Money When It Comes To Your Retirement Plan The Fiscal Blueprint: Retirement Built Right w/ Financial Coach Jeff Montgomery
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- Investing
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?
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?
18 min