We make a lot of analogies when discussing the financial planning process, and we introduced a few new ones on our latest podcast.

Think about these three games: chess, roulette, and poker. The first relies exclusively on strategy and planning. The second leans only on luck for the outcome. And the third uses a little luck and strategy to win a big hand.

So what do these have to do with financial planning? Well, the decisions we make during the planning process might be a lot like one of these three. In this episode of the Money Wisdom podcast, we’ll look at a handful of topics and determine which of the three games you’re playing in each scenario.

Timing the Market

Joel puts this one in the category of roulette mainly but there’s a little poker to it. There is some analysis that can help you predict the market to an extent, but it’s mostly luck. And that’s dangerous because people will become overconfident and mistake luck for skill, which can lead to disasters later on.  

Converting IRA to Roth

This one is absolutely chess. Deciding how much money you need to convert from an IRA to Roth takes careful planning and an analytical approach. You might have to make an assumption on tax rates in the future, but that’s not even necessary. It might be a difficult decision to make because you’re giving up some money now to gain more later, but it’s one that you definitely have to think through and plan out.

Retirement Dates

Emotions play a little into this decision but it’s mainly a chess game. It ultimately comes down to two questions. Can you afford to retire on that date and do you want to? But the analytical part comes first because you have to determine when you can retire, and you do that but answering how much income you want in retirement.

Pension

Two factors go into this one. The first is purely analytical or a chess decision and that is when and how should I take the pension. The other factor is a little more subtle because you need to determine how much you trust yourself with money. If you take a lump sum, will you be disciplined enough with the money? You also might have to think about how good your heirs are with handling money as well.

Picking Stocks

This one might fall under the poker category because there’s some luck involved but there’s also some analysis involved. That might upset some people because people often attribute luck to their own intelligence.

When to Start Social Security

Figuring out the date that works best for you is purely a chess move. Of course, life expectancy goes into it a little bit but a lot of it is about how much savings you have. Social Security doesn’t give you much control so you want to make sure you’re able to have control over how much you need to pull from your other sources of income.

Mailbag Questions

Let’s turn to some questions from you now. The first one we answer on the show is about how to invest money if you have plans to use it for a real estate investment in three years. The best option is probably to find a money market account or a super short-term bond fund. You might not earn over 2% on that money but if you need it in a few years, you don’t want to take a big risk in the market. It’s not the best long-term investment but you’ll have a plan for the money so the goal is to just pile up cash before you use it for this bigger investment later.

The next question asks about where the best place is to open up a new account. This listener wants to roll over an old 401(k) and can’t decide between the bigger custodians like Fidelity, Vanguard, etc. What you’ll find is these companies all have very similar investment options and now offer commission-free trading so it won’t make much of a difference. Check and see what offers they have because gaining customers has become very competitive.

The last topic we discuss is renting versus buying. A couple is leaning towards moving out of a house that is eating up their money on repairs, but they’re also concerned about becoming renters in their 50s. This isn’t necessarily an issue and it’s becoming more and more popular today. Many people want the flexibility that comes along with renting, and there are many situations where a rental might cost you less than owning. So there are multiple factors but renting isn’t a bad thing.

[1:54] – The difference between these three games.

[2:54] – Timing the Market

[4:03] – Deciding how much to convert from an IRA to a Roth IRA

[6:35] – Picking a retirement date

[7:11] – Choosing the right pension option

[9:56] – Picking stocks

[11:39] – Determining when to start your Social Security

[15:21] – Mailbag Question: What’s a good way to invest money that we’ll likely use to buy a rental property in about three years?

[17:24] – Mailbag Question: I’m trying to set an account so that I can roll over an old 401(k). What’s the difference between these different companies I see commercials for? Who has the best investment options?

[19:38] – Mailbag Question: Our house is a money-pit and we’re tired of repairing. We’re so fed up we want to sell and rent a place until we find something. Would it be silly to become renters again in our 60s?

Thanks for listening to this episode. We’ll be back again next week for another show.