In this episode, Daniel Sharkey, senior wealth advisor, sits down with Breanna Seech, senior wealth advisor, to explore the strategy of portfolio income buffers. Together, they discuss how these buffers can safeguard against market volatility, enhance cash flow flexibility and support long-term financial goals. Whether you’re navigating uncertain markets or planning for retirement, this episode offers actionable insights on managing portfolio risk and creating resilient investment strategies.

Transcript

Daniel Sharkey: Are you confused about where your cash will come from in your portfolio? Well, today we’re here to talk about a better way to think about your portfolio construction and spending in retirement. Welcome to Your Life Simplified. My name is Dan Sharkey, senior wealth advisor and CERTIFIED FINANCIAL PLANNER® at Mariner. And today I have an extra special guest. Her name is Breanna Seech, senior wealth advisor and certified financial planner in our Grand Rapids office, and one of the most talented people I know here at Mariner. Bre, welcome to Your Life Simplified.

Breanna Seech: Thanks, Dan. Happy to be here.

Dan: Where does this podcast find you today?

Bre: So, I’m from our Grand Rapids office here in Michigan.

Dan: Excellent. Well, before we get started, I couldn’t be more excited to have you here, but I just want to make sure that you get proper credit for your achievements and credentials. So, not only are you a CFP, but you’re also a Certified Private Wealth Advisor® and a Chartered Retirement Planning Counselor ^SM, so you are literally the perfect person to talk about our topic today, and that is really how to structure your portfolio, having a conversation about spending in retirement. So, let’s just kind of dive right in and start defining what we’re really here to discuss.

At Mariner, we call that a portfolio income buffer. Sounds like a very kind of heady term, but in plain terms, what does that mean to you? How do you use it? And really, what are we talking about when we say “income buffer” as it relates to your portfolio?

Bre: Yeah, so it’s a great question and I think pretty much every advisor has had the question, how do I start to live off of my assets? Where does the money come from? How do I think about taxes? So, it’s a lot different when we move from that accumulation to decumulation, right, and how do we plan for that? So, I think one thing that I hear a lot is a tendency to maybe be overly conservative, holding a lot of cash out of concern that maybe it’s in the right bucket, maybe not from a tax perspective. So, the way I really help clients think about income is buckets, right? We have that first bucket, which would be one to two years of living expenses, safety, cash, and then you’ve got that five to 10-year bucket that is traditionally investment grade bonds or something of that nature.

Perhaps you’re using some alternative investments or other things depending on the client’s risk tolerance and sophistication. And then you have the long-term equity bucket, and that’s really your inflation fighter, that’s your ten-year plus bucket. And so this conversation becomes really important when we think about how to take risks with someone who is no longer working and how to produce the income they need. So, that’s just kind of teeing up maybe how I start to position the conversation or think about this with clients.

Dan: And that’s a really important point that you just made that I want to come back to just quickly. That is the idea of your longer-term bucket being 10 years plus, seven to 10 years, somewhere in that range. I think that’s often where clients trip themselves up a little bit in the sense that they have a portfolio that’s really destined for a longer time horizon than they’re considering, far beyond the one or two years that they typically look at it. So, let’s talk about that middle bucket, that two to three years of living expenses in between your short-term cash and that longer-term portfolio.

How does that structure in the integration of your portfolio and your financial plan help protect against market volatility and specifically against what we call sequence of return risk, meaning getting precisely the wrong string of returns at the time that you’re most vulnerable drawing from your portfolio?

Bre: So, in simple terms, the way I think about the intermediate-term bucket or middle bucket, however you want to think about it, is that it protects us from having to sell equity when the market is down. So, we don’t know when the market’s going to correct, we know it will correct at some point. If you think about ‘07 to ’09, the S&P got back to even, I believe, around 2012. So, that middle bucket is really equivalent to living expenses.

Conservatively, I plan for five years because we don’t know what a correction could look like or how long it takes for us to recover before we might be comfortable rebalancing out of equity into more stable buckets. So, I look at, of course, traditional bonds. I also look at some alternative investments if it makes sense for the client, something that is cashflow producing that we don’t need to access principle perhaps immediately for some of it, but we want increased cashflow, so you could look to things like private credit or options if you’re looking for a longer period of time in that middle bucket.

And then you’ve got sort of your traditional bond ladder or bond strategy that produces income and principle as bonds mature. So that’s really the point of that bucket. In my mind, I want to make sure clients are covered at any point in time for at least five years without having to sell equity. Now, the flip side of that is part of doing a great job with the strategy—like, right now, I’m rebalancing all of my clients from equity to perhaps fixed income and alternatives because the market has done tremendously well. And part of this working over long periods of time is making sure that you’re replenishing, so it’s almost like I think about it almost like a feeding system.

So, you’ve got your cash, then you’ve got sort of the stable intermediate bucket, and then you’ve got equity and each bucket should be replenishing depending on the market cycle we’re in. So, that’s kind of how I think about it broadly, both to deliver cashflow but also to do good rebalancing and portfolio management.

Dan: That’s really interesting. Let’s just stay on the idea of rebalancing the portfolio, but it sounds like what you’re hinting at — it’s really fascinating — is that you’re able to rebalance it not when you are required to do so, when a client actually needs money, but what you’re suggesting is really finding a way to rebalance a portfolio on your terms when you determine whether or not equities are at the appropriate time. Do I have that about right?

Bre: Yeah, I mean, I wouldn’t say I’m trying to time the market, but we can look at, hey, if we started at 65% equity and over the past two and a half years you’ve drifted up to 75% equity, perhaps we should take five to 10% off the table and move it to something more stable. So, I’m always trying to proactively present that to clients, so all of my clients have sort of a target allocation that we’ve agreed on, and that’s documented in our framework that we review as part of our meeting agenda and then where they’re today, so it becomes a very natural progression with long-term clients and so on and so forth.

So, it’s not a perfect science by any means, but yeah, I do think it’s responsible to reduce equity risk when your clients have had tremendous returns over the past 18, 24 months, whatever it’s been.

Dan: And this also helps with making sure that clients stay on target, absolutely. And we constantly have to walk people through not to panic when things go poorly and markets have turned against you for a period of time, but also to fight against the jubilation when markets are at all-time record highs. Staying in that correct risk-return profile through all those market cycles is really the key to success.

Bre: Exactly. And I think it’s important just to educate clients on the why, right? Because it is, I mean, people are euphoric right now. They’re very risk-on, right, to some degree. That’s the behavioral side of investing. We always think that what’s happening right now is going to continue to happen. So part of it is just making clients aware of where they stand relative to cash needs. And at the end of the day, we have to kind of take direction from our clients, but I do think it’s very important to educate clients on the risk of being too aggressive, especially in this sort of euphoric market stage that we’re seeing right now.

Dan: That’s really well said. Let’s stay on something that you just mentioned that’s really important. That is behavior. We talk often about how your behavior will dictate your success. For the clients that you have in which you have kind of instilled this approach of having those five years of expenses in shorter-term investments, how have you seen this help them, and what are the benefits that they’re getting from taking that kind of disciplined, long-term view?

Bre: So, wherever possible, I do try to set up clients on a monthly or quarterly direct deposit. So part of my, I’ll say intake process or new client process would be running through the numbers. What income—because income is kind of, it’s a complicated issue, right? Because you have your fixed income, maybe there’s a pension, social security, passive rental income, whatever that looks like. So it’s sort of a gap analysis exercise to really identify what the portfolio needs to deliver if anything.

Dan: Right.

Bre: So, that’s kind of the first step. It’s, okay, what’s the gap and how are we solving for that? And that lends itself into that asset allocation discussion, income generation discussion. And then we come up with a target to say, okay, every month or every quarter, we’re going to send you X, and it’s your responsibility to tell me if you anticipate any large expenses, spend within the next couple of years because we want to plan for that too, right, one-time items.

We have to have that open dialogue and communication to make sure that those things are solved and we’re not taking unnecessary risk that puts you at risk of [not] being able to do something that’s important to you in three years. And so that’s kind of the behavioral side. I find is when you automate it and you really make clients a part of that process and they essentially validate the plan, agree to the plan, you start the monthly transfer, that helps, I think remove the emotion.

I have had a lot of clients that manage everything themselves and now we do it for them. And they say to me things like, “Bre, I don’t even look at this like I used to. I don’t worry about the daily fluctuations because I know that I’m getting my monthly deposit. I know that we have plenty of reserves that continue to fund that.” And that’s really our responsibility as planners and advisors in my opinion. It’s really the core of what people are asking us to help them with.

And it’s a little bit different of a conversation if they don’t have significant needs from the portfolio. But most people — and I think it’s going to continue, that trend, if you think about how few and far between we even see defined benefit plans or pensions and things like that, so this is going to continue to become a lot more complex as people age, as we see different generations move into retirement.

I do think it’s been pretty straightforward for a lot of, I’ll say baby boomers, a lot of them have pensions so advisors haven’t been challenged to think about these complexities, and clients really haven’t because they live off of pensions and social security, and this is extra. We’re seeing a huge shift in that, and I think this topic is going to become more and more complicated. We haven’t even talked about, okay, now what about taxes?

And that’s a huge piece, the amount of people that have massive tax-deferred buckets and how does that play into this cashflow planning, and when do we take more aggressive distributions from tax-deferred buckets because you’re in a lower marginal tax rate. So there’s a lot here that you could really unpack and should be [unpacking] with clients because most of these issues impact, I’d say, some level of the people that we work with.

Dan: That’s really well said. And I think what we’re kind of — to summarize, what we’re talking about is really having a clear understanding of where your withdrawals are going to come from. To the point that you made about clients not worrying about the daily fluctuations: If you know where your draw is coming from and the fluctuations do not impact that pool of capital itself, it’s a lot easier to get through that quarter or two quarters or even a year without really worrying about where that money’s going to come from.

The risk that people have is having to sell those assets when they’re depressed, and that’s really what we’re looking to avoid. So, that’s really well said. Let me just throw a little bit of a curve ball at you, and this is often some feedback that we get when we’re introducing this topic to those who haven’t taken as much time to think through how this could benefit them. And that is those who say, I don’t want that much cash. How do you respond to that, and how do you show them that this is actually to their benefit to take this type of approach?

Bre: So, I mean, it kind of goes back to that plan, right? Well, what do you need? If there’s a cash flow need, here’s the risk, right? Okay, maybe you don’t want that much cash. So what can we talk about that might make sense in place of that? There’s not a lot of choices. You have cash, you have investment-grade bonds of any type of variety. You have private credit, alternative-type investments, private real estate, private equity.

You’ve got perhaps some options strategies, and then you’ve got traditional equity, and if somebody wants to take unnecessary risk, right — Again, it goes back to the plan. Why do you need to make double-digit returns for your plan to work? No. So why are we anchoring to that? And so, it’s a challenge with some people because again, we’re in this euphoric marketplace where people think they’re just going to go for that 26% return every year or whatever.

Dan: That’s right. That would be nice, but that’s not what we’re expecting longer-term, is it?

Bre: Well, and I actually use our modeling software to show people what happens if we see a prolonged correction. And I think that’s really powerful. And at the end of the day, we have to let people make the choices they want to make, but using some of our planning tools, showing them tax projections, and also this is something I see a lot — there’s sort of this mindset of “I take all my equity risk and my IRAs because that’s my long-term money, and I keep all my cash in my trust or my joint account.”

And we’re often having to really work with people to flip that thinking to some degree because you’re really just growing a future tax liability, and you have all your preservation in a pretty tax-efficient place. So a lot of it is really just working people through the process of educating them. Of, okay, why are you uncomfortable holding cash? Because you feel like you’re missing out?

Okay, well, let’s talk about maybe you’re sophisticated enough to take on some risk in different areas that add diversification, but perhaps aren’t just this long equity risk. So I really just try to work with people to understand the why. Again, why are we anchoring to this, and what’s the downside, right? If we don’t change, what could play out in a scenario where we see a significant correction, and does that impact your plan in a way that would make things very difficult for you to perhaps outlive your assets or whatever that could look like? So, I do think it’s educating and modeling and taking clients through, on some level, the impact of their decisions. And then reassessing, are you still comfortable taking that amount of risk?

Dan: It’s so well said. And just being able to understand that we have a plan for the scenarios that could potentially come up, and I think that’s what you’re speaking to. And making sure that you have all the requisite pieces aligned and an understanding of how it all fits together is really what creates that efficiency and ensures that people’s plans are set up for success. So thank you, Bre, for being so generous with your time.

We have been speaking with Bre Seech, a senior wealth advisor and certified financial planner out of our Grand Rapids office. If you enjoyed this conversation, please check out any of the previous episodes that we have done, and please make sure to subscribe to Apple, Spotify, YouTube, wherever you get your podcasts. Thank you for listening and make it a great day.

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