It is important to understand how to split shared assets in the most suitable, future-considering, and financially savvy way. Austyn Garcia, a financial and investment advisor with Denver Wealth Management, uses hypothetical divorcees, Eric and Melanie, to explain how people should manage their finances during a divorce.
Austyn explores the different assets to consider during a divorce (real estate, savings, and non-savings accounts) and then focuses on how to manage said money post-divorce. Austyn explains the importance of using individualized investment strategies, why you need to understand dollar-cost averaging versus the lump-sum approach, and how to get comfortable with market trends. From managing IRAs to 401(k)s and the tax implications when splitting joint accounts, Austyn covers it all!
Key Points From This Episode:
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Ryan Kalamaya and Amy Goscha provide tips and recommendations on issues related to divorce, separation, and co-parenting in Colorado. Ryan and Amy are the founding partners of an innovative and ambitious law firm, Kalamaya | Goscha, that pushes the boundaries to discover new frontiers in family law, personal injuries, and criminal defense in Colorado.
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Ryan Kalamaya (3s):
Hey everyone. I'm Ryan Kalamaya.
Amy Goscha (6s):
And I'm Amy Goscha
Ryan Kalamaya (8s):
Welcome to the Divorce at Altitude. A Podcast on Colorado. Family Law.
Amy Goscha (13s):
Divorce is not easy. It really sucks. Trust me I. know Besides. being an experienced divorce attorney, I'm also a Divorce client.
Ryan Kalamaya (20s):
Whether you are someone considering divorce or a fellow family law attorney, listen in for weekly tips and insight into topics related to Divorce co-parenting and Separation in Colorado. Welcome. back to another episode of Divorce Altitude. This is Ryan Kalamaya. This week we're gonna be talking with Austyn Garcia. He is a financial advisor at Denver Wealth Management, and we're gonna be talking about the situation of a party in a divorce and really after the Divorce getting a particular amount of money and what they should do with it. And, we're gonna talk about some dollar cost averaging.
Ryan Kalamaya (1m 1s):
What allocation investment strategy might be employed by either Eric or Melanie And some, some taxes. They're gonna really kind of drive what Melanie or Eric gets. But Austyn, can you tell our audience a little bit about who you are? Some contacts for our conversation?
Austyn Garcia (1m 20s):
Yeah, absolutely. Well, thanks for having me on. Ryan. Excited to talk about Eric and Melanie. Wolf. I have to say I love your hypothetical couple. I know, I wish they had a little bit better situation, but unfortunately that's not the case. But yeah, I mean, thank you for the introduction. My name's Austyn Garcia, working with Denver Wealth Management here in the Green and Greenwood Village and the Denver Tech Center. We are a full service boutique financial advisor, meaning that we help with everything from investment management to cash flow management, to estate planning considerations to tax mitigation strategies. Really, the way we put it to our clients is anything with a dollar sign in front of it. We ask that they come to us first. I've been in the industry for about four years. And, I actually started with this firm in more of a marketing capacity, more exclusively in a marketing capacity because I didn't, I actually did not have a financial background.
Austyn Garcia (2m 9s):
I graduated with a degree in economics, which kind of got me in the door and very grateful that I took those economics courses. They just have have paid off pretty exponentially for me as far as my career track goes. But since then, I've kind of transitioned away from the marketing and more into financial advising. Passed all my certifications a couple years ago and yeah, been in the industry as an advisor ever since and it's been a lot of fun.
Ryan Kalamaya (2m 35s):
Well, in terms of your comment about Eric and Melanie, I joke that no one ever wants to call me for my line of, of work. And you know, people that are listening to this podcast, certainly that resonates with 'em because no one wants to be talking with Divorce unless they're, you know, a Divorce professional, which I think there are members of our audience that are within that, that industry. So, but let's get into it. Let's kind of set the stage of Eric and Melanie. They're, they're going through a Divorce and if Melanie comes to you and says, you know, Austyn, listen, Eric, we we're my lawyer's talking about IRAs or Roth IRA and a 401k, and then, then we've got money in the savings account.
Ryan Kalamaya (3m 19s):
Eric's done this, Eric's done that. Can you walk us through the kind of conversation that you would have in terms of the different types of accounts that are out there and how those accounts and, and the tax implications, how that might matter to someone like Melanie? Yeah,
Austyn Garcia (3m 37s):
Absolutely happy to, and this is to your point in an unfortunate circumstance, but when you have the right people in your corner, it can make this event a little bit easier. It's, it's never easy even in amiable situations, but having folks like yourself and our team to help can certainly make a difference. Where we come into play in these situations is really, as you described, is helping folks sort out the Assets and really split the Assets in a manner that is going to be most suitable for that specific person. So if Melanie or Eric came to us, we'd wanna look at Melanie or Eric's full portfolio.
Austyn Garcia (4m 18s):
And a lot of that includes current investment allocations, but also the different account types like you touched on, because a big consideration is taxes, And I think that's a cost that not many folks work into the equation. Instead, they look at the balance sheet in the bottom line and wanna split Assets 50 50, whether that's physical Assets or traditional Assets like stocks, bonds, mutual funds, ETFs or otherwise. But again, one of the considerations that I think is lost along the way is what are The long term impacts of the different account types or different Assets that you choose in that Separation? And that's kind of where the basis is for, you know, how I wanna go through some of these different accounts.
Austyn Garcia (5m 1s):
For instance, you know, one of the, I think more popular real Assets that's discussed in Divorce is real estate. So who gets the home? Well, real estate is one of those, it falls into what's called after tax contributions. It's in our tax conversation, in our account conversation. It represents after tax contributions. Much like other accounts like your bank account, you touched on savings accounts or non-retirement accounts. In any of these accounts or in any of these asset classes, you've already paid income tax before investing the money. So before investing the money in a home, in a bank account or in a non-retirement account, you have fulfilled your tax obligation to the irs, you've paid your income tax from there, the money's going to grow and it's gonna earn what is called capital gains.
Austyn Garcia (5m 51s):
And so when you go to sell out of these Assets, whether that's real estate stocks, bonds, CDs, money markets, you're gonna have to pay capital gains tax on that difference. And in certain situations that can be a pretty big tax liability. Now the other types of accounts like 401ks, you might see those separated through a Q Dro or Quadro. I mean we have a, an ongoing argument in our office as far as how that's pronounced, but those represent pre-tax contributions. So in a traditional 401k, I think a lot of us are familiar with that, with what that entails or an IRA or 4 0 3 <unk> you make those contributions before paying income tax, so it lowers your taxable income.
Austyn Garcia (6m 36s):
Then in those retirement accounts it grows tax deferred until you're at least 59 and a half when you can access that money. And when you do, you have to pay income tax at that point at your respective rate. So it's a matter of paying income tax today versus down the road. The other option, and this is kind of the final in the third I guess, taxable stream that we'll touch on is after tax contributions again, but in a retirement account. So the first type of after tax contributions we talked about were in a non-retirement account or real estate or bank account where you have a lot more flexibility in a non or in a retirement account. You also have the option to make after tax contributions.
Austyn Garcia (7m 17s):
I think a lot of us have heard the term Roth Roth ira, Roth four ohk, or you pay your income tax today or in the year that you make the contributions, the money again grows tax deferred until 59 and a half, at which point you can take the money out and the growth tax free. So in that situation, you pay tax today and you get access to the money tax free. We usually go much more in depth with our clients because we can look at the portfolio and look at the real Assets that they own when talking about it. Hypothetically though, for Melanie or Eric, that's a big consideration that we wanna make is yes, we see the Assets in front of us ensure we can split the Assets 50 50, but what is The long term effect of that look like?
Austyn Garcia (7m 57s):
What are the tax ramifications that Melanie or Eric might be hit with down the road?
Ryan Kalamaya (8m 4s):
Well I think for listeners, they hopefully they can kind of wrap their head around that and kind of a series of hypotheticals or examples might further flush that issue out. And the, the issue is if Eric and Melanie, if they have an investment account, Eric's been a very savvy investor and it's an account with Denver, Wealth management with you, Austyn, you guys have done a great job. The stocks and bonds have gone up in value. If that portfolio on its face, the statement that you will send will say $2 million. But if you know Melanie gets that in the Divorce to offset real estate or some other business interest or something of that variety, if she then, you know, And, we we're gonna get into asset allocation and investment.
Ryan Kalamaya (8m 53s):
If for example, like Eric's a venture capitalist, generally speaking a lot venture capitalists, they have a lot of risk. They're going up and down in their own profession. The Wealth that they've accumulated, most venture capitalists are really conservative. They'll be in treasuries, they'll be in bonds and Melanie might say, listen, I want to get off this rollercoaster of of venture capital. And, I have a different outlook. And so if she sells her portfolio then she's gonna trigger some taxes. I mean the transfer from Eric to Melanie in the Divorce is not taxable event. But your point is that she really needs to take the considerations that often are overlooked that if that 2 million is in an account and it has a million dollars of gain, she might have to pay taxes if she sells it.
Ryan Kalamaya (9m 45s):
But what she does with it, I think really matters, which is something that we're really going to kind of drill down on in this episode is what should Melanie or Eric do with whatever money they get. But this monologue Austyn any comments on the monologue that I just went through?
Austyn Garcia (10m 1s):
Yeah, yeah, And, I can, I can certainly relate with you as far as monologues go because when you talk about taxes, that's about how the conversation always goes. But I think to summarize things, you make a good point in what are the capital gains gonna be. But I mean, just to make a very simplistic example of this, if Melanie and Eric have a portfolio of 2 million, 1 million in a Roth 401K and 1 million in a traditional 401K on paper, sure, maybe you could split it down the middle. One person gets their traditional, one person gets the Roth, let's say Melanie gets the Roth I or the Roth 401k. In this situation, Eric gets the traditional, well Eric is gonna have to pay income tax on that same amount of money down the road when he starts to access it.
Austyn Garcia (10m 46s):
Where Melanie has this tax-free source of income at 59 and a half. And so while on paper they're getting the same amount of money, that tax consideration can be a very big element of determining the equity in splitting those two Assets. So that's, I mean, kind of a simple example of another way of looking at
Ryan Kalamaya (11m 5s):
It. Yeah, And I think that's a great point. And if we look at real estate, we don't just split the house down the middle, but you know, if someone gets the real estate, they're not gonna be able to make a return on on their investment, which is really what we're kind of segueing into is what should people do with their income or the money that they get in a divorce. So I think Austyn, at least from my perspective, from a financial standpoint, I think a lot of people put a little bit too much of an emphasis on real estate. They think their house is gonna grow, they really want the house cuz they think it's a good investment. Can you maybe comment on some of the traps or issues and how people should think about Assets even beyond just the 401k versus, you know, money in the checking or savings account?
Austyn Garcia (11m 52s):
Yeah, the point that we always go back to is oftentimes in a divorce the house ends up being too big for either party. You are living there with a family and unfortunately that's not the case anymore and there might be some sentimental value in the home and it's always great. And our job is to work with our clients and help them address the objective. So if they state that the house is the most important thing, then we will help them find the best way to maintain the home. But we'll often have to have the conversation around real properties or real tangible Assets like real estate or investment properties as far as you know, what, what do you need? And then secondarily, can you continue to afford a mortgage payment by yourself?
Austyn Garcia (12m 34s):
That's a big one. It's great to have the home, but is that gonna put you in a bind with cash flow? Are you gonna deplete the other Assets that you have? And from, you know, we're financial advisors, we are gonna give our clients the best financial advice in the most suitable financial advice is fiduciaries. That's our legal obligation. But that's not always how it plays out when it comes to personal finance, it's 80% personal, it's a lot of Behavioral aspects in it. So our job is always gonna say, you know, what is the most appropriate, most most suitable way to approach these types of Assets. So when it comes to real estate, are there other opportunities? And again, we're always looking at the big picture.
Austyn Garcia (13m 14s):
If you're putting a hundred percent of your paycheck into your mortgage every month, rather than say downsizing and putting 50% of your mortgage in and then investing some of your other disposable income, how is that gonna play out over the next 10, 20, 30 years? Well, generally liquidity and having cash and having those investible Assets is gonna play out a little bit better because you can diversify your stream.
Ryan Kalamaya (13m 40s):
Yeah, And I think people overlook and, and part of the Divorce process, they go through their expenses, but there are a lot of phantom costs, not phantom costs, but they are overlooked costs with owning real estate, the maintenance, the insurance, all of these things, And I wanna be, you know, a naysayer on on real estate. I do see yesterday, for example, I mean this conversation is timely, honest, And I, I had a trial yesterday and the issue was on support in alimony and the other side took out a 2.7 million loan to keep a house and they were on social security, that's what their income was and it was a ninja, no income, no job loan.
Ryan Kalamaya (14m 25s):
And the judge was just like, you are crazy. This is insane. But people, we see these types of decisions that really have no bearing in financial, really the hardcore economics. But you mentioned Behavioral economics and personal decisions, So, can you maybe talk about kind of Behavioral economics and how people should maybe be aware of that and what, what exactly that is? Because I know it's something that you're particularly interested in.
Austyn Garcia (14m 52s):
Yeah, and it's always timely. So I, I mean my background was in marketing, again, I graduated with a degree in economics. But one of the reasons that I liked marketing so much was because of the psychological and Behavioral aspect of it, which is also true in financial advice and financial planning when it comes to investing. There are, there is are just countless studies that show and indicate, and this is no pitch, it's just what studies will show is that working with an active investment manager versus investing in Managing, Your, Assets yourself, there is a huge difference in the return of both groups then it's not necessarily because one group is better at stock picking than the other.
Austyn Garcia (15m 32s):
If you have the time, the temperament, the technique, and especially in today's investment environment, retail investors have much more access to information and much more access to the market, which is fantastic. We have access that we haven't seen in the history of the stock market decades ago, used to have to know somebody on Wall Street to be able to purchase shares of companies where that now you can just go on the app on your phone and make a trade within 30 seconds. And that's all great. It's fantastic that people have that access, but the reason that there's such a differentiation in the returns and that the retail investor, And I don't have the numbers right in front of me. The study though that we most highly recommend is called the Advisor Alpha by Vanguard.
Austyn Garcia (16m 16s):
So if you have time, go look at the advisor alpha and it actually breaks down the numbers as far as retail advisor or retail investors. So just individual investors tend to far underperform professional, active investment managers. Again, the reason isn't necessarily because one is better at stock picking than the other. Granted we look at all of this all day every day as our job, but it's because of the Behavioral aspect. What happens is these individual investors let their behavior get the best of them and they tend to buy and sell it in opportune times where when you work with a professional, they're gonna help you through the highs and the lows of the market talking you through different investment options if you have opportunities, our job is to discuss those with you and again, give you the best advice that we think is suitable, but especially in a year like 2022 where the market drops by 30% or back in 2020 or March of 2020 when the market dropped by 30% and then rebounded within a month.
Austyn Garcia (17m 15s):
So many individual investors fall into the category of getting out at the wrong time and getting back in at the wrong time. You have to get two things right, right. When you're timing the market, when to get out, when to get back in. And that is, I mean, just so hard to do, if not impossible.
Ryan Kalamaya (17m 31s):
Awesome. What you say, it resonates with me because as a Divorce lawyer, I see people that are emotional and because they're going through a Divorce and they're not making the best decisions, they're emotionally charged decisions. And the same thing is true with Investments, where when you're constantly checking your investment statement, especially if you're in the middle of a Divorce where you're, you know, you've got emotion and then the market's going up and down and you've made a ton of money on crypto and then all of a sudden it's crypto wintertime and you know, the people are freaking out. And like what I hear you saying and it makes sense to me is that the investment advisor prevents the person, the client from making those emotional decisions.
Ryan Kalamaya (18m 22s):
And it's like Warren Buffett says that sometimes the hardest decision is to do nothing. And you know that one of your roles as an investment advisor is to counsel people, Hey listen, you gotta stick with it. Stay in the market. Let's not, you know, try to time the market go in and out and really kind of walk people back from a, from the brink. And big part of what I do is people will say that they're gonna do something and then we'll say, really? Is that really what you want to do? But that the Behavioral aspect I think really is important for people to understand. That makes a lot of sense to me.
Austyn Garcia (18m 56s):
Yeah, no I, I remember back in 2020 we have, we have an investment committee meeting, so we have nine advisors and when we manage our portfolios, we do it as a team. So we're meeting at least once a month back in 2020. We're meeting much more frequently than that just because of the nature of the market and the volatility and the uncertainty. But I remember that being a theme in trying to find different options. When we look for Investments, we're looking for historical performers, but we're also looking at funds and companies that have strong fundamentals, strong executive teams, strong management teams. And when none of that is changing, you have to take a step back and think, is there really a reason to be moving out of these positions if we want this for The long term growth?
Austyn Garcia (19m 39s):
And there hasn't been a change in the, in the technicals or the fundamentals of the company. The balance sheet's still strong. All we're seeing is at that point in time, 30 day bear market, sometimes the hardest thing to do is nothing at all. But sometimes that's the best thing that you can do is stay put, stay with your Investments and that's gonna be something that we can touch on with the dollar cost averaging versus lump sum investing. But making sure that you're appropriately invested in the correct asset allocation and that you're comfortable with your risk tolerance is the most important thing that an investor can do in any situation.
Ryan Kalamaya (20m 16s):
Yeah. So you mentioned dollar cost averaging and let's set the stage. If Eric and Melanie are going through a Divorce and Eric has got some business and he is going to give Melanie a million dollars to offset to buy her out of that business interest and she has a million dollars of cash and she comes to you, what should she do with the money? Or what are her options for the money? And specifically for people that don't know what dollar cost averaging, because I know that's one of the options. Can you walk our listeners through those kinds of
Austyn Garcia (20m 49s):
Scenarios Yes. In what we're talking about? Yeah, absolutely. And I think, I mean the call of the financial advisor, our go-to quote is always, it depends, it depends on what Melanie's situation is. But it's funny that you pick a million dollars because the study that I'm gonna cite is also won by Vanguard and it's titled Dollar cost averaging just means taking risk later. It's a very, it's, it's pretty easy read. I like Vanguard's studies and make 'em, they put 'em in in layman's terms and even though I'm in the industry, I still prefer layman's terms, but they use a million dollars in their study and they compare it between dollar cost averaging. So if the investor of Melanie in this situation were, instead of making one lump sum investment, so instead of investing all million dollars upfront in various allocations, the study takes into consideration stocks and bonds, all stock portfolios, all bond portfolios, and then various balances of the, of the two stocks and bonds versus leaving money in cash, in dollar cost averaging.
Austyn Garcia (21m 48s):
So does Melanie, like you said, invest everything upfront as one lump sum or instead does Melanie employ some sort of dollar cost averaging strategy? The easiest way to think of dollar cost averaging is your four <unk> contributions or your IRA contributions where where you're making monthly contributions or contributions with every paycheck. Essentially you're just kind of easing into the market in different intervals. And the purpose of dollar cost averaging is to create sort of an average purchase price or an average acquisition price. So let's say there's a stock X, Y, Z and it's up $100 this year and you buy it a hundred dollars, you have a thousand dollars to spend her and Melanie's case, we'll use her numbers, she has a million dollars and she wants to invest $100,000 every month for the next 10 months.
Austyn Garcia (22m 34s):
Well, in month one if the stock that she's purchasing is a thousand dollars, she can purchase 100 shares of that stock at a thousand dollars a share. If the next month it jumps up to $2,000, well then Melanie can only purchase half of those shares. So she's purchasing less because it's at a higher price. If the market falls to say $500, that stock is now $500, she'd be able to purchase twice as many. And so dollar cost averaging tends to work over a very long time horizon, hence your 401K or other things of that nature to where you're not purchasing at the highest highs but you're not purchasing at the lowest lows. So you're just kind of easing into the market and you have this steady average cost of this average purchase price.
Austyn Garcia (23m 19s):
So this study by Vanguard compares the two, what is better if you have a million dollars to invest, is it better to employ a dollar cost averaging strategy where you're putting some in at different intervals or is it better to invest it all at once? And it's interesting, whether CIS study or any other, you'll find, I mean the answer is generally lump sum investing. So this one found that two-thirds of the time lump sum investing over a longtime horizon is going to outperform dollar cost averaging. And this is a very extensive study. So the study compares 1 million invested into a stock bond portfolio versus a 1 million in the cash portfolio. And it's equally transferred into that stock bond allocation and increments of 6, 12, 18, 24 30 and 36 months.
Austyn Garcia (24m 5s):
And then the investment performance is measured across various allocations ranging like I said, from a hundred percent stocks to a hundred percent bonds. This is measured across three different markets to the us, Australia, and the United Kingdom. So it even takes into account international markets and still two-thirds of the time, The lump sum investment tends to perform better for investors. But like I said, the most important thing in this consideration is that your asset allocations have to be correct. So you can't just put a hundred percent of your lump sum into speculative stock that could crash, could shoot up, cuz that's gonna throw your numbers off, but it's also gonna throw your comfortability off as an investor and it might just not be appropriate for you.
Austyn Garcia (24m 53s):
The other thing to consider is you have to be comfortable with the trends in the market. So right now we see a lot of uncertainty and if you are a stock investor then going up one, or if Melanie's an all stock investor than 1 million introduced straight into the market is gonna see a lot of volatility upfront. If she's comfortable with that then and she has a long time horizon, then great, now is a great time to buy stock to low valuations. But the other piece of it too is that if Melanie just stays in cash, instead she has an opportunity cost. I mean inflation's been at seven 8%, so her purchase power with cash is slowly deteriorating and that this time next year she wouldn't be able to purchase as much.
Austyn Garcia (25m 36s):
So the other alternative is treasuries. US treasuries right now are seeing interest rates that we haven't seen in a decade. So I looked it up right before we came on this. In the 10 year US treasury is earning a 3.7% yield. So a government bond, 3.7% CDs, I pulled some CDs in numbers and just certificates of deposit for one month. A one month CD is earning 3.2% right now all the way up to a 12 month CD earning 4.7%. So for Melanie as an investor, when we look at lump sum investing versus dollar cost averaging, the real difference is the price of staying in cash versus being in the market.
Austyn Garcia (26m 17s):
So for Melanie, even if she's not sure about her allocations being in things like treasuries, which are very, very, very, very, very low risk, I think it's the only asset that we can consider risk free because if the government needs to pay back its investors, they can print more money or being in a CD that's F D I C insured. In either of those situations, earning 4% is better than losing money to inflation and at least least being introduced to the market is the most important thing.
Ryan Kalamaya (26m 46s):
We kinda tie in the Behavioral economics and just what people are going through in a divorce. I've heard a lot of, you know, financial advisors or rather I, I think it's a common piece of advice of just don't make drastic steps right after a Divorce you just went through hell. Oftentimes people just wanna go and do stuff and, but on the other hand, the Vanguard study and like, you know, there's various books that are kind of in vogue or the, you know, blogs, there's dollars in data, there's psych, the psychology of money where they go through do you invest and, and really it's like does Melanie as of the date of this recording, does she just go and invest a million dollars in the stock market today?
Ryan Kalamaya (27m 35s):
How's she gonna feel if tomorrow some news comes out where the market just drops? And that's versus does she take the million dollars and does she invest $10,000 every week or something of that variety where she's spreading the risk. And really I think it goes back to in her mind, how is she gonna feel about that. Some people they want to pay off their mortgage even though generally speaking it doesn't make financial or economic sense, but it makes them feel like, and And I think it's a balancing act of what Austyn you do and what I see. But I often will have clients there like, I want the house or I want this And I, it doesn't make financial sense to me, but that's what they want.
Ryan Kalamaya (28m 21s):
I'll walk through the the risk, but I think it's really interesting the kind of scenarios that you, you went through. And one other kind of final point is I see a lot of people, they sit in cash and then that is essentially the inflation is just that tax on, you know, just sitting in cash, And, I don't think people really understand that, especially Melanie, she might not be financially savvy so you know, she just wants the security and that's fine for the time being, but she really needs to make sure that she's thoughtful about that with some guidance.
Austyn Garcia (28m 56s):
Oh absolutely. I think if there was one point to take from all of it is there's no right or wrong answer when it comes to dollar cost averaging or lump sum investing. The numbers will say one thing, but the the correct answer is the right answer for you as an individual. So for Melanie, yeah, and another great point that you made earlier, Ryan is after a Divorce, your budget changes. Your expenses change the amount of cash that you need in emergency reserve changes. And that's not an overnight, there's no overnight solution. It's not like you're gonna wake up one morning, your budget's gonna be down packed. That's just not the reality. And so it takes a little bit of time and there has to be a comfortability and there has to be a margin for error.
Austyn Garcia (29m 40s):
And so yes, that's where the Behavioral aspect comes in and that's again our job to work with folks to determine what that comfortability is.
Ryan Kalamaya (29m 49s):
Well let's talk about the kind of allocations and the portfolio and the risk. So NA was saying the whole dollar cost averaging. Another aspect that you're gonna deal with Austyn is the, just kind of the age, the background, the risk tolerance. So you know, Melanie, she gets a million dollars, does she put a hundred percent into stocks, whether it's dollar cost averaging or not? And what are the things that listeners should be aware of with the, are gonna go into the decision of what Melanie does with her money?
Austyn Garcia (30m 22s):
And again, you know, it, it depends, it always depends when Melanie comes to us, you know, that first meeting is intended, assuming that Melanie was coming to us for a first meeting, we're not meeting together yet. That first meeting looks a lot like a conversation, getting to know each other. And the main point that we wanna impress upon is what do we need our money to accomplish? What is the goal of our money? So for Melanie, if Melanie comes to us and says, Austyn, yes, I'm a I'm, I need this money to grow at 10 to 12% a year, I have plenty of other cash in emergency reserves, I have other cash and less risky Assets. The primary piece of this, or the primary objective of this 1 million is to grow at 10 to 12%.
Austyn Garcia (31m 5s):
In that situation, Melanie would need to be mostly, if not entirely in stocks because historically stocks have achieved that 10 to 12% annualized return. Annualized being very important in that if Melanie came to us and said, I wanna do a million dollars, it'd be a, a conversation to make sure that it's suitable, but there is a chance that the market declines and she loses a lot, some of that money right away, there's a chance that it goes up. So Melanie has to have a long-term approach to it as well. We're not gonna be, you know, we're not gonna be a year down the road and give Melanie exactly what she wants. We need time, we need 3, 5, 10, 20, 30 years to grow that and achieve that objective for her or at least address the objective.
Austyn Garcia (31m 48s):
The way I like to describe volatility in stocks is it's like a yo-yo on an escalator. If you're watching the yo-yo, it's going up and down, it's ebbing and flowing. There's, that represents the volatility. But when you look at the general stock market, you have to see it as the escalator. So you take a step back, you look at the big picture and you can see that it is incrementally going up over time. So it depends on how you look at it. The other piece of it too though is if Melanie came to us and had no financial foundation, maybe has consumer debt or maybe she has none of that in her goal. This is something that I've been working with someone on recently is to purchase a home. So going back to the real estate example that we were talking about earlier, maybe she did not keep the property in the Divorce, maybe they sold the property in the Divorce and now Melanie's goal is to purchase her own home in a year.
Austyn Garcia (32m 38s):
Well if, if we're gonna invest that money, sure we don't want it sitting out of the market for a year. We might not wanna buy right now because the housing market isn't as strong as it was a couple years ago. Or maybe Melanie just needs some time to feel comfortable in purchasing that home. Well we're gonna invest that money a lot differently based on the needs for a down payment for additional expenses when it comes to purchasing a home. Another piece of it is in Divorce. Melanie might be hit with certain taxes, like we talked about capital gains earlier or additional income, like those spousal support payments add to your taxable income in a year. We need to keep some of the money on the side in cash or in low risk investment options for taxes and things like that.
Austyn Garcia (33m 24s):
So it depends on the allocation. Stocks just tend to be a little bit more aggressive if you wanna earn more, a higher return over a longer period of time than yes maybe go with a heavier allocation to stocks. Right now bonds, fixed income like CDs are earning. I mean great return for lower risk and So. that might be another alternative for things like the down payment on a home taxes or if Melanie just isn't comfortable taking on a ton of risk or maybe she can't. That's the other thing. Ryan, you touched on age is a big proponent. If they're getting divorced and they're sixties and seventies, that's gonna be a whole lot different than if they're getting divorced in their thirties or forties.
Ryan Kalamaya (34m 5s):
Absolutely. I think that that's a really important point that people need to understand is that, and and it goes into the Behavioral economics. If Eric and Melanie their story contemplates younger kids in, if they're gonna save a particular amount for college for the kids, then they're, they're going to earmark that and that time horizon, let's say 10 years that they expect, you know, Johnny and Sally to go to college. The allocation on 10 years. And maybe you can give some readers some kind of general guidelines or some examples of, you know, if you need money in 10 years versus Melanie wants that money for retirement and she's in her thirties and she gets a million dollars, that's gonna be a different scenario.
Ryan Kalamaya (34m 50s):
And you know how you have various goals earmarked if you're saving for the purchase of a house in a year versus retirement. The allocations are, are generally gonna be different. So, can you maybe talk a little bit more about that particular issue?
Austyn Garcia (35m 7s):
Yeah, absolutely. And this is an issue that we've worked with, I mean I've worked with very recently and that you have different buckets and different objectives for your cash. So for Melanie, if she's in her thirties, the way that I like to look at it is that each bucket has an objective. So it's likely that at this point Melanie probably has a bucket for retirement income or retirement saving retirement Investments that money, let's say it's a 401k, she can't touch until she's at least, least 59 and a half. So if in that bucket, if the stock market drops by 30%, that's okay because she has plenty of time for the market to rebound that bucket.
Austyn Garcia (35m 48s):
Our goal is to capture long-term growth. And, we can take on more risk And, we want more return. So in that bucket for this hypothetical investor, Melanie would most likely want to have a much higher stock allocation than bonds for another bucket. Let's say she is saving for the down payment on a home in the next year. Well we don't wanna take risk because if the stock market does fall by 30%, Murphy's law tells us that anything that can go wrong will go wrong. So in Melanie finds that perfect home and she needs money for the down payment and then the market falls by 30%. Melanie's gonna be pretty upset with us and she's not gonna have the money that she had saved. So we don't want to take risk, but we do want to grow that.
Austyn Garcia (36m 28s):
We don't want it in cash because if we look back over the last year, the money that Melanie would have in cash today is worth 7% or the money that she had in cash a year ago is worth seven and a half percent less than it was. So our purchasing power has naturally declined. So in that situation we might look at maybe some risk adverse stock options like utilities, but we'd also look at opportunities and treasuries in government bonds in corporate bonds, some sort of bond portfolio, fixed income portfolio, potentially CDs, something that's at least earning some interest in, generating some appreciation to keep up with inflation.
Austyn Garcia (37m 9s):
And then as far as 5 29 goes, this says, you know, there's a specific example that I've actually worked with recently that has all of these different buckets, young kids starting five 20 nines, then a 5 29, just a college investment account. The benefit is largely in taxes. So you can write off or you can deduct state income tax in the, in the state of Colorado up to, I believe it's $20,000 for an individual, $30,000 for a couple. You might have to strike that from the record cause I need to polish up on those, those numbers change. But, so in the state of Colorado, a 5 29 plan contributions are state deduct or state tax deductible up to a certain limit that limit changes on a regular basis and the money grows tax defer like retirement account until you use that money for qualified education expenses and you can use it tax free.
Austyn Garcia (38m 0s):
So it's a, a great account when saving for education. That bucket depends on, again, the timeline that you need. If her kids are 16 years old, we don't wanna take any risk in those accounts. They need that money for college. If the money drops by 20%, they're not gonna be able to pay tuition or might not be able to afford the same tuition. We don't wanna be taking cash out while the market's down. But if they're six years old, then yeah, let's be a little bit more aggressive on the front end and increase our stock allocation over bonds. So a lot of it is based on, you know, what is our objective? What do do we need our money to accomplish, what's our timeframe? And then most importantly, what's our risk tolerance?
Austyn Garcia (38m 40s):
Because at the end of the day, Ryan, we can say, yes, I could stomach a 30% drop in my my retirement account, but until that actually happens to you and you log into your portfolio and see it at 30% less than it was, I don't care how old you are, that hurts. It's tough. And so until you actually feel it, it's a little bit arbitrary to say, yeah, that's totally fine. So a lot of it too has to do with your experience and your actual risk tolerance.
Ryan Kalamaya (39m 7s):
Yeah, And I think, I mean, people are going through a Divorce, they're having to provide information on those accounts and then they update them before mediation and they update them before trial. And so they're, they're being forced by virtue of the Divorce process to get in and look at those accounts. And if the accounts are going down, they are freaking out because they're having to split it. There's not as much money, they're incurring fees, their life is turned upside down. And it is one of, you know, the reasons that a lot of people, you know, suggest just take hey, you know, put your money in a safe.
Ryan Kalamaya (39m 47s):
You don't wanna feel like you just lost a lot of money. I mean, I I we're recording this in 2022, there are several examples that I can recall where we reached an agreement very early in 2022 and then promptly the market just kind of the bottom fell out of, of it. And how those people handled that I think is a takeaway for, for people. Well, Austyn, super helpful, interesting. Love to have you on the show. I'd love to get into kind of compounding, just a quick fact at least that And I could be getting this wrong, is that Warren Buffet, I think 90%, he is one of the richest men and, and or people in the, in the world.
Ryan Kalamaya (40m 27s):
90% of his Wealth has been generated in just the last 10 years. And, and just being able to stay, I think Behavioral economics, one of the points is to stay in the game. To stay in the market for a l The long term. And how can you do that, whether it's dollar cost averaging or at the very beginning, it, it, it is something that we could kind of go on endlessly. But for those that wanna find more information about Denver Wealth management and you, where where's the best place for them to find you? Yeah,
Austyn Garcia (40m 57s):
Of course. Well, great point, Ryan, it's the most important thing is time in the market, not timing the market. That's fun. Little thing that we like to say around the office as far as where to find us, Denver Wealth dot com or a local firm, a boutique firm here in the Greenwood Village like I started with, you can also reach out to me directly Austyn at Denver Wealth dot com and that's A U S T Y N or you can call our office at (303) 261-8015. But And I know this conversation will continue. I know Ryan has agreed to be a guest on our podcast, the Mind of a Millionaire coming up here in January, February, but early next year. So you can find us there too, the Mind of a Millionaire podcast,
Ryan Kalamaya (41m 34s):
And we'll have links to the show notes. There's a lot for people to learn. I mean, if they're going through a, a Divorce and any part of this conversation has been helpful. There's so much information out there and, and hopefully we'll be having future episodes. But until then, thanks for joining us on Divorce at Altitude Hey everyone, this is Ryan again. Thank you for joining us on Divorce at Altitude. If you found our tips, insight, or discussion helpful, please tell a friend about this podcast. For show notes, additional resources or links mentioned on today's episode, visit Divorce at Altitude dot com. Follow us on Apple Podcasts, Spotify, or wherever you listen in.
Ryan Kalamaya (42m 15s):
Many of our episodes are also posted on YouTube. You can also find Amy And me at Kalamaya Law or 9 7 3 1 5 2 3 6 5. That's km.