dollars are not Legos

When it comes to building your future, many people treat the endeavor like collecting LEGOs® and constructing a building. You know, LEGOs® are those wonderful building bricks. They come in all sorts of colors and shapes. And you can count on every single Lego snapping together and working perfectly.

Dollars are a little bit like LEGOs® in that every single dollar bill functions in the economy just like any other dollar bill. You can take any dollar bill out of your wallet and use it just like any other dollar bill in your wallet – just like you can expect any 1×2 Lego to function just like any other 1×2 Lego.

definition of fungibleAs a kid, or even now, you may have collected LEGOs®. After all, the thought was that the more different LEGOs® you had, the cooler things you could build. You might collect corner pieces or decorated pieces. You might collect pieces that had an interesting angle or pieces that were perfect for roofs or a fence. People collect LEGOs®, and they collect dollars because they believe that the more you have, the more options you’ll have.

Have a goal in mind

But here’s the thing. That may work well if you really don’t have a specific goal. Having 5000 LEGOs® in a combination of gray, tan, pink, purple, blue, and orange may allow you to build a sturdy structure. But, if you are actually trying to build the Death Star or Hogwarts, while the structure might function, those pink, purple, blue, and orange LEGOs® may keep your project from actually looking like the Death Star or Hogwarts. Or maybe you’ve collected hundreds of roof pieces because you knew that they could be hard to find. At the same time, you delayed collecting the standard pieces because you knew you could always get them when you needed them. But when the time comes to build the Death Star or Hogwarts, it’s going to be really difficult to build the project of your dreams with just the roof pieces you’ve amassed.

The same thing goes for dollars in your financial plan. Let’s say you and your spouse have built your retirement portfolios to $2 million, and you’d like to retire next year when you’re 62 and your spouse is 58. You would like to buy a vacation house and perhaps travel a bit.

Now, let’s also say that $250,000 of your retirement portfolio is in an annuity because you worked in education, and that is often the default investment in the retirement plan for educational institutions. Another $1 million is in your employers’ pre-tax retirement plans. And finally, the remaining $750k is split between IRA accounts for you and your spouse. In addition, you have a bit of cash stashed away and some Apple stock that you purchased 30 years ago worth about $100K.

First, we have to consider how you will cover the basics like food, housing, and healthcare. Health insurance is expensive, and you won’t qualify for Medicare until you’re 65. You’ll need to determine which sources of income you’ll use to cover these basic expenses as well as your goals. Most of the annuity is off the table because you have to spread those distributions over at least 10 years. You can use distributions from your 401k, but remember that they’ll be fully taxable. If you draw funds from your spouse’s 401k, they’ll be fully taxable and they’ll be subject to a 10% penalty because your spouse won’t be 59 1/2 yet. You can sell some Apple stock, but remember that nearly all of the value will be taxable (albeit at long-term capital gains rates) because most of the value is capital gain.

Later on in retirement, you will qualify for Medicare. However, many people don’t realize that the amount that they will pay for Medicare will depend on their adjusted gross income. A higher income could add as much as $500 in Medicare premium every month, for each of you. In some cases, taxable income is higher simply because the regulations require retirees to withdraw from their portfolio – even if they don’t need the money.

Consider all the pieces

When all of the pieces of your retirement portfolio are taxable, it’s a lot like building your lego house, and having the government take the roof. A hefty percentage of the income that you take from your portfolio each year will go to the government.

Then, you may have a significant portion of your retirement portfolio in annuities. An annuity is a great way to shift the risk that you outlive your assets to the insurance carrier. But, depending on your particular annuity, you may be restricted as to when you can draw funds from them. It’s like having that perfect piece to finish your project, but it falls behind the cabinet. So you can see it, but you can’t use it until you remodel.

Unfortunately, unlike LEGOs®, there are no sets or prepackaged boxes of components to build the financial picture of your dreams. When you decide to build the Eiffel Tower or Hogwarts, we all have a pretty good idea of what those should look like. And, if you’ve purchased the box set of LEGOs® to build Hogwarts, you’ve probably decided that you want your project to ultimately look like the picture on the box. But, when it comes to your financial future, there are no prepackaged kits because everyone’s idea of the perfect financial future is unique.

Having a well-defined goal and image of your financial future is critical. It allows you to collect the appropriate pieces to build your dream with intention. Ideally, it helps you start with a strong foundation, allows you to keep options open, and prevents you from wasting resources acquiring pieces that you either can’t use or won’t need.

LEGO® is a trademark of the LEGO Group of companies, which does not sponsor, authorize, or endorse this site.


At Infinity Financial Strategies, we start by defining your goals and your ideal financial future. We determine the core pieces, the types of accounts that will be necessary for your financial plan, and how they will function in your plan. For instance, we will evaluate the types of accounts in your portfolio including taxable investment accounts, employer-provided retirement plans, IRAs, Roth IRAs and other financial products like annuities and life insurance. We will determine which of these financial pieces are necessary to your financial plan: those that provide protection for your financial plan, those that allow options in the future, and those that may be extraneous or distractions. We look at your current situation and financial needs, and we look far into the future to consider what options you would like to have available to you – like different sources of income so that you can manage your income and your taxes, keep more of what you make and successfully pursue your goals.

This article is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals. We examine these factors and many others during our financial planning process to determine appropriate financial strategies for YOU.

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