Power Up Wealth podcast – Managing a Mountain of Risk – Episode 47 transcript:
James Derrick 0:00
Risk is different for those saving than for those spending. I’m James Derrick, the Chief Investment Strategist at Smedley Financial Services, and today I’ll be joined by Sharla Jessop, President of Smedley Financial, to talk about the risks and volatility and how it impacts workers and retirees differently.
Sharla Jessop 0:30
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick 0:53
Thank you for joining me today, Sharla.
Sharla Jessop 0:55
Thanks for having me, James.
James Derrick 0:56
Yes, I’m happy to be interviewing today. Sharla Jessop is President of Smedley Financial Services. She is a certified financial planner and a behavioral financial advisor. You recently wrote an article called “Managing a Mountain of Risk,” and you’re talking about retirees versus workers contributing to 401(k)s. And so, before we dive into those differences, could you explain risk? In general terms for everybody? The way you look at it?
Sharla Jessop 1:26
Yes, risk is volatility in the market. Most people are familiar with volatility in the market, different sectors of the markets or areas of the markets that go up and down. But it impacts people differently based on the phase of life they’re in if they’re contributing to 401k and growing their assets for retirement, or if they’ve hit that peak and are at retirement, and now they’re going to start using their money for income, that volatility and risk has a totally different impact on them.
James Derrick 1:52
I find this pretty fascinating. I mean, in many ways, the volatility can be helpful for those who are still contributing into an account, like a 401k. Explain to us how volatility can actually benefit in their contributions.
Sharla Jessop 2:07
Volatility relates to the ups and downs in the market. And typically, when you’re investing into a 401k, or some type of an investment, preparing for retirement, it’s diversified. So you have different areas of the market, which have different levels of volatility. You might have something that’s going up at the same time, you might have something else that’s going down. But the benefit of contributing during volatility, when you’re preparing for retirement, is that you’re buying at all levels. And typically, when it’s really volatile, you’re buying in at lower levels. So that’s called dollar cost averaging. And it means that every time you buy a share, you’re buying a share at a different price. And as you make monthly contributions, like into a 401k or an IRA or something like that, you’re buying in at different prices. And the lower the price, the better because that means as it grows, you’re going to capture more appreciation over time.
James Derrick 2:57
Buy low, sell high, as they say.
Sharla Jessop 3:00
Exactly.
James Derrick 3:01
This is interesting to me, because I remember riding my bike in 2020. And in the late afternoon, and I took a phone call from a friend who wanted to know about taking money out of his 401k because it’s not making money anyway, is how he put it and I had a neighbor way back in 2008, say something similar about her 401k. So it seems that during bad times, people consider not only not contributing, but they consider taking their money out. And this is exactly the wrong thing is what you’re saying?
Sharla Jessop 3:34
Especially for someone who’s contributing to a 401k. Because that really charges up your balance long-term. I mean, you might not see the benefits right away. And you might be watching the rest of the money that you’ve had in there as going down. But you know, there’s never been a time in history when the market didn’t recover. So think long-term, put the money in, if it goes down and you’re buying it at lower price, that’s good for you, that’s good for your portfolio, it’ll be be good for you during retirement. As you prepare.
James Derrick 3:34
It’s really a matter of perspective. I think if people think of it as buying low, they will be much more excited about their contributions in bad times. Now, does all this logic apply to retirees?
Sharla Jessop 4:13
Not at all. It’s almost the opposite. I would say I would liken it to someone who’s climbing a mountain, you know, as you’re going up the mountain, you can see where you’re going to put your foot you can see the trail, you can kind of map out where you’re going to go. When you get to the top and you’re going down. You don’t have that same perspective. You know, there are hazards of tripping. There’s all different types of hazards going down versus going up. And that’s true also in investing. That same volatility that we talked about, for someone who’s contributing and building for retirement can have a devastating impact on a retirees account as they’re pulling money out.
James Derrick 4:48
All right, you’re gonna have to explain why because it seems a little complicated. I think now we understand dollar cost averaging, you’re buying in low, you’re buying in at all times, which means you’re getting more shares when things are low. Elaborate more on during retirement, how it’s different?
Sharla Jessop 5:03
Well think of yourself in retirement, now you’re going to start taking your money out of your account that’s diversified. And you experience the same volatility that you would experience, you know, contributing. The main impact is that as you’re pulling money out, you’re actually selling the shares, they’re not going to go back in, there’s not going to be recovery, as the market bounces, you’re not going to participate. So someone who’s pulling money out during those volatile periods of time and out of, you know, a diversified portfolio across the board, they might be taking things out of investments that have dropped significantly, and investments that have not moved much at all. In other words, some of their portfolio might be conservative, and some of it might be invested for longer term more aggressive. But if you’re taking out from the aggressive investments that are dropping, then you’re locking in losses.
James Derrick 5:50
These investments, they’re down, you know, they’ll come back up eventually. But because you’re in retirement, you’re taking money out. So you’re getting out when it’s low, and you’ll never get that bounce back up.
Sharla Jessop 6:03
That’s right, you have less money in the account when the market bounces because you’ve pulled money out.
James Derrick 6:08
Now over a long period of time, we know dollar cost averaging really pays off. With this reverse how significant an impact is it?
Sharla Jessop 6:17
Well, let me tell you, let me give you an example. We had clients, I’m gonna go back a ways now, in 2000, if everybody remembers the .com bubble, and you remember leading up to the .com bubble, we had unbelievable returns in the market, you know, 10, 10% was a low return 15%.
James Derrick 6:34
For almost 20 years, pretty fantastic returns.
Sharla Jessop 6:38
So they had high returns. So people had built these expectations that they could use 10% of their portfolio at retirement. That would be a safe withdrawal rate. Withdrawal rate means the percentage of your portfolio that you’re going to take out on an annual basis. And so they would plan for a 10% withdrawal rate. So they would retire because they had great increase. The markets had done well, they were near retirement, a lot of companies were offering early retirement incentives. So people would retire maybe at 62 and start using their money out of their retirement account. And as the market dropped, as everyone remembers 2000, the market started dropping, and it didn’t rebound until 2003. And during that period of time, it dropped 50%, the S&P 500 dropped over 50%. Well, those people who are taking out at a high distribution rate, 10%, from a diversified portfolio really were in trouble because they didn’t have money then to last throughout their lifetime. Because if you’re taking, if you’re taking money out of a portfolio, and you are taking out across the board, and the market is very volatile in the beginning years of your retirement, it has creates a deficit in your portfolio long-term, versus someone who might be taking money out in the beginning stages of retirement and the markets going up is a totally different scenario at the end.
James Derrick 7:59
Fascinating. So that means, the account is dropping, because they’re taking out too much money at the 10% withdrawal rate. And it’s losing value in the market just because of the way that these things cycle. And then the third problem is that they’ve just entered retirement, and it has a devastating long-term impact. It’s It’s fascinating. So when you do planning, how do you counteract these issues?
Sharla Jessop 8:26
Well, some of the things we do in planning are, first of all, understand goals, when people are going to retire their longevity, you know, people are living longer and longer, you can’t plan for just 15-20 years in retirement, you might be in retirement 30 or more years. So we have to plan for a longer period of time. We have to understand reasonable distribution rate is to take from an account.
James Derrick 8:46
What is a reasonable distribution rate? And I’m sure it changes over time, but.
Sharla Jessop 8:50
It changes over time. And it really depends on what the market is when you retire. Some would say 4% is a safe rule. But we say that you even have to monitor a 4% distribution rule. Because you know, markets change. And if you haven’t properly invested, you could 4% could be too much. So the way that we manage that in our planning is by setting the accounts up where when we’re taking money out in retirement, we’re taking it from things that are less volatile, we have not just a portion of an account, but an actual account where we’re investing it so it’s more conservative. So as we’re using money, we don’t have to worry about the volatility in the market. It’s not impacting what we’re taking out. And then we have other segments or buckets of investments that are designed for the growth portion where those can fluctuate in the market. We don’t have to worry we’re not going to withdraw from those. So the ups and downs and the volatility right then don’t matter. And it helps investors both stay invested, not take out more than they should not be withdrawing during volatile markets. And it really gives them an emotional tolerance for risk during retirement.
James Derrick 9:57
Fascinating! Now in 2022 and 2023, we are living through some great uncertainties. Inflation has been the primary issue. But there’s also the potential for a recession. So how does your planning advice change when there’s great uncertainty?
Sharla Jessop 10:16
Well, the advice doesn’t really change actually. For people who are retired, when we set up a plan, we take into account different types of market periods. And when we segment the assets, we’re already preparing for volatile periods of the market. Certainly, if we thought it was just going to be all growth, we wouldn’t worry about putting money in a conservative account to draw from because the market would be going up and we’d be pulling money from an aggressive account. But because we don’t know. And there’s always uncertainty, and we always have to worry about risk. Putting the money and doing something in a more conservative account upfront, gives us the ability to not have to worry about what happens in 2020, or 2023, 2021. You know, all the volatile periods we’ve been through more recently, it gives us the ability to just stay invested.
So you’ve already planned for the volatility. What about the 401k? The contributors to 401k’s?
If you’re saving for retirement?
James Derrick 11:11
Yes.
Sharla Jessop 11:11
Is that what you’re thinking? If you’re saving for retirement, you should just keep with your plan, stay diversified, don’t become conservative, that’s not the time. The opportunities come when the markets are volatile. And by contributing, you’re gonna gain more over time than if you you know, pull in your horns and think that you’re trying to self manage and pull out of the market.
James Derrick 11:31
Well it sounds like fantastic advice. And it’s, it’s do nothing but only if you have planned correctly and invested correctly. Obviously, if you have all of your money, aggressive times of uncertainty are are great times then to consider adjustments. And I’m sure you help people do that every day.
Sharla Jessop 11:50
That’s right. If you’re if you are fully invested in the market, and you don’t have a plan that it’s assesses the risk and addresses when you’re going to take your money out from what accounts, I think that it would make sense to sit down and talk with one of our wealth management advisors and see what a plan would do for you. One of our lifetime income plans to help you manage risk in retirement.
James Derrick 12:11
I love this because it’s controlling what you can control so that when the hard times come, you can sleep at night, you’re prepared. Thank you for joining me today. Sharla.
Sharla Jessop 12:20
Thank you, James.
Shane Thomas 12:21
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
