Power Up Wealth podcast – Am I Going To Be Okay? Part 1 – Episode 52 transcript:
Sharla Jessop 0:00
If you’re getting ready to retire, you’re probably wondering, Am I going to be okay? Is my money going to last? I’m Sharla Jessop. And today, my guest and colleague, Parker Thompson, will talk about the risks and concerns facing today’s retirees.
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.
Parker, thank you for joining me today.
Parker Thompson 0:51
Thanks for having me.
Sharla Jessop 0:52
Parker Thompson is part of our wealth management team. And he helps people as they design retirement plans and prepare for the future. Parker, why are people wondering if they’re going to be okay?
Parker Thompson 1:03
I think more and more retirees are worried if their money’s gonna last or if they’re going to be okay. And they ask that question a lot more in our meetings, because of the risks that are posed you know, for retirees nowadays. It seems like more and more challenges are coming up for them in that they’re more and more worried about if they’re going to make their money last. If they’re going to be able to live the lifestyle that they want in retirement.
Sharla Jessop 1:26
That makes sense, especially since the number one thing that’s changing is longevity. People are living longer and longer. And we have many clients living into their 90s and up to 100. It’s a lot different situation than planning till you’re 80.
Parker Thompson 1:38
Yeah, with the expected lifespan of a retiree only lasting about 10 to 15 years, that was not so long ago. To be able to maintain a really good relaxing retirement for only 10 or 15 years was a fairly easy task with the nest eggs that people had. But now we’re looking more at 25, 30 and even longer years. People living into their 90s and hundreds.
Sharla Jessop 1:59
That’s a long time to spend your money.
Parker Thompson 2:01
Yeah, especially if you’re retiring at, you know, 60 or in your 60s, at some point, that’s a longer time to stretch that money out and try to make it work for you.
Sharla Jessop 2:09
So share with us some of the things you’ve identified as concerns and how to address them.
Parker Thompson 2:14
I looked at retirement and I thought what are the main antagonists that could really derail a retirement? What are the main risks and challenges that could really throw off a plan that we see that we have to plan against, right that we have to somehow combat. I’ve gotten just kind of an overview and listed a few but bear markets are one of them sequence of returns we’ve heard before and the power of losses. There’s a lot more and they all kind of mix well together. But there’s just a few of those things and inflation, too, that we’ve seen even most recently, last year. Those are buzzwords that we’re starting to hear that I think not a lot of people are realizing that they can really affect their retirement.
Sharla Jessop 2:52
So let’s talk a little bit about bear markets. Because everyone’s a little bit concerned now or we have been in a bear market are we headed into a bear market? What’s going on?
Parker Thompson 3:00
That has been one of the buzzwords one of the headlines that you’ve seen a lot is are we in a bear market? It’s not necessarily the matter of if we’re in a bear market now? Or if we’re not that affects your time, it’s how many bear markets are you going to go through during your retirement? And how long are they going to last? We’ve seen historically that bear markets are very stubborn. And they last longer than we think. The typical bear market usually is about 19 years. And the typical bull market or a good positive market is only 11. Your bear markets are typically longer than your bulls. And your losses during that time are usually just longer and sustained. And it’s harder to come back from those losses, right? So bear markets can just be a consistent thing that comes every once in a while and being able to make it out of each bear market without losing a lot of your money and keeping your portfolio intact. That’s the challenge.
Sharla Jessop 3:46
I can see why that can be challenging, especially if you’re drawing on your money. And we’re in one of those bear market situations, it’s very disconcerting to see that your maybe your high watermark before your portfolio had been comes down. And you’re also drawing your money out that’s really concerning for retirees.
Parker Thompson 4:03
Yeah, what we’ve seen is that each bear market happens every seven years, right? So like we talked about the longevity of retirees, you only had to whether one or two of these bear markets in your retirement life. But now that if they’re happening every seven years, and they’re lasting a longer time, and the typical drop in the market is just over 39% then that’s a big drop that happens every seven years, right on average. And to happen to have that happen multiple times. If you’re in your retiring ages for 25 to 30 years, that can be intimidating.
Sharla Jessop 4:37
It seems like you’d probably have to have a plan to prepare for that.
Parker Thompson 4:43
Right? You’d want to mitigate losses as much as possible and be able to sustain through those years, right. If you have those bumpy years in the bear market. You want to be able to protect your assets during that time. But then you also don’t want to be so protective that during those bull years, that short 11 year stint right where the market gains very, very drastically, you want to make sure that you’re still in and participating and invested.
Sharla Jessop 5:03
So that deals a lot with what you’d mentioned earlier sequence of return risk. Explain that to our listeners.
Parker Thompson 5:09
Sequence of return risk is just the chance of your portfolio losing heavily in the first years of retirement sequentially. So if you have a really bad first couple of years, and the rough couple of years in the market in your retirement, if you’re drawing on those assets on a monthly basis, and you’re using that to live on, it’s harder to come back if you’re losing value on those dollars, right. Whereas if you’re contributing in your years, where you’re leading up to retirement, you’re buying stocks or the market, or whatever funds you’re buying at a discount each time so they can grow back. In this point, if you’re taking money from your account, it’s harder to gain back because you’re not buying back into the market, you’re taking it out at a loss, and you’re just using that as income. And so if you have too many years, right off the bat at the beginning of your retirement, you’re subject to running out of money a lot quicker.
Sharla Jessop 5:59
I can understand that. If it doesn’t have an opportunity to bounce back if it’s gone.
Parker Thompson 6:03
Yeah.
Sharla Jessop 6:04
If you no longer own the shares or the investment. And you know, people have faced sequence of return risk that I remember during my career after the .com bubble from 2000 through 2003. Again, in the Great Recession from 2007, 8, and through part of 2009. Those were some disconcerting years, where people who are taking money out of their accounts, especially if they just are newly retired, it was really hard, emotionally for them to stay invested.
Parker Thompson 6:31
Yeah, there was a lot of people that saw that 50% drop in their portfolio right when they retired during those years. And there were some that decided they couldn’t retire, they had a plan for decade, that they were going to retire at a certain age and it happened to fall in one of those 2000s or 2008 years. And they decided a my portfolio is not actually going to make it my plan has now been shrunk because of the loss in the market. And so we have to put off retirement, I have to work another five years or so. And this is because that sequence of returns risk can really affect someone.
Sharla Jessop 7:03
And these are risks that can be addressed in advance in a plan so you’re prepared. So you don’t face that decision of am I going back to work.
Parker Thompson 7:13
So look at the numbers, if you wanted any motivation to do it, we’ve just run a couple scenarios, right, just to point out how drastic this can be. And we started with, you know, just a small dollar amount of 250,000 for retiree a proposed 250,000. And we saw that, you know, if you take the average annual return, and it was you know, if the market wasn’t choppy, and it wasn’t volatile, we all wish that that was the case, if you just took that average 7% return that it would slowly grow, and then it would hit a peak and then it would start to draw down. But you would never run out of money for 30 years. But if you had really good early returns, right, which is what we all wish we we could have, right? Then that portfolio grows, grows and grows up until you’re finished with retirement, right? The bad case scenario or the worst case scenario, or a likely scenario is when you have early returns that are negative or not so good. And in that case, we actually see that the money runs out about 10 years earlier than we expected at age 81, right. And so if we think about people that are living longer, if you have those first couple of years, like 2002 2003, or 2008 recession, and you have those losses, all of a sudden your retirements cut by 10 years or even more if it’s worse. And so if we take that into account, you want to have a plan in place, like you said, you want to have measures that, that basically limit some of the losses, or limit the volatility of the market in those early years to prepare you for the longevity of retirement. And that’s one thing that we do we look at something called volatility or another way to put that is standard deviation. And if the market is going to lose a certain amount, we want to be less than that we want to lose less, right, we want to protect the account. And there’s multiple ways that we can do that. But just managing risk and making sure we’re not fully exposed to the market has is a very general way to look at that.
Sharla Jessop 9:04
How does our lifetime income planning address sequence of return risk?
Parker Thompson 9:09
The nuts and bolts of it is we’re not just putting all of our money into one aggressive account. Even though that aggressive account is going to grow for us long-term and sustain retirement in the later years. We can’t have it all aggressively invested right off the bat. Otherwise, if the market does drop drastically, then your account drops drastically and you run into this sequence of returns risk. That’s why we have different accounts and different buckets that we put the money into that are less risky, we have conservative, we have moderate and we have you know some that are more growth minded and some that are more income driven. If we space our money out between those accounts, we accomplish that mitigating of standard deviation, right mitigating volatility, right so there’s less ups and downs, it’s more steady. We don’t lose as much we sometimes don’t gain as much but we’re we’re gaining all that we need to basically withstand to the end of our retirement, if that makes sense.
Sharla Jessop 9:59
It does and I think it makes sense to clients because it gives them an emotional backdrop to help protect them from wanting to get out of the market. Knowing that some of my money is very conservative, there’s, here’s the money I’m gonna live on right away, it’s protected is safe, I don’t have to worry about what’s going on in the market, and allows my money that’s in the market to continue to grow even with volatility, even if I’m losing now. I know that market trends over time, I’m going to win.
Parker Thompson 10:25
Yeah, you can keep basically compartmentalizing that, I have my money in my long-term account that I will pull on later my years that can grow, right, that has lost a lot of money, or that has dropped a little bit, but it’ll come back. The money that is safe and conservative now that you’re pulling on, you can pull on it on a monthly basis at ease, right? Your mind is at ease that this money is okay, it hasn’t lost that much. Right. It’d be a different story. If your account lost 50% and it was half the retirement and you were still pulling money from it each month, you would get start to get worried and maybe not want to pull as much as you used to and your lifestyle would change. And these are all factors that we think of and so we want people to be able to enjoy retirement and be relaxed.
Sharla Jessop 11:05
And alleviate some of those worries.
Yeah
Parker, we have a lot more to talk about. We’re gonna do this as a two part series. So I appreciate your time. Thank you for joining me today.
Parker Thompson 11:14
Thanks, Sharla.
Shane Thomas 11:20
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.
Am I Going To Be Okay? (Part 1)
