Power Up Wealth podcast – Am I Going To Be Okay? Part 2 – Episode 53 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 for this episode.
Parker Thompson 0:51
Pleasure to be here.
Sharla Jessop 0:52
This is our episode two of Am I going to be okay for retirement. And last time, we talked a little bit about sequence of return risk and bear markets and what to expect and all based on some of the concerns that retirees are facing today. Parker, can you give us some real life scenarios?
Parker Thompson 1:12
Yeah, we we can put them together. We talked about bear markets, we talked about sequence of returns risk, and how those all really can either affect a retiree in a good way or a bad way, right, depending on how the markets go early in retirement. There’s an example here that I thought was very impactful that has to do with the timing retirement and the returns that you would get early on in retirement. But it’s three retirees that retired back in 1969. And if we think back to that time, we can think that there’s a lot of parallels today, as far as inflation and high cost of living, and the volatile markets at that time. Essentially, three retirees all retired in this year of 1969, but they all retired three months apart. One in January, one in April and one in July. Now you would think on the surface that they would probably be pretty aligned with each other as far as retirees go and how long their money lasts. But it’s actually quite the opposite. Over the course of 30 years, their nest eggs or their retirement fluctuated as it does with the markets. But each one ended up in a very different position. The first retiree that retired in January, their money bounced around went up and down a little bit. But by the time that they were age 92, they had run out of money completely. They had lost all money due to inflation. And you know, having to spend it on their lifestyle to keep their lifestyle in retirement. The second retiree who retired in April, was able to maintain money, right, it’s only a three month difference of retirement, and that retiree was able to maintain or even grow slightly, and then the third retiree that retired in July actually grew their money. Now for frame of reference, each of these retirees started with $500,000 as a lump sum. So the one that ran out of money obviously ended with zero, the one that gained slightly ended up with about 700,000. And the one that grew his money. So retired in July, actually ended up over a million dollars at age 92. Now, how could three different retirees retiring at three months difference from each other in the year of 1969, all end up at three drastically different places from zero to 700 to a million dollars. That’s the risk of sequence of returns and bear markets and the power of losses, right and the timing of retirement specifically, we don’t always think that, you know, we need to retire at a specific month, we always think well a certain year. And we hope that that’s a good year for the market. Because if it’s not, then we get into some of these risks of our money may not make it right, it may not last for us. I just think that this example was was really impactful to show that even the slightest difference in timing, depending on where the market is, and what happens over the next decade or so your retirement can really affect how your money lasts.
Sharla Jessop 3:42
It is impactful. People don’t I think recognize how significant the timing of market and distribution of money are when you combine them together, it can really have a different outcome. And unfortunately, some really negative outcomes in the long run. And in our planning, we do that people think of losses and they don’t really think of the full impact. But tell us what it takes when you have a loss in your portfolio. What do you have to do to get back where you were assuming no distributions?
Parker Thompson 4:11
The math that we like to use as financial planners is a simple numbers game. If you lose 10%, you need 11% to get back to be even where you were at before. By the numbers if you have a 25% loss, then you’ll need 33% to get back. 50% like we saw closer in 2008. You would need 100% return to get back even to that same dollar amount that you were at before. And like you said this is without distributions and for most of our retirees we see that they need to complement their social security and their pension if they have one, their income they needed to complement it with their own assets that they’ve saved up and it’s becoming more relevant as pensions are going away. And as Social Security as you know, has some questions over the next few decades. People are going to rely more and more on their own money that they’ve saved up and they’ve been able to invest. So let’s say that you are taking distributions these numbers get more drastic. If you’re taking about 4% of your assets out each year, which is typically what we see. That same 20% loss would require you to have a 56% return, right as opposed to 25%.
Right, just say that, again, if you have lost 20% in your portfolio, and you’re taking a distribution, how much do you have to make up?
You have to make up 56%. So you have to have a 56% positive return.
Sharla Jessop 5:25
That’s amazing.
Parker Thompson 5:25
That’s assuming that we have a 20% loss like we had last year, right in the markets. If you have something closer to the 2000’s like the early 2000s, like 2000 – 2003 or 2008 even where we lost even close to 50. If you lose 32%, right, you’re having to make up a whole lot more. And it depends on if you’re taking more and more distributions. So we just said that’s 4% distribution. If that all of a sudden becomes a 5% distribution rate, and you’re having to take out more money to afford your lifestyle, you now have to have a 67% return. And you can see how that starts to waterfall as you start to have bigger, bigger losses. So that’s why we always say the power of losses is one of the bigger risks. Where it comes to retirement timing and the sequence of return risk. Those first few years are pivotal. Because if you do have those big losses, it takes a lot to gain that back.
Sharla Jessop 6:10
It makes it even more important to find a way to protect yourself against those types of losses. But still protect yourself against inflation. Talk about that with us.
Parker Thompson 6:21
Yes, inflation is always there, right? I think we’ve heard it termed a lot that it’s the silent killer. So the losses are important, but inflation is always going to be nagging at your cost of living. We want to stay invested, but we want to have less losses, it almost seems counterintuitive, because we want to mitigate those losses in retirement early on. But that lends itself to saying oh, maybe we’re less than less invested in the market. However, over the long-term, if you’re not invested in the market, and inflation is starting to, you know, grow, like we saw in the last year hitting almost 9%. If inflation is even at a consistent three or 4%, you have to earn more than that for your money to work for you. Otherwise, your cost of living starts to drag on your portfolio. In other words, inflation can really kill your portfolio over the long-term. You need to be earning at or above inflation rates each year for that money to continue to grow for you in retirement. And that’s hard to do when you’re not in the market. So we see that where a lot of people get spooked by those early losses, and the timing of their retirement and they get out of the market, and they lose out on a lot of the game and inflation starts to eat at them and starts to chunk away their portfolio to the point where sometimes at the end of retirement, they run out of money earlier than they think.
Sharla Jessop 7:29
Scary! So how do we protect our clients? Or how what strategies do we use to help prevent that and help them stay invested?
Parker Thompson 7:38
Overall, generally, people want to try to mitigate losses as much as possible. And now this is a technical term that we use in the financial planning industry called standard deviation. And I think for those who maybe want to revamp of their math class in high school, standard deviation is just the variability of how high or low that their dollar amount in this case their investment can go right with the market. So what’s the chance that the market could lose 30%? versus what’s the chance that it could gain 30%? Right, and how often does that happen? We sometimes call that volatility. So standard deviation, we want to try to mitigate that because if your portfolio has less of a chance to drop 30 or 50%, then you have less of a chance of running out of money because you don’t have to gain back a lot more to mitigate those losses to basically recoup some of the money that you’ve lost. Something that we do is just picking the right selection of funds or stocks in your portfolio to create the right standard deviation, right? If your standard deviation of the market is let’s just say 15%, then you want to have something less than that. But it’s hard to sometimes pick the right stocks or funds that can lend itself to that risk. At Smedley Financial, we actually have the Lifetime Income Plan that does a lot of this for us, right? We explained this in the last episode, where by putting our money in different buckets, different risk levels, we’re able to have some that’s long-term that can grow and be acceptable, you know, fluctuating up and down. But the money that we’re drawing on right now we have more conservative, and if we need to pull from it, it doesn’t lose as much. So that’s one of the things that we do. Another way is just active management. Sometimes we can see there’s economic indicators and factors and we’re able to say, hey, maybe we want to reduce risk in our investments right now and wait to see what happens in the economy and put it back at the right time. Right. So that’s just timing of investments.
Sharla Jessop 9:26
You know, it’s like a barbell approach because we have two things. We’re trying to outpace inflation, but at the same time, we’re trying to prevent losses as individuals in our portfolios or in our plans. It’s a real balancing act it sounds like.
Parker Thompson 9:39
It’s counterintuitive because you think that you you just always want to be in the market. And eventually, over time, it’ll grow and it’ll be it’ll sustain your retirement. However, we’ve seen through a few of these examples if you just buy and hold and let it ride, sometimes those early losses can really affect you. So we want to have somewhere we’re protecting it and trying to make sure that we don’t have those big deep loss losses, because then we don’t have such a wall to climb to get back to normal to where the portfolio mount was at before, right? All of a sudden, we’re stuck with the dilemma of we’re trying to grow the money, but we have less dollars to do that with.
Sharla Jessop 9:41
That makes sense. I think that the lifetime income plan will help people understand emotionally that they have to have some of their money, it has to be in the market, even though it’s volatile and losing at a time when they’re, you know, have the whole portfolio taking it. But knowing that there’s money that set aside, that’s not tied to that volatility, where they can where they can use it, I think it makes good sense.
Parker Thompson 10:34
I think one example, if I can pull one out of just the standard deviation or the volatility, is an example of two different portfolios. And in this case, we’ve all heard of the hare versus the tortoise, right? The slow versus the fast. In this case, we saw an example where they put two portfolios up against each other. So two dollar amounts that someone starts with in retirement and the first 10 years of their retirement, one matches the exact return of the markets themself, right, that’s the hare portfolio. So the same standard deviation, the same risk as the market, there’s no protection whatsoever. So it loses more when the market goes down. And it gains more when the market goes up, where as opposed to the tortoise portfolio. So the slower slow and steady one is half of that standard deviation, so half the volatility, which means when the market loses, let’s say in the first year, in this case, 26%, the tortoise portfolio only use 13%. What we noticed is over a 10 year period, that the tortoise portfolio actually ends up with more money at $100,000, as opposed to $90,000. Right. And they both began with $100,000. So the tortoise portfolio, although it didn’t sway as much, right, it maintained a lot better, and it grew at a steadier pace. Whereas, because the hare portfolio was so subject to risk and volatility, it actually lost out because some of those losses were so big that it was hard to come back from them. That to me is a great example of why it’s important to mitigate standard deviation or to mitigate the losses, you want to have protection against those because it can really affect you long term. And that on the flip side, we have to be content when the market sometimes is gaining more than our portfolio and we’re gaining still at a steady rate that’s going to support us into retirement. However, we’re just taking less risk.
Sharla Jessop 12:16
I like that I think it makes a lot of sense. I would say that, from my experience the pain of losing is much greater than the joy of winning. And when we’re managing portfolios, that’s what we’re thinking of, you know, the downside can be more critical than investors realize, because we don’t want to necessarily participate in all the downside.
Parker Thompson 12:34
Yeah, as we’ve seen those the power of losses is a lot more powerful than the power of gains. Sadly, that’s just how it goes with investments, especially when you’re taking distributions in retirement.
Sharla Jessop 12:44
Parker, this is great information. Thank you so much for joining me.
Parker Thompson 12:47
Appreciate it. Thank you.
Shane Thomas 12:53
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.
